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Title: The Principles of Economics, with Applications to Practical Problems

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*** START OF THE PROJECT GUTENBERG EBOOK THE
PRINCIPLES OF ECONOMICS, WITH APPLICATIONS TO
PRACTICAL PROBLEMS ***

THE PRINCIPLES OF
ECONOMICS

WITH APPLICATIONS TO PRACTICAL
PROBLEMS
BY

FRANK A. FETTER, PH.D.
PROFESSOR OF POLITICAL ECONOMY AND FINANCE,
CORNELL UNIVERSITY

NEW YORK
THE CENTURY CO.
1904

Copyright, 1904, by
The Century Co.

The DeVinne Press

TO THE STUDENTS
OF THREE UNIVERSITIES
—INDIANA, STANFORD, AND CORNELL—
FOR WHOM, WITH WHOM, AND BY WHOSE AID
THIS BOOK CAME TO BE WRITTEN

CONTENTS
PART I

PAGE
The Value of Material Things 1-169

DIVISION A—WANTS AND PRESENT GOODS

CHAPTER

1 The Nature and Purpose of Political Economy: Name and Definition;
Place of Economics Among the
Social Sciences; The Relation of Economics to Practical Affairs 3

2 Economic Motives: Material Wants, The Primary Economic Motives;
Desires for Non-material Ends,
as Secondary Economic Motives 9

3 Wealth and Welfare: The Relation of Men and Material Things to
Economic Welfare; Some Important
Economic Concepts Connected with Wealth and Welfare 15

4 The Nature of Demand: The Comparison of Goods in Man's Thought;
Demand for Goods Grows Out
of Subjective Comparisons 21

5 Exchange in a Market: Exchange of Goods Resulting from Demand;
Barter Under Simple Conditions;
Price in a Market 30

6 Psychic Income: Income as a Flow of Goods; Income as a Series of
Gratifications 39

DIVISION B—WEALTH AND RENT

7 Wealth and Its Direct Uses: The Grades of Relation of Indirect Goods
to Gratification; Conditions of
Economic Wealth 46

8 The Renting Contract: Nature and Definition of Rent; The History of
Contract Rent and Changes
in It 53

9 The Law of Diminishing Returns: Definition of the Concept of
(Economic) Diminishing Returns; Other
Meanings of the Phrase "Diminishing Returns"; Development of the
Concept of Diminishing Returns 61

10 The Theory of Rent: The Market Value of the Usufruct: Differential
Advantages in Consumption
Goods; Differential Advantages in Indirect Goods 73

11 Repair, Depreciation, and Destruction of Wealth: Relation to its Sale
and Rent: Repair of Rent-bearing
Agents; Depreciation in Rent-earning Power of Agents Kept in Repair;
Destruction of
Natural Stores of Material 81

12 Increase of Rent-bearers and of Rents: Efforts of Men to Increase
Products and Rent-bearers;
Effects of Social Changes in Raising the Rents of Indirect Agents 90

DIVISION C—CAPITALIZATION AND TIME-VALUE

13 Money as a Tool in Exchange: Origin of the Use of Money; Nature of
the Use of Money; The Value of
Typical Money 98

14 The Money Economy and the Concept of Capital: The Barter
Economy and its Decline; The Concept of
Capital in Modern Business 108

15 The Capitalization of All Forms of Rent: The Purchase of Rent-
charges as an Example of Capitalization;
Capitalization Involved in the Evaluating of Indirect Agents; The
Increasing Role of Capitalization
in Modern Industry 118

16 Interest on Money Loans: Various Forms of Contract Interest; The
Motive for Paying Interest 131

17 The Theory of Time-value: Definition and Scope of Time-value; The
Adjustment of the Rate of Time-discount 141

18 Relatively Fixed and Relatively Increasable Forms of Capital: How
Various Forms of Capital May
Be Increased; Social Significance of These Differences 152

19 Saving and Production as Affected by the Rate of Interest: Saving as
Affected by the Interest Rate;
Conditions Favorable to Saving; Influence of the Interest Rate on
Methods of Production 159

PART II

The Value of Human Services 171-355

DIVISION A—LABOR AND WAGES

20 Labor and Classes of Laborers: Relation of Labor to Wealth;
Varieties of Talents and of Abilities
in Men 173

21 The Supply of Labor: What Is a Doctrine of Population? Population in
Human Society; Current Aspect
of the Population Problem 184

22 Conditions for Efficient Labor: Objective Physical Conditions; Social
Conditions Favoring Efficiency;
Division of Labor 195

23 The Law of Wages: Nature of Wages and the Wages Problem; The
Different Modes of Earning Wages;
Wages as Exemplifying the General Law of Value 205

24 The Relation of Labor to Value: Relation of Rent to Wages, Relation
of Time-value to Wages; The
Relation of Labor to Value 215

25 The Wage System and its Results: Systems of Labor; The Wage
System as it Is; Progress of the Masses
Under the Wage System 226

26 Machinery and Labor: Extent of the Use of Machinery; Effect of
Machinery on the Welfare and Wages
of the Masses 236

27 Trade-unions: The Objects of Trade-unions; The Methods of Trade-
unions; Combination and Wages 245

DIVISION B—ENTERPRISE AND PROFITS

28 Production and the Combination of the Factors: The Nature of
Production; Combination of the Factors 257

29 Business Organization and the Enterpriser's Function: The Direction
of Industry; Qualities of a Business
Organizer; The Selection of Ability 265

30 Cost of Production: Cost of Production from the Enterpriser's Point

of View; Cost of Production from
the Economist's Standpoint 273

31 The Law of Profits: Meaning of Terms; The Typical Enterpriser's
Services Reviewed; Statement of the
Law of Profits 282

32 Profit-sharing, Producers' and Consumers' Coöperation: Profit-
sharing; Producers' Coöperation; Consumers'
Coöperation 292

33 Monopoly Profits: Nature of Monopoly; Kinds of Monopoly; The
Fixing of a Monopoly Price 302

34 Growth of Trusts and Combinations in the United States: Growth of
Large Industry in the United
States; Advantages of Large Production; Causes of Industrial
Combinations 312

35 Effect of Trusts on Prices: How Trusts Might Affect Prices; How
Trusts Have Affected Prices 323

36 Gambling, Speculation, and Promoters' Profits: Gambling vs.
Insurance; The Speculator as a Risk taker;
Promoter's and Trustee's Profits 333

37 Crises and Industrial Depressions: Definition and Description of
Crises; Crises in the Nineteenth
Century; Various Explanations of Crises 345

PART III

The Social Aspects of Value 357-563

DIVISION A—RELATION OF PRIVATE INCOME TO SOCIAL
WELFARE

38 Private Property and Inheritance: Impersonal and Personal Shares of
Income; The Origin of Private
Property; Limitations of the Right of Private Property 359

39 Income and Social Service: Income from Property; Income from
Personal Services 370

40 Waste and Luxury: Waste of Wealth; Luxury 381

41 Reaction of Consumption on Production: Reaction upon Material
Productive Agents; Reaction upon
the Efficiency of the Workers; Effects on the Abiding Welfare of the
Consumer 392

42 Distribution of the Social Income: The Nature of Personal
Distribution; Methods of Personal Distribution 402

43 Survey of the Theory of Value: Review of the Plan Followed;
Relation of Value Theories to Social
Reforms; Interrelation of Economic Agents 412

DIVISION B—RELATION OF THE STATE TO INDUSTRY

44 Free Competition and State Action: Competition and Custom;
Economic Harmony through Competition;
Social Limiting of Competition 422

45 Use, Coinage, and Value of Money: The Precious Metals as Money;
The Quantity Theory of Money 431

46 Token Coinage and Government Paper Money: Light-Weight Coins;
Paper Money Experiments; Theories
of Political Money 443

47 The Standard of Deferred Payments: Function of the Standard;
International Bimetallism; The Free-silver
Movement in America 453

48 Banking and Credit: Functions of a Bank; Typical Bank Money;
Banks of the United States To-day 462

49 Taxation in its Relation to Value: Purposes of Taxation; Forms of
Taxation; Principles and Practice 471

50 The General Theory of International Trade: International Trade as a
Case of Exchange; Theory of
Foreign Exchanges of Money; Real Benefits of Foreign Trade 480

51 The Protective Tariff: The Nature and Claims of Protection; The
Reasonable Measure of Justification
of Protection; Values as Affected by Protection 491

52 Other Protective Social and Labor Legislation: Social Legislation;
Labor Legislation 504

53 Public Ownership of Industry: Examples of Public Ownership;
Economic Aspects of Public Ownership 514

54 Railroads and Industry: Transportation as a Form of Production; The
Railroad as a Carrier; Discrimination
in Rates on Railroads 525

55 The Public Nature of Railroads: Public Privileges of Railroad
Corporations; Political and Economic
Power of Railroad Managers; Commissions to Control Railroads 534

56 Public Policy as to Control of Industry: State Regulation of
Corporate Industry; Difficulties of
Public Control of Industry; Trend of Policy as to Public Industrial
Activity 544

57 Future Trend of Values: Past and Present of Economic Society; The
Economic Future of Society 555

Questions and Critical Notes 565

Index 595

PREFACE
This book had its beginning ten years ago in a series of brief discussions
supplementing a text used in the class-room. Their purpose was to amend
certain theoretical views even then generally questioned by economists, and
to present most recent opinions on some other questions. These critical
comments evolved into a course of lectures following an original outline,
and were at length reduced to manuscript in the form of a stenographic
report made from day to day in the class-room. The propositions printed in
italics were dictated to the class, to give the key-note to the main divisions
of the argument. Repeated revisions have shortened the text, cut out many
digressions and illustrations, and remedied many of the faults both of
thought and of expression; but no effort has been made to conceal or alter
the original and essential character of the simple, informal, class-room talks
by teacher to student. To this origin are traceable many conversational
phrases and local illustrations, and the occasional use of the personal form
of address.
The lectures, at the outset, sought to give merely a summary of widely
accepted economic theory, not to offer any contribution to the subject.
While they were in progress, however, special studies in the evolution of
the economic concepts were pursued, and the manuscript of a book on that
more special subject was carried well toward completion. That work, which
it is hoped some time to complete, was, for several reasons, put aside while
the present text was preparing for publication. The economic theories of the
present transition period show many discordant elements, yet the author felt
that his attempt to unify the statement of principles, in an elementary text
explaining modern problems, and consistent in its various parts, helped to
reveal to him both difficulties and possible solutions in the more special
theoretical field. The unforeseen outcome of these varied studies is an
elementary text embodying a new conception of the theory of distribution,
an outline of which will be found in Chapter Forty-three. It is, in brief, a
consistently subjective analysis of the relations of goods to wants, in place
of the admixture of objective and subjective distinctions found in the
traditional conceptions of rent, interest, and price.

The beginning of the systematic study of economics, like the first steps in a
language, is difficult because of the entire strangeness of the thought, and it
is not to be hoped that any pedagogic device can do away with the need of
strenuous thinking by the student. The aim, however, in the development of
this theory of distribution, has been to proceed by gradual steps, as in a
series of geometrical propositions, from the simple and familiar acts and
experiences of the individual's every-day life, through the more complex
relations, to the most complex, practical, economic problems of the day.
The hope has long been entertained by economists that a conception of the
whole problem of value would be attained that would coördinate and unify
the various "laws,"—those of rent, wages, interest, etc. This solution has
here been sought by a development of recent theories, the unit of the
complex problem of value being the simplest, immediate, temporary
gratification.
Possibly some teachers will observe and regret the almost entire absence of
critical discussions of controverted points in theory, which make up so large
a part of some of the older texts. The more positive manner of presentation
has been purposely adopted, and only such reference is made to conflicting
views as is needed to guard the student against misunderstanding in his
further reading. The author would not have it thought that he doubts the
disciplinary value of economic theory or its scientific worth for more
advanced students, for, on the contrary, he believes in it, perhaps to an
extreme degree; but, for his own part, he has become convinced of the
unwisdom of carrying on these subtle controversies in classes of beginners.
The inherent difficulties of the subject are great enough, without the
creation of new ones.
The fifty-seven chapters represent the work of the typical college course in
elementary economics, allowing two chapters a week, and a third meeting
weekly for review and for the discussion of questions, exercises, and
reports. The subject is so large that the text is, in many places, hardly more
than a suggestive outline. In class-room work it should be supplemented by
other sources of information, such as personal observation by the students
(many of the questions following the text serving to stimulate the attention);
visits to local industries; interchange of opinions; examples given by the
teacher; study and discussion, in the light of the principles stated in the text,
of some such problems as are suggested in the appended list of questions;

collateral reading; the preparation of exercises and the use of statistical
material from the census, labor reports, etc.; history and description of
industries; history of the growth of economic ideas. Suggestions, from
teachers, of changes that will make the text more useful in their classes, will
be thankfully received by the author.
Lack of space makes it impossible to mention by name the many sources to
which the writer is indebted. Special acknowledgment, however, is
gratefully made to C. H. Hull, of Cornell University; to E. W. Kemmerer,
now of the Philippine Treasury Department, and to U. G. Weatherly, of
Indiana University, who have read large portions of the manuscript, and
have made many valuable suggestions; to W. M. Daniels, of Princeton
University, who has read every page of the copy, and to whom are due the
greatest obligations for his numerous and able criticisms both of the
argument and of the expression; to R. C. Brooks, now of Swarthmore
College, for a number of the questions in the appended list, and for helpful
comments given while the course was developing; and to R. F. Hoxie and to
A. C. Muhse, whose thoughtful reading of the proof has eliminated many
errors. For the defects remaining, not these friendly critics, but the author
alone, should be held accountable.
No book on economics can to-day satisfy everybody—"Or even anybody,"
adds a friend. But with this book may go the hope that what has been
written with love of truth and of democracy may serve, in its small way,
both to further sound economic reasoning and to extend among American
citizens a better understanding of the economic problems set for this
generation to solve.
Frank A. Fetter.

Ithaca, N. Y., August, 1904.

THE PRINCIPLES OF ECONOMICS

PART I
DIVISION A—WANTS AND PRESENT GOODS

CHAPTER I
THE NATURE AND PURPOSE OF POLITICAL ECONOMY

§ I. NAME AND DEFINITION

1. Economics, or political economy, may be defined,
Verbal definition of
briefly, as the study of men earning a living; or, more
economics
fully, as the study of the material world and of the
activities and mutual relations of men, so far as all these are the objective
conditions to gratifying desires. To define, means to mark off the limits of a
subject, to tell what questions are or are not included within it. The ideas of
most persons on this subject are vague, yet it would be very desirable if the
student could approach this study with an exact understanding of the nature
of the questions with which it deals. Until a subject has been studied,
however, a definition in mere words cannot greatly aid in marking it off
clearly in our thought. The essential thing for the student is to see clearly
the central purpose of the study, not to decide at once all of the puzzling
cases.
2. A definition that suggests clear and familiar thoughts
Natural sciences to the student seem at first much more difficult to get in
deal with material
things any social science than in the natural sciences. These
deal with concrete, material things which we are
accustomed to see, handle, and measure. If a mere child is told that botany
is a study in which he may learn about flowers, trees, and plants, the answer
is fairly satisfying, for he at once thinks of many things of that kind. When,
in like manner zoölogy is defined as the study of animals, or geology as the
study of rocks and the earth, the words call up memories of many familiar
objects. Even so difficult and foreign-looking a word as ichthyology seems
to be made clear by the statement that it is the name of the study in which
one learns about fish. It is true that there may be some misunderstanding as
to the way in which these subjects are studied, for botany is not in the main
to teach how to cultivate plants in the garden, nor ichthyology how to catch

fish or to propagate them in a pond. But the main purpose of these studies is
clear at the outset from these simple definitions. Indeed, as the study is
pursued, and knowledge widens to take in the manifold and various forms
of life, the boundaries of the special sciences become not more but less
sharp and definite.
Political economy, on the other hand, as one of the social
Economics studies sciences, which deal with men and their relations in
some social acts
and relations society, seems to be a very much more complex thought
to get hold of. We are tempted to say that it deals with
less familiar things; but the truth may be, as a thoughtful friend suggests,
that the simple social acts and relations are more familiar to our thought
than are lions, palm-trees, or even horses. Every hour in the streets or
stores, one may witness thousands of acts, such as bargains, labor,
payments, that are the subject-matter of economic science. Their very
familiarity may cause men to overlook their deeper meaning.
Many other definitions have been given of political economy. It has been
called the science of wealth, or the science of exchanges. Evidently there
are various ways in which wealth may be considered or exchanges made.
The particular aspects that are dealt with in political economy will be made
clear by considering two other questions, the place of economics among the
social sciences and the relation of economics to practical affairs.

§ II. PLACE OF ECONOMICS AMONG THE SOCIAL SCIENCES

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

2. The social sciences deal with men and their relations
Character of the with each other. The word "social" comes from the Latin
social sciences
socius, meaning a fellow, comrade, companion,
associate. As men living together have to do with each other in a great many
different ways, and enter into a great many different relations, there arise a
great many different social problems. Each of the social sciences attempts
to study man in some one important aspect—that is, to view these relations
from some one standpoint.
Man's acts, his life, and his motives are so complex that it is not surprising
that there has been less definiteness in the thought of the social sciences,
and that they have advanced less rapidly toward exactness in their
conclusions, than have the natural sciences. This complexity also explains
the discouragement of the beginner in the early lessons in this subject.
Usually the greatest difficulties appear in the first few weeks of its study.
The thought is more abstract than in natural science; it requires a different, I
will not say higher, kind of ability than does mathematics. But little by little
the strangeness of the language and ideas disappears; the bare definitions
become clothed with the facts of observation and recalled experiences; and
soon the "economic" acts and relations of men in society come to be as real
and as interesting to the student as are the materials in the natural world
about him—often, indeed, more interesting.
3. Political economy is related to all the other social
Economics, politics, sciences, it being the study of certain of men's relations,
law, and ethics
while politics, law, and ethics have to do with other
relations or with relations under a different aspect. Politics treats of the
form and working of government and is mainly concerned with the question
of power or control of the individual's actions and liberty. Law treats of the
precepts and regulations in accordance with which the actions of men are
limited by the state, and the contracts into which they have seen fit to enter
are interpreted. Ethics treats the question of right or wrong, studies the
moral aspects of men's acts and relations. The attempt just made to
distinguish between the fields occupied by the various social sciences
betrays at once the fundamental unity existing among them. The acts of
men are closely related in their lives, but they may be looked at from
different sides. The central thought in economics is the business relation,
the relation of men in exchanging their services or material wealth. In

pursuing economic inquiries we come into contact with political, legal, and
ethical considerations, all of which must be recognized before a final
practical answer can be given to any question. Nevertheless the province of
economics is limited. It is because of the feebleness of our mental power
that we divide and subdivide these complex questions and try to answer
certain parts before we seek to answer the whole. When we attempt this
final and more difficult task, we should rise to the standpoint of the social
philosopher.

§ III. THE RELATION OF ECONOMICS TO PRACTICAL AFFAIRS

1. The ideal of political economy here set forth is that it
Economics is first a should be a science, a search for truth, a systematized
science
body of knowledge, arriving at a statement of the laws to
which economic actions conform. It is not the advocacy of any particular
policy or idea, but if it arrives at any conclusions, any truths, these cannot
fail to affect the practical action of men.
Political economy, because defined as the science of
But it touches many wealth, has been described by some as a gospel of
practical interests
Mammon. It is hardly necessary to refute such a
misconception. Political economy is not the science of wealth-getting for
the individual. Its study is not primarily for the selfish ends and interest of
the individual. (Certainly some of its lessons may be of practical value to
men in active business) for many economic "principles" are but the general
statement of those ideas that have been approved by the experience of
business men, of statesmen, and of the masses of men. Some of its lessons
must have educational value in practical business, for political economy is
not dreamed out by the closet philosopher, but more and more it is the
attempt to describe the interests and the action of the practical world in
which men must live. Many men are working together to develop its study
—those who collect statistics and facts bearing on all kinds of practical
affairs, and those who search through the records of the past for illustrations
of experiments and experiences that may help us in our life to-day.
2. But, in the main, the study of political economy is a
Economic study social study for social ends and not a selfish study for
needed in a
individual advantage. The name political economy was

democracy first suggested in France when the government was
monarchical and despotic in the extreme. As domestic
economy indicates a set of rules or principles to guide wisely the action of
the housekeeper or the owner of an estate, so political economy was first
thought of as a set of rules or principles to guide the king and his counselors
in the control of the state. The term has continued to bear something of that
suggestion in it, though of late the term "economics," as being broader and
less likely to be confused with politics, has very generally come into use.
But in the degree in which unlimited monarchy has given way to the rule of
the people, the conception of political economy has been modified. In a
democracy there is need for a general diffusion of knowledge. The power
now rests not with the king and a few counselors, but in the last resort with
the people, and therefore the people must be acquainted with the experience
of the past, must have all possible systematic knowledge to enlighten public
policy and to guide legislation.
Moreover, with the growth of the modern state, with the
Is of growing interest increasing importance of business, and of
interest and
influence industrial and commercial interests, as compared with
changes of dynasty or the personal rivalries of rulers,
economic questions have grown in relative importance. In our own country,
particularly since the subjects of slavery and of States' rights ceased to
absorb the attention of our people, economic questions have pushed rapidly
into the foreground. Indeed, it has of late been more clearly seen that many
of the older political questions, such as the American Revolution and
slavery, formerly discussed almost entirely in their political and
constitutional aspects, were at bottom questions of economic rivalry and of
economic welfare. The remarkable increase in the attention given to this
study in colleges and universities in the last twenty years is but the index of
the greatly increased interest and attention felt in it by citizens generally.
To sum up, it may be said that in the study of political economy we are
seeking the reason, connection, and relations in the great multitude of acts
arising out of the dependence of desires on the world of things and men.

CHAPTER 2
ECONOMIC MOTIVES

§ I. MATERIAL WANTS, THE PRIMARY ECONOMIC MOTIVES

1. A logical explanation of industry must begin with a
Feeling urges to discussion of the nature of wants, for the purpose of
economic actions
industry is to gratify wants. An economic want may be
defined as a feeling of incompleteness, because of the lack of a part of the
outer world or of some change in it. Often the question asked when one first
sees a moving trolley car or automobile or bicycle is: What makes it go?
The first question to ask in the part of the study of economic society here
undertaken is: What is its motive force? Without an answer to that question
one cannot hope to understand the ceaseless and varied activities of men
occupied in the making of a living. The question merits long and careful
study, but the general answer is so simple that it seems almost self-evident:
The motive force in economics is found in the feelings of men. It is men's
desire to make use of men and things about them which calls forth all the
manifold phenomena studied in economics.
2. Wants among animals depend on the environment;
Animal species that is to say, the utmost that creatures of a lower order
shaped by their
environment than man can do is to take things as they find them. The
imagination and intelligence of animals are not
developed enough to lead them to desire much beyond that which is
ordinarily to be obtained. And so the environment shapes and affects the
animal. The fish is fitted to live in the water and thrives there, and we must
believe, enjoys living there. The horse and the cow like best the food of the
fields, and so each species of animal, in order to survive in the severe
struggle for existence, has been forced to fit itself to the conditions in which
it lives. After the animal has been thus fitted, its desire is for those things
normally to be found in its surroundings. So different animals desire or

want different things, but always it is the environment that determines the
want, and not the want that determines the environment.
3. In simpler human societies, wants are mostly confined
Simple wants of to physical necessities; that is, in the earlier stages of
primitive men
society, man's wants are very much like those of the
animals. Man bends his energies to securing the things necessary to
survival. He feels the pangs of hunger and he strives to secure food. He
feels the need of companionship, for it is only through association and
mutual help that men, so weak as compared with many kinds of animals,
are able to resist the enemies which beset them. He needs clothing to
protect him against the harsher climates of the lands to which he moves. For
the same purpose, to protect himself against the cold and rain, he needs a
shelter, a cave, a wigwam, or a hut; for a house is but a larger dress.
4. In human society, wants develop and transform the
Manifold wants in world. In the rudest societies of which there is any
civilized society
record, savages are found with wants developed in a
great number of directions beyond the wants of any animals. Man is not a
passive victim of circumstances; his wants are not determined solely by his
environment; his desires soar beyond the things about him. As men become
more the masters of circumstances, their desires anticipate mere physical
wants; they seek a more varied food of finer flavor and more delicately
prepared. Dress is not limited by physical comfort, for one of the earliest of
the esthetic wants to develop is the love of personal ornament. The rude hut
or communal lodge to protect against rain and cold becomes a home. Out of
the earlier rude companionship develop the noblest sentiments of friendship
and family life. Seeking to gratify the senses and the love of action, men
develop esthetic tastes, the love of the beautiful in sound, in form, in taste,
in color, in motion. And finally, as the imagination and intellect develop,
there grow up the various forms of intellectual pleasures—the love of
reading, of study, of travel, and of thought.
The various wants of man are sometimes classified as necessities, comforts,
and luxuries, but all economists take care to emphasize that these terms
have only relative meanings which, in the rapidly changing conditions of
modern life, are changing constantly. The comforts of one generation, or of
one country, become the necessities in another; and luxuries becoming
comforts, are looked upon finally as necessities. And as the desires grow,

they more and more alter the world. Man has changed the face of the earth;
he has affected its climate, its fertility, its beauty, because, either for better
or for worse, his desires have impressed themselves upon the world about
him.
5. In human society the growth of wants is necessary to
Wants must precede progress. From the earliest times teachers of morals
wealth
have argued for simplicity of life and against the
development of refinements. We do not now raise the moral question, but
there is no doubt that the economic effect of developing wants is in the
main to impel to greater effort. They are the mainspring of economic
progress. In recent discussion of the control of the tropics, the too great
contentedness of tropical peoples has been brought out prominently. Some
one has said that if a colony of New England school-teachers and
Presbyterian deacons should settle in the tropics, their descendants would,
in a single generation, be wearing breech-clouts and going to cock-fights on
Sunday. Certain it is that the energy and ambition of the temperate zone are
hard to maintain in warmer lands. The negro's content with hard conditions,
so often counted as a virtue, is one of the difficulties in the way of solving
the race problem in our South to-day. Booker T. Washington, and others
who are laboring for the elevation of the American negroes, would try first
to make them discontented with the one-room cabins, in which hundreds of
thousands of families live. If only the desire for a two- or three-room cabin
can be aroused, experience shows that family life and industrial qualities
may be improved in many other ways.
Not only in America, but in most civilized lands to-day,
But impossible is seen a rapid growth of wants in the working-classes.
hopes lessen
gratifications The incomes and the standard of living have become
increasing, but not so fast as have the desires of the
working-classes. Regret has been expressed by some that the workers of
Europe are becoming "declassed." Increasing wages, it is said, bring not
welfare, but unhappiness, to the complaining masses. If discontent with
one's lot goes beyond a moderate degree, if it is more than the desire to
better one's lot by personal efforts, if it becomes an unhappy longing for the
impossible, then indeed it may be a misfortune. But a moderate ambition to
better one's condition is the "divine discontent" absolutely indispensable if
energy and enterprise are to be called into being.

