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The Principles of Economics

by Alfred Marshall

Book II

Some Fundamental Notions

Chapter

Introductory

! "e ha#e seen that economics is$ on the one side$ a Science

of "ealth% and$ on the other$ that part of the Social Science of

man&s action in society$ 'hich deals 'ith his Efforts to satisfy

his "ants$ in so far as the efforts and 'ants are capable of

bein( measured in terms of 'ealth$ or its (eneral representati#e$

i!e! money! "e shall be occupied durin( the (reater part of this

#olume 'ith these 'ants and efforts% and 'ith the causes by 'hich

the prices that measure the 'ants are brou(ht into e)uilibrium

'ith those that measure the efforts! For this purpose 'e shall

ha#e to study in Book III 'ealth in relation to the di#ersity of

man&s 'ants$ 'hich it has to satisfy% and in Book I* 'ealth in

relation to the di#ersity of man&s efforts by 'hich it is

produced!

But in the present Book$ 'e ha#e to in)uire 'hich of all the

thin(s that are the result of man&s efforts$ and are capable of

satisfyin( man&s 'ants$ are to be counted as "ealth% and into

'hat (roups or classes these are to be di#ided! For there is a

compact (roup of terms connected 'ith "ealth itself$ and 'ith

Capital$ the study of each of 'hich thro's li(ht on the others%

'hile the study of the 'hole to(ether is a direct continuation$

and in some respects a completion$ of that in)uiry as to the

scope and methods of economics on 'hich 'e ha#e +ust been

en(a(ed! And$ therefore$ instead of takin( 'hat may seem the more

natural course of startin( 'ith an analysis of 'ants$ and of

'ealth in direct relation to them$ it seems on the 'hole best to

deal 'ith this (roup of terms at once!

In doin( this 'e shall of course ha#e to take some account of

the #ariety of 'ants and efforts% but 'e shall not 'ant to assume

anythin( that is not ob#ious and a matter of common kno'led(e!

The real difficulty of our task lies in another direction% bein(

the result of the need under 'hich economics$ alone amon(

sciences$ lies of makin( shift 'ith a fe' terms in common use to

e,press a (reat number of subtle distinctions!

-! As Mill says./01 2 3The ends of scientific classification

are best ans'ered 'hen the ob+ ects are formed into (roups

respectin( 'hich a (reater number of (eneral propositions can be

made$ and those propositions more important$ than those 'hich

could be made respectin( any other (roups into 'hich the same

thin(s could be distributed!3 But 'e meet at startin( 'ith the

difficulty that those propositions 'hich are the most important

in one sta(e of economic de#elopment$ are not unlikely to be

amon( the least important in another$ if indeed they apply at

all!

In this matter economists ha#e much to learn from the recent

e,periences of biolo(y. and 4ar'in&s profound discussion of the

)uestion/-01 thro's a stron( li(ht on the difficulties before us!

5e points out that those parts of the structure 'hich determine

the habits of life and the (eneral place of each bein( in the

economy of nature$ are as a rule not those 'hich thro' most li(ht

on its ori(in$ but those 'hich thro' least! The )ualities 'hich a

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breeder or a (ardener notices as eminently adapted to enable an

animal or a plant to thri#e in its en#ironment$ are for that #ery

reason likely to ha#e been de#eloped in comparati#ely recent

times! And in like manner those properties of an economic

institution 'hich play the most important part in fittin( it for

the 'ork 'hich it has to do no'$ are for that #ery reason likely

to be in a (reat measure of recent (ro'th! Instances are found in many of the relations bet'een employer

and employed$ bet'een middleman and producer$ bet'een bankers and

their t'o classes of clients$ those from 'hom they borro' and

those to 'hom they lend! The substitution of the term 3interest3

for 3usury3 corresponds to a (eneral chan(e in the character of

loans$ 'hich has (i#en an entirely ne' key2note to our analysis

and classification of the different elements into 'hich the cost

of production of a commodity may be resol#ed! A(ain$ the (eneral

scheme of di#ision of labour into skilled and unskilled is

under(oin( a (radual chan(e% the scope of the term 3rent3 is

bein( broadened in some directions and narro'ed in others% and so

on!

But on the other hand 'e must keep constantly in mind the

history of the terms 'hich 'e use! For$ to be(in 'ith$ this

history is important for its o'n sake% and because it thro's side

li(hts on the history of the economic de#elopment of society! And

further$ e#en if the sole purpose of our study of economics 'ere

to obtain kno'led(e that 'ould (uide us in the attainment of

immediate practical ends$ 'e should yet be bound to keep our use

of terms as much as possible in harmony 'ith the traditions of

the past% in order that 'e mi(ht be )uick to percei#e the

indirect hints and the subtle and subdued 'arnin(s$ 'hich the

e,periences of our ancestors offer for our instruction!

6! 7ur task is difficult! In physical sciences indeed$

'hene#er it is seen that a (roup of thin(s ha#e a certain set of

)ualities in common$ and 'ill often be spoken of to(ether$ they

are formed into a class 'ith a special name% and as soon as a ne'

notion emer(es$ a ne' technical term is in#ented to represent it!

But economics cannot #enture to follo' this e,ample! Its

reasonin(s must be e,pressed in lan(ua(e that is intelli(ible to

the (eneral public% it must therefore endea#our to conform itself

to the familiar terms of e#eryday life$ and so far as possible

must use them as they are commonly used!

In common use almost e#ery 'ord has many shades of meanin($

and therefore needs to be interpreted by the conte,t! And$ as

Ba(ehot has pointed out$ e#en the most formal 'riters on economic

science are compelled to follo' this course% for other'ise they

'ould not ha#e enou(h 'ords at their disposal! But unfortunately

they do not al'ays a#o' that they are takin( this freedom%

sometimes perhaps they are scarcely e#en a'are of the fact

themsel#es! The bold and ri(id definitions$ 'ith 'hich their

e,positions of the science be(in$ lull the reader into a false

security! Not bein( 'arned that he must often look to the conte,t

for a special interpretation clause$ he ascribes to 'hat he reads

a meanin( different from that 'hich the 'riters had in their o'n

minds% and perhaps misinterprets them and accuses them of folly

of 'hich they had not been (uilty!/601

A(ain$ most of the chief distinctions marked by economic

terms are differences not of kind but of de(ree! At first si(ht

they appear to be differences of kind$ and to ha#e sharp outlines

'hich can be clearly marked out% but a more careful study has

sho'n that there is no real breach of continuity! It is a

remarkable fact that the pro(ress of economics has disco#ered

hardly any ne' real differences in kind$ 'hile it is continually

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resol#in( apparent differences in kind into differences in

de(ree! "e shall meet 'ith many instances of the e#il that may be

done by attemptin( to dra' broad$ hard and fast lines of

di#ision$ and to formulate definite propositions 'ith re(ard to

differences bet'een thin(s 'hich nature has not separated by any

such lines!

8! "e must then analy9e carefully the real characteristics ofthe #arious thin(s 'ith 'hich 'e ha#e to deal% and 'e shall thus

(enerally find that there is some use of each term 'hich has

distinctly (reater claims than any other to be called its leadin(

use$ on the (round that it represents a distinction that is more

important for the purposes of modern science than any other that

is in harmony 'ith ordinary usa(e! This may be laid do'n as the

meanin( to be (i#en to the term 'hene#er nothin( to the contrary

is stated or implied by the conte,t! "hen the term is 'anted to

be used in any other sense$ 'hether broader or narro'er$ the

chan(e must be indicated!

E#en amon( the most careful thinkers there 'ill al'ays remain

differences of opinion as to the e,act places in 'hich some at

least of the lines of definition should be dra'n! The )uestions

at issue must in (eneral be sol#ed by +ud(ments as to the

practical con#enience of different courses% and such +ud(ments

cannot al'ays be established or o#erthro'n by scientific

reasonin(. there must remain a mar(in of debatable (round! But

there is no such mar(in in the analysis itself. if t'o people

differ 'ith re(ard to that$ they cannot both be ri(ht! And the

pro(ress of the science may be e,pected (radually to establish

this analysis on an impre(nable basis!/801

N7TES.

! :o(ic$ Bk! I*$ ch! *II$ Par! -!

-! 7ri(in of Species$ ch! ;I*!

