The Common Sense of Political Economy

ECONOMICAL ADMINISTRATION AND ITS DIFFICULTIES

CHAPTER III

Summary.—
The ideal coincidence between marginal significances and market prices is impeded by the difficulty of keeping all departments of expenditure in connection with each other, and by the fact that we cannot always get things in the exact quantities in which we want them. We have also to keep the balance between expenditure on things that we pay for as we use them, like food, and things that we pay for at once and use over a long period, like furniture; and if all expenditures alike have to be met out of income, the period of saving during which we are stinting ourselves in current expenditure and have not yet secured the more permanent possession for which we are saving, will be a period of privation during which we are paying without enjoying, and it will be followed by another in which we are enjoying without paying. The various systems of hire are a device to enable us to spread the period of payment over the whole period of use, and so to relieve the comparative indigence of the first period at the expense of the comparative abundance of the second. Hire also enables us to enjoy the fraction we want of commodities that cannot be divided. The premium we pay for these advantages is one of the sources of interest. The administration of our resources, which is complicated by these phenomena, is also confused by false analogies and illusions generated by custom, environment, and untrained mental habits. But, however perfectly we overcome these difficulties and errors of administration, objective and subjective, the ultimate significance of our use of our means must depend on the nature of our ends.

Having now arrived at a clear conception of marginal significance and of the principles on which the marginal significance of desired objects may be brought into correspondence with the terms on which nature or man offers them to us, we may proceed to examine some of the difficulties which are met in carrying out these principles of administration in practice.

One of the chief of them is the difficulty of bringing our different branches and different scales of expenditure into effective relation with each other. It is comparatively easy to keep our expenditure on different articles of dress or on different articles of food properly balanced; that is to say, to administer a housekeeping allowance or a dress allowance is a comparatively easy problem, and if all the money we can command is assigned to us in allowances, earmarked for this or that general purpose, the problem of administration is simple. And even where there is no such externally imposed system of divisions, the mind is apt to run into grooves, and form certain fixed ideas as to the suitable amount to spend on books, on travelling and holidays, on housekeeping, and so forth, under cover of which very considerable differences of the marginal significance of a shilling may grow up undiscovered between two branches of expenditure. When a man is carefully considering whether it would be an extravagance to take a cab or not, a quite new light may be thrown on the problem if it occurs to him that the cab-fare will be the exact price of a volume of Ruskin or of the Temple Classics. Our expenditure has a tendency to divide itself into water-tight compartments, and the difference of density of the fluid in different compartments is sometimes very high before any effective endosmosis or exosmosis takes place.

Again, we can compare quantities of about the same magnitude with much greater accuracy than quantities of different magnitude. It may be comparatively easy to determine whether two penny satisfactions are pretty nearly equal to each other, and again to equate two shilling or two pound satisfactions with each other, but it is startling to realise that when we say that one thing is worth £1 and another only worth 1d. we are asserting that the first is 240 times as great as the second. We never think of satisfactions in this quantitative manner, and the very conception of multiplying a satisfaction by 240 strikes us as absurd. But, after all, multiplication is only a form of addition, and we are constantly, with more or less accuracy, endeavouring to add up small satisfactions and weigh them against larger ones. Indeed it is only by realising that a leakage by drops, which are insensible when taken alone, will amount to a sensible volume collectively, that a rich man can have any rational motive for attending to pence and shillings at all. He cannot feel the loss of a shilling in itself. He is not aware that it will in any remotest degree affect his life or his conduct in any particular, but he knows that if he does not look after the pence and shillings a large part of his income will ooze away without his knowing how, and this introduces a habit of mind in which carelessness as to pence and shillings becomes in itself unpleasant. And though the shilling has no direct significance to him, the loss of it, by association, has. The keeping of regular accounts is recommended, and rightly so, on these grounds. It helps us to bring our expenditures in pence and our expenditures in pounds into touch with each other.

Apart from the difficulty of realising the relative significance of small and large units of expenditure, which is subjective, there is sometimes an external and objective difficulty in balancing expenditure with any fineness. We cannot always get things in the quantities which would be requisite in order to bring their marginal value into close coincidence with their price.

