The Economics of Welfare

Pigou, Arthur C.
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First Pub. Date
London: Macmillan and Co.
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4th edition.
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Part IV, Chapter XIII


§ 1. WHEN we desire to determine whether the fact and the expectation of the fact, taken together, of any given annual transference of resources from the relatively rich to the relatively poor are likely to increase the national dividend, all the various considerations set out in the preceding chapters must be taken into account. There is little doubt but that plans could be devised, which would enable transferences, involving a very large amount of resources, to be made with results advantageous to production. Since the generality of these transferences will also increase the real incomes of the relatively poor, they must redound to the advantage of economic welfare in a wholly unambiguous way. Transferences which diminish the national dividend, on the other hand, are liable, through various reactions which have been indicated in the course of this discussion, to diminish the real earnings of the relatively poor; and, if their amount is kept constant, they may do this to so great an extent that the earnings per year of the relatively poor plus the transference made to them will ultimately be less than their earnings alone would have been, had no transference been made. When this happens, these transferences also affect economic welfare in an unambiguous way: this time by injuring it. There remains, however, one further sort of transference, the results of which cannot be unambiguous. I refer to a system of transferences varied from year to year in such a way as to compensate for any reduction that may come about in that part of the income of the poor which accrues to them through earnings. An arrangement of this sort is implicitly introduced whenever a government establishes a minimum standard of real income, below which it refuses to allow any citizen in any circumstances to fall. For the establishment of such a minimum standard, implying, as it does, transferences to the poor of a kind that differentiate in favour of poverty, is likely to diminish the national dividend, while it will, at the same time, for an indefinitely long period, increase the aggregate real income of the poor. To determine the effect, which the establishment of this kind of minimum standard is likely to exercise upon economic welfare, involves, therefore, a balancing of conflicting considerations.


§ 2. Before this balancing is attempted, it is desirable to obtain a clear notion of what precisely the minimum standard should be taken to signify. It must be conceived, not as a subjective minimum of satisfaction, but as an objective minimum of conditions. The conditions, too, must be conditions, not in respect of one aspect of life only, but in general. Thus the minimum includes some defined quantity and quality of house accommodation, of medical care, of education, of food, of leisure, of the apparatus of sanitary convenience and safety where work is carried on, and so on. Furthermore, the minimum is absolute. If a citizen can afford to attain to it in all departments, the State cares nothing that he would prefer to fail in one. It will not allow him, for example, to save money for a carouse at the cost of living in a room unfit for human habitation. There is, indeed, some danger in this policy. It is a very delicate matter for the State to determine authoritatively in what way poor people shall distribute scanty resources among various competing needs. The temperaments and circumstances of different individuals differ so greatly that rigid rules are bound to be unsatisfactory. Thus Dr. Bowley writes: "The opinion is quite tenable that the poor are forced (by the effect of the law to enforce a minimum quality and quantity of housing accommodation) to pay for a standard of housing higher than they obtain in food, and that they would make more of their income if they were worse housed and better fed."*30 This danger must be recognised; but the public spirit of the time demands also that it shall be faced. A man must not be permitted to fall below the minimum in one department in order that he may rise above it in others. Again, if a citizen cannot afford to attain the minimum in all departments, but, by failing in one, can remain independent, that does not justify the State in standing aside. The State must not permit anywhere hours of child labour or of women's labour or conditions of housing accommodation incompatible with the minimum standard, on the ground that, by resort to them, some given family could, and, without resort to them, it could not, support itself; for, if that is the fact, the family ought not to be required to support itself. There is no defence for the policy of "giving poor widows and incapable fathers permission to keep their children out of school and take their earnings."*31 Rather, the Committee on the Employment of Children Act are wholly right when they declare: "We feel, moreover, that the cases of widows and others, who are now too often economically dependent on child labour, should be met, no longer by the sacrifice of the future to the present, but, rather, by more scientific, and possibly by more generous, methods of public assistance."*32 The same type of reasoning applies, with even greater force, to the common plea that women should be allowed to work in factories shortly before and shortly after confinement, because, if they are not allowed to do this, they and their children alike will suffer shocking poverty. In these circumstances it is the duty of the State, not to remit the law, but to defend those affected by it from this evil consequence.


