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Principles of Economics; Marshall, Alfred
60 paragraphs found.

Again, though there is a sharp line of division between man himself and the appliances which he uses; and though the supply of, and the demand for, human efforts and sacrifices have peculiarities of their own, which do not attach to the supply of, and the demand for, material goods; yet, after all, these material goods are themselves generally the result of human efforts and sacrifices. The theories of the values of labour, and of the things made by it, cannot be separated: they are parts of one great whole; and what differences there are between them even in matters of detail, turn out on inquiry to be, for the most part, differences of degree rather than of kind. As, in spite of the great differences in form between birds and quadrupeds, there is one Fundamental Idea running through all their frames, so the general theory of the equilibrium of demand and supply is a Fundamental Idea running through the frames of all the various parts of the central problem of Distribution and Exchange *1.




§ 1. Economics is a study of men as they live and move and think in the ordinary business of life. But it concerns itself chiefly with those motives which affect, most powerfully and most steadily, man's conduct in the business part of his life. Everyone who is worth anything carries his higher nature with him into business; and, there as elsewhere, he is influenced by his personal affections, by his conceptions of duty and his reverence for high ideals. And it is true that the best energies of the ablest inventors and organizers of improved methods and appliances are stimulated by a noble emulation more than by any love of wealth for its own sake. But, for all that, the steadiest motive to ordinary business work is the desire for the pay which is the material reward of work. The pay may be on its way to be spent selfishly or unselfishly, for noble or base ends; and here the variety of human nature comes into play. But the motive is supplied by a definite amount of money: and it is this definite and exact money measurement of the steadiest motives in business life, which has enabled economics far to outrun every other branch of the study of man. Just as the chemist's fine balance has made chemistry more exact than most other physical sciences; so this economist's balance, rough and imperfect as it is, has made economics more exact than any other branch of social science. But of course economics cannot be compared with the exact physical sciences: for it deals with the ever changing and subtle forces of human nature *4.




§ 1. We have seen that the economist must be greedy of facts; but that facts by themselves teach nothing. History tells of sequences and coincidences; but reason alone can interpret and draw lessons from them. The work to be done is so various that much of it must be left to be dealt with by trained common sense, which is the ultimate arbiter in every practical problem. Economic science is but the working of common sense aided by appliances of organized analysis and general reasoning, which facilitate the task of collecting, arranging, and drawing inferences from particular facts. Though its scope is always limited, though its work without the aid of common sense is vain, yet it enables common sense to go further in difficult problems than would otherwise be possible.


When any particular thing, as a house, a piano, or a sewing machine is lent out, the payment for it is often called Rent. And economists may follow this practice without inconvenience when they are regarding the income from the point of view of the individual trader. But, as will be argued presently, the balance of advantage seems to lie in favour of reserving the term Rent for the income derived from the free gifts of nature, whenever the discussion of business affairs passes from the point of view of the individual to that of society at large. And for that reason, the term Quasi-rent will be used in the present volume for the income derived from machines and other appliances for production made by man. That is to say, any particular machine may yield an income which is of the nature of a rent, and which is sometimes called a Rent; though on the whole, there seems to be some advantage in calling it a Quasi-rent. But we cannot properly speak of the interest yielded by a machine. If we use the term "interest" at all, it must be in relation not to the machine itself, but to its money value. For instance if the work done by a machine which cost £100 is worth £4 a year net, that machine is yielding a quasi-rent of £4 which is equivalent to interest at four per cent. on its original cost: but if the machine is worth only £80 now, it is yielding five per cent. on its present value. This however raises some difficult questions of principle, which will be discussed in Book V.




§ 1. The first condition of an efficient organization of industry is that it should keep everyone employed at such work as his abilities and training fit him to do well, and should equip him with the best machinery and other appliances for his work. We shall leave on one side for the present the distribution of work between those who carry out the details of production on the one hand, and those who manage its general arrangement and undertake its risk on the other; and confine ourselves to the division of labour between different classes of operatives, with special reference to the influence of machinery. In the following chapter we shall consider the reciprocal effects of division of labour and localization of industry; in a third chapter we shall inquire how far the advantages of division of labour depend upon the aggregation of large capitals into the hands of single individuals or firms, or, as is commonly said, on production on a large scale; and lastly, we shall examine the growing specialization of the work of business management.


§ 5. The printing trade affords another instance of the way in which an improvement of machinery and an increase in the volume of production causes an elaborate subdivision of labour. Everyone is familiar with the pioneer newspaper editor of newly settled districts of America, who sets up the type of his articles as he composes them; and with the aid of a boy prints off his sheets and distributes them to his scattered neighbours. When however the mystery of printing was new, the printer had to do all this for himself, and in addition to make all his own appliances *114. These are now provided for him by separate "subsidiary" trades, from whom even the printer in the backwoods can obtain everything that he wants to use. But in spite of the assistance which it thus gets from outside, a large printing establishment has to find room for many different classes of workers within its walls. To say nothing of those who organize and superintend the business, of those who do its office work and keep its stores, of the skilled "readers" who correct any errors that may have crept into the "proofs," of its engineers and repairers of machinery, of those who cast, and who correct and prepare its stereotype plates; of the warehousemen and the boys and girls who assist them, and several other minor classes; there are the two great groups of the compositors who set up the type, and the machinists and pressmen who print impressions from them. Each of these two groups is divided into many smaller groups, especially in the large centres of the printing trade. In London, for instance, a minder who was accustomed to one class of machine, or a compositor who was accustomed to one class of work, if thrown out of employment would not willingly abandon the advantage of his specialized skill, and falling back on his general knowledge of the trade seek work at another kind of machine or in another class of work *115. These barriers between minute subdivisions of a trade count for a great deal in many descriptions of the modern tendency towards specialization of industry; and to some extent rightly, because though many of them are so slight that a man thrown out of work in one subdivision could pass into one of its neighbours without any great loss of efficiency, yet he does not do so until he has tried for a while to get employment in his old lines; and therefore the barriers are as effective as stronger ones would be so far as the minor fluctuations of trade from week to week are concerned. But they are of an altogether different kind from the deep and broad partitions which divided one group of mediæval handicraftsmen from another, and which caused the lifelong suffering of the handloom-weavers when their trade had left them *116.


