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
BOOK II, CHAPTER II
§ 1. All wealth consists of desirable things; that is, things which satisfy human wants directly or indirectly: but not all desirable things are reckoned as wealth. The affection of friends, for instance, is an important element of wellbeing, but it is not reckoned as wealth, except by a poetic licence. Let us then begin by classifying desirable things, and then consider which of them should be accounted as elements of wealth.
In the absence of any short term in common use to represent all desirable things, or things that satisfy human wants, we may use the term
Goods for that purpose.
Desirable things or goods are Material, or Personal and Immaterial.
Material goods consist of useful material things, and of all rights to hold, or use, or derive benefits from material things, or to receive them at a future time. Thus they include the physical gifts of nature, land and water, air and climate; the products of agriculture, mining, fishing, and manufacture; buildings, machinery, and implements; mortgages and other bonds; shares in public and private companies, all kinds of monopolies, patent-rights, copyrights; also rights of way and other rights of usage. Lastly, opportunities of travel, access to good scenery, museums, etc. are the embodiment of material facilities, external to a man; though the faculty of appreciating them is internal and personal.
non-material goods fall into two classes. One consists of his own qualities and faculties for action and for enjoyment; such for instance as business ability, professional skill, or the faculty of deriving recreation from reading or music. All these lie within himself and are called
internal. The second class are called
external because they consist of relations beneficial to him with other people. Such, for instance, were the labour dues and personal services of various kinds which the ruling classes used to require from their serfs and other dependents. But these have passed away; and the chief instances of such relations beneficial to their owner now-a-days are to be found in the good will and business connection of traders and professional men
Again, goods may be
non-transferable. Among the latter are to be classed a person’s qualities and faculties for action and enjoyment (
i.e. his internal goods); also such part of his business connection as depends on personal trust in him and cannot be transferred, as part of his vendible good will; also the advantages of climate, light, air, and his privileges of citizenship and rights and opportunities of making use of public property
Those goods are
free, which are not appropriated and are afforded by Nature without requiring the effort of man. The land in its original state was a free gift of nature. But in settled countries it is not a free good from the point of view of the individual. Wood is still free in some Brazilian forests. The fish of the sea are free generally: but some sea fisheries are jealously guarded for the exclusive use of members of a certain nation, and may be classed as national property. Oyster beds that have been planted by man are not free in any sense; those that have grown naturally are free in every sense if they are not appropriated; if they are private property they are still free gifts from the point of view of the nation. But, since the nation has allowed its rights in them to become vested in private persons, they are not free from the point of view of the individual; and the same is true of private rights of fishing in rivers. But wheat grown on free land and the fish that have been landed from free fisheries are not free: for they have been acquired by labour.
§ 2. We may now pass to the question which classes of a man’s goods are to be reckoned as part of his wealth. The question is one as to which there is some difference of opinion, but the balance of argument as well as of authority seems clearly to incline in favour of the following answer:—
When a man’s
wealth is spoken of simply, and without any interpretation clause in the context, it is to be taken to be his stock of two classes of goods.
In the first class are those material goods to which he has (by law or custom) private rights of property, and which are therefore transferable and exchangeable. These it will be remembered include not only such things as land and houses, furniture and machinery, and other material things which may be in his single private ownership, but also any shares in public companies, debenture bonds, mortgages and other obligations which he may hold requiring others to pay money or goods to him. On the other hand, the debts which he owes to others may be regarded as negative wealth; and they must be subtracted from his gross possessions before his true net wealth can be found.
Services and other goods, which pass out of existence in the same instant that they come into it, are, of course, not part of the stock of wealth
In the second class are those immaterial goods which belong to him, are external to him, and serve directly as the means of enabling him to acquire material goods. Thus it excludes all his own personal qualities and faculties, even those which enable him to earn his living; because they are Internal. And it excludes his personal friendships, in so far as they have no direct business value. But it includes his business and professional connections, the organization of his business, and—where such things exist—his property in slaves, in labour dues, etc.
