m. LIBRARY OF CONGRESS. Chap. Copyright No. Shelf..>i'B...nl- S UNITED STATES OF AMERICA. isL9^ THE WORKING PRmCiPLES POLITICAL EOOKOMY IN A NEW AND PEACTICAL FOEM A BOOK FOR BEGINNERS SyM/MACVANE ^j. --^^ -f" ^ McLean Professor of History in Harvard College Second Edition. Revised. NEW YORK: Maynard, Merrill, & Co., 29, 31, AND 33 Bast 19th Street, 1897. Copyright, 1890 and 1897, By S. M. MACVANE. PREFACE. The aim of this book is to give, in small compass, a sufficient view of economic doctrine for the ordinary needs of intelligent citizens. I have had two principal motives in writing it. In the first place, I wished to show that the principles of Political Economy may be developed in such a form as to bring out, more clearly than is done in the standard books, their close and vital connection with every-day industry. In the second place, I wished to suggest some modifications, chiefly in points of detail, of the conclusions commonly accepted hitherto by the leading economists. Political Economy is among the most practical of sci- ences, yet it has been made to look very much like an abstract philosophy. The great writers seem to have been more concerned about the logical validity of their reasoning, than they were to keep their work, at all points, plainly and closely in touch with the mechanism of practical business. The result is, that their readers, after mastering the doctrine as a matter of abstract theory, are too often quite in the dark as to the precise mode of its application in practice. Economic truth can hardly obtain general acceptance, as the basis of indus- trial hygiene, until it is so presented as to apply, directly and without laborious interpretation, to the visible facts •of industrial life. vi Preface. In the little book here offered, the attempt is made to work out the leading principles of economics with a constant eye on actual affairs. The facts discussed are taken in their ordinary, observalole form ; the student is asked and helped to analyze them, with a view of per- ceiving their relations to each other, and the underlying principles by which they are controlled. The plan has difficulties which the more abstract treatment avoids ; but I hope the character of the result may be found a sufficient compensation. The modifications of theory which I have ventured to suggest grow naturally out of the method I have fol- lowed. In all fundamental points, my results are in substantial harmony with the teachings of the older economists. But in the analysis of cost of production, and in the consequent distinction between savings and working capital, I have ventured on an innovation which seems to be called for in the interest of clearness, both in the discussion of wages and in the law of value. In the treatment of money and prices, I have departed con- siderably, in secondary points, from tlie beaten track. In developing the theory of prices, I found it necessary to have the use of a term which should recognize bank deposits as an integral part of the circulation. The term " bank currency," though not free from objection, seemed on the whole to be the one most suitable for the case. I accordingly adopted it, with the understanding that it includes, on the side of Notes, those issued by Govern- ments as well as those issued by ordinary banks. In the great question of Protection and Free Trade, I have simply tried to indicate the grounds of controversy. So long as the Tariff is a political issue, it seems only fair that a book intended, in part, for use in High Schools" Preface. vii should contain nothing offensive to either of the parties into which our citizens are divided. This book makes no pretence of being easy reading. The subject-matter is, I think, too complex, and at some points too elusive, to admit of a treatment that shall be at once easy and adequate. The best a writer can hope for is that his work shall be found clear and instructive by those who give time to the study of. it. Not that Political Economy is, on the whole, a very difficult study. It merely calls for some patient reflection, especially at those critical points where sound reason is opposed to superficial appearances. There is nothing in the science that young persons of ordinary ability may not master, if only they apply themselves. It would be a happy reform in our national education, if a portion of the time that is now spent by our youth over barren puzzles in percentage, and the arid subtleties of formal gram- mar (English and other), were devoted to intelligent study of elementary economics. I cherish a hope that this little book may do something towards promoting 'such a reform. Cambridge, Mass., Dec. 1889. CONTENTS. Chapter page I. The Study of Political Economy ... 11 II. Division of Labor : Exchange of Products : Wrong View of Money .... 17 III. The Uses of Money: Buying and Selling . 25 Questions and Exercises . . . . . 35 IV. Of Wealth and the Distinction between Natural Wealth and Wealth produced BY Labor 36 V. Why Natural Wealth, originally a Gift to Men, cannot always be obtained for Nothing 43 VI. Of Labor, and its Productiveness . . 52 VII. Nature and Necessity of Capital . . 58 VIII. Capital Represents Industrial Improve- ments 65 IX. Two Classes of Producers, Laborers and Employers 72 Questions and Exei'cises 83 X. Of Value in Exchange .... 86 XI. Cost of Production as the Ultimate Regu- lator OF Value 92 XII. Exceptions to the General Law of Value 109 Questions and Exercises 120 ix Contents. XIII. Op Prices, or the Value of Money . XIV. Production of the Precious Metals XV. Bank Currency XVI. Questions between Gold and Silver . XVII. Inconvertible Legal Tender Notes . Questions and Exercises XVIII. Wages and Profits as Portions of the Pro- duct OF Industry XIX. AVages of Individual Laborers XX. Further Considerations Regarding Wages XXI. Profits of Individual Employers XXII. Interest on Borrowed Savings XXIII. Productiveness of Natural Agents : Eco- nomic Rent XXIV. Consequences of Diminishing Returns . Questions and Exercises XXV. Exchange of Products between Separate Communities, or International Trade XXVI. Free Trade and Protection . . . . XXVII. Concluding Suggestions Questions and Exercises Index Tage 122 141 1.50 165 182 192 194 212 231 251 270 286 310 321 323 349 364 377 381 Political Economy. CHAPTEE I. THE STUDY OF POLITICAL ECONOMY. 1. Political Economy and Daily Life. — The general subject of political economy is wealth, which is simply a short name for the numberless things we all like to have and to own. Everybody needs some wealth in order to live ; most persons are eager to get a great deal of it, — more, perhaps, than would be good for them, if they got it. How to get the wealth we need in the world is, for most of us, a very serious question. Few therefore, even among young people, can be en- tirely ignorant of some at least of the ways by which wealth may be obtained. There are few who have not seen some kinds of wealth actually produced. Those who live in the country, or have even spent their holidays there, must have seen something of the ways by which a very important part of wealth, namely, our food, is produced. Those who live in the city wit- ness the activity of mills and factories and the busy operations of commerce. We have all seen men at 11 12 Political Economy. work, and know in a general way what labor accom- plishes. There are but few of us who have not seen machinery in operation, or are ignorant of the powerful aid it gives to human labor. Everybody knows what it is to buy and to sell. We are all familiar with the use of money, and checks, and bank-notes. We all know the difference between saving and spending, and between diligence and sloth. No intelligent person can grow up in a civilized community without often hearing and thinking about these matters, for they are part and parcel of our daily life. Now these are the chief topics of political economy. The object of the science is to study the conditions under which we carry on the struggle for tlie means to supply our daily wants, — the struggle for wealth. It aims to discover the principles that govern the pro- duction and sharing of wealth ; the circumstances that favor and those that obstruct the largest production and the fairest sharing of the product. 2. True and False Political Economy. — It is at once an advantage and a disadvantage for political economy that it deals with subjects that enter so closely into our daily life. The advantage is that the science must always possess great interest for every intelligent lover of his country and his fellow-men ; it can never lack earnest and devoted students. The disadvantage is that beginners in political economy are seldom wholly beginners. Their familiarity, in practical ways, with many of the topics and questions of the science, — Difficulties of the Study. 13 things tliey hear and ideas they pick up in one way or another, — give them a sort of political economy before coming to the set study of it. Now if this political economy were good and sound so ■ far as it goes, it would save us the necessity of much elementary explanation and definition. But, un- fortunately, it is for the most part wrong. It is adopted without sufficient reflection, is not tested at all, and has usually no better basis than half -seen facts or wholly misinterpreted relations of things. Economic subjects are peculiarly ill adapted for hasty treatment, being full of pitfalls for the unwary. They often have, superficially, an appearance of great sim- plicity, while they are in fact highly complicated. The motions of the earth and its true relations to the heavenly bodies are not more effectually disguised to the careless observer than are the real facts of eco- nomic life. To pierce through the illusions and gain a clear view of things as they really are, demands an amount of thought and study that busy people are seldom able, and careless people are seldom willing, to bestow. So it comes to pass that popular political economy is so often erroneous. So also it comes to pass that beginners in the set study of political economy have usually much to unlearn. They have to give up ideas which they previously regarded as familiar and unques- tionable truths. Much of the space in every book on political economy has to be devoted to the refutation 14 Political Economy. of false theories. In fact, the prevalence of wrong ideas is one of the chief causes for the existence of political economy. If the laws of production, wages, currency, etc., were so clear and simple that he who runs might read, there would be no occasion to spend time in writing or studying books about them. But it is not only false theories that beginners have to unlearn. They have to unlearn wrong ways of look- ing at things and fallacious modes of reasoning about them. This is more difficult. Habits of thought are hard to shake off. Long after the student has per- ceived the faultiness of his former way of thinking, he is apt to find himself unconsciously falling back into it. Other sciences have no such obstacles to contend against. In chemistry, for example, the student has everything to learn ; but then he has nothing to un- learn. He comes to the study with a mind open to the truth, and can advance from point to point unem- barrassed by any relics of past errors. 3. Political Economy and Politics. — The fact that political economy has to appeal to reason in opposition to appearances, and has to reject as false so many views held by the unthinking, makes the spread of economic truth slow and difficult. The close connection of economic questions with the daily life and welfare of the people tends rather to aggravate than to diminish this difficulty. There must be laws about trade, and the currency, and banking, and taxes. Now men are almost certain to disagree as to the kind of Economic Questions in Politics. 15 laws it - would be wise to pass in relation to such matters. Thus in every free country economic ques- tions often become political questions. This view or that principle becomes the rallying-cry of a party. In the debates that ensue men are prone to seek argu- ments rather than the truth, and pohtical success rather than the public welfare. In such contests it is unfortunately true that sound and just principles are often difficult to explain and uphold in opposition to false and glittering theories, that seem to be more in harmony with daily observation. Fallacies exist only because false doctrine often looks truer than the truth. As political economy has many such strongly entrenched fallacies to expose and refute, and has to run counter to the cherished opinions of large classes of men in relation to subjects that in- terest them deeply, it is inevitable that it should be regarded by many as a tissue of idle dreams, or even something worse. The science has also suffered from the denunciations of benevolent enthusiasts whose schemes for the im- provement of the world it has had to oppose. Well- intending visionaries take it amiss to be reminded of the hard realities of life. The offence of political economy is that it insists on getting at the true causes of the poverty and misery that are so sadly prevalent in the world. It rejects all remedies that do not address themselves to the seat and source of the disease. For this, eloquent enthusiasts have denounced 16 Political Economy. it as "the gloomy science," and an enemy of human progress. They have no doubt turned many against it. Yet political economy is but reason and common sense applied to practical affairs. It has made great progress in the last hundred years, and is steadily, if slowly, winning its way to general acceptance. Even in quarters where it is rejected as a system, many of its most important principles are followed in practice. CHAPTER II. DIVISION OP LABOR. -EXCHANGE OP PRODUCTS.— WRONG VIEW OP MONEY. 1. The struggle for Money. — The source of many wrong theories about economic subjects is found in the use of money in business transactions. Money is exceed- ingly important to us in practical ways, and at the same time hard to get. To a superficial observer the struggle of life may well seem to be a struggle for money. All our gains, and the worth of all our possessions, are expressed in money. The man who has plenty of money is regarded as rich ; the man who has none is regarded as poor. Industrial labors of all kinds are apt to be thought of merely as ways of getting money. The laborer who works in the factory or in the field ; the employer who plans and directs the work ; the merchant who buys the product and sells it again ; the builders of houses and ships and railways ; the inventors of ma- chinery and the owners of land, — all seem to exert themselves only for the sake of the money they hope to get in return. 2. Money not Useful in Itself. — Now this view of industrial activity, though natural and convenient for 17 18 Political Economy. practical purposes, is totally false and misleading when used as the basis of economic theories. The first step in the study of political economy is to gain a larger and truer view of industrial operations. One who re- flects a little will perceive that money, in and of itself, has no qualities that should make it an object of uni- versal quest. It is, in truth, the one form of wealth that has no independent use for us. Every other thing is useful in itself; money is useful only as a means of getting other things. If some vmseen power were suddenly to deprive everybody of all things that are good to eat or to drink or to wear or to enjoy in other ways, leaving even a most liberal price in money for everything so taken away, it is easy to see that the money would not save us from cold, hunger, and misery. Money is useful only where we can get other things in exchange for it, — ^ useful only when we part with it. 3. Division of Labor. — Why, then, are men so much concerned about money ? Why care for it or use it at all ? In order to answer these questions we must con- sider a point of the very highest importance in actual life as well as in political economy. Civilized life de- mands the use of many different commodities. One has only to think of the various things a person in ordinary circumstances makes use of in the course of a single day, in order to perceive how great the number and variety of commodities necessary for comfortable livinsf. Division of Labor. 19 Now, no one person could possibly succeed in making so many things. Life is too short to learn the way of making even a small part of them. If each person were limited to the things he could produce for himself, we could never rise above the condition of rude bar- barians. Civilization is possible only by dividing up the work of production, — by arranging that each producer shall make enough of one commodity for a considerable number besides himself. This is called Division of Labor. The following great advantages are gained by the use of it. 4. Advantages of Division of Labor. — ( a ) A great saving of time in learning how to make things. There are but few things that can be made properly without some degree of skill and special knowledge. Skill can be acquired only by practice. All fine and compli- cated products require much skill and knowledge : years of practice are necessary for learning the art of making them. If every man had to learn the art of making shoes, for example, merely in order to supply his ' own need of them, one can readily see how great a waste of time there would be. By arranging that one man shall learn the art, and shall make shoes for many others, a great saving is effected in the work of learning. (&) A man who devotes himself to the production of one thing learns the art of making that one thing thoroughly. He learns all about the materials and tools. He seldom wastes time and materials by bung- ling. He learns to turn everything to the best account. 20 Political Economy. Thus he is able to make a better article, and to make it more quickly than would be possible for one who had to divide his time among many different kinds of production. (c) Division of labor enables each person to do the work for which he or she is best fitted. Those who have great muscular strength and endurance can do the kinds of work in which strength and endurance are necessary. Those who have deft fingers and deli- cate taste can devote themselves to occupations in which there is need of taste and dainty workmanship. Thus division of labor enables all the talents of the community to be turned to the best account. The result is to increase production and improve its quality, besides promoting in other ways the comfort and happiness of the producers. By an extension of the principle, people living in different parts of the country are enabled to make full use of the natural advantages which their neigh- borhood possesses. Thus local peculiarities of soil climate, water-power, mineral resources, etc., become available for supplying the needs of the people living in other places. {d) Division of labor makes the use of machinery possible. No man would build a cotton-mill in order to make cotton cloth for his own family. There would be no saving of labor in doing so. "When the mill can be used to supply a whole city or a whole country the case is different. It then becomes the means of Division of Labor. 21 saving a great deal of labor ; or, better, of adding greatly to the productiveness of labor. By division of employments, and the machinery it makes possible, men are enabled to use the forces of nature with great effect, as aids in production. (e) Division of labor is applied with great advan- tages to the different parts or stages of the production of things that are made up of several different materials, or go through a number of different processes. For ex- ample, take the production of penknives. For making the blades, iron ore must be dug from the earth ; then it must be smelted and turned into steel; then it must be cut up and beaten into the required shapes; then each piece must be ground and polished. Each of these operations is distinct from the rest, requiring different tools, a different kind of skill, and a different sort of place for carrying it on. Again, the production of the handles is an entirely different sort of work from that of making the blades, and is itself broken up into several distinct operations. There is, therefore, the same reason for subdividing the work of making penknives that there is for division of labor in producing different commodities. The only difference is that here the different sets of laborers co-operate towards the production of a single com- modity. This difference has led some to distinguish this sort of division of labor by a separate name : viz.. Combination of Labor. Whatever we call it, the important thing to be clear 22 Political Economy. about is that the production of all complicated articles is greatly cheapened, and the quality greatly improved, by dividing the work of making them among a number of different sets of laborers. 5. Necessity of Exchange. — Enough has been said, it may be hoped, to suggest the great power of division of labor to increase the productiveness of industry. But obviously production of things by division of labor has the awkward result of leaving them in the wroncj hands when they are finished. Nobody has the things he needs ; everybody has, instead, a great stock of a single article. In order that all persons shall get the things they need for their own use, a most compli- cated set of exchanges must take place. This is the one serious disadvantage of division of labor: it is the price we pay for all the advantages, 6. Exchange by Barter : its Difficulties. — Now it is at least conceivable that the producers should meet each other at appointed times and places, and exchange products one with another. In a very small community this might perhaps be done. But one readily sees that exchange of products conducted on that plan would be very laborious, if not quite impracticable, in a large community. Two very great difficulties would be encountered. In the first place, the man who has produced, we will sup- pose, a carriage, and wishes to get in exchange for it a watch, a coat, and a barrel of flour, must find a man who not only wishes to get a carriage, but also has a Exchange of Products. 23 watch, a suit of clothes, and a barrel of flour, — all of the kmd desired, — to give in exchange for it. Since, under division of labor the man who wishes the car- riage has presumably but one commodity to offer in exchange, and that one commodity would rarely happen to be one of the things needed by the carriage-maker, we readily see how awkward the situation would be. Exchange by direct barter between producers would involve so much trouble and so great risks of failure, that the whole advantage arising from division of labor might be lost thereby. 7. A Central Exchange. — The only plan by which barter could be made possible in practice would be to have some very wealthy man or company undertake the business of making the exchanges. The undertaking would be a vast one. A stock would have to be kept on hand of all the various commodities that people want, including many different sorts and qualities of each com- modity ; and not merely a single specimen of each thing, but so large a supply of it that all persons in the community could get access to it and obtain the desired quantity. The universal exchange, we may assume, would have to be about as large as all the present shops and ware- houses put together. Probably the management of so vast a business would exceed human capacity. To say nothing of the knowledge of all articles of trade that the business would call for, the mere size of the establish- ment and the extent of its operations would render the supervision of it exceedingly difficult if not impossible. 