6! "e ou(ht 3to 'rite more as 'e do in common life$ 'here the

conte,t is a sort of une,pressed &interpretation clause&% only as

in Political Economy 'e ha#e more difficult thin(s to speak of

than in ordinary con#ersation$ 'e must take more care$ (i#e more

'arnin( of any chan(e% and at times 'rite out &the interpretation

clause& for that pa(e or discussion lest there should be any

mistake! I kno' that this is difficult and delicate 'ork% and all

that I ha#e to say in defence of it is that in practice it is

safer than the competin( plan of infle,ible definitions! Any one

'ho tries to e,press #arious meanin(s on comple, thin(s 'ith a

scanty #ocabulary of fastened senses$ 'ill find that his style

(ro's cumbrous 'ithout bein( accurate$ that he has to

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8! "hen it is 'anted to narro' the meanin( of a term /that is$ in

lo(ical lan(ua(e$ to diminish its e,tension by increasin( its

intension1$ a )ualifyin( ad+ecti#e 'ill (enerally suffice$ but a

chan(e in the opposite direction cannot as a rule be so simply

made! Contests as to definitions are often of this kind. 2 A and

B are )ualities common to a (reat number of thin(s$ many of thesethin(s ha#e in addition the )uality C$ and a(ain many the )uality

4$ 'hilst some ha#e both C and 4! It may then be ar(ued that on

the 'hole it 'ill be best to define a term so as to include all

thin(s 'hich ha#e the )ualities A and B$ or only those 'hich ha#e

the )ualities A$ B$ C$ or only those 'hich ha#e the )ualities A$

B$ 4% or only those 'hich ha#e A$ B$ C$ 4! The decision bet'een

these #arious courses must rest on considerations of practical

con#enience$ and is a matter of far less importance than a

careful study of the )ualities A$ B$ C$ 4$ and of their mutual

relations! But unfortunately this study has occupied a much

smaller space in En(lish economics than contro#ersies as to

definitions% 'hich ha#e indeed occasionally led indirectly to the

disco#ery of scientific truth$ but al'ays by roundabout routes$

and 'ith much 'aste of time and labour!

Chapter -

"ealth

! All 'ealth consists of desirable thin(s% that is$ thin(s 'hich

satisfy human 'ants directly or indirectly. but not all desirable

thin(s are reckoned as 'ealth! The affection of friends$ for

instance$ is an important element of 'ellbein($ but it is not

reckoned as 'ealth$ e,cept by a poetic licence! :et us then be(in

by classifyin( desirable thin(s$ and then consider 'hich of them

should be accounted as elements of 'ealth!

In the absence of any short term in common use to represent

all desirable thin(s$ or thin(s that satisfy human 'ants$ 'e may

use the term @oods for that purpose!

4esirable thin(s or (oods are Material$ or Personal and

Immaterial! Material (oods consist of useful material thin(s$ and

of all ri(hts to hold$ or use$ or deri#e benefits from material

thin(s$ or to recei#e them at a future time! Thus they include

the physical (ifts of nature$ land and 'ater$ air and climate%

the products of a(riculture$ minin($ fishin($ and manufacture%

buildin(s$ machinery$ and implements% mort(a(es and other bonds%

shares in public and pri#ate companies$ all kinds of monopolies$

patent2ri(hts$ copyri(hts% also ri(hts of 'ay and other ri(hts of

usa(e! :astly$ opportunities of tra#el$ access to (ood scenery$

museums$ etc! are the embodiment of material facilities$ e,ternal

to a man% thou(h the faculty of appreciatin( them is internal and

personal!

A man&s non2material (oods fall into t'o classes! 7ne

consists of his o'n )ualities and faculties for action and for

en+oyment% such for instance as business ability$ professional

skill$ or the faculty of deri#in( recreation from readin( or

music! All these lie 'ithin himself and are called internal! The

second class are called e,ternal because they consist of

relations beneficial to him 'ith other people! Such$ for

instance$ 'ere the labour dues and personal ser#ices of #arious

kinds 'hich the rulin( classes used to re)uire from their serfs

and other dependents! But these ha#e passed a'ay% and the chief

instances of such relations beneficial to their o'ner no'2a2days

are to be found in the (ood 'ill and business connection of

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traders and professional men!/01

A(ain$ (oods may be transferable or non2transferable! Amon(

the latter are to be classed a person&s )ualities and faculties

for action and en+oyment /i!e! his internal (oods1% also such

part of his business connection as depends on personal trust in

him and cannot be transferred$ as part of his #endible (ood 'ill%

also the ad#anta(es of climate$ li(ht$ air$ and his pri#ile(es ofciti9enship and ri(hts and opportunities of makin( use of public

property!/-01

Those (oods are free$ 'hich are not appropriated and are

afforded by Nature 'ithout re)uirin( the effort of man! The land

in its ori(inal state 'as a free (ift of nature! But in settled

countries it is not a free (ood from the point of #ie' of the

indi#idual! "ood is still free in some Bra9ilian forests! The

fish of the sea are free (enerally. but some sea fisheries are

+ealously (uarded for the e,clusi#e use of members of a certain

nation$ and may be classed as national property! 7yster beds that

ha#e been planted by man are not free in any sense% those that

ha#e (ro'n naturally are free in e#ery sense if they are not

appropriated% if they are pri#ate property they are still free

(ifts from the point of #ie' of the nation! But$ since the nation

has allo'ed its ri(hts in them to become #ested in pri#ate

persons$ they are not free from the point of #ie' of the

indi#idual% and the same is true of pri#ate ri(hts of fishin( in

ri#ers! But 'heat (ro'n on free land and the fish that ha#e been

landed from free fisheries are not free. for they ha#e been

ac)uired by labour!

-! "e may no' pass to the )uestion 'hich classes of a man&s

(oods are to be reckoned as part of his 'ealth! The )uestion is

one as to 'hich there is some difference of opinion$ but the

balance of ar(ument as 'ell as of authority seems clearly to

incline in fa#our of the follo'in( ans'er!

"hen a man&s 'ealth is spoken of simply$ and 'ithout any

interpretation clause in the conte,t$ it is to be taken to be his

stock of t'o classes of (oods!

In the first class are those material (oods to 'hich he has

/by la' or custom1 pri#ate ri(hts of property$ and 'hich are

therefore transferable and e,chan(eable! These it 'ill be

remembered include not only such thin(s as land and houses$

furniture and machinery$ and other material thin(s 'hich may be

in his sin(le pri#ate o'nership$ but also any shares in public

companies$ debenture bonds$ mort(a(es and other obli(ations 'hich

he may hold re)uirin( others to pay money or (oods to him! 7n the

other hand$ the debts 'hich he o'es to others may be re(arded as

ne(ati#e 'ealth% and they must be subtracted from his (ross

possessions before his true net 'ealth can be found!

Ser#ices and other (oods$ 'hich pass out of e,istence in the

same instant that they come into it$ are$ of course$ not part of

the stock of 'ealth!/601

In the second class are those immaterial (oods 'hich belon(

to him$ are e,ternal to him$ and ser#e directly as the means of

enablin( him to ac)uire material (oods! Thus it e,cludes all his

o'n personal )ualities and faculties$ e#en those 'hich enable him

to earn his li#in(% because they are internal! And it e,cludes

his personal friendships$ in so far as they ha#e no direct

business #alue! But it includes his business and professional

connections$ the or(ani9ation of his business$ and 2 'here such

thin(s e,ist 2 his property in sla#es$ in labour dues$ etc!

This use of the term "ealth is in harmony 'ith the usa(e of

ordinary life. and$ at the same time$ it includes those (oods$

and only those$ 'hich come clearly 'ithin the scope of economic

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science$ as defined in Book I% and 'hich may therefore be called

economic (oods! For it includes all those thin(s$ e,ternal to a

man$ 'hich /i1 belon( to him$ and do not belon( e)ually to his

nei(hbours$ and therefore are distinctly his% and 'hich /ii1 are

directly capable of a money measure$ 2 a measure that represents

on the one side the efforts and sacrifices by 'hich they ha#e

been called into e,istence$ and$ on the other$ the 'ants 'hichthey satisfy!/801

6! A broader #ie' of 'ealth may indeed be taken for some

purposes% but then recourse must be had to a special

interpretation clause$ to pre#ent confusion! Thus$ for instance$

the carpenter&s skill is as direct a means of enablin( him to

satisfy other people&s material 'ants$ and therefore indirectly

his o'n$ as are the tools in his 'ork2basket% and perhaps it may

be con#enient to ha#e a term 'hich 'ill include it as part of

'ealth in a broader use! Pursuin( the lines indicated by Adam

Smith$/01 and follo'ed by most continental economists$ 'e may

define personal 'ealth so as to include all those ener(ies$

faculties$ and habits 'hich directly contribute to makin( people

industrially efficient% to(ether 'ith those business connections

and associations of any kind$ 'hich 'e ha#e already reckoned as

part of 'ealth in the narro'er use of the term! Industrial

faculties ha#e a further claim to be re(arded as economic in the

fact that their #alue is as a rule capable of some sort of

indirect measurement!/01

The )uestion 'hether it is e#er 'orth 'hile to speak of them

as 'ealth is merely one of con#enience$ thou(h it has been much

discussed as if it 'ere one of principle!

Confusion 'ould certainly be caused by usin( the term

3'ealth3 by itself 'hen 'e desire to include a person&s

industrial )ualities! 3"ealth3 simply should al'ays mean e,ternal

'ealth only! But little harm$ and some (ood seems likely to arise

from the occasional use of the phrase 3 material and personal

'ealth!3

8! But 'e still ha#e to take account of those material (oods

'hich are common to him 'ith his nei(hbours% and 'hich therefore

it 'ould be a needless trouble to mention 'hen comparin( his

'ealth 'ith theirs% thou(h they may be important for some

purposes$ and especially for comparisons bet'een the economic

conditions of distant places or distant times!

