The Economics of Welfare
By Arthur C. Pigou
WHEN a man sets out upon any course of inquiry, the object of his search may be either light or fruit—either knowledge for its own sake or knowledge for the sake of good things to which it leads. In various fields of study these two ideals play parts of varying importance. In the appeal made to our interest by nearly all the great modern sciences some stress is laid both upon the light-bearing and upon the fruit-bearing quality, but the proportions of the blend are different in different sciences. At one end of the scale stands the most general science of all, metaphysics, the science of reality. Of the student of that science it is, indeed, true that “he yet may bring some worthy thing for waiting souls to see”; but it must be light alone, it can hardly be fruit that he brings. Most nearly akin to the metaphysician is the student of the ultimate problems of physics. The corpuscular theory of matter is, hitherto, a bearer of light alone. Here, however, the other aspect is present in promise; for speculations about the structure of the atom may lead one day to the discovery of practical means for dissociating matter and for rendering available to human use the overwhelming resources of intra-atomic energy. In the science of biology the fruit-bearing aspect is more prominent. Recent studies upon heredity have, indeed, the highest theoretical interest; but no one can reflect upon that without at the same time reflecting upon the striking practical results to which they have already led in the culture of wheat, and upon the far-reaching, if hesitating, promise that they are beginning to offer for the better culture of mankind. In the sciences whose subject-matter is man as an individual there is the same variation of blending as in the natural sciences proper. In psychology the theoretic interest is dominant—particularly on that side of it which gives data to metaphysics; but psychology is also valued in some measure as a basis for the practical art of education. In human physiology, on the other hand, the theoretic interest, though present, is subordinate, and the science has long been valued mainly as a basis for the art of medicine. Last of all we come to those sciences that deal, not with individual men, but with groups of men; that body of infant sciences which some writers call sociology. Light on the laws that lie behind development in history, even light upon particular facts, has, in the opinion of many, high value for its own sake. But there will, I think, be general agreement that in the sciences of human society, be their appeal as bearers of light never so high, it is the promise of fruit and not of light that chiefly merits our regard. There is a celebrated, if somewhat too strenuous, passage in Macaulay’s Essay on History: “No past event has any intrinsic importance. The knowledge of it is valuable, only as it leads us to form just calculations with regard to the future. A history which does not serve this purpose, though it may be filled with battles, treaties and commotions, is as useless as the series of turnpike tickets collected by Sir Matthew Mite.” That paradox is partly true. If it were not for the hope that a scientific study of men’s social actions may lead, not necessarily directly or immediately, but at some time and in some way, to practical results in social improvement, not a few students of these actions would regard the time devoted to their study as time misspent. That is true of all social sciences, but especially true of economics. For economics “is a study of mankind in the ordinary business of life”; and it is not in the ordinary business of life that mankind is most interesting or inspiring. One who desired knowledge of man apart from the fruits of knowledge would seek it in the history of religious enthusiasm, of martyrdom, or of love; he would not seek it in the market-place. When we elect to watch the play of human motives that are ordinary—that are sometimes mean and dismal and ignoble—our impulse is not the philosopher’s impulse, knowledge for the sake of knowledge, but rather the physiologist’s, knowledge for the healing that knowledge may help to bring. Wonder, Carlyle declared, is the beginning of philosophy. It is not wonder, but rather the social enthusiasm which revolts from the sordidness of mean streets and the joylessness of withered lives, that is the beginning of economic science. Here, if in no other field, Comte’s great phrase holds good: “It is for the heart to suggest our problems; it is for the intellect to solve them…. The only position for which the intellect is primarily adapted is to be the servant of the social sympathies.”… [From the text]
First Pub. Date
1920
Publisher
London: Macmillan and Co.
Pub. Date
1932
Comments
4th edition.
Copyright
The text of this edition is copyright © 1932. This book is available through Transaction Publishers, Inc. Direct all requests for permissions and copyrights to Transaction Publishers, Inc.