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

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

1. The spiritual nature of man must not be ignored in
The real man in economic reasoning. There has been much and just
economics
criticism of the earlier writers and of their conclusions
because so little account was taken by them of any but the motive of self-
interest in economic affairs. Generally it was assumed that men knew their
own interest, and sought in a very unsympathetic way those things which
would gratify their material wants. Thus man in economic reasoning was
made an abstraction, differing from real men in his lack of manifold
spiritual and social elements.
2. The main classes of non-material wants that are
Desires for the non- secondarily economic are fear of temporal punishment;
material may
become economic sentiments of moral and religious duty; pride, honor,
motives and fear of disgrace; and pleasure in work for itself, for
social approval, or for a social result. The first is best
illustrated by slavery, where the slave is not impelled to seek wealth for his
own welfare, but is driven by punishment to perform the task. The object is
to create within the mind of the slave a motive that will take the place of the
ordinary economic motive. The feeling of religious or moral duty leads men
to act often in direct opposition to the usual economic motive. The taboo is
faithfully observed by the members of a savage tribe who suffer as a result
the severest hardships. A religious injunction prevents the use of food that
would save from starvation. Pride, either of family or of calling; the

soldier's honor leading him to sacrifice not only his future but his life; the
love of social approval, holding men to the most disagreeable tasks—these
illustrate how strongly social sentiments oppose the narrower motive of
immediate self-interest as generally thought of. Pleasure in work for work's
sake, and pride in the result, may act as motives quite as strong in some
cases as desire for the product that can be used. And even where this does
not change the kind of work done, it comes in to influence the interest and
earnestness with which the work is performed.
3. Whatever motive in man's complex nature makes him
Economists must desire things more or less, becomes for the time, and in
overlook no
influence on value so far, an economic motive. These various social and
spiritual motives sometimes work positively, in the
direction of magnifying man's desire for things; sometimes negatively, to
diminish it. If we are to understand economic action, we must take men as
they are. A religious motive that leads men to refrain from the eating of
meat or to eat fish in preference on certain days, is a fact which the
economist has but to accept, for it is sure to affect the value of meat and fish
at that place and time. Moral convictions, whatever be their origin, whether
due to the teaching of parents, to unconscious influences, or to native
temperament, may be quite as effective as the pangs of hunger in
determining what men desire. Therefore, while these various motives are
primarily social or moral or religious, they may be said to be secondarily
economic motives, and they may become in certain cases the most
important influences of which the economist must take account.

CHAPTER 3
WEALTH AND WELFARE

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

1. The gratifying of economic wants depends on things
Man is the center ofoutside of the man who feels the wants. Man is to
economic reasoning
himself the center of the world. He groups things and
estimates things with reference to their bearing on his desires, be these what
are called selfish or unselfish. If we were discussing the economics of an
inferior species of animals, things would be grouped in a very different way.
But economics being the study of man's welfare, everything must be judged
from his standpoint, and things are or are not of economic importance
according as they have relation to his wants and satisfactions. Things
needful for any of the lower animals are spoken of as "ministering to
welfare" in the economic sense only in case these animals are useful to
men. Examples are the mulberry-tree on which the silkworm feeds, the
flower visited by the honey-bee. In the same view some men are seen to
minister to the welfare of other men and therefore bear the same relation for
the moment to the welfare of the others as do material things. In any case
we study man's welfare as affected by the world which surrounds him.
2. Material things and natural forces differ in kind and
Physical nature is nature. This is an axiom which we must take as a basis
an unchangeable
fact for reasoning in economics. Things have certain physical
qualities quite apart from any action or influence of man.
They are operated on by mechanical laws; the force of gravitation causes
them to fall at a certain rate under given conditions. They differ in specific
gravity, reflect the rays of light, absorb or transmit heat. All these things are
for man ultimate physical facts, but unless he knows these facts he cannot
take full advantage of the favorable qualities of things or weigh properly
their importance to his welfare. Things differ in a multitude of ways in their

chemical qualities. Niter, charcoal, and saltpeter, combined in certain
proportions, give certain reactions; different combinations give various
results. Solids combine to form gases, and liquids unite to form solids, and
these qualities and reactions of material things are for man ultimate truths
of chemistry. Likewise many things have certain physiological effects.
Sunshine acts on living bodies, whether plant, animal, or man, in certain
ways. Some plants are nourishing to man, others are poisonous. If man were
not on the earth, things would have the same physical and chemical
qualities, mechanical laws would be the same as at present so far as we can
conclude. Man cannot change the nature of things; but he can acquaint
himself with that nature and then put the things into the relations where a
given result will follow.
3. As a result of these differences, things have different
But economics has relations to wants. These various qualities, physical,
to do with
psychological chemical, physiological, are important in an economic
effects sense only as they produce psychological effects, that is,
as they affect the feelings and judgments of men. We
come to some general thoughts which it will be well to define.
Gratification is the feeling that results when a want has
Some definitions been met. Feelings are hard to define in words; the best
definition is found in the experience of each individual.
We can only say, therefore, that gratification is the attainment of desire, the
fulfilment of wants. The word that has usually been employed in this sense
in economic discussion is "satisfaction"; but by its derivation and general
usage satisfaction means "the complete or full gratification" of a desire, and
this meaning is quite inconsistent with the thought in many connections in
which the word is used. We shall therefore prefer here the word
gratification, and its corresponding verb, gratify.
Wealth is the collective term for those things which are felt to be related to
the gratification of wants. The word is applied in economic discussion to
any part of those things, no matter how small. We shall have occasion later
to define and discuss this term more fully.
Welfare, in an immediate or narrow sense, is the same as gratification of the
moment; in a broader sense, it means the abiding condition of well-being.
We have here a distinction very much like that often made between pleasure

and happiness. If we think of only the present moment, welfare is the
absence of pain, and the presence of the pleasureable feeling; but if we
consider a longer period in a man's life or his entire lifetime, it is seen that
many things that afford a momentary gratification do not minister to his
ultimate, or abiding, welfare. Moralists and philosophers often have dwelt
on this contrast. The difference is illustrated by the thoughtlessness and
impulsiveness of a child or savage as contrasted with the more rational life
of those with foresight and patience.
Wealth, in the general economic sense, is judged with
Economics first reference to gratification rather than with reference to
studies wealth
abiding welfare. It is the first duty of the economist not
to preach what should be, but to understand things as they are. He must, in
studying the problem of value, recognize any motive that leads men to
attach importance to acts and things. He will therefore take account of
abiding welfare and of immediate gratification to exactly the degree that
men in general do, and the sad fact is that the present impulse rules a large
part of the acts of men. Whether tobacco or alcohol or morphine minister to
the abiding happiness of those who use them does not alter the immediate
fact that here and now they are sought and an importance is attached to
them because of their power to gratify an immediate desire.
5. In studying the question of social prosperity, however,
Then wealth and we must rise to the standpoint of the social philosopher
welfare
and consider the more abiding effects of wealth. Wants
may be developed and made rational, and the permanent prosperity of a
community depends upon this result. Any species of animal that continued
regularly to enjoy that which weakens the health and strength would
become extinct. Any society or individual that continues to derive
gratification, to seek its pleasure, in ways that do not, on the average,
minister to permanent welfare, sinks in the struggle of life and gives way to
those men or nations that have a sounder and healthier adjustment of wants
and welfare. We touch here, therefore, on the edge of the great problems of
morals, and while we must recognize the contrast that often exists in the life
of any particular man between his "pleasures" and his health and happiness,
we see that there is a reason why, on the whole, and in the long run, these
two cannot remain far apart. The old proverbs, "Be virtuous and you will be
happy," "Honesty is the best policy," and "Virtue is its own reward," have a

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

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

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

fall into several classes. We may first distinguish between free and
economic goods. Free goods are things that exist in superfluity, that is, in
quantities sufficient not only to gratify, but to satisfy all the wants that may
depend on them. Economic goods are things so limited in quantity that all
of the wants to which they could minister are not satisfied. The whole
thought of economy begins with scarcity; indeed, even the conception of
free goods is hardly possible until some limitation of wants is experienced.
Practical economics is the study of the best way to employ things to secure
the highest amount of gratification. The problem itself arises out of the fact
that many things are used up before all wants dependent on them are
completely satisfied.
A distinction is often made between consumption and production goods, or
it may be better to say immediate and intermediate goods. Consumption
goods are those things which are immediately at the point of gratifying
man's desires. Production goods are those things which are not yet ready to
gratify desires; some of them, being merely means of securing consumption
goods, never will themselves immediately gratify desire.
3. Value, in the narrow personal sense, may be defined
Value is utility as the importance attributed to a good by a man. The
given precision
vagueness and inexactness of the word "utility," or the
word "good," disappears when we reach the word "value." It is not a usual
relation or a vague degree of benefit sometimes present and sometimes
absent, but it refers to a particular thing, person, time, and condition. Value
is in the closest relation with wants, and in this narrow sense depends on the
individual's estimate. From the meeting and comparison of the estimates of
individuals, arise market values or prices, which are the central object of
study in economics.

CHAPTER 4
THE NATURE OF DEMAND

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

1. As wants differ in kind and degree, so goods differ in
Wants and goods their power to gratify wants. This general and simple
must be constantly
adjusted statement unites the leading thoughts of the two chapters
preceding. Confirmation of its truth may be found in
observation and experience. The purpose of this chapter is to show how,
starting from the general nature of wants and the nature of goods, we can
arrive at an explanation of the exchange of goods. Recognizing the simple
but fundamental fact stated at the opening of this paragraph, an exchange
may be seen to be a rational and a logical result when men are living
together in society.
2. Immediately enjoyable goods are the first objective
Ripe and unripe things whose value is to be explained. Goods come into
goods
relation with wants in a multitude of ways. Some things
will not gratify a want until after the lapse of a long time, as ice cut in
December and stored for summer use. Other things will never themselves
directly gratify a want, but will be of help in getting things that do; such are
the young fruit trees planted in the orchard, and the hammer that will be
used to drive nails in a house that will shelter men. Still other things are
gratifying wants at this moment, or are ready for use and will be used up in
a very short time; examples of such are the food on the table and in the
pantry, and the cigar in the pocket. All these things are called goods,
because of their beneficial relation to man's desires, but the relation is very
immediate in some cases, very remote in others. The value of all goods is to
be explained, but the explanation will be more or less complex according to
the directness or indirectness of their relation with wants. As it is the power
of goods to gratify wants that alone causes value to be attributed to them,
those goods which are ripest, which are ready to gratify wants, are nearest

to the source of an explanation. The value of unripe enjoyments must be
traced to some expected gratification as its cause or basis. In order to attack
the difficulties one by one we will, therefore, in the following discussion,
deal first with this class of ripe, consumable goods, as food, personal
services, enjoyments of any sort that are immediately available. The
explanation of these cases of value must precede that of cases in which the
relation to wants is less obvious and direct.
3. As the amount of any good increases, after a certain
The law of point the gratification that the added portions afford
diminishing utility
decreases. This is called the law of the diminishing
utility of goods or of the decreasing gratification afforded by goods. The
reason for the truth of this proposition is found in the very nature of man
and his nervous organization. Any stimulus to the nerves, however pleasant
at first, becomes painful when long continued or increased unduly. The
trumpet too distant at first for the ear to distinguish its notes, may swell to
pleasing tones as it approaches, until at length its volume and its din may
become absolutely painful. If we were to express the degree of gratification
by a curve, we should see the curve rising gradually to a maximum, and
then falling somewhat suddenly and becoming a negative quantity, when
pain, not pleasure, resulted. The same change could be illustrated by any
sensation or by any of men's activities.
The proposition must be understood as applying to the gratification
resulting from each added portion of the sensation. There is a maximum
point in the gratification afforded by any nerve-stimulus. A man coming in
from the winter's storm and holding out his hands before the fire, feels an
intense pleasure in the grateful warmth; a few moments later, the same heat
becomes unpleasant. In winter we wish for a moderation of the temperature;
on the sultry days of summer, we think of a cool breeze as the most to be
desired of all things. Whether the temperature rises or falls, there is a point
beyond which the change is no longer an addition to, but a subtraction from,
pleasure. A man, however hungry at first, may be made miserable if forced
to eat beyond his capacity. Each added portion of the good consumed
contributes to the gratification up to a certain point. The sum of these
pleasurable sensations may be called the total gratification, which finally
reaches satisfaction or fullness. Then begins what may be called in
algebraic phrase a "negative gratification" which, if it becomes large

enough, will make the total gratification a negative quantity. Each added
portion, dose or increment beyond a certain point reduces thus the welfare
of the user. One may have too much of a good thing.
4. Marginal utility is the gratification afforded by the
The marginal utility
added portion of the good. The marginal dose,
increment, or portion is that which may be logically
considered as coming last in the case of any good or group of goods
divisible into small parts. In considering the strict theory of the case, in
order to get at the principle involved, the doses may be spoken of as
infinitesimally small. The marginal utility expresses the importance that
men attach to one unit of this kind of goods under the particular
circumstances at the moment existing, and not under certain conceivable
conditions which do not in fact exist or need to be taken into account by the
persons affected. The marginal unit of a homogeneous supply cannot be
considered to have a greater utility than any other unit at the moment, and
therefore the product of the marginal utility by the number of units, gives
the total measure of importance of the supply then and there, and this is the
value.
The value of goods, as has been indicated, is the measure of the dependence
felt by men on a portion of the outer world, as the condition of gratifying
their wants. From the very nature of wants, which reside in feelings, a
dependence that is not felt, a relation between things and gratification that is
not recognized, can have no influence on value. Now, it is at this margin of
supply that dependence is felt. Men do not concern themselves about that
which they have in superfluity—unless, indeed, the excess causes them
some discomfort. It is well that they do not, for a wise direction of effort
can only take place when men think mainly of their need of things that they
want, and want most, and direct their efforts toward securing them.
The diminishing utility of successive portions (doses or
From marginal increments, as they are called) may be represented by a
utility to value
curve of utility.

Scale of Supply
The diagram is constructed on the hypothesis that a tenth unit of a certain
good would have a utility expressed as 36; a fifteenth unit of 30, etc., and
that the value of the whole supply is estimated according to these marginal
units. Of course if the conditions were that "all or none" was to be taken,
the result would be different.
Unit of Supply Marginal Utility Value of Whole Supply
10 36 360
15 30 450
20 25 500
30 19 570
40 15 600
50 10 500
60 5 300
This diagram is frequently used, and it is important to guard against some
misunderstandings. The marginal unit of any given supply—for example,
ten units—is not any particular unit, it is any one of the ten units. In the
presence of nine units of the good the person or persons find all the various

wants that are dependent on that good gratified to such a degree that the
tenth unit has an importance expressed by 36. But as this last or marginal
unit of supply may be used for any of the purposes, the importance of each
and every unit likewise will be expressed by 36. Any one of the units, when
once present is, in a logical sense, a marginal unit. When, however, it is a
question of increasing the supply, some one unit may properly be looked
upon as marginal. The dependence felt by men on the whole group is the
product of the units by the marginal utility. As the number of units
increases, the marginal utility decreases, until at length it may reach zero,
and the total value would be nothing. A point of maximum value evidently
will be found somewhere between the two extremes.
Note carefully that on the one diagram are represented a
Only one marginal large number of marginal utilities which never exist at
utility at one
moment one and the same moment. At any one moment there is a
given number of units and there is but one marginal
utility, and this is the same for each of the units. It is quite erroneous to say
that when there are 30 units the utility of the tenth unit is 36; of the
twentieth, 25; of the thirtieth, 19. It is equally incorrect to say that when
there are 60 units the "total utility" is equal to the area between the right
angle and the curve a-g, while the value is equal to the rectangle below and
to the left of the point g. The curve from a-g but marks the height of
marginal utilities that have no existence when the supply is 30. The "total
utility," often spoken of in this connection, if it has any existence certainly
cannot be calculated. The diagram must be understood as representing
indicatively at any given moment but one marginal utility, the same for
every unit of like goods. The other perpendicular lines are expressed in the
conditional mood; they are what the marginal utility would be were the
numbers of units different.
5. Since goods possess utility only as they gratify wants,
Changing feelings it follows that if wants change, the utility changes.
changes utility
Utility does not rest unchanging in the goods as
something "intrinsic," but it depends on the relation of goods to men. This
truth, unrecognized for many centuries, is now seen to be fundamental to
the whole problem of value. The portions of a good added later do not
appeal to the same man as the earlier portions. The man has been changed
by what he has enjoyed. In changing his feelings, goods have also changed

his wants. Hence, the added portions of the good are changed in respect to
their utility or power to gratify a man's wants. Though physically and
chemically, i.e., in every material way, they are exactly like the earlier
portions, they cannot have the same want-gratifying power until he again
changes, for they are not in the presence of the same feelings.
Wants are constantly shifting; different kinds of goods are compared in
man's thought and arranged on a scale at every moment according to their
felt utility. An increase in the amount of a good will drop the marginal
utility of the added portions down the scale of usefulness for the next
moment. When we rise in the morning, we want our breakfast; the breakfast
eaten, another breakfast does not appeal to us. Our tasks done, we take a
boat-ride or go golfing; then, appetite returning, we are tempted to our
dinner. And thus from hour to hour wants are gratified, are altered and are
shifted, until, wearied with the day's labor and pastimes, we go to rest. In a
well-ordered life, in an advanced economic society, the means for gratifying
our wants as they arise are provided in advance. The changing series of
desires is met by a changing series of goods. Life has been defined as a
constant adjustment of inner relations to outer conditions. Economic life is
therefore like physical life, a constant adjustment; and this adjustment of
goods but reflects the shifting and adjustment of feelings.
6. The substitution of goods in men's thought is the
Choice is constantly
shifting of the choice from a good that does not give the
shifting
highest gratification economically possible at the time,
to another good that does. The shifting that takes place on the scale of
gratification makes it necessary for man to shift constantly his choice of
goods. This again is the problem of "economy." Waste results when goods
continue to be used to secure a lower degree of gratification, if they might
be used to secure a higher. The change of choice may be because of a
change in the man, or because of a change in the quality or the quantity of
the goods; or because of a change in the ratio at which the goods can be
secured.

§ II. DEMAND FOR GOODS GROWS OUT OF SUBJECTIVE
COMPARISONS

1. Demand is desire for goods united with the power to
Desire may become give something in exchange. An example frequently
demand
given to show the difference between desire and demand
is the hungry boy looking longingly at the sweetmeats in the confectioner's
window. He represents desire, but not until the kind-hearted gentleman
gives him a nickel does he represent effective demand. Desire, therefore,
must be united with power to give something in exchange before it can be
called demand. It must be for something that is attainable; yearning for
something beyond reach, sighing for the moon, is desire that never can
become effective demand.
2. Demand is the social aspect of the individual man's
Demand the Social comparison of utilities. It is the expression of the man's
expression of
shifting choice wish to substitute some of his goods for some one else's
goods in order to get a higher satisfaction. This
comparison is often made between two goods owned in different quantities.
When men are constantly comparing things in their own possession, it is a
short step to compare their goods with their neighbor's.
Demand for consumption goods is thus the manifestation of the man's
desire to redistribute his enjoyments. In demand for goods men virtually
say: "Part of what I have I am ready to give for part of what you have." The
strength of their desire is expressed by the amount of their offer. When he
makes this comparison and this offer, man enters into a social, economic
relation with his fellows.
3. The law of individual demand is: The trader will
The limit of the reduce his stock of a particular good to the point where
exchanger's demand
its marginal utility equals that of the alternative goods.
The greater the divergence in his estimates of the marginal utilities of two
goods, the more ready is he to trade the lower utility for the higher one.
Exchange is but the effort to adjust goods to wants in the best way. The less
useful (marginally viewed) is traded for the more useful. The greater the
difference, in the one trader's judgment, between the marginal utilities of
the two goods, the greater is the maladjustment, and the greater, therefore,
is the motive to seek readjustment by means of exchange. As the quantity of
the good parted with declines, its marginal utility increases; and as more of
the other good is acquired, its marginal utility declines. The marginal utility
of the two exchangeable units must come to equilibrium in the individual's

judgment. At this point demand ceases, not because an additional unit of the
one good could afford no gratification, but because it would afford less
gratification than the other good in which demand must be expressed to be
effectual.
4. Demand thus varies at different ratios of exchange
The Demand curve between goods, and may be expressed graphically by a
demand curve. This would show for any one man the
decline of the marginal utility of each added portion of a good, and these
individual demand curves may be united into a demand curve for a group of
men. The demand curve expresses graphically what a man would be willing
to pay at each particular stage in the increase of goods. We have here come
to the very threshold of the subject of markets and exchange.
5. Elasticity of demand, in the case of any good,
Elasticity of expresses the degree in which a change in its ratio to
demand
other goods will increase the demand. Elasticity varies
for different classes of men according to their wealth and to the cost of the
goods. If strawberries are a dollar a box in the city market, a slight fall in
the price, say to seventy-five cents, will increase the demand but slightly.
But if the price is fifteen cents and falls to ten, the increase in the demand
will be marked, for the number of consumers to whom a difference of five
cents is important is then very great. The demand for the staples is
comparatively inelastic. A certain amount of simple food is necessary to
support life; an increase in its price will not quickly check the demand. On
the other hand, if the price of staple foods falls, no very great increase will
take place in the demand.

CHAPTER 5
EXCHANGE IN A MARKET

§ I. EXCHANGE OF GOODS RESULTING FROM DEMAND

1. Exchange in the usual economic sense is the transfer
Reciprocal demand of two goods by two owners, each of whom deems the
becomes exchange
good taken more than a value-equivalent for the one
given. The comparison of goods that has been discussed above is a kind of
exchange. When a person chooses one thing rather than another, one form
of gratification may be said to be mentally exchanged for another. This is
exchange in that person's mind, or subjective exchange. But the word
"exchange" as usually employed means an exchange of goods between
persons. It is objective exchange, and when the word is used without
modification, it is to be understood in the objective sense. In the last chapter
were analyzed the motives of the individual man. Robinson Crusoe on his
desert island would in very many ways be acted upon by the same motives
in reference to economic goods that men are in society. Yet, it is exchange
in society and the complicated problems arising from this transfer of goods
from person to person that constitute nearly the whole of the subject-matter
of political economy.
Exchange is seen to arise out of the differences in the situations of men with
reference to goods. The different subjective valuations give rise to demand,
and demand leads to exchange. In early societies differences in natural
products were the most usual causes of exchange. Salt, though so essential
to life, is found in few places. The metals early became indispensable for
weapons of defense or for the chase, and were sought far and wide. Rare
shells, feathers, jewels, and the precious metals appealed in early times to a
universal desire for ornament. Products like these are the objects of a rude
sort of exchange in the first simple efforts made to adjust possessions to
wants. Within the tribe, differences in the skill and ability of men to

produce arrow heads or weapons or ornaments, bring about the exchange of
goods.
2. The advantage of exchange consists in the raising of
Mutual advantage the want-gratifying power of goods to both parties. It
in exchange
generally was assumed by medieval thinkers that if one
party to an exchange gained, the other must lose. The mistaken idea
prevailed that value is something fixed in the good, and unchangeable.
Where the exchange is voluntary (and only that kind is here being
considered), it is mutual advantages which make the exchange rational.
Many false conclusions on practical questions still result from a failure to
grasp this simple truth. It follows from this that the act of exchange is itself
useful, for goods having a small importance to men are given a higher
importance by being brought into better relations with wants. Merchants,
peddlers, traders, and common carriers of all sorts, therefore, are adding to
the utility of goods. This idea has been only slowly apprehended, but is now
one of the least disputed propositions in economics.
3. Barter is the exchange of goods without the use of
Demand is supply money. Either one of the goods traded in cases of barter
in another aspect
may be considered as sold, and either one as bought,
according as the matter is looked at from the standpoint of the one or the
other party to the exchange. Demand, therefore, is supply, and supply is
demand when the point of view is shifted from one party to another. The
fisherman's demand for venison is expressed in terms of fish; the hunter's
demand for fish is expressed in terms of venison. But to the fisherman the
venison is the supply offered to him. The term "marginal utility" of a good,
therefore, does not refer merely to the demand of the consumer; for it
expresses by a single phrase the idea both of demand and of supply. The
utility of the goods composing the supply is expressed in terms of the goods
that represent demand and vice versa. The only way in which man can give
definite, concrete, numerical expression to his desire for goods is to state it
in terms of other goods. In expressing numerically, in terms of other
objects, an estimate of the utility of an apple, a horse or a house, one
inevitably gives expression to a ratio of exchange; demand for one good is
the offer of another good.