§ 3. There is general agreement among practical philanthropists that some minimum standard of conditions ought to be set up at a level high enough to make impossible the occurrence to anybody of extreme want; and that whatever transference of resources from relatively rich to relatively poor persons is necessary to secure this must be made, without reference to possible injurious consequences upon the magnitude of the dividend.*33 This policy of practical philanthropists is justified by analysis, in the sense that it can be shown to be conducive to economic welfare on the whole, if we believe the misery that results to individuals from extreme want to be indefinitely large; for, then, the good of abolishing extreme want is not commensurable with any evils that may follow should a diminution of the dividend take place. Up to this point, therefore, there is no difficulty. But our discussion cannot stop at this point. It is necessary to ask, not merely whether economic welfare will be promoted by the establishment of any minimum standard, but also by what minimum standard it will be promoted most effectively. Now, above the level of extreme want, it is generally admitted that increments of income involve finite increments of satisfaction. Hence the direct good of transference and the indirect evil resulting from a diminished dividend are both finite quantities; and the correct formal answer to our question is that economic welfare is best promoted by a minimum standard raised to such a level that the direct good resulting from the transference of the marginal pound transferred to the poor just balances the indirect evil brought about by the consequent reduction of the dividend.


§ 4. To derive from this formal answer a quantitative estimate of what the minimum standard of real income established in any particular country at any particular time ought to be, it would be necessary to obtain and to analyse a mass of detailed information, much of which is not, in present circumstances, accessible to students. One practical conclusion can, however, be safely drawn. This is that, other things being equal, the minimum can be advantageously set higher, the larger is the real income per head of the community. The reason, of course, is that every increase in average income implies a diminution in the number of people unable by their own efforts to attain to any given minimum standard; and, therefore, a diminution, both absolute and proportionate, in the damage to the dividend which an external guarantee of that standard threatens to bring about. It follows that, when we have to do with a group of pioneer workers in rough and adverse natural circumstances, the minimum standard may rightly be set at a low level. But, as inventions and discoveries progress, as capital is accumulated and Nature subdued, it should be correspondingly raised. Thus it is reasonable that, while a relatively poor country makes only a low provision for its "destitute" citizens, a relatively rich country should make a somewhat better provision for all who are "necessitous."*34


§ 5. In this connection it is important that there should be no confusion as to what is meant by a rich country. For the present purpose country means, not Government, but people. There is a widespread impression that a nation's duty to make provision for its poorer citizens depends upon the amount of money that the Government has to provide for other purposes; and from this it is inferred that the great increase in the British Budget required to meet the annual charges on the war debt justifies, and, indeed, commands, large retrenchments in social expenditure. This idea is, in great measure, illusory. It is true, of course, that the indirect effect in checking production of the expectation of continuous taxation sufficient to yield 800 million post-war £s annually is a good deal greater than that of the expectation of taxes yielding 200 million pre-war £s. But this, though important, is a secondary matter. The essential fact is that, when interest is paid to domestic holders—the case is, of course, different with foreign holders—of Government securities, no part of the real income of the country is directly used up. Resources are merely transferred from one group of citizens to another. No doubt, when a nation has to provide funds for a large internal debt in consequence of a war, this is a sign that resources have been expended on war that might have been expended on building up capital equipment and so making the real income larger. It must not be forgotten, however, that a large part of the resources that were lent, for example, to the British Government by its citizens in the Great War, was not withdrawn from what would have been real capital, but was the result of economies in consumption and special activities in production, which, but for the war, would not have taken place. Even, therefore, as a sign of a country's capacity to give help to its poor, the magnitude of an internal war debt is of little use. The true test of this capacity is the direct one—aggregate real income compared with population. It is, indeed, proper to subtract from this the resources which are necessarily used up in unproductive ways. Thus, when a country is so situated that it has to devote an exceptionally large proportion of its real income to the upkeep of powerful armaments, or to the payment of interest to foreigners, who, in the past, have lent money to its Government, or to machinery for preserving internal order, account must be taken of these things. As a rule, however, they are relatively unimportant. The amount of the aggregate real income in relation to the number of the population is the dominant relevant fact.