In the printing trades, as in the watch trade, we see mechanical and scientific appliances attaining results that would be impossible without them; at the same time that they persistently take over work that used to require manual skill and dexterity, but not much judgment; while they leave for man's hand all those parts which do require the use of judgment, and open up all sorts of new occupations in which there is a great demand for it. Every improvement and cheapening of the printer's appliances increases the demand for the judgment and discretion and literary knowledge of the reader, for the skill and taste of those who know how to set up a good title-page, or how to make ready a sheet on which an engraving is to be printed, so that light and shade will be distributed properly. It increases the demand for the gifted and highly-trained artists who draw or engrave on wood and stone and metal, and for those who know how to give an accurate report in ten lines of the substance of a speech that occupied ten minutes—an intellectual feat the difficulty of which we underrate, because it is so frequently performed. And again, it tends to increase the work of photographers and electrotypers, and stereotypers, of the makers of printer's machinery, and many others who get a higher training and a higher income from their work than did those layers on and takers off, and those folders of newspapers who have found their work taken over by iron fingers and iron arms.

"The type-founder was probably the first to secede from the concern; then printers delegated to others the making of presses; afterwards the ink and the rollers found separate and distinct manufacturers; and there arose a class of persons who, though belonging to other trades, made printing appliances a speciality, such as printers' smiths, printers' joiners and printers' engineers" (Mr Southward in the Article on Typography in the Encyclopædia Britannica).
The percentage of the population occupied in the textile industries in the United Kingdom fell from 3.13 in 1881 to 2.43 in 1901; partly because much of the work done by them has been rendered so simple by semi-automatic machinery that it can be done fairly well by peoples that are in a relatively backward industrial condition; and partly because the chief textile goods retain nearly the same simple character as they had thirty or even three thousand years ago. On the other hand manufactures of iron and steel (including shipbuilding) have increased so greatly in complexity as well as in volume of output, that the percentage of the population occupied in them rose from 2.39 in 1881 to 3.01 in 1901; although much greater advance has been meanwhile made in the machinery and methods employed in them than in the textile group. The remaining manufacturing industries employed about the same percentage of the people in 1901 as in 1881. In the same time the tonnage of British shipping cleared from British ports increased by one half; and the number of dock labourers doubled, but that of seamen has slightly diminished. These facts are to be explained partly by vast improvements in the construction of ships and all appliances connected with them, and partly by the transference to dock labourers of nearly all tasks connected with handling the cargo some of which were even recently performed by the crew. Another marked change is the increased aggregate occupation of women in manufactures, though that of married women appears to have diminished, and that of children has certainly diminished greatly.

The Summary Tables of the Census of 1911, published in 1915, show so many changes in classification since 1901 that no general view of recent developments can be safely made. But Table 64 of that Report and Prof. D. Caradog Jones' paper read before the Royal Statistical Society in December 1914 show that the developments of 1901-1911 differ from their predecessors in detail rather than in general character.


For in most of those trades in which the economies of production on a large scale are of first-rate importance, marketing is difficult. There are, no doubt, important exceptions. A producer may, for instance, obtain access to the whole of a large market in the case of goods which are so simple and uniform that they can be sold wholesale in vast quantities. But, most goods of this kind are raw produce; and nearly all the rest are plain and common, such as steel rails or calico; and their production can be reduced to routine, for the very reason that they are plain and common. Therefore in the industries which produce them, no firm can hold its own at all unless equipped with expensive appliances of nearly the latest type for its main work; while subordinate operations can be performed by subsidiary industries; and in short there remains no very great difference between the economies available by a large and by a very large firm; and the tendency of large firms to drive out small ones has already gone so far as to exhaust most of the strength of those forces by which it was originally promoted.


Lastly, the very conditions of an industry which enable a new firm to attain quickly command over new economies of production, render that firm liable to be supplanted quickly by still younger firms with yet newer methods. Especially where the powerful economies of production on a large scale are associated with the use of new appliances and new methods, a firm which has lost the exceptional energy which enabled it to rise, is likely ere long quickly to decay; and the full life of a large firm seldom lasts very long.


§ 3. We may now sum up provisionally the relations of industrial expansion to social wellbeing. A rapid growth of population has often been accompanied by unhealthy and enervating habits of life in overcrowded towns. And sometimes it has started badly, outrunning the material resources of the people, causing them with imperfect appliances to make excessive demands on the soil; and so to call forth the stern action of the law of diminishing return as regards raw produce, without having the power of minimizing its effects. Having thus begun with poverty, an increase in numbers may go on to its too frequent consequences in that weakness of character which unfits a people for developing a highly organized industry.


This state obtains its name from the fact that in it the general conditions of production and consumption, of distribution and exchange remain motionless; but yet it is full of movement; for it is a mode of life. The average age of the population may be stationary; though each individual is growing up from youth towards his prime, or downwards to old age. And the same amount of things per head of the population will have been produced in the same ways by the same classes of people for many generations together; and therefore this supply of the appliances for production will have had full time to be adjusted to the steady demand.


But if we turn to consider the normal supply price with reference to a long period of time, we shall find that it is governed by a different set of causes, and with different results. For suppose that the disuse of meat causes a permanent distaste for it, and that an increased demand for fish continues long enough to enable the forces by which its supply is governed to work out their action fully (of course oscillation from day to day and from year to year would continue: but we may leave them on one side). The source of supply in the sea might perhaps show signs of exhaustion, and the fishermen might have to resort to more distant coasts and to deeper waters, Nature giving a Diminishing Return to the increased application of capital and labour of a given order of efficiency. On the other hand, those might turn out to be right who think that man is responsible for but a very small part of the destruction of fish that is constantly going on; and in that case a boat starting with equally good appliances and an equally efficient crew would be likely to get nearly as good a haul after the increase in the total volume of the fishing trade as before. In any case the normal cost of equipping a good boat with an efficient crew would certainly not be higher, and probably be a little lower after the trade had settled down to its now increased dimensions than before. For since fishermen require only trained aptitudes, and not any exceptional natural qualities, their number could be increased in less than a generation to almost any extent that was necessary to meet the demand; while the industries connected with building boats, making nets, etc. being now on a larger scale would be organized more thoroughly and economically. If therefore the waters of the sea showed no signs of depletion of fish, an increased supply could be produced at a lower price after a time sufficiently long to enable the normal action of economic causes to work itself out: and, the term Normal being taken to refer to a long period of time, the normal price of fish would decrease with an increase in demand *40.