This use of the term Wealth is in harmony with the usage of ordinary life: and, at the same time, it includes those goods, and only those, which come clearly within the scope of economic science, as defined in Book I.; and which may therefore be called
economic goods. For it includes all those things, external to a man, which (i) belong to him, and do not belong equally to his neighbours, and therefore are distinctly his; and which (ii) are directly capable of a money measure,—a measure that represents on the one side the efforts and sacrifices by which they have been called into existence, and, on the other, the wants which they satisfy
§ 3. A broader view of wealth may indeed be taken for some purposes; but then recourse must be had to a special interpretation clause, to prevent confusion. Thus, for instance, the carpenter’s skill is as direct a means of enabling him to satisfy other people’s material wants, and therefore indirectly his own, as are the tools in his work-basket; and perhaps it may be convenient to have a term which will include it as part of wealth in a broader use. Pursuing the lines indicated by Adam Smith
*25, and followed by most continental economists, we may define
personal wealth so as to include all those energies, faculties, and habits which directly contribute to making people industrially efficient; together with those business connections and associations of any kind, which we have already reckoned as part of wealth in the narrower use of the term. Industrial faculties have a further claim to be regarded as economic in the fact that their value is as a rule capable of some sort of indirect measurement
The question whether it is ever worth while to speak of them as wealth is merely one of convenience, though it has been much discussed as if it were one of principle.
Confusion would certainly be caused by using the term “wealth” by itself when we desire to include a person’s industrial qualities. “Wealth” simply should always mean external wealth only. But little harm, and some good seems likely to arise from the occasional use of the phrase “material and personal wealth.”
§ 4. But we still have to take account of those material goods which are common to him with his neighbours; and which therefore it would be a needless trouble to mention when comparing his wealth with theirs; though they may be important for some purposes, and especially for comparisons between the economic conditions of distant places or distant times.
These goods consist of the benefits which he derives from living in a certain place at a certain time, and being a member of a certain state or community; they include civil and military security, and the right and opportunity to make use of public property and institutions of all kinds, such as roads, gaslight, etc., and rights to justice or to a free education. The townsman and the countryman have each of them for nothing many advantages which the other either cannot get at all, or can get only at great expense. Other things being equal, one person has more real wealth in its broadest sense than another, if the place in which the former lives has a better climate, better roads, better water, more wholesome drainage; and again better newspapers, books, and places of amusement and instruction. House-room, food and clothing, which would be insufficient in a cold climate, may be abundant in a warm climate: on the other hand, that warmth which lessens men’s physical needs, and makes them rich with but a slight provision of material wealth, makes them poor in the energy that procures wealth.
Many of these things are
collective goods; i.e. goods which are not in private ownership. And this brings us to consider wealth from the social, as opposed to the individual point of view.
§ 5. Let us then look at those elements of the wealth of a nation which are commonly ignored when estimating the wealth of the individuals composing it. The most obvious forms of such wealth are public material property of all kinds, such as roads and canals, buildings and parks, gasworks and waterworks; though unfortunately many of them have been secured not by public savings, but by public borrowings, and there is the heavy “negative” wealth of a large debt to be set against them.
But the Thames has added more to the wealth of England than all its canals, and perhaps even than all its railroads. And though the Thames is a free gift of nature (except in so far as its navigation has been improved), while the canal is the work of man, yet we ought for many purposes to reckon the Thames a part of England’s wealth.
German economists often lay stress on the non-material elements of national wealth; and it is right to do this in some problems relating to national wealth, but not in all. Scientific knowledge indeed, wherever discovered, soon becomes the property of the whole civilized world, and may be considered as cosmopolitan rather than as specially national wealth. The same is true of mechanical inventions and of many other improvements in the arts of production; and it is true of music. But those kinds of literature which lose their force by translation, may be regarded as in a special sense the wealth of those nations in whose language they are written. And the organization of a free and well-ordered State is to be regarded for some purposes as an important element of national wealth.
But national wealth includes the individual as well as the collective property of its members. And in estimating the aggregate sum of their individual wealth, we may save some trouble by omitting all debts and other obligations due to one member of a nation from another. For instance, so far as the English national debt and the bonds of an English railway are owned within the nation, we can adopt the simple plan of counting the railway itself as part of the national wealth, and neglecting railway and government bonds altogether. But we still have to deduct for those bonds etc. issued by the English Government or by private Englishmen, and held by foreigners; and to add for those foreign bonds etc. held by Englishmen
Cosmopolitan wealth differs from national wealth much as that differs from individual wealth. In reckoning it, debts due from members of one nation to those of another may conveniently be omitted from both sides of the account. Again, just as rivers are important elements of national wealth, the ocean is one of the most valuable properties of the world. The notion of cosmopolitan wealth is indeed nothing more than that of national wealth extended over the whole area of the globe.
