Principles of Economics
By Alfred Marshall
Economic conditions are constantly changing, and each generation looks at its own problems in its own way. In England, as well as on the Continent and in America, Economic studies are being more vigorously pursued now than ever before; but all this activity has only shown the more clearly that Economic science is, and must be, one of slow and continuous growth. Some of the best work of the present generation has indeed appeared at first sight to be antagonistic to that of earlier writers; but when it has had time to settle down into its proper place, and its rough edges have been worn away, it has been found to involve no real breach of continuity in the development of the science. The new doctrines have supplemented the older, have extended, developed, and sometimes corrected them, and often have given them a different tone by a new distribution of emphasis; but very seldom have subverted them…. [From the Preface to the First Edition]
First Pub. Date
London: Macmillan and Co., Ltd.
The text of this edition is in the public domain.
- Appendix A
- Appendix B
- Appendix C
- Appendix D
- Appendix E
- Appendix F
- Appendix G
- Appendix H
- Appendix I
- Appendix J
- Appendix K
EARNINGS OF LABOUR, CONTINUED.
BOOK VI, CHAPTER V
§ 1. The next peculiarity in the action of demand and supply with regard to labour, which we have to consider, is closely connected with some of those we have already discussed. It consists in the length of time that is required to prepare and train labour for its work, and in the slowness of the returns which result from this training.
This discounting of the future, this deliberate adjustment of supply of expensively trained labour to the demand for it, is most clearly seen in the choice made by parents of occupations for their children, and in their efforts to raise their children into a higher grade than their own.
It was these chiefly that Adam Smith had in view when he said:—”When any expensive machine is erected, the extraordinary work to be performed by it before it is worn out, it must be expected, will replace the capital laid out upon it, with at least the ordinary profits. A man educated at the expense of much labour and time to any of those employments which require extraordinary dexterity and skill, may be compared to one of those expensive machines. The work which he learns to perform, it must be expected, over and above the usual wages of common labour, will replace to him the whole expense of his education, with at least the ordinary profits of an equally valuable capital. It must do this too in a reasonable time, regard being had to the very uncertain duration of human life, in the same manner as to the more certain duration of the machine.”
But this statement is to be received only as a broad indication of general tendencies. For independently of the fact that in rearing and educating their children, parents are governed by motives different from those which induce a capitalist undertaker to erect a new machine, the period over which the earning power extends is generally greater in the case of a man than of a machine; and therefore the circumstances by which the earnings are determined are less capable of being foreseen, and the adjustment of supply to demand is both slower and more imperfect. For though factories and houses, the main shafts of a mine and the embankments of a railway, may have much longer lives than those of the men who made them; yet these are exceptions to the general rule.
§ 2. Not much less than a generation elapses between the choice by parents of a skilled trade for one of their children, and his reaping the full results of their choice. And meanwhile the character of the trade may have been almost revolutionized by changes, of which some probably threw long shadows before them, but others were such as could not have been foreseen even by the shrewdest persons and those best acquainted with the circumstances of the trade.
The working classes in nearly all parts of England are constantly on the look-out for advantageous openings for the labour of themselves and their children; and they question friends and relations, who have settled in other districts, as to the wages that are to be got in various trades, and as to their incidental advantages and disadvantages. But it is very difficult to ascertain the causes that are likely to determine the distant future of the trades which they are selecting for their children; and there are not many who enter on this abstruse inquiry. The majority assume without a further thought that the condition of each trade in their own time sufficiently indicates what it will be in the future; and, so far as the influence of this habit extends, the supply of labour in a trade in any one generation tends to conform to its earnings not in that but in the preceding generation.
Again, some parents, observing that the earnings in one trade have been for some years rising relatively to others in the same grade, assume that the course of change is likely to continue in the same direction. But it often happens that the previous rise was due to temporary causes, and that, even if there had been no exceptional influx of labour into the trade, the rise would have been followed by a fall instead of a further rise: and, if there is such an exceptional influx, the consequence may be a supply of labour so excessive, that its earnings remain below their normal level for many years.
Next we have to recall the fact that, although there are some trades which are difficult of access except to the sons of those already in them, yet the majority draw recruits from the sons of those in other trades in the same grade: and therefore when we consider the dependence of the supply of labour on the resources of those who bear the expenses of its education and training, we must often regard the whole grade, rather than any one trade, as our unit; and say that, in so far as the supply of labour is limited by the funds available for defraying its cost of production, the supply of labour in any grade is determined by the earnings of that grade in the last rather than in the present generation.