It is conceivable that we might want a pen full of ink with an urgency greater than that represented by a halfpenny and less than that represented by a penny, and might grudge buying a penny bottle of ink while unable to get a smaller quantity for a smaller price. It does not follow that we really could not induce a stationer to give us a halfpennyworth of ink out of his own open bottle, but in the first place it does not follow that we could, and in the next place it would in any case involve proceedings for which we should consider ourselves very inadequately compensated by the saving of a halfpenny; so that we cannot get a halfpennyworth of ink instead of a pennyworth except by paying in trouble, or sense of awkwardness and humiliation, more than the halfpenny saved is worth to us. We must therefore either pay a penny or go without the ink, and if we feel the want but do not value its satisfaction at a penny, we cannot adjust our expenditure to meet it. It is an instructive fact that the lowest commercial unit of a given commodity is not uniformly fixed. Shops in a poor district, dealing with customers who can discriminate between the services of very small units, will deal in ha’porths or even farthingworths, when no such units are commercially recognised in more opulent parts of the town. In these cases, however, the commodities are physically capable of much finer subdivisions than are commercially recognised or are even psychologically recognisable; whereas there are other things which in their nature are incapable of minute subdivision. Pianos, watches, bicycles, and many articles of dress, though they can all be hired, can be neither purchased in small units nor hired on such terms as to enable us to take “another pennyworth” of chronometer or high-class piano. How, then, are we to bring their marginal services into exact harmony with the price we pay for them? It is true that all these things are more or less finely graded in quality, and may therefore, to some extent, be adjusted to our marginal wants, if a poorer thing may be regarded as performing part of the services of a better one. I may have a watch which, if I set it every morning by the town clock, will enable me roughly to apportion my day, and to keep my appointments within five minutes; and the services it thus renders may be very valuable to me. Indeed, it may be that the difference between having no watch at all and such a one as this would be greater to me than the difference between having such a watch as this and the most perfect instrument that I should be capable of handling and keeping in order. And yet it would be a very considerable extra convenience, for which I should be willing to pay proportionally, if I could rely on my watch not gaining or losing more than a minute a day; and a still greater convenience if, week in week out, I could rely on it to the second in catching my daily train. Similar remarks will be found to have a wider range than would at first sight be expected; but it remains true that no man can get an initial ha’porth of time-keeping apparatus, and compare its value with a marginal ha’porth of cheese. Say, then, that I must have no watch at all or one that costs at least 2s. 6d., or must have no piano that I would take at a gift or must spend at least £10 on one. Now it may well be that a man would be glad, if he could, to get the half use of a £10 piano for £5, whereas £10 for the full use of it is “more than he can afford”—that is to say, is not worth making the extra sacrifice for. Our example of the tea on page 49 has familiarised us with this idea. If the option were between getting a fifth half-pound of tea at 6s. 6d. or going without, it would be bought, but if it were between getting a third pound at 13s. or going without it, it would not be bought. As the marginal significance of the tea declines throughout its consumption, so the marginal significance of hours of command of a piano may be higher if we have only fourteen a week than if we have twenty-one; and consequently it might be worth giving two-thirds of £10 to get the two hours a day, but not be worth giving the whole £10 to have the three hours a day, which perhaps is as much as we want. But the purchaser has not the option of buying the two-hour-a-day control of a piano. If he buys anything he must buy the whole three-hour-a-day control that he wants (and the remaining twenty-one-hour-a-day control that he does not want, as well). Now it will not be good economy to buy a piano until the whole £10 that he will have to pay for it, if distributed over all alternative expenditures, at their margins, would collectively give a smaller satisfaction than that to be derived from the piano. But when this stage is reached if he discriminates in his mind between the marginal and initial services rendered him by the piano, the marginal ones will be worth far less than their proportion of the marginal sacrifices of other things made to secure the piano; whereas long before this point has been reached the initial gratification would have been worth much more than its proportion of them; just as the first ounces of the third pound of tea are valued at more and the last at less than the average of 9d. each, which makes the collective value of the sixteen ounces 12s. The purchaser would gladly sacrifice one-tenth of the actual use he makes of his piano for £1, retaining nine-tenths of it and paying £9, but he would not sacrifice the whole for £10, nor nine-tenths for £9, nor eight-tenths for £8. The first tenths are worth more than £1 each, though the last tenth, and perhaps the last but one, and the last but two, are worth less than £1 each. But as he has no such options of tithes at a pound each, he must take them all or none, and he takes them all for his £10 as soon as they are collectively worth it.