These (oods consist of the benefits 'hich he deri#es from

li#in( in a certain place at a certain time$ and bein( a member

of a certain state or community% they include ci#il and military

security$ and the ri(ht and opportunity to make use of public

property and institutions of all kinds$ such as roads$ (asli(ht$

etc!$ and ri(hts to +ustice or to a free education! The to'nsman

and the countryman ha#e each of them for nothin( many ad#anta(es

'hich the other either cannot (et at all$ or can (et only at

(reat e,pense! 7ther thin(s bein( e)ual$ one person has more real

'ealth in its broadest sense than another$ if the place in 'hich

the former li#es has a better climate$ better roads$ better

'ater$ more 'holesome draina(e% and a(ain better ne'spapers$

books$ and places of amusement and instruction! 5ouse2room$ food

and clothin($ 'hich 'ould be insufficient in a cold climate$ may

be abundant in a 'arm climate. on the other hand$ that 'armth

'hich lessens men&s physical needs$ and makes them rich 'ith but

a sli(ht pro#ision of material 'ealth$ makes them poor in the

ener(y that procures 'ealth!

Many of these thin(s are collecti#e (oods! i!e! (oods$ 'hich

are not in pri#ate o'nership! And this brin(s us to consider

'ealth from the social$ as opposed to the indi#idual point of

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#ie'!

! :et us then look at those elements of the 'ealth of a

nation 'hich are commonly i(nored 'hen estimatin( the 'ealth of

the indi#iduals composin( it! The most ob#ious forms of such

'ealth are public material property of all kinds$ such as roads

and canals$ buildin(s and parks$ (as'orks and 'ater'orks% thou(h

unfortunately many of them ha#e been secured not by publicsa#in(s$ but by public borro'in(s$ and there is the hea#y

3ne(ati#e3 'ealth of a lar(e debt to be set a(ainst them!

But the Thames has added more to the 'ealth of En(land than

all its canals$ and perhaps e#en than all its railroads! And

thou(h the Thames is a free (ift of nature /e,cept in so far as

its na#i(ation has been impro#ed1$ 'hile the canal is the 'ork of

man$ yet 'e ou(ht for many purposes to reckon the Thames a part

of En(land&s 'ealth!

@erman economists often lay stress on the non2material

elements of national 'ealth% and it is ri(ht to do this in some

problems relatin( to national 'ealth$ but not in all! Scientific

kno'led(e indeed$ 'here#er disco#ered$ soon becomes the property

of the 'hole ci#ili9ed 'orld$ and may be considered as

cosmopolitan rather than as specially national 'ealth! The same

is true of mechanical in#entions and of many other impro#ements

in the arts of production% and it is true of music! But those

kinds of literature 'hich lose their force by translation$ may be

re(arded as in a special sense the 'ealth of those nations in

'hose lan(ua(e they are 'ritten! And the or(ani9ation of a free

and 'ell2ordered State is to be re(arded for some purposes as an

important element of national 'ealth!

But national 'ealth includes the indi#idual as 'ell as the

collecti#e property of its members! And in estimatin( the

a((re(ate sum of their indi#idual 'ealth$ 'e may sa#e some

trouble by omittin( all debts and other obli(ations due to one

member of a nation from another! For instance$ so far as the

En(lish national debt and the bonds of an En(lish rail'ay are

o'ned 'ithin the nation$ 'e can adopt the simple plan of countin(

the rail'ay itself as part of the national 'ealth$ and ne(lectin(

rail'ay and (o#ernment bonds alto(ether! But 'e still ha#e to

deduct for those bonds etc! issued by the En(lish @o#ernment or

by pri#ate En(lishmen$ and held by forei(ners% and to add for

those forei(n bonds etc! held by En(lishmen!/=01

Cosmopolitan 'ealth differs from national 'ealth much as that

differs from indi#idual 'ealth! In reckonin( it$ debts due from

members of one nation to those of another may con#eniently be

omitted from both sides of the account! A(ain$ +ust as ri#ers are

important elements of national 'ealth$ the ocean is one of the

most #aluable properties of the 'orld! The notion of cosmopolitan

'ealth is indeed nothin( more than that of national 'ealth

e,tended o#er the 'hole area of the (lobe!

Indi#idual and national ri(hts to 'ealth rest on the basis of

ci#il and international la'$ or at least of custom that has the

force of la'! An e,hausti#e in#esti(ation of the economic

conditions of any time and place re)uires therefore an in)uiry

into la' and custom% and economics o'es much to those 'ho ha#e

'orked in this direction! But its boundaries are already 'ide%

and the historical and +uridical bases of the conceptions of

property are #ast sub+ ects 'hich may best be discussed in

separate treatises!

! The notion of *alue is intimately connected 'ith that of

"ealth% and a little may be said about it here! 3The 'ord #alue3

says Adam Smith 3has t'o different meanin(s$ and sometimes

e,presses the utility of some particular ob+ect and sometimes the

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po'er of purchasin( other (oods 'hich the possession of that

ob+ect con#eys!3 But e,perience has sho'n that it is not 'ell to

use the 'ord in the former sense!

The #alue$ that is the e,chan(e #alue$ of one thin( in terms

of another at any place and time$ is the amount of that second

thin( 'hich can be (ot there and then in e,chan(e for the first!

Thus the term #alue is relati#e$ and e,presses the relationbet'een t'o thin(s at a particular place and time!

Ci#ili9ed countries (enerally adopt (old or sil#er or both as

money! Instead of e,pressin( the #alues of lead and tin$ and

'ood$ and corn and other thin(s in terms of one another$ 'e

e,press them in terms of money in the first instance% and call

the #alue of each thin( thus e,pressed its price! If 'e kno' that

a ton of lead 'ill e,chan(e for fifteen so#erei(ns at any place

and time$ 'hile a ton of tin 'ill e,chan(e for ninety so#erei(ns$

'e say that their prices then and there are and ?D

respecti#ely$ and 'e kno' that the #alue of a ton of tin in terms

of lead is si, tons then and there!

The price of e#ery thin( rises and falls from time to time

and place to place% and 'ith e#ery such chan(e the purchasin(

po'er of money chan(es so far as that thin( (oes! If the

purchasin( po'er of money rises 'ith re(ard to some thin(s$ and

at the same time falls e)ually 'ith re(ard to e)ually important

thin(s$ its (eneral purchasin( po'er /or its po'er of purchasin(

thin(s in (eneral1 has remained stationary! This phrase conceals

some difficulties$ 'hich 'e must study later on! But mean'hile 'e

may take it in its popular sense$ 'hich is sufficiently clear and

'e may throu(hout this #olume ne(lect possible chan(es in the

(eneral purchasin( po'er of money! Thus the price of anythin(

'ill be taken as representati#e of its e,chan(e #alue relati#ely

to thin(s in (eneral$ or in other 'ords as representati#e of its

(eneral purchasin( po'er!/>01

But if in#entions ha#e increased man&s po'er o#er nature #ery

much$ then the real #alue of money is better measured for some

purposes in labour than in commodities! This difficulty ho'e#er

'ill not much affect our 'ork in the present #olume$ 'hich is

only a study of the 3Foundations3 of economics!

N7TES.

! For$ in the 'ords in 'hich 5ermann be(ins his masterly

analysis of 'ealth$ 3Some @oods are internal$ others e,ternal$ to

the indi#idual! An internal (ood is that 'hich he finds in

himself (i#en to him by nature$ or 'hich he educates in himself

by his o'n free action$ such as muscular stren(th$ health$ mental

attainments! E#erythin( that the outer 'orld offers for the

satisfaction of his 'ants is an e,ternal (ood to him!3

-! The abo#e classification of (oods may be e,pressed thus.

@oods are. ! e,ternal a! material i! transferable

ii! non2transferable

b! personal i! transferable

ii! non2transferable

-! internal2personal2non2transferable

Another arran(ement is more con#enient for some purposes.

@oods are. ! material2e,ternal i! transferable

ii! non2transferable

-! personal a! e,ternal i! transferable

ii! non2transferable

b! internal2non2transferable

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6! That part of the #alue of the share in a tradin( company 'hich

is due to the personal reputation and connection of those 'ho

conduct its affairs ou(ht properly to come under the ne,t head as

e,ternal personal (oods! But this point is not of much practical

importance!

8! It is not implied that the o'ner of transferable (oods$ if he

transferred them$ could al'ays reali9e the 'hole money #alue$

'hich they ha#e for him! A 'ell2fittin( coat$ for instance$ may

be 'orth the price char(ed for it by an e,pensi#e tailor to its

o'ner$ because he 'ants it and cannot (et it made for less. but

he could not sell it for half that sum! The successful financier

'ho has spent D$DDD on ha#in( a house and (rounds made to suit

his o'n special fancy$ is from one point of #ie' ri(ht in

reckonin( them in the in#entory of his property at their cost

price. but$ should he fail$ they 'ill not form an asset to his

creditors of anythin( like that #alue!

And in the same 'ay from one point of #ie' 'e may count the

business connection of the solicitor or physician$ the merchant

or the manufacturer$ at the full e)ui#alent of the income he

'ould lose if he 'ere depri#ed of it% 'hile yet 'e must reco(ni9e

that its e,chan(e #alue$ i!e! the #alue 'hich he could (et for it

by sellin( it$ is much less than that!

! Comp! "ealth of Nations$ Bk! II$ ch! II!

! 3The bodies of men are 'ithout doubt the most #aluable

treasure of a country$3 said 4a#enant in the se#enteenth century%

and similar phrases h#e been common 'hene#er the trend of

political de#elopments has made men an,ious that the populations

should increase fast!