24 Political Economy. 8. Difl&culty of Exchange without a Standard of Value. — But supposing these difficulties to be overcome, there would remain, in the second place, the problem of find- ing some ready way of expressing the proportions in which things should exchange for each other. The per- sons concerned could not say, as we do, that a thing is worth so many dollars, for that would imply the use of money, which they are supposed not to have. In order to express the value of each article, they would need a list stating how much of every other article a given quantity of it would exchangq, for. In fact, the company would need two such lists for each article, one for use in buying and the other for use in selling it ; for they could not afford to buy and sell at the same value. The number of commodities of all kinds entering into the trade of a civilized community being so great, each list would be extremely long, and the number of lists would be extremely great. There would, further, be endless labor in correcting them from day to day, owing to the continual changes that occur in the market value of things. A single change in any article would involve a correction of every list. Altogether, then, it is clear that exchange of products by means of direct barter would be very costly and labo- rious. The institutions for making exchanges would necessarily be few in number, so that most producers would have to travel considerable distances in order to get their products exchanged. There would also be a danger that the community might have to pay very dearly for the services of the exchangers. CHAPTEE III. THE USB OF MONEY AS A MEDIUM OF EXCHANGE.— NATURE OF BUYING AND SELLING. 1. Money facilitates Exchange. — It is only by consid- ering the difficulties attending the use of barter that one can get clear views as to the true nature and use of money. The great and true service rendered by money is, that it makes the exchange of commodities easy. This it accomplishes in two ways. First, by breaking up the exchange into two parts or stages. It substi- tutes two comparatively easy exchanges for one ex- ceedingly difficult one. The man who wishes to exchange a carriage for a coat, a watch, and a barrel of flour, first sells the carriage for money, and then with the money buys the things he wants wherever he can buy them most favorably. This enables the work of exchanging things to go on without the help of a great central exchange. Secondly, money makes exchange easy by making it possible to have a price for everything. Instead of cumbersome lists, showing how much of every other article a thing is worth, we need only to say how much money it is worth. Money serves as a standard of value. 25 26 Political Economy. 2. Exchange is obscured by the Use of Money. — In these two ways the use of money renders the work of exchanging commodities comparatively easy and expedi- tious. But it greatly increases the difficulty of study- ing political economy. The use of money gives rise to most of the wrong ideas against which political economy has to contend. Exchange of commodities is very much disguised by it, — so much so, in fact, that many men who do a great deal of exchanging never once think of it as exchanging at all. They think of selling as a thing by itself, and of buying as a thing by itself, — not waiting to consider that these are in reality the separated halves of an exchange. Two circumstances tend to conceal the real nature of the case. In the first place, the two halves of the exchange are transacted with different persons. The man to whom, in our example, the carriage is sold, is not the man from whom the watch or the coat or the barrel of flour is bought; so that the transaction lacks the appearance of an exchange. Secondly, the two parts of the exchange may be separated by a considerable interval of time. It may suit the convenience of the carriage-builder not to buy the watch or the coat or the barrel of flour at once. With the money in his pocket, he can safely wait. He may in the meantime make and sell another carriage, and the money derived from the new sale may get mixed up with the other money, so that when he buys a thing he could not easily tell for which of the carriages he receives it in exchange. How Money Obscures Exchanges. 27 Thus the use of money, while makhig exchange easy, has made it compUcated. When men sell things, they do not usually think of the particular things they are to buy with the money they get. They may not have decided yet. Their immediate object is to get money. They know that to him who has this, the whole market is open. Money has been very fitly called " general purchasing power," because it can be so readily exchanged for any desired commodity. Until the actual moment of pur- chase the owner of money is free to choose what he ivill have. Yet when he does buy, it is clear that he is simply completing the exchange that was begun when die obtained the money. The money served as a pledge that he should receive an equivalent for the thing sold, leavino; him free to choose the time and the form in which he should receive it. Thus the use of money enables each producer to exchange on free terms with the general body of other producers, instead of being limited to the particular individual who buys his product and to the particular moment at w^hich he buys it. These facts disguise the exchange, but they do not affect its real character. In the end each producer has parted with certain things, and has received certain other things in return. 3. Buying easier than Selling. — There are some other circumstances that tend to obscure this funda- mental relation between buying and selling. In the first place the use of money affects the two halves of 28 Political Economy. exchange very unequally. As there are always stocks of goods for sale, the possession of money makes it comparatively easy to get what we want. But the difficulty of finding the persons who want our product remains precisely as great as it would be under a system of barter. Thus the chief remaining difficulty in making the exchanges is thrown on the side of selling. There is usually no small difficulty in getting things sold at satisfactory prices. The attention of business men, producers as well as traders, is thus ordinarily fixed on their sales. Every other part of their busi- ness they can control, but for their sales they must await the pleasure of other men. This is, therefore, the part that causes anxiety. A natural result of this is a tendency to forget the other part of the exchanges they are carrying on, and to view all sorts of industrial activity merely as so many different ways of' getting money. From this state of mind manifold errors spring. The student of political economy has made his first real step in the science, when he has perceived clearly that Ituying and selling are merely the easiest way of exchanging products, and that, though buying is so much easier than selling, it is not a whit less im- portant. In fact, what is selling for one man is buying for another. 4. Function of Traders. — It may occur to the reader that there are some facts of daily life which seem to con- The Trading Class. 29 flict with this view of buying and selling. To begin with, there is the fact that merchants and traders constantly buy and sell the same thing. When the cloth merchant has sold his cloth he does not buy a stock of other commodities: he buys more cloth. In this sort of buying and selling there would seem to be no exchange of commodities. But we must note the fact that merchants and traders buy of one set of men and sell to quite a different set. As a class, they buy of those who produce and sell to those who consume. The truth, then, is that they are the men who manage the exchange of products for us. Money allows division of labor to be used in ex- change as well as in production. Instead of one great central place of general exchange, money enables us to have many small establishments, in each of which some part of- the work is done. Each dealer devotes himself to trading in some one commodity, or in a limited number of commodities. His buying and selling are part of the process by which commodities find their way from the farms, mines, factories, and mills where they are produced, to the hands of those who are to consume them. Things are usually bought and sold at least three times in passing from the producer to the consumer, The manufacturer sells to the wholesale dealer, the wholesale dealer to the shopkeeper, and the shop- keeper to the consumer. In some trades there are several other intermediate changes of ownership. 30 Political Economy. These transfers from dealer to dealer are for con- venience and economy. They simplify the operations of each dealer, and are commercially of great impor- tance. But for political economy they have little significance beyond their effect in lessening the labor of carrying on exchange. In all respects except that of economy and convenience the man who buys of the producer might be the same who sells to the consumer. These are the essential transactions in economic exchange ; all the intermediate transfers are merely helps towards making these easy. 5. Buying and Selling do not create Wealth. — The gains made by buying and selling are often very large, — so large that many think of buying and selling as the true source of wealth. But one who reflects at all readily sees that mere buying and selling can produce nothing. Individuals may grow rich by fortunate opera- tions of that kind ; but the whole community cannot do so. The general wealth can be increased only by producing more or by saving more. If all the commodities in the world were bought and sold fifty times in a day, with a rise of price at each new sale, the world would be no richer at the end of the day than it was at the beginning. Some indi- viduals might no doubt be richer; but others would be poorer by the same amount. 6. Speculative Buying and Selling. — Every change in the price of an article usually brings gain or loss to those who happen to have stocks of it on hand. Such Speculators, 31 changes are an unavoidable evil. They disturb the course of trade and production. The opportunities they pr3sent for making large and sudden gains give rise, in every community, to a class of men called specu- lators. Speculators perform no necessary part of the work) of exchange. They carry things no step forward from' the producer to the consumer. They merely aim to profit by the fluctuations of the market. By buying things that are about to rise in price, and selling again after the rise, they are able to gain the differ- ence If prices were steady, they would have no basis for their operations. So far as speculators merely anticipate the natural course of the market, their operations are entirely legit- imate, and even at times beneficial to the community. By buying in seasons of plenty and carrying over a stock that might otherwise be partly wasted, they some- times help out the deficie'ncy in seasons of dearth. But when, for purposes of gain, they impose on the igno- rance or timidity of their neighbors, when they resort to knavery and deception, — when, by combinations and "corners," they create artificial fluctuations of the market, — they become enemies of honest industry and a burden to the community. 7. Some appear only as Buyers. — There is another circumstance which seems to conflict with the view that buying and selling are at bottom exchange of commodi- ties. Many persons appear only as buyers. They have 32 Political Uconomy. nothing to sell, for they produce nothing. The large class who live in idleness are in this position. Also the more numerous class who, though doing useful service in other ways, take no part in the production of com- modities. Even the hired laborers, who do the chief work of production, appear in the market as buyers only. How, then, shall we maintain the doctrine that buying and selling are mainly exchanging of things? As it is of the highest importance that the beginner shomGt^^uitQ j3lear on this point, let us consider these cases. First the case ot the idl-^rs. It is obvious that these, in order to be able to buy anything, must have an income from some source. Some of them own estates of land and receive rents from their tenants ; others own buildings or building-lots in the cities ; still others hold bonds, mortgages, railway stocks, etc. Their income from these sources is now commonly paid in money. But this is merely for the convenience of all concerned. If there were no money in the world, there would still be farms and city lots and the various other forms of property named. The rents, however, would have to be paid in commodities : so many bushels of wheat, so many tons of coal, so many yards of cloth. In some countries rent of land is actually paid in products of the land itself. If all rents, dividends, and interest were paid in commodities, the objection we are considering would not be thought of. The persons receiving income from such sources would receive it Buying is Exchanging, 33 either in the precise commodities they happened to need for their own use, or in other things. If they received the things needed for their own use, they would not appear in the market at all : they would be neither buyers nor sellers. If, on the other hand, they received things unsuitable for their own use, they would appear in the market both ' as sellers and as buyers. It would then be clear that their purchases are in fact part and parcel of the general exchange of commodities. At present the troublesome half of their exchange is done for these persons by those who pay them rents, interest, or dividends. Others are compelled to sell more than they buy by the full amount of the money paid to the receivers of rent, interest, and dividends. If those others were allowed to spend the money for themselves, their buying would simply be equal to their selling, and there would be no difficulty in perceiving the reality of the exchange. That they hand over a part of their buying power to their landlords and creditors does not change the essential features of the case. Their landlords and creditors simply, complete exchanges whereof the difficult half has been done already. The same remarks apply to all payments of money in the form of tees, salaries, and wages. Men nominally work for money, but in reality they work for commodities. By getting paid in money, they really get the commodities, without any danger 34 Political Economy. of disputes about quality or kind, and without the trouble and risks attending the difficult half of ex- change. If each laborer were paid in the product of his own labor, he would run great risks of loss and suffering in the effort to sell it. The arrangement whereby laborers receive money for their labor frees them from all that trouble and risk. The employer does the selling for them. His purchases of com- modities fall short of his sales by the whole amount of the laborers' purchases. Their buying simply completes the exchange that his selling begins. 8. Money and Prices. — Since the final object of all our industrial exertions is to obtain enjoyable commodities or services, it follows that the amount of money we receive does not, of itself, determine our reward. In order to know how much we are receiving for our labors, we must also know the prices of the things we wish to buy with the money. If the prices be fixed, any increase of our money income means a corresponding increase of our real rewards. Similarly if our money incomes be fixed, a fall in the prices of the things we buy means a corresponding increase of our real rewards. But an increase of onr money income, accompanied by an equal rise in the prices of the things we buy, would leave us no better off than before. These are important principles and need to be steadily borne in mind. Many speak and act as if Our Money not our Pay. 35 mere increase of money were, in and of itself, a general blessing. But to one who reflects at all, it must be clear that what we need in order to have an increase of the general wealth is not more money, but more commodities. If every person's money income were doubled, without any increased production of commodities, nobody would be better off than before. QUESTIONS AND EXERCISES. 1. Describe the advantages arising from division of labor. 2. Show that the trouble of exchanging products is a disad- vantage attending division of labor. 3. Could exchange be carried on by barter ? 4. Show how the use of money facilitates exchange. 5. How does the use of money disguise the exchange of products ? 6. Why is it usually so much harder to sell than to buy? 7. Trace carefully the exchanges of products in the following cases : (a) A farmer receives $25 for wheat, uses $20 of the amount to pay his debt to the coal-dealer, and with the balance buys a dozen of spoons. (b) The coal-dealer pays the $20 to his bookkeeper, who buys with it a suit of clothes from the tailor. (c) The tailor \ises the money to pay his house rent, and the owner of the house buys a watch with it. 8. A teacher receives her salary from the town treasury and spends half of it in buying books and deposits the balance in a savings bank. [Consider the tax-payers as well as the teacher and the book-sellers.J CHAPTEK IV. OF WEALTH AND THE DISTINCTION BETWEEN NATURAL WEALTH AND WEALTH PRODUCED BY LABOR. 1. Wealth consists of Material Objects. — It has been stated that the word " wealth " is simply a short name for the numberless things we all like to have and to own. It is now necessar}^ to define wealth somewhat more fully, in order that there may be no misunderstanding as to the nature and extent of our subject. The first point to be noted is that the wealth of which political economy treats is material wealth. The things comprised in it are material objects. Our invisible possessions, our powers of body and mind, even those of them that come into play in getting material wealth, are not themselves included in the definition of our wealth, since they are rather part of ourselves than of our worldly goods. The wealth we speak of in political economy is such as one may part with at will. Therefore we exclude our personal gifts and attainments, such as knowledge, intelligence, skill, good health, physical strength, social position, a good name, the love of friends, and the like. This implies no contempt for these unseen possessions, 36 Wliat our Wealth Includes. 37 which are, in fact, far more important and precious tlian mere material wealth. We only mean that political economy does not undertake to deal with them. It wisely confines itself to the humbler task of considering those material things that men need for the support of life, or desire as aids to comfortable living. 2. Useless Things are not Wealth. — Wealth, then, consists of material objects ; but not all material objects are wealth. Things that have no known use for us, things that nobody wants, are not wealth. This principle excludes from wealth a large part of the material objects in the world. It applies not only to useless things found in nature, such as desert lands, useless rocks, weeds, noxious animals, etc., but also to products of labor that are worn out or have proved to be useless. Of course a thing may have useful properties not yet discovered. To men who are ignorant of the good in it, it is not wealth. Thus wealth depends on knowledge. The metallic ores were not wealth till men learned to smelt and forge them. Linen rags were not wealth till men learned the art of making them into paper. We cannot tell how many sub- stances now regarded as useless rubbish may become, through new discoveries, valuable portions of the world's wealth.^ 1 The words useful and useless, as here employed, have no necessary reference to any real or intrinsic usefulness. A thing 38 Political Economy. It may be well to add that wealth implies posses- sion, or the ability on the part of somebody to have the use of it. Therefore things that are beyond our reach are not wealth. Mineral beds that lie too deep to be dug up, treasures at the bottom of the sea, game that is too wary to be caught, are examples. Here again new discoveries and inventions may bring within our reach things that have hitherto been of no use to us because unknown, or regarded as inaccessible. Our wealth, then, consists of all the useful and agreeable material objects we own, or have the right to use and enjoy without asking the consent of any other person. 3. Rights over Human Beings are not Wealth. — We have seen that a man's powers of body and mind are not included in his wealth. Much less can they, in any case, be regarded as the wealth of another. Men, the owners of wealth, can never themselves be regarded as mere wealth, even when reduced to a state of slavery. To the slave-owner, indeed, the possession of slaves may be a source of income ; it may suit him in his pride of mastery over his fellow- men to regard them as his property. But to adopt that view would be to forget the poor slaves, who are members of the community, with as good a claim to be considered as the master has. All that is useful, in tlie sense liere intended, if it is an object of desire to any portion of tlie luiman race. It may be in itself strictly worthless, or even injurious to those who use it : tlie fact that men desire to have it makes it a part of wealth. Bights over Men not Wealth. 39 the master gains by the existence of slavery they lose. If he is richer by reason of his power to exact their service, they are poorer to the same extent by the loss of their freedom and the products of their labor. Therefore, in any country where slavery exists, the wealth of the community as a whole would not be lessened by freeing the slaves ; nor, in free countries, would it be increased by making one part of the population slaves ' of the other part. The same principle applies to all other claims and rights of one man over the person or the property of other men. Debts of all kinds, as well as all mere proofs of debt, such as notes, bonds, mortgages, etc., must be excluded from our idea of wealth. They merely show to whom the wealth belongs, or will belong when the debts are paid. If every debt were forgiven, and every bond, note, and mortgage were cancelled, we should still have precisely as much wealth in the country as we had before. We create no riches by getting into debt or by writing mortgages on our property. 4. Natural Wealth and Wealth produced by Labor. — The wealth of the people of the United States is of two general kinds. Partly it consists of what remains of the natural resources that originally fitted our country to be the home of a civilized nation. This part, which we may call our Natural Wealth, our forefathers acquired for themselves and us simply by coming over the sea and taking possession; 40 Political Economy. it cost no labor beyond the trouble of taking and holding it. The other part of our wealth consists of products of human industry, — things for which, or upon which, labor in some form has been expended. This part we may call Wealth produced by Labor. Natural wealth includes the land, with its sponta- neous growth of forest-trees, etc., its bearing capacity under tillage, and its varied uses as our home ; also all such things as deposits of coal, iron, and other useful metals and minerals; water and water-power; electricity ; the expansive force of steam, and all other physical forces ; harbors and navigable rivers ; fisheries, wild game and the like ; a pleasant and healthful cli- mate ; a favorable position for commerce ; — in a word every resource and advantage of a material kind be- stowed on men by the beneficence of the Creator. We must also include in natural wealth some things that ordinarily come to us so freely, without care or effort on our part, that we rarely give them even a thought. It may seem strange, at first, to give the name of wealth to air, water, and sunlight; but they are surely among the most important things in the world, as anybody quickly discovers who is cut off from adequate supplies of them. That they come to us so easily would be a poor reason for excluding them from the list of things constituting our natural wealth. The modes in which natural wealth is useful are highly varied; it would be difficult to mention all Two General Divisions of Wealth. 