The general drift of the term normal supply price is always the same whether the period to which it refers is short or long; but there are great differences in detail. In every case reference is made to a certain given rate of aggregate production; that is, to the production of a certain aggregate amount daily or annually. In every case the price is that the expectation of which is sufficient and only just sufficient to make it worth while for people to set themselves to produce that aggregate amount; in every case the cost of production is marginal; that is, it is the cost of production of those goods which are on the margin of not being produced at all, and which would not be produced if the price to be got for them were expected to be lower. But the causes which determine this margin vary with the length of the period under consideration. For short periods people take the stock of appliances for production as practically fixed; and they are governed by their expectations of demand in considering how actively they shall set themselves to work those appliances. In long periods they set themselves to adjust the flow of these appliances to their expectations of demand for the goods which the appliances help to produce. Let us examine this difference closely.


§ 6. The immediate effect of the expectation of a high price is to cause people to bring into active work all their appliances of production, and to work them full time and perhaps overtime. The supply price is then the money cost of production of that part of the produce which forces the undertaker to hire such inefficient labour (perhaps tired by working overtime) at so high a price, and to put himself and others to so much strain and inconvenience that he is on the margin of doubt whether it is worth his while to do it or not. The immediate effect of the expectation of a low price is to throw many appliances for production out of work, and slacken the work of others; and if the producers had no fear of spoiling their markets, it would be worth their while to produce for a time for any price that covered the prime costs of production and rewarded them for their own trouble.


But, as it is, they generally hold out for a higher price; each man fears to spoil his chance of getting a better price later on from his own customers; or, if he produces for a large and open market, he is more or less in fear of incurring the resentment of other producers, should he sell needlessly at a price that spoils the common market for all. The marginal production in this case is the production of those whom a little further fall of price would cause, either from a regard to their own interest or by formal or informal agreement with other producers, to suspend production for fear of further spoiling the market. The price which, for these reasons, producers are just on the point of refusing, is the true marginal supply price for short periods. It is nearly always above, and generally very much above the special or prime cost for raw materials, labour and wear-and-tear of plant, which is immediately and directly involved by getting a little further use out of appliances which are not fully employed. This point needs further study.


To sum up then as regards short periods. The supply of specialized skill and ability, of suitable machinery and other material capital, and of the appropriate industrial organization has not time to be fully adapted to demand; but the producers have to adjust their supply to the demand as best they can with the appliances already at their disposal. On the one hand there is not time materially to increase those appliances if the supply of them is deficient; and on the other, if the supply is excessive, some of them must remain imperfectly employed, since there is not time for the supply to be much reduced by gradual decay, and by conversion to other uses. Variations in the particular income derived from them do not for the time affect perceptibly the supply; and do not directly affect the price of the commodities produced by them. The income is a surplus of total receipts over prime cost; [that is, it has something of the nature of a rent as will be seen more clearly in chapter VIII.]. But unless it is sufficient to cover in the long run a fair share of the general costs of the business, production will gradually fall off. In this way a controlling influence over the relatively quick movements of supply price during short periods is exercised by causes in the background which range over a long period; and the fear of "spoiling the market" often makes those causes act more promptly than they otherwise would.




§ 1. This Chapter and the three following are given to a study of the marginal costs of products in relation to the values of those products on the one hand, and on the other hand to the values of the land, machinery, and other appliances used in making them. The study relates to normal conditions and long period results. This fact must ever be borne in mind. The market value of anything may be much above or much below the normal cost of production: and the marginal costs of a particular producer at any time may stand in no close relation to marginal costs under normal conditions *73.


Similarly, with regard to machinery and other appliances of production made by man, there is a margin through which additional supplies come in after overcoming the resistance of a spring, called "cost of production." For when the supply of those appliances is so small relatively to the demand that the earnings expected from new supplies are more than sufficient to yield normal interest (or profits, if earnings of management are reckoned in) on their cost of production, besides allowing for depreciation, etc., then the valve opens, and the new supplies come in. When the earnings are less than this, the valve remains shut: and as anyhow the existing supply is always in process of slow destruction by use and the lapse of time, the supply is always shrinking when the valve is closed. The valve is that part of the machinery by which the general relations of demand and supply govern value. But marginal uses do not govern value; because they, together with value, are themselves governed by those general relations.


§ 5. Finally a little may be said on a distinction that is sometimes made between "scarcity rents" and "differential rents." In a sense all rents are scarcity rents, and all rents are differential rents. But in some cases it is convenient to estimate the rent of a particular agent by comparing its yield to that of an inferior (perhaps a marginal) agent, when similarly worked with appropriate appliances. And in other cases it is best to go straight to the fundamental relations of demand to the scarcity or abundance of the means for the production of those commodities for making which the agent is serviceable.


So again a manufacturer or trader, owning both land and buildings, regards the two as bearing similar relations to his business. Either will afford him aid and accommodation at first liberally; and afterwards with diminishing return, as he endeavours to force more and more from them: till at last he will doubt whether the overcrowding of his workshops or his storerooms is not so great a source of trouble, that it would answer his purpose to obtain more space. And when he comes to decide whether to obtain that space by taking in an extra piece of land or by building his factory a floor higher, he weighs the net income to be derived from further investments in the one against that to be derived from the other. That part of his production which he just forces out of his existing appliances (being in doubt whether it would not be better worth his while to increase those appliances than to work so intensively those which he has), does not contribute to the net income which those appliances yield him. This argument says nothing as to whether the appliances were made by man, or part of a stock given by nature; it applies to rents and quasi-rents alike.