=! The #alue of a business may be to some e,tent due to its

ha#in( a monopoly$ either a complete monopoly$ secured perhaps by

a patent% or a partial monopoly$ o'in( to its 'ares bein( better

kno'n than others 'hich are really e)ually (ood% and in so far as

this is the case the business does not add to the real 'ealth of

the nation! If the monopoly 'ere broken do'n$ the diminution of

national 'ealth due to the disappearance of its #alue 'ould

(enerally be more than made up$ partly by the increased #alue of

ri#al businesses$ and partly by the increased purchasin( po'er of

the money representin( the "ealth of other members of the

community! /It should$ ho'e#er$ be added that in some e,ceptional

cases$ the price of a commodity may be lo'ered in conse)uence of

its production bein( monopoli9ed. but such cases are #ery rare$

and may be ne(lected for the present!1

A(ain$ business connections and trade reputations add to the

national 'ealth$ only in so far as they brin( purchasers into

relation 'ith those producers 'ho 'ill meet their real 'ants most

fully for a (i#en price% or in other 'ords$ only in so far as

they increase the e,tent to 'hich the efforts of the community as

a 'hole meet the 'ants of the community as a 'hole! Ne#ertheless

'hen 'e are estimatin( national 'ealth$ not directly but

indirectly as the a((re(ate of indi#idual 'ealth$ 'e must allo'

for these businesses at their full #alue$ e#en thou(h this partly

consists of a monopoly 'hich is not used for the public benefit!

For the in+ury they do to ri#al producers 'as allo'ed for in

countin( up the #alues of the businesses of those ri#als% and the

in+ury done to consumers by raisin( the price of the produce$

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'hich they buy$ 'as allo'ed for in reckonin( the purchasin( po'er

of their means$ so far as this particular commodity is concerned!

A special case of this is the or(ani9ation of credit! It

increases the efficiency of production in the country$ and thus

adds to national 'ealth! And the po'er of obtainin( credit is a

#aluable asset to any indi#idual trader! If$ ho'e#er$ any

accident should dri#e him out of business$ the in+ury to national'ealth is somethin( less than the 'hole #alue of that asset%

because some part at least of the business$ 'hich he 'ould ha#e

done$ 'ill no' be done by others 'ith the aid of some part at

least of the capital 'hich he 'ould ha#e borro'ed!

There are similar difficulties as to ho' far money is to be

reckoned as part of national 'ealth% but to treat them thorou(hly

'ould re)uire us to anticipate a (ood deal of the theory of

money!

>! As Cournot points out /Principes Mathemati)ues de la Theorie

des ichesses$ ch! II1$ 'e (et the same sort of con#enience from

assumin( the e,istence of a standard of uniform purchasin( po'er

by 'hich to measure #alue$ that astronomers do by assumin( that

there is a 3mean sun3 'hich crosses the meridian at uniform

inter#als$ so that the clock can keep pace 'ith it% 'hereas the

actual sun crosses the meridian sometimes before and sometimes

after noon as sho'n by the clock!

Chapter 6

Production$ Consumption$ :abour$ Necessaries

! Man cannot create material thin(s! In the mental and moral

'orld indeed he may produce ne' ideas% but 'hen he is said to

produce material thin(s$ he really only produces utilities% or in

other 'ords$ his efforts and sacrifices result in chan(in( the

form or arran(ement of matter to adapt it better for the

satisfaction of 'ants! All that he can do in the physical 'orld

is either to read+ust matter so as to make it more useful$ as

'hen he makes a lo( of 'ood into a table% or to put it in the 'ay

of bein( made more useful by nature$ as 'hen he puts seed 'here

the forces of nature 'ill make it burst out into life!/01

It is sometimes said that traders do not produce. that 'hile

the cabinet2maker produces furniture$ the furnituredealer merely

sells 'hat is already produced! But there is no scientific

foundation for this distinction! They both produce utilities$ and

neither of them can do more. the furniture2dealer mo#es and

rearran(es matter so as to make it more ser#iceable than it 'as

before$ and the carpenter does nothin( more! The sailor or the

rail'ay2man 'ho carries coal abo#e (round produces it$ +ust as

much as the miner 'ho carries it under(round% the dealer in fish

helps to mo#e on fish from 'here it is of comparati#ely little

use to 'here it is of (reater use$ and the fisherman does no

more! It is true that there are often more traders than are

necessary% and that$ 'hene#er that is the case$ there is a 'aste!

But there is also 'aste if there are t'o men to a plou(h 'hich

can be 'ell 'orked by one man% in both cases all those 'ho are at

'ork produce$ thou(h they may produce but little! Some 'riters

ha#e re#i#ed the medie#al attacks on trade on the (round that it

does not produce! But they ha#e not aimed at the ri(ht mark! They

should ha#e attacked the imperfect or(ani9ation of trade$

particularly of retail trade!/-01

Consumption may be re(arded as ne(ati#e production! ust as

man can produce only utilities$ so he can consume nothin( more!

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5e can produce ser#ices and other immaterial products$ and he can

consume them! But as his production of material products is

really nothin( more than a rearran(ement of matter 'hich (i#es it

ne' utilities% so his consumption of them is nothin( more than a

disarran(ement of matter$ 'hich diminishes or destroys its

utilities! 7ften indeed 'hen he is said to consume thin(s$ he

does nothin( more than to hold them for his use$ 'hile$ as Seniorsays$ they 3are destroyed by those numerous (radual a(ents 'hich

'e call collecti#ely time3!/601 As the 3producer3 of 'heat is he

'ho puts seed 'here nature 'ill make it (ro'$ so the 3consumer3

of pictures$ of curtains$ and e#en of a house or a yacht does

little to 'ear them out himself% but he uses them 'hile time

'astes them!

Another distinction to 'hich some prominence has been (i#en$

but 'hich is #a(ue and perhaps not of much practical use$ is that

bet'een consumers& (oods /called also consumption (oods$ or a(ain

(oods of the first order1$ such as food$ clothes$ etc!$ 'hich

satisfy 'ants directly on the one hand% and$ on the other hand$

producers& (oods /called also production (oods$ or a(ain

instrumental$ or a(ain intermediate (oods1$ such as plou(hs and

looms and ra' cotton$ 'hich satisfy 'ants indirectly by

contributin( to'ards the production of the first class of

(oods!/801

-! All labour is directed to'ards producin( some effect! For

thou(h some e,ertions are taken merely for their o'n sake$ as

'hen a (ame is played for amusement$ they are not counted as

labour! "e may define labour as any e,ertion of mind or body

under(one partly or 'holly 'ith a #ie' to some (ood other than

the pleasure deri#ed directly from the 'ork!/01 And if 'e had to

make a fresh start it 'ould be best to re(ard all labour as

producti#e e,cept that 'hich failed to promote the aim to'ards

'hich it 'as directed$ and so produced no utility! But in all the

many chan(es 'hich the meanin( of the 'ord 3 producti#e$$ has

under(one$ it has had special reference to stored2up 'ealth$ to

the comparati#e ne(lect and sometimes e#en to the e,clusion of

immediate and transitory en+oyment%/01 and an almost unbroken

tradition compels us to re(ard the central notion of the 'ord as

relatin( to the pro#ision for the 'ants of the future rather than

those of the present! It is true that all 'holesome en+oyments$

'hether lu,urious or not$ are le(itimate ends of action both

public and pri#ate% and it is true that the en+oyment of lu,uries

affords an incenti#e to e,ertion$ and promotes pro(ress in many

'ays! But if the efficiency and ener(y of industry are the same$

the true interest of a country is (enerally ad#anced by the

subordination of the desire for transient lu,uries to the

attainment of those more solid and lastin( resources 'hich 'ill

assist industry in its future 'ork$ and 'ill in #arious 'ays tend

to make life lar(er! This (eneral idea has been in solution$ as

it 'ere$ in all sta(es of economic theory% and has been

precipitated by different 'riters into #arious hard and fast

distinctions by 'hich certain trades ha#e been marked off as

producti#e and certain others as unproducti#e!

For instance$ many 'riters e#en of recent times ha#e adhered

to Adam Smith&s plan of classin( domestic ser#ants as

unproducti#e! There is doubtless in many lar(e houses a

superabundance of ser#ants$ some of 'hose ener(ies mi(ht 'ith

ad#anta(e to the community be transferred to other! uses! but the

same is true of the (reater part of those 'ho earn their

li#elihood by distillin( 'hisky% and yet no economist has

proposed to call them unproducti#e! There is no distinction in

character bet'een the 'ork of the baker 'ho pro#ides bread for a

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family$ and that of the cook 'ho boils potatoes! If the baker

should be a confectioner$ or fancy baker$ it is probable that he

spends at least as much of his time as the domestic cook does$ on

labour that is unproducti#e in the popular sense of pro#idin(

unnecessary en+ oyments!

"hene#er 'e use the 'ord Producti#e by itself$ it is to be

understood to mean producti#e of the means of production$ and ofdurable sources of en+oyment! But it is a slippery term$ and

should not be used 'here precision is needed!/=01

If e#er 'e 'ant to use it in a different sense$ 'e must say

so. for instance 'e may speak of labour as producti#e of

necessaries$ etc!