§ 6. For the United Kingdom the best available estimate gives an aggregate national income, for 1913-14, represented at then prices by some 2250 million pounds. Deducting some 250 millions for rates and taxes and some 230 millions for new investments, we have left a sum sufficient, if it could have been divided up equally without being diminished in the process, to yield an income of £162 to each representative family of 4½ persons.*35 Of course, as a matter of fact, it would have been quite impossible to pool the national income in this way without a large part of the flow of goods and services, which this money figure represents, disappearing altogether. Apart from great improvements in productive organisation, which may, perhaps, be hoped for, but certainly cannot be predicted with confidence, there is no reason to expect that the real income per head of the country—we need not trouble about its swollen reflex in the glass of money—will be substantially greater in the near future than it was in 1913-14. In view of these facts it is plain that, wealthy as this country is, as compared both with itself in the past and with most of its neighbours in the present, it is not wealthy in an absolute sense. As things are it is literally impossible for it, by any manipulation of distribution, to provide for all its citizens a really high standard of living. In so far, therefore, as social reformers rely upon improvements in the distribution of wealth, as distinguished from improvements in production, they are bound to chasten their hopes. The national minimum may rightly be set now much higher than it could have been set a hundred or fifty years ago. But, with the national average no larger than it is, it is inevitable that the national minimum must still be set at a deplorably low level.


§ 7. So far nothing has been said of the common view that, in determining the minimum standard which it will establish for itself, one country must have regard to the policy of other countries. It is widely held that the prohibition in England of socially undesirable practices, such as the employment of women at night, the use of unfenced machinery, the building of factories without proper sanitary arrangements, or the working of unduly long hours, involve a larger real cost to us if undertaken here alone than if undertaken by all industrial countries together. The reason commonly given for this view, that isolated action here would cause a flood of imports from abroad destructive of our industries, fails to take account of the fact that, subject to certain well-known qualifications, imports cannot expand in the long period without exports expanding correspondingly; so that our industries as a whole could not suffer injury in the manner contemplated. It is true, however, that, if a handicap is imposed on productive methods in one country only, there will be a tendency for employing power, capital and labour to leave that country. If all leave in equal proportions, the general scale of the country's industry will be correspondingly reduced, the rate of pay per unit of every factor remaining much as before. The national dividend need not fall as much as production falls, because capitalists may still live and receive income here while employing their capital elsewhere. Since, in fact, capital—at all events if we suppose the obstacle of double income-tax to be done away with by international and intra-imperial agreement—is more mobile than labour, the presumption is that capital will leave in a somewhat larger proportion, and that, therefore, the earnings per head of work-people will fall. In whatever way the detail of the movement is worked out, it is plain that economic welfare in the country affected is likely to be lessened. The injury thus inflicted on it cannot, it should be observed, be prevented by setting up a tariff against imports from countries where labour legislation is less advanced. On the contrary, such a tariff, by interfering with the normal distribution of the country's resources among different occupations, would, in general, make the national dividend smaller, and the injury, therefore, worse. If, however, the handicap of these high minima is extended to all important countries by international labour legislation, the danger that our capital will be driven abroad is removed—at the cost of some slight damage to us in the terms on which our goods exchange against foreign goods.