But there is this difference from the point of view of society. If one person has possession of a farm, there is less land for others to have. His use of it is not in addition to, but in lieu of the use of a farm by other people: whereas if he invests in improvements of land or in buildings on it, he will not appreciably curtail the opportunities of others to invest capital in like improvements. Thus there is likeness amid unlikeness between land and appliances made by man. There is unlikeness because land in an old country is approximately (and in some senses absolutely) a permanent and fixed stock: while appliances made by man, whether improvements in land, or in buildings, or machinery, etc., are a flow capable of being increased or diminished according to variations in the effective demand for the products which they help in raising. So far there is unlikeness. But on the other hand there is likeness, in that, since some of them cannot be produced quickly, they are a practically fixed stock for short periods: and for those periods the incomes derived from them stand in the same relation to the value of the products raised by them, as do true rents *91.


§ 5. A little has been said incidentally of the competition between different branches of industry for the same raw material or appliances for production. But now we have to consider the competition between various branches of agriculture for the same land. This case is simpler than that of urban land, because farming is a single business so far as the main crops are concerned; though the rearing of choice trees (including vines), flowers, vegetables etc. affords scope for various kinds of specialized business ability. The classical economists were therefore justified in provisionally supposing that all kinds of agricultural produce can be regarded as equivalent to certain quantities of corn; and that all the land will be used for agricultural purposes, with the exception of building sites which are a small and nearly fixed part of the whole. But when we concentrate our attention on any one product, as for instance, hops, it may seem that a new principle is introduced. That is however not the case. Let us look into this.


§ 6. The argument of the last section applies, so far as short periods are concerned, to the earning power of farm-buildings and to other quasi-rents. When existing farm-buildings, or other appliances which could be used in producing one commodity are diverted to producing another because the demand for that is such as to enable them to earn a higher income by producing it, then for the time the supply of the first will be less, and its price higher than if the appliances had not been able to earn a higher income by another use. Thus, when appliances are capable of being used in more than one branch of agriculture, the marginal cost in each branch will be affected by the extent to which these appliances are called off for work in other branches. Other agents of production will be pushed to more intensive uses in the first branch, in spite of a diminishing return; and the value of its product will rise, because only at a higher value will the price be in equilibrium. The increased earning power of the appliances due to the external demand will appear to be the cause of this increase in value: for it will cause a relative scarcity of the appliances in that branch of production, and therefore raise marginal costs. And from this statement it appears superficially to be a simple transition to the statement that the increased earning power of the appliances enter into those costs which govern value. But the transition is illegitimate. There will be no direct or numerical relation between the increase in the price of the first commodity and the income that the appliances can earn when they have been transferred to the second industry and adapted for service in it.


Again supplementary costs are, as a rule, larger relatively to prime costs for things that obey the law of increasing return than for other things *112; because their production needs the investment of a large capital in material appliances and in building up trade connections. This increases the intensity of those fears of spoiling his own peculiar market, or incurring odium from other producers for spoiling the common market; which we have already learnt to regard as controlling the short-period supply price of goods, when the appliances of production are not fully employed.


On the other side of the line of division are periods of time long enough to enable producers to adapt their production to changes in demand, in so far as that can be done with the existing provision of specialized skill, specialized capital, and industrial organization; but not long enough to enable them to make any important changes in the supplies of these factors of production. For such periods the stock of material and personal appliances of production has to be taken in a great measure for granted; and the marginal increment of supply is determined by estimates of producers as to the amount of production it is worth their while to get out of those appliances. If trade is brisk all energies are strained to their utmost, overtime is worked, and then the limit to production is given by want of power rather than by want of will to go further or faster. But if trade is slack every producer has to make up his mind how near to prime cost it is worth his while to take fresh orders. And here there is no definite law, the chief operative force is the fear of spoiling the market; and that acts in different ways and with different strengths on different individuals and different industrial groups. For the chief motive of all open combinations and of all informal silent and "customary" understandings whether among employers or employed is the need for preventing individuals from spoiling the common market by action that may bring them immediate gains, but at the cost of a greater aggregate loss to the trade.


Thus when we are taking a broad view of normal value, when we are investigating the causes which determine normal value "in the long run," when we are tracing the "ultimate" effects of economic causes; then the income that is derived from capital in these forms enters into the payments by which the expenses of production of the commodity in question have to be covered; and estimates as to the probable amount of that income directly control the action of the producers, who are on the margin of doubt as to whether to increase the means of production or not. But, on the other hand, when we are considering the causes which determine normal prices for a period which is short relatively to that required for largely increasing the supply of those appliances for production; then their influence on value is chiefly indirect and more or less similar to that exerted by the free gifts of nature. The shorter the period which we are considering, and the slower the process of production of those appliances, the less part will variations in the income derived from them play in checking or increasing the supply of the commodity produced by them, and in raising or lowering its supply price.


If now a new invention doubles the efficiency of work in any trade, so that a man can make twice as many things of a certain kind in a year without requiring additional appliances, then those things will fall to half their old exchange value. The effective demand for everyone's labour will be a little increased, and the share which each can draw from the common earnings-stream will be a little larger than before. He may if he chooses take twice as many things of this particular kind, together with his old allowance of other things: or he may take somewhat more than before of everything. If there be an increase in the efficiency of production in many trades the common earnings-stream or dividend will be considerably larger; the commodities produced by those trades will constitute a considerably larger demand for those produced by others, and increase the purchasing power of everyone's earnings.


But the ambiguity of the phrase, "the efficiency of the workers," has not yet been completely cleared away. When the payment for work of any kind is apportioned to the quantity and quality of the work turned out, it is said that uniform rates of piece-work wages are being paid; and if two persons work under the same conditions and with equally good appliances, they are paid in proportion to their efficiencies when they receive piece-work wages calculated by the same lists of prices for each several kind of work. If however the appliances are not equally good, a uniform rate of piece-work wages gives results disproportionate to the efficiency of the workers. If, for instance, the same lists of piece-work wages were used in cotton mills supplied with old-fashioned machinery, as in those which have the latest improvements, the apparent equality would represent a real inequality. The more effective competition is, and the more perfectly economic freedom and enterprise are developed, the more surely will the lists be higher in the mills that have old-fashioned machinery than in the others.