Producti#e consumption$ 'hen employed as a technical term$ is

commonly defined as the use of 'ealth in the production of

further 'ealth% and it should properly include not all the

consumption of producti#e 'orkers$ but only that 'hich is

necessary for their efficiency! The term may perhaps be useful in

studies of the accumulation of material 'ealth! But it is apt to

mislead! For consumption is the end of production% and all

'holesome consumption is producti#e of benefits$ many of the most

'orthy of 'hich do not directly contribute to the production of

material 'ealth!/>01

6! This brin(s us to consider the term Necessaries! It is

common to distin(uish necessaries$ comforts$ and lu,uries% the

first class includin( all thin(s re)uired to meet 'ants 'hich

must be satisfied$ 'hile the latter consist of thin(s that meet

'ants of a less ur(ent character! But here a(ain there is a

troublesome ambi(uity! "hen 'e say that a 'ant must be satisfied$

'hat are the conse)uences 'hich 'e ha#e in #ie' if it is not

satisfiedG 4o they include deathG 7r do they e,tend only to the

loss of stren(th and #i(ourG In other 'ords$ are necessaries the

thin(s 'hich are necessary for life$ or those 'hich are necessary

for efficiencyG

The term Necessaries$ like the term Producti#e$ has been used

elliptically$ the sub+ect to 'hich it refers bein( left to be

supplied by the reader% and since the implied sub+ect has #aried$

the reader has often supplied one 'hich the 'riter did not

intend$ and thus misunderstood his drift! In this$ as in the

precedin( case$ the chief source of confusion can be remo#ed by

supplyin( e,plicitly in e#ery critical place that 'hich the

reader is intended to undsertand!

The older use of the term Necessaries 'as limited to those

thin(s 'hich 'ere sufficient to enable the labourers$ taken one

'ith another$ to support themsel#es and their families! Adam

Smith and the more careful of his follo'ers obser#ed indeed

#ariations in the standard of comfort and 3decency3% and they

reco(ni9ed that differences of climate and differences of custom

make thin(s necessary in some cases$ 'hich are superfluous in

others!/?01 But Adam Smith 'as influenced by reasonin(s of the

Physiocrats. they 'ere based on the condition ofthe French people

in the ei(hteenth century$ most of 'hom had no notion of any

necessaries beyond those 'hich 'ere re)uired for mere e,istence!

In happier times$ ho'e#er$ a more careful analysis has made it

e#ident that there is for each rank of industry$ at any time and

place$ a more or less clearly defined income 'hich is necessary

for merely sustainin( its members% 'hile there is another and

lar(er income 'hich is necessary for keepin( it in full

efficiency!/D01

It may be true that the 'a(es of any industrial class mi(ht

ha#e sufficed to maintain a hi(her efficiency$ if they had been

spent 'ith perfect 'isdom! But e#ery estimate of necessaries must

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be relati#e to a (i#en place and time% and unless there be a

special interpretation clause to the contrary$ it may be assumed

that the 'a(es 'ill be spent 'ith +ust that amount of 'isdom$

forethou(ht$ and unselfishness$ 'hich pre#ails in fact amon( the

industrial class under discussion! "ith this understandin( 'e may

say that the income of any class in the ranks of industry is

belo' its necessary le#el$ 'hen any increase in their income'ould in the course of time produce a more than proportionate

increase in their efficiency! Consumption may be economi9ed by a

chan(e of habits$ but any stintin( of necessaries is

'asteful!/01

8! Some detailed study of the necessaries for efficiency of

different classes of 'orkers 'ill ha#e to be made$ 'hen 'e come

to in)uire into the causes that determine the supply of efficient

labour! But it 'ill ser#e to (i#e some definiteness to our ideas$

if 'e consider here 'hat are the necessaries for the efficiency

of an ordinary a(ricultural or of an unskilled to'n labourer and

his family$ in En(land$ in this (eneration! They may be said to

consist of a 'ell2drained d'ellin( 'ith se#eral rooms$ 'arm

clothin($ 'ith some chan(es of underclothin($ pure 'ater$ a

plentiful supply of cereal food$ 'ith a moderate allo'ance of

meat and milk$ and a little tea$ etc!$ some education and some

recreation$ and lastly$ sufficient freedom for his 'ife from

other 'ork to enable her to perform properly her maternal and her

household duties! If in any district unskilled labour is depri#ed

of any of these thin(s$ its efficiency 'ill suffer in the same

'ay as that of a horse that is not properly tended$ or a

steam2en(ine that has an inade)uate supply of coals! All

consumption up to this limit is strictly producti#e consumption.

any stintin( of this consumption is not economical$ but 'asteful!

In addition$ perhaps$ some consumption of alcohol and

tobacco$ and some indul(ence in fashionable dress are in many

places so habitual$ that they may be said to be con#entionally

necessary$ since in order to obtain them the a#era(e man and

'oman 'ill sacrifice some thin(s 'hich are necessary for

efficiency! Their 'a(es are therefore less than are practically

necessary for efficiency$ unless they pro#ide not only for 'hat

is strictly necessary consumption$ but include also a certain

amount of con#entional necessaries!/-01

The consumption of con#entional necessaries by producti#e

'orkers is commonly classed as producti#e consumption% but

strictly speakin( it ou(ht not to be% and in critical passa(es a

special interpretation clause should be added to say 'hether or

not they are included!

It should ho'e#er be noticed that many thin(s 'hich are

ri(htly described as superfluous lu,uries$ do yet$ to some

e,tent$ take the place of necessaries% and to that e,tent their

consumption is producti#e 'hen they are consumed by

producers!/601

N7TES.

! Bacon$ No#um 7r(anon I*$ says 3Ad opera nil aliud potest homo

)uam ut corpora naturalia admo#eat et amo#eat$ reli)ua natura

intus a(it3 /)uoted by Bonar$ Philosophy and Political Economy$

p! -8?1!

-! Production$ in the narro' sense$ chan(es the form and nature

of products! Trade and transport chan(e their e,ternal relations!

6! Political Economy$ p! 8! Senior 'ould like to substitute the

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#erb 3to use3 for the #erb 3to consume!3

8! Thus flour to be made into a cake 'hen already in the house of

the consumer$ is treated by some as a consumers& (ood% 'hile not

only the flour$ but the cake itself is treated as a producers&

(ood 'hen in the hand of the confectioner! Carl Men(er

/*olks'irtschaftslehre$ ch! I$ -1 says bread belon(s to the firstorder$ flour to the second$ a flour mill to the third order and

so on! It appears that if a rail'ay train carries people on a

pleasure e,cursion$ also some tins of biscuits$ and millin(

machinery and some machinery that is used for makin( millin(

machinery% then the train is at one and the same time a (ood of

the first$ second$ third and fourth orders!

! This is e#ons& definition /Theory of Political Economy$ ch!

#1$ e,cept that he includes only painful e,ertions! But he

himself points out ho' painful idleness often is! Most people

'ork more than they 'ould if they considered only the direct

pleasure resultin( from the 'ork% but in a healthy state$

pleasure predominates o#er pain in a (reat part e#en of the 'ork

that is done for hire! 7f course the definition is elastic% an

a(ricultural labourer 'orkin( in his (arden in the e#enin( thinks

chiefly of the fruit of his labours% a mechanic returnin( home

after a day of sedentary toil finds positi#e pleasure in his

(arden 'ork$ but he too cares a (ood deal about the fruit of his

labour% 'hile a rich man 'orkin( in like manner$ thou(h he may

take a pride in doin( it 'ell$ 'ill probably care little for any

pecuniary sa#in( that he effects by it!

! Thus the Mercantilists 'ho re(arded the precious metals%

partly because they 'ere imperishable$ as 'ealth in a fuller

sense than anythin( else$ re(arded as unproducti#e or 3sterile3

all labour that 'as not directed to producin( (oods for

e,portation in e,chan(e for (old and sil#er! The Physiocrats

thou(ht all labour sterile 'hich consumed an e)ual #alue to that

'hich it produced% and re(arded the a(riculturist as the only

producti#e 'orker$ because his labour alone /as they thou(ht1

left behind it a net surplus of stored2up 'ealth! Adam Smith

softened do'n the Physiocratic definition% but still he

considered that a(ricultural labour 'as more producti#e than any

other! 5is follo'ers discarded this distinction% but they ha#e

(enerally adhered$ thou(h 'ith many differences in points of

detail$ to the notion that producti#e labour is that 'hich tends

to increase accumulated 'ealth% a notion 'hich is implied rather

than stated in the celebrated chapter of The "ealth of Nations

'hich bears the title$ 37n the Accumulation of Capital$ or on

Producti#e and

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inches are to be classed as tall$ or only those abo#e fi#e feet

ten! And 'e can speak of the increase of producti#e labour at the

e,pense of unproducti#e 'ithout fi,in( on any ri(id$ and

therefore arbitrary line of di#ision bet'een them! If such an

artificial line is re)uired for any particular purpose$ it must

be dra'n e,plicitly for the occasion! But in fact such occasions

seldom or ne#er occur!