41 of them. Some things are directly useful to us just as we find them and where we find them ; e. g. air, sunlight, and (merely as a lodging-place) land. Other things are made useful by merely bringing them to the place where we need them; for example, coal and other fuel, mineral oil, game, fish, etc. Other things serve mainly as materials for the production of useful commodities ; e. g. metallic ores, wool, cotton, silk ; skins of animals, woods other than fuel, marble, etc. Still other parts of natural wealth are useful chiefly as necessary agents in the production of commodities or materials, or as aids in producing and transporting commodities and materials from one place to another ; e. g. the soil, the motive power of wind, water, and steam, and the various physical forces that come into play in the growth of plants and animals. Wealth produced by labor includes all useful things that have been prepared for use by exertion of any kind on the part of men ; for example, houses, furniture, pictures, food, clothing, horses, and other domestic animals, machinery, ships, railways, money, etc. Land in its wild state, fishes in the sea, coal in the seam, trees in the forest, belong to natural wealth. Cultivated farms, fish that has been caught, coal that has been mined, lumber that has been cut, belong to wealth produced by labor. 5. The Nature of Production. — Obviously natural 42 Political Economy. wealth is the basis or source of all wealth produced by labor. Men create nothing. They can only make use of the materials, forces, and opportunities they find in the world about them. Strictly, what we call Production consists, so far as men are concerned, in moving things or parts of things from one place or position to another. (Jonsider carefully, for example, what men do in building a house, or in making clothes, or in procuring food, and you will perceive that it is confined to moving things, or placing things in particular ways. The so-called forces of nature do the rest. Men plough the ground, sow the seed, and harvest the crop, but without the germi- nating principle in the seed itself, and the nourishing influences of sun, rain, and soil, the united labors of the whole human race could not avail to pro- duce a grain of wheat. In some cases the work of production consists more obviously of moving things than in other cases. In the production of beef, for example, it is only by an effort of thought that we perceive the exact nature of men's contribution to the product. But in the case of producing coal, lumber, fish, ice, and the like, we perceive it very readily. The reason is that in the latter case nature's work is, so to say, completed before man's part begins ; whereas in the other case man's work and nature's work go on simultaneously, and men easily take credit to themselves for more than they actually accomplish. CHAPTEK V. WHY NATURAL WEALTH, ORIGINALLY A GIFT TO MEN. CANNOT ALWAYS BE OBTAINED FREE OF COST. 1. The Supply of Natural Wealth. — Different kinds of natural wealth differ very much in point of copiousness of supply. Some forms of it are found in practically unlimited quantity in every part of the habitable globe : the air is an example of this. Other kinds are found in abundance in particular neighborhoods, while in other places little or none is found : coal, petroleum, and most of the metals are examples ; also the distinctive natural products of par- ticular zones of the world. Still other kinds of natu- ral wealth are found in but few places and in but small quantities : of these gold and silver, diamonds and other precious stones are examples. Again it usually happens that not all portions of the supply in any given region are equally desirable. In some cases the differences relate to quality, in other cases to ease of access or convenience in use ; in still other cases some portions of the supply combine several kinds of superiority over other por- tions. There is usually, therefore, a descending scale of excellence from the best to the poorest in the case of 43 44 Political Economy. each species of material wealth in any given region. Further, the best and really desirable portions are in most cases very limited in supply as compared with the less desirable portions. These facts are most clearly seen in the case of Land, one of the most important parts of natural wealth. The whole area of land in the world is very great, but different portions of it differ very much in point of fertility, convenience of situation, nearness to the great centres of population, etc. Further, the amount of really excellent land, excellent in all respects, is very limited in comparison with the amount of indifferent and distinctly poor land. Be- tween the two extremes, the best and the utterly useless, there is an infinite variety in lands, one piece differing from another by a very slight balance of advantages. 2. The Demand for Natural Wealth. — The demand for natural wealth in any region depends partly on the number and partly on the character of its inhabitants. The demands of a civilized people are very different from those of a savage one. In one sense at least the savage has a larger demand for natural wealth than the civilized man. He must have a wide range of territory for his hunting and other crude pursuits, otherwise he cannot find a subsistence. His demand is, so to say, a wasteful one : he must have much more natural wealth than he uses. He remains poor and squalid in the midst of overflowing natural wealth. Natural Wealth. 45 The civilized man, on the other hand, has a stronger demand for material wealth than the savage. There is no known limit to his demand for natural wealth, except his physical ability to make use of it. His demand is, however, much more intelligent than that of the savacre. He seeks out all the various resources' O of his region, and endeavors by labor to turn all the best of them to account. A civilized community may, therefore, live and flourish in a region where a savage community one-tenth as numerous would perish of want. Given the character of the inhabitants of a country, we may safely assume that the demand for natural wealth will increase with the increase of population. The more persons there are to be supplied, the greater the amount needed to satisfy them. This does not mean that the demand for each kind of natural wealth must increase in the same proportion : trade between different regions and countries modifies the particular direction of the demand in each case. England, for example, draws her supply of wheat largely from the United States. This increases in our country the demand for wheat-growing lands, and diminishes the demand for the sources of materials needed for the production of the things we get in exchange for the wheat. In England there is a lessened demand for wheat-growing land, and an increased demand for the natural wealth needed for the production of the articles she gives us in exchange. Still, it is clear that an increase of population involves, 46 Political Economy. in every country, an increased demand for some form, and usually for all forms, of natural wealth. 3. Natural Wealth is gratuitous while the Supply exceeds the Demand. — Natural wealth is originally a gift to the human race. The first owner, whether a •government or an individual, gets it in all cases for the mere trouble of taking it. So long, in any region, as there is enough of any particular kind of natural wealth to satisfy the whole desire of every- body for the possession of it, that particular kind can be obtained free of cost by everybody. No man would pay a price for a given portion of it, if other portions equally desirable were still to be had out of nature's free supply. Therefore natural wealth that is found everywhere in unlimited quantity and of uniform quality, — air, for example, — can never cost any man anything. There are, no doubt, special circumstances in which men find themselves cut off from the natural supply of air, in which, therefore, laborious contrivances have to be used for conveying fresh air to them. But fresh air in a crowded hall, or in a mine, or in a diving-bell, is brought there by the use of labor: is, in fact, a product of labor quite as truly as coal in our bins or ice in our reirigerators is a product of labor. The contrivances for conveying it cost something ; but the air itself required for the purpose costs nothing. 4. Natural Wealth acquires a Price when Demand ex- ceeds Supply. — Natural wealth that is limited in supply can also be obtained free of cost wherever the supply. Natural Wealth. 47 though limited, exceeds the demand. But so soon as, owing to increase of population, the demand for any given kind of natural wealth becomes greater than the supply, that particular kind passes into the list of things for which a price must be paid. Those who wish to get it must induce some holder of it to part with his holding, by the offer of something else in exchange. It may seem, in such a case, that the cause of the price is the fact that certain persons hold the whole supply and refuse to part with it without payment. But the true cause is the greatness of the demand. If the whole supply were again thrown open to everybody free of cost, or were shared equally among all seekers, the article would still command a price, because (on the supposition that the demand exceeds the supply) there would still be some persons de- sirous of getting more than the equal sharing would give them ; and they would be ready to pay some- thing to other holders for their share. Since most kinds of natural wealth are found in varying degrees of excellence, only the better grades or specimens of each have a price at first. So long as the next inferior grade exceeds the demand for it, it will remain gratuitous ; and the price of the better grade will be limited to the value of the difference between them. Since the population of most parts of the United States is increasing, we find, as we should expect 48 Political Economy. to find, that many things which could formerly be obtained free of cost, or at a merely nominal price, are now no longer so obtainable. Also since the ratio of population to natural wealth differs greatly in different parts of the country, we find that some iorms of natural wealth which cost little or nothing in one part, have a considerable price in other parts. Of course in the case of transportable things, this difference of price could not ordinarily exceed the cost of transportation. But the cost of transportation is itself considerable, especially in the case of bulky and heavy articles such as make up so large a part of natural wealth (e. g. coal, wood of all kinds, build- ing-stone, metallic ores, etc.). Again some kinds of natural wealth are not transportable. Land, for ex- ample, cannot be carried from regions where it is cheap to places where it is dear. It therefore happens that land, especially land for building purposes, may have a very high price in one place and a very low one in another. A single square yard of land in the central parts of New York, or Chicago, costs more than a square mile in some parts of the world. 5. Some Exceptional Cases. — There are a few forms of natural wealth that never acquire a value in ex- change, however far the supply of them may fall short of satisfying the demand. In certain cases this is because the nature of the thing is such that many persons can use it in common without interfering with each other, and the laws of civilized countries Natural Wealth. 49 give the right of use to everybody free of charge: harbors and navigable rivers are examples. In the remaining cases the failure to acquire exchange value is due to the fact that the natare of the things themselves renders it impossible for them to be bought and sold. Eain, for example, would bring a high price in some countries at almost any time, and in every country at particular times. But rain is a form of natural wealth that cannot be transferred or diverted from one man's fields to those of another, or from one re2:ion to another. The same is true of all other elements that go to form the climate of any region. Those who would have the benefit of them must go where they are found, and found only as gratuities of nature. Though harbors, rivers, climate, scenery, and the like have no exchange value of their own, it is obvious that they may affect very much the value of other kinds of natural wealth, — especially that of land. It is well known that land lying near to harbors and navi- gable rivers has a higher value than land, equally good as land, which is remote from such facilities. In the same way a good climate, including regularity and sufficiency of rainfall, tends to attract men to the regions enjoying those advantages. The resulting in- crease of demand for the natural wealth of those regions must, of course, tend to raise the value of such parts of it as can have exchange value. 6. The Rising Value of Natural Wealth no general 50 Political Economy. Gain. — "When a useful thing, formerly without exchange value, acquires a value in exchange by reason of an increase of demand, it is well to observe that the com- munity as a whole gains nothing by the change. The persons who own the existing supply of the article are benefited, but their gain is at the expense of the rest of the community. The change implies, in itself, no increase of the actual things owned and enjoyed by the community as natural wealth. There is simply an increase in the number of persons wanting those things, with the result that there is less for each than there was formerly. If the circumstance that causes any kind of natural wealth to acquire an exchange value be a lessening of the supply, it is obvious that the community is not only not richer, but is even poorer by reason of the change. It has, so far as this portion of its wealth is concerned, a smaller stock of useful things than before. The individual owners of the remaining supply may gain by the change. Their gain, however, is at the expense of other men. If, for example, the supply of fresh water should become so reduced as to acquire a con- siderable exchange value, the owners of ordinary springs might be enriched; but the general body of citizens would be poorer than before. When the natural wealth that has been lessened in supply is not private, but public, property, nobody gains by the change. For example, the diminished productiveness of the fisheries has been attended by a Natural Wealth. 51 rise in the value of fish. But this rise is only suffi- cient to compensate the fishermen for the increased labor required in catching a given quantity. The diminished yield is a simple loss to everybody. The same principle applies to the present scarcity and con- sequent high value of game, forest - trees, fur-bearing animals, etc., as compared with early times. This last remark suggests the fact that some kinds of natural wealth are unavoidably diminished by the progress of civilization. The destruction of the forests, together with the game and other products of wild nature, is necessary in order to fit the land for agri- culture ; and it is needless to say that the farms are more useful and a greater wealth than the forests they have displaced. But it is none the less true that the loss of the forests is in itself a loss of wealth. If land could be tilled without interfering with the growth of trees, we should all be richer, not poorer, than we are. Trees for fuel and for building purposes could then be obtained, in most places, for the mere trouble of cutting them down on the nearest hill-side ; whereas at present they have a very considerable ex- change value in ail settled regions. CHAPTER VI. OF LABOR AND ITS PRODUCTIVENESS. 1. Productive Labor. — Natural wealth, as we have seen, is the basis and source of wealth produced by labor. Any human exertion devoted to procuring or preparing natural wealth for the uses of men, is called Productive Labor. Productive labor is of many kinds. First and most obviously, it includes all the manual labor of preparing tools, implements, buildings, and machinery needed in production ; of preparing the natural agents (e. g. land) and procuring the raw materials ; of working up these raw materials into the various commodities of civilized life ; and of carrying on the exchange of products between the various sets of producers, — including herein the necessary labor of transportation. Productive labor includes, secondly, all mental efforts whose aim is the production of material wealth. Strictly there is a mental effort involved even in manual labor of the simplest kind. But there are some kinds of productive labor in which the exertion is more dis- tinctly that of the mind. This is true of the labors of merchants, bankers, book-keepers, inventors, managers, and all others whose task lies in planning and directing 52 Productiveness of Labor. 53 the work of production and exchange. Such labors are necessary in order to carry on production effectively, and are as truly productive as is the labor of those who come into actual contact with the things produced. 2. Non-productive Labor. — The greater part of the world's labor is directed to the production of wealth. But we have many needs besides those that material things can satisfy. In infancy and again in old age we need nursing and care. In sickness we need also the help of a physician. Born ignorant and with many evil propensities to overcome, we need much careful training, instruction, and (on our own part) study, in order to become enlightened and useful men and women. As members of civilized society we need the labors of legislators, judges, administrators, and other guardians of law and civil order. These and many other sorts of labor we need not as producers, but as men and as citizens of a civilized country. We should need them even if the material commodities we require were supplied to us without effort or exertion on our part. These kinds of labor we shall therefore designate as non-productive. Incidentally non-productive labor may help in the production of wealth. When a teacher reclaims a vagrant youth and converts him into an honest laborer, or a physician cures the ailment of a producer and restores him to his work, or the civil authorities repress public disorders, the act has in each case the effect of increasing production. But this effect is undesigned, 54 Political Economy. or at most secondary. Besides it would be difficult, as well as useless, to distinguish, among acts of this character, those that are indirectly productive from those that are not so. We shall, therefore, understand Productive labor to mean labor whose immediate object is the production or exchange of wealth. All other labor we sliall regard as Non-productive. 3. The Productiveness of Labor. — The circumstances which determine how great an amount of wealth a man may produce by his labor, are too numerous to admit of complete enumeration. They are, however, reducible, for the most part, to three general classes : («) The working capacity of the man himself, his diligence, energy, intelligence, and endurance, go far to determine the product. These are points in which men differ very much. This is true not only of individuals but to a considerable extent of whole nations and races. The people of the United States are pre-emi- nent for their efficiency as laborers. They are drawn mainly from those branches of the human family that excel in all the qualities that give success in the pro- duction of wealth. Further, the original settlers were, in a way, picked men of the nations to which they belonged, since none but men of courage and capacity would face the dangers and hardships of the long voyage and of the pioneer life that it brought them to. Of the subsequent migration of Europeans to our country, the same remark holds true to a very consider- able extent. The more capable and enterprising are Productiveness of Labor. 55 those most ready to come ; the sluggish and shiftless usually stay at home. (h) The productiveness of a man's labor depends largely on the character of the natural wealth he has free access to. If that be rich and copious, and all the natural conditions be favorable to his industry, his product will be large for a given outlay of labor. The people of the United States are highly favored in these respects. We have ample areas of fertile soil ; for the most part we have a favorable climate ; we have almost every material and natural facility for produc- tion. Compared with the extent of our natural wealth of all kinds, our population is small, so that there are comparatively few places in which very good resources may not be obtained at a low cost. In these respects our producers have great advantages over the inhab- itants of older and more crowded countries. (c) The productiveness of labor in a country depends much on the advancement its people have made in the arts of production, that is to say, in the discoveries and inventions by which the great forces of nature are made to aid in the work of production. There are some industries, such as the manufacture of cloth, in which it is probable that modern machinery enables men to produce a hundred times as much as they could produce by the old modes of hand-manufacture. In every sort of production skilful devices may do much to add to the product, or improve its quality. Here again the people of the United States have shown 56 Political Economy. great capacity for the invention antl use of machinery, and for the discovery of new metnoas of production. The intelligence and ingenuity of our laborers have been stimulated into great inventive activity by our Patent Laws, which secure to every inventor the exclusive riglit to manufacture his device for a limited number of years. In addition to these general causes affecting the productiveness of labor, the capacity of a nation for properly organizing and managing its industries de- serves to be mentioned. The industrial system of a civilized country is highly complicated, and calls for great skill on the part of those who arrange its details. How best to divide and subdivide the work among different sets of laborers ; what grouping of the various sets is most advantageous ; how the various local re- sources may be turned to best account; how large a scale of production under a single management gives the best results, — these and many similar questions must be solved before the labor of a country can reach its full capacity for production of wealth. Wise and skilful management turns every advantage to the best account, prevents waste of labor and materials, and thus gives us every commodity for the least pos- sible exertion. 4. WeU-being of the Laborer. — There is one other general remark to be made regarding the productive capacity of laborers, and that is that the productiveness of labor depends much on the state of comfort and Well-being of the Laborer. 