It must, however, be remembered that the birth-rate in every grade of society is determined by many causes, among which deliberate calculations of the future hold but a secondary place: though, even in a country in which tradition counts for as little as it does in modern England, a great influence is exerted by custom and public opinion which are themselves the outcome of the experience of past generations.
§ 3. But we must not omit to notice those adjustments of the supply of labour to the demand for it, which are effected by movements of adults from one trade to another, one grade to another, and one place to another. The movements from one grade to another can seldom be on a very large scale; although it is true that exceptional opportunities may sometimes develop rapidly a great deal of latent ability among the lower grades. Thus, for instance, the sudden opening out of a new country, or such an event as the American war, will raise from the lower ranks of labour many men who bear themselves well in difficult and responsible posts.
But the movements of adult labour from trade to trade and from place to place can in some cases be so large and so rapid as to reduce within a very short compass the period which is required to enable the supply of labour to adjust itself to the demand. That general ability which is easily transferable from one trade to another, is every year rising in importance relatively to that manual skill and technical knowledge which are specialized to one branch of industry. And thus economic progress brings with it on the one hand a constantly increasing changefulness in the methods of industry, and therefore a constantly increasing difficulty in predicting the demand for labour of any kind a generation ahead; but on the other hand it brings also an increasing power of remedying such errors of adjustment as have been made
§ 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.
§ 5. Market variations in the price of a commodity are governed by the temporary relations between demand and the stock that is in the market or within easy access of it. When the market price so determined is above its normal level, those who are able to bring new supplies into the market in time to take advantage of the high price receive an abnormally high reward; and if they are small handicraftsmen working on their own account, the whole of this rise in price goes to increase their earnings.
In the modern industrial world, however, those who undertake the risks of production and to whom the benefits of any rise in price, and the evils of any fall, come in the first instance, are capitalist undertakers of industry. Their net receipts in excess of the immediate outlay involved for making the commodity, that is, its prime (money) cost, are a return derived for the time being from the capital invested in their business in various forms, including their own faculties and abilities. But, when trade is good, the force of competition among the employers themselves, each desiring to extend his business, and to get for himself as much as possible of this high return, makes them consent to pay higher wages to their employees in order to obtain their services; and even if they act in concert, and refuse for a time any concession, a combination among their employees may force it from them under penalty of foregoing the harvest, which the favourable turn of the market is offering. The result generally is that before long a great part of the gains are being distributed among the employees; and that their earnings remain above the normal level so long as the prosperity lasts.
Thus the high wages of miners during the inflation which culminated in 1873, were governed for the time by the relation in which the demand for their services stood to the amount of skilled mining labour available, the unskilled labour imported into the trade being counted as equivalent to an amount of skilled labour of equal efficiency. Had it been impossible to import any such labour at all, the earnings of miners would have been limited only by the elasticity of the demand for coal on the one hand, and the gradual coming to age of the rising generation of miners on the other. As it was, men were drawn from other occupations which they were not eager to leave; for they could have got high wages by staying where they were, since the prosperity of the coal and iron trades was but the highest crest of a swelling tide of credit. These new men were unaccustomed to underground work; its discomforts told heavily on them, while its dangers were increased by their want of technical knowledge, and their want of skill caused them to waste much of their strength. The limits therefore which their competition imposed on the rise of the special earnings of miners’ skill were not narrow.
When the tide turned those of the new-comers who were least adapted for the work left the mines; but even then the miners who remained were too many for the work to be done, and their wage fell; till it reached that limit, at which those who were least adapted for the work and life of a miner, could get more by selling their labour in other trades. And that limit was a low one; for the swollen tide of credit, which culminated in 1873, had undermined solid business, impaired the true foundations of prosperity, and left nearly every industry in a more or less unhealthy and depressed condition.