>! All the distinctions in 'hich the 'ord Producti#e is used are

#ery thin and ha#e a certain air of unreality! It 'ould hardly be

'orth 'hile to introduce them no'. but they ha#e a lon( history%

and it is probably better that they should d'indle (radually out

of use$ rather than be suddenly discarded!

The attempt to dra' a hard and fast line of distinction 'here

there is no real discontinuity in nature has often done more

mischief$ but has perhaps ne#er led to more )uaint results$ than

in the ri(id definitions 'hich ha#e been sometimes (i#en of this

term Producti#e! Some of them for instance lead to the conclusion

that a sin(er in an opera is unproducti#e$ that the printer of

the tickets of admission to the opera is producti#e% 'hile the

usher 'ho sho's people to their places is unproducti#e$ unless he

happens to sell pro(rammes$ and then he is producti#e! Senior

points out that 3a cook is not said to make roast meat but to

dress it% but he is said to make a puddin(!!!! A tailor is said

to make cloth into a coat$ a dyer is not said to make undyed

cloth into dyed cloth! The chan(e produced by the dyer is perhaps

(reater than that produced by the tailor$ but the cloth in

passin( throu(h the tailor&s hands chan(es its name% in passin(

throu(h the dyer&s it does not. the dyer has not produced a ne'

name$ nor conse)uently a ne' thin(!3 Pol! Econ! pp! 2-!

?! Compare Car#er$ Principles of Political Economy$ p! 8=8% 'hich

called my attention to Adam Smith&s obser#ation that customary

decencies are in effect necessaries!

D! Thus in the South of En(land population has increased durin(

the last hundred years at a fair rate$ allo'ance bein( made for

mi(ration! But the efficiency of labour$ 'hich in earlier times

'as as hi(h as that in the North of En(land$ has sunk relati#ely

to the North% so that the lo'2'a(ed labour of the South is often

dearer than the more hi(hly2paid labour of the North! "e cannot

thus say 'hether the labourers in the South ha#e been supplied

'ith necessaries$ unless 'e kno' in 'hich of these t'o senses the

'ord is used! They ha#e had the bare necessaries for e,istence

and the increase of numbers$ but apparently they ha#e not had the

necessaries for efficiency! It must ho'e#er be remembered that

the stron(est labourers in the South ha#e constantly mi(rated to

the North% and that the ener(ies of those in the North ha#e been

raised by their lar(er share of economic freedom and of the hope

of risin( to a hi(her position! See Mackay in Charity

7r(ani9ation ournal$ Feb! >?!

! If 'e considered an indi#idual of e,ceptional abilities 'e

should ha#e to take account of the fact that there is not likely

to be the same close correspondence bet'een the real #alue of his

'ork for the community and the income 'hich he earns by it$ that

there is in the case of an ordinary member of any industrial

class! And 'e should ha#e to say that all his consumption is

strictly producti#e and necessary$ so lon( as by cuttin( off any

part of it he 'ould diminish his efficiency by an amount that is

of more real #alue to him or the rest of the 'orld than he sa#ed

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from his consumption! If a Ne'ton or a "att could ha#e added a

hundredth part to his efficiency by doublin( his personal

e,penditure$ the increase in his consumption 'ould ha#e been

truly producti#e! As 'e shall see later on$ such a case is

analo(ous to additional culti#ation of rich land that bears a

hi(h rent. it may be profitable thou(h the return to it is less

than in proportion to the pre#ious outlay!

-! Compare the distinction bet'een 3Physical and Political

Necessaries3 in ames Steuart&s In)uiry$ A!4! ==$ II$ ,,i!

6! Thus a dish of (reen peas in March$ costin( perhaps ten

shillin(s$ is a superfluous lu,ury. but yet it is 'holesome food$

and does the 'ork perhaps of three penny'orth of cabba(e% or

e#en$ since #ariety undoubtedly conduces to health$ a little more

than that! So it may be entered perhaps at the #alue of fourpence

under the head of necessaries$ and at that of nine shillin(s and

ei(htpence under that of superfluities% and its consumption may

be re(arded as strictly producti#e to the e,tent of one fortieth!

In e,ceptional cases$ as for instance 'hen the peas are (i#en to

an in#alid$ the 'hole ten shillin(s may be 'ell spent$ and

reproduce their o'n #alue!

For the sake of (i#in( definiteness to the ideas it may be

'ell to #enture on estimates of necessaries$ rou(h and random as

they must be! Perhaps at present prices the strict necessaries

for an a#era(e a(ricultural family are co#ered by fifteen or

ei(hteen shillin(s a 'eek$ the con#entional necessaries by about

fi#e shillin(s more! For the unskilled labourer in the to'n a fe'

shillin(s must be added to the strict necessaries! For the family

of the skilled 'orkman li#in( in a to'n 'e may take t'enty2fi#e

or thirty shillin(s for strict necessaries$ and ten shillin(s for

con#entional necessaries! For a man 'hose brain has to under(o

(reat continuous strain the strict necessaries are perhaps t'o

hundred or t'o hundred and fifty pounds a year if he is a

bachelor. but more than t'ice as much if he has an e,pensi#e

family to educate! 5is con#entional necessaries depend on the

nature of his callin(!

Chapter 8

Income$ Capital

! In a primiti#e community each family is nearly

self2sufficin($ and pro#ides most of its o'n food and clothin(

and e#en household furniture! 7nly a #ery small part of the

income$ or comin(s in$ of the family is in the form of money%

'hen one thinks of their income at all$ one reckons in the

benefits 'hich they (et from their cookin( utensils$ +ust as much

as those 'hich they (et from their plou(h. one dra's no

distinction bet'een their capital and the rest of their

accumulated stock$ to 'hich the cookin( utensils and the plou(h

alike belon(!/01

But 'ith the (ro'th of a money economy there has been a

stron( tendency to confine the notion of income to those

incomin(s 'hich are in the form of money% includin( 3payments in

kind3 /such as the free use of a house$ free coals$ (as$ 'ater1$

'hich are (i#en as part of an employee&s remuneration$ and in

lieu of money payments!

In harmony 'ith this meanin( of Income$ the lan(ua(e of the

market2place commonly re(ards a man&s capital as that part of his

'ealth 'hich he de#otes to ac)uirin( an income in the form of

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money% or$ more (enerally$ to ac)uisition /Er'erbun(1 by means of

trade! It may be con#enient sometimes to speak of this as his

trade capital% 'hich may be defined to consist of those e,ternal

(oods 'hich a person uses in his trade$ either holdin( them to be

sold for money or applyin( them to produce thin(s that are to be

sold for money! Amon( its conspicuous elements are such thin(s as

the factory and the business plant of a manufacturer% that is$his machinery$ his ra' material$ any food$ clothin($ and

house2room that he may hold for the use of his employees$ and the

(ood'ill of his business!

To the thin(s in his possession must be added those to 'hich

he has a ri(ht and from 'hich he is dra'in( income. includin(

loans 'hich he has made on mort(a(e or in other 'ays$ and all the

command o#er capital 'hich he may hold under the comple, forms of

the modern 3money market!3 7n the other hand debts o'ed by him

must be deducted from his capital!

This definition of capital from the indi#idual or business

point of #ie' is firmly established in ordinary usa(e% and it

'ill be assumed throu(hout the present treatise 'hene#er 'e are

discussin( problems relatin( to business in (eneral$ and in

particular to the supply of any particular (roup of commodities

for sale in open market! Income and capital 'ill be discussed

from the point of #ie' of pri#ate business in the first half of

the chapter% and after'ards the social point of #ie' 'ill be

considered!

-! If a person is en(a(ed in business$ he is sure to ha#e to

incur certain out(oin(s for ra' material$ the hire of labour$

etc! And$ in that case$ his true or net income is found by

deductin( from his (ross income 3the out(oin(s that belon( to its

production!3/-01

Anythin( 'hich a person does for 'hich he is paid directly or

indirectly in money$ s'ells his nominal income% 'hile no ser#ices

that he performs for himself are commonly reckoned as addin( to

his nominal income! But$ thou(h it is best (enerally to ne(lect

them 'hen they are tri#ial$ account should for consistency be

taken of them$ 'hen they are of a kind 'hich people commonly pay

for ha#in( done for them! Thus a 'oman 'ho makes her o'n clothes

or a man 'ho di(s in his o'n (arden or repairs his o'n house$ is

earnin( income% +ust as 'ould the dressmaker$ (ardener or

carpenter 'ho mi(ht be hired to do the 'ork!

In this connection 'e may introduce a term of 'hich 'e shall

ha#e to make fre)uent use hereafter! The need for it arises from

the fact that e#ery occupation in#ol#es other disad#anta(es

besides the fati(ue of the 'ork re)uired in it$ and e#ery

occupation offers other ad#anta(es besides the receipt of money

'a(es! The true re'ard 'hich an occupation offers to labour has

to be calculated by deductin( the money #alue of all its

disad#anta(es from that of all its ad#anta(es% and 'e may

describe this true re'ard as the net ad#anta(es of the

occupation!