57 contentment in which the laborers are maintained. A certain degree of comfort is necessary in order simply to keep them in physical vigor. But that is as true of dumb animals as it is of men. Men are much influenced by their state of mind as well as by their state of body. It is, therefore, wise, on purely economic grounds, to do what may be done without injustice to others, to remove real or fancied grievances on the part of any class of laborers. Men who are satisfied with the conditions under which they work, will produce more and better results than men who are chafing under a sense of wrong, or have abandoned themselves to despair. For this reason, as well as on higher grounds, slavery is to be condemned. It deprives the laborer of every- thing which could spur him to exert his powers. For this reason also every other unfair or oppressive treat- ment of laborers is contrary to the general interest. Cheerful and willing workers are those who produce most wealth. CHAPTEE VII. THE NATURE AND NECESSITY OF CAPITAL. 1. Contrast between Savage and Civilized Industry. — Wherever laborers and natural wealth exist, production of some sort is possible. In those parts of the world, where, without the aid of human labor, the earth bears copious supplies of wild fruits, nuts, and edible roots, men may find a rude subsistence without other tool or implement than their hands. The production carried on by savage races, consisting as it does, for the most part, in merely gathering or capturing the spontaneous growths of land and water, requires but few imple- ments, and those of the simplest character. If we compare the production carried on in civilized countries with crude production of this kind, we find (in addition to other differences) these striking points of contrast: First, that civilized production requires a large outfit of tools, machinery, buildings, and other appliances. Secondly, that civilized production requires large quantities of materials, meaning thereby not only things in their natural state, but also things that have had labor bestowed upon them, — things that have passed through one or more stages of production. Thirdly, that civilized industry, being carried on by 68 Tliree ForTns of Capital. 59 division of labor, needs to have large quantities of finished commodities always on hand, for purposes of exchange. We see, then, that in order to carry on civilized pro- duction and exchange the producers must have the use, at any given moment, of the results of much previous labor. To these results of past labor used in present production and exchange the general name of Capital is given. 2. Three Forms of Capital. — The capital of a country consists of three parts, answering to the three needs spoken of above. In order to obtain clear views as to the nature and uses of capital it will be necessary to consider each of these portions separately. {a) The plant of production. This includes the buildings, implements, and machinery of all kinds used in production and exchange. Under this head we in- clude also many things which would not ordinarily be called machinery ; such as railways, ships, canals, piers, and the like. Also we include money, since it is a product of labor used in the exchange of products. Also we must include the changes wrought by labor in the land in order to prepare it for use in produc- tion. The land itself, in its natural state, is not capital, because it is not a product of labor. The capital used in agriculture includes, besides buildings and imple- ments, everything by which a farm differs from a forest. That is to say, the improvements in land are capital, though the land itself is not. 60 Political Economy. (h) Secondly, materials of production on which, or for which, labor has been spent. This brings us again to the fact that the production of a commodity is in most cases not a single act, but a succession of acts. To make a table includes cutting down the tree, sawing it up, drying the boards, dressing the pieces to the required shapes, and finally fastening them together in the form of a table. To make a coat involves raising the wool, combing and spinning it, dyeing the yarn, weaving it into cloth, fulling the cloth, and finally making it up into the desired garment. Now, under division of labor, we must have all these operations going on at once. The saw-mill must have logs on hand ; the drying establishment must have boards on hand getting dried ; and the cabinet-maker must have a supply of seasoned stock on hand to select from. The spinner must have wool on hand ; the dyer must have yarn in his vats ; the weaver must have an assortment of dyed yarns ; the fuller must have unfuUed cloth on hand ; and finally the tailor must have a supply of various kinds and pat- terns of cloth to draw on in order to suit the tastes of those who want coats. If anybody doubts that these products of past labor are necessary in order that the labor of to-day may go forward, let him imagine how things would stand with the cabinet-maker, if he had to wait till the tree, cut down this morning, should be ready for making up into tables ; or how it would fare with the tailor and the man Commodities seeMng Exchange. 61 who wants the coat, if they had to wait for the cloth to be woven, and the weaver had to wait for the yarn to be spun, and the spinner had to wait for the wool to be grown. As all producers are to work every day, each, except the first in each series, must have a supply of his proper material to work upon, and this supply must have been prepared for him by previous labor on the part of those performing the earlier stages of the work. It is obvious also that in all cases where other things are needed besides machinery and the material operated on, these too must be provided in advance. The most common example of this is fuel for the engine. Materials on which, or for which, no labor has been expended, are not capital. Coal in the furnace -room of a mill is capital, but not so coal in its native seam. Logs in the timber-pond are capital, but forest -trees are not. The crop growing on a farm and the cattle on a ranch are capital ; but the fishes in our rivers and lakes and the wild animals in our forests are not. ( c ) Capital in commodities seeking exchange. — The third form of Capital is connected with division of labor. It consists of commodities awaiting exchange. The difficulty of selling products has already been spoken of. We are not here concerned merely with the labor it involves, which is greater in many cases than the labor of actually producing the articles. The chief point to notice at present is that, in order 62 Political Economy. to carry on exchange of products, we need to have great masses of commodities of all kinds continually on hand in the stores and warehouses. These com- modities are capital, products of labor used in ex- change. Production cannot go on without them. Inventions have done much to cheapen the pro- duction of things ; but, beyond diminishing the cost of transportation, little has been done to cheapen ex- change. In fact, considering the tendency of recent times to erect very costly buildings for use as stores and shops, and to multiply the number of them everywhere, we may fairly question whether exchange has been cheapened at all. Just how great a number of shops, and how great supplies of finished commodities displayed in them, may be necessary for carrying on exchange in the most economical way, it would be impossible even to conjecture. It is only evident that we need here a large accumulation of products of past labor, and that the more the community is willing to pay for convenience and sumptuousness of service in its buy- ing and selling, the more numerous and costly and fully stocked the stores and shops will be. 3. Production in Progress. — Viewing now the pro- ductive system as a whole, and at work, we may think of its results as a stream of commodities flowing day by day into the reservoirs of trade, and through these into the homes of the people. This stream is made up of many smaller streams, — • Capital is Consumed. 63 each industry contributing its quota to the flow. Con- tinuing the figure, we may say that each of these lesser streams has at its fountain-head the laborers who draw the original materials from the earth ; the other laborers in the industry, each in his place, are engaged in forwarding and transforming these materials, stage by stage, towards the final form in which they are to be received by the consumer. Out of the reservoirs of trade every, man receives the reward of his exertions, — the daily food, clothing, and whatever of other comforts and luxuries he may have earned. The larger the stream of products the more the community will have to divide and enjoy, — for everything in it goes to somebody. How each man's share is determined, we shall consider later. 4. Capital is Consumed. — It follows from the nature of the uses Capital is put to that it is perpetually undergoing transformations. The portion that consists of materials is in a constant state of change until it eventually is carried as finished commodity into the stores and shops ; from here it sooner or later passes into the hands of the consumer and ceases to be capital. But it is replaced, in the natural course of production, by new materials and new products coming forward all the time by the action of the producers. Once, provided with capital and started on its present basis, production itself keeps up the stock of capital, so far as the portions consisting of materials and of commodities awaiting 64 Political Economy. exchange are concerned. We could not produce the kmds of commodities we do produce, and use division of labor, without creating these forms of capital, even if they did not exist before. This is simply putting in other words the proposition that capital is necessary for civilized production; it is in fact inseparable from it. As to the other portion of capital, which consists of machinery,, buildings, railways, and the like, the case is somewhat different. This form of capital is also consumed, but more slowly than the other portions. The machinery wears out, the buildings and ships decay. These, however, are not inevitably and, as it were, unconsciously replaced by the mere course of production itself. A portion of the labor of the country has to be diverted from the work of directly producing commodities, to the work of providing the tools, machinery, and other equipment designed to assist that production. Fixed and Circulating Capital. — The gi-eater lasting power of machinery, buildings, etc., has led economists to distinguish this portion of Capital as Fixed, the remainder being designated as Circulating Capital. The latter includes all parts of capital that are consumed at a single use : e. g. the wool used by the spinner, the grain used by the miller, the fuel used for the engine, etc. On the other hand, all tools and implements belong to Fixed Capital, on the ground that they are not used up at a single use. The distinction is not important except so far as it bears on the law of wages, and for this purpose it is far from covering the whole principle with which it is connected, viz., the element of Time in production. CHAPTEE VIII. CAPITAL REPRESENTS INDUSTRIAL IMPROVEMENTS. 1. The Capital of To-day a Legacy. — The present generation inherited from the one just preceding it a productive system equipped with materials and machinery. The same is true of every other generation of men since the dawn of history. Each inherited capital from its predecessor. The propor- tion of capital was undoubtedly smaller in early times than it is now; but our ancestors, as far back as we know anything of them, had industrial knowledge and capital for turning it to account. As men's knowledge increased, and improved ways of using the productive forces were invented, additions have been made to the world's capital, until it is what we find it. To those who already have capital, increase is comparatively easy. With the old tools new ones can be made. But how did the progenitors of our race produce their first capital ? 2. The Beginnings of Capital. — The only answer we can give to this question is to consider briefly the circumstances in which a community would naturally become possessed of capital. We must sup- 65 66 Folitical Economy. pose some member of tlie community to liave discovered a new and better way of getting food, clothing, or some other needful thing, — ; which new way promises larger returns for labor, but at the expense of wait- ing longer than hitherto for the finished product to appear. Without this knowledge there would be neither motive nor room for the existence of capital. In the second place, we must suppose the community, or some of its members, to have spare time and strength left over after providing for their daily necessities ; otherwise they could produce no capital, since the production of capital requires the expendi- ture of labor in some way that promises no imme- diate result good for human use. In the third place, they must be diligent and enterprising enough to use this spare time in the manner their new discovery suggests, for the sake of the future benefit it promises. Given these conditions, capital will inevitably spring into existence. 3. Capital may be created by working for the Future. — As to the precise mode of creating capital in such a case, there would be several alternatives open. It may help to clear up our notions regarding the nature of capital, if we consider these alternatives briefly. Taking as primitive a case as possible, let us imagine a community that has subsisted hitherto on roots, nuts, berries, and such varieties of fish and game as can be captured without laborious contrivances of any kind. How Capital may he created. 67 Supposing now that a member of this community, by happy accident, discovers the superiority of some particular root, say the potato, when grown in loose soil, in an open place where it has plenty of sun and no weeds to retard its growth, over the same plant grown in the hap-hazard way of wild nature. To make use of this discovery will require much preliminary labor in clearing the ground, gath- ering good specimens for seed, planting them and protecting them while they grow, weeding, etc. This is a case in which, I think, the work would naturally be done little by little, in the spare time left over after providing for daily wants.^ It would naturally be tried on a small scale at first, in order to be quite sure that the discovery was a real advantange, — worth the labor of putting it into practice: As each successive crop showed more and more conclusively the value of the discovery, a larger area would gradually be cleared and planted, until finally the raising of potatoes became a regular source of food supply. In this case the improvement of the land, the necessary seed,^ and, in its season, the growing crop, would be capital. If, instead of an agricultural discovery, the new idea 1 We may suppose the daily consumption to be reduced in order to gain time for the new work, — if such reduction be possible. 2 The land itself, as already stated, is not Capital, — not being a product of human labor. By the "improvement of the land" we mean the changes made in or upon it by labor, with a view to production : for example, the removal of trees, levelling the hillocks, plowing, fencing, etc. 68 Political Economy. happened to be the construction of a weir for capt- uring fish by the flow and ebb of the tide, the same mode of procedure would be open. The labor of con- structing the weir' could be done in whatever time could be spared from getting food and other neces- saries in the old way, — partly, perhaps, by stinting the consumption of these things in order to have more time for the new work. The weir would, in this case, be the resulting Capital. Till finished, it would of course add nothing to the daily food supply. 4. Capital may be created by Saving. — It is obvious that, in both of these cases, the man making the improvement might proceed differently. He might begin by saving up a supply of food obtained in the old way, by working harder and perhaps consuming- less than usual, in order to be able presently to devote his time entirely to the work of making the improve- ment. This course, however, would be less likely to be adopted than the other, both because it seems to call for more energy and self-denial than the other; and because the kinds of food accessible in such a case as we are considering, are hard to preserve for any length of time, and always lose something by keeping. If it should be adopted, the store of food and other necessaries would ordinarily be called capital. For, though not strictly used in production, it is accumu- lated for a productive purpose.^ 1 If such a store were used merely as the means of living for a time in idleness, it would not be Capital. How Capital viay he created. 69 We shall see later that in an advanced state of society, the more common mode of creating new capital is by thus saving the means of support for laborers in advance. But it is never the sole mode. 5. A Third Alternative. — If, instead of a single producer, several producers should unite to make the improvement ; or if the single producer should have dependents or slaves to assist him, still another method would be open. Some of those concerned could devote their time entirely to the new work of creating capital, while the rest provided, by the old way, enough of the necessaries of life for the whole number, until the new method of production began to yield its returns. For a time they would have to work harder than formerly, or consume less than formerly, or both, in order to obtain the capital necessary for putting the new discovery or invention into practical use. Thus the creation of Capital implies a present sacrifice for a future gain. 6. Capital facilitates the Creation of more Capital. — If the new contrivance should prove successful, it would presently add to the productiveness of the labor of the community. Its members would have more to enjoy than formerly, without working any harder. They would therefore be in a better position to take advantage of any fresh invention that might occur to them. They could more easily spare the labor required to put it into practice. Thus, every step in advance makes every succeeding 70 Political Economy. step easier. This is especially true in relation to mechanical inventions. The making of the first tools and implements ever made in the world must have been a very slow and painful process, — for tools are needed in making tools. Men must have worked longer and harder to make a wretched axe of stone, in the so-called stone-age of the world, than they now work to get a whole outfit of cutting tools made of steel. Not only so, but it must have been infinitely harder for them to spare time from the struggle for daily food, for the purpose of making tools. 7. Civilization and Capital. — We thus see that in every way capital and civilization go together, and OTow tocjether. Increasing knowledge of nature and natural laws comes with the experience and observa- tion of successive generations. The ingenuity of men is always ready to suggest contrivances by which the new knowledge may be turned to account in producing wealth. With rare exceptions, every new contrivance de- mands a larger outlay of labor without immediate return, than was demanded by the old devices. It de- mands more waiting or longer waiting after the outlay of labor, as the price of its larger yield. Unless men are ready to bestow labor on these terms, the new idea remains a mere idea. How many happy concep- tions have failed to be put into use in the world's history, because no man was able and willing to make the sacrifice of present ease and comfort required for How Capital may he Created. , 71 introducing it, we shall never know. But it is more than probable that there have been many such cases. The many peoples of the world, who are still living in poverty and barbarism, can hardly be wholly igno- rant, all of them, of the better ways of production de- veloped by the nations of Western Europe and America. They lack the energy and self-denial, rather than the knowledge, required for the creation of Capital. 8. Two Sets of Helpers. — From all this it follows that two sets of men have conferred great industrial benefits on their fellow-men : first, the inventors and discoverers who have suggested new and better ways of production : secondly, those who, by their willing- ness to labor and wait for their return, or to accept future instead of present commodities, have furnished the means of putting these improvements into actual operation. The work of the inventor — the idea — goes first : the labor and waiting required for putting it into practice come later. Both are necessary in order to give us the blessing of easier and better ways of producing wealth. It may perhaps seem strange to some of my readers to call such things as a weir, or an axe, or the culti- vation of the land, an " improvement in production." But unless we are to believe that men were created with a large knowledge of productive devices, there must have been a time when the very simplest and commonest parts of our present knowledge came as a new discovery or invention. CHAPTEE IX. TWO CLASSES OF PRODUCERS: EMPLOYERS AND LABORERS. 1. Comparatively Few Men own Capital. — Nothing has been said hitherto about the familiar division of producers into the two classes known as Employers and Laborers. For the sake of simplicity, I have spoken as if every producer supplied the capital requisite for carrying on his industry. We must now consider the highly important fact that the enormous capital used in production and exchange belongs, in the main, to a comparatively small number of persons. We have already seen that for the production of capital, labor must be spent in ways that promise no immediate return. Capital is the result of labor and waiting. Now we know that people differ very much in the power and willingness to wait for good things. To the enger and passionate, such waiting is much more irksome than it is to the cool and sedate. Some are by nature careless and improvident, ready to " let the future take care of itself"; others are naturally thrifty, anxious to increase their possessions, always willing to forego present enjoyment for the sake of future advantage. 72 Two Classes of Producers. 