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
London: Macmillan and Co.
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
§ 1. BEFORE the effect of interference to raise wages is examined, it is necessary to make a preliminary inquiry into the methods of engaging workpeople; for the effect produced by interference depends in part upon what these methods are. The reason for this dependence is that, when wages in any place or occupation are raised, an influence is set at work, which, according to circumstances, may draw new workpeople from outside into the place or occupation, or,
per contra, may push out workpeople who are already there. This influence acts through the change which the wage movement brings about in the attractiveness of the place or occupation, on the one hand, to people outside it, and, on the other, to those already belonging to it. The change in attractiveness to these two sets of people is not determined solely by the amount of the change in wage and the nature of the relevant demand for labour, but also by certain other conditions associated with the methods of engagement in vogue. This can be proved as follows. The mathematical expectation of earnings in any place or occupation is measured by the aggregate annual earnings of all the workpeople of given quality attached to it at any time, divided by the number of those workpeople. If the methods of engagement are such that everybody of given quality, whether already engaged there or at present outside, has an equal chance of obtaining a share of employment in it, the attractiveness of the place or occupation to outsiders and insiders alike corresponds to this mathematical expectation; and, from the standpoint of both these classes, changes in the mathematical expectation correspond roughly to changes in
attractiveness. This correspondence is not, indeed, complete, because to many men a given “expectation of earnings” made up of a higher nominal wage coupled with a worse prospect of employment is more attractive than an equal expectation made up of a lower nominal wage coupled with a better prospect of employment. Thus the Poor Law Commissioners report: “In Liverpool it is freely said that the nominally high wages attract men from the country and from Ireland, under the impression that they can get regular work at these rates.”
*91 Mr. Dearle speaks to like effect of the London building trades.
*92 Sir William Beveridge again, before the war, wrote: “Men can be got to follow up work which gives them five shillings a day about four times in a fortnight, when they would repudiate with scorn a regular situation at fifteen or eighteen shillings a week.”
*93 But this consideration need not be pressed here. It is enough that, in the conditions contemplated, there is a rough general correspondence between changes in the mathematical expectation of earnings and changes in the attractiveness of the industry both to outsiders and to insiders. If, however, the methods of engagement are of such a sort that anybody of given quality, who has already been employed in the industry, will be taken on rather than a new man from outside, the attractiveness to outsiders of the industry, when the rate of wages there is forced up—and the quantity of employment available thereby reduced—is necessarily zero, whatever the effect of the change may be upon the mathematical expectation of earnings. Yet again, if the methods of engagement are such that, among the workpeople of given quality who have already been employed, men are always selected for employment in accordance with a formal or informal preference list, an enforced rise in the wage rate must press the attractiveness of the place or occupation to those insiders who are near the bottom of the list down to zero. Of course, divergencies in the methods of engagement are more or less blotted out from the point of view of people considering a long time beforehand for what industries their
children shall be trained. This, however, does not lessen their relevance to the effect produced by interference designed to raise wages. In the face of an enforced rise there are three possibilities: (1) the attractiveness of the place or occupation affected may correspond after the change, both for outsiders and for insiders, to the mathematical expectation of earnings there; (2) for all insiders it may correspond to this mathematical expectation, but for all outsiders to zero; and (3) for displaced insiders, as well as for all outsiders, it may be zero. The first of these possibilities will be realised if the method of engagement of labour is entirely haphazard and engagements are for short periods; the second if the method is such that all insiders are preferred to any outsiders, but among themselves are on an equal footing; the third if all workpeople interested in the place or occupation are implicitly or explicitly arranged, for purposes of engagement, upon a preference scale. Of the three methods thus distinguished the obvious label for the first is the
casual method and for the third the
preference method. For the second no satisfactory label is available, and it is necessary to invent a name: I shall call it the
privileged class method.