The payment made by a borro'er for the use of a loan for$

say$ a year is e,pressed as the ratio 'hich that payment bears to

the loan$ and is called interest! And this term is also used more

broadly to represent the money e)ui#alent of the 'hole income

'hich is deri#ed from capital! It is commonly e,pressed as a

certain percenta(e on the 3capital3 sum of the loan! "hene#er

this is done the capital must not be re(arded as a stock of

thin(s in (eneral! It must be re(arded as a stock of one

particular thin($ money$ 'hich is taken to represent them! Thus

DD may be lent at four per cent!$ that is for an interest of 8

yearly! And$ if a man employs in business a capital stock of

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(oods of #arious kinds 'hich are estimated as 'orth D$DDD in

all% then 8DD a year may be said to represent interest at the

rate of four per cent! on that capital$ on the supposition that

the a((re(ate money #alue of the thin(s 'hich constitute it has

remained unchan(ed! 5e 'ould not$ ho'e#er$ be 'illin( to continue

the business unless he e,pected his total net (ains from it to

e,ceed interest on his capital at the current rate! These (ainsare called profits!

The command o#er (oods to a (i#en money #alue$ 'hich can be

applied to any purpose$ is often described as 3free3 or

3floatin(3 capital!/601

"hen a man is en(a(ed in business$ his profits for the year

are the e,cess of his receipts from his business durin( the year

o#er his outlay for his business! The difference bet'een the

#alue of his stock of plant$ material$ etc! at the end and at the

be(innin( of the year is taken as part of his receipts or as part

of his outlay$ accordin( as there has been an increase or

decrease of #alue! "hat remains of his profits after deductin(

interest on his capital at the current rate /allo'in($ 'here

necessary$ for insurance1 is (enerally called his earnin(s of

undertakin( or mana(ement! The ratio in 'hich his profits for the

year stand to his capital is spoken of as his rate of profits!

But this phrase$ like the correspondin( phrase 'ith re(ard to

interest$ assumes that the money #alue of the thin(s 'hich

constitute his capital has been estimated. and such an estimate

is often found to in#ol#e (reat difficulties!

"hen any particular thin($ as a house$ a piano$ or a se'in(

machine is lent out$ the payment for it is often called ent! And

economists may follo' this practice 'ithout incon#enience 'hen

they are re(ardin( the income from the point of #ie' of the

indi#idual trader! But$ as 'ill be ar(ued presently$ the balance

of ad#anta(e seems to lie in fa#our of reser#in( the term ent

for the income deri#ed from the free (ifts of nature$ 'hene#er

the discussion of business affairs passes from the point of #ie'

of the indi#idual to that of society at lar(e! And for that

reason$ the term Huasirent 'ill be used in the present #olume for

the income deri#ed from machines and other appliances for

production made by man! That is to say$ any particular machine

may yield an income 'hich is of the nature of a rent$ and 'hich

is sometimes called a ent% thou(h on the 'hole$ there seems to

be some ad#anta(e in callin( it a Huasi2rent! But 'e cannot

properly speak of the interest yielded by a machine! If 'e use

the term 3interest3 at all$ it must be in relation not to the

machine itself$ but to its money #alue! For instance if the 'ork

done by a machine 'hich cost DD is 'ortb 8 a year net$ that

machine is yieldin( a )uasi2rent of 8 'hich is e)ui#alent to

interest at four per cent! on its ori(inal cost. but if the

machine is 'orth only >D no'$ it is yieldin( fi#e per cent! on

its present #alue! This ho'e#er raises some difficult )uestions

of principle$ 'hich 'ill be discussed in Book *!

6! Ne,t to consider some details relatin( to capital! It has

been classed as Consumption capital$ and Au,iliary or

Instrumental capital. and thou(h no clear distinction can be

dra'n bet'een the t'o classes$ it may sometimes be con#enient to

use the terms$ 'ith the understandin( that they are #a(ue! "here

definiteness is necessary$ the terms should be a#oided% and

e,plicit enumerations should be (i#en! The (eneral notion of the

distinction 'hich the terms are desi(ned to su((est$ can be

(athered from the follo'in( appro,imate definitions!

Consumption capital consists of (oods in a form to satisfy

'ants directly% that is$ (oods 'hich afford a direct sustenance

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to the 'orkers$ such as food$ clothes$ house2room$ etc!

Au,iliary$ or instrumental$ capital is so called because it

consists of all the (oods that aid labour in production!

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form or another if he de#otes it as a matter of business to the

ser#ice of others! Similarly any useful thin( 'hich he has made

or ac)uired in the past$ or 'hich has been handed do'n to him$

under the e,istin( institutions of property$ by others 'ho ha#e

so made or ac)uired it$ is (enerally a source of material benefit

to him directly or indirectly! If he applies it in business$ this

income (enerally appears in the form of money! But a broader useof this term is occasionally needed$ 'hich embraces the 'hole

income of benefits of e#ery sort 'hich a person deri#es from the

o'nership of property ho'e#er applied. it includes for instance

the benefits 'hich he (ets from the use of his o'n piano$ e)ually

'ith those 'hich a piano dealer 'ould 'in by lettin( out a piano

on hire! The lan(ua(e of common life 'hile a#erse to so broad a

use of the term Income as this e#en 'hen discussin( social

problems$ yet habitually includes a certain number of forms of

income$ other than money income!

The Income Ta, Commissioners count a d'ellin(2house inhabited

by its o'ner as a source of ta,able income$ thou(h it yields its

income of comfort directly! They do this$ not on any abstract

principle% but partly because of the practical importance of

house2room$ partly because the o'nership of a house is commonly

treated in a business fashion$ and partly because the real income

accruin( from it can easily be separated off and estimated! They

do not claim to establish any absolute distinction in kind

bet'een the thin(s 'hich their rule includes$ and those 'hich it

e,cludes!

e#ons$ re(ardin( the problem from a purely mathematical

point of #ie'$ 'as +ustified in classin( all commodities in the

hands of consumers as capital! But some 'riters$ 'hile de#elopin(

this su((estion 'ith (reat in(enuity$ ha#e treated it as a (reat

principle% and that appears to be an error in +ud(ment! A true

sense of proportion re)uires us not to burden our 'ork 'ith the

incessant enumeration of details of secondary importance$ of

'hich no account is taken in customary discourse$ and 'hich

cannot e#en be described 'ithout offendin( a(ainst popular

con#entions!

! This brin(s us to consider the use of the term capital

from the point of #ie' of in)uiries into the material 'ellbein(

of society as a 'hole! Adam Smith said that a person&s capital is

that part of his stock from 'hich he e,pects to deri#e an income!

And almost e#ery use of the term capital$ 'hich is kno'n to

history$ has corresponded more or less closely to a parallel use

of the term Income. in almost e#ery use$ capital has been that

part of a man&s stock from 'hich he e,pects to deri#e an income!

By far the most important use of the term Capital in (eneral$

i!e! from the social point of #ie'$ is in the in)uiry ho' the

three a(ents of production$ land /that is$ natural a(ents1$

labour and capital$ contribute to producin( the national income

/or the national di#idend$ as it 'ill be called later on1% and

ho' that income is distributed amon( the three a(ents! And this

is an additional reason for makin( the terms Capital and Income

correlati#e from the social$ as 'e did from the indi#idual point

of #ie'!

Accordin(ly it is proposed in this treatise to count as part

of capital from the social point of #ie' all thin(s other than

land$ 'hich yield income that is (enerally reckoned as such in

common discourse% to(ether 'ith similar thin(s in public

o'nership$ such as (o#ernment factories. the term :and bein(

taken to include all free (ifts of nature$ such as mines$

fisheries$ etc!$ 'hich yield income!

Thus it 'ill include all thin(s held for trade purposes$

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'hether machinery$ ra' material or finished (oods% theatres and

hotels% home farms and houses. but not furniture or clothes o'ned

by those 'ho use them! For the former are and the latter are not

commonly re(arded as yieldin( income by the 'orld at lar(e$ as is

sho'n by the practice of the income ta, commissioners!

This usa(e of the term is in harmony 'ith the common practice

of economists of treatin( social problems in broad outline tostart 'ith$ and reser#in( minor details for later consideration.

it is in harmony also 'ith their common practice of takin( :abour

to include those acti#ities$ and those only$ 'hich are re(arded

as the source of income in this broader use of the term! :abour

to(ether 'ith capital and land thus defined are the sources of

all that income of 'hich account is commonly taken in reckonin(

up the National Income!/0=1

! Social income may be estimated by addin( to(ether the

incomes of the indi#iduals in the society in )uestion$ 'hether it

be a nation or any other (roup of persons!

"e must ho'e#er not count the same thin( t'ice! If 'e ha#e

counted a carpet at its full #alue$ 'e ha#e already counted the

#alues of the yarn and the labour that 'ere used in makin( it%

and these must not be counted a(ain! And further$ if the carpet

'as made of 'ool that 'as in stock at the be(innin( of the year$

the #alue of that 'ool must be deducted from the #alue of the

carpet before the net income of the year is reached% 'hile

similar deduction must be made for the 'ear and tear of machinery

and other plant used in makin( it! This is re)uired by the

(eneral rule$ 'ith 'hich 'e started$ that true or net income is

found by deductin( from (ross income the out(oin(s that belon( to

its production!