- Preface to the Third Edition
- Note to the Fourth Edition
- Part I, Chapter 1
- Part I, Chapter 2
- Part I, Chapter 3
- Part I, Chapter 4
- Part I, Chapter 5
- Part I, Chapter 6
- Part I, Chapter 7
- Part I, Chapter 8
- Part I, Chapter 9
- Part I, Chapter 10
- Part I, Chapter 11
- Part II, Chapter 1
- Part II, Chapter 2
- Part II, Chapter 3
- Part II, Chapter 4
- Part II, Chapter 5
- Part II, Chapter 6
- Part II, Chapter 7
- Part II, Chapter 8
- Part II, Chapter 9
- Part II, Chapter 10
- Part II, Chapter 11
- Part II, Chapter 12
- Part II, Chapter 13
- Part II, Chapter 14
- Part II, Chapter 15
- Part II, Chapter 16
- Part II, Chapter 17
- Part II, Chapter 18
- Part II, Chapter 19
- Part II, Chapter 20
- Part II, Chapter 21
- Part II, Chapter 22
- Part III, Chapter 1
- Part III, Chapter 2
- Part III, Chapter 3
- Part III, Chapter 4
- Part III, Chapter 5
- Part III, Chapter 6
- Part III, Chapter 7
- Part III, Chapter 8
- Part III, Chapter 9
- Part III, Chapter 10
- Part III, Chapter 11
- Part III, Chapter 12
- Part III, Chapter 13
- Part III, Chapter 14
- Part III, Chapter 15
- Part III, Chapter 16
- Part III, Chapter 17
- Part III, Chapter 18
- Part III, Chapter 19
- Part III, Chapter 20
- Part IV, Chapter 1
- Part IV, Chapter 2
- Part IV, Chapter 3
- Part IV, Chapter 4
- Part IV, Chapter 5
- Part IV, Chapter 6
- Part IV, Chapter 7
- Part IV, Chapter 8
- Part IV, Chapter 9
- Part IV, Chapter 10
- Part IV, Chapter 11
- Part IV, Chapter 12
- Part IV, Chapter 13
- Appendix I
- Appendix II
- Appendix III
Part II, Chapter II
THE DEFINITION OF MARGINAL SOCIAL AND PRIVATE NET PRODUCTS
§ 1. CONCERNED as we are with the national dividend as a continuing flow, we naturally understand by the resources directed to making it, not a stock of resources, but a similarly continuing flow; and we conceive the distribution of these resources among different uses or places on the analogy, not of a stagnant pond divided into a number of sections, but rather of a river divided into a number of streams. This conception involves, no doubt, many difficulties in connection both with the varying durability of the equipment employed in different industries and with the dynamic, or changing, tendencies of industry as a whole. In spite of these difficulties, however, the general idea is exact enough for the present purpose. That purpose is to provide a suitable definition for the concepts which are fundamental throughout this Part, namely,
the value of marginal private and
the value of the marginal social net product. The essential point is that these too must be conceived as flows—as the result
per year of the employment
per year of the marginal increment of some given quantity of resources. On this basis we may proceed to work out our definition.
§ 2. For complete accuracy it is necessary to distinguish between two senses in which the term marginal increment of resources may be employed. It may be conceived either as being added, so to speak, from outside, thus constituting a net addition to the sum total of resources in existence, or as being transferred to the particular use or place we are studying
from some other use or place. If the effect on production in a particular use or place of adding an increment of resources is independent of the quantity of resources employed elsewhere, the net products of these two sorts of marginal increment will be the same. It often happens, however, that this condition of independence is not satisfied. Thus, as will be shown more fully in a later chapter, the
nth unit of resources employed in a particular firm will yield different quantities of produce according as the quantity of resources employed in other firms in the same industry is larger or smaller. The net products derived from marginal increments of resources, interpreted in the above two ways, might perhaps be distinguished as additive marginal net products and substitutive marginal net products. In general, however, the net products derived from the two sorts of marginal increment of resources in any use or place are not likely to differ sensibly from one another, and for most purposes they may be treated as equivalent.
§ 3. Waiving, then, this point, we have next to define more precisely what is meant when we speak of the marginal net product of the resources employed in any use or place as
the result of the marginal increment of resources employed there. This is tantamount to saying that the marginal net product of a given quantity of resources is equal to the difference that would be made to the total product of these resources by adding to or subtracting from them a small increment. This, however, is not by itself sufficient. For the addition or subtraction of a small increment can be accomplished in several different ways with correspondingly different results. We are here concerned with a particular way. For us the marginal net product of any flow of resources employed in any use or place is equal to the difference between the aggregate flow of product for which that flow of resources,
when appropriately organised, is responsible and the aggregate flow of product for which a flow of resources differing from that flow by a small (marginal) increment,
when appropriately organised, would be responsible. In this statement the phrase
when appropriately organised is essential. If we were thinking of marginal net product in the sense of the difference
between the products of two adjacent
quantities of resources, we should normally imagine the resources to be organised suitably to one of these quantities and, therefore, not to the other. Since, however, our interest is in the difference between the products of two adjacent
flows of resources, it is natural to conceive each of the two flows as organised in the manner most appropriate to itself. This is the conception we need. It is excellently illustrated by Professor J. B. Clark. The marginal increment of capital invested in a railway corporation is in reality, he writes, “a difference between two kinds of plant for carrying goods and passengers. One of these is the railroad as it stands, with all its equipment brought up to the highest pitch of perfection that is possible with the present resources. The other is the road built and equipped as it would have been if the resources had been by one degree less. A difference in all-round quality between an actual and a possible railroad is in reality the final increment of capital now used by the actual corporation. The product of that last unit of capital is the difference between what the road actually produces and what it would have produced if it had been made one degree poorer.”