73 The nature of production puts these qualities to the test. Those who are not willing to work for a distant object, decline to fulfil the conditions on which alone large returns can be obtained for their labor. They doom themselves in advance to a life of rude poverty, such as that led by our native Indians; or to a life of dependence on whatever other men may offer in exchange for labor, as is the case with so many laborers in all countries. On the other hand, those who have the foresight and strerjgth of will to meet fairly the whole burden of civilized production, who are ready not only to labor but to wait as long as need be for the enjoyable re- sults, are able to win the largest and best rewards for their exertions. Not only so, but they are enabled, by the possession of capital, to make gain by hiring their less provident neighbors to work for them. Once possessor of enough capital to employ even a small number of laborers, a man is usually able to gain a livelihood without further manual labor on his own part. His task becomes that of directing and controll- ing the labor of other men. The possessor of large capital is even able to relieve himself of the trouble of managing industry ; he can live in comfort on the interest of his capital by loaning it to employers. The familiar differences between men as regards care for the future are therefore of great consequence, socially and economically. They must be relied on chiefly to explain the fact that some men have capital while others have none. 74 Political Economy. Of course men have not at the present time, perhaps they have never had, equal opportunities for acquiring capital. Some have inherited wealth, while others have inherited nothing. In this, as in other respects, the shortcomings of the fathers are visited upon the children. The man who has inherited even a little can add to it more easily than the man who has nothing can acquire the beginnings of capital. It is the first steps that are hard. Yet we may safely believe that, apart from mis- fortune, the cases are rare in our country, in which diligence and thrift would fail of winning some amount of capital. The chief obstacle is lack of will, the natural inclination of most men to consider the present ratlier than the future, and to work only in such ways or on such terms as promise speedy returns. Though well aware that, by adding the sacrifice of waiting to the sacrifice of labor, they might presently increase to an indefinite extent the rewards of their industry, they make no attempt to avail themselves of the opportunity. Let us be clear, once for all, that the richest man is under constant temptation, just as the poor man is, to spend his whole income in immediate enjoyment instead of turning it into capital. It is only by resist- ing this temptation that anybody, rich or poor, has ever acquired or maintained capital. Those who resist it successfully are our capitalists. 2. Distinction between Savings and Capital. — The fact Savings and Capital. 75 that the mass of laborers work for wages rather than for the final products of their labor, has an important effect on the mode by which those who desire to have capital may set about obtaining it. The pres- ence of laborers ready to work for wages makes it possible to acquire working capital in return for mere savings, — i. e. for finished commodities, or the means to buy finished commodities. This is therefore the course usually followed in practice. The person de- siring to possess capital saves his income, or borrows other men's savings, and uses the amount so obtained in paying wages to laborers for producing the desired capital. For this reason it is common to speak of savings as capital. But capital is the equipment for producing and exchanging commodities ; it is the necessary means for effective industry. Savings, on the other hand, are the completed results of production and exchange, — commodities (or the means to buy commodities) which the owner chooses not to consume but to spare for hiring laborers. When turned over to the laborers, these commodities are not used to assist production ; they are consumed by the laborers and their families just as they might have been consumed by the original owner. To say that savings are capital, or are a necessity of production, is to look on industry solely from the point of view of the employer; is to regard the la- borers not as men but as mere animals for use in 76 Political Economy. production, and needing to be fed and clothed by other men, in order that they may be able to work effectively. No man can be an employer, in the present sense of the word, without the use of savings. But capital, as we have already seen, can be produced without the necessity of some men saving in order to pay other men wages. It is, strictly, only for the payment of wages in advance of production that savings are necessary. In order that some men may have wages, other men must save the means of paying them. In other words, if some men must have a reward for their labor sooner than production yields it, then other men must postpone the enjoyment of their reward beyond the point at which production yields it. One man's wages can only come from another man's savings. But there is surely no necessity or reason in the nature of production, why the burden of the necessary waiting should be borne by different persons from those who perform the labor. That is rather a conse- quence, originally, of the very unequal degrees in wliich men are gifted with the readiness to work for future advantage, — partly also, now, a natural conse- quence of the existing inequalities of wealth. As capital is, in practice, usually provided through the savings of the few, no serious error is likely to arise, except in treating wages, from confounding savings with working capital. It is customary to speak of "saving capital," and we may safely enough The Basis of Wage-paying. 77 follow the general usage, understanding the phrase as a short expression for "saving the means to pay labor- ers for producing capital." 3. Incidental Results of Wage-paying-. — It is of course in the nature of working for wages tliat the product of the labor belongs to the employer. That is the basis of the bargain. Yet some persons talk and write as if the laborer had still a reserved claim upon, or a right of some kind in, the product of his labor. All such assumptions are foolish and vain, — as foolish and vain as it would be to argue that the person selling a com- modity has a right both to the thing sold and to the thing he receives in exchange for it. Under the system known as " Profit-Sharing " there is a right expressly reserved to the laborers of sharing in any profit that may be made beyond a certain fixed rate. But this is not a simple case of working for wages. The manager, in profit-sharing, agrees to pay in advance a certain amount, presumably less than the cur- rent rate of wages^ and a further sum, greater or less, at the close of the year, — the precise amount to depend on the success of the business in the meantime. This arrangement does, by inference, give the laborers a re- served claim upon the product, — a right, for example, to object to any course that should lessen its value. But in the ordinary case of hiring for wages there is no such right. A second result of wage-paying is that the employer bears all the pecuniary risks of production. The la- 78 Political Ecottomy. borers get tlieir wages whether the enterprise turns out well or ill. For the employer there is always some risk of losing his savings, — especially so in the pro- duction of things that are at all subject to sudden change of taste and fashion. He may find that he has produced the wrong article, or the wrong variety of it, and may find no buyers for his product except at a loss. There is a further risk of loss to employers by the overproduction of any particular commodity. A few producers of any article have the power to bring em- barrassment and loss on all producers of it by reckless increase of the supply. Under the system of producing only to fill orders, which is common in some branches of manufacturing, these risks are assumed by the capitalist, merchant, or dealer, who gives the order. The risk under this plan is probably lessened, since the dealer has better oppor- tunities for watching the tendencies of the market than the manufacturer has. But the risk can never be wholly done away until a plan is devised by which things may be produced only in response to orders from consumers. It is needless to say that such a plan is very unlikely to be devised. Apart from the general risks attending all produc- tion under division of labor, some industries have special risks of their own. In farming, for instance, there are dangers from unfavorable weather, the at- tacks of destructive insects, etc. In mining there is danger from fire, exhaustion of the deposit, etc. In the Advantages of the Wages System. 79 manufacture of gunpowder there is constant danger of loss by explosion. These risks, so far as they affect property, are borne by the employer. 4. Advantages of the Wages System. — As the em- ployer bears the pecuniary risks of production, and owns the product when completed, it is natural that he should have complete direction of the business. Wherever the laborers, even if supplied with capital, are too ignorant to manage the work of production, or to choose efficient managers to act for them, the control of a wise employer is undoubtedly an advan- tage for all concerned. It prevents waste of labor through short-sighted and inefficient modes of produc- tion. In those industries that need the joint action of large bodies of laborers, the managing rights of the employer are particularly important. Laborers have not always had the education and training that would qualify them even for choosing wise directors in such industries, — to say nothing of their ability to pro- nounce on difficult questions of general business policy. It may therefore be taken for granted that, so far as regards the mere question of management, the wages system has been generally favorable, in the past, to wise and efficient direction of all large industrial enterprises. Again, the regularity and certainty of the reward for labor under the wages system is a clear advantage. For persons whose income must, in any event, be small, it is important to know exactly how much 80 Political Economy. they are to receive, and when they are to receive it. They can then arrange their scale of expenditure on a safe basis. Any risk of delay in receiving their earnings, or any uncertainty as to the amount to be received, is burdensome in such cases. Another great and obvious advantage of the wages system is that it provides the whole labor force of the country with abundant capital. The amount of capital available for each laborer is made as great, not as the laborer himself would have made it, but as those would have it who are most able and willing to save. The labor of the man who owns no capital is thus supplied with a full equipment of the most effective devices for increasing production. The resulting increase of product goes mainly to the hired laborer himself. The gains of the employer are easily reckoned, being the difference between his pay- ments and his receipts. But the laborer who has no capital of his own is the great gainer by the wages system, though his gain is less easily measured than his employer's, and is often quite forgotten. In order to tell how much the laljorers of a civil- ized country are benefited by the savings of other men, we should need to know how much they could produce, with little or no capital, if thrown entirely on their own resources. We can only be sure that, in comparison with even the lowest wages, the amount would be small. The whole excess of wages above what could be so produced is a clear gain to the Defects of the Wages System. 81 laborers from being hired. It is a benefit accruing to them from the presence of capital which they have done nothing towards accnmulating. 5. Some Disadvantages of the Wages System. — On the other hand, it must be admitted that production by hired labor has some serious drawbacks. On the side of the laborer it is unfavorable to efficiency. The hired laborer has no direct and personal interest in the product of his labor. Any immediate gain from improving its quality, or increasing its quantity, goes to the employer. The same is true of the benefit arising from any saving in materials or needless wear and tear of machinery and buildings. The hired la- borer lacks the personal incentive to make the best use of his labor and to turn everything to the best account. While, therefore, the wages system has undoubtedly been favorable to efficiency and far-sightedness in management, it depends too much on the presence and watchfulness of the manager. The " hireling " has always been proverbial for slackness in his work. Men, as a rule, work with a will only when the pro- duct of their labor is to be their own. The eye of the overseer cannot be everywhere ; and even if it could be, it is a very poor substitute for the active spur of self-interest, urging the worker who looks to his product as his reward. The adoption of " piece-work," or payment accord- ing to results, acts to some extent as a corrective of 82 Political Economy. this evil. But this plan puts the workman under a strong temptation to do his work in a poor and hasty manner. Except in the few industries where defects of worlcmanship are readily observed, this plan is un- suitable. Like the system of paying by the day, it depends too much on the eye of the manager. The workman has no personal interest in the goodness and value of his product, nor in economizing the materials and machinery used in producing it. Since the employer owns the product he at least is interested in having it as great and excellent as pos- sible. But it is another defect of the wages system that even the employer's interest in production is not of the simple and stimulating kind that sees in the product a reward for the labor of producing it. For him the product is not a reward of labor, but a return for savings paid out in getting it made. His motive is to make profit, not to get wealth produced. Take away the chance to make profit, and he will cease to carry on production. Now the employer's chance to make profit depends, at any given time, on the price at which he can sell the product. A fall of the price may cut off his profit and thus leave him no motive for going for- ward. When this happens production comes to a stand- still, unless the laborers are willing to work for less money. As they commonly are not willing to do this, strikes and lockouts follow, — with resulting loss and bitterness for all concerned. These disastrous inter- Questions and Exercises. 83 ruptions of industry, instead of decreasing with the spread of education among the masses, seem rather to increase in number and intensity as time goes on. No device has yet been disco-vered for preventing them. They are an evil common to all forms of wage-paying. It will be convenient to defer our discussion of wages and profits until we have considered the princi- ples governing the value of commodities in exchange. QUESTIONS AND EXERCISES. 1. How do you show that the business of merchants is to manage the exchange of products ? 2. In what sense is it true that all wealth is useful? Should you give the name of wealth to rum? to quack medicines? to dime novels? 3. Should you give the name of wealth to a good voice? to a talent for acting on the stage? to great physical strength? Why? 4. What is Natural Wealth, and how is it related to wealth produced by labor ? Give examples of each kind of wealth. 5. Show that increase of knowledge tends to increase natural wealth. What illustrations can you give? 6. What is meant by Production ? Can you always tell by the mere name of a thing whether it is a product of labor or not? For example : if you were asked whether a tree, or a flower, or a, berry, or a parrot is a product of labor, could you answer with- out knowing particulars? How as to books, coats, houses, and pictures ? 7. In what circumstances does any kind of natural wealth acquire a value in exchange ? Is a nation enriched by the fact of its natural wealth acquiring an exchange value ? Suppose, for example, the lands, coal mines, etc., of the United States became twice as high in value as they are at present, would this of itself add anything to the wealth of the people? 84 Political Economy. 8. Is it possible for any person to grow richer by reason of the destruction of natural wealth ? If so, what is the precise source of his gain ? 9. Did President Lincoln's proclamation of freedom for the slaves make any class of persons poorer than they were before ? If so, did it diminish tli« wealth of the United States? 10. Why does land differ more in value in different places than cotton cloth does ? Do you see any reason why timber should differ more widely in different places tlian silk ? Any reason why green vegetables or fresh fish should differ more than tea or sugar 11. Why have rivers and natural harbors no exchange value, whereas canals and artificial harbors have a value in exchange? Would it be true to say that streets and highways have exchange value, as streets and highways? How as to railways? 12. Are mortgages and railroad bonds to be regarded as wealth? How as to railroad stocks? When a man buys a rail- road bond, or a share of railroad stock, just what does he buy? Suppose a railroad pays no dividends, is it wealth ? Is a bank- note wealth? 13. Illustrate by example in your own neighborhood the dis- tinction between Capital and other wealth. 14. What three classes of things constitute the capital of a community ? Give examples of each kind. 15. A watchmaker's stock of watches are part of his capital : does it follow that all watches are capital ? Is there any kind of wealth that can never be capital? Any kind that is always capital. 16. Explain the remark that "Capital is perpetually under- going transformations." 17. If you were asked whether pcqjer is capital, why could you give no definite answer? Should you have the same difficulty if the question were asked in reference to coal ? Pig iron ? Race- horses? Printing paper? Mill machinery ? Unimproved lands ? Questions and Exercises. 85 Ploiighs ? Turnip seeds ? Could you answer with certainty in any of these cases ? Why ? 18. What circumstances determine the productiveness of labor ? Why is American labor more productive than that of most othor countries ? 19. Illustrate the distinction between Productive and Non- productive labor. Mention some kinds of labor that are neither wholly productive nor wholly non-productive. To which class should you assign each of the following labors ; nut-gathering; building toy-boats; making fire-crackers; fishing for sport; exer- cising in a gymnasium ; playing base ball ; the study of music ; the study of architecture ; the study of drawing ; the labor of a bank-teller ; of a tailor's apprentice ; of a merchant ; of an in- ventor; of a doctor; of a policeman; of a jailer? Is the fact that labor is paid for a proof that it is productive ? 20. In what ways may capital be created ? How do you dis- tinguish between Savings and Capital ? 21. How does the possession of some capital facilitate the creation of more? 22. Why are the Indian tribes of the West usually so poor ? 23. How do you account for the fact that comparatively few men own capital? 24. Mention the chief industrial consequences of the fact that the mass of producers work for wages. 25. The profits made by hiring laborers can be accurately measured. Can the gain of the laborer be measured? How should you express the laborer's gain from being hired? 26. Can wages change without any change in the amount of money the laborers receive? 27. Explain the remark that " The more a nation saves, the more it can priDduce." Do you think of any limit to the increase of production through increased saving? CHAPTER X. OF VALUE IN EXCHANGE. 1. The Distinction between Value and Price. — We must now consider the principles governing the value of commodities. The first thing to be done is to make sure that we see clearly what is meant by the value of an article, and how its value differs from the price of it. The price of a thing means the amount of money it exchanges for : the value of it means the amount of any and every other commodity it exchanges for. The value of a thing, therefore, includes the price of it. The price is simply one example or instance of its value ; the instance that, by frequent use, is most familiar and expressive to us. In speaking of value we compare each commodity with all other commodi- ties ; in speaking of price, we compare it with the one commodity, money. Money gives us a convenient and ready standard for expressing the value of things. For all practical purposes men naturally prefer to speak of price rather than value. Even when they use the word value, they often mean only the price. In political economy it is necessary to keep in mind the distinction, and to Value in Exchange. 87 observe it very carefully. For example, the price of a thing may rise, without any change taking place in its value : the price of every other thing may rise at the same time. If, for example, all prices rise ten per cent., money is the only thing whose value is affected: the value of money is lowered. All prices may rise or fall together, but it is impos- sible for all values to rise or fall together. If some things rise in value, other things fall. If beef rises in value as compared with tea, tea falls in value as com- pared with beef. It would be impossible for a pound of tea to become worth more beef, and a pound of beef to become, at the same time, worth more tea. To speak of a general rise or a general fall of values is to use a contradiction in terms, since to say that some things have risen in value is the same as saying that other things have fallen in value. In other words, value is purely a matter of comparison ; there is no absolute standard for measuring it. We simply compare one commodity with another. As all the runners in a race cannot simultaneously gain on each other, so all commodities cannot simultaneously rise or fall in value. We shall find that the price of every commodity is subject to two very different kinds of change. In the first place, it may rise or fall without a corresponding rise or fall in the prices of other things. In this case the value of the commodity is affected. It becomes worth more or less of other commodities than it was worth before. 88 Political Economy. In the second place, all prices may change together, and. equally ; that is to say, the exchange value of money may rise or fall. In this case, leaving money out of the account, the exchange value of other things, compared among themselves, remains unaltered. The difference between the two cases is highly important. Since a change in the price of an article may or may not imply a change in its value, it would be safest always to speak of value, rather than price. But we can hardly avoid speaking of prices. When- ever, in the following pages, a rise or fall of price is spoken of, it is to be understood as a rise or fall con- fined to the commodity named: implying therefore a corresponding change in the value of the commodity. 2. Exchange Value and Intrinsic Value. — It is neces- sary also to guard against confounding the value of which we speak in political economy with the intrinsic value or usefulness of things. The value of which we speak here relates simply to buying and selling. The full name for it is value in exchange. It is true, of course, that nothing can have value in exchange unless some persons consider it a good thing to have. Things that have no intrinsic value for any- body have no exchange value either. But, beyond this, there is no connection between the exchange value of commodities and their intrinsic utility. . I suppose we should all agree that bread is intrinsically more useful than diamonds; yet one little diamond has more exchange value than many tons of bread. Value in Exchange. 