§ 2. The distinction between these three methods can be made clear by examples. The casual method reigns when all comers of given quality (not necessarily all comers of different qualities) are accepted indifferently. The general nature of the method is obvious. It is sometimes supposed that, when workpeople for a number of firms are engaged through a central institution, it is necessarily ruled out by that fact. But this is a confusion. It is open to Employment Exchanges, just as much as to single firms, to engage men by the casual method; and, in fact, the rules of many of them provide that they
must do so. Thus, in a number of Employment Bureaux organised by trade unions in France, the officials “allot situations to their members strictly in order of
priority of application.”*94 “The Antwerp Bureau adopts the rule of sending workmen to situations in the order in which they apply at the office—a method which has been the subject of much criticism.”
*95 In the Labour Bureau of the Berlin brewers
“a workman must wait his turn before he is placed,
i.e. on registration he gets a number and must then wait till all the numbers on the list prior to his own have been satisfied.”
*96 Under all these arrangements the method of engagement that rules is the casual method. The privileged class method was formally established under the Liverpool docks scheme of 1912. All workmen who were dockers at a given date were furnished with a tally, possession of which gave them preference over workmen not holding tallies, while leaving certain classes of them still equal among themselves.
*97 The preference method, whether formally or informally applied, is of wide scope. It implies that different workpeople of given quality are not hired indifferently but in some sort of more or less definite order, so that whatever work there is tends to be concentrated upon certain individuals, while the others get nothing. When an actual preference list is used it does not matter, from the present point of view, upon what basis this list is drawn up. One made by placing the names of applicants in order of their length of service in the industry—a specially good arrangement in a decaying trade—or even in alphabetical order, would answer the purpose. In practice, when preference lists among similar men exist, they are always a mere bye-product of lists designed to set in order of capacity a number of workpeople presumed to be dissimilar. Thus the Central (Unemployed) Body for London suggested, among its model rules, that “the superintendent will recommend applicants for employment according to suitability, but employers may select from the registered applicants any one whom they consider suitable.”
*98 Broadly speaking, this policy is pursued by the Berlin Central Labour Registry.
*99 In so far as it involves the placing in order of precedence of a number of men of
equal capacity, it implies preference of the kind relevant to this discussion.
§ 3. It need hardly be said that the methods of engagement ruling in different places and occupations are not sharply separated into the three types that have just been described. Rather, actual existing arrangements are, in general, compromises tending towards, but not identical with, one or another of them. The influences which determine the choice made between them are very similar to those which were discussed in Chapter XI. in connection with the choice between different ways of meeting periods of depression. Many of the considerations which make employers unwilling to resort to a reduction of staff in these periods—fear of losing men who for any reason have a special value to them, and so on—also make them hostile to the casual method. Therefore this method is likely to be adopted only when the men are so unskilled, and the detailed conditions of particular plants or works so similar, that a man’s value to an employer is not appreciably increased by his having been employed by him before. The preference method is favoured when the conditions are such that continuity of work by the same man is important, while to retain in bad times a larger number of men that is necessary by resort to short time would be costly or otherwise injurious. Where the technical objections to short time are less serious the way is open for the privileged class method. It will be readily perceived that in a “stationary state” the last two methods would lead to identical results.
§ 4. It is interesting to observe that there is a connection between the casual method and the custom of short engagements. Long engagements are not, indeed, incompatible with some degree of casualness, because, even with annual engagements, provided the hirings of different people terminate irregularly, there will always be a certain number of jobs on offer; whereas, if the hirings of different individuals all terminate at the same times, at those times all the jobs that there are will be on offer. With very short engagements, however, practically all the jobs that there are will be continuously on offer. Since it is only in respect of jobs on offer that casualness is possible, it follows that the casual method cannot be developed so completely when long engagements
prevail as when short engagements do; or, more generally, that every increase in the length of the normal period of engagement, in an industry in which the casual method prevails, will, to some extent, undermine that method. In great measure, long engagements are a bye-product of the same causes that make employers prefer the preference or privileged class method to the casual method, and have not themselves any causal influence. Sometimes, however, long engagements are fostered by causes other than these, and then the long engagements, or, more strictly, the causes which bring them about, operating through them, are properly regarded as additional factors making against the casual method. Among skilled manual workers, in industries where continuous service to the public is extremely important, long engagements have sometimes been introduced as a device for obviating strikes. An example is afforded by the agreement of the South Metropolitan Gas Company with its “co-partners.” “The agreement is a definite engagement on our part to give a man work for a period varying from three months to twelve months, and the great bulk of our men work under such agreements. The origin of it was, as perhaps you may have heard, in order to prevent a large number of men giving notice to us at the same time. At the time of our strike in 1889 all the stokers gave notice at one time. In order to obviate that, we instituted a series of agreements, to fall in so many every week. It is not compulsory. The men can sign them or not as they please, but those who do sign partake in the prosperity of the Company. At present, the men who have signed are getting 10 per cent on their wages as a result of being under agreement, so you may realise that there is no difficulty in getting the bulk to sign.”