*8
§ 4. One further point must be made clear. The marginal net product of a factor of production is the difference that would be made to the aggregate product by withdrawing
any (small) unit of the factor. The marginal unit is thus not any particular unit. Still less is it the worst unit in existence—the most incompetent workman who is employed at all—as some writers have supposed! It is
any (small) unit out of the aggregate of units,
all exactly alike, into which we imagine this aggregate to be divided. Though, however, the marginal unit is thus
any unit, it is not any unit
however placed. On the contrary, it is any unit
conceived as placed at the margin. The significance of this is best understood with the help of an illustration. To withdraw a man attending a new machine or working in an easy place in any industry and to do nothing else would, of course, affect aggregate output more seriously than to withdraw a man attending an obsolete machine or
working in a difficult place would do. The marginal net product of work in that industry is then the difference that would be made to aggregate output by withdrawing for a day any (similar) man and redistributing, if necessary, the men that are left in such wise that the machine consequently left unattended or place of work left unfilled is the least productive machine or place of work of which use has hitherto been made.
§ 5. So much being understood, we have next to distinguish precisely between the two varieties of marginal net product which I have named respectively
social and
private. The marginal social net product is the total net product of physical things or objective services due to the marginal increment of resources in any given use or place, no matter to whom any part of this product may accrue. It might happen, for example, as will be explained more fully in a later chapter, that costs are thrown upon people not directly concerned, through, say, uncompensated damage done to surrounding woods by sparks from railway engines. All such effects must be included—some of them will be positive, others negative elements—in reckoning up the social net product of the marginal increment of any volume of resources turned into any use or place. Again an increase in the quantity of resources employed by one firm in an industry may give rise to external economies in the industry as a whole and so lessen the real costs involved in the production by other firms of a given output. Everything of this kind must be counted in. For some purposes it is desirable to count in also indirect effects induced in people’s tastes and in their capacity to derive satisfaction from their purchases and possessions. Our principal objective, however, is the national dividend and changes in it as defined in Part I. Chapters III. and V. Therefore psychical consequences are excluded, and the marginal social net product of any given volume of resources is taken, except when special notice to the contrary is given, to consist of physical elements and objective services only. The marginal private net product is that part of the total net product of physical things or objective services due to the marginal increment of resources in any given use or place which accrues in the first instance—
i.e.prior to sale—to the person responsible for investing resources there. In some conditions this is equal to, in some it is greater than, in others it is less than the marginal social net product.
§ 6. The
value of the marginal social net product of any quantity of resources employed in any use or place is simply the sum of money which the marginal social net product is worth in the market. In like manner the value of the marginal private net product is the sum of money which the marginal private net product is worth in the market. Thus, when the marginal social net product and the marginal private net product are identical and the person responsible for the investment sells what accrues to him, the value of both sorts of marginal net product in respect of a given volume of resources is equal to the increment of product multiplied by the price per unit at which the product is sold when that volume of resources is being employed in producing it.
*9 For example, the two sorts of marginal net product per year of a million units of resources invested in weaving being assumed to be identical, the value of both is equal to the number of bales of cloth by which the output of a million
plus a small increment, say a million and one, exceeds the output of a million units, multiplied by the money value of a bale of cloth when this output is being produced.
*10 This, it should be observed in passing, is different from, and must by no means be confused with, the excess—if there is an excess—of the money value of the whole product when a million and one units of resources are being employed over the money value of the whole product when a million units are being employed.
Principles of Economics, p. 847. It will be noticed by the careful reader that, even when the
additive marginal net product and the
substitutive marginal net product are equal, the
value of the marginal net product will be different according as marginal net product is interpreted as additive and as substitutive marginal net product. The difference will, however, in general, be of the second order of smalls.
Part II, Chapter III