§ II. BARTER UNDER SIMPLE CONDITIONS

1. In isolated exchange, where only two traders engage
In isolated in barter, their estimates give respectively the upper and
exchange the price
is not economicallythe lower figures of the ratio at which the trade can take
fixed place. Let us recall the fact that a difference in the
relative estimates that men place on goods is the first
essential of exchange. Those estimates may be expressed in a ratio; we may
say that A will give four apples for one orange, would be glad to give fewer,
but will not give more; while B will give one orange for three apples, would
be glad to get more apples, but will not take fewer. The outside limits of the
ratio at which the exchange must take place will, therefore, be one orange
for three or four apples.
A, seller of apples, offers 4 (or fewer) apples for 1 orange.
B, buyer of apples, demands 3 (or more) apples for 1 orange.
There is, in entirely isolated exchange, therefore, a lack of definiteness in
the price, much depending on what Adam Smith called the "higgling of the
market." In the old-time American horse trade much depended on "bluff"; in
such cases it was as important to be able to judge character as to judge
horses. A thorough analysis of the trade, however, would probably show
that the bargain is concluded at a point which exactly balances the hopes of
gain and fears of loss of one of the parties.
2. Where one-sided competition exists, the ratio of the
Competitive exchange will be somewhere between the estimates of
bidding narrows the
limits of price the two buyers most eager for the last portion offered.
By competition is here meant the independent seeking of
the same thing at one time by two or more persons. Where there is one
market price paid by a number of buyers, it may be that no two of the
subjective estimates are alike; the exchange value may differ from all of
their estimates, and yet must correspond closely to two. Auction sales well
illustrate the principle. If there is one ax to be sold and ten possible buyers
for an ax, and there is no combination among them, the bidding will go on
until the estimate of the buyer next to the most eager, has been reached. The
most eager buyer can then secure the ax by bidding just a little above his
next competitor. But if there are ten axes and ten buyers who know that
there will be ten axes offered, the more eager buyers will refuse to bid much
above the less eager ones. A shrewd auctioneer, therefore, often conceals

the fact that there is more than one of an article, and having sold it off,
brings out a second or a third one of the same kind, thus keeping the buyers
in ignorance of the supply and getting somewhere near the estimate of the
most eager buyer in each case. Advertisements of "a limited supply," "the
last chance," "positively the last appearance," are meant to stimulate the
demand of the patrons, and to lead them to buy at once. In general,
therefore, where competition exists on one side, price is fixed with greater
definiteness than in isolated exchange. Not so much depends on shrewd
bargaining, on bluff, or on the stubbornness of an individual. Far more
depends on forces outside the control of any one man. The bidders are
impelled by self-interest to outbid their competitors, and thus the limits
within which the market price must fall are narrowly fixed.
If things already brought to market must be sold at any
Buyers fix price of price that can be secured, the buyers may be said to fix
perishable goods
the price. This does not mean that they can buy it for any
sum that they wish, but it means that when each one is trying to get it as
cheap as possible, their bids finally determine how much it will sell for. In
such cases, therefore, the competition is for the moment one-sided.
If a part of the supply can be withdrawn and kept without great loss, this
will be done if the price is low. Strawberries, fish, and meat may be sold
Saturday night at any price that will secure purchasers, but every thing that
can be kept with little or no depreciation will be withheld from sale for a
time. It may even be of advantage to the seller to destroy a part of the
supply, when the increased price of the smaller amount will give a larger
total.
3. Where two-sided competition exists, the bidding goes
The margin of on until a price is reached where the least eager seller
advantage and the
marginal pair and the least eager buyer have the narrowest possible
motive to exchange. As the market ratio varies from
those in the minds of the individuals when they come to the market, there is
left a considerable margin to some and a very small one to others. This
difference between the market value and the ratio of exchange at which any
given individual would continue to exchange for the good may be called the
margin of advantage. Moreover, the buyers will have a margin and the
sellers a margin, and as that margin narrows there is less and less motive to
continue the exchange until, finally, the margin disappearing, the buyer or

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

Units of Goods

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

§ III. PRICE IN A MARKET

1. A market is a body of buyers and sellers in such close
One price in a business relations that the actual price conforms closely
market
to the valuation of the marginal pair. The word "price"
which we have used, may be defined as value expressed in terms of some
commonly exchanged commodity. The term is used more broadly of
anything given in exchange. The very terms of this definition imply that
there can be but one price in a market. This is a somewhat abstract but a
useful economic proposition. Very often within sound of each other's voices
traders are paying different prices for a good. On the occasion of a break in
the stock-market, excited traders within ten feet of each other make bids
that differ by thousands of dollars. Retail and wholesale merchants may be
purchasing goods in the same room at the same time at very different prices.
But within a group of buyers and sellers where competition is
approximately complete, price is fixed with some degree of exactness. The
more nearly the actual conditions approach to the ideal of a market, the less
are prices fixed by higgling, and the more impersonal they become, the
buyers and sellers being compelled to adjust their bids to the needs of the
market, and not being able to vary them greatly one way or the other.
2. Markets are steadily widening through the
The earlier markets improvement of means of communication and
transportation. The earliest markets were established on
the borders between tribes, villages or nations as a common ground where
strangers met to trade. At such markets were brought together from sparsely
settled districts a comparatively large number of merchants and customers.
Buyers had the opportunity of wide selection both in kind and quality, and
the sellers found a large body of customers gathered at one point.
Throughout the Middle Ages purchases were made by the more prosperous
husbandmen in great quantities once a year at the fairs or markets. As both
the buyers and sellers came from widely separated places, there was, in
most respects, no combination, and the conditions of a competitive market
were present.
The number of buyers and sellers that can constitute a
The growth of single market is limited both directly and indirectly by
markets
the means of transportation. A dense population cannot
usually be maintained without easy means of transportation to bring in a
large supply of food, and to carry back manufactured goods great distances.

The remarkable growth in the means of commerce since the application of
steam to water traffic, and the invention of the railroad, have made it
possible for goods to be gathered from most distant points. A market
implies a common understanding among traders. Modern means of
communication such as newspapers, post-offices, telegraph and cable, trade
bulletins, commercial travelers, the consular service, and many forms of
special agencies, are diffusing information widely. As a result of these
changes, there has been a widening of the village-market to the markets of
the province, of the nation, and finally of the world. While a part of every
one's purchases continues to be made in the neighborhood, a greater and
greater portion of the total business is done by traders who are widely
separated and who are indeed members of the world market. Various
articles produced in the same locality may seek different markets. The
market for wheat may be in Liverpool, while that for fruit and eggs is in the
village near the farm-house. If a given product of any community is sold in
different markets, the net prices secured must be very nearly equal.
3. Normal price is spoken of in contrast to market price
The conceptions when the actual market price results from exceptional
normal and market
price circumstances and probably will not be maintained. The
term "normal price," much used in economic discussion,
is the price which, apart from exceptional conditions, is expected to prevail,
and to which actual prices seem constantly striving to adjust themselves. As
actual prices are nearly always either more or less than so-called normal
price, and only momentarily ever correspond with it, the term "normal"
would appear to be something of a misnomer. Moreover, as the
circumstances of production change, this normal price itself is altered so
that what is normal one day may be quite abnormal the next. The thought of
"normal price" is an abstract one, but despite the inaptness of the word it is
not without some practical validity. In determining whether he shall
continue to produce certain goods, the business man is practically guided by
his view of normal price. An example of departure from normal price as
above defined, is found in the price of food when an expected ship has
failed to arrive at a port with its cargo of grain. A scarcity amounting almost
to famine might thus exist in a seaboard city, and the market price would
rise; but as this would be due to an accident and would afford a larger gain
than usual to those who happened to have a supply of grain, men would say

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

CHAPTER 6
PSYCHIC INCOME

§ I. INCOME AS A FLOW OF GOODS

1. Satisfaction and gratification being only temporary
The recurrence of conditions, economic wants appear in more or less
wants
regularly recurring series. Impressions are short lived,
sensations are temporary, wants that have been satisfied recur. Wants recur
for the same reason that they first arose. No impression on the nerves or on
the senses is lasting. Man's senses were developed for the purpose of
bringing him into relation with the outer world, of enabling him to survive
in his struggle with the forces of nature. So, when a good has been enjoyed,
the utility to that person of that thing or service for that particular moment,
falls, it may be even to zero. To keep wants satisfied is impossible; we
cannot do next year's reading or next week's eating now; we cannot live the
life of to-morrow. The best results in reading or eating come from taking the
right amount day by day. But it is a need in the life of men that wants
should recur after a time, otherwise there would be no motive for action.
2. The economic ideal is that this series of recurring
Series of wants and wants should be met by a corresponding series of goods.
series of goods
It is evident that if a series or succession of goods varies,
at different times, moments, and conditions, in its power to gratify wants,
the closer the correspondence between the two series, that of wants and that
of goods, the greater will be the total of gratification. We may liken man's
life to a journey in which the supplies of food are gotten at the stations. If
any one of these supplies fails, the traveler suffers the pangs of hunger, and
if two or three supplies are at one point, they do not serve the needs of man
so well as if distributed along the way. This constant inflow of goods is one
of the fundamental needs of life. The savage dimly understands this need.
Even the birds and the beasts adjust their lives to it either by travel or by
toil. The spring and autumn migrations to new feeding grounds are the

attempts of the bird to gratify this series of wants as they arise. The ant, the
bee, and the squirrel anticipate, and work to fill their storehouses against the
days of need.
3. Objective income consists of the additional sums of
Social and private goods acquired by individuals or by society during the
incomes
income period. The term national or social income may
be contrasted with individual or private income in the objective sense. The
nature of the acquisition of objective incomes may, in some cases, be
different if viewed from the social and individual standpoints. Society, as a
whole, may be said to acquire income only when goods are produced;
individuals may acquire income by gift, bequest, theft, or other modes of
transfer from other individuals. In many cases the two kinds of income,
however, agree, the objective income of society being the algebraic sum of
the goods acquired or parted with by all the individuals.
We should not understand that either social or private objective incomes
include only material goods, for many utilities and labor services that never
take on a material or money expression are included in either case. Indeed,
we are close here to the conception of psychic income which is to be
developed more fully.
Income of money is not often the same as income of
Money income things. Usually many of these subtler utilities are
overlooked and omitted from the recognized money
income. In this day the use of money is so common that we are sometimes
led to ignore the value of things to which the money expression is not
given. The money income is merely the money expression of the value of
currently acquired goods, and it is the only medium through which such
varied sources of gratification can be compared.
4. Income in the logical sense must be a net addition, but
Gross and net the term gross income is not without popular and
income
practical meaning. Gross income is sometimes spoken
of in the sense of total receipts, as the total of goods secured; net income is
the remainder after deducting expenditures and after replacing the goods
employed to secure the income. In order to produce some goods technically,
men make use of other goods. While they are storing up a supply of wood
or coal it may be looked upon as the income, but they may burn it to help

grow hothouse plants. While they gather flowers with one hand, they
destroy fuel with the other. Only the net increase in value can be accounted
income in the second period. The goods that come into a man's possession
in any period are of many sorts: to get some he has destroyed many
previously existing goods; while to get others he has not needed to use up
the accumulations of the past or to mortgage the future. The one kind is
gross, the other net income.
5. An income of consumption goods is a part of wealth,
Wealth and income but not the whole of it. The consumption goods, the
"present goods" at the moment available, are the
essential part of wealth for the moment's enjoyment. The only essential and
immediate conditions of a series of gratifications is a regular series of
consumption goods. But many things existing which could be used to
secure a gratification are not in fact treated as consumption goods. A crop of
corn is not all income. In a time of famine it could be used, but seed-corn
was saved from last year, and some must be kept for next year. This is a part
of wealth, but not of "present goods" as we understand the term.
Further, in the economic world there is much wealth that
Some goods never never can gratify any want directly; many forms of
can become
enjoyable goods wealth never can be consumption goods. It is true that
everything called wealth is expected to contribute sooner
or later in some way to the sum of gratifications. It is for that reason it is
called wealth. It is, however, a mere figure of speech to say indirect want-
gratifiers become want-gratifying goods. For example, the engine
transporting a load of coal is indirectly gratifying wants; if it is transporting
a train-load of passengers, the gratification is direct. A machine making
cloth for next year is gratifying wants only in a metaphorical sense. A field
used to produce food is not a direct want-gratifier until it is transformed into
a residence site, a playground, or a tennis-court.
It is necessary therefore to recognize the distinction between present and
future incomes. The value of the mass of wealth in possession and yielding
income, rests in large part upon its power of contributing to income in some
future period. Thus, any durable good may be looked upon as embodying a
series of incomes ranging from present to future in varying degrees. This
will be fully considered under the subject of capital.

6. Incomes are called funded or unfunded according to
Income from wealththe sources from which they are derived. Funded income
and from labor
arises from the possession of wealth or of claims on
wealth, such as lands, railroad stocks, government bonds, etc. The income is
"funded" because it corresponds to an abiding fund of wealth. The income
arising from current labor is unfunded, because there is no permanent fund
of accumulated wealth corresponding to it.
The idea of regularity connected with funded income is not essential to the
idea of income in general, i.e., we cannot refuse to call a thing income
because it occurs only this year. If it is part of the sum of goods that flows
in, that is newly available for the man's use, it is income. But funded
income is the more abiding, for income from wages stops when the man
dies or fails to perform his work, while the income from wealth continues
after he ceases to be active. Thus, families with equal incomes may differ
greatly in wealth, the one depending entirely on salaries, the other on rents.

§ II. INCOME AS A SERIES OF GRATIFICATIONS

1. The value of consumption goods is
Gratification the All sources of derived from the pleasurable psychic
test of psychic income are
income productive impressions which they aid to
produce, and these psychic effects
constitute the psychic income. The objective income is sometimes called the
"real" income, but certainly it is not income in the most essential sense.
Things outside of men cannot be feelings, they can only call out or occasion
feeling, and it is the attainment of pleasurable conditions in mind or soul
that is the aim of all economic activity. Material income and immaterial
income are both related to and reducible to psychic income. Some portions
at least of the objective incomes of goods are continually by use becoming
subjective incomes of enjoyment. Men talk of material income as consisting
of bushels of wheat, head of cattle, etc., and of immaterial income as the
uses that durable goods yield directly or that men perform for each other,
e.g., those of the singer, physician, teacher, judge—all services that do not
take on material form. There was a long-standing dispute in economic
literature regarding the difference between productive and unproductive
labor. Productive labor was said to be that which embodied itself in abiding

material form. The distinction led to some peculiar puzzles and paradoxes.
The bartender mixing drinks, adds to the value of those ingredients; in a
minute that value is dissipated. According to the distinction in question, he
is a productive laborer because his services are embodied in material form,
whereas the lecturer is regarded as an unproductive laborer because the
results of his labor are not embodied in material form. But whether or not
the service has for a moment embodied itself in material form is of no
essential economic import. The presence of the waiter is as essential to the
well-served dinner as are the polished silver and china, or as the well-
cooked food. The distinction in question is not now made by economists, all
labor that contributes to value being regarded as productive. But a similar
distinction is inconsistently preserved by many writers in the case of
material things. A building used as a factory is called productive, but used
by the owner as a dwelling it is called unproductive because the service it
renders does not appear in material form. But the use of the house, or that of
land for a school ground or campus, secures a certain gratification, an
immaterial good. Consistency requires that the services of men and the use
of material things be judged by their psychic results, the question whether
the service takes on a material or an immaterial form being disregarded.
2. Only those things and actions that are in some causal
All wealth is relation to gratifications can have value to man. This
logically related to
psychic income proposition of theory is demonstrated every hour in
practical life. The business man always is trying to trace
a causal relation between things that do not and cannot themselves directly
satisfy wants, and things that do. The vineyard has no value to Tantalus,
unable to reach its fruit. A captive, chained to a rock, attaches value only to
the things within his reach. Men living in savagery and ignorance starve
amid the possibilities of plenty. Chained by their ignorance and
improvidence to a little spot of earth, they do not see clearly, either in time
or space, the economic relations about them.
3. Man's foresight and knowledge enable him to think of
Values of things many periods at once, and thus his felt dependence on
distant in time
goods extends over a series of future productive agents.
In order to simplify the problem, we have spoken of the economic man as
living only in and for the moment. If he had no more knowledge, memory,
or imagination than is necessary to compare goods here, only present goods

could have value to him. Even the higher animals, and much more the
savages, rise above that level of improvidence. With increased intelligence
the economic life of man expands, and he attaches importance to things
which at the present moment have not, and cannot have, the slightest
influence on his immediate gratification. The extension of man's view
works a momentous change in his economic estimates. Of the thousands of
forms of matter in the world, only a comparatively few ever will make an
immediate gratifying impression on man's senses. But many of them are so
connected in his thought by chains of association with pleasures or uses,
that almost instinctively and most intensely he attaches an importance to
them. In most cases it would require close thought to see that the service
attributed directly to them was but a reflection of that performed by some
other good. Thus, more and more, the estimates placed by men on goods
come to depend on knowledge and foresight, and not on immediate
impressions and feelings.
4. Things are causally related in varying degrees to the
Goods related in psychic income, and have value only as their relation is
varying degrees to
psychic income known and felt. The explanation of value is not complete
till value has been traced back to its source in
gratification. Often the complex nature of the problem is ignored. If one
discusses the trading of a bushel of grain, to be used by a hungry man for
food, for a sheep to be kept for breeding, or for wool to be made into cloth
next year, he may overlook the difference in the grade of wants compared.
In this case, a gratification of the present moment is compared with a
gratification of a very different kind at a future time. The problem involved
is complex because of differences in time, in place, and in the nature of the
want-gratifiers. The student should endeavor to reduce the problem of value
to its simplest form by considering first the exchange, at the present
moment, of immediately enjoyable goods. The logical starting-point in the
theory of value is in those goods that are in closest touch with feeling, and
on this basis may be built up an explanation of values in which reason and
forethought have a greater part. Starting from the proposition that psychic
income is the foundation of all values, we shall go on, however, to trace
causes that give value to all the physical agents, and to the most indirect of
want-gratifiers.

DIVISION B—WEALTH AND RENT

CHAPTER 7
WEALTH AND ITS INDIRECT USES

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

1. Goods may be ranked according to their technical
Technical rank of relation to wants. The technical rank of goods
agents
(sometimes spoken of as the degree of roundaboutness
of the process) signifies the number of steps or processes that intervene
between the agent used and the desired form. If one wishing the hickory-nut
hanging above his head must first pick up a stick to throw at it, the nut is
removed one step from desire. But even among savages the processes are
much more complicated. The Indian with a crude knife fashions his bow
and arrow, fastens the flint and cord which represent still other processes of
industry, and shoots the bird which satisfies his hunger. In modern
conditions the relations are vastly more complicated; only at the end of a
long series do men arrive at the thing which gratifies their wants.
2. Goods may be ranked by their relation to wants in
Time relations of time. The relation in respect to time is measured by the
goods to wants
period that must elapse before the utility of an agent
results in, is converted into, gratification. No agent or influence intervening,
a thing may yet be removed a long way from gratification. A tree may not
be fitted to bear fruit for ten years to come. Meantime, there are many other
possible uses for the tree: it may be used for fuel, or to make a canoe with
which to catch fish, or to follow some other indirect method of production.
Evidently the technical and time relations of goods are very different. The
number of steps has no necessary relation to the time. A number of
technical steps may be taken in half an hour, or a process of a single
technical step may last a year. In the mechanic arts the technical relations
are of primary significance, but in economics the time relations are mainly
to be considered.

3. Economic goods may be classified as immediately enjoyable goods and
durable agents. Enjoyable goods are goods in a final form, producing
gratification or just ready to give gratification the next moment, as the cool
draft of air made by a fan on a hot day, the cup of coffee steaming on the
table.
Many goods of just the same form as the foregoing may
Enjoyable goods not be affording current gratification (except that
and durable agents
afforded by thrift and forethought), but are kept because
later they will gratify a more intense want or gratify a want better. Apples
and potatoes are kept in a cellar so that their use is distributed throughout
the winter; cider and wine are kept till they get a quality that appeals more
to the palate. Coal, wood, and stocks of goods, are thus kept in the form of
enjoyable goods, destined to be physically destroyed when at length they
yield a gratification. Evidently they must be storing up meantime a certain
additional utility, for otherwise there would be no reason why they should
be kept for the future. Such goods as these are sometimes called unripened
consumption goods, but until ripened they bear in part the character of
durable agents.
Abiding sources of economic enjoyments are called durable agents. The
inhabited house is a source of continued gratification in each moment's
shelter it affords; but, further, it is the durable source of a series of future
uses, as yet unripened. The hammer, the hoe, the tree, the field may all be
considered as agents to secure consumption goods. Some of these are but
one step removed from direct gratification, as the hoe helping the gardener
to get food for his own use. Other agents are bound by many technical links
to the ultimate gratification.
4. This classification of goods is abstract, in that it is a
Degrees of classification, not of concrete goods, but of qualities
durableness
shared in some degree by nearly all goods. Most goods
unite in some degree both characters, but in varying measure. This is,
therefore, a continuity classification, the varying classes of goods grading
from those whose durableness is zero (just at the moment of consumption)
to those most durable, which yield an endless series of uses or products. Yet
the classification is practical, corresponding as it does with thoughts which
men have in the use of goods. By repairs and other methods goods become,
and are looked upon as, durable sources of a series of uses.

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

§ II. CONDITIONS OF ECONOMIC WEALTH

1. The bounty and variety of the natural supply of
Income as affectedindirect goods in the material world are the prime
by climatic
conditions conditions of a bountiful income to society. The effect of
climate on the supply of goods available for man is
complex. Climate is itself a direct source of gratification. As temperature
must be adjusted to man's need, climate satisfies wants directly. Health,
energy, the beauty of noonday woods and of sunlit clouds are conditioned
on the favor of nature. Climate affects, further, the supply of material
economic goods. All the earlier civilizations arose in warmer countries. But,
after man had gained a certain mastery over the obstacles of nature, he was
able to soften the harsher features of climate, and with better shelter and
clothing, with better stocks of winter food and fuel, the more favorable
features of the temperate zone could be utilized. So civilization moved
northward from Egypt and India to Greece and Rome, to northern Europe
and America.
Soil conditions for vegetable life determine first the
By natural amount and kind of animal life. Animal life from one
resources
point of view is a parasite, living on the vegetable; it is
only the vegetable that has power to assimilate most inorganic compounds.
Water being a need of plant life, the amount of rainfall is one of the most
important conditions of industry. Man, therefore, depends on the resources
of the soil directly or indirectly; a fertile soil furnishes him either directly a
supply of vegetable food, or indirectly a supply of animal food.
Natural supplies of metals, of coal, and of timber are important
consumption goods, but they are also indirectly the condition for a vast
variety of other goods. The industry that could exist without iron, copper,
and coal would be of a very low grade.

The variety of flora and fauna, and their fitness for man's
By flora and faunaneeds, largely condition the possible production. If, in
the course of evolution, it had chanced that wheat and
corn, the horse and the cow, had been crowded out in the struggle for
existence, we should have had a very different civilization. The possibilities
of civilization in Peru, and those of all the Indians on the American
continent, were limited for lack of domestic animals. Animals that are fit for
domestication are a necessary intermediate agent by aid of which man can
appropriate and turn to his use the fertile qualities of the soil.
Not content with the material world about him, even when it is at its best,
man alters it in many ways. He enriches the soil, improves the varieties of
animals, he even in some slight degree affects the climate, and by the use of
a multitude of artificial bits of matter called tools, works profound changes
in the world in which he lives.
2. A large part of the utility of goods is conditioned on
By motion and motion and energy. It has been said that man's power in
energy
production is limited to moving things. The outer world
is to man the sole source of motive forces. He can bring things together and
they produce the result. Further, it may be said that nearly every kind of
utility is conditioned on motion. It is man's aim to secure a constant inflow
of goods. To secure this either he must move to get the goods, or he must
cause goods to move toward him.
The law of "conservation of energy" helps to explain economic action; the
supply of energy in the universe cannot be increased or diminished, but may
take on new forms. So a limited supply in man's control may take on
various forms and so have different effects on gratifications. One and the
same source of energy may be converted into the different forms of heat,
light, motion, electricity, etc. But there must be some source. Man's desire is
directed to getting force at the right place and in the right degree. If light or
heat is too intense, it causes pain; the glare of the sun blinds instead of
giving keener vision. A moderate force applied to any of the senses gives
the maximum clearness or pleasure. Man is constantly endeavoring to
secure forces from the outer world and to adjust motion so that it will
directly or indirectly best serve his purposes.

3. Among the main sources of power used by men are
By food, animals, food, domestic animals, and fuel. In eating food man
and fuel
stores up force in his own body. When he draws the bow
he puts force into it to lie latent until liberated at the right moment. There
must be a source of energy likewise that mental action may go on, and the
power of sunbeams, stored for a time in food, is liberated in the processes
of thought.
This first natural mode of liberating energy within their own bodies does
not satisfy the growing needs and aims of men. Such a mode is "labor,"
which becomes at times painful and distasteful. In the earliest societies
known, some sorts of domestic animals are found supplementing man's
efforts and acting upon the material world to alter it for man. The dog
joining in the chase guards his master's safety, and helps to bear his
burdens. The draft-beast in the field turns the heavy soil, and aids in the
final harvest. The trained elephant does the work of twenty men piling logs,
loading ships, or carrying burdens.
Man further increases his control over the material world by making other
men do his bidding. Domestic slavery, where wife or child serves the father
of the family, or chattel slavery, where the vanquished toils for the victor,
are all but universal in early communities. Such a method of increasing
one's control over the forces of the world requires only superior strength, no
special intelligence in mechanics, and is thus one of the first crude devices
in a primitive civilization.
Fuel has been, up to the present time, perhaps the most important source of
energy. Fire in the hands of savage man gave him dominion over the forests
and over the metals. In this age of steam the liberation of the energy of the
sun, stored up in coal in ages past, is still the indispensable condition of our
developed industry.

4. The greatest and most exhaustless reservoirs of power
By the energy in for man's use are in wind and water. While the supply of
wind and flowing
water fuel is being used at a progressive rate and will soon
approach exhaustion, there are elsewhere exhaustless
stores of energy awaiting man's command. To make use of the wind for
sailing a boat, only the simplest arrangements are needed; a windmill fixed
at one place requires more ingenuity and machinery. The energy of the wind
is derived from the sun and will last until the sun loses its heat. If some
means can be found for equalizing the flow and for storing the power of the
wind, it may yet become a great agency of industry. The force of falling
water, long used in a petty way by the old water-mills, is just beginning to
be employed on a large scale at such points as Niagara. Where fuel is high,
as on the Pacific coast, wave motors have been successfully used in a small
way, but wave motion is too irregular to serve well the needs for power. But
the constant motion of the tides offers, at some favored points, a source of
power that will remain as long as the earth revolves upon its axis.
5. Man studies and compares the durable goods that
By the intelligent give him command over enjoyable goods, and attaches
utilization of all
these agencies value to them. Thus energy is found dissipating itself
throughout the world in ways useless to man, and in
places where it cannot serve his purposes. As man grows in power of
control over nature, he seeks to apply these forces in forms and at places he
has selected. If he can arm himself with the energies of mine and torrent, he
can react with giant strength on the material world. He ceases to accept
passively its conditions, and to live on its grudging gifts; he becomes its
fashioner, in a sense its creator. His intelligence and his wants are most
important factors determining what the form of the physical world about
him shall be.
But all the efforts of men in the most developed economy cannot make to
disappear the differences in the quality of goods and agents. Desirable
goods to consume are limited in quantity, and they vary in quality; hence
they have value and some higher than others. Likewise, durable material
agents and sources of power are limited in number and vary in convenience
of location and efficiency. As men seek to gratify their desires, they attach
importance to these agents of power. Each is valued for its service or its
series of services. When anything is seen to contain a series of uses, it

becomes a rent-bearer, and the economic problem of rent arises, one step
more complex than the problem of valuing simple consumption goods.