*100 Among unskilled workpeople, not only is this positive motive for long engagements generally weak, because, in the event of a strike, their work can be more easily replaced, but there is sometimes a negative motive working definitely in the opposite sense. For, whereas, among skilled men, their own greater intelligence and the existence of strong union organisation make
disciplinary machinery unnecessary, among the rougher class of the unskilled, foremen may find it impossible to enforce a fair day’s work unless the weapon of instant dismissal is ready to hand.
*101 Moreover, it must be remembered that, among all classes of workers, short engagements
may, as was indicated in § 1, be preferred by the men themselves, just because they make casualness possible. The majority of the Poor Law Commissioners write: “The ‘docker’s romance,’ as it is called, is that he, alone of all tradesmen, can take days off when he likes, without suffering for it…. At Southampton docks several cases have come under notice, where permanent hands have asked to be given casual employment.”
*102 Mr. Walsh, in like manner, writes that a large percentage of men have taken to the docks, “because the work there is intermittent and, therefore, more congenial to them than other occupations, where regularity in attendance is required.”
§ 5. It is possible for the Government, by direct action designed to encourage the re-engagement of the man whose engagement has just terminated rather than of a new man, to combat the casual method in the same way that the establishment of a system of long engagements would do. Thus the Poor Law Commissioners write: “One method of discouraging casual labour would be the imposition of what we might call an ’employment termination due.’ That is to say that, to the termination of an engagement, either by the master or by the man, should be attached a small payment, both by the master and the man, in the nature of a fine or stamp duty to the State. The tax, or ’employment termination due,’ could be very easily levied by means of stamps placed upon a ‘termination of employment’ form, which it might be made incumbent upon every workman to produce to the labour exchange upon registration. It is urged that the advantages of this system, if it could be adopted, would be threefold. In the first place, it would discourage the, so to speak, wanton termination of employment either by the employer or the employee. In the
second place, it would discourage also the employment of casual labour, inasmuch as, the more casual the labour employed in a concern, the greater would be the amount of ’employment termination due’ which would have to be paid. And, thirdly, to the extent to which it did not deter either of these practices, it would afford a source of revenue, which might be devoted to defraying the cost of one or other of the proposals which we shall make.”
*104 Devices of this sort, if introduced, would undoubtedly strengthen the desire of employers to keep posts occupied as far as possible by the same men, and so would enhance the stimulus, which this desire affords, towards the adoption of methods of engagement other than the casual method. The provision of the National Insurance Act of 1911 (not continued in the Act of 1920), to the effect that, “when an employer has employed a man continuously throughout a period of twelve months, he may recover one-third of the contributions paid for that man,”
*105 was a device of the kind contemplated. We must not forget, however, that all such devices not only encourage employers to fill posts, which they have decided in any event to fill somehow, with the same man continuously, but also encourage them, in some slight measure, to keep men on in posts which otherwise they would have been inclined temporarily to close down.
Pro tanto, the effect of this is to check the free movement of labour from centres of falling demand to centres of rising demand, thus impeding its most advantageous employment. The direct injury which these devices would in this way inflict on the national dividend needs to be set against whatever indirect benefit they may confer upon it.
Report on Agencies and Methods for dealing with the Unemployed, p. 84.
The First Year’s Working of the Liverpool Docks Scheme, chapter i.
Report on Agencies and Methods for dealing with the Unemployed, p. 87.
Report to the Poor Law Commission, Appendix, vol. xix. p. 15.
Cd. 8911, p. 5.
Part III, Chapter XIV