§ 6. We have already remarked that only part of the return derived from an improvement which is being exhausted can be regarded as being its net earnings; for a sum equivalent to the exhaustion of the capital value of the improvement must be deducted from these returns, before they can be counted as net income of any kind. Similarly allowance must be made for the wear-and-tear of a machine, as well as for the cost of working it, before we can arrive at its net earnings. Now the miner is as liable to wear-and-tear as machinery is; and a deduction must be made from his earnings also on account of wear-and-tear, when the special return of his skill is being estimated
But in his case there is a further difficulty. For while the owner of machinery does not suffer from its being kept long at work when the expenses of working it, including wear-and-tear, have once been allowed for; the owner of skilled faculties does suffer when they are kept long at work, and he suffers incidental inconveniences, such as loss of recreation and of freedom of movement, etc. If the miner has only four days’ work in one week and earns £1, and in the next week he has six days’ work and earns £1. 10
s.; only part of this extra 10
s. can be regarded as return for his skill, for the remainder must be reckoned as the recompense of his additional fatigue as well as wear-and-tear
To conclude this part of our argument. The market price of everything,
i.e. its price for short periods, is determined mainly by the relations in which the demand for it stands to the available stocks of it; and in the case of any agent of production, whether it be a human or a material agent, this demand is “derived” from the demand for those things which it is used in making. In these relatively short periods fluctuations in wages follow, and do not precede, fluctuations in the selling prices of the goods produced.
But the incomes which are being earned by all agents of production, human as well as material, and those which appear likely to be earned by them in the future, exercise a ceaseless influence on those persons by whose action the future supplies of these agents are determined. There is a constant tendency towards a position of normal equilibrium, in which the supply of each of these agents shall stand in such a relation to the demand for its services, as to give to those who have provided the supply a sufficient reward for their efforts and sacrifices. If the economic conditions of the country remained stationary sufficiently long, this tendency would realize itself in such an adjustment of supply to demand, that both machines and human beings would earn generally an amount that corresponded fairly with their cost of rearing and training, conventional necessaries as well as those things which are strictly necessary being reckoned for. But conventional necessaries might change under the influence of non-economic causes, even while economic conditions themselves were stationary: and this change would affect the supply of labour, and would lessen the national dividend and slightly alter its distribution. As it is, the economic conditions of the country are constantly changing, and the point of adjustment of normal demand and supply in relation to labour is constantly being shifted.
§ 7. We may now discuss the question under what head to class those extra incomes which are earned by extraordinary natural abilities. Since they are not the result of the investment of human effort in an agent of production for the purpose of increasing its efficiency, there is a strong
primâ facie cause for regarding them as a producer’s surplus, resulting from the possession of a differential advantage for production, freely given by nature. This analogy is valid and useful so long as we are merely analysing the component parts of the income earned by an individual. And there is some interest in the inquiry how much of the income of successful men is due to chance, to opportunity, to the conjuncture; how much to the good start that they have had in life; how much is profits on the capital invested in their special training, how much is the reward of exceptionally hard work; and how much remains as a producer’s surplus or rent resulting from the possession of rare natural gifts.
But when we are considering the whole body of those engaged in any occupation, we are not at liberty to treat the exceptionally high earnings of successful men as rent, without making allowance for the low earnings of those who fail. For the supply of labour in any occupation is governed, other things being equal, by the earnings of which it holds out the prospect. The future of those who enter the occupation cannot be predicted with certainty: some, who start with the least promise, turn out to have great latent ability, and, aided perhaps by good luck, they earn large fortunes; while others, who made a brilliant promise at starting, come to nothing. For the chances of success and failure are to be taken together, much as are the chances of good and bad hauls by a fisherman or of good and bad harvests by a farmer; and a youth when selecting an occupation, or his parents when selecting one for him, are very far from leaving out of account the fortunes of successful men. These fortunes are therefore part of the price that is paid in the long run for the supply of labour and ability that seeks the occupation: they enter into the true or “long period” normal supply price of labour in it.
It may be conceded, however, that, if a certain class of people were marked out from their birth as having special gifts for some particular occupation, and for no other, so that they would be sure to seek that occupation in any case, then the earnings which such men would get might be left out of account as exceptional, when we were considering the chances of success or failure for ordinary persons. But as a matter of fact that is not the case; for a great part of a person’s success in any occupation depends on the development of talents and tastes, the strength of which cannot be clearly predicted until he has already committed himself to a choice of occupation. Such predictions are at least as fallible as those which a new settler can make as to the future fertility and advantages of situation of the various plots of land that are offered for his selection
*56. And partly for this reason the extra income derived from rare natural qualities bears a closer analogy to the surplus produce from the holding of a settler who has made an exceptionally lucky selection, than to the rent of land in an old country. But land and human beings differ in so many respects, that even that analogy, if pursued very far, is apt to mislead: and the greatest caution is required in the application of the term producer’s surplus to the earnings of extraordinary ability.
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.
Life and Labour in London; and Sir H. Ll. Smith’s
Modern Changes in the Mobility of Labour.