89 If the world should be overtaken by a famine, the exchange values of bread and diamonds would be changed. In either case, the value of the bread or of the diamond is the amount of other things to be got in exchange for it. 3. Value depends immediately on Demand and Supply. — We are all aware that when the supply of a commod- ity coming forward for sale falls short of the demand for it, the price is usually raised. Those who have it for sale find that they can charge more for it than before, and yet dispose of their whole stock. Since business men are on the alert to make all they can, they ordinarily raise the price at once. Even if for any reason they fail to do this, the stock will pres- ently become exhausted, and the buyers, eager to get more, will offer a higher price for it. On the other hand, when the salable supply of a commodity exceeds the demand for it at the existing price, those who have it for sale find themselves obliged to lower the price in order to tempt people to buy more of it. If they fail to do this a portion of the supply will remain unsold on their hands, and they may lose more thereby than they would lose by lowering the price. Thus much we could safely say, even if all sellers worked in perfect harmony and strict combination with each other. But it is extremely rare that all sellers act in harmony. They are usually more or less in the attitude of rivals. Each acts for himself; and 90 Political Economy. when it becomes clear that the commodity is not sell- ing as fast as it is produced, some dealer is pretty certain to offer his stock at a lower price than before. In such a case, the action of one dealer is usually followed by others, and finally by all. Any dealer who declines to follow, does so at the risk of selling little or none of his stock. We have in this a case of the competition of sellers. 4. Ec[iiilibriiim of Supply and Demand. — The natural aim of trade is to make exchange keep pace with production, — to sell things as rapidly as they are produced. When people buy any commodity faster than it comes forward from the producers, the price is raised. The rise of price causes people to buy less of it. The price goes on rising until the demand is brought to a rough equality with the daily production. In the reverse case, when a commodity does not sell as fast as it is produced, the price is lowered in order to tempt people to buy more of it. The price goes on falling until the purchases of consumers come to be roughly equal to the daily production. Thus the value of everything tends to be such as to make the demand equal to the supply. But changes of value react on the supply of things as well as on the demand for them. On the side of supply we come to the source of commodities, namely, production. When the value of a commodity rises, the production of it becomes more profitable than before. Those who Value in Exchange. 91 produce it are stimulated to produce more of it; new laborers are called in, more capital is devoted to the work, and the production is increased. On the other hand, when the value of a thing falls, those who produce it find their industry less profitable. This will tend to make them produce less of it. But the process of increasing or diminishing the pro- duction of most commodities is necessarily somewhat slow. Production, as we have already seen, requires time, especially where much machinery is needed, or long processes of growth and manufacture have to be waited for. Again, once men have engaged in pro- ducing a given commodity, it is not easy for them to withdraw from it. Even a temporary stoppage implies great inconvenience and loss both to employers and laborers. Men usually abandon an industry only when they are forced to do so. It follows that the rough equality between supply nnd demand is maintained, from day to day, rather by affecting the demand through changes of value than by affecting the supply through changes of production. A high or low value acts at once on the demand, checking or stimulating it into equality with the existing supply, until production can adjust itself to the situation. The connection between value and production will be considered more fully in the next chapter. CHAPTEE XI. COST OF PRODUCTION AS THE ULTIMATE REGULATOR OP VALUE. 1. Cost of Production to the Employer, or Money Cost. — There are two ways of looking at cost of production. We may, in the first place, regard the matter wholly from the stand-point of employers of labor. For them the cost of producing a commodity is the amount they pay out for materials, machinery, etc., and in wages to their laborers. This is a natural and convenient view of cost of production as a matter of practical business. It is, in fact, the only view that could find expression in book-keeping. It gives the employer a basis for reckon- ing how much he gains by selling his product at any given price. The question of cost for him has refer- ence only to his profits. Of course, the more cheaply he can get the requisites of production, including pro- ductive labor, the greater his profits will be. But in several ways this view is inadequate foi scientific uses. First, it is too narrow, since it applies only to production carried on by hired labor. It gives us no definition for the cost of production where those who do the labor provide the capital too, — as is the case, for example, with many hunters, fishermen, 92 Cost of Production the Regulator of Value. 93 tailors, shoemakers, small farmers, and others. In fact, it relates not to production in and of itself, but to the terms on which some men can hire other men to labor for them in producing things. It views the hired laborer as a productive machine whose services cost men something, rather than as himself a man equally interested with the employer in getting com- modities produced at a low cost. The true cost to men of producing the things they need must be the same, whether some work as hired laborers for others, or all work for themselves. We therefore need a broader definition that shall not view production solely as an opportunity for employers to make profit. Secondly, even where production is carried on by hired laborers, this view of cost of production exposes those who adopt it to very serious errors and miscon- ceptions. The payments an employer has to make in getting an article produced are liable to change for reasons that have no real connection with the produc- tion of the article. For example, four hundred years ago an employer's accounts showed very much smaller payments for wages and other things than they do at present. Men could be hired for from ten to fifteen cents a day ; wheat could be bought for eighteen cents a bushel ; beef for less than a cent a pound ; butter for a cent ; and other things in proportion.^ In those days money had ten or twelve times more value than it has now. If, therefore, we should hold the view 1 Thorold Rogers, Work and Wages, p. 539. 94 Political Economy. that the cost of production of things is measured by the money payments of employers, we should have to say that it is greater now than it was four hundred years ago : the fact being that inventions have very much lessened it. Those who compare the cost of producing things in different countries at the present time, using the money payments of employers as a basis of compari- son, are liable to the same error. The value of money differs very considerably in different countries and even in different parts of the same country. This is especially true in the case of countries and regions between which trade is impeded or prevented. For example, in the early days of gold-mining in Califor- nia, before facilities existed for trade with other parts, money had a much lower value than it had in the rest of the country. 2. True Cost of Production. — We need a broader and truer definition of cost of production than the one just considered, a definition that shall apply to all production under whatever conditions carried on, and shall be free from liability to error on account of fluctuations in the value of money. Such a definitioii we gain by looking simply at production itself, rather than at the accidental and more or less artificial arrangements made between men in regard to it. It is no necessary feature of production that a few men should own the capital and should hire the rest with a view to making profit. Cost of Production the Regulator of Value. 95 It is, however, necessary that men should labor; and it is equally necessary, owing to the nature of produc- tion, that most of the labor needed for producing enjoy- able commodities, should be expended long in advance of receiving them as its reward. These two sacrifices of our ease and present enjoy- ment, first the burden of labor and then the burden of waiting for our reward, are demanded by the very nature of production, and constitute for men the trua cost of everything they produce. Men who, having the requisite knowledge and natural wealth, are able and willing to labor and to wait for the reward, are in a position to produce for themselves whatever it is possible for men to produce. We may therefore define the cost of production of every commodity as the quantity of labor and the amount of waiting necessary in order to produce it. (See Appendix, page 387.) This definition applies equally well whether those who perform the labor receive wages or wait for the natural reward of their labor ; if they receive wages, then the burden of waiting is assumed by another. It also avoids all danger of error on account of changes in the value of money. As thus defined, cost of production is affected only by changes that appear in the act of production itself, — changes that make the production easier or harder than it was before. Inventions that lessen the necessary labor, and the discovery of new and more fruitful sources of materials, lessen the cost of produc- 96 Political Economy. tiou. On the other hand, if the best and most con- venient sources of materials should become exhausted, the cost of production would be increased. But changes of wages have no effect on cost of production as here defined. The labor and the waiting required to produce any article are the same when wages are high as when wages are low. Changes of wages, as we shall see presently, affect only the profits of employers. Again, according to this definition the exertions of the employer himself are part of the cost of produc- tion, since the labor of planning and directing the work is a necessary part of the labor of producing things. The view that finds the cost of production in the employer's payments, makes no account of this : it ignores the employer's own share in production. Since, however, the business man's view of the cost of production is not likely to be abandoned, we may distinguish the two definitions by calling the first. Em- ployer's Cost or Money Cost, and the other. Economic Cost or Real Cost. In this way we may hope to avoid misunderstandings. The two, as we shall see more fully later, relate to very different things. 3. Labor as an Element in the Cost of Production. — The chief element in the cost of production is labor. We include, in each case, all the labor, whether of hand or head, which contributes in any way to the production of the conmiodity. The mental labor of planning the work and of directing and overseeing the Cost of Production the Regulator of Value. 97 workmen, is part of the cost of production as well as the exertions of the workmen themselves. It is to be remembered that the labor of producing an article includes all the labor from the Deginninc, not merely the last stage of the work. For example, the labor of making cotton cloth includes the labor spent in raising and transporting the raw cotton, as well as that spent in making it up into cloth at the mills. Also, it includes the labor of producing all the secondary materials needed in the production, such as, in the case of cotton cloth, starch, dyes, chemicals, fuel, etc. In the Industries requiring skill or training, the labor of acquiring this skill is also included in the cost of production. The labor of producing a commodity also includes the labor of making the requisite tools, machinery, and appliances of all kinds for carrying on the work. But here we must remember that the machinery, buildings, etc., are not used up in producing a single specimen of the commodity. The labor of making the machinery must be regarded as belonging, in part, to every specimen it helps to produce until it is worn out. Thus, if a sewing-machine stitches ten thousand shirts before it wears out, only one-ten- thousandth part of the labor of making it is chargeable to each shirt. In the same way, in the case of all other apparatus of production and exchange, only a pro- portional part of the labor of making it belongs to 98 Political Economy. the cost of production of any given quantity of each commodity. 4. How Labor is Measured. — The term " quantity of labor," as used in defining cost of production, needs some explanation. The quantity of labor required for producing a commodity is not measured simply by days or hours, though the length of time occupied must always be the chief factor in the case. We must include, with the length of time, every other feature of the work that tends to attract or to repel producers. A day's labor in an industry that is disagreeable, or dangerous, or exhausting for those engaged in it, is a greater quantity of labor than a day's work in a pleasant, safe, and easy occupation. The standard, however, for judging the character of different occu- pations in these respects, is the opinion and behavior of the laborers concerned, — which may or may not be entirely in harmony with the actual facts. What they think hard or dangerous or disagreeable is, for our present purpose, hard or dangerous or disagree- able ; what they think easy and pleasant is easy and pleasant. The product of an industry that the laborers are reluctant to enter must have a higher value than a product made in the same length of time in an in- industry which they regard as attractive, — enough higher to correspond with the greater sacrifice made by the laborers who engage in the distasteful industry. Cost of Production the Regulator of Value. 99 If, for example, workmen think two days' labor in a coal-pit as great a sacrifice as three days' labor in the fields or in the forest, then so far as cost of produc- tion is concerned, two days' work in a coal-pit is as great a quantity of labor as three days' labor in the fields or in the woods. In such a case, other things being equal, the coal produced by two days' labor will ordinarily have the same value as the amount of wheat or of lumber produced by three days' labor. 5. Of Waiting as an Element in Cost of Production. — I have said that labor is the chief element in the cost of production. But since labor does not result at once in a commodity good for human use, and since it is burdensome to wait for good things after we have labored to get them, this necessity of waiting must be included in each case as part of the cost. It is a sacrifice as real as the labor itself, though of a different kind. The period of necessary waiting differs much, as we have already seen, in different industries. For example, a quarter of beef and a load of building stones may have cost the same amount of labor; but their values are not for that reason the same. The labor that produced the building stone may have been for the most part quite recent; whereas, by the necessity of the case, the labor of raising the beef must have been spread over several years. The labor spent in the early stages of producing the beef has to go long without its natural reward. Therefore, the 100 Political Economy. beef, when at last it is ready for use, must have a value enough higher than that of the stones to reward this longer waiting. Otherwise men would avoid industries, such as the raising of beef, in which long waiting is necessary, and would flock into those occupations that yield their products most quickly. The waiting element in cost of production is con- nected, as we see at once, with the capital used. Capital at any moment represents the labor put into production without receiving, as yet, any enjoyable return. Somebody is, of course, entitled to receive Nature's reward for that labor in the future. The man who actually performed the labor may have been relieved of the waiting, may have parted with his right to the future reward by receiving wages in- stead of it ; but this only transfers the burden of the waiting to another. Capital always implies a deferred reward for labor. A large part of capital consists of machinery. The natural reward of the labor spent in making machinery, comes by small installments, day by day, in the enjoy- able products the machinery helps to produce. The sustained waiting for these products to appear con- stitutes a substantial part of the cost of producing them. When machinery is introduced into an in- dustry previously carried on by hand, the cost of production is not lessened to the same extent as the quantity of labor is lessened. The making of the machinery involves new waiting, since the natural Cost of Production the Regulator of Value. 101 reward of the labor that makes it will be very slow in coming. If the new mode of production should give us the commodity for half the old quantity of labor (counting in the labor of making the machinery), the value of the commodity would not fall to half of the old value. If it did, there would be nothing to reward the new waiting for the reward of the labor that makes the machinery. On these terms no man would devote labor to the making of machines. How much the value of a commodity that requires long waiting shall exceed the value of one made by the same amount of labor but with less waiting, depends mainly on the character of the people who have to be looked to for the capital needed in pro- duction. If these regard waiting as a great sacrifice, the value of things requiring long waiting will be high in comparison with things requiring little wait- ing, — the amount of labor being the same in both. If, on tlie other hand, they regard waiting as a slight sacrifice, then the waiting element in cost of produc- tion will count for comparatively little in determining value. ^ In other words, there is no standard for measuring how great a sacrifice waiting is in itself ; we can only take the judgment of those who submit to it. Their opinion regarding it is roughly indicated by the average 1 It follows that, as a community becomes more willing to make the sacrifice of waiting, those products which demand longest waiting decline in exchange value. 102 Political Economy. rate of interest on loans. In a country where the people readily suhmit to waiting, the rate of interest is usually low ; whereas in countries where waiting is regarded as more burdensome, the rate of interest is usually high. 6. Cost of Production is made up of many small parts. — If now we should try to analyze the cost of produc- tion of any commodity, we should find it to consist of many small bits of labor, each followed by its own period of waiting. The number of persons who contribute, in one way or another, to the work of producing and exchanging even the simplest com- modity, is surprisingly large. The production of a book is probably not more complicated than that of most other commodities ; yet if I were to begin here a full account of all the separate contributions made by different persons to the production of this little book, I think the book itself would hardly contain the list of them. Let us look for a moment at tlie cost of producing the paper on which it is printed. The cost of manufacturing the best printing-paper, and of transporting it to the place of use, is made up of the items given in the following list : The figures are for a quantity costing $ 10,000, and are taken from the actual accounts of a New England paper-mill for the year 1887. They represent, of course, what we have called the Employer's, or Money, Cost, since this is all that the manufacturer's books are concerned with. Cost of Production the Regulator of Value. 103 Buildings 1 $200 Machinery! 516 Fuel 360 Wood Fibre 3,753 Cotton Rags 1,388 Lftien " 142 Papers 158 Soda Ash ....... 11 Alum 49 Clay. . . . Lime . . . Rosin . . . Oil of Vitriol Colors . . . Starch . . . 125 75 6 2 14 Bleach $103 Lubricating Oil .... 21 Lights 17 Lumber 91 Wrappers 64 Marline 73 Freight and Cartage ., . . 562 Horse and Carriage ... 24 Sundries . 48 Insuraiice^ 90 Taxes2 , 46 Wages (including manager's salary) 1,974 Total $ 10,000 It may seem at first sight that only about a fifth of the whole money cost of manufacturing paper consists of wages. But a little study of the matter enables us to see that the sums paid for machinery, materials, etc. are in fact mainly payments of wages m disguise. These sums replace (with a profit) to other employers the wages paid for the production of the machinery, ma- terials, etc. In this respect the division of labor among employers makes no difference ; in the end it is as if one employer carried on the whole business. As the true cost of production is always, at bottom, made up 1 Of course these figures represent not the total cost of the build- ings and machinery, but the proportion of that cost assignable to the given quantity of paper. (See p. 91.) The buildings and machinery are in fact worth many thousands of dollars. 2 In regard to insurance as an element in cost of production, see the note on " Risk " at the end of this chapter. Taxes are strictly not a part of the cost of production ; they are rather to be regarded as a portion of the product taken by the government for public purposes. 104 Political Economy. of labor and waiting, so the employer's cost is always at bottom made up of payments for labor and waiting. If now we should attempt to analyze the cost of production of any commodity into all the parts or par- ticles of which it is composed, the task would prove to be very long. Whatever is used in the production of the buildings or the machinery, or the wood-fibre or the alum or anything else named in the above list, is in fact used in the production of paper. Its cost of production is therefore part of the cost of producing paper. In analyzing the cost of production of paper we should have to analyze the cost of each of these, — which would give us for each of them a list of items about as long as that given above for the paper itself. Again, each article named in these new lists, would have a cost of production needing, in turn, to be simi- larly resolved into its parts ; which would give a new and very numerous set of items ; and so on until we should bring in every article that comes into play, directly or indirectly, in the production of paper. We should find, in this way, that the labor of making paper is resolvable into many hundreds, perhaps thou- sands, of parts ; some of them perhaps too small to be stated, but all of them necessary to the final result. The sum of all these labors, together with the aggregate of all corresponding periods of waiting for reward, con- stitute the true or economic cost of production. This reminds us of the wonderful extent to which civilized men have carried division of labor. The in- Cost of Production the Regulator of Value. 105 dustries of a nation are closely interwoven with each other, forming in reality one great system of .co-opera- tion. Each producer depends on the help of thousands of others, whom he has never seen. The situation, along with the great advantages it brings, obviously imposes a grave duty on ' all concerned. Any interrup- tion or disturbance at any part of the system is certain to work injury for the whole body of producers. 