But if the carpet is cleaned by domestic ser#ants or at steam

scourin( 'orks$ the #alue of the labour spent in cleanin( it must

be counted in separately% for other'ise the results of this

labour 'ould be alto(ether omitted from the in#entory of those

ne'ly2produced commodities and con#eniences 'hich constitute the

real income of the country! The 'ork of domestic ser#ants is

al'ays classed as 3labour3 in the technical sense% and since it

can be assessed en bloc at the #alue of their remuneration in

money and in kind 'ithout bein( enumerated in detail$ its

inclusion raises no (reat statistical difficulty! There is

ho'e#er some inconsistency in omittin( the hea#y domestic 'ork

'hich is done by 'omen and other members of the household$ 'here

no ser#ants are kept!

A(ain$ suppose a lando'ner 'ith an annual income of D$DDD

hires a pri#ate secretary at a salary of DD$ 'ho hires a

ser#ant at 'a(es of D! It may seem that if the incomes of all

these three persons are counted in as part of the net income of

the country$ some of it 'ill be counted t'ice o#er$ and some

three times! But this is not the case! The landlord transfers to

his secretary$ in return for his assistance$ part of the

purchasin( po'er deri#ed from the produce of land% and the

secretary a(ain transfers part of this to his ser#ant in return

for his assistance! The farm produce the #alue of 'hich (oes as

rent to the landlord$ the assistance 'hich the landlord deri#es

from the 'ork of the secretary$ and that 'hich the secretary

deri#es from the 'ork of the ser#ant are independent parts of the

real net income of the country% and therefore the D$DDD and the

DD and the D 'hich are their money measures$ must all be

counted in 'hen 'e are estimatin( the income of the country! But

if the landlord makes an allo'ance of DD a year to his son$

that must not be counted as an independent income% because no

ser#ices are rendered for it! And it 'ould not be assessed to the

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Income ta,!

As the net payments on account of interest etc! due to an

indi#idual2net$ i!e! after deductin( those due from him to others

are part of his income$ so the money and other thin(s recei#ed

net by a nation from other countries are part of its income!

=! The money income$ or inflo'$ of 'ealth (i#es a measure of

a nation&s prosperity$ 'hich$ untrust'orthy as it is$ is yet insome respects better than that afforded by the money #alue of its

stock of 'ealth!

For income consists chiefly of commodities in a form to (i#e

pleasure directly% 'hile the (reater part of national 'ealth

consists of the means of production$ 'hich are of ser#ice to the

nation only in so far as they contribute to producin( commodities

ready for consumption! And further$ thou(h this is a minor point$

consumable commodities$ bein( more portable$ ha#e more nearly

uniform prices all the 'orld o#er than the thin(s used in

producin( them. the prices of an acre of (ood land in Manitoba

and ent differ more tban those of a bushel of 'heat in the t'o

places!

But if 'e look chiefly at the income of a country 'e must

allo' for the depreciation of the sources from 'hich it is

deri#ed! More must be deducted from the income deri#ed from a

house if it is made of 'ood$ than if it is made of stone% a stone

house counts for more to'ards the real richness of a country than

a 'ooden house 'hich (i#es e)ually (ood accommodation! A(ain$ a

mine may yield for a time a lar(e income$ but be e,hausted in a

fe' years. in that case$ it must be counted as e)ui#alent to a

field$ or a fishery$ 'hich yields a much smaller annual income$

but 'ill yield that income permanently!

>! In purely abstract$ and especially in mathematical$

reasonin( the terms Capital and "ealth are used as synonymous

almost perforce$ e,cept that 3land3 proper may for some purposes

be omitted from Capital! But there is a clear tradition that 'e

should speak of Capital 'hen considerin( thin(s as a(ents of

production% and that 'e should speak of "ealth 'hen considerin(

them as results of production$ as sub+ects of consumption and as

yieldin( pleasures of possession! Thus the chief demand for

capital arises from its producti#eness$ from the ser#ices 'hich

it renders$ for instance$ in enablin( 'ool to be spun and 'o#en

more easily than by the unaided hand$ or in causin( 'ater to flo'

freely 'here#er it is 'anted instead of bein( carried laboriously

in pails% /thou(h there are other uses of capital$ as for

instance 'hen it is lent to a spendthrift$ 'hich cannot easily be

brou(ht under this head1! 7n the other hand the supply of capital

is controlled by the fact that$ in order to accumulate it$ men

must act prospecti#ely. they must 3'ait3 and 3sa#e$3 they must

sacrifice the present to the future!

At the be(innin( of this Book it 'as ar(ued that the

economist must fore(o the aid of a complete set of technical

terms! 5e must make the terms in common use ser#e his purpose in

the e,pression of precise thou(ht$ by the aid of )ualifyin(

ad+ecti#es or other indications in the conte,t! If he arbitrarily

assi(ns a ri(id e,act use to a 'ord 'hich has se#eral more or

less #a(ue uses in the market place$ he confuses business men$

and he is in some dan(er of committin( himself to untenable

positions! The selection of a normal use for such terms as Income

and Capital must therefore be tested by actually 'orkin( 'ith

it!/>01

N7TES.

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! This and similar facts ha#e led some people to suppose not

only that some parts of the modern analysis of distribution and

e,chan(e are inapplicable to a primiti#e community% 'hich is

true. but also that there are no important parts of it that are

applicable% 'hich is not true! This is a strikin( instance of the

dan(ers that arise from allo'in( oursel#es to become the ser#ants

of 'ords$ a#oidin( the hard 'ork that is re)uired for disco#erin(unity of substance under lyin( #ariety of form!

-! See a report of a Committee of the British Association$ >=>$

on the Income Ta,!

6! Professor Clark has made the su((estion to distin(uish bet'een

Pure Capital and Capital @oods. the former is to correspond to a

'aterfall 'hich remains stationary% 'hile Capital @oods are the

particular thin(s 'hich enter and lea#e the business$ as

particular drops pass throu(h the 'aterfall! 5e 'ould of course

connect interest 'ith pure capital$ not 'ith capital (oods!

8! See abo#e II$ iii$ sec! !

! Adam Smith&s distinction bet'een fi,ed and circulatin( capital

turned on the )uestion 'hether the (oods 3yield a profit 'ithout

chan(in( masters3 or not! icardo made it turn on 'hether they

are 3of slo' consumption or re)uire to be fre)uently reproduced3%

but he truly remarks that this is 3a di#ision not essential$ and

in 'hich the line of demarcation cannot be accurately dra'n!3

Mill&s modification is (enerally accepted by modern economists!

! Compare abo#e II! i$ sec! 6!

=! ust as for practical purposes it is better not to encumber

oursel#es 'ith specifyin( the 3income3 of benefit 'hich a man

deri#es from the labour of brushin( his hat in the mornin($ so it

is better to i(nore the element of capital #ested in his brush!

But no such consideration arises in a merely abstract discussion.

and therefore the lo(ical simplicity of e#ons& dictum that

commodities in the hands of consumers are capital has some

ad#anta(es and no disad#anta(es for mathematical #ersions of

economic doctrines!

>! A short forecast of some of this 'ork may be (i#en here! It

'ill be seen ho' Capital needs to be considered in re(ard both to

the embodied a((re(ate of the benefits deri#able from its use$

and to the embodied a((re(ate of the costs of the efforts and of

the sa#in( needed for its production. and it 'ill be sho'n ho'

these t'o a((re(ates tend to balance! Thus in *$ I*$ 'hich may be

taken as in some sense a continuation of the present chapter$

they 'ill be seen balancin( directly in the forecasts of an

indi#idual obinson Crusoe% and for the (reater part at least in

terms of money in the forecasts of a modern business man! In

either case both sides of the account must be referred to the

same date of time% those that come after that date bein(

3discounted3 back to it% and those that come before bein(

3accumulated3 up to it!

A similar balancin( in re(ard to the benefits and the costs

of capital at lar(e 'ill be found to be a chief corner stone of

social economy. althou(h it is true that in conse)uence of the

une)ual distribution of 'ealth$ accounts cannot be made up from

the social point of #ie' 'ith that clearness of outline that is

attainable in the case of an indi#idual$ 'hether a obinson

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Crusoe$ or a modern business man! In e#ery part of our discussion

of the causes that (o#ern the accumulation and the application of

producti#e resources$ it 'ill appear that there is no uni#ersal

rule that the use of roundabout methods of production is more

efficient than direct methods% that there are some conditions

under 'hich the in#estment of effort in obtainin( machinery and

in makin( costly pro#ision a(ainst future 'ants is economical inthe lon( run$ and others in 'hich it is not. and that capital is

accumulated in proportion to the prospecti#eness of man on the

one hand$ and on the other to the absorption of capital by those

roundabout methods$ 'hich are sufficiently producti#e to

remunerate their adoption! See especially I*$ *II$ sec$ >% *$ I*$

*I$ I$ sec! >% and *I$ *I$ sec! !

The broader forces$ that (o#ern the production of capital in

(eneral and its contribution to the national income$ are

discussed in I*$ *II$ I; ;I. the imperfect ad+ustments of the

money measures of benefits and costs to their real #olume are

discussed chiey in III$ III2*% I*$ *II% and *I$ III *III% the

resultin( share in the total product of labour and capital$ aided

by natural resources$ 'hich (oes to capital$ is discussed chiey

in *I$ I$ II$ *I2*II$ ;I$ ;II!

Some of the chief incidents in the history of the definitions

of Capital are (i#en in Appendi, E!