CHAPTER 8
THE RENTING CONTRACT

§ I. NATURE AND DEFINITION OF RENT

1. The temporary use of materials and power and their
Temporary use and sources is necessary to bring most enjoyable goods into
permanent
possession of being. Indirect goods have value solely because they
agents help to get direct goods. The apple-tree is valued
because it bears fruit, and the orchard because the trees
give promise of yielding a succession of crops for years to come. There are
thus two problems of value in connection with durable goods: that of the
value of a temporary use for a brief period, as for a year; and that of the
value of a thing itself, the use-bearer, for a long series of years or in
perpetuity. To explain what fixes the value of the temporary use is the
problem of rent; to explain what determines the value of long-continued use
or of permanent control and ownership of a use-bearer is the problem of
capitalization.
2. The term rent is used in a number of senses, which
Origin of the term must be carefully distinguished. The original meaning of
rent
rent was any regular income or revenue arising from
wealth. The word comes from the low Latin renta from renda, in turn from
redditus, that which is given, yielded or given back, or rendita, that which is
given or returned. The French rendre (English render), to give or return that
which belongs to one, is used very early. Chaucer used "rente" as an
income. "Cattle had he enough and rente," cattle probably meaning property
(chattels), and rente income. Rental is a collective term for a number of
rents. The total yield of an estate was called its rental or rent-roll, and a list
of the various sources of income, including all payments from tenants in
money, produce or services, constituted its rental.
3. The popular meaning of rent is the amount paid for the use of material
things which must be returned to the owners after the time of use agreed

upon. We speak of the rent of a house, boat, etc., using
the word as a synonym for hire. In the European
Popular and special
meaning of rent
languages the word is used more frequently in that
sense. In the French la rente means the income from any kind of property;
but corporate securities and national bonds came particularly to be called
les rentes, because they are a form of investment yielding a permanent
income. The one who has a perpetual income from bonds or rents is called a
rentier. In German the term Rente is used more broadly than in English, as
an income of any sort, Grundrente meaning the rent of land, and
Capitalrente the income usually in England called interest.
A restricted meaning has long been applied by economists to the word: the
income yielded by lands, etc. This was put in contrast with interest for
money and capital, and with wages of labor. This meaning is now being
abandoned by economic students.
A wider meaning recently given to the word by many economists turns on
the supposed relation of some portions of price to cost of production. Thus,
frequent use is made of the expressions: consumer's rent, producer's rent,
buyer's rent, seller's rent, etc. In the well-founded opinion of some recent
critics this usage rests on a mistaken reasoning. However, in the midst of
this wide variety of usage the student must be forewarned and alert.
Doubtless agreement will at length be arrived at. Meantime, no economist
can dictate what meaning is to be attached to the term, but one may suggest
the definition that seems to him most expedient. Throughout this work we
shall endeavor to use the term rent uniformly and consistently as it is now
to be defined.
4. The essential thought in rent, as we shall use it, is that
The essence of rent it is the value of the usufruct as distinguished from the
value of the use-bearer or thing itself. The meaning of
usufruct is the use of the fruits, or in legal phrase: "the right of using and
enjoying the income of an estate or other thing belonging to another,
without impairing the substance." The obvious fact is that fruits can be
eaten without destroying the tree, the harvest gathered without destroying
the field. By a metaphor the word in legal discussion is applied to the use of
any product, and we shall employ it, as in common speech, in reference to
one's own goods as well as to the goods of another.

The qualities whose use gives value are not usually
Rented agents are indestructible, but they are treated as undestroyed. There
looked upon as
durable is a famous phrase used by Ricardo, "rent is paid for the
original and indestructible qualities of the soil." He said
"indestructible," but the word is not apt. There are many qualities in the
fertile field that must be destroyed when it is used. Every economist since
Ricardo's time has recognized this, and many excuses for the inaccuracy
have been given. After every harvest, the field is less serviceable than
before, and if it is to be of the same grade of efficiency, the fertile elements
must be restored. We cannot assert that Ricardo meant undestroyed, for he
was not quite clear on the question. But it is evident that one can count as
true income only that part of the value of product that remains after full
repairs have been made. It is only by a fiction that most indirect agents can
be regarded as indestructible. Things yielding rent are not indestructible, but
generally they are preserved undestroyed.
5. A distinction must be made between gross and net, or
True rent a net true and false rent. Before the usufruct is estimated,
income
allowance must be made for repairs, depreciation, and
for various expenses which absorb a good portion of the gross product.
When this allowance has been made, the income may be considered as a net
sum not due to the sale, or to the using up of any part of the thing rented.
This is the essential thought in typical rent—that it is the value of the
surplus, or net product, of an economic agent leaving the agent itself
unimpaired in efficiency. The total product is sometimes called the "gross
rent," but economic rent is "net rent." This thought is made clearer by the
following discussion.

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

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

The two diverge more or less. If the contract has been lately made the two
will be nearly the same. Contracts of long standing often bind the tenant or
borrower to pay either more or less than the present competitive price. If,
after a time, the value of the use is greater than the contract rent, the tenant
is fortunate in having his lease. But he is the loser if he is bound by lease or
agreement to pay rent in a locality where land has become less valuable.
Economic and contract rent usually diverge also because of the agreement
that the owner, or lender, keep up the repairs and pay the taxes. Here it is
simply the difference between gross and net rent.
Custom may prevent the owner from charging all the usufruct of the agent
is worth. If the contract rent is less than the economic rent, evidently the
borrower enjoys a part of the usufruct, without charge, and to that degree is
in the position of an owner. The usufruct in this case is divided between the
two parties. Such instances were numerous in the Middle Ages in the
renting of land, and still are found in many countries.
Contract rent is based on economic rent and tends to conform to it
whenever there is competition. The existence of economic rent is the basis
of the agreement to pay contract rent. Prospective hirers of agents forecast
what the use will be worth to them and make their bids accordingly.
2. The renting contract is the agreement of a borrower to
The renting contract pay for the use of a thing and, at the end of the time, to
for the use of
wealth restore it in good condition or pay for its complete
repair. In practical business it is necessary to have
definite agreements to prevent disputes. Some provide that one party, some
that the other party, shall keep up repairs. The form of the renting contract is
observed by men in estimating the uses of their own wealth where no
contract exists. If they count the gross product of an agent as rent, it is bad
bookkeeping. In many cases it is necessary, therefore, to follow the form of
the renting contract in order to determine the net yield of indirect goods.
3. In early stages of industry the use of nearly all wealth
The renting contract is estimated under the renting contract. In the lower
in the middle Ages
stages of culture, in hunting, fishing, or nomadic
pastoral tribes, land is not recognized as wealth to be exchanged or owned.
But at a later stage, as in the Middle Ages in Europe, land and the things
pertaining to it, as ditches, houses, mills, cattle, stock, and the few simple

implements, constituted the larger portion of the wealth. Land was granted
to the tenant or serf in return for services. The contract was pretty strictly
drawn and all items were specified. It was not hard to hold the tenant to his
contract to keep the land in about the same condition. There was a certain
rotation of crops; the tenant was obliged to keep his stock up to standard;
and, moreover, he had a certain interest in the land because his contract rent
(as explained above) was less than the economic rent. The landlord,
therefore, could count pretty surely on the undiminished power of his land
and stock from one year to another.
At that time, truck and barter were the common modes of exchange, and
rents were paid in products and services, not in money. The fruits of the soil
were consumed on the spot instead of being sold as now. Land was rarely, if
ever, sold outright, so that there was no occasion to estimate its total selling
value. It was thought of as a place on which to live and as a source of
livelihood. Its yearly use was all that was subject to contract, sale, and
exchange. Not the land itself but a rent charge on the land was sold, the
term rent charge meaning an annual sum payable out of the yield of an
estate. Many medieval estates were so tied up by legal conditions that they
could not be sold outright; all that the owner could do was to sell or
mortgage the annual rental. Thus, in the Middle Ages, it was all but
universal to look upon most indirect agents as exchangeable only under the
renting contract, as subject to renting but not to complete transfer and sale.
4. As industry developed, the renting contract remained
The renting contract almost wholly confined to cases of renting lands and
not convenient in
commerce houses. The materials and appliances needed for
manufacture and commerce are so manifold and varying
in quality that the rent-form of contract is very cumbersome and difficult for
exchangers to enforce. If a merchant about to embark on a trading journey
wished to rent a ship and a stock of goods, the renting contract became most
difficult to interpret. He must agree to repay the loan in goods of the same
kind and quality as those received, a contract most difficult to execute, and
giving occasion to costly tests and countless disagreements. It was much
easier for the merchant to get his loan under the interest contract, i.e., a
money loan, with which to buy the goods. With the growth of industry and
commerce, wealth increased in towns, taking many forms, as those of ships,
wagons, tools, and stocks of goods, that could not conveniently be rented.

In England, the country which developed its industrial
The thought of it system earliest, the idea of rent, therefore, gradually
remains associated
with a rural became disassociated almost entirely from the use or
economy hire of any wealth but land and real property. Because in
the Middle Ages rent was associated almost entirely with
natural resources, they being the only important forms of wealth which men
rented from others, there was fostered the idea that the essential mark of
rent is the connection with natural resources. It is a simple example of the
association of ideas. In the transfer or loan of movable goods, the rent
contract was quite overshadowed by the other form of contract, that of a
money loan. According to this explanation the essential and primary
difference between renting wealth and borrowing money at interest is not in
the kind of wealth whose use is thus temporarily transferred, but in the
nature of the contract. But as forms of wealth differ in their fitness for
transfer under the two forms of contract, there goes on a competition
between them, as a result of which each becomes associated with certain
groups of goods. In the Middle Ages the renting contract was the dominant
form, but it has been progressively displaced by loans in the money form,
and its importance is still declining.
5. The main forms of wealth whose usufruct is still sold
Renting contracts under long renting contracts are land and its more
most used with land
durable improvements. In England farms are let under
long leases, a very common form being the thirty-year lease. Under the old,
almost fixed, conditions in agriculture such a lease was equitable, but when
prices are rapidly changing and when new methods are being introduced, it
gives rise to great hardships. About twenty-five years ago, the great fall in
the price of agricultural products brought ruin to many of the tenant
farmers. The land troubles in Ireland have been largely about tenants'
improvements. When the lease expired, the landlord could appropriate all
the improvements that the tenant had made. In America farms are let
usually on shares, and from year to year, but the plan of a money rent is
increasingly followed. The difficulty of getting an equitable arrangement
between landlord and tenant is recognized by all. The landlord must make
the proper repairs or see that they are made; he must specify in the contract
whether the products can be taken away or are to be fed on the place so that
the soil may not be impoverished, and he must provide for the purchase of
other fertilizers. On the other hand, the tenant under the renting contract has

little motive for improvement, and many occasions for discontent. So in
America, far more than in the older countries, land changes hands by sale,
the purchaser going into debt for it, giving his note and paying interest on
the loan rather than rent for the farm.
Many less durable goods are rented for brief periods.
But many other Carriages are rented for the day, bicycles by the week or
goods are rented
month. Sewing-machines, boats, guns, tents, and even
diamond engagement rings, yield their joys under the renting contract.
People frequently hesitate between the renting and the purchase of a piano,
and in some cases renting is the more convenient and desirable way of
securing its use. The purchase of a dress-coat or of a masquerade-suit to be
worn but once, involves for some an excessive and needless sacrifice. For a
moderate sum its temporary use may be had, and it is then returned, little
the worse for wear, to the accommodating clothier.
A final word of caution may be given. Economic rent is
Economic rent not confined to the cases of contract rent. It exists in
much wider than
every case where a more or less durable agent yields a
the renting contract
use that is scarce and desirable. The owner who uses a
thing himself gets the advantage in the product as clearly as if he collected
rent from a borrower. Houses lived in by the owners, house furnishings,
clothing, books, all scarce and durable agents, are yielding rents in this
logical sense. To the economist, therefore, the problem of economic rent, as
one of the grand divisions of the problem of value, remains of undiminished
importance, for in these unceasing streams of uses emanating from our
environment, is found the basis for the value of all durable wealth.

CHAPTER 9
THE LAW OF DIMINISHING RETURNS

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

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

from very different fields, to show that the truth is a general one: a good
that affords a given service can be made to increase that service, ordinarily,
only on condition that men put forth greater effort, or sacrifice more goods.
The decreased utility is most clearly seen in the diminished effect which
other agents produce when used in connection with the thing. When several
are trying to use the same book, and are wasting time trying to get it, we
often say their study hours are less fruitful because of the poor library
facilities. Again, we speak either of the diminished returns of the field, or of
the labor applied to the field. Either the particular thing is said to show
diminished returns or the other coöperating agents are said to show them.
2. As the agents used in connection with a fixed amount
Decreasing of any other agent (for mechanical, chemical,
technical
effectiveness of physiological, psychological, and other purposes)
material things increase, their objective effectiveness after a given point
decreases. Objective or technical effectiveness means
effectiveness independent of the thought or estimate of men. It is not the
effectiveness to produce a feeling in men, but to produce results on the
material world. In a mechanism, if one part is increased without increasing
the other parts, a point is reached where it does not add to the result. If in
the building of a bridge the weight of the floor is increased beyond a certain
point, the rest of the bridge being left unchanged, the bridge is weakened
instead of strengthened. If the weight of the iron in the framework is
increased beyond a certain point without strengthening the piers, the
structure is weakened. If the pier is greatly enlarged, the bridge may not be
weakened, but there is an utter waste of material and effort, and perhaps the
main purpose of the bridge is defeated by the damming up of the stream. A
bicycle frame, like a chain, is no stronger than its weakest part. If the
strength of all parts of the wheel and frame is in equal proportion to the
strain they must bear, added weight to any single part weakens the whole
machine. The development of the modern type of bicycle, by many
experiments, is a good example of the adjustment of materials according to
the principle of technical efficiency.
A variation of the same principle is seen in chemical combinations. Exact
proportions of materials must be used to get a certain result. Increase of one
ingredient will not increase the desired product. Either the added part is

rejected, does not enter at all into the compound, or it unites to form another
and different product.
That the same principle holds good of the psychological effects of things,
we have already fully recognized in discussing wants and marginal utility. A
given amount of a good will affect the senses in a pleasurable way, but an
increase in the amount will not cause a proportional addition to pleasure of
sight, sound, or smell. On the contrary, such an increase may defeat the
object entirely. Here we are at the threshold of the economic problem, for
we have touched on "feeling."
3. The idea of economic diminishing returns arises when
Economic man recognizes these technical facts and their relation
diminishing returns
relate to value to gratification, in his use of a limited supply of indirect
agents. All economy begins with scarcity. The varying
effects produced by different agents therefore require to be studied or the
sum or direct goods of enjoyment will not be as great as is possible. Waste
will take place. A bridge will have its maximum use with a minimum outlay
when the parts are in a certain proportion. Beyond that point, the increase of
any part may add something to the usefulness of the bridge, but the agents
must be taken from some other and greater use.
The thought of economic diminishing returns always has reference to value.
If a particular kind and amount of a certain material is used in varying
combinations with other agents, the value of the added product will not
always be in the same proportion to the value of the added agent. The
bridge-builder must consider not only what the added material will add to
strength, but what it will cost, and whether the result will justify this
expense. So the economic problem of diminishing returns is more
complicated than the mechanical one, for it contains not only the technical
but other factors.
If the value of the product increases less rapidly than the
The marginal utility cost of the agents successively added to secure it, a point
in goods
must at length be reached where the value of the added
agents and of the additional product just balance; this is called the point of
marginal utility.
If a certain value in labor, fertilizer, or material, be applied to an acre of
land, it may be more than recovered in the value of the product. Further

applications give a product increased not in equal proportion to the former
yield, and so on till the value of the last-added agent just balances that of
the added product. This is the best adjustment possible, and beyond this
point there will be a deficit in value. Just where the equilibrium is found at
any time is the margin of cultivation.
The term "cultivation" is taken from agriculture but must be understood in
the broader sense of utilization, as the principle is not confined to the case
of land or agriculture, but applies as well to the use of furniture, books,
clothing, horses, or any other indirect agents.
4. There are two margins, the
Meaning of The extensive intensive and the extensive. The
intensive margin of margin of
utilization utilization margin of utilization in the case of a
single piece of wealth is called the
intensive margin. Any form of indirect wealth, anything kept to use, may be
considered as containing a series of uses. Using one thing more and more
while uniting other things with it, is using it more intensively.
Getting more use out of the book by effort, out of the farm by applying
more fertilizer, out of the house by putting more people into it, is intensive
utilization. The earlier uses come easily, naturally; the later ones are gotten
with increasing difficulty.
When a number of agents are of different qualities, the point between the
one last used and the next unused is the extensive margin of utilization. The
best agents that are available are naturally used first, but as they are more
intensively used there is increasing inconvenience. Then recourse must be
made to the inferior agents, whose first uses, however, are greater than the
later, intensive uses, of the better grades. When the step is made to the use
of agents that were before unused because inferior, it is extending the
margin of utilization. The intensive margin of use is in the particular thing;
the extensive margin of use lies outside of this.

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

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

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

1. The phrase diminishing returns is sometimes taken as
Does not mean meaning merely a decrease in prosperity. Many ideas are
declining prosperity
connected with this phrase. It is not self-explanatory. It
suggests various thoughts according to context and these have not failed to
give rise to different uses. The student must be cautious if he is to think
clearly about it. If population declines, or industry changes from one place
to another, or from one kind of goods to another, it is sometimes said that
returns are diminishing in the deserted district.
2. A more common misuse of the term is to apply it to the
Nor exhaustion of exhaustion of the soil. If the soil of a district has been
the soil
robbed of its fertile qualities and smaller crops are raised
than was the case fifty years before, it is said to be a case of of the increased
difficulty in the extraction of natural stores in mining. The veins near the
surface being mined first, later the galleries must be cut deeper and greater
expense incurred to get the stores. But the conditions here are very different
from those we have considered under diminishing returns. Mines are used
not under the renting contract, but under the royalty contract, which permits
and contemplates a progressive using up of the limited stores of natural
resources.
3. Manufactures are often said to
Fallacious contract All industries if show increasing returns in contrast
between limited as to one
manufacture and factor, as area, with agriculture as an industry of
agriculture show diminishing decreasing returns. There is here an
returns inconsistent shifting of thought.
Agriculture is thought of as limited to

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

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

§ III. DEVELOPMENT OF THE CONCEPT OF DIMINISHING
RETURNS

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

While all the forms of industry most common in cities were increasing, and
the wealth of the cities was growing, poverty was increasing among the
peasantry. Especially was this true in England during the Napoleonic wars,
1793-1815, owing to exceptional conditions. The food-supply from abroad
was cut off, and when the English farmers, tempted by the high prices, took
poorer land into cultivation, and sought to get larger crops from their older
fields, a great object-lesson was presented on the principle of diminishing
returns in agriculture.
2. This truth of diminishing returns in agriculture was
This confused with confused with the thought of historical diminishing
historical
diminishing returns returns. Circumstances of the time led to the belief that
because of lack of food misery must continue among the
masses of men. It was thought inevitable that the population would continue
to increase and food become more scarce. The idea of diminishing returns
became thus a prophecy of what would happen, a social philosophy, that
affected the thought of men on every practical social question.
3. The application of the principle of diminishing returns
The principle was soon broadened to include land in other than
applies to land in all
of its uses agricultural uses. This was a natural and inevitable
extension of the thought. It was evident that an unlimited
use could not be made of a limited area of land, in any industry whatever.
There is no explanation of rent of business sites, residences, lots, wharves,
waterfalls, etc., unless account is taken of diminishing returns. If it were
possible to do an unlimited amount of business upon a limited area of land,
it would never get more scarce and could never rise in value. The idea of
diminishing returns came properly, therefore, to be applied to land in all its
uses. It is true, however, that the relatively large areas needed in agriculture
make the phenomenon of diminishing returns much more striking in it than
in most other industries.
4. "Diminishing returns" should be broadly applied to all
And to all indirect
wealth having indirect uses. The argument for this view
agents
may take both a negative and a positive form. Why
should we say that the principle applies to land and not to cases of other
industrial agents? Why in the case of a waterfall and not in the case of the
water-wheel? Why in the case of the field and not in the case of the trees in

the field? Are they not all scarce and desirable goods yielding a limited
supply of uses?
Positively it can be argued that the concept of diminishing returns is
indispensable to a reasonable explanation of the value of any indirect
agents. Anything that could afford an infinite series of uses at once would
be an infinite supply. If an infinite number of uses could be gotten out of
one hammer in all places at once, it would pound all the nails in the world.
One wagon, one acre of land, one ax, one book of each kind, would serve
for all men, and duplicates would be valueless. But in the case of every
material thing there is a limit of convenient and economic use.
5. Diminishing returns of indirect agents is a special
Diminishing returnscase of the universal law of the diminishing utility of
related to
diminishing goods. Diminishing returns have to do with indirect
gratification goods, while diminishing gratification has to do with
direct or consumption goods. They are two species or
aspects of the same general principle. If the supply of certain indirect agents
is increased, thereby increasing consumption goods, the utility of the
indirect agents per unit diminishes. In such a case a diminishing return is
the reflection, back to the indirect good, of the diminishing utility of the
direct goods it helps to secure. Any indirect agent, added to a fixed amount
of other agents with which it is technically used, is credited with a
diminished utility, just as an additional supply of enjoyable goods, coming
to meet a fixed demand, falls in value.
The concept of technical diminishing returns has reference to a limited
period of time. Though a definite agent may have bound up in it a long
series of uses, these cannot be secured at the moment. If a rent-bearer, such
as a fruit-tree, were permanent, and men could wait through eternity for its
yield, they would get an infinite yield of fruit. But in any finite period, there
can be only a limited yield.
The concept of diminishing returns is one aspect of the
The basal law of great economic law of proportionality, that is, it is one
economics
expression of the fundamental, axiomatic truth, that
there is a best or proper adjustment of means and ends. It is, therefore, the
central and essential thought in political economy. On it depend all

important conclusions with reference to the value of indirect goods. Out of
it grow the important economic theories of rent and capitalization.

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

§ I. DIFFERENTIAL ADVANTAGES IN CONSUMPTION GOODS

1. Both rent and the value of durable wealth are based
Connection on the value of the fruits or products yielded by the
between
wealth. Gratification, afforded directly or indirectly, is
gratification, rents,
and value of wealththe basis of all values. The relation of most kinds of
wealth to wants is indirect; but gratification thus
afforded indirectly is none the less the basis on which the usufruct of wealth
is estimated. Men find the logical or causal connection between direct
goods, or final product, and indirect goods, or agents.
To explain the value of the durable wealth, or rent-bearer, a still farther step
in thought must be taken. The value of the rent-bearer is based on the series
of rents which it affords. To explain how these rents are added to give the
value of the indirect agents is the task of a theory of capitalization. This
being the relation, a change in the value of the product changes the rent, and
this in turn changes the value of the rent-bearer. The theory of rent,
therefore, has to begin with a review of the valuation of enjoyable goods.
2. In a group of consumption goods, all of the same
Effect of scarcity on quality, the marginal utility declines as the quantity
utility of uniform
goods increases. If the quantity of an article capable of
ministering to man's wants is very limited, its value is
high. If the supply of something of uniform quality, for which there is no
substitute, is scanty, the value is estimated without reference to any other
grade. If a fishing tribe caught very few fish, but these were all equally
good, and if no other food were to be had, fish would have a high ratio of
exchange with every other kind of goods.

If the quantity increases, the value of each unit of the whole supply falls, as
the importance attributed to its parts declines. If an Indian hunting-party
met with unusual success, the value of buffalo meat declined. If there is a
remarkable potato crop, potatoes fall in value.
3. In a series of consumption goods of different qualities,
Relation of the lower grades acquire value only as scarcity
different grades of
consumption goods increases in the higher grades. If difference in quality
between two grades of apples is marked and there is a
superabundant supply of the best grade, no importance is attached to the
poorer. But if the better grade becomes scarce, the appetite for the poorer
grade increases, and finally it, too, will be consumed. In some years the
small, knotty apples are allowed to rot on the ground; in other years they are
gathered and are sold at good prices. But if there is an abrupt difference in
quality, and hence in the marginal utility of the two grades, the value of the
better goods may rise considerably before there is any recourse to the
poorer. If the differences in quality are very slight, the presence of the lower
grades has the effect of limiting the increase of value of the higher grades.
Practically in almost all kinds of goods there are gradations in quality.
Complete uniformity is of the rarest occurrence. When did one ever see a
basket of peaches that were all of the same size, ripeness, color, flavor, and
perfection? If the step from the higher to the lower grade is very slight,
resort is immediately made to the next lower grade, some of which is
substituted for the higher.
There is an independent reason for the value of each grade of goods; each
grade would have value if there were none of the other, but they mutually
affect each other's value when they exist, side by side, in the same market.
The marginal utility of each is lessened by the presence of the other. And
thus, two or ten grades constitute for many purposes a single supply as they
shade into each other or are merged by substitution.

Grades of Consumption Goods by Quality

Free goods are on
4. Goods of the lowest grades, having no marginal
the margin of utility, are free goods. This is a simple truth, but it has
utilization important bearings. There may be said to be an
"extensive margin of utilization" of many consumption
goods. The poorer grades of apples, rotting on the ground, the multitudes of
waste things not valued, are on the margin of utilization. When a lower
grade is used, the margin is extended. The value of goods is measured
upward from the margin of utilization, but this is simply to say that their
value is measured from zero upward.
Likewise, there is an intensive marginal utility in consumption goods. As
the better grade of apples becomes more scarce, they will be used more
sparingly and kept to satisfy only the intenser wants. The superiority of
some consumption goods, either in quantity or quality, often is exactly
analogous to the "differential advantage" spoken of by economists in the
case of productive agents. The differential advantage of the highest grade
over the grade of free goods, whose value is zero, evidently is the whole
value of the highest grade.