7. Market Value tends to Conform to Natural Value. — The Natural Value of every commodity is that which cor- responds to the cost of producing it. Things exchange for each other at their natural value when for a given quantity of any particular commodity, the seller can ob- tain as much of every other commodity as is produced by the same quantity, or equivalent quantities, of labor and waiting. Thus the law of natural value is simply the just rule of equal rewards for equal sacrifices. This is, however, a rather ideal standard to which the actual values of things at any given moment seldom or never exactly correspond. The actual or market value of every commodity is acted on, as we know, by every change of demand or of supply. These disturbances are temporary in their effects, but they are constantly occurring. The result is that the market value of every commodity is commonly somewhat above or below its natural value. But we can safely say that, except in special cases to be spoken of in a later chapter, when the market value of any commodity is above or below its natural 106 Political Economy. value, the rule of equal rewards for equal sacrifices will tend to bring it back to that level. When the business of producing any commodity is more profitable than the production of other things, new labor and capital will be attracted into producing it, and the resulting increase of supply will cause the market value to fall ; when it is less profitable, the reverse will happen. We now sec how, under division of labor, each man knows what to produce and what to avoid producing, though he has never seen the persons who are to use his product. These changes of value are messages of a very effective sort from the consumers, telHng when too much or too little of any article is produced. With- out them, production by division of labor would be reduced to hopeless guessing. 8. Improvements in Production. — It is important in considering the effect of improvements, to bear in mind that it is the comparative, not the absolute, cost of pro- duction that governs the values of things. If by a universal improvement we could lessen by one-half the cost of production of all things, the value of every com- modity would remain unchanged. The ratio of the cost of each to that of every other would be the same as before, and it is obviously on this alone that values depend, since value is simply a comparison. The only effect of a general and equal cheapening of all things would be to increase the rewaids of labor and waiting. Wages and profits would be higher. Things would be cheaper in the sense of getting more of them Cost of Production the Regulator of Vahte. 107 for our work, but not in the sense of getting more of one commodity for another. Improvements do always, in practice, affect values when they are introduced, because no invention is uni- versally applicable. Coming as they do, in single in- dustries, they have the effect of lowering the values of the commodities whose production they make easier than it was before. It is to be observed that they also increase the Rewards of all producers who use the cheapened articles. The fall of value is obviously the process by which improvements in single industries extend their benefits to the whole community. Every improvement that lessens the labor of producing any article in general use, adds to the general prosperity. Since, in the long run, improvements are made to some extent in every industry, it follows that to some extent the effect of improvements in the long run, is rather to raise wages and profits than to lower the values or prices of commodities. Perhaps a better way to express it is to say that, in the long run, improvements raise wages and profits • without lowering values or prices. It used to be thought necessary to show in political economy, that labor-saving improvements are not injuri- ous to the laborers. There was formerly among the laborers of the old world a strong dislike of machinery, on the ground that it took the place of men, and de- prived laborers of the opportunity to earn wages. There is no doubt that, temporarily, the introduction of ma- chinery on a large scale may give rise to hardships 108 Political Economy. until things adjust themselves to the new situation. But when necessary changes are made, every labor- saving contrivance is a benefit to the community. The displaced laborers soon find other employment, and the community as a whole has a greater return for its labor than it had before. I think that in America machinery needs no defence. Of Risk in Production.— It is usual to name risk as an element in cost of production, but it does not seeni to me that risk is an element distinct in kind from the necessary labor and waiting. Personal risks to health, etc. incurred by the producers are in- cluded in the quantity of labor required. [See p. 98]. Risks to the capital employed are no burden in themselves. The real burden is, in part, the labor of taking precautions against the danger, and in part, the labor of repairing the damage when loss occurs.. The burden of risk is therefore resolvable into labor; it simply adds to the quantity of labor necessary on the average for accomplishing a given result. The business of in- suring against loss by fire, shipwreck, etc. is simply a useful device for distributing the actual losses among all who incur the risk : a small payment by each of them is ordinarily suf- ficient to make good the losses, and leave a profit for those who conduct the insurance. The risk of loss to individual employers and dealers by a fall in the value of their goods, is strictly no pai't of the burden of production, since it affects only the comparative earnings of particular individuals, and not the general result for the whole community. AVhat one man loses by a fall of value other men gain, since they get that particular commodity more cheaply than they could naturally have hoped to get it. These risks involve a chance for gain as well as a danger of loss. CHAPTEE XII. EXCEPTIONS TO THE GENERAL LAW OP. VALUE. 1. The Value of Natural Wealth. — The general law of value considered in the preceding chapter applies only to wealth on which labor has been bestowed, since that alone has a cost of production. Things that have come to mankind as simple gifts of the Creator acquire an exchange value, as we have seen in Chapter V., when the demand for them as a gratuity exceeds the supply. The value of natural wealth of any kind, at any particular place, is wholly under the control of the de- mand. The supply being fixed, whenever the demand, at any given value, exceeds that supply the value rises. In every place where population is increasing, this rise of value is usually progressive. It is the process by which the demand for the natural wealth of the region is kept down to an equality with the fixed supply. There are two checks on this local rise in the value of natural wealth. The first of these is the power of men to move away to other places where there is less crowding. The second is the continual cheapening in the cost of transportation, which enables men to bring the materials of production from regions where the 109 110 Political Economy. local demand is small to places where it is great. Of course iliings so transported cease to be strictly natural wealth and become wealth produced by labor, their value being regulated by the cost of bringing them. But in the place to which they are brought, the materials of production serve the same purpose as if they had been procured on the spot. The additional supplies obtained from other places keep down the value of the home supply. Such things as do not admit of transportation may rise indefinitely in value in the crowded portions of the world. As already noted, land for building pur- poses is the most important article of this character. Yet even the value of building land is greatly affected by the cheapening and quickening of transportation. In one sense the demand for building ground in the cities is diminished by the facility with which men, whose business is in the city, are enabled by the rail- roads to have their homes in the country. But, on the other hand, the railroads enable vastly greater numbers to congregate in the cities than could find subsistence there without them. The result is that cheap trans- portation tends powerfully, in the long run, to raise the value of city lands. 2. Products that cannot be increased in Supply. — There are a few products of human labor which cannot be increased at will. Old pictures and statuary, old furniture, and all relics of by-gone times are of this nature. The value of all such articles is governed by Excerptions to the General Laiu of Value. Ill the demand. As the supply is fixed, when the demand for them at any given price becomes greater or less than this supply, the price rises or falls so as to restore the equality. Works of art even by living masters have their value determined in the same way. Though subject to in- crease, they cannot be indefinitely increased, since only one person in each case lias the gift of producing them. In practice it is nearly as if the supply of such works were absolutely limited. The demand for the produc- tions of real artists is always greatly in excess of the supply, except at values far above that of other things having the same cost of production. The inventor of any new article is given, by the laws of most countries, the exclusive right of manufacturing the article for a limited term of years (in the United States seventeen years). An article covered by a patent may be classed, as far as the general body of producers are concerned, with things that cannot be increased in supply at will. Yet, in practice, such articles are pro- duced freely in answer to the demand. The effect of the patent is to enable the owner of it to obtain an extra profit or royalty on the manufacture. In other words, it enables him to hold the market value somewhat above the natural value, — that is, if his invention should meet with a ready demand. There is a constant effort on the part of producers and traders to obtain, as regards ordinary commodities, a sim- ilar advantage by the use of trade-marks. Where trade- 112 Political Economy. marks enjoy legal protection, they enable the producer of any commodity to keep exclusive control of the market for his own particular brand or " make " of the article. The primary effect of trade-marks may be to serve as a guarantee of quality for the consumer. They save the consumer some trouble of investigation at each purchase. But for this very reason they may enable the possessor of an established brand to obtain more for his product than other less-known producers are getting for the same quality. 3. Products of Skilled Labor. — The value of products requiring special slcill or long training on the part of the producers, is not fully controlled by tlie cost of produc- tion. Such products are permanently higher in value than ordinary products made by the same quantity of labor and waiting. The reason is two-fold. First, the need of skill limits the number of persons who are able to make these articles : the general mass of laborers are effectually barred out from the business by lack of this essential qualification. Secondly, the demand for these products, if they were offered for sale at their natural prices, would far exceed the supply which this limited num- ber of laborers can produce. The high value is caused by this large demand acting on a restricted supply. But why do not more of the laborers learn the neces- sary skill ? The answer to this is that it is costly to acquire skill ; further, the outlay is for a somewhat dis- tant object. The same reasons which prevent the mass Exceptions to the General Laiv of Value. 113 of laborers from acquiring capital, also prevent them from acquiring skill. Few among them are able and willing to save from their slender incomes the means whereby they themselves, or their children, may acquire the training necessary for the higher grades of produc- tive labor. The young laborers, partly no doubt from necessity, partly however from eagerness to earn quickly something of their own, turn to industries in which little or no preliminary training is needed. Thus it happens that the number of men in the skilled trades is never large enough to supply all the products of skill that would readily sell at their natural value. The resulting high market value is the premium con- stantly paid by the community to induce laborers to make the sacrifice necessary for obtaining skill.^ This is obviously a case of defective competition • among producers. The rule of equal rewards for equal 1 Of course all the actual labor and waiting demanded in acquiring skill are included in the cost of production. The point is that the value of skilled products is ordinarily considerably above that of other things costing the same amount of labor and vs^aiting. The labor of the skilled occupations is, in itself, usually lighter and more agreeable than that of the unskilled. Yet, day for day, its products are always a good deal higher in value, in some cases two or three times higher. It is, of course, possible to maintain that the reluctance or inability of common laborers to strive for skill is a part of the cost of production in these cases ; and that the natural value here, as in the case of unskilled products, is a rough average of the actual market value. In this view the only peculiarity in the case of skilled products is the fact that a considerable part of the waiting necessary in producing them, has to be borne by a class of men who find long waiting very burden- 114 Political Economy. sacrifices, which keeps market value in touch with natu- ral value, takes effect only where men ordinarily choose the industries that, all things considered, offer best re- turns for the sacrifices demanded. If the producers, especially those who are beginning life, customarily neg- lect their best opportunity in any direction, the full and direct control of natural value over market value is to that extent defeated. It is not, however, even in these cases, wholly pre- vented. The market value of skilled products is always above the natural value ; but the interval between them is not a matter of mere accident. It depends on the amount of inducement required in order to make par- ents and young laborers willing to face the cost of ac- quiring skill. At this interval, the market value is held in check, in the ordinary way, by the cost of pro- duction. Competition is obstructed ; but, with an allow- ance for the obstruction, it works as in other cases. 4. Exchange between Distant Places. — A similar ob- stacle to freedom of competition among producers is found in the case of men in different countries, and even in distant parts of the same country. Any two places are distant from each other in the sense here intended if there are serious impediments to the free movement of laborers from the one to the other. The impediment may be difference of language, or of religion, or of social customs, or of climate; or it may be mere national prejudice, or love of home and friends, or the difficulties and cost of the journey. Exceptions to the General Law of Value. 115 When a trade exists between two places distant from each other in any of these ways, the active prin- ciple that keeps exchange on the basis of cost of pro- duction is lacking. The only reason why we can say that market value, in any case of exchange, tends to conform to the cost of production, is the fact that pro- ducers may ordinarily be counted on to choose among their home industries those that offer best returns. The diificulty, in trade between distant places, is that they are largely prevented from doing this. In the exchange of commodities between countries, it is there- fore possible that the products of the one shall have regularly a higher value, as compared with those of the other, than the cost of production on either side would suggest. For example, the United States, in trading with Brazil or with China, may ordinarily ob- tain for the product of two days' labor here, commod- ities that cost five days' labor in the other country. Further discussion of this very interesting portion of our subject will be found under the head of Interna- tional Trade. 5. Things having a Joint Cost of Production. — We have thus far spoken as if every commodity were the result of a separate and independent outlay of pro- ductive labor. In point of fact very many products are coupled in production with other products, so that the one is never produced without the other. The production of wheat is also the production of straw; the production of wool involves that of mutton; the 116 Political Economy. production of beef that of hides and tallow, etc. Nearly every sort of production has some by-product or products of more or less commercial importance. It is to be noted that men cannot in these cases regulate the proportions in which the several associated articles shall be produced. Nature fixes the ratio for us. In order to increase or diminish the supply of beef we must also increase or diminish in the same propor- tion the supply of hides, horns, hair, tallow, etc. The natural value of the whole group of products resulting from, the raising of an ox is, of course, deter- mined by the cost of raising the animal. The relative value of each separate product in the group depends on comparative supply and demand. The stronger the de- mand for each product, in comparison with its quantity, the higher its relative value. Suppose that, at the existing prices of beef, hides, and tallow, the demand for beef increases, without increase of demand for the other' products. The price of beef will rise. This makes the raising of oxen more profitable than before: the production of beef will be increased. But this brings also an increased supply of the associated products ; and since there is no increase of demand for these, the price of them must fall in order to create more demand. In the end, what is gained by the rise in the value of beef is lost by the fall in value of the associated products, — the combined value of the whole group tending always to conforn^ to the cost of producing the animal from which they are made. Exceptions to the General Law of Value. 117 6. Arbitrary Exceptions. — There is a further class of exceptions to the general law of value, arising from in- tentional interference with the free course of industry. An example, now fortunately much rarer than in former times, is seen in the case of things produced by slaves. Slave labor is not adapted for any but the crud- est occupations ; usually it is confined to a few industries. It is not open to the slaves to leave these industries when the products fall below their natural value ; nor is it for the master's interest to withdraw them. The result is, that the value of slave products may be permanently below that of other things made in the same country by an equal quantity of free labor. In some cases men who trade in several commodities single out one of them for exceptional treatment, — set- ting the price of it rather with a view to drawing custom- ers than to making a profit. The commodity selected for the purpose needs to be one in common use, as to the usual price of which there is general knowledge, so that the buyer may recognize a good bargain when one is offered to him. In such cases, the dealer counts on mak- ing up for the lack of profit on his decoy, by increasing his sales of other things. The result is sometimes, however, to establish for a time, a low price for the article at all the competing shops. It is commonly understood, for example, that retail grocers in most parts of the United States have not been making any profit by the sale of sugar for a number of years past. They have had to compensate lis Political Economy. themselves, of course, by charging higher prices for other things. 7. Combinations, Trusts, etc. — In some cases those who have a commodity for sale are able to combine to keep up the price of it. At the time of writing these pages, there is much talk of " trusts " and other combinations for raising the prices of various articles. If a commod- ity be produced in a few places only, or by a few large establishments only, its price may be fixed by agreement between the producers rather than by competition. In order that the price may be kept much above the natural price, those who make the combination must be able to prevent other men from entering the business. This they can do in the long run, only by gaining control of most of the available sources of supply. A combination controlling the whole supply of a com- modity might extort from the consumers any price it chose. But even in such a case the monopolists might discover that it woukl not be for their own advantage to charge much more than the natural price. A high price lessens the demand for any article. There are few things which are absolutely necessary, and for which no tolerable substitute can be found. Mostly, therefore, any attempt to extort an unreasonable price for an article would only result in loss to the monopolists. They would have to limit their production very much in order to find a market. It is probable that the most advantageous price for the producers of all ordinary articles is, in the long run, the one that corresponds most nearly to the natural price. Combinations, Trusts, etc. 119 Yet it is undoubtedly true that a combination among the producers, or even the chief producers of a commod- ity, may succeed for a time in raising the price of their product. This is especially true where large plant is required for the production. The mere time necessary for starting a competing establishment may be consider- able. Further, the greatness of the outlay required, and the risk of loss in facing a competition with the combin- ation, may deter outsiders for a considerable period from embarking in the business. To that extent the com- munity is always exposed to injury at the hands of a combination. Our best protection against monopolies has hitherto been the difficulty of forming and maintaining effective combinations. Where the means of production are wide- spread and producers are numerous, effective combina- tion is probably impossible. Even where the sources of production are limited, it has yet to be shown that effec- tive combination can be made permanent. No monopoly has in the past succeeded in maintaining itself for any length of time unless sustained by force of law. In a country where the laws allow perfect freedom of indus- try, I think there is no serious danger to be apprehended from "trusts " or other combinations to interfere with the natural course of production and exchange. In the end every such attempt is likely to bring loss rather than gain to those who make it. It must not be inferred from the space devoted to exceptional commodities in this chapter, that they con- 120 Political Economy. stitute a very large proportion of all the things bought and sold, or that their value departs very widely from the ordinary rule. Compared with the great mass of exchanges subject to the ordinary rule, they are very small in amount : and the extent of their departure from the common law of value is not often i^reat. QUESTIONS AND EXERCISES. 1. Explain the distinction between Value and Price. Show that the price of a thing may change without a change of its value. 2. Remembering that every article may fall in value, show whether all things may fall in value together. 3. How does a change in the value of money show itself ? Has money a price ? 4. What is meant by the "equilibrium of demand and supply"? How is it maintained from day to day? 5. What do you understand by the Natural Value of any com- modity ? What may cause it to change ? 6. When the market value of any commodity is above its nat- ural value, what ground is there for anticipating a fall? Should you expect the fall to come equally soon in all cases ? Compare, for example, apples, beef, coal, and paving-stones. 