Hence arises the paradoxical result that the dirtiness of some occupations is a cause of the lowness of the wages earned in them. For employers find that this dirtiness adds much to the wages they would have to pay to get the work done by skilled men of high character working with improved appliances; and so they often adhere to old methods which require only unskilled workers of but indifferent character, and who can be hired for low (Time-) wages, because they are not worth much to any employer. There is no more urgent social need than that labour of this kind should be made scarce and therefore dear.


§ 4. Let us now revert to the principle that the income derived from the appliances for the production of a commodity exerts a controlling influence in the long run over their own supply and price, and therefore over the supply and the price of the commodity itself; but that within short periods there is not time for the exercise of any considerable influence of this kind. And let us inquire how this principle needs to be modified when it is applied not to the material agents of production, which are only a means towards an end, and which may be the private property of the capitalist, but to human beings who are ends as well as means of production and who remain their own property.


To begin with we must notice that, since labour is slowly produced and slowly worn out, we must take the term "long period" more strictly, and regard it as generally implying a greater duration, when we are considering the relations of normal demand and supply for labour, than when we are considering them for ordinary commodities. There are many problems, the period of which is long enough to enable the supply of ordinary commodities, and even of most of the material appliances required for making them, to be adjusted to the demand; and long enough therefore to justify us in regarding the average prices of those commodities during the period as "normal," and as equal to their normal expenses of production in a fairly broad use of the term; while yet the period would not be long enough to allow the supply of labour to be adjusted at all well to the demand for it. The average earnings of labour during this period therefore would not be at all certain to give about a normal return to those who provided the labour; but they would rather have to be regarded as determined by the available stock of labour on the one hand, and the demand for it on the other. Let us consider this point more closely.


Finally, it may be observed that the argument of V. VIII.—XI., with regard to the special earnings (whether of the nature of rents or quasi-rents) of appliances capable of being used in several branches of production, is applicable to the special earnings of natural abilities, and of skill. When land or machinery capable of being used for producing one commodity is used for another, the supply price of the first is raised, though not by an amount dependent on the incomes which those appliances for production would yield in the second use. So when trained skill or natural abilities which could have been applied to produce one commodity, are applied for another, the supply price of the first is raised through the narrowing of its sources of supply.


In exceptional cases the foremen may earn their wages by overdriving those whose work they superintend. But we may now suppose them to contribute to the success of the undertaking in a legitimate way, by securing a better organization of its details; so that fewer things are done amiss and need to be undone; so that everyone finds the help that he wants in moving heavy weights, etc., ready for him just when he wants it; so that all machinery and implements are kept in good working order, and no one has to waste his time and strength by working with inadequate appliances, and so on. The wages of foremen who do work of this kind may be taken as typical of a great part of the earnings of management: society, acting through the individual employer, offers an effective demand for their services until that margin is reached at which the aggregate efficiency of industry would be increased by adding workers of some other trade more than by adding the foremen whose wages would add an equal amount to the expenses of production.


§ 5. During all this inquiry we have had in view chiefly the ultimate, or long-period or true normal results of economic forces; we have considered the way in which the supply of business ability in command of capital tends in the long run to adjust itself to the demand; we have seen how it seeks constantly every business and every method of conducting every business in which it can render services that are so highly valued by persons who are able to pay good prices for the satisfaction of their wants, that those services will in the long run earn a high reward. The motive force is the competition of undertakers: each one tries every opening, forecasting probable future events, reducing them to their true relative proportions, and considering what surplus is likely to be afforded by the receipts of any undertaking over the outlay required for it. All his prospective gains enter into the profits which draw him towards the undertaking; all the investments of his capital and energies in making the appliances for future production, and in building up the "immaterial" capital of a business connection, have to show themselves to him as likely to be profitable, before he will enter on them: the whole of the profits which he expects from them enter into the reward, which he expects in the long run for his venture. And if he is a man of normal ability (normal that is for that class of work), and is on the margin of doubt whether to make the venture or not, they may be taken as true representatives of the (marginal) normal expenses of production of the services in question. Thus the whole of the normal profits enter into true or long-period supply price.

The expert evidence that is given in such cases is full of instruction to the economist in many ways, and in particular because of the use of mediæval phrases as to the customs of the trade, with a more or less conscious recognition of the causes which have produced those customs, and to which appeal must be made in support of their continued maintenance. And it almost always comes out finally that if the "customary" rate of profit on the turnover is higher for one class of job than another, the reason is that the former does (or did a little while ago) require a longer locking-up of capital; or a greater use of expensive appliances (especially such as are liable to rapid depreciation, or cannot be kept always employed, and therefore must pay their way on a comparatively small number of jobs); or that it requires more difficult or disagreeable work, or a greater amount of attention on the part of the undertaker; or that it has some special element of risk for which insurance has to be made. And the unreadiness of experts to bring to light these justifications of custom, which are lying almost hidden from themselves in the recesses of their own minds, gives ground for the belief that if we could call to life and cross-examine mediæval business men, we should find much more half-conscious adjustment of the rate of profit to the exigencies of particular cases than has been suggested by historians. Many of them fail sometimes to make it clear whether the customary rate of profits of which they are speaking is a certain rate on the turnover, or such a rate on the turnover as will afford in the long run a certain rate of profits per annum on the capital. Of course the greater uniformity of the methods of business in mediæval times, would enable a tolerably uniform rate of profits on the capital per annum to exist without causing so great variations in the rate on the turnover as are inevitable in modern business. But still it is clear that if one kind of rate of profits were nearly uniform, the other would not be; and the value of much that has been written on mediæval economic history seems to be somewhat impaired by the absence of a distinct recognition of the differences between the two kinds, and between the ultimate sanctions on which customs relating severally to them must depend.
The difficulty is even greater in small holdings. For the capitalist farmer does at all events measure the prime cost in terms of money. But the cultivator working with his own hands often puts into his land as much work as he feels able to do, without estimating carefully its money value in relation to its product.

Although peasant proprietors resemble the heads of other small businesses in their willingness to work harder than those whom they hire and for less reward; yet they differ from the small masters in manufacture in this, that they often do not hire extra labour even when it would pay them well to do so. If all that they and their family can do for their land is less than enough for it, it is generally under-cultivated: if more, it is often cultivated beyond the remunerative limit. It is a common rule that those who give the time which is free from their main occupation to some other industry, often regard their earnings in this last, however low, as an extra gain; and they sometimes even work below what would be a starvation wage to those who depend on that industry for support. This is especially true when the side-industry is that of cultivating, partly for the pleasure of doing it, a small plot of land with imperfect appliances.