§ 8. From these considerations it appears that the extension by international labour legislation of regulations, which are both desirable in themselves and also a real handicap to industry, is likely, though in a way different from that commonly supposed, to lessen the burden which these regulations would inflict on any country adopting them in isolation. To this extent it will, therefore, really be easier for a country to rule out injurious methods and processes, if it can persuade other nations to move forward in company with it. Moreover, when the injurious methods specially affect particular industries, an international agreement will really make it easier for the persons engaged in those industries to accept a veto upon injurious methods; and it will almost always be thought to make this easier both for those persons and for the community regarded as a whole. Hence the development of machinery for international labour legislation may be expected to accomplish something solid in speeding up improvements in industrial conditions. The advantage to be looked for is the greater in that many improvements in method, which are not really handicaps at all, but, through their effect on efficiency, net benefits, are, nevertheless, popularly believed to be handicaps, and are, therefore, unlikely to be adopted by cautious statesmen without some outside stimulus. International negotiation may often furnish such a stimulus and give strength to reformers in a country where the social movement is slack or the power of vested interests strong. There can be little doubt, for example, that the Franco-Italian treaty of 1906 led indirectly to a general improvement in Italian practice in the supervision and enforcement of labour laws. At the same time it would be a mistake to expect from the lever of internationalism more than it has power to give. Inevitably international minima, if they are to secure general or wide assent, must lag behind the practice of the most advanced nations. It would be disastrous if a custom should grow up of regarding these international minima as national maxima; for that would check the forward movement of pioneer nations, and so indirectly of the whole world. Just as a "good" employer, while welcoming the Factory Acts, will keep his own practice well in advance of the legal standards, so also a "good" nation will always maintain national laws more ambitious than those which at the time have international sanction.*36


§ 9. One word should be added in conclusion. In spite of what was said in Part I. Chapter IX. about the probable reaction of improved fortunes upon the standard of living, it must be conceded that the establishment by the State of an effective national minimum, since it must in effect, if not in name, differentiate to some extent in favour of large families, may somewhat increase the birth-rate among the poor. It is reasonable to hope that this tendency would not be very pronounced, since the people affected would be mainly those the size of whose families is not determined to any large extent by economic considerations. As much cannot be said, however, of an associated tendency. The establishment of an effective minimum standard, if adopted in one country alone, might well lead to a considerable increase in the numbers of the population through the immigration of relatively inefficient poor persons attracted by the prospect of State aid. If it did lead to this, the new immigrants would consume more than they contributed to the dividend; and, as their numbers grew, the native-born citizens of the country concerned would be more and more heavily mulcted to maintain them. It is, therefore, to the advantage of a State, which has established a minimum standard above that enjoyed by its neighbours, to forbid the immigration of persons who seem unlikely to attain this minimum without help from the public funds. To this end idiots, feeble-minded persons, cripples, beggars and vagrants, and persons over or under a certain age may be excluded, unless they are either accompanied by relatives able to support them, or themselves possess an adequate income derived from investments.*37 Unfortunately, however, it is exceedingly difficult to devise machinery which shall be effective in excluding all "undesirable" immigrants without at the same time excluding some that are "desirable."

Notes for this chapter

The Measurement of Social Phenomena, p. 173.
Cf. Henderson, Industrial Insurance in the United States, p. 301.
Report, p. 15.
It is sometimes suggested that those very improvements in the capacity of labour, which have been discussed in previous parts of this book, are calculated to push some men below the minimum standard. It is true, as a point of analysis, that increased capacity of labour is, in effect, equivalent to an addition to its supply, and, therefore, involves a slight reduction in the real wage of a labour unit of given quality. In view, however, of the elastic character of the demand for labour in general, the number of the unimproved men whom this change would push over the line of self-support would almost certainly be very small.
This is the term employed by the Majority Commissioners of the 1909 Report on the Poor Laws.
Cf. Bowley, The Division of the Product of Industry, pp. 20 et seq.
The International Labour Conference of 1919, in framing its convention on Women's Employment, aimed at a high standard. On each separate provision of the Convention it fell behind the practice of some countries, but the existing law of no country covered the whole requirement of the Convention (G. Hetherington, International Labour Legislation, p. 90).
For a summary of a number of laws on this matter, cf. Grunzel, Economic Protectionism, pp. 281 et seq.

Appendix I

End of Notes

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