§ II. DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS

1. Rent varies with the quality of the products yielded by agents, other
things being equal. Let us take first a simple case where the agent is the

sole condition of the product. If there is but one tree
Differential bearing a certain luscious fruit, or but one spring
advantage of agents
in the quality of yielding a mineral water, the rent of the tree or spring
their products being equal to the value of the products must vary as the
quality of the products varies. If two or more trees are
standing side by side, they will be compared with regard to the difference in
the quality of their fruits. If two fields differ in quality, greater importance
will be attached to the field capable of producing the better grade or variety
of fruit or product. A peculiar mineral quality in the soil may impart to wine
a choice flavor that can at once be recognized by experts; while other fields,
distant but a few rods, cannot by any effort be made to produce wine of the
same rare quality. There is said to be a marked difference in the success of
vineyards lying only a short distance apart on the shores of the larger lakes
of New York. Nearness to the water moderates the temperature, often
prevents frosts, and hence insures the ripening and quality of the fruit. In
the Santa Clara valley, as in other parts of California, there is a frostless
belt, sharply marked off from the lands where it is unsafe to attempt to
cultivate the delicate orange-tree and other semi-tropical plants. In manifold
ways differences in geological formation affect the use of land and the
success of many industries. On one side of a little creek is limestone land,
on the other shale, the limestone producing a crop larger and of better
quality. When the peculiar nature of the one field is found to be the cause of
the exceptional quality of its fruits, the difference in value is attributed to it.
If there is but one grade of agent, it is, of course, valued
The lower grade without reference to any lower grade. The effect of the
limits the value of
the higher grade presence of lower grades of agents is to lower the value
of the higher, inasmuch as the lower grades are
substituted for the higher. There may be at first enough of the higher grade
of agents to produce all the fruit wanted of the better quality. If, then, there
is an increasing demand, and the additional yield can be secured only with
greater effort, the value of the product will rise. The presence of poorer
grades, however, checks that rise, because use can be shifted to them. The
value of grade one is not high because grades two, three, and four, which
are worse than it, are available, but because they are not of better quality
than they are. Poor as they are, their presence reduces somewhat the
intensity of demand for the best grade. Indirect agents, therefore, are seen to

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

Grades of Agents by amount of Product of Uniform Quality
3. When two agents are necessary to secure a product,
Complementary the value attributed to each is influenced by competing
agents unite to form
a product uses. The thought of one agent independently producing
a certain product is far too simple to correspond with
reality. Two or more agents unite to produce a single product, and each
agent at the same time can be used for acquiring other products. Complex
as the problem appears, it is solved according to the principle of marginal
utility at every moment in every market. The different uses, figuratively
speaking, bid for an agent, and thus its marginal utility is determined just as
is the price of a good by the bidding of buyers. Indeed, it is the bidding of

buyers, indirectly. The more urgent the use, the higher the bid. The felt
importance is reflected from the consumption goods that are sought, to the
agent that will aid to get them. Two or more agents that are mutually needed
for the acquiring of a product are complementary goods. A complementary
agent may be either other material agents or labor.
When labor is applied to an agent, either to improve the
Complementary Quality or to increase the quantity, it is subject to the law
agents used
intensively show of diminishing returns. In the effort to increase the
diminishing returns quantity of products, labor is applied first more
intensively to the better agents. If it meets with
resistance, if returns diminish, it is transferred to any of the poorer agents
that have in them uses of as high grade as those still in the better agent. The
superior effectiveness of the earlier over the later units of the added agent is
called the "differential advantage" of the two fixed agents. The result of a
day's labor applied to a field may be represented by 100, a second day's
labor by 90 (it being only ninety per cent, as effectual), a third day's labor
by 75; but it is more usual to say that the first field produces 10 more than
the second and 25 more than the third, the second 15 more than the third. To
the agent fixed in supply is attributed the difference in the effectiveness of
the agent that is applied.
4. The marginal uses of indirect goods are free uses.
The relentless Here again is noted the close parallelism in the process
extensive margin of
agents of evaluating direct and indirect goods. There is an
extensive margin in the use of an indirect agent, a point
in the gradation from the better to the poorer agents where the materials and
forces are left unused and have no value. Land beyond that point is free.
Outworn goods in manifold forms, old pictures, old machines, having no
longer charms even for a rummage sale, form a no-rent margin of wealth.
On every hand a great multitude of things unused and worthless differ by
only a shade from things that still are used and valued. Every rubbish-heap,
rag-bag, junk-shop, and garret contains things once prized, now lingering
on the margin of utilization.
There is also in agents an intensive margin, beyond which are certain
unexploited uses in the things that we already have. This is a more subtle
thought, but it has been already discussed in connection with diminishing
returns. These potential uses in agents, uses which in the existing conditions

lie outside the margin of utilization, of course have no value. We have noted
that there is an equilibrium between these two margins. Rent is measured
from a zero point of utility either in a good, or in other poorer grades of
goods.
A corollary of this proposition is that there is a limit to the rental that
anything can yield under any given condition. Below the present margin of
utility of any goods there exist great quantities of free goods, unused goods,
or unexploited uses. It is only uses above this margin that yield rent. Rent is
the difference between the value of the better grades and the value of the
free goods. It is therefore due to the limitation in the supply of indirect
agents of the better quality, or to the scarcity of the more effective uses in
those agents.
5. Rent may be redefined as the value
Restatement of rent, Economic rent is of the scarce uses of wealth within a
economic and primary
contract given period. Rent is the felt
importance of the usufructs of agents in securing
gratification. It is measured by the marginal utility of any particular grade
of agents in securing products. These definitions and the discussion
throughout this chapter applies to economic rather than to contract rent. In
fixing and agreeing on contract rent, men are seeking to estimate the
importance of indirect goods, the importance that an agent will have in
getting a product. They are bidding for the use of things, and what they bid
is contract rent. Contract rent is based on the existence of economic rent.
Economic rent does not depend on contract rent, but on the differences in
the effectiveness of agents to secure a given product. If there were not
differences in the product, and no limits to the supply of indirect agents,
rent could not exist; it would be inconceivable. But these differences
existing, economic rent inevitably arises, for men cannot keep from
attaching value to the things that affect their desires. Contract rent in turn
appears wherever the use of wealth becomes an object of exchange and
agreement between men in a free society.

CHAPTER 11
REPAIR, DEPRECIATION, AND DESTRUCTION OF
WEALTH: RELATION TO ITS SALE AND RENT

§ I. REPAIR OF RENT-BEARING AGENTS

1. The continued rent of indirect agents is dependent on
The necessity of the continual repair of certain parts necessary for their
repairing nearly all
economic agents efficiency. All earthly things wear out or decay.
Whenever man's hand is withheld, nature takes
possession of his work, regardless of his purposes. Dust gathers on unused
clothes, and moths burrow in them. Shut up a house, and windows are
shattered, roofs leak, and vermin swarm. To close a factory is to hasten the
time when buildings and machinery will be piled upon the rubbish heap.
The most magnificent and solid works of man have crumbled under the
finger of time. The earth is strewn with ruins of gigantic engineering works,
aqueducts, canals, temples, and monuments, whose restoration would be no
less a task than was their first building. Everywhere vigilance and repairs
are the conditions of continued uses of wealth. Some works of nature, such
as waterfalls, may appear to have a continued use without repair, but they
bear rent only when used with other things that must be constantly mended.
A certain amount of labor on the banks of the mill-stream, and certain
repairs on the dam, the water-wheel, and the gates are necessary. By a
fiction in business contracts the waterfall may be dealt with apart from
those conditions to its use, and may be rented, as a field is, with the
agreement that the tenant keep up the repairs.
The efficiency of land as mere standing-room usually does not seem to be
dependent on repairs. But here again the land yields rent in connection with
other rent-bearing agents (such as houses and other agents above ground),
which must be repaired. Standing-room on land is not a complete indirect
agent; it is but one of the conditions for carrying on an industry, and even it
often requires repairs to make it usable. Ranging from these extreme cases

of stableness and durability, indirect agents vary to the extremes of fragility
and ephemeralness.
2. Most of the qualities that contribute to make land
The fertile lands of fertile in agriculture being destructible, the constant
large regions have
lost their usefulness repair of tilled land is necessary to its continued fertility.
If any things could be said to be indestructible, they
would be some of the works of nature. In a sense, all matter is
indestructible. Man cannot annihilate it, he can simply change its condition.
But in economic discussion it is the value of things that is being considered,
and from this point of view everything is in some degree destructible. The
effects of bad husbandry are everywhere apparent, and in many regions
fertile fields have been physically and economically destroyed. In Asia,
lands that once supported millions, perhaps hundreds of millions, of
population are now deserts. Egypt, for a time reduced to a semi-desert
condition, has only in the past century been restored to a certain extent by
the use of new methods and a return to the old ones. Many of the areas that
were the granaries of Rome can now hardly support a sparse, half-starving
population. The lands, or at any rate, the elements that gave them value,
have been destroyed.
Even in young America may be seen the effect of a
Wearing out of failure to keep land in repair. As the new rich lands of
some American
lands the West were opened up, the old lands in the East were
allowed to wear out, and many of them were abandoned.
On the new lands in turn the same methods were followed, using up the first
rich store of fertility with no attempt to keep up the quality of the soil. This
may have been the best policy for the time; it would not have been
economical to employ Old World methods of intensive husbandry when
such rich extensive areas were being opened up. But the process was one
destructive of natural resources. As settlement moved westward, great
forests fell in ashes, and the soil was robbed of the fertile elements which it
had taken centuries for nature to store up.
3. The machinery and appliances used in transportation
Wearing out of the and manufacturing are all perishable in varying
parts the railroad
degrees. Take as an example the great agency for
transportation, the railway. The roadbed, which is but the natural soil
excavated or filled to a better grade, is the most permanent part; yet every

frost weakens, every rain undermines, a portion of it. Earthquake, landslide,
and flood fill up the ditches, or tear down the embankments. Constant work
is needed to keep it fit and safe for use. Above this is the track, slightly less
permanent, more frequently changed. The ties rot, and even the rails of steel
must be at times replaced. The rolling-stock is still less durable, and the
different parts vary in length of life. It is said that the wheel-tires are
renewed four times, the boiler three times, and the paint seven times, before
a locomotive is entirely worn out. The oil used in the wheel, which is a
necessary part of the running machine, has to be applied every day.
There is a great difference in the length of life of
Depreciation of manufacturing appliances. The building is fairly durable;
manufacturing
appliances yet an average depreciation-rate of one and one half per
cent. a year must be allowed to offset a reduction in its
value of over fifty per cent, in thirty years. Machinery differs greatly in
durability; well-made, substantial machinery depreciates about five per
cent. yearly. The engines and boilers depreciate more rapidly than the
running gear; the loose tools have to be replaced every second to fourth
year; while the materials consumed in the industry must be repaired and
replaced at every repetition of the process of manufacture. If a factory is to
be maintained in its efficiency in accordance with the terms of the renting
contract, and is to continue its renting power, everything about it must be
from time to time repaired and replaced.
4. Neglect or postponement of repairs must cause a
Neglect of repairs falling off of the rent-earning power. The neglect of
often has evil
effects repairs may have different results in the factory. The
neglect of one kind simply reduces present rental while
not preventing the future restoration of the plant to its full efficiency. If
certain necessary tools wear out and are not replaced, the factory as a whole
will be less efficient. Each part of the entire outfit being needed in due
proportion, the loss in rental will correspond not merely to the lost
efficiency of the missing tools, but to the crippled efficiency of the
remaining appliances. Failure to apply seed to the land causes the land as a
whole to be useless for that year's crop. In other cases, neglect of repairs
increases the expenses of repairs and cuts off future rental. The adages, "A
stitch in time saves nine," and "An ounce of prevention is worth a pound of
cure," must be acted upon in every industry. The neglect to repair a roof

causes damage to an amount many times the cost of a new roof. Failure to
replace a bolt costing five cents may result in the rack and ruin of a machine
worth many dollars. A handful of earth on a dike may save a whole country
from destruction.
Neglect of repairs may be economical, however, when
But sometimes is outer conditions have first reduced the demand for the
economical
agent and consequently the rental. When the line of
travel changes, it does not pay to keep an old hotel up to the same state of
repair as when it had a great patronage. Old factories sometimes may better
be allowed to depreciate while the price of repairs is invested in more
prosperous industries. In a declining neighborhood the houses fall into
decay, the owners seeing that "it would not pay" to keep them up.

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

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

finally a termination of the rent-earning power of wealth, and the whole has
to be replaced.
2. A change in inventions and processes may reduce the
Technical changes rent of agents, independently of their material condition.
destroy the uses of
agents Rent is dependent on the indirect relation of things to
wants; that relation may be changed if some other agent
is found fitted to serve these wants more directly. Not only do the materials
of houses change, but fashion and engineering skill change, making the old
mansions cheerless and inconvenient, and affecting their rent-earning
power. At every moment, in a progressive society, many rent-earning agents
are being thrown out of use. The machinery in flour-mills has been almost
completely changed, parts of it repeatedly, while the roller process has been
substituted for the old millstones. Water-power, because of its uncertainty,
has been replaced in many places by steam-power, and in many places
steam-power in turn, has been rivaled by water-power since the
improvements in the generation and transmission of electricity. A change in
the process of making paper threw out of use much machinery that was only
in part saved by its removal and adaptation to the making of coarser grades
of paper. Many minor inventions in the iron industry, still more the
invention of the Bessemer process, threw out of use great numbers of the
old appliances.
3. A change in the outer conditions that give occasion to
Industrial the use of agents may cause depreciation. The
circumstances
affect the uses of exhaustion of materials on which machinery is
agents employed may reduce its usefulness. A sawmill located
in the midst of a forest has a high-earning power while
the forest lasts, but when the forest is cut off the mill itself declines in
value. Unless it can be removed to another forest and thus have its earning
power renewed, it will have the value only of scrap-iron; it has become an
indirect agent in the wrong place. Oil-boring machinery where a rich supply
of oil is found has a high rental for a time, but when the oil-fields give out
the machinery falls in value, being worth more or less than the cost of
transporting it according as the next oil-field is near or far. Changes in
fashions, calling for different kinds of products, cause a depreciation in the
value of the old agents. Coarse salt, evaporated by the sun, was used by our
fathers, but the finer product of the steam process is driving out the product

of the old solar plants. As homespun went out of use, much machinery still
in good physical condition was cast aside. Changes in transportation work
revolutions in industrial methods. Many prosperous small forges on the
country roads of Pennsylvania became valueless after the building of the
railroads. New forges were built at favored points where materials and
products could be shipped by rail.
4. The agents employed in any industry range from the
Various grades of more efficient, high rent, down to the less efficient, low
efficiency in rent-
bearers rent, grades in a more or less regular series. It follows
that as these changes are going on, the place of agents on
the scale of efficiency is constantly shifting. The various agents represent
all grades of efficiency. One depreciates, possibly is restored later and takes
a high place, and again depreciates until finally it is thrown out of use. One
loom embodies the latest improvements and corresponds to the most fertile
field; another can still be made to yield a little rent; the use of a third results
in certain loss. A great mass of no-rent agents lie just below the margin of
utilization in every industry. Some of these are permanently abandoned;
some will be taken back into use when business conditions improve. When
the iron industry is dull, many forges are out of blast; but when iron is again
in demand, there is a gradual taking up of the abandoned forges, factories,
and machines as they are brought within the margin of profitable utilization.
Many agents not actually earning a rent, may become rent-earning through
a change in business conditions.

§ III. DESTRUCTION OF NATURAL STORES OF MATERIALS

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

Considering present needs and conditions, the labor seems to have been
worse than wasted.
The direct effect of this destruction of the supply has
Effects on value of been the increase in the value of timber. To the settlers
timber
much of the timber was worse than useless; they paid
and labored to get rid of it; now the supplies of lumber must be sought on
the very margins of our territory: Florida, Maine, northern Michigan and
Wisconsin, Washington, and Oregon. The supplies in Washington and
Oregon are almost unavailable in the Eastern states on account of the cost
of transportation. Professor Marsh, thirty years ago, strikingly characterized
the policy that has been pursued: "We are breaking up the foundation
timbers and the wainscoting of the house in which we live in order to boil
our mess of pottage."
The indirect effects of these changes are fully as great as
Physical effects the direct ones. Forests greatly affect climate,
temperature, and soil; they influence the humidity. They
equalize the flow of streams, moderate floods, and by preventing the
washing down of the rich soil, keep the mountain sides from becoming bare
and sterile rocks. So, within the last two decades, the people in America
have begun to think of forestry. Its purpose is to restore the forests to the
condition of permanent rent-earners, to make the mountains yield not a
temporary supply, but a perpetual crop of timber.
2. The extraction of coal and other mineral deposits
Possible exhaustionreduces for future generations a supply already limited.
of the coal-supply
The coal deposits in the earth have only recently been
drawn upon. A small city like Ithaca probably uses to-day a greater quantity
of coal than was used in all Europe two centuries ago. The large deposits of
coal and their early development in England long gave a great advantage to
English industry over that of other countries. In England, however, has first
been felt the fear of the exhaustion of the coal-supply. Professor Jevons, in
1861, sounded the note of alarm; he prophesied that because the coal
deposits of America were many times as great as those of England,
industrial supremacy must inevitably pass to America. Already the
supremacy in coal and iron production has passed to America, and that in
textiles soon will come. In England the accessible supply of coal is limited,
deeper shafts must be sunk, and the coal gotten with greater difficulty and at

greater expense. Coal has risen in price in England within the last few
years, and will continue to rise in the future. The coal deposits of America
are thirty-seven times as great as those of England, but even these will soon
be exhausted. And yet on the part of all except the coal trust, there appears
in America a thoughtless disregard for the future. Supplies of copper, iron,
and lead in favored positions are likewise limited, and are being rapidly
centered in the hands of great companies. The increasing demand for these
products insures a steadily rising income from their annual use. The value
of the mines, being based on the series of incomes they will yield, may
increase while their unused treasures dwindle in quantity.
3. The exhaustion of natural stores of material is due to
Many natural civilization, but it threatens to put an end to industrial
resources are being
rapidly exhausted progress. The savage does not go deep enough to use up
permanently the world in which he lives. He uses the
fruits that he finds, and those fruits are, almost without exception, renewed
the next year. The only mines that were worked out in ancient times were
gold and silver mines, while the mines of useful metals were touched but
lightly. Within the last century the earth's crust has been exploited with
startling rapidity. Scientific knowledge and mechanical improvement have
combined to unlock the storehouses of the geologic ages. At the ever-
increasing rate of their use, many important materials must be exhausted in
the not far distant future. While it is probable that substitutes will be
discovered for many of them, the outlook in some directions has little
promise. To treat terminable incomes, exhaustible sources of supply, as
permanent sources of income, leads alike to unsound theory and to reckless
practice.

CHAPTER 12
INCREASE OF RENT-BEARERS AND OF RENTS

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

1. While man destroys some agents of production he
Desire for better multiplies many others. We have noted many kinds of
agents impels men
to improvements depreciation, destruction, and wearing out of wealth; but
the normal thing in a healthy society is an increase, on
the whole, of rent-bearers. The increase of rents is due to two causes:
changes in the agents by which they become more efficient technically, or
more numerous; and changes taking place outside of the agents, affecting
the utility of the products. The first of these will be considered in this
section.
The increase of the efficiency of agents is usually the aim of the individual
producer, and thus is brought about an increase of the stock of wealth. In
some cases, however, improvements such as the dredging of harbors or as
the protecting of forests, are made by men collectively through the agency
of governments. Somewhere, however, the desire for these changes must
arise in the minds of individuals. Increase of most things involves "cost" or
sacrifice, in the psychological sense; that is, man must strive, perhaps
suffer, to get a certain result. This end, therefore, must be in itself desirable,
and social organization must be such as to present a motive to the men to
make the needed effort.
2. Rent-bearers may be increased in quantity and
Improvements by improved in quality by the adaptation of natural
adaptation of
natural resources resources to man's purposes. To get food, men use the
tracts of land that under the conditions give the largest
product. Other tracts less fertile, or for some reason less available, are
ditched, tiled, and diked, and fertilizers are carried up steep hillsides to
make a soil upon the very crags. In commerce and transportation, new ways

are opened by canals, railroads, and tunnels. An isthmian canal will raise
the efficiency of ships plying between New York and San Francisco,
enabling them to carry a greater amount of freight within a year. The tolls
will represent to the users an expenditure only partially offsetting the
increased efficiency of the agents of transportation. By the building of
wharves, the dredging of harbors, and by many other methods, indirect
agents are constantly growing in number and efficiency.
3. Rent-bearers may be increased by inventions and
Machinery is an improvements that make machines stronger, quicker, and
adaptation of
natural resources better. This proposition is not logically different from the
preceding. A machine is an arrangement of material
things through which force may be indirectly applied to move matter. No
fast line divides machinery as regards form, purpose, or cause of value,
from the artificially improved natural agents that we have been discussing.
Just as a field is drained, plowed, and cultivated to fit it better to yield a
crop, so is the iron ore shaped into a form called a machine, better fitted to
cut, carve, and weave as man wills. Machines are merely adaptations of
natural resources.
Increase in machinery may be either in quality or
Bettering quality of quantity. The two causes have in most cases the same
agents
result. If the quality or efficiency of looms is doubled, it
is as if their number had grown in like proportion. In its economic function
the beast of burden may not illogically be classed with inanimate machines.
The horses in America have been remarkably improved of recent years by
the importation of thoroughbred stock from Europe. Ten or fifteen years ago
the number of horses in the United States was found to have decreased, and
there was much comment on this evidence of a declining industry. It was
not at once recognized that there was embodied in horse-flesh more horse-
power than ever before, as a single Norman horse has the strength of
several Mexican mustangs. Numbers alone are not the measure of
efficiency.
4. The increase of wealth and the betterment of
Increasing number environment go on as well through the increase in the
and better grouping
of agents number of appliances and through their improved
arrangement, as through changes in their kind. A
machine is an adjustment of various natural agents to each other so as to

make a more efficient agent, and machines in turn may be adjusted as parts
of a larger system of production. The ideal of the modern factory system is
so to arrange the machinery that no bit of material will make an
unnecessary motion. The log, once started through the mill, is carried
automatically from one machine to another until it emerges as a roll of
paper or as a box of tooth-picks, ready for use. In an American watch-
factory one man tends twelve or fifteen automatic machines. A small brass
rod is fed automatically to the machine; a piece is cut off, is picked up by a
human-like metal hand; is put into a lathe, and shifted or held firmly while
it goes through fifteen or twenty processes; and then is dropped into a box
where it is ready for the "assembling" of the watch. As the machinery
improves, factories making allied products are grouped to make a system
still more efficient.
As the number of agents increases they are distributed so as to be where
most useful to the owner. A man having two umbrellas keeps one at his
office and the other at home; a student having two books of the same kind
keeps one at his room and the other at the university; a farmer having two
hoes keeps one at the barn and the other in a distant field, and by this
distribution the agents are increased in efficiency.
The aim of a progressive society is to enlarge the
A larger and betterenvironment, and constantly to adapt it better to the
environment
service of wants. This is done largely by mechanical
agents, which capture the natural forces of the world, put them into the right
place at the right time, and make them do the right thing, or which group
and relate the materials of the world in the right ways. Some of the
groupings in the chemical and physical world that do not fit man's purposes
may be made to do so. The world in this way becomes more and more a
great workshop, better and better adjusted to man's wants.
5. The betterment of the environment of society in some
Increasing some directions reduces the rent of other parts. The wish of
rent-bearers reduces
the rents of others the individual is to raise his own rent-bearers in
efficiency, but in doing that he affects the agents owned
and controlled by others. The ideal from a social standpoint is to increase
not rent but the welfare of society, and this is not always the ideal of
individuals seeking their own interest. However, as the efficiency of some
agents rises, it becomes unnecessary and unprofitable to use the less fertile

fields; they cease to be rent-bearers, and the rent of the richer fields falls
under the influence of the new supply of products. Some inventions
suddenly increase the efficiency of free goods to such a degree that the less
efficient rented agents are thrown out of use, and the margin of utilization is
moved to a higher plane than it was on before. Improved types of
machinery more or less rapidly displace the older, less efficient types,
which, therefore, more or less completely lose their rent-bearing power long
before they are physically worn out. When improvements in agriculture that
are applicable to a considerable area of land take place, and the product thus
is increased and cheapened, the poorer land is abandoned. Inventions and
improvements thus gradually becoming common property, increase the free
goods and free uses not bearing rent and open to every one. One who
improves the quality of a machine or the economy of a process may thus
unintentionally injure some of the owners of low-rent agents, while
unintentionally increasing the welfare of the mass of men for whom the
margin of utilization is thus lifted.

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

1. Changes in the number and kind of competing
Effect of decrease resources may raise the rents of particular agents. Rents
of the competing
agents may increase without increase in the quantity or number
of a particular group of agents or without change in their
technical efficiency. As changes in the conditions of society may reduce
rents, so other changes may increase them. Agents of the same kind may
diminish in number, either absolutely or relatively. If some of the competing
machines are destroyed, the rents of the machines that remain rise, while if
new supplies are found, either in nature or by improved industrial
processes, the rents of the older agents fall.
2. The discovery of new uses for agents or for their
Effect of new uses products raises their rents. Farm land of the poorest kind
for agents
often is found to contain valuable mineral deposits. Such
a lucky find has lifted the mortgage from a farm in eastern Pennsylvania,
from which, in two or three years, has been taken feldspar exceeding in
value the agricultural products of the same land in the last fifty years. The

discovery of building stone, coal, natural gas, or oil land may make the
annual rent (or royalty) of land tenfold its former total value. Fitness to
produce nettles is not ordinarily a virtue in land, but the discovery that
certain fields produce a superior quality of the nettle used for heckling
cloth, causes them to take on a new value. A mineral spring, because of the
supposed or proved healing properties of its waters, may be as good as a
mine to the owner. Peculiar fitness for the cultivation of celery may convert
marsh land into a substantial source of income.
Social changes are constantly causing agents to shift from lower to higher
uses. As population grows and groups about new industries, farm land is
used for residence lots, and in turn for business purposes. Rents therefore
rise, and this rise is reflected in the higher selling value of the land. If a new
demand arises for the product of any machine, its rent rises, although it may
continue to turn out the same product as measured by number or quantity.
For, if consumers increase, a given supply of agents becomes relatively
smaller than before.
3. A rise in rents due to social changes may be relatively
Sudden variations permanent or temporary. Business conditions sometimes
in demand
change quickly. An urgent demand for special machinery
raises quickly its rent and value. It is said that lace machinery is sometimes
thrown out of use for several years, until a sudden renewal of the demand
for lace causes the rental to equal, in two years, more than the original cost.
At such times the value of factories increases greatly, but after a few years
of prosperity business again collapses. Such prosperous periods are the
opportunity of the business man and of the promoter to sell the factory at its
highest price. Machinery adapted only for a special product will not sell as
readily when less needed for its special use, as that which, like a turning-
lathe, can be used for many purposes; but the more special the appliances
needed for a certain product, the higher, more abnormal will be their
temporary value when they are suddenly needed. Land near the site of an
exposition takes on a very great value and again falls after the exposition is
over. During the Boer War horses and mules rose in price in the United
States on account of British purchases.
A rise in the value of any agent at once causes an
Cause efforts to attempt to duplicate it or to find a substitute for it; this
increase the supply
attempt, if successful, puts a check or sets a limit to the

of agents rise. In this search for new devices the man who can see
most quickly and clearly has a key to wealth. Some
kinds of agents, as rare minerals or tools that can be produced only by
highly skilled labor, cannot be increased rapidly in number and remain high
in price for a long period; and favorably located building sites illustrate the
same principle. In some cases, it is true, the demand may be due to some
temporary cause, as in a period of unsound land speculation, but usually the
growing value of location is due to a steady and abiding change in
population or business.
4. Such public utilities as are guarded from competition
Franchises guard by franchises, often rise in rental with increase in
the growing rents
from the influence population. The leading classes of public utilities
of substitution referred to are waterworks, gas-works, street-railways,
ferries, and wharves. This evidently is only a special
illustration of the principle just stated, where it is not easy to find a
substitute for certain agents. Public franchises entitle the owners to special,
sometimes exclusive, privileges, and protect them legally from competition.
Not all franchises are valuable; many street-railways are unfortunate
ventures, the earnings being insufficient to pay expenses, to say nothing of
interest on the investment. But when they pay greatly, their high value is
due to the impossibility of competition. The cars, mules, dynamos, steam-
engines, and other agents combined to furnish transportation, have a special
earning power because other similar agents are forbidden to be used in that
market.
5. Industry abounds with cases of unearned increments
Various kinds of of value due to accidental and social causes raising the
"unearned
increments" rents of wealth. The term unearned increment may be
defined as an increase in rents (or value) of agents, due
to something other than the efforts or merits of the owner; in fact, it is that
of which we have been speaking. In some cases powerful or wealthy men
can bring about social changes in entirely legitimate ways. The owner of a
large factory, moving it into the country, may buy up surrounding land and
found a city, converting pasture lands and corn-fields into valuable building
lots. Again, social changes are produced immorally, if not illegitimately,
when wealthy men or influential politicians cause laws to be passed which
inure to their advantage but which may ruin many other citizens.