7. Are there any products whose market value is always above their natural value? Any always below? Why? 8. Explain carefully the distinction between employer's Cost of Production, and the true or Economic Cost. 9. Show that the employer's cost of production may change without any change in the true cost. 10. How should you proceed to analyze the economic cost of producing a woolen coat ? What account should you make of the loom on which the cloth was woven ? Questions and Exercises. 121 11. Explain the term "quantity of labor" as used in defining cost of production ? 12. If two articles are produced by equal quantities of labor why can we not assume, without further knowledge about them, that they will ordinarily have the same exchange value ? 13. Explain the remark that " the law of natural value is simply the just rule of equal rewards for equal sacrifices." How is the rule put in force ? 14. If one should argue that the invention of reaping-machines has benefited farmers only, how should you answer him ? 15. How is the value of building land determined ? What pro- ducts of labor have their value determined in the same general way, and why? 16. Suppose a machine invented that gives us, for half of the previous labor, an article formerly made by hand; should you expect the value of the article to fall to half of its old value. 17. Is there any connection between the value of products of skilled labor and their economic cost of production ? 18. How is the value of wool determined? Suppose the demand for mutton should increase without increase of demand for wool, how and by what steps would the value of wool be affected ? 19. In what cases are " trusts " likely to succeed in maintaining high prices ? What is necessary in order to insure permanent success ? 20. Supposing it were possible for all producers to combine effectively, what effects should you anticipate from a universal system of trusts? 21. How do you explain the fact that a diamond necklace is worth so much more than a barrel of flour, — seeing that bread is so much more necessary than jewelry ? 22. Suppose a man loses $1,000,000 by a fall in the price of wheat, show whether the world is poorer by that amount. CHAPTER XIIL OF PRICES, OB THE VALUE OF MONEY. 1. Importance of Changes in the Value of Money. — The value of money is expressed by the general level of prices. When the value of money rises the change is shown by a general fall of prices, and vice versa. Money has itself no price; a dollar is always worth a dollar, whether the exchange value of money be high or low ; but every change in the general level of prices makes each dollar worth more, or less, of other things than it was worth before. So far as the mere exchanging of products is con- cerned, it obviously makes no difference to the exchan- gers whether the prices be all high or all low. If, for example, a man has a hundred bushels of wheat to exchange for cotton cloth, it makes no difference to him whether the wheat be a dollar a bushel and the cloth ten cents a yard ; or the wheat five dollars a bushel and the cloth fifty cents a yard. It is only compara- tive prices that tell in simple exchange. If the price of wheat should change, the price of cloth remaining stationary, that would affect the values of the two articles. 122 The Value of Money. 123 But though the general level of prices is immaterial in simple exchange, it is highly important in some other ways. Much of the business of the world involves agreements to pay money in the future. All loans, especially loans for long periods, such as are represented by city, state, and national bonds, are of this character; also all contracts for the future delivery of goods at set prices. If the value of money change in the meantime, evidently the basis of the agreement is disturbed to the disadvantage of one of the parties to it. Again, the wages of laborers (including salaries of all grades) are agreed upon in money. Every general rise or fall of prices lowers or raises the real wages of all persons who work for hire. Of course the wage agree- ments may be revised; but they are never revised at once, and for mere temporary fluctuations of prices they could hardly be revised at all. 2. Market Value and Natural Value of Money. — True money is always a product of labor. Every nation has the power to choose the product of which its money shall consist. In past times there was a good deal of diversity in the money of different peoples; some used cattle, some iron, some bronze, and some silver; others used shells, others salt, and still others, tea. In modern times all civilized nations agree in using gold and silver. The essential qualities of true money are that it shall have a value of its own, that it shall be convenient, and that it shall be as little as possible exposed to fluctuations of value. 124 Political Economy. True money being a product of labor, it has, like all other products, a natural or normal value depending on the cost of producing it. Also it has, like all other products, a market value depending immediately on supply and demand, but tending in the long run to con- form to the natural value. There are, however, some notable peculiarities in the case of money which call for a special discussion of its law of value.- In the present chapter we shall confine our attention to its market value alone. 3. Meaning of the Supply of Money. — The supply of money, like the supply of every other article, is the amount of it offering in excliange for other things. But the supply of every other article is kept down by the constant drain made upon it by the purchases of consumers. The amount of it in the market at any time consists mainly of newly-made specimens. In the case of money there is little or no buying for con- sumption. We buy it {i.e. give other things in exchange for it), not intending to keep it, but to pay it away again for other things. The supply of money consists, there- fore, mostly of old pieces. The same old money is paid again and again for goods, until it becomes so worn as to need recoining. Now every time a piece of money is used in making an exchange, it counts in the supply of money quite as effectually as if it were a new piece. It follows that in ordei" to ascertain the supply of money in a country, we should have to do something more than merely to Tlie Demand for Money. 125 count the number of dollars or pounds in its currency ; we should have to take into account the number of times each dollar is used in exchange in a given period. This is called the Eapidity of Circulation of money. The rapidity with which money circulates in a country depends partly on the business arrangements and partly on the temperament of its people. We shall have occasion to discuss the subject fully a little farther on. 4. Peculiar Character of the Demand for Money. — The demand for money is also marked by two notable peculiarities. The first of these is its remarkable steadi- ness. Money being the medium for making exchanges, the demand for it is as great as the demand for all other things put together; the demand for every other thing presents itself first in the form of a demand for the money wherewith to buy it. Putting the same fact in another way, the demand for money consists of all the things offering for sale, or needing to be sold. Evidently, therefore, it depends on the total production of things, and this, as we easily see, must be slow to change. It follows that the demand for money has greater steadiness than the demand for any other thing. Changes of fashion, so powerful in other cases, have no effect on the demand for money, since they imply no change in the total product of the world's industry. Again, merely anticipated changes of supply, owing to changes in the conditions of production, can have 126 Political Kconomij. but little, influence on the demand for money. If the wheat crop threatens to be deficient, the demand for wheat increases and the value rises at once. If a new copper mine is discovered, the demand for copper falls off at once : intending buyers will not buy much at the old value, and holders of it must lower the price before a single pound of the new copper is in the market. But the demand for money does not fluctuate for such causes; it can be changed only by changing the total quantity of things for sale. To give up demanding money would be to give up trying to sell goods. Fur- ther, it would be impossible to get more money for goods this year because the supply of money is likely to be greater next year. Prices are as high already as the existing supply of money will allow them to be, on con- dition of selling things as rapidly as they are produced. The second peculiarity of the demand for money is that, beings in fact a demand for other things, it is satisfied with any substitute or representative of actual money which will answer equally well the real end in view. Now we shall see presently that men have in- vented some excellent substitutes for money, — together, unfortunately, with some very bad ones. A very small proportion of the payments made for goods in this country are now made with coin. We find mere paper evidences of the riglit to get gold and silver on de- mand a more convenient sort of currency for ordinary purposes than actual gold and silver coins. Hov) Prices are Fixed. 127 The result is that the offer of goods for sale has now become a nominal rather than a real demand for true money. It is in practice a demand for the mere right to get true money in case of need, but with a practical certainty, in most cases, that the seller will find the mere right itself entirely sulificient for his purpose. In fact, then, the real demand for money is limited to such a sum as may enable the banks and the Treasury to pay coin to every holder of the right to get coin, who chooses to exercise his right. I shall not wait in this chapter to discuss the various substitutes for money, and the peculiar effects of each. Our present task is to consider the operation of supply and demand in determining the market value of money, or the general level of prices at any given time. For the moment we shall regard as money everything that the people accept as money. Since true money and all the honest substitutes for it rise and fall in value together, we run no risk of falling into error by tempo- rarily treating the whole currency, whatever its amount and composition, as if it consisted wholly of true money. 5. How the General Level of Prices is Fixed. — The problem of the value of money, or the general level of prices, is one of considerable difficulty. In order to. master it, the student must consider carefully every point in the case. ., In the first place, it is to be remembered that things must be sold as fast, on the whole, as they are produced ; 128 Political Economy. otherwise the markets become glutted. The efforts of the producers and dealers are directed towards ol:)tain- ing for all articles the highest prices at which the whole product will sell. The producers are especially interested in having the price as high as possible. The dealers, however, must take care that the goods on hand shall move off as rapidly as new goods come for- ward from the producers. If they find products accumu- lating on their hands they must, in self-protection, set the prices lower, both when they buy and when they sell. Now, in order that exchange may keep j)ace with production, it is necessary that the amount of money demanded for the whole product of industry shall be roughly equal to the whole supply of money offering for goods. In other words, if you add together the prices of all the goods needing to be sold each week, the sum of them must be roughly equal to the amount of money the buyers are able and willing to spend in the purchase of goods each week. If, for example, the aggregate of the prices asked for the week's product be one hundred and two mill- ions, and the people have only one hundred millions to spend in buying, it is clear that about two per cent, of the goods must remain unsold. In this situation prices must fall ; that is to say, the value of money must rise. If, on the other hand, • the prices asked be ninety- eight millions, the supply of money being a hundred Ho%o Prices are Fixed. 129 millions, the stocks on the hands of the dealers will get sold faster than new goods can be found to replace them. In this case the prices must rise; that is to say, the value of money must fall. Since, however, buying and selling are only the separated halves of the general exchange of products, the prices paid are on the whole identical with the prices received. It may seem therefore that the buyers may pay as much as they receive, and that there is really no limit to the prices that might be charged and paid. This would be true if product were exchanged directly for product, using the price of each simply as a means of comparison. But where money of any kind has to be used, there is at once a question of the sufficiency of the supply of it to carry on the exchanges at a given scale of prices. No part of the money can be in two places at once. Everywhere that a payment is being made, there must be money enough to make it ; and the same money cannot be used in making another exchange until the receiver, or somebody else receiving it from or through him, uses it again in buying goods. This brings us back to the two things which deter- mine the supply of money ; the quantity of it in cir- culation and the rapidity of its circulation. The quan- tity being a simple question of the number of dollars in use, it is not likely to perplex the student. We shall consider in the next chapter the circumstances on which the quantity of money depends. The circum- 130 Political Economy. stances determining its rapidity of circulation are equally influential in fixing the general scale of prices, and are at the same time much less simple. We must there- fore try to gain some clear ideas regarding them. 6. The Movements of Money. — The movements of money in detail are exceedingly intricate, but there are certain great currents of circulation which are cre- ated and determined by the business arrangements of each country. These are not hard to follow, and they are sufficient at least to explain the meaning of "rap- idity of circulation " in its bearing on prices. In studying them the following hints may be helpful. (ft) It is most convenient here to confine our atten- tion to prices at retail. Though these are not uniform, not being fvilly under the control of competition, never- theless it is at retail that the true exchange of products is effected. The transfers of goods from the producers to wholesale merchants, and from these to the retail merchants, look towards the final sale to consumers and are designed to facilitate this. For our present purpose, prices at wholesale may be regarded as conforming to prices at retail, with an interval sufficient to give the retail merchant the ordinary rate of profit. The same principle runs back through the earlier prices in the series, till we reach the original payments for productive labor. The whole chain of prices and payments may be regarded as conforming to the level of prices at retail, with necessary intervals. {b) When money has once been used in the purchase The Movements of Money. 131 of goods for the buyer's consumption, it cannot be simi- larly used again until, in the course of business, somebody again receives it in payment for labor or waiting, and chooses to spend it in that way. If the receiver should choose to save it for paying wages to productive laborers, or to spend it in paying for non-productive services of any kind, the circulating period is likely to be longer than if he should buy goods with it himself. Again, if the receiver of the wages should in turn save it for use in hiring another man, instead of buying goods with it for himself, the circulating period is likely to be still further lengthened. (c) After each use of money in buying goods for the buyer's own consumption, the business arrangements of the country may require it to make a considerable cir- cuit before it can reach the person who is next to use it in similar buying. The money that pays for goods at retail must find its way back through all the channels by which the goods, and the materials for making them, come forward in the course of production and exchange. Some of it must go to each person whose labor or wait- ing aids in producing goods or in conveying them to the consumer. The number of hands through which it must pass in reaching the next man to spend it, and the delay at each stage of its passage, determine the length of time that must elapse between each use of money in paying for goods at retail, and the next similar use.^ 1 It may be well to state that these principles relate, not to par- ticular pieces, but to sums of money. Each dollar being the precise 132 Political Economy. {(I) It is evident at once that the circulating period is not the same for all parts of the currency. The sellers at retail spend a part of the money they receive in buy- ing things for their own use and that of their families. The money so used returns quickly to become again part of the supply acting on prices : it makes the shortest circuit that is possible. Very different is the circuit made by money which is used by the retail merchant in buying goods at wholesale, and then by the wholesale merchant in buying goods of the manufacturers, and then by the manufacturers in buying materials, and then by the producers of materials in paying wages to their labor- ers. It is clear that a sum of money always taking the short circuit could do much more buying at retail than an equal sum that should always take the long one. (c) To all except the last receiver (the one who spends it) the money may represent savings to be used in business with a view to profit. This usually requires some consideration and planning. Even if this were not so, every business man needs to keep some money by him to meet unforeseen calls. Each must therefore hold the money he receives long enough to keep his reserve of cash up to the required limit. In fact, at any given moment, the money of the world is mainly held by equivalent of every other, the individual pieces of money may ex- change places freely without affecting the result. In fact, the very form of currency used in retail transactions differs from that chiefly used in wholesale trade. In the former, notes and coins are used for the most part, whereas the larger transactions of wholesale trade are settled by the use of bank deposits. Two Functions of Money. 133 business men, either as savings awaiting investment (or re-investment) or as reserve funds to meet emergencies. Even those persons who ordinarily spend their whole income do not part with all the money they receive the very day they receive it. They must ordinarily reserve some part for current payments, until they can count on receiving more. (/) It is to be noted that money has two distinct functions to perform in its circuit, the one as a medium of exchange, the other as a vehicle for transmitting un- invested savings and for paying wages. It is highly important to keep the distinction in mind. The consumer who pays money for goods, uses it simply as a medium of exchange. The dealer, in his turn, uses in the same way whatever part of it he spends. For him, however, the sale of the goods is the close of an investment. The money represents savings, now in the free or uninvested state. Much the greater part of it he must use over again in his business. If he pay it as wages, his act is clearly not one of exchange. If he use it to buy new goods at wholesale, this again is a case of investment rather than of economic exchange. He gives free savings in return for invested capital. The same is true when the wholesale merchant buys goods of the manufacturer. By these transfers the savings released from investment by the consumer's purchases at retail, are transmitted to the producing employers, by whom they are embarked in new investments through payment as wages. In the hands of the laborers the money received as wages becomes again a mere medium of exchange. 134 Political Economy. 7. Diagram illustrating the Circuits made by Money in the ordinary course of production and exchange. ^ I e ''r"'*^% ,.^:^f. ---------- r^- "^^3 t 1 1 1 1 I iir I I I I I ^ X A i\ II M 1 p I 1 I I 1 , a v\ Iv/ J, !3 1 I '— ~I^ ^ Explanations. — At 1 the money is pair! for consumable com- modities at retail; at 2 it is paid to the wholesale dealers; at 3 to the producers of finished commodities; at 4 to the producers of materials; and at 5 to the producers of machinery.. The dealers and employers spend the portions of a, r/, <;, y, and q, in buying commodities at retail, and pay as wages the portions h, e, h, I, and 0. (The latter include salaries, fees, and payments for non- productive services as well as savings paid to productive laborers. Money paid as wages passes through a bulb.) The recipients of the wages spend the portions c,f, i, m, and r, in buying commodi- ties at retail, and save or pay as wages in other ways the portions ly, e\ //', /', and o'. The producers of materials pay the portion n Circuits Made hy Money. 135 for machinery ; and the producers of machinery the portion p for materials. Everything is a finished commodity in the sense here intended when it has reached the condition in which it is to be used and enjoyed as a reward of labor or waiting. For example, coal for house use is a finished commodity, even though coal for use in a factory is only a material. The arrows outside of the figure are intended to indicate the return movement of products of labor, for which the money is jaaid, — thus the one at the top indicates the movement of materials and machinery to the producers of finished commodities; the one at the right the movement of finished com- modities from the producers to the wholesale dealers, etc. The diagram makes no pretence of giving a complete picture of industry, or of including all the movements of money. For example, speculative trading in stocks, bonds, land, etc., makes a considerable demand on the currency ; but it may be regarded rather as keeping a certain amount of money out of use in pro- duction and exchange than as constituting a part of the true circulation. Again, no attempt is made to separate payments for transporting goods and materials from other payments ; though they do not exactly coincide in point of time with any other set of payments, we may perhaps regard them as included in the dis- bursements at wholesale. Again, no account is made of the les- sening of industrial incomes by taxes. These undoubtedly lessen somewhat the rapidity of circulation of the money drawn into public treasuries ; but unless taxes be excessive, or the proceeds be held unduly long, the proportion of the general circulation absorbed by them is small, and may be ignored. It is assumed in the diagram that all commodities pass through the hands of one, and only one, wholesale merchant. In fact, of course, many products are sold directly to the retailer by the pro- ducer, while others pass through the hands of several wholesale dealers. Perhaps the two errors may be regarded as offsetting each other, so far as the rapidity of circulation of money is con- cerned. 136 Political Economy. 8. Application of the Foregoing Principles. — Let us now suppose the currency of a country to consist of $150,000,000, distributed among the circuits of our dia- gram as indicated in the following table. Assuming for simplicity that each receiver of money holds it for a week, we group together circuits of the same length. Returning at Amount circulating. Circulating period. Corresponding supply of money for purchases at retail each week.