§ 1. The argument of the preceding ten chapters may now be summarized. It falls far short of a complete solution of the problem before us: for that involves questions relating to foreign trade, to fluctuations of credit and employment, and to the influences of associated and collective action in its many forms. But yet it extends to the broad action of the most fundamental and permanent influences which govern distribution and exchange. In the summary at the end of Book V. we traced a continuous thread running through and connecting the applications of the general theory of equilibrium of demand and supply to different periods of time; from those so short that cost of production could exercise no direct influence on value, to those so long that the supply of the appliances of production could be fairly well adjusted to the indirect demand for them, which is derived from the direct demand for the commodities which they produce. In the present Book we have been concerned with another thread of continuity, which lies transversely to the thread connecting different periods of time. It connects the various agents and appliances for production, material and human; and establishes a fundamental unity between them, in spite of their important differences of outward feature.


Again, since human beings grow up slowly and are slowly worn out, and parents in choosing an occupation for their children must as a rule look forward a whole generation, changes in demand take a longer time to work out their full effects on supply in the case of human agents than of most kinds of material appliances for production; and a specially long period is required in the case of labour to give full play to the economic forces which tend to bring about a normal adjustment between demand and supply. Thus on the whole the money cost of any kind of labour to the employer corresponds in the long run fairly well to the real cost of producing that labour *133.


§ 7. But though the development of the industrial environment tends on the whole to raise the value of land, it more often than not lessens the value of machinery and other kinds of fixed capital, in so far as their value can be separated from that of the sites on which they rest. A sudden burst of prosperity may indeed enable the existing stock of appliances in any trade to earn for a time a very high income. But things which can be multiplied without limit cannot retain for long a scarcity value; and if they are fairly durable, as for instance ships and blast furnaces and textile machinery, they are likely to suffer great depreciation from the rapid progress of improvement.


The value of such things as railways and docks however depends in the long run chiefly on their situation. If that is good, the progress of their industrial environment will raise their net value even after allowance has been made for the charges to which they may be put in keeping their appliances abreast of the age *145.

Primitive appliances will bring water from high ground to a few public fountains: but the omnipresent water supply which both in its coming and its going performs essential services for cleanliness and sanitation, would be impossible without coal-driven steam-pumps and coal-made iron pipes.

It is a fact—and, so far as it goes, an important fact—that some share of the loss resulting from the lessening of output by (say) plasterers or shoemakers, will fall on those who do not belong to the working classes. Part of it will no doubt fall on employers and capitalists, whose personal and material capital is sunk in building or shoemaking; and part on well-to-do users, or consumers, of houses or shoes. And further if there were a general attempt by all of the working classes to obtain high wages by restricting the effective supply of their labour, a considerable part of the burden resulting from the shrinkage of the national dividend would doubtless be thrown on other classes of the nation, and especially on the capitalists, for a time: but only for a time. For a considerable diminution in the net return to investments of capital would speedily drive new supplies of it abroad. In regard to this danger it is indeed sometimes urged that the railways, and factories of the country cannot be exported. But nearly all of the materials, and a large part of the appliances of production are consumed, or worn out, or become obsolete every year; and they need to be replaced. And a reduction in the scale of this replacement, combined with the exportation of some of the capital thus set free, might probably so lessen the effective demand for labour in the country in a few years, that in the reaction wages generally would be reduced much below their present level *159.


But though the emigration of capital would not in any case be attended by much difficulty, owners of capital have good business reasons as well as a sentimental preference in favour of investing it at home. And therefore a rise in the standard of life, which makes a country more attractive to live in, is sure to counteract to some extent the tendency of a fall in the net return on investments to cause capital to be exported. On the other hand an attempt to raise wages by anti-social contrivances for stinting output, is certain to drive abroad well-to-do people in general; and especially just that class of capitalists whose enterprise and delight in conquering difficulties is of the most importance to the working classes. For their ceaseless initiative makes for national leadership and enables man's work to raise real wages; while promoting an increased supply of those appliances which make for efficiency, and thus sustain the growth of the national dividend.


Starting from the fact that the growth of the national dividend depends on the continued progress of invention and the accumulation of expensive appliances for production; we are bound to reflect that up to the present time nearly all of the innumerable inventions that have given us our command over nature have been made by independent workers; and that the contributions from Government officials all the world over have been relatively small. Further, nearly all the costly appliances for production which are now in collective ownership by national or local Governments, have been bought with resources borrowed mainly from the savings of business men and other private individuals. Oligarchic Governments have sometimes made great efforts to accumulate collective wealth; and it may be hoped that in the coming time, foresight and patience will become the common property of the main body of the working classes. But, as things are, too great a risk would be involved by entrusting to a pure democracy the accumulation of the resources needed for acquiring yet further command over nature.


Even as it is, something like this has happened: the wages of unskilled labour have risen faster than those of any other class, faster even than those of skilled labour. And this movement towards the equalization of earnings would have gone much faster, had not the work of purely unskilled labour been meanwhile annexed by automatic and other machinery faster even than that of skilled labour; so that there is less wholly unskilled work to be done now than formerly. It is true that some kinds of work, which traditionally belong to skilled artisans, require now less skill than formerly. But, on the other hand, the so-called "unskilled" labourer has now often to handle appliances too subtle and expensive to have been safely entrusted to the ordinary English labourer a century ago, or to any people at all in some backward countries now.

Appendix A

Nor was the principle of association inactive. Trade gilds had some vigour in spite of the paucity of artisans who were free. Those methods of combined action for business purposes, and of production on a large scale by slave labour in factories, in which Greece had been the pupil of the East, gained new strength when imported into Rome. The faculties and the temper of the Romans fitted them especially well for the management of joint-stock companies; and a comparatively small number of very wealthy men, with no middle class, were able, with the aid of trained slaves and freedmen, to undertake large contracts by land and by sea at home and abroad. They made capital hateful; but they made it powerful and efficient; they developed the appliances of money-lending with great energy; and partly in consequence of the unity of the imperial power, and the wide extent of the Roman language, there was in some important respects more freedom of commerce and of movement throughout the civilized world in the days of the Roman Empire than even now.