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

DIVISION C—CAPITALIZATION AND TIME-
VALUE

CHAPTER 13
MONEY AS A TOOL IN EXCHANGE

§ I. ORIGIN OF THE USE OF MONEY

1. The exchange of goods by barter is extremely difficult
The consideration in most cases. Thus far we have not considered the
of money can no
longer be postponedsubject of money and have so far as possible avoided
even the use of the term. Value in economics does not
depend on money, and is not necessarily connected with it. Things can be
compared in their utility, their importance to our welfare can be estimated,
without the use of money. Many problems of economics can be discussed
pretty thoroughly and solved without the use of the word money or any
term of similar meaning. But to-day it is impossible to go very far in the
discussion of economic questions without using the concept of money,
which is interwoven with every practical and theoretical problem in
economics. We have delayed to the farthest limit the formal recognition of
the subject; but we are now approaching the question of capital and interest,
and it is no longer possible to avoid a preliminary consideration of the
money concept.
In considering the problem of exchange of consumption
Exact measurement goods, we have assumed that it is possible to weigh
of utilities is not
possible without small differences in the marginal utility of goods, and
some medium of that such differences have influence on exchange. Now
exchange in exchange by barter such a small estimate is
impossible. In barter things are exchanged directly for
each other in kind. If the two things do not chance to coincide in value, the
exchange cannot be completed. An equivalent must be found, or a multiple,
if the marginal utility of two goods is to be equalized for either party by
exchange. As in most cases this adjustment must be very incomplete, many
exchanges that otherwise would be advantageous cannot take place. In the
earlier stages of development, this careful estimate of value is not found.

Children do not make it. The typical trade of the small boy is a "trade
even"; Johnny exchanges his gingerbread for Jimmie's jack-knife. It marks
an epoch in the industrial development of the boy when he begins to keep
store with pins, and no longer trades candy for apples, but both for pins,
which have become the medium of exchange in his boy world. He then can
express values in much more exact terms. In our society most children
begin early to grow familiar with this conception; but travelers find some
savage tribes still in the earlier childish stage of development, unable to
grasp the thought of a general medium of exchange. When, through lack of
a medium of exchange, there is a failure to adjust utilities, there is a loss of
the possible advantage in each defeated exchange. There is a further waste
of time and of vain efforts to find something that will be accepted in
exchange, and the loss offsets a large part of the gain even when the barter
is effected.
2. Some kind of enjoyable good in general use comes to
Money is found to be money, that is, to be accepted as a medium of
serve as a general
medium of exchange. The difficulties just mentioned are met by the
exchange use of a medium of exchange. A medium of exchange is
simply one kind of wealth which is taken, not for itself,
but to pass along, in the belief that it will enable the taker to gratify his
wants and distribute his purchasing power in a more effective way. Money
is an "invention" in that it is a means of exchange that came into use
independently in a great number of communities. It is not an invention in
the sense of a mechanical device suddenly hit upon, but rather in the sense
of a social custom that grows as its convenience is tested by practice.
Money is used, in some degree, everywhere except in the most primitive
tribes. Historically viewed, the money first used in any community is seen
in every case to be a commodity capable of giving immediate gratification,
a direct good in immediate use. It then gradually comes to be used as
money, which is an indirect agent. Still later, when the money habit is well
established, a kind of material having no utility except as a medium of
exchange may come to be used.
3. Money in its origin is that good which best unites the
Qualities of thequalities that make it easy to sell, to carry, to know, to
primitive money
keep, to divide, and unite. It is evident that if some one
commodity is gradually to take on this use as a medium of exchange there

will be a choice; some things will be better fitted than others. First, this
thing must have the quality of salability, or marketability. In the channels of
exchange it is taken not because it is wanted for itself, but because it will
help to get something else that is wanted. To be sure of a ready sale in a
primitive community it must, however, be something that is generally
desired. Food and clothing, which supply the fundamental physical needs,
are the most generally used and desired of all goods. But they do not have
the second quality of a good money material, that of great value in small
bulk, transportability. Food is bulky. The carrying of a venison or of a bag
of wheat on one's back a short distance requires an effort as great as that for
the procuring of the food. Furs, however, have this quality in a high
measure, united with other qualities of money, as is shown by their general
use in the exchanges of northern tribes. Thirdly, a thing must be
recognizable; counterfeits must be easily avoided, and the quality must be
easy to test: this is the quality of cognizability. The love of ornament is
universal in human societies, and gives value to many materials combining
in a high degree the qualities thus far named. Fourthly, the money material,
when taken in exchange, must remain without loss of quality, perhaps for
long periods, until it can be exchanged again. Food does not answer to this
requirement, being organic and perishable. But some of the metals, having
value in small bulk, salability, cognizability, and durability, step by step
displaced other forms of money. Finally, money must be made of a material
easy to divide and unite. It is a great convenience in small transactions to be
able to represent a fractional value by a small coin. The money material
thus, likewise, is easily shifted to and from its money use. It is a very poor
money that has not this quality, yet a thing may serve for money in larger
transactions without it. Cattle, slaves, and land have been thus used,
although they answer in a very rough way these fundamental requirements
of the money material.
4. The changing material and industrial conditions of
Industrial changes
society change the kind of money that is used. The
affect the
convenience of money use, as has just been shown, is a resultant of a
certain money number of different motives in men. Things that have
forms the highest claim to fitness for money with a people at
one stage of development would have a low claim at
another. As each of these stages is passed, the thing used as money either
increases or decreases in its fitness. The final choice depends on the

resultant of all the advantages. The use of a material may become more
general or less so. Shells used for ornament in poor communities cease to
be so used in a higher state of advancement, and thus their salability ceases.
Furs, used at some stage of development as money in all northern climes,
cease to be generally marketable when the fur-bearing animals are nearly
killed off and the fur trade declines. Tobacco was at one time in Virginia a
great staple. Merchants were always ready to take it, and its market price
was known by all; but as it ceased to be the almost exclusive product of the
province, it lost the knowableness and marketability it had before. In
agricultural and pastoral communities where every one had a share in the
pasture, cattle were a fairly convenient form of money, but to-day would be
a most inconvenient one; a city merchant exchanging goods for Poland
China pigs and Texas steers would envy the proverbial owner of a white
elephant.
The value of the money material may fall so greatly as a
The proved fitness result of greater production, as in the case of iron, tin,
of gold and silver as
money copper, that it becomes unsuitable. Again, as wealth
grows, as exchanges increase, as the use of money
develops, as commerce extends to more distant lands, the heavier, less
precious metals fail to serve the money need, especially in the larger
transactions. Thus, in a sense, different commodities compete, each trying
to prove its fitness to be a medium of exchange; but only one, or two, or
three at the most, can at one time hold such a place. Silver and gold, step by
step, often making little progress in a century, have displaced other
commodities, and are the staple and dominant forms of money in the world
to-day. Every community has witnessed some stage of this evolution. Now
nations are divided into two great groups, silver- and gold-using, in
accordance with the metals they use as standards. The gold-using countries
are the most advanced industrially, requiring the most valuable money
metal. Many countries have passed in the last century from the silver to the
gold standard, and in an intermediate period have tried to use both
standards. The Asiatic and South American countries mainly use silver,
while most of those in North America and Europe use gold.
While industrial changes thus affect the choice of money, in turn money
reacts upon the other industrial conditions. If a new and more convenient
material is found, or the value of the money metal changes to a degree that

affects the generalness of its use, industry is greatly affected. The discovery
of mines in America brought into Europe, in the sixteenth century, a great
supply of the precious metals, and this change in the use of money reacted
powerfully on industry. Money being itself one of the most important of the
industrial conditions, is affected by and in turn affects all others.

§ II. NATURE OF THE USE OF MONEY

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

agents of every other kind than it could use. Pioneers in a poor community
where the average wealth is low, cannot afford to keep a large number of
wagons, plows, good roads, or school-houses. If the community were
wealthy enough it would have more of these and of other things, and great
as is the convenience of money, poorer communities have to do with little
of it. It is, therefore, a confusion of cause and effect for poor communities
to imagine that their poverty is due to lack of money.
2. Out of its use as a medium of exchange comes the use
The use of money of money as a common denominator of values. Money
as a common
denominator serves as a "common denominator," for, as all other
things can be expressed in terms of money, through it
the value of other things can be compared. The other things can be
expressed in money because they are constantly exchanged for it. All things
being compared with money, can in turn be compared with each other.
Some consider this service as a common denominator to be the primary and
most important function of money. Sometimes a money of account is found,
which is not in use as a medium of exchange. Cattle and slaves have served
as money of account while not used as a medium of exchange in larger
transactions. Money of account is used, as the shilling in New York, which
for a century has not been in use at all as a medium of exchange. It is,
however, only apparently a denominator of value; the shilling represents
five fourths of ten cents. The actual standard is the dollar; the shilling is
only a habitual form of speech and is mentally reduced to terms of the
money in use. A decimal system is a great convenience in the use of money
as a common denominator, but not indispensable. It is a striking fact that
England, until a few years ago the greatest industrial nation, still uses a
money unit requiring cumbrous calculations.
3. Other uses of money are as a storehouse of saving and
Money used as a as a standard of deferred payments. These uses grow out
storehouse for
saving. of those before mentioned. The standard of deferred
payments is the unit of value in which debts are agreed
to be paid later. It is evidently most convenient, and therefore almost
inevitable, that the common denominator in which all values are expressed
from day to day should continue to be taken as the value unit when the
completion of the exchange is delayed a day, a month, or a year. This will
be more fully discussed at a later stage of our study.

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

§ III. THE VALUE OF TYPICAL MONEY

1. The money use, historically considered, is a new use
The money use is added to a good, and increases the demand for that
added to other uses
good. The history of any particular kind of money may
be traced back to a point where it was not money, since which the money
use has been added gradually to the other uses. The value of the material
later to become money is determined, as is that of any good, according to its
marginal utility in all possible applications. No new theory is required to
explain the value of this same commodity as it gradually acquires the added
use of a medium of exchange. The new use influences demand for the thing
just as do the other uses. What is here said must be understood as applying
to typical money, which is at the same time a commodity having other uses.
Other things that are not typical money come later to be used as money,
under legal regulations.
2. A good that comes to be used as money continues to
The other uses have a commodity use along with the money use. When
continue, slightly
modified by the a thing is wanted for some quality that gives immediate
money use gratification to the user, the explanation of its value is
simple. Ornaments, shells, feathers, food can be seen to
have a direct want-gratifying power. The money use is one that works no
physical or visible change in goods, and to many minds it appears so

different from other utilities that it remains quite mysterious and
incomprehensible. To persons accustomed to thinking on problems of value,
this case appears to be no more difficult than that of anything else having
two or more uses. Cows are used for milk, for meat, and as beasts of
burden. Each of these uses is logically independent as a cause of value, yet
all are mutually related, the values of cattle being determined by the
consideration of all their uses united into one scale of diminishing utility.
3. The uses of money make it a rent-bearing form of
Money yields a wealth. The rent that money yields is in the form of
series of rents
which are the basisconvenience and economy. This is sometimes rendered
of its value directly as psychic income, as in enabling the traveler to
buy his dinner, for the money thus yields gratification
just as does the carriage in which he rides. One may go for a day to the
seashore without a parasol and suffer from heat, or without money and
suffer from hunger. In every case where money is retained for a time in
possession, there is expected from it a usufruct as great as, or greater than,
can be secured from anything else for which it can be exchanged. This
usufruct is a net surplus, or income, yielded by a sum of money
undiminished in amount up to the moment it is spent, but meantime
increasing in the gratification it will help to secure. In many cases in
practical business money yields gratification only indirectly, as the
objective contract rent received as interest for borrowed money in business
uses, or as economic rent when the use of money in business enables one to
secure a larger income. Because money yields a rent men make the sacrifice
involved in keeping a stock of it on hand. On this rent is based that part of
the value of money that is derived from its money use. As the use of money
as a standard of deferred payment, or basis of commercial obligations, does
not require that it be owned by the parties writing the contract, this use of
money is a free good, a sort of social by-product of the medium of
exchange. When money is in use in a community, any person may draw up
contracts in terms of money, borrowing and lending, buying and selling
wealth, later to be repaid in other wealth or services expressed in the
circulating medium.
4. Money may be defined as a generally accepted
The general use of material means of payment and medium of exchange.
money is
This, its primary and essential function, may appear to

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

CHAPTER 14
THE MONEY ECONOMY AND THE CONCEPT OF
CAPITAL

§ I. THE BARTER ECONOMY AND ITS DECLINE

1. The use of money prevails in very different degrees in
Various points of various parts of the United States. The members of this
view of the students
regarding money 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.
2. The extent to which, on an average, money is used in
Countries differ in different countries of the world, differs widely.

their use of money 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.
3. In a historical view the European nations are seen to
Slight use of money begin with a barter economy and to pass through great
in the Middle Ages
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.
The condition of the serf appears to have been, under
Land, the main these circumstances, inevitably connected with the
form of wealth, was
rented without the "barter economy" as applied to the renting of land. A
use of money 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.
4. With the growth of cities developed a new class of
Contrast between wealthy men and a new view of wealth. The student of
city wealth and
history knows of the conflict that grew up during the
feudal estates in the
Middle Ages 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.
The use of money grew up in the city. The density of
Money thus more population made it easy, the growth of wealth made it
used in city trade
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.
5. The loan and hire of wealth in medieval cities came to
Money loaned and be expressed as a money loan. The loan of money and of
borrowed in cities
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.
Such a contract differed not in economic purpose, but
The medieval only in form and terms of obligation, from the renting of
opposition to loans
at interest 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.

6. The owners of city wealth and of country landed estates
Rivalry of the often were opposed as well in social and political as in
commercial and
landholding classes economic affairs. The practical economic questions of the
in Europe 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.
Indeed, for centuries the sharper features of the contrast
Land continues to behave been steadily softened. The money economy of the
rented while city
wealth is borrowed city gradually spread to the rural districts, but never entirely
in money form 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

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-
Extension of the use lenders has led to a transfer of all sorts of wealth from
of the money loan
and of the capital owners to users by means of money. As in medieval Europe
concept 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.
2. Capital to-day may be defined as economic wealth
Definition of capitalexpressed 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.
3. Capital must not be identified with money although it is
Distinction between expressed in terms of money. While money and capital are
money and capital
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.
4. Renting wealth and borrowing capital have the same
Contractual interesteconomic purpose, but the capital contract presents certain
and rent involve a
difference of peculiar features. In the interest contract for the loan of
business procedure 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.
As here presented, the essence of the capital concept is in
The wealth concept the mode or form of expression of wealth, not in the
and the capital
concept contrasted 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.
Summarizing the thought of this chapter, it may be said that
The capital conceptthe capital concept has gradually developed with industry,
now prevalent
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.

CHAPTER 15
THE CAPITALIZATION OF ALL FORMS OF RENT

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

1. From the twelfth to the sixteenth centuries the sale and
The nature and sale purchase of rent-charges was the most general form of
of rent-charges
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.
2. The sale of rent-charges grew out of an industrial need of
Rent-charges were a the exchange of safe permanent incomes for larger sums of
convenient
wealth. The custom of the purchase of rent-charges grew up

investment in in the cities. The increasing wealth of cities, the growth of
medieval cities
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.
The practice was allowed by the church, though interest and
Rent-charges were the lending of money were forbidden. The loan was
not forbidden by the
church 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.
3. Rent-charges had a market-value, varying with time and
The market value ofplace, and expressed as a number of years' purchase of the
rent-charges reflects
the exchange ratio rent-charge. The sellers of rent-charges were influenced by
between present andmany motives: a lord wished to build a castle, or go on a
future money crusade; a farmer wished to improve his estate; a merchant
incomes
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.
4. The sale of rent-charges has gradually given place to the
Purchase and sale of
modern form of money loan. The conditions of the contract
rent-charges gives
way to more modern in the sale of rent-charges were gradually changed for
contracts 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

1. The buying of any indirect agent is practically the
The capital value of purchasing of a "rent-charge." To account rationally for the
durable wealth is the
sum of its expected market value of anything, its importance must be traced
rents 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.
2. There are two modes of approach to the problem of
Capital value is not
interest: one from the side of income (rents); the other, from
primary
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.
But the approach from the side of income has been shown
Expected rents are to be in some important cases the historical origin of the
primary, and capital
value is the "years'rate of interest, and we need but reconsider reasoning that
purchase" 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.

3. The capitalization of comparatively safe permanent
The rate of incomes from real estate contains within itself all the
capitalization of
rents is not fixed factors for the independent determination of the interest
merely in commerce 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.
It can not be otherwise in the particular problem of value
The exchange of any called capitalization. The first task of scientific study is to
present and future
state clearly the nature of the problem. In this case it is seen
rents results in a rate
of time discount 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.
4. In practical business may be seen innumerable instances
Capitalization of a of the capitalization of both permanent and limited series of
perpetual uniform

series of rents; 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.
But social changes alter rental values, and so far as these
Of a probably changes are foreseen, these anticipated or expected rents are
increasing series of
rents; 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.
Again the expected series of incomes may be declining, as
And of a declining or
the royalties (not typical rents) secured from mines. If the
fluctuating series of
rents 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.
Every exchange of a durable agent involves an estimate,
Mode of fixing the rough and imperfect it may be, of that agent's future. The
rate of time discount
in practical business 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

1. Where a system of exchange is highly developed, things
As exchange are looked upon as capital yielding an objective income
increases
capitalization of rather than as wealth yielding immediate means of
goods becomes more enjoyment. In the old organization of industry most men got
usual 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.
2. The issue of capital stock is the putting of the incomes of
Various kinds of wealth into marketable form. Stock companies, or
corporation
securities put corporations, are business enterprises which issue stock, or
expected incomes in certificates of a share in their wealth and income. Doubtless
salable form 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.
3. Men seek to convert into marketable capital any increase
Any continuing of income in their wealth or business. A man who invests a
income can be
capitalized 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.
Notable cases of this sort arise in connection with public
The capitalizing of franchises. If a street-railway or a gas-company is given the
franchises for public-
service corporationsexclusive 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.
4. The manipulation of dividends and the resulting changes
Some difficulties inin capitalization open up great opportunities for the
the capitalization of
corporate incomes 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.

CHAPTER 16
INTEREST ON MONEY LOANS

§ I. VARIOUS FORMS OF CONTRACT INTEREST

1. Interest, the amount paid according to contract by one
Distinction between person to another for credit given in terms of money, is but
contract interest and
time-value 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.
2. Gross interest must be distinguished from net interest.
Risk and expenses toThe forms of wealth yielding incomes are so mutable, and
the money-lender
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.
3. The most usual form of short-time loan is that made by a
Short-time loans by bank or broker to business men on security of commercial
discounting of
commercial paper 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.
4. Most debts in modern times are outstanding for a term of
Long-time loans byyears and represent the lender's purchase of a claim on the
purchase of
mortgages, bonds, earnings of some productive enterprise. The simplest forms
and stocks 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.
5. The sale of goods on credit is a mode of lending and
The cost of credit to
involves interest in a disguised form. In some cases
the improvident
buyer 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.
6. Interest is often concealed under other forms which
Evasion of legal rate
increase the apparent rate. This fact is well shown in the
of interest
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

1. Interest for loans to obtain consumption goods is paid
Money borrowed to because they are felt to have greater importance at the
buy consumption
goods 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.
2. Interest on indirect agents is paid as a more or less
Money borrowed to indirect means of securing gratification. This can be clearly
buy indirect agents
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.
3. The money market in which short-time loans are made is
The special case of peculiar in that the money frequently is borrowed to pay
money borrowed to
pay debts 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.
4. In the long-time money loan the money generally is
Productive borrowed first merely as a medium of exchange to get
borrowers seek a
profit on their control of indirect agents. The borrower of a long-time
investments 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.
5. The rate of contract interest on money loans is adjusted
The developed at each moment in the money market by the bidding for
market for money
loans 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.
6. The individual must adjust his business dealings to the
Every person is a market rate of interest. The market rate is fixed by the
buyer or a seller of
present goods 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.

CHAPTER 17
THE THEORY OF TIME-VALUE

§ I. DEFINITION AND SCOPE OF TIME-VALUE

1. Time-value is the difference between the values of things
The simplest cases of
at different times. Things differ in value according to form,
time-value
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.
But two or more quite different things may be expressed in
Time-value in the terms of another thing and so be made comparable. Money
case of different
kinds of becomes the value-unit through which different things may
gratifications 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.
2. The problem of time-value is quite separable from the
Time-value is concepts of money and capital, though usually connected
involved in
with them in practice and theory. It is true that the problem
capitalization of land
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.
3. The problem of time-value is involved in repairs and
Time-value is taken depreciation, and in the use of consumption goods. It is
account of in the
possible, as we have seen, to increase the sum available for
keeping up of repairs
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.
As will be more fully shown in discussing the relation of
And in the choice of the prevailing rate of interest to saving, the recognition of
enjoyments
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.
4. The problem of time-value is involved in much foolish
Prodigality and vice pleasure, in prodigality, and in vice. Economics touches
involve a high
discount of future frequently on the borders of ethics. If there were to be
happiness 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

1. The fixing of the discount on future goods is, in its
The exchange value essentials, like the fixing of the market price of consumption
of present and future
goods 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.
2. Time-value as the premium rate on
The peculiar nature Several reasons whypresent goods is unlike the ordinary
of the exchange in this is not easily
the case of time- recognized market price, of goods only in the
value 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.
3. There being a limited number of indirect agents, their
The scarcity of limited powers in a given period limit the supply of present
present gratifications
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.
But if indirect agents could produce an indefinitely large
The total of future product at any given moment, the supply of present goods
uses in vastly greater
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.
4. The rate of capitalization of income and the rate of
The choice open to contract interest on money capital tend to unite into a single
the investor of
money 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.
A person wishing to make an exchange of the opposite kind
The choice open to to that described may sell his wealth for money; he may
the borrower of
wealth 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.
5. Where goods are sold at forced sale or sacrifice, it is
A sacrifice sale equivalent to a contract loan at a high rate of interest.
involves 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.
6. The rate of contract interest on safe long-time loans
Interrelations of the
registers pretty nearly the prevailing rate of time-discount
money interest rate
and of time-discountin 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.
7. All the net usufructs actually yielded by wealth are rents;
Relations between economic time-discount is never a realized income; it is
the concepts of rent,
interest, and time- merely a calculation form, or anticipation of the difference
value 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.
Time-value is here understood to be that all-pervading
Rent and time-valuedifference in the values of uses and gratifications of wealth
are essentially
at different points of time. A comparison of the value of
different phrases of
the value problem 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.

CHAPTER 18
RELATIVELY FIXED AND RELATIVELY INCREASABLE
FORMS OF CAPITAL

§ I. HOW VARIOUS FORMS OF CAPITAL MAY BE INCREASED

1. Men seek to increase income by increasing capital. Men
The older and the may strive to increase their rents without expressing the
modern way of
viewing wealth 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.
2. There are some classes of goods that
Free goods of Beginning of can be increased without any noticeable
unlimited supply scarcity of common
materials 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.
It has long been customary for economists to talk of
No scarce goods can economic goods that could be increased indefinitely
be indefinitely
increased (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.
3. There is a large class of goods whose increase is seen to
The products of land
be gained with increasing difficulty. This is seen most
are increased at a
clearly in the diminishing returns from land. In the attempt
given time and place
at increasing cost 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.
4. There is a class of goods, natural agents and stores of
Agents most nearly materials which appears to be relatively fixed in quantity or
fixed in amount are
somewhat which is increasable only with much difficulty. The first part
increasable 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

1. Not the fixity of the physical amount of agents, but the
Physical amount vs.economic supply is significant. There is danger of confusion
economic supply
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.
2. Discovery of new lands and of new natural deposits
Discovery enlarges continually enlarges the economic supply of the agents most
the supply of natural
resources 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.
3. Invention, including new modes of transportation and
The effective supply new processes, increases the economic supply of most
grows by invention
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.
4. Increasing wealth and new labor make possible the
Production of land increase of the agents that appear most nearly fixed in
by physical change
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.
The work of the pioneer, as a producer of a supply of land,
And by the work of is, however, of the greatest importance. The pioneer
pioneers
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.
5. Limitation of the supply appears first in the better
Successive qualities, and efforts to increase wealth are then directed to
utilization of various
grades of agents 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.

The difference in increasableness of the various forms of
Goods ranged on a wealth is of importance in considering various social
scale of
increasableness 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.

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

§ I. SAVING AS AFFECTED BY THE INTEREST RATE

1. In the case of consumption goods, present marginal uses
The interest rate are often less than future uses as judged at the present. The
traces the division
between present and proposition that future goods sometimes have a greater
future gratifications 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.