Individual and national rights to wealth rest on the basis of civil and international law, or at least of custom that has the force of law. An exhaustive investigation of the economic conditions of any time and place requires therefore an inquiry into law and custom; and economics owes much to those who have worked in this direction. But its boundaries are already wide; and the historical and juridical bases of the conceptions of property are vast subjects which may best be discussed in separate treatises.
§ 6. The notion of
Value is intimately connected with that of Wealth; and a little may be said about it here. “The word
value” says Adam Smith “has two different meanings, and sometimes expresses the utility of some particular object and sometimes the power of purchasing other goods which the possession of that object conveys.” But experience has shown that it is not well to use the word in the former sense.
The value, that is the exchange value, of one thing in terms of another at any place and time, is the amount of that second thing which can be got there and then in exchange for the first. Thus the term value is relative, and expresses the relation between two things at a particular place and time.
Civilized countries generally adopt gold or silver or both as money. Instead of expressing the values of lead and tin, and wood, and corn and other things in terms of one another, we express them in terms of money in the first instance; and call the value of each thing thus expressed its
price. If we know that a ton of lead will exchange for fifteen sovereigns at any place and time, while a ton of tin will exchange for ninety sovereigns, we say that their prices then and there are £15 and £90 respectively, and we know that the value of a ton of tin in terms of lead is six tons then and there.
The price of every thing rises and falls from time to time and place to place; and with every such change the purchasing power of money changes so far as that thing goes. If the purchasing power of money rises with regard to some things, and at the same time falls equally with regard to equally important things, its general purchasing power (or its power of purchasing things in general) has remained stationary. This phrase conceals some difficulties, which we must study later on. But meanwhile we may take it in its popular sense, which is sufficiently clear; and we may throughout this volume neglect possible changes in the general purchasing power of money. Thus the price of anything will be taken as representative of its exchange value relatively to things in general, or in other words as representative of its general purchasing power
But if inventions have increased man’s power over nature very much, then the real value of money is better measured for some purposes in labour than in commodities. This difficulty however will not much affect our work in the present volume, which is only a study of the “Foundations” of economics.
external, to the individual. An internal good is that which he finds in himself given to him by nature, or which he educates in himself by his own free action, such as muscular strength, health, mental attainments. Everything that the outer world offers for the satisfaction of his wants is an external good to him.”
And in the same way from one point of view we may count the business connection of the solicitor or physician, the merchant or the manufacturer, at the full equivalent of the income he would lose if he were deprived of it; while yet we must recognize that its exchange value,
i.e. the value which he could get for it by selling it, is much less than that.
Wealth of Nations, Bk. II. ch. II.
Again, business connections and trade reputations add to the national wealth, only in so far as they bring purchasers into relation with those producers who will meet their real wants most fully for a given price; or in other words, only in so far as they increase the extent to which the efforts of the community as a whole meet the wants of the community as a whole. Nevertheless when we are estimating national wealth, not directly but indirectly as the aggregate of individual wealth, we must allow for these businesses at their full value, even though this partly consists of a monopoly which is not used for the public benefit. For the injury they do to rival producers was allowed for in counting up the values of the businesses of those rivals; and the injury done to consumers by raising the price of the produce, which they buy was allowed for in reckoning the purchasing power of their means, so far as this particular commodity is concerned.
A special case of this is the organization of credit. It increases the efficiency of production in the country, and thus adds to national wealth. And the power of obtaining credit is a valuable asset to any individual trader. If, however, any accident should drive him out of business, the injury to national wealth is something less than the whole value of that asset; because some part at least of the business, which he would have done, will now be done by others with the aid of some part at least of the capital which he would have borrowed.
There are similar difficulties as to how far money is to be reckoned as part of national wealth; but to treat them thoroughly would require us to anticipate a good deal of the theory of money.
Principes Mathématiques de la Théorie des Richesses, ch. II.), we get the same sort of convenience from assuming the existence of a standard of uniform purchasing power by which to measure value, that astronomers do by assuming that there is a “mean sun” which crosses the meridian at uniform intervals, so that the clock can keep pace with it; whereas the actual sun crosses the meridian sometimes before and sometimes after noon as shown by the clock.