The factory system, and the use of expensive appliances in manufacture, came at a later stage. They are commonly supposed to be the origin of the power which undertakers wield in English industry; and no doubt they increased it. But it had shown itself clearly before their influence was felt. At the time of the French Revolution there was not a very great deal of capital invested in machinery whether driven by water or steam power; the factories were not large, and there were not many of them. But nearly all the textile work of the country was then done on a system of contracts. This industry was controlled by a comparatively small number of undertakers who set themselves to find out what, where and when it was most advantageous to buy and to sell, and what things it was most profitable to have made. They then let out contracts for making these things to a great number of people scattered over the country. The undertakers generally supplied the raw material, and sometimes even the simple implements that were used; those who took the contract executed it by the labour of themselves and their families, and sometimes but not always by that of a few assistants.

Appendix C

An analogy may be borrowed from naval affairs. The details of a battle with appliances that have passed away may be of great interest to the student of the general history of those times; but they may afford little useful guidance for the naval commander of to-day, who has to deal with a wholly different material of war. And therefore, as Captain Mahan has admirably shown, the naval commander of to-day will give more attention to the strategy than to the tactics of past times. He will concern himself not so much with the incidents of particular combats, as with practical illustrations of those leading principles of action which will enable him to hold his whole force in hand, and yet give to each part of it adequate initiative; to keep up wide communication, and yet be able to concentrate quickly, and select a point of attack at which he can bring an overwhelming force.


Similarly a man saturated with the general history of a period may give a vivid picture of the tactics of a battle, which will be true in its main outlines, and almost harmless even if occasionally wrong: for no one is likely to copy tactics, the appliances of which have passed away. But to comprehend the strategy of a campaign, to separate the real from the apparent motives of a great general of past times, a man must be a strategist himself. And if he is to make himself responsible for suggesting, however unobtrusively, the lessons which the strategists of to-day have to learn from the story which he records; then he is bound to have analysed thoroughly the naval conditions of to-day, as well as those of the time about which he is writing; and he must neglect no aid for this end that is to be had from the work of many minds in many countries studying the difficult problem of strategy. As it is with naval history, so it is with economic.


It is only recently, and to a great extent through the wholesome influence of the criticisms of the historical school, that prominence has been given to that distinction in economics which corresponds to the distinction between strategy and tactics in warfare. Corresponding to tactics are those outward forms and accidents of economic organization which depend on temporary or local aptitudes, customs and relations of classes; on the influence of individuals; or on the changing appliances and needs of production. While to strategy corresponds that more fundamental substance of economic organization, which depends mainly on such wants and activities, such preferences and aversions as are found in man everywhere: they are not indeed always the same in form, nor even quite the same in substance; but yet they have a sufficient element of permanence and universality to enable them to be brought in some measure under general statements, whereby the experiences of one time and one age may throw light on the difficulties of another.


For mental faculties, like manual dexterity, die with those who possess them: but the improvement which each generation contributes to the machinery of manufacture or to the organon of science is handed down to the next. There may be no abler sculptors now than those who worked on the Parthenon, no thinker with more mother-wit than Aristotle. But the appliances of thought develop cumulatively as do those of material production.


Ideas, whether those of art and science, or those embodied in practical appliances, are the most "real" of the gifts that each generation receives from its predecessors. The world's material wealth would quickly be replaced if it were destroyed, but the ideas by which it was made were retained. If however the ideas were lost, but not the material wealth, then that would dwindle and the world would go back to poverty. And most of our knowledge of mere facts could quickly be recovered if it were lost, but the constructive ideas of thought remained; while if the ideas perished, the world would enter again on the Dark Ages. Thus the pursuit of ideas is not less "real" work in the highest sense of the word than is the collection of facts; though the latter may in some cases properly be called in German a Realstudium, that is, a study specially appropriate to Realschulen. In the highest use of the word, that study of any field of the wide realm of economics is most "real" in which the collection of facts, and the analysis and construction of ideas connecting them are combined in those proportions which are best calculated to increase knowledge and promote progress in that particular field. And what this is, cannot be settled offhand, but only by careful study and by specific experience.

Appendix E

Nor can we avail ourselves here of the notion that capital is distinguished from other forms of wealth by its superior power of giving employment to labour. For in fact, when yachts and carriages are in the hands of dealers and are thus counted as capital, less employment is given to labour by a given amount of yachting or carriage driving than when the yachts or carriages are in private hands and are not counted as capital. The employment of labour would not be increased but lessened by the substitution of professional cookshops and bakeries (where all the appliances are reckoned as capital) for private kitchens (where nothing is reckoned as capital). Under a professional employer, the workers may possibly have more personal freedom: but they almost certainly have less material comfort, and lower wages in proportion to the work they do than under the laxer régime of a private employer.

Appendix H

For, when any casual disturbance has caused a great increase in the production of any commodity, and thereby has led to the introduction of extensive economies, these economies are not readily lost. Developments of mechanical appliances, of division of labour and of the means of transport, and improved organization of all kinds, when they have been once obtained are not readily abandoned. Capital and labour, when they have once been devoted to any particular industry, may indeed become depreciated in value, if there is a falling off in the demand for the wares which they produce: but they cannot quickly be converted to other occupations; and their competition will for a time prevent a diminished demand from causing an increased price of the wares *82.


But in the world in which we live, the term "average" expenses of production is somewhat misleading. For most of the appliances of production, material and personal, by which a commodity was made, came into existence long before. Their values are therefore not likely to be just what the producers expected them to be originally; but some of their values will be greater, and others less. Thus present incomes earned by them will be governed by the general relations between the demand for, and the supply of, their products; and their values will be arrived at by capitalizing these incomes. And therefore, when making out a list of normal supply prices, which, in conjunction with the list of normal demand prices, is to determine the equilibrium position of normal value, we cannot take for granted the values of these appliances for production without reasoning in a circle.