Present VALUE line

The less necessary
Let us illustrate by the case of fruit stored in the cellar for
goods are the ones future use. In the fall after the appetite for apples has been
saved 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.
2. The gradual rise of a consumption good with the lapse of
The less valuable time from the lower to the higher degree of gratification is
rise in value with the
lapse of time 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.
3. The saving of present goods for future use is encouraged
Interest is the by the motive of gaining the interest. Many consumption
equalizer of time
values 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.
4. The postponement of present wants results in bettering
Saving increases and the economic environment for the future. Economic
improves economic
agents 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.
5. Abstinence is the faculty of mind that enables present
The kinds of wants to be subordinated to future wants. Abstinence may
abstinence
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

1. Political security and domestic order are essential to the
Political insecuritydevelopment of saving. As saving results from a comparison
discourages saving
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.
2. Social institutions that give a motive to the individual are
Influence of private essential to saving. Among these institutions the most
property on saving
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.
3. Opportunity for the investment of small savings favors a
Safe and paying spirit of abstinence. The institution of small property,
investments
encourage saving 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.
4. Variations in the rate of discount of the future react upon
Changing interest the spirit of saving in various ways. This very general
rate in relation to
saving 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

1. The individual saver is enabled to improve the agents
Saving permits that he uses. The simplest case is presented when means of
improvement of
agents 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.
2. Consumption goods, when saved, may be exchanged for
Saving of services, and these may be used to create durable agents.
consumption goods
for exchange 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.
3. In modern industry, saving frequently takes the form of
Money savings are money, which is then loaned to productive borrowers. This
converted into other
wealth 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.
4. A fall in the rate of interest normally accompanies an
Lower interest increase in the mass, efficiency, and valuation of durable
means higher
capitalization 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.
Another phase of the change is the
And more complex It encourages the greater complexity of the processes of
industrial processes increase of fixed
charges to reduce industry. Production becomes
cost of operation 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.
The benefits of saving viewed broadly are not confined to
Diffused benefits ofthe owner of the wealth saved, but are diffused throughout
saving
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.

PART II
THE VALUE OF HUMAN SERVICES

DIVISION A—LABOR AND WAGES

CHAPTER 20
LABOR AND CLASSES OF LABORERS

§ I. RELATION OF LABOR TO WEALTH

1. Labor is any human effort having an aim or purpose
Work and play outside of itself. It is difficult to define satisfactorily the
defined and
distinguished 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. PleasurableNot useful Play
2. PleasurableUseful 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.
The first group comprises most of the sports, games, and
Play 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.

Acts in the second group give pleasure and at the same time
Labor as pleasure 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.
In a third class are the acts that are painful in themselves,
Labor as sacrifice 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.
There is thus labor that is pleasurable in itself and labor that
Joy in work is the is painful though it leads to a desirable result. The social
ideal
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.
2. The agents of production compose two great species,
The distinction material goods and human services. Our discussion of
between men and
things 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.
3. Labor and material wealth are complementary and
Rent and wages indispensable to each other in most of their uses. The
mutually affect each
other 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.
Each of two kinds of agents used together affects the utility
Certain shares of the
of the other, and the value of the product. If neither can be
product are logically
attributed to each 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?

4. Human service has the same general relation to wants
Labor gratifies that material goods have, affording gratification either
directly and
indirectly 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.
But the results of most human services may be seen to
Labor embodied for rest, at least temporarily, in some material form. Effort is
a time in material
form 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

1. As material things differ in their fitness to gratify
Grades of labor are wants, so do men differ in their powers of labor. The
analogous to grades
fields, hammers, plows, tools, and machinery of

of wealth 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.
2. The physical strength of workers differs according to
Physical differences
age, individual, race, and sex. Differences due to age are
among men
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.
A difference in the physical strength of the sexes is
Comparative found in some degree throughout the world, but it would
strength of men and
women 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.
3. Differences in intelligence are a resultant of native
Talent and training talent and acquired ability. It is difficult to distinguish
as factors of
efficiency 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.
4. The moral qualities of the worker are increasingly
The moral qualities important as society grows more complex. The need of a
required in industry
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.
5. Skill and capacity in industrial tasks is a resultant of
The union of many many qualities. The simplest task calls for a combination
qualities needed
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.
6. Biologic studies have of late made clearer the
Inequality of talents
existence and continuation of the inequality of talents.
shown by biologic
studies 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.

7. The scarcity of human services,
Scarcity of labor is Unlimited demand relative to wants, is the fundamental
essential to wages for labor
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.

CHAPTER 21
THE SUPPLY OF LABOR

§ I. WHAT IS A DOCTRINE OF POPULATION?

1. The supply of labor means here not the number of
The employer's and workers available in any one industry, but the number
the social view of
supply of labor 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.
2. "Supply of labor," as an economic problem, presents a
Population in large and complex case of diminishing returns. The
relation to resources
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.
3. Each species of the lower animals is seen to have a
Equilibrium relatively fixed habitat limited by its food-supply and by
between numbers of
animals of differentits enemies. The rocks tell a story of a slow and steady
species 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.
Throughout nature each species of animal keeps its
The surplus of life
customary place, changing little despite its efforts to
germs
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.
4. A doctrine of human population is a reasoned
These facts related explanation of the causes determining the number of
to the doctrine of
population 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

1. In the earlier stages of human history, population is
The biologic stage limited mainly by biologic factors. The biologic stage
of human
population 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.
2. War for the possession of limited resources is the first
War among rude social remedy for an excess of population. War is
primitive societies
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.

3. Volitional control of population begins by the
Crude beginnings destruction of offspring before or after birth. The
of volitional control
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.
4. The pressure of increase of
Private property The problem a numbers on resources is confined by
limits population psychic one
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.
5. Volitional control is effective in very different degrees
Social classes differ in different families and industrial classes. The
in volitional control
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.
Postponement of marriage must be classed as a mode of
Motives in volitional control of population. The average age of
volitional control
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

1. Changes in population are resultants of many forces:
The many motives those favoring a high birth-rate and low death-rate, and
controlling
population 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.
2. The desire to maintain and raise the standard of life is
The standard of life
the most effective motive limiting population in our
in Asiatic countries
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.
The American standard of living, while it differs in
The American different classes, is on the whole the highest found
standard
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.
3. Great improvements in medical and in sanitary
The decreasing science are decreasing the death-rate and thus partly
death-rate
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.
4. Volitional control is acting with the greatest force in
The quality of the more capable classes and thus threatens to reduce
population counts
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.
The average number of children reaching maturity in the
Change in the families of the American colonists was six; the average
American birth-rate
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.
5. Population increased at an unprecedented rate
Rate of increase inthroughout Christendom in the nineteenth century, but
the nineteenth
century 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.
Population should increase more slowly than wealth and
Conclusion 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.

CHAPTER 22
CONDITIONS FOR EFFICIENT LABOR

§ I. OBJECTIVE PHYSICAL CONDITIONS

1. The efficiency of labor, in its broadest sense, is its
Subjective and ability to render services or produce things that minister
objective factors of
efficiency 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.
2. The efficiency of labor is limited objectively by the
Bounty and abundance and quality of material resources. Material
goodness of
productive agents resources include both those called natural (as the field
affect the output ofand its fertile qualities), and those called artificial (as
labor 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.

3. The laborer's efficiency is greatly affected by the
Causal relation of quality of his food, clothing, and shelter. Usually
wages and
efficiency; food 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.
A few years ago an experiment in the feeding of pigs
An experiment in was tried on the Cornell farm. Four groups of six pigs
feeding
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.

The effect of the quality and amount of clothing, while
Clothing 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.
4. The growth of society is, for the average man, making
Physical conditions
some of the conditions of efficiency more difficult, others
surrounding labor
grow worse or more easy, to secure. In agricultural and sparse
better 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

1. The first social condition for the workers' efficiency is
Government to political security. For the same reason that this condition
insure the reward to
labor 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.
2. The prevalence of standards of honesty in private and
Common honesty public business is a condition to high efficiency.
as a condition to
efficient labor 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.
3. Custom and social ideals that raise or depress hope
Effect of caste on and ambition, affect efficiency. The institution called
efficiency of lower
and upper classes 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.
Democracy makes for the efficiency of American
American industry not less than do the great natural resources. If
democracy and the
efficiency of labor 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.
4. Custom and national temperament affect the
The balance of efficiency of labor by determining the normal period of
advantage between
work and leisure 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

1. Division of labor is a term expressing that complex
Division and arrangement of industrial society whereby individual
exchange of labor
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.
2. Division of labor is primarily between individuals, but
Division of labor appears between trades, territories, and nations. In
between trades and
territories 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.
3. Division of labor increases efficiency by: (a)
Advantages of increasing skill; (b) saving time; (c) saving tools and
division of labor
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.
4. The individual worker, to attain his
Best adjustment of Choice of a life highest economic efficiency, must
talent and career
occupation 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.

CHAPTER 23
THE LAW OF WAGES

§ I. NATURE OF WAGES AND THE WAGES PROBLEM

1. Wage in the broad sense is the income due to labor, in
Wages and rent distinction from that due to the control of material
compared and
contrasted 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.
2. A law of wages is a statement of the relation of the
Nature of the law of
general causes of value to the value of human services.
wages
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.
3. Economic wages are the value of human services in
Economic wages the broad sense; contract wages are the goods paid by
and contract wages
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.

4. Human services, being one of the conditions of
Scarce services psychic income, bear the same relation to wants that
gratify wants
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

1. The self-employed laborer earns wages in the broad
The simplest case economic sense. In this sense the isolated workman,
of economic wages
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.

2. The wages of self-employed labor are often simply the
Wages of the self-value of the material product it secures by exchange.
employed
exchanging worker 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.
3. Contract wages, paid by an employer, rest on the
Both impersonal same cause of value, the direct or indirect effect of labor
and personal causes
of contract wages 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.

To begin with the simplest case: workers often are
A single direct temporarily employed to produce for others means of
personal service
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.
In ordinary domestic service the only condition not
The continued wage present in the cases just given is the more abiding
contract for
personal services 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.
4. The payment of the laborer to produce goods for
Labor employed on exchange is the most common modern case of wages.
products exchanged
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.
5. The wages paid by the various methods of
Various methods of remuneration—as, by time, by the piece, by premium for
remuneration, but
one general rule 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

1. Each grade of labor is a potential supply of desirable
Ratio of exchange things and its wage is determined in essentially the same
of services adjusted
to their marginal way as if it were an actual supply. If all the various
utility 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.
In this situation the real wages of some being so much
Differences in more than those of others, the low-paid workers will
wages persist
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.
2. The term general rate of wages can be used only of a
Various grades of certain grade of labor and of the rate for the average
labor and rates of
wages 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.
Abstractly considered, that is, wherever free competition
Equilibrium of exists, there is a constant tendency toward a state of
services and wages
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.
3. The law of wages may be stated thus: in any state of
Wages follow the the labor market the wages of any labor or class of
law of marginal
valuation 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.
This statement of the law of wages is broad, and appears
Wages exemplify to be modified in many ways in practice: by changes in
the general law of
value 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.

CHAPTER 24
THE RELATION OF LABOR TO VALUE

§ I. RELATION OF RENT TO WAGES

1. The law of wages must be considered in connection
Concrete conditions with other far-reaching influences. One may use the
of industry must be
studied with wages sentence, "the marginal productivity of labor determines
wages," without having a true understanding of its
meaning. Memorizing a definition is only the first step toward economic
reasoning. Till that definition becomes a real thing in the student's thought it
helps him but little. The law of wages is an abstract statement of the logical
relation of wages to utility; it is not a concrete statement of the industrial
conditions in which labor works, yet these are more nearly in the nature of
true causes of value. The marginal utility is itself determined by forces and
conditions outside of labor that are constantly changing. The more thorough
is the student's knowledge of the actual conditions of industry, the more
correctly he can apprehend the relations of wages to other incomes, and the
more wisely he will apply the abstract law to practical life.
2. The marginal productivity of labor is affected by the
Productivity of relative abundance and efficiency of natural resources.
labor and
diminishing returnsIf land suddenly becomes more abundant through the
of natural agents opening up of new continents, the lower grades of agents
are sooner or later abandoned. Labor having more of a
choice as to the place where it is to be used, spreads itself over the better
grades and takes on a greater marginal productivity. The marginal unit of
labor working on better soil than before produces more, and wages
expressed in produce are higher. Ground rent, on the other hand, is less
under these conditions. If, however, the land is fixed in area, and population
increases, no other change taking place, the principle of diminishing returns
applies. The marginal laborers (the last arrivals or the growing generation)
being compelled to work with less efficient resources on a poorer quality of

land, produce less than was the rule before, and a smaller product therefore
is attributed to all the laborers of that grade. They get lower wages and
more goes as rent to the owners of the land. By shifting of occupations this
reduction may be somewhat moderated and equalized among the workers in
other industries. In both these cases, wages vary more than does the
physical amount of the total product. In the first case, wages are a larger
proportion of a larger product; in the second case, the product is larger
(there being more laborers) but wages are a smaller proportion of it.
3. The unwarranted assumption that a disproportionate
The iron law of increase in population is sure to occur, gave rise to the
wages
subsistence theory, or iron law of wages. This
assumption is now seen not to correspond with what is occurring in the
civilized world. A hundred years ago, however, when the poorer classes of
Europe appeared to be increasing with little restraint, it was not strange that
thinkers should look upon this increase as inevitable. According to the
subsistence theory, the question of population was simply a question of
food; it was believed that men surely would multiply up to the point where
they could not further increase their numbers, and starvation wages would
be the rule. It was this way of looking at things that gave to political
economy the name of the dismal science. When population is limited in
large measure by volitional means instead of by war, starvation, and other
material means, the problem changes and the error in such a theory of
wages becomes clear.
The "standard of living" theory of wages is a refined
The standard of form of the subsistence theory. This theory is that wages
living, and wages
must rise to meet the cost of any standard that the
laborers may set, and below which they will refuse to multiply. This is
probably a fragmentary truth, but is quite inadequate as a theory. A high
standard of living and all the social institutions and customs that aid in
keeping the population from too rapid increase, are factors in determining
ultimately the marginal productivity of labor and, hence, the height of
wages. If these restraining influences suddenly were withdrawn, a reduction
of wages would follow slowly because of the diminishing returns of
material agents. But the standard of living is merely a partial and negative
factor. No limitation of the number of workers can raise wages above their
productive contribution and, in the present state of industry, a considerable

falling off in population might be expected to result in a loss of enterprise,
of coöperation, and of capital. The positive factor in wages is productivity.
4. An increase of population more rapid than that of the
If labor increases artificial industrial agents would reduce marginal
faster than wealth,
wages fall productivity. Labor makes use of many kinds of agents
besides the so-called natural resources. If population is
stationary while tools are allowed to wear out or if an increasing population,
while opening up a proportionate supply of land for food, fails to
accumulate a proportionate stock of other tools, the marginal productivity
of labor must diminish. Labor would be more imperfectly equipped with
spades, hoes, wagons, horses, cattle, machinery. These artificial agents help
in getting not only manufactured products, but food products. The
equipment of labor must keep pace with the number of workers or they will
be forced to the lower, or less effective, uses in the tools. On the other hand,
the growth of science and invention, and the growth of wealth faster than
the population, equipping labor as it does with more efficient implements,
cause the marginal productivity of labor to rise, and hence also the wages.
5. The "wage-fund theory" was an imperfect perception
The wage-fund of this truth that wages are influenced by the efficiency
theory explained
of the industrial equipment. As the subsistence theory
took a partial view, looking at agricultural land alone as the determinant of
wages, so the wage-fund theory looked alone at a portion of the capital in
the hands of employers which was the fund from which wages were paid.
The large part played in discussion by this doctrine and the strong hold it
had on thought is somewhat puzzling now; for if one begins to doubt its
entire truth it is difficult to be quite just to its merits or to state it in a form
that is plausible. The theory was that wages depended on the amount of
capital that, in some way not clearly seen, was set apart by employers for
the payment of wages. The capital making up the fund out of which wages
were supposed to be paid, was only a very small part of all capital, even in
the narrow sense in which that term was then used. It was assumed that this
wage fund, once set aside, was necessarily paid out to laborers, wages being
therefore determined by simple division: laborers were the divisor, the wage
fund the dividend, and the average wage the result. When the theory is thus
baldly expressed, it appears to begin and end on the surface of the facts; and

the wage fund appears to be rather the arithmetic sum of variously
determined payments than, in any sense, the cause of wages.
The abler wage-fund theorists did not fail at times to see,
The wage-fund though too dimly, as the determining causes behind the
theory a partial
truth employers' action, certain other things, such as the
material facilities, the desires of consumers, the
capabilities of the workers, and the resulting value of the labor. The element
of truth which still should be recognized in this theory is that the relation of
labor to its equipment influences its efficiency, and determines the part of
the product to be set aside for wages. In that sense, wages are related to the
abstinence of capitalists and to the supply of "capital," but capital
understood not as a special fund of the employers, but, in a broader sense,
as labor's entire environment of indirect agents.

§ II. RELATION OF TIME-VALUE TO WAGES

1. The services of labor, whether for one's self or others,
Labor may be near have a more or less immediate relation in time to the
or far, in time, from
gratifications gratifying of wants. While all human efforts to which the
term services is applied have a relation to wants, there is
much diversity in their nearness to the gratification for which they are
destined. The process may be technically roundabout, to use the language of
recent economists. One may break a stick from a tree, pick up a stone and
drill a hole in it, catch an animal, cut thongs, tie the handle to the stone, and
use it as a weapon to kill other animals for food, the first step being taken
with the last object in view. But a still more essential relation we have seen
to be the relation in time. Some things, some goods, are used at once, some
after a long interval; some are durable, others perishable. Labor produces a
song or a glass of lemonade to be consumed on the instant; it is employed
on bridges, monuments, railroads, or interoceanic canals lasting for
centuries. In all these cases the general object sought is the same though
very different intervals of time must elapse before the gratification matures.
2. As different periods of time must elapse before
All future products services are enjoyed, the expected value of all products
of labor are
discounted to their but those immediately available is discounted in
present value advance. The services that afford gratification

immediately, and those that afford gratification at a later time, are judged
and compared at one and the same moment. All economic life centers in the
present. This difference in the time of services surely cannot be ignored. If
Robinson Crusoe, at work on his island with his limited supply of energy,
continues to provide for next year's enjoyment, neglecting the present,
present goods become scarce and their utility rises as compared with the
future goods the same labor secures. To escape inconvenience, and in the
extremest case to escape starvation, Crusoe would be compelled to restore
the equilibrium between the wants of the two periods by shifting his labor
back to the present. So in each little economic group and in our complex
society there is constant rivalry of present and future wants, competing for
the limited present supply of labor. The present says, "Give me your labor
and I will give you the fullest enjoyment." The future says, "I will give you
a greater gratification, but you must wait for it." A given labor force thus
making possible a wide range of choice among present and future services,
labor is distributed according to the prevailing rate of time-value, which, as
we have seen, is approximately expressed by the rate of interest. If the rate
of interest is high, it means that the present is urgent and will not easily
yield to the future. If the rate is low, it implies that the present is
comparatively well provided for, and that future wants are given more
consideration.
3. The employer in hiring labor and producing goods
The employer takes account of these time differences. In the preceding
adjusts his labor
force to the interest paragraph has been noted the influence of time
rate differences in the simplest problem of economic wages.
Interest is likewise taken account of in the bargains
between workman and employer, by which contract wages are fixed. The
employer of labor works subject to a prevailing rate of interest. If he
ignores it he must lose. He should direct a given amount of labor to
products that mature next year only when their expected selling price is
greater than that of products that can be marketed this year. This difference
due to time can no more be ignored than can any other difference in the cost
of products. If the employer keeps the future goods to sell later, they will
normally increase in value as they approach maturity; if he markets the
goods at once, he normally must pass on to the purchaser the benefit of the
discount he has made on their future value. That is to say, it is not the
employer of labor, the purchaser of labor as such, who gains by discounting

the future value of labor; it is the investor of capital (whether employer or
later purchaser) who secures the rent as it matures.
4. Hence all wages paid for help on products that are
The discount of the remote are based on the present worth, or discounted
future value of
services is value, of the future gratification to which the labor
inevitable contributes. The idea is held in one form or another by
all radical socialistic writers, that the laborer does not
get the full value of his products. In the sense that is here discussed, he does
not. He does not get what the product will sell for in the future. He gets the
probable future value at its present worth, discounted at the prevailing rate.
That part of the employer's gains corresponding to this discount on labor is
economic time-value.
Nor is this discount of future services dependent on a political system or on
private property or on the wage system, as some have assumed. It is a
universal truth. It is in the nature of wants that present and future should
differ. A communistic or socialistic state would have to take account of this
difference, else the whole social economy would be irrational and there
would be no principle by which to apportion in time the productive forces
of the community. Contracts to pay interest and contracts to pay wages
might be forbidden and made criminal by formal law, but time-value would
persist.
5. Wages and rent are coördinate species of the value
Relations of wages, problem; time-value is a different kind of problem,
rent, and time-value
bearing to both the other problems a similar relation. A
close examination of the problems of rent and wages serves to bring out the
close parallelism of these two forms of income as here defined. Rent is the
value of the usufruct of wealth, wages are the value of the usufruct of labor.
The bearer of the use in one case is material goods, in the other is human
agents. Different in the source of use, they are in large measure alike in the
form of contract, or nature of the calculation. Together rent and wages
comprise the value of all currently arising uses; they are the two coördinate
species of the genus "value of uses." The two groups of uses are closely
interrelated in practice, each acting and reacting on the value of the other.
Time-value is a different genus of the value problem. Having to do with
time differences, it must be found in connection with every use that is not

immediate, whatever be the bearer of that use. Its application to rent is more
frequent and obvious, as only the uses of material agents are capitalized,
that is, sold in perpetuity. Moreover any service of labor that is not at once
consumed is fixed in material form and appears thenceforward as wealth
whose uses are yielded as rent or as consumption goods.

§ III. THE RELATION OF LABOR TO VALUE

1. Labor is a cause, but only one of the causes of value.
Several conditions A cause is some one condition which is seen to be
of value
necessary to the existence of a thing, and usually that
condition which brings the thing about, other things being assumed. In what
sense ought a cause of value be spoken of? In one sense it is in the minds of
men—it is their wants; again, looked at objectively it is in the nature of the
good—it is the quality that fits it to gratify the want. But if both these
causes are operative, and labor is applied to fit goods better to gratify wants,
labor appears as the cause of value. Personal causes are so much more
evident, an explanation through personal causation is so much more
satisfying in the earlier stages of scientific inquiry, that labor long continued
to be looked upon as the one source of value. This erroneous view has never
quite ceased to influence economic thought, and a great deal of effort has
been directed to formulating theories of value based upon it. The cruder
form of the error has now almost disappeared, but in various little
recognized ways it still persists.
2. Economic production is the origin, or genesis, of
Two phases of value finding its source either in objective things or in
economic
production services. The writers of fifty years ago defined economic
production as the application of labor to the creation of
wealth. But as there are two factors in production, man and material things,
so there are two productive sources of value. In some cases the origin of
value is attributable to man's action; in other cases scarce uses arise in
objective things without man's action. Broad as is this definition of
production, it does not include the enjoyment of free goods, as in the case
of the care-free darky basking in the sun. Anything that, causing a feeling of
greater importance to attach to a thing, changes it from a free good to a
scarce good or makes it more scarce, is a cause of its value. A large rainfall

causing a greater crop of grain may be thought of as producing utility. The
regular surplus of value attributable to the waterfall or to the railroad, is the
product of the material services of wealth. Production through human action
is the more obvious and is the more usually thought of; the part of material
agents must be recognized if the fallacies of the labor theory of value are to
be avoided.
3. Human activity is directed to shaping and arranging
Labor applied to things so as to increase their want-gratifying power.
creating utility
Human and non-human agents are combined in different
proportions in various products. In one thing more land and machinery are
used, in another more labor is used. But either of these two great classes of
agents may touch the vanishing point in the production of value. While it is
true that man's part is the most striking aspect of production, yet there may
be value without labor. The study of rent puts this abstractly, but in a clear
light. In actual life, however, a part of the value is usually attributable to
rent, a part to labor.
But in what sense is even this part attributable? Not in
Value of labor the sense that the labor is the original source of value
derived from its
products which imparts that value to its products. The usufruct of
wealth is the basis of rent; the need to pay rent is not the
cause of value in the product. Likewise, product is the basis of wages, labor
is not the origin of value. Labor, like the forces and qualities of wealth, is
the cause of technical changes. These changes, if favorable, cause the goods
to take on a higher value which is reflected back to the labor. The labor
itself has not a predetermined, ascertainable value, but only a resultant,
derived value. An exception to this statement appears on a superficial view
of the value of labor hired under the wage contract to make a particular
product. The labor having a market value because of a large number of
well-known alternate uses, can be diverted to a particular use only on
condition of a definite payment. Labor here, as viewed by the employer,
appears to have an original value; products, a derived value. But in the
logical view, labor is seen to impart technical qualities to the goods; in turn,
the goods to impart value to the labor. Man hunts throughout industry for
those things to which his labor can be applied usefully. He foresees in them
the changes that will increase the value. It is only as he has judged rightly

that the value taken on by the things is reflected back to the labor attributed
to it.
4. Labor being of many qualities and receiving many
No unit of labor to rates of pay, there is no unit of labor that can be used as
serve as a standard
of value a measure of value. The idea of finding in a "unit of
labor" an objective standard of value to which the value
of all other things could be reduced has been a very attractive one. This
fallacious hope animates every one beginning to think of the value problem.
The thought was so plausibly formulated by Ricardo that it continued for a
long time to be the generally accepted doctrine of value. Although most
writers reject the formal statement of the labor theory of value, use is
frequently made, even now, of the phrase "unit of labor," suggesting the
thought that labor is the standard by which the value of all goods may be
measured. This unit of labor of the text-books may be seen to be either
labor arbitrarily assumed to be of uniform quality and quantity, as a day of
unskilled labor (in that form quite incomparable as to amount with other
qualities), or a given amount of money invested in labor of different grades
at its market value. It is only by expressing labor in terms of its value that
the various grades of skilled and unskilled labor can be reduced to a
homogeneous unit, which is but a unit of money wages. This should not
deceive us into the belief that in any peculiar sense labor can be used as a
unit of value. It is equally valid and convenient to speak of units of
machinery and of units of land. In terms of capital a factory site can be
expressed as a multiple of a potato patch not less perfectly than can a
sculptor's labor as a multiple of a ditch-digger's.
Scarcity of things desired is the one objective condition
Scarcity and utility of value. The things that labor can produce and the labor
of labor
to produce them being scarce, labor takes on a value. All
things at last become comparable in terms of psychic income in each
individual's judgment, but as yet neither in this comparison nor in the
market values that are fixed in exchange, has any absolute standard been
found by which the utility of all goods or the welfare of all men can be
measured.