Figure 39. Click to enlarge in new window.In the adjoining diagram, SS' is not a true supply curve adapted to the conditions of the world in which we live; but it has properties, which are often erroneously attributed to such a curve. We will call it the particular expenses curve. As usual the amount of a commodity is measured along Ox, and its price along Oy. OH is the amount of the commodity produced annually, AH is the equilibrium price of a unit of it. The producer of the OHth unit is supposed to have no differential advantages; but the producer of the OMth unit has differential advantages which enable him to produce with an outlay PM, a unit which it would have cost him an outlay AH to produce without those advantages. The locus of P is our particular expenses curve; and it is such that any point P being taken on it, and PM being drawn perpendicular to Ox, PM represents the particular expenses of production incurred for the production of the OMth unit. The excess of AH over PM = QP, and is a producer's surplus or rent. For convenience the owners of differential advantages may be arranged in descending order from left to right; and thus SS' becomes a curve sloping upwards to the right.

Proceeding as in the case of consumer's surplus or rent (III. VI. 3), we may regard MQ as a thin parallelogram or as a thick straight line. And as M takes consecutive positions along OH, we get a number of thick straight lines cut in two by the curve SA, the lower part of each representing the expenses of production of a unit of the commodity, and the upper the contribution which that unit affords towards rent. The lower set of thick lines taken together fill up the whole space SOHA; which therefore represents the aggregate of the expenses of production of an amount OH. The upper set of thick lines taken together fill up the space FSA, which therefore represents producer's surplus or rent in the ordinary sense of the term. Subject to the corrections mentioned above (III. VI. 3), DFA represents the surplus satisfaction which consumers get from an amount OH over that, the value of which is represented to them by a sum of money equal to OH × HA.

Now the difference between the particular expenses curve and a normal supply curve lies in this, that in the former we do, and in the latter we do not, take the general economies of production as fixed and uniform throughout. The particular expenses curve is based throughout on the assumption that the aggregate production is OH, and that all the producers have access to the internal and external economies which belong to this scale of production; and, these assumptions being carefully borne in mind, the curve may be used to represent a particular phase of any industry, whether agricultural or manufacturing: but they cannot be taken to represent its general conditions of production.

That can be done only by the normal supply curve, in which PM represents the normal expenses of production of the OMth unit on the supposition that OM units (not any other amount, as OH) are being produced; and that the available economies of production external and internal are those which belong to a representative firm where the aggregate volume of production is OM. These economies will generally be less than if the aggregate volume of production were the larger quantity OH; and therefore, M being to the left of H, the ordinate at M for the supply curve will be greater than for a particular expenses curve drawn for an aggregate production OH.

It follows that the area SAF which represents aggregate rent in our present diagram would have represented something less than the aggregate rent, if SS' had been a normal supply curve even for agricultural produce ( DD' being the normal demand curve). For even in agriculture the general economies of production increase with an increase in the aggregate scale of production.

If however we choose to ignore this fact for the sake of any particular argument; that is, if we choose to assume that MP being the expenses of production of that part of the produce which was raised under the most difficult circumstances (so as to pay no rent) when OM units were produced, it remains also the expenses of production (other than rent) of the OMth unit even when OH is produced; or, in other words, if we assume that the increase in production from the amount OM to the amount OH did not alter the expenses of production of the OMth unit, then we may regard SAF as representing the aggregate rent even when SS' is the normal supply curve. It may be occasionally convenient to do this, attention being of course called every time to the nature of the special assumption made.

But no assumption of the kind can be made with regard to the supply curve of a commodity that obeys the laws of increasing return. To do so would be a contradiction in terms. The fact that the production of the commodity obeys that law, implies that the general economies available when the aggregate volume of production is large, are so much greater than when it is small, as to override the increasing resistance that nature offers to an increased production of the raw materials of which the industry makes use. In the case of a particular expenses curve, MP will always be less than AH ( M being to the left of H) whether the commodity obeys the law of increasing or diminishing return; but on the other hand in the case of a supply curve, for a commodity that obeys the law of increasing return, MP would generally be greater than AH.

It remains to say that if we are dealing with a problem in which some even of those appliances for production which were made by man, have to be taken as a given quantity for the time, so that their earnings will be of the nature of a quasi-rent; we may then draw a particular expenses curve, in which MP stands for the expenses of production in the narrower sense in which such quasi-rents are excluded; and the area SAF would thus represent the aggregate of rents proper and of these quasi-rents. This method of treating short-period normal value problems has attractions, and may perhaps ultimately be of service: but it requires careful handling, for the assumptions on which it rests are very slippery.

Appendix K

§ 2. The case is in some respects simpler when we pass to consider the earnings of material appliances for production. The work and the waiting by which they have been provided, yield their own worker's and waiter's surplus just mentioned, and in addition a surplus (or quasi-rent) of the excess of total money returns over direct outlay; provided we confine our attention to short periods only. But for long periods, that is, in all the more important problems of economic science, and especially in the problems discussed in this chapter, there is no distinction between immediate outlay and total outlay. And in the long run the earnings of each agent are, as a rule, sufficient only to recompense at their marginal rates the sum total of the efforts and sacrifices required to produce them. If less than these marginal rates had been forthcoming the supplies would have been diminished; and on the whole therefore there is in general no extra surplus in this direction.


To state from the point of view of this chapter a doctrine which has been discussed at length in V. VIII.—XI.:—All appliances of production, whether machinery, or factories with the land on which they are built, or farms, are alike in yielding large surpluses over the prime costs of particular acts of production to a man who owns and works them: also in yielding him normally no special surplus in the long run above what is required to remunerate him for his trouble and sacrifice and outlay in purchasing and working them (no special surplus, as contrasted with his general worker's and waiter's surplus). But there is this difference between land and other agents of production, that from a social point of view land yields a permanent surplus, while perishable things made by man do not. The more nearly it is true that the earnings of any agent of production are required to keep up the supply of it, the more closely will its supply so vary that the share which it is able to draw from the national dividend conforms to the cost of maintaining the supply: and in an old country land stands in an exceptional position, because its earnings are not affected by this cause. The difference between land and other durable agents is however mainly one of degree: and a great part of the interest of the study of the rent of land arises from the illustrations which it affords of a great principle that permeates every part of economics.