CHAPTER 25
THE WAGE SYSTEM AND ITS RESULTS

§ I. SYSTEMS OF LABOR

1. The wage system is the
The wage system Never the exclusiveorganization of industry wherein
defined form of
organization some men, owning and directing
capital, buy at their competitive
value the services of men without capital. The wage system is a method of
organization never found completely realized. A community made up
entirely of independent small farmers, living each on his little patch of
ground, does not have any essential feature of the wage system. So long as
they continue to be independent small farmers, owners of small capital,
self-employing workers, the wage system does not exist in complete form.
Some men with capital in every community are working for wages, while
others, as independent producers, are their own employers. Society is not
sharply divided into two classes, one controlling all the working capital, the
other quite without resources. The wage system may be spoken of as
prevailing to-day not as the exclusive, but as the typical, or dominant, form,
while side by side or along with it is found independent production. It is
clear that the wages here spoken of are contract wages. The wage system
implies a money contract between employer and employed. The relation or
bond between them is that of a wage payment.
The wage system cannot be judged properly apart from questions to be later
considered, such as private property and the enterpriser's part in industry;
but some consideration of the subject properly belongs here. The wage
system has become of recent years in America the dominant form of
industry. The theory of wages is applied most frequently in the discussion
of contract wages, and there are certain practical relations between the
results of the wage system and the theory of wages.

2. The wage system, historically considered, is seen not
Workers to have displaced a system of independent labor. This
subordinate in early
societies question should be viewed in historical perspective. As
far back as history can be traced, the masses of workers
have been subordinate. Civilization began with direction, with obedience to
superiors on the part of the mass of men. Within the family, in the rudest
tribes, the women and children were subject to the will of the stronger, the
head of the family. Among the Aryan races the family system was widened,
and the patriarch of the tribe secured personal obedience and economic
service from all members of the community. Chattel slavery, the typical
form of industrial organization in early tropical civilization, seems to have
been one of the necessary steps to progress from rude conditions; students
to-day incline to view it as an essential stage in the history of the race. But
as conditions changed with industrial development, chattel slavery became
a hindrance to progress, a disadvantage to higher industry.
3. Serfdom for rural labor and many limitations on the
Place of the workman's freedom in the towns, were the prevailing
workers in the
Middle Ages conditions in medieval Europe. Serfdom was both a
political and an economic relation. The serf was bound
to the soil; the lord could command and control him; but the serf's
obligations were pretty well defined. He had to give services, but in return
for them he got something definite in the form of protection and the use of
land. Between the lord and the serf continued a lifelong contract, which
passed by inheritance from father to son, in the case both of the master and
of the serf. In the towns conditions were better for the skilled workmen, but
many things bore heavily on the mass of the workers shut out from special
privileges. There were strict rules of apprenticeship; gild regulations
forbidding the free choice of a trade or a residence; laws against
immigration; settlement laws making it impossible for poor men to remove
from one place to another; arbitrary regulation of wages, either by the gilds
in the towns or by national councils and parliaments, forbidding the
workmen to take the competitive wages that economic conditions forced the
employers to pay; combination laws forbidding laborers to combine in their
own interest. It is not an attractive picture, but, as far as is possible in a few
words, it is a truthful picture of the conditions that existed before the
coming of the modern system.

4. Many continuing limitations on the freedom of the
The wage system worker are not the results of the wage system or a part
not the main cause
of present evils of it, but are opposed to its complete workings. The
worker's ignorance is a limitation, preventing the choice
of an occupation for which he might naturally be fitted. Neglect of children
by parents is a limitation, preventing industrial training and the
development of qualities that would make it possible for the child to excel.
The faults of human nature cannot be attributed to any "system"; and if they
are remediable, it is by education and better social opportunity. Trade
unions often forbid boys to become apprentices, and forbid the choice of a
trade except under conditions so exacting that to many they are impossible.
Such limitations are made by the privileged few in their own interest, but
they are annoying and opposed to the interests of the many. The typical
wage system would be one in which all such hindrances were lacking, in
which there were no social or political limitations on free competition
except such as would help in educating and training the worker. The wage
system should be judged by what it is, not by things directly opposed to its
spirit.

§ II. THE WAGE SYSTEM AS IT IS

1. Under the wage contract the worker gets in a definite
sum at once the market value of his services. Under the
Merits and faults of
the definite wage
payment wage contract the employer takes the risk as to the future
selling price of the product. That he is the one best
prepared to assume the risk will be made clearer in the discussion of the
employer's function. Wage payment, therefore, is a form of insurance to the
workingman; he gets something definite instead of taking chances he is ill
prepared to take. Wage payment is a form of credit to the laborer whose
labor has not yet produced the distant gratification. The employer advances
to the workman the value of the future gratification, discounting it at the
prevailing rate of interest. The darker side of the wage bargain is that the
"cash nexus," as Carlyle expressed it, is too often the only bond between the
parties. When the wages are paid, the employer considers his obligations
discharged. There is a lack of fellowship and sympathy in it all. Work
should be a bond of communion between men, but as it is, the laborers in
some great factories and their employers live in entirely different worlds.

The great inequality of their condition makes mutual understanding
difficult. They are master and man, "boss" and hireling, not co-workers,
each with a worthy part in the noble tasks of industry.
2. The wage-earner gets the competitive value of his
Strength and services, securing in most cases much more than a bare
weakness of the
worker in subsistence. At the present time competition is in a large
competition measure active among employed as well as among
employers. A believer in the subsistence theory of wages
must, under these conditions, expect wages to fall to the starvation level.
But according to the law of wages here presented, it is to be expected that
wages can and will remain indefinitely above that level, falling or rising as
conditions change. The increase in material wealth of itself tends to increase
the wages of the workman. The laborer, though without resources and even
though not contributing to the increase of capital by saving, thus shares in
the benefit of increasing capital. It is true that under some conditions the
workman is at a disadvantage in making the wage contract; labor must be
applied from day to day or it is lost, and the laborer must work to live.
While this does not determine the rate of wages in the long run in any
occupation nor to any great extent except among the lowest grades of labor,
it does give an advantage for the moment to the employer, and enables him
to exercise at times a harsh power over the workmen in his immediate
neighborhood. A single workman is thus very often at a disadvantage, but it
must not be overlooked that in a large degree the competition for good
workmen is effective between employers in different trades and in distant
localities.
3. Increase of efficiency due to the sacrifice of parents or
Wages as affecting to personal exertion, goes to the individual worker. The
the ambition of the
worker most essential practical feature in any industrial system
is the appeal to the ambition of each man. This appeal is
made where a premium is placed on increasing efficiency, by insuring to it a
higher return. This result is possible and in large measure is attained under
the wage system. Little less important is the appeal to family affection to
make possible by its sacrifices each worker's best preparation.
An offsetting disadvantage appears in the loss to the laborer in the decline
of his powers. As he gains in wages if he increases in efficiency, so he loses
if his strength fails from accident or in the course of years. This loss falls

upon him, not, as is sometimes said to have been the case under serfdom or
slavery, upon his owner (as if that secured to the slave immunity from
suffering). It is true that in general under the wage system the worker has no
guarantee against loss of work or, what is equally important, against sudden
changes in industry. He may be, and often is, a victim of invention and of
changes in machinery or industrial processes, by which the masses of men
are the gainers.
4. Liberty of the worker in his choice of work and
Large liberty of theoutside of working hours makes for happiness,
wage-worker
character, and progress. Opinion is almost a unit as to
the truth of this statement. The present wage system is the freest condition
for the mass of men that ever has existed. Their religious, political, and
personal convictions, are for the most part inviolate. There is a true but
much misused maxim that liberty has its dangers. Freedom means freedom
to make mistakes. Intelligence and strong industrial virtues are required to
exercise properly a freedom newly acquired. Thus it is the lowest class of
labor that reaps the smallest advantage from free conditions, and that suffers
most from their misuse.
The main evil in the wage system is certainly not that
Limits to the the liberty of the worker is too great, but that it is too
worker's liberty
small. The sale of labor involves the obeying of orders
during certain hours specified in the contract. Here again the evil is greatest
in the lowest grades of work, while the great majority of wage-earners are
left a large measure of choice in the time and manner of their work. Where
labor is severe and without joy to the worker, it appears to be little better
than a form of slavery. Contrast the condition of the section hand, cursed
and beaten by a brutal foreman, with that of the wage-earner in the
locomotive-cab, self-respecting, self-directing, and trusted with the safety
of property and lives. The wage system is manifold, it is adaptable. If it
holds a portion of the laborers with a harsh hand, it gives to all a wide
measure of opportunity, and to most a great degree of independence in their
lives. A hasty resort to indiscriminating analogy, as in calling wage-work
"slavery," does not further truth or social justice.

§ III. PROGRESS OF THE MASSES UNDER THE WAGE SYSTEM

1. The nineteenth century was a period of great progress
The rise of money for the masses in America, England, and throughout
wages
Europe. There are differences of opinion as to the extent
of this progress, the way in which it is to be measured, and the degree to
which it is an occasion for congratulation. There is no longer any dispute as
to the actual fact that it has taken place. Many lines of evidence converge to
confirm this one conclusion. The average money wages in the United States
may be represented in 1840 by 87.7, in 1860 by 100, and in 1891 by 161.2.
This was the high mark for a time and a decline followed. Again wages rose
from 1897 on, and in 1899 had reached 163.2. They have continued to rise
since and in 1903 attained the highest point in the history of our country
and therefore in the history of the world. Another temporary decline
undoubtedly will occur when industrial conditions become less prosperous.
Real wages, also, the power to purchase goods with
Changes in real labor, are greater than ever before so far as this can be
wages
measured in the price of leading commodities. The
offsetting loss of the free health-giving pleasures of country life cannot
easily be expressed. In England likewise the rise in money wages has been
great. In 1860 it is represented by 100, in 1870 by 113, in 1880 by 125, in
1891 by 140, in the intervals some decline occurring. For a century in all
civilized lands wages have moved in an ever-rising series of waves. The
purchasing power of wages in England increased ninety per cent, in the
thirty years between 1860 and 1891. Throughout Europe the same general
change is seen, going always hand in hand with new industrial methods and
the displacing of the old agricultural system by the wage system. As the
hours of labor have at the same time been shortened, the workers have
gained doubly.
2. This progress is mainly due to the opening up of rich
Need of a broad natural resources and to the development of industrial
explanation of
rising wages processes. Recognized in some measure by every one,
this progress is attributed by different observers to
different causes: in America, by many to the protective tariff; in England,
by many to the freer trade introduced about 1840; throughout the continent
of Europe, to the spread of constitutional government and free institutions;
by trade-unions everywhere, to the organization of labor. There is,
doubtless, under certain conditions, some portion of truth in each of these

claims. But, either separately or altogether, they fall short of a broad,
reasonable, and sufficient explanation. The two-fold proposition just
presented, the justification for which has been given in preceding chapters,
points to a general and adequate cause.
Seventy-five years ago it was thought that, with the
The gloomy view as increase of machinery, of factories, of the concentrated
to the wage system
was mistaken control of wealth, and especially with the wage system,
there must go a steady depression in the welfare of the
workingman. This idea was connected with the iron law of wages. It was
believed by some that, whatever the causes of advancing social income
might be, the wage system would rob the wage-earners of all share in
progress. In view of the facts, if it cannot now be asserted positively that the
wage system is the cause of all the gain, it can be asserted negatively that it
is not inconsistent with great progress on the part of the laboring classes. It
might be possible to go further and to maintain that the organization of
industry, under the wage system and competitive conditions, by its
encouragement of enterprise, energy, and economy, has been an
indispensable condition in the industrial progress which has in turn made
possible the rising wages of labor.
3. The increased proportion of workers in the higher
More workers now occupations means a further rise in the average
in better-paid
callings condition of the masses. A smaller proportion of workers
is now engaged in the low-paid industries than fifty
years ago, and a correspondingly larger proportion is in the better, or highly
paid, industries. Decade by decade the proportion shifts toward the upper
part of the scale. Both in America and in England (doubtless also in other
countries) more men are now engaged in the higher professions and skilled
occupations, a smaller proportion in the lower occupations. This would
raise the average of wages even if the wages of particular occupations had
not risen.
4. The diffused advantages of progress mean relatively
The masses gain by
more to the masses than to the rich. In the olden days the
general social
advance poor man was bound to the spot where he lived, the rich
man had his carriage; to-day poor and rich ride side by
side in the trolley car. The introduction of these cheap methods of
enjoyment means relatively more to the poor. Better medical care, better

sanitation, more abundant food, clothing, comfort, free schools, and
libraries have all a part in this movement. The enormous possibilities in
these lines are just beginning to be realized. The achievements of the last
twenty years read like a story from fairy-land. It tells the leveling up of the
conditions enjoyed by the common man.
5. Any sound method of improving
Better social Improvement in the social conditions must grow out of
conditions must wage system
grow out of the experience, not break with it. Even if
wage system things were on the downward instead of the upward road
there would be no excuse for wild speculation. The only
rational way is to find what is good in what is, and build upon it. There can
be no excuse for suggesting a method from imagination. Projects of social
change must be tried by successful experiment, and gradually fitted to
present needs. It is in this way that the higher forms of life have developed;
it is in this way that social and political institutions have come into being.
Things that work successfully first in a small way are worthy of trial on a
larger scale. The wage system is a favorite object of attack for radical social
reformers. It has many unlovely features and there are many individual
cases of hardship. It may well be asked, What method shall be pursued to
reform it? Its retention, however, is not inconsistent with very great changes
in the present political and economic arrangements. The impersonal
economic forces are working for improvement; but further, there is a
growth of sentiment, an increase in sympathy, a feeling among men that the
"cash nexus" is not the only bond that should unite different classes, and
this sympathy is becoming an economic force, softening and improving
many of the most unlovely features of the modern wage system.

CHAPTER 26
MACHINERY AND LABOR

§ I. EXTENT OF THE USE OF MACHINERY

1. A machine is a mechanical device by which power is
Tools, machines, applied in an automatically repeated manner, to change
and power
the place or form of things. It is not easy, perhaps not
important, to distinguish the machine from the tool in every case. Tools are
portions of matter, such as bone, wood, iron, which man guides and directs
in applying his energy to things. A machine may be used by the foot, but the
hand is the great tool-using member. In many cases there is a clearly
marked distinction between tool and machine. A simple, single piece that
can be taken into the hand, as a spade, a hammer, a knife, is a tool; a
combination of wheels, levers, pulleys, etc., is a machine. The simplest
machine is but a slight adaptation of the tool, by which power may be
applied in an automatically repeated manner. The drag develops into the
cart, a simple machine. The spinning-stick, a tool used in ancient times,
developed into the Saxon spinning-wheel of the sixteenth century, the form
used when America was colonized. The use of power derived from nature,
as that of wind and water and steam, while not the essential mark of
machines, is the most characteristic feature of their modern development.
Hand-machines, such as the hand-press and the type-writer, have had
important industrial results, but it is the use of power leading to the
concentration of industry and the ownership of machinery by the employers
that has the greatest significance in the modern economic problem.
2. Machinery of many sorts has long been used, but the
Machinery brought "age of machinery" begins with the eighteenth century.
in an industrial
revolution Inventions, new machines, and new processes, though
not frequent, were not unknown in the Middle Ages; but
no one class of machines took possession of a whole field of industry and
gave rise to a great economic problem by the displacing of labor. The great

industrial changes in the Middle Ages generally grew out of political
changes, or of changes of routes of trade whereby large industries were
disturbed, or of changes in the use of land through new methods and the
bringing into use of land in other places. The industrial changes in England
at the end of the eighteenth century on the contrary were due mainly to
great mechanical inventions. The development of the textile machines for
cotton and wool spinning and weaving mark the beginning of the
movement. Here for the first time were inventions in such numbers, of such
a nature, and under such conditions, that they were rapidly and widely
applied, affecting the lives of a great number of workers. The steam-engine
at the same time opened up the long line of mechanical inventions by which
wood and iron are shaped and wrought, and the iron industry underwent
notable developments. Since that time, have taken place in all Western
countries that rapid expansion in the use of machines and those notable
changes in industrial organization which distinguish our era from all others.
3. Machinery is applicable in very different degrees to
Increased use of the different processes and industries. Machinery can
power
save much labor in some directions, little or none in
others. It is especially adapted to the application of power. In the United
States, in 1870, in manufactures alone, two and one third million horse-
power were used; in 1900, eleven and one third million, the increase being
five-fold. It is said that in the world, in 1870, three and one half million
horse-power was furnished by stationary engines, ten millions by
locomotives. Probably to-day the total is four-fold as great.
Machinery is applicable with especial advantage to
Machines can best industries that change the form of materials easily
be used in
manufactures transported and widely used. There must be a large
output to justify the use of machinery. In 1840 a man's
work in spinning cotton was three hundred and twenty times as effective as
in 1769, in 1855 it was seven hundred times; and though the rate of
improvement is diminishing, to-day the productivity of such labor is still
greater. Similar examples are found in the manufacture of shoes, and in all
varieties of wood- and iron-work. Machinery is most applicable where there
is a compact plant; not so easily where the power has to be distributed over
a wide area, unless a special track can be provided.

Machinery, therefore, has affected manufactures much
Not to so great an more immediately and greatly than it has agriculture. It
extent in agriculture
has not as yet, for example, been found practicable to
apply steam to ploughing to any great extent. As the profitable use of most
farm machinery requires a level surface and a large area given to a single
crop, it cannot be used as well east of the Alleghany Mountains as in the
Mississippi Valley, and it is still uneconomical in large portions of the
civilized world. Despite this difficulty the methods of the farmer of to-day
contrast strongly with those of one hundred or fifty years ago. Planters and
seeders, reapers, harvesters, corn-shellers, hay-loaders, automatic
unloading-forks, elevators, water-power-, steam-, and gasoline-engines
allow great economies. The labor needed to produce food for one hundred
people is a fraction of what it was one hundred years ago. In many other
industries machines are usable only in a slight measure, indirectly, or not at
all. They are of the least assistance in the personal services, and in the work
of the thinker, the teacher, the speaker, and the artist.

§ II. EFFECT OF MACHINERY ON THE WELFARE AND WAGES
OF THE MASSES

1. The immediate effect of improved machinery, if
Evil of sudden suddenly introduced, is almost always to throw some
introduction of
machinery men out of employment. Any sudden change in industry
injures men who have become adapted to the work that
is affected. A well-mastered trade, a wage-earning though intangible
possession, may be made suddenly valueless. Men cannot quickly change
their methods of working or their place of work. This is as true of change
brought about by new trade routes or by scientific discoveries (where
machinery does not enter in) as in the case of labor-saving machines. If
machines displace labor rapidly, men who cannot adjust themselves to the
new conditions suffer, and there are always some who cannot adjust
themselves, always some who suffer. It is rarely possible for a man past
middle life to shift over into a new trade where his efficiency will be as
great and his pay as high as in the old. New methods of puddling iron sent
many old men into the poorhouses of Pennsylvania only a few years ago.
Even where the total employment increases, the individual sometimes
suffers. The increased demand resulting from the cheapening of a product
may call for more workers than were employed before the new machinery
came in, and yet some of the former workmen may be thrown out of
employment. The introduction of the linotype is said to have displaced a
large number of hand type-setters, but to have increased greatly the amount
of printing. As the machines are expensive and cannot be worked properly
by men not highly expert, men past thirty-five years of age have not been
allowed to learn their use.
The least efficient men in any trade always suffer most.
Loss falls on the The change crushes hardest the man at the margin of
less efficient
workers employment. The more skilled workman can hasten his
pace and still earn a living wage in competition with a
machine, while the less skilled can but drop out entirely, innocent victims of
an economic change, sacrifices to the cause of industrial progress. Happily
such pathetic incidents are relatively not numerous. Most machinery is
introduced in commercial centers, and gradually spreads to other factories
in such a way that most men can adapt themselves to the change. The effect
of machinery must not be judged by the extreme cases. It was found that
there were more hand-looms in use in England in 1850 than fifty years

before, though in the meantime power-looms had displaced the hand-looms
in all the great factories.
2. After time for adjustment, the total sum of employment
Error of the "lump is as great as before, but the labor is differently
of labor" notion
distributed. The "lump of labor" idea, as it is called, is
widely held, especially among workingmen. The notion is that there is
exactly so much labor predetermined to be done; therefore, if machines are
introduced, there is that much less for men to do. The logical conclusion
easily drawn is that every machine reduces wages. Few, however, would go
on to the further conclusion that in the aggregate the existing machinery,
like an enormous vampire, is sucking the life-blood of the working-people,
—though traces of such a notion frequently appear.
If extreme examples are taken, it may be made to appear
Effect of machinery either that an increase or that a decrease of employment
varies in different
industries results from machinery. Industries grade off from those
that are capable of developing a greater and greater
demand, to those at the other extreme that are capable of a very slight
increase, as a result of a lowering of the price. There seems to be practically
no limit to the consumption of textiles, provided their price falls; the
demand for dress alone is indefinitely expansible. Queen Elizabeth, who
had a different dress for every day in the year, has many potential imitators.
There is a constant increase relatively, as well as absolutely, in the number
employed in transportation, as each census shows; there are more railroad
men relatively than there were stage-drivers and teamsters before the day of
railroads. The number of people now engaged in printing books and papers
is larger by far than in the days when all the books of the world were
written by the old monks in their cloisters. The proportion of workers in
agriculture, on the other hand, is less than it formerly was. In part this is a
change in appearance only, for the farmer once made a large part of his
tools which are now made by workers employed in manufactures, yet who
in a very real way are aiding in agriculture. In part the change is, however,
the effect of the use of machinery and other improvements in agricultural
processes. The amount of raw-food products required for each hundred
persons is quite inelastic. As it becomes possible to expend more for food,
the change is made in quality, variety, flavor, rather than in quantity. The
greater part of the saving in the cost of food is, however, expended in other

products, and the labor saved in agriculture finds employment in supplying
these rising wants. In other cases also, new industries are made possible as
machines liberate energy from the production of the more necessary goods.
At each census it is necessary to change the schedule of occupations,
because men have adopted callings unknown before.
3. In some cases the introduction of new machines
Abnormal effect of injures particular workmen. The only reason for the use
the new machinery
in England of machinery is to improve the quality or to lower the
price of products. If the workers can do nothing but
blindly pursue the same tasks, it is to be expected that the wages of hand-
labor will fall in a particular trade into which machinery is suddenly
introduced. When, as sometimes happens, employers introduce machines
for the immediate purpose of breaking a strike, the workmen are convinced
that machinery is the enemy of labor.
Because the extensive introduction of machinery in England was at first
accompanied by the unhappy result of a lengthening of the hours of labor in
factories, this result was deemed to be necessary in all other cases. It was in
fact quite abnormal, and has not been seen elsewhere. The owners of
factories wished to keep their machines employed as many hours as
possible; the laboring classes of England, being at the same time
demoralized and depressed by industrial and social influences that had no
logical connection with machinery, had no power to resist this movement.
In all other countries of Europe and in America, where the introduction of
machinery has been more gradual and normal, it has been followed
immediately by a shortening of working hours, as eventually it was in
England also.
4. Indeed, the economic effect of improved appliances is
Higher wages logically and inevitably to raise wages. It has been
logically result
from the use of shown above, in the discussion of wages, that if the
machinery efficiency of machines increases faster than does the
number of workers who use them, the marginal
application of labor stops at the higher uses or services of agents and is not
forced to the lower. The more perfect the economic environment, the higher
the incomes even of those who own no part of the machinery. A part of this
benefit may appear in the form of higher money wages received, a part in
the form of the lower price of things bought. Real wages are the essential

thing, and as a consumer the laborer shares with every other member of
society in the benefits of improved machinery. The benefits resulting from
greater abundance are diffused, and as goods are brought from the high, or
scarcity, end of the scale of value down toward the level of free goods,
everybody gains by the abundance and cheapness.
The general, or average, gain is not to be judged by
Some grades gain comparing the conditions of the lowest grade of society
more than others
with those of fifty years ago, for while that grade may
have been bettered only a little, it has been possible for large numbers to
rise to higher grades because of the use of machinery. The physical tasks are
to-day much lighter than ever before, and a larger proportion of society is
engaged in industries that require skill and thought rather than physical
labor. That portion of the work is being more and more shifted upon
machines. It is important, though, to distinguish between classes of workers
in judging of the benefits and evils of machines. A machine is "an iron
man," it has been said, and comes into competition with other men to lower
their wages by outworking and underbidding them. But this iron man can
do only automatic tasks; it is not capable of exercising judgment. Every
intelligent laborer who can adjust, adapt, fit himself for more intelligent
action will rise above the machine and profit by its presence. But the crude
physical labor which can compete only on the plane of automatic machines,
must find its field of employment more and more hedged in. If the wages of
unskilled labor are not depressed, it is because of the enterprise of others
who rise to more skilled employments and thus reduce the competitors of
the lowest rank.
5. The early effects of the factory system on the health,
The growth of intelligence, and morals of the workers often have been
factories
bad; but not necessarily the abiding effects. Some kinds
of machines can be more profitably used when they are grouped in great
factories, and, where this is common, it is spoken of as the factory system.
In the ideal modern factory (realized in few cases) each smaller machine is
a part of a larger organization of machinery, so perfect that the material
goes in at one end of the building and out at the other without the loss of a
single motion. Factories compel great numbers of laborers to live near each
other and to work together. The sudden crowding together of people into
new social relations is usually bad for morals. Men are moral under the eyes

of their neighbors, acquaintances, and families; habits become adjusted to
right standards, and the temptations in new conditions are always great.
Until of late, engineering science has not been able to deal with the
problems that arise where population is densely crowded, and the early
factories with their surroundings were most unsanitary. Under the degrading
conditions that resulted in some places, especially in England, the effect of
machinery on the intelligence of the workers was bad. Whether this is its
natural result is debatable, but the factory worker in general does not appear
to be less intelligent than the agricultural worker. The alertness of the city
dweller is due doubtless to social contact more than to the immediate work
he does. This work may or may not be less thought-awakening than work
with simple tools. There is a general improvement along all the lines of
intelligence, morals, and health. The conditions in the cities as regards
health and morals are approaching those of agricultural communities. While
many factory districts are forlorn, there may be seen around many factories
more happy conditions, better buildings, better sanitation, increased leisure
for workers, workmen's clubs, educational agencies, and many other
evidences of civic and social progress.
6. The great social consequences flowing from the
Problems of large concentration of industry and wealth are the most
industry
serious problems in the relation of machinery to labor.
The ownership of tools was widely diffused in medieval times. It is not yet
evident how many can own a share in great factories, but the control drifts
into few hands. It is not yet clear what social effects great corporations will
have on our democratic institutions. Many problems of large industry
remain to be solved in the near future. The question in the old form, as to
the effect of machinery on labor, is no longer open. It has been clearly
answered by experience and explained by theory: the economic effect of
machinery is to lift the productiveness and efficiency of the average man.
The benefits are unequally distributed, but nearly all share in them to some
degree. The question which the future will have to answer is, What will be
the social and political effects of the great fortunes that have been made
possible by the enormous development of machinery?