Thus, where large units come into competition with small ones and with each other, we are always vaguely conscious of either being in arrears or being in advance in our expenditure on the large units. If I have not a piano I am conscious of the pressure of an unsatisfied want which is slowly accumulating until it shall be of sufficient weight and volume to justify the whole expenditure. Meanwhile it is absolutely unsatisfied, whereas the wants to which smaller units minister are partially satisfied, though all the while I feel that they do not add as much to the value of life as an occasional hour of the piano would do if I could get it
pro rata parte at a fraction of the price of complete command. And when I have got my piano I am conscious, from time to time, when my appetite for playing on an inferior instrument is temporarily sated, that I would very gladly curtail my opportunities of gratifying it, if I could thereby relieve the general pressure I feel at all the points at which small units might minister to unsated desires. Probably the impossibility of bringing these two classes of expenditure into perfect harmony goes a long way towards explaining that almost universal experience embodied in the aphorism, “A competence is a little more than a man has.” Conscious of a ragged edge in our expenditure, and especially of some few things, purchasable in large units, of which we constantly feel the want, we imagine that if we had them we should be satisfied. As a matter of fact they have merely attracted to themselves our whole sense of dissatisfaction. If we got these particular articles, promontories would just at these points be substituted for bays, but the coast would be no more even than before. Certain other wants would now be realised, and new voids would begin to ache. Perhaps we should be quite conscious that our general level of well-being and satisfaction was raised, but the vague uneasiness caused by the uneven edge would still be there.

Another problem rises immediately out of these reflections. Some of our wants are recurrent and are met by supplies which are destroyed in the process of ministering to them. I eat to-day and I shall want to eat again to-morrow. There is no sense in talking of the “amount of bread” which will satisfy my wants, unless I specify the amount of time during which it is to satisfy them. The proper form under which to consider my provision is a stream of supply, not a stock. I am well or ill supplied with bread, not according to the amount of bread I have, but according to the amount per day, week, or other unit of time, which I command. Whereas we do not talk of the rate per day or year at which I am supplied with pianos or watches. On what principle can I compare £5 spent on bread, which for a period of twelve months supplies wants which will be as keenly felt and will as urgently demand provision at the end of that time as at the beginning, with £5 spent on a watch, which will perhaps never require supplementing or renewing?

The difficulty is not so great as it appears. Such as it is it arises from our taking the problem the wrong way about. Single purchases, such as that of a knife, a coat, or a piano, present themselves readily to the imagination, are easily and firmly held in the mind, and are regarded as normal. Whereas continuous purchases of things which are as continuously consumed, such as food or coals, seem to have something evasive and baffling about them. We always seem to be in the same position as before. We naturally attempt, therefore, to express our expenditure on this latter class of commodities in terms of our expenditure on the former, or at least to bring it into comparison with it. But this is a mistake in method. It is the continuous expenditure that really furnishes the type to which all others must be reduced; for however permanent the piano itself may be, the use of it is as much related to time as the consumption of potatoes, and though the payment may be concentrated into a minute, the employment may extend over a lifetime. In short, the instinct of the old economists was correct when they took “consumption” as the general term for all kinds of employment, use, and enjoyment of things. It is the things we really “consume” that are typical; but unfortunately the violence to current language involved in the terminology by which all use is called consumption has greatly interfered with its effectiveness.

We shall find that the difficulties of the subject yield readily enough as soon as we understand that it is payment for those things the “using” of which covers a long time and many successive occasions that is the branch of expenditure needing special study and explanation, and which must be brought into line with normal “consumption”—that is to say, the “using up” of things dissipated or transformed by a single application. It is this latter class of obviously “consumable” goods which, as a fact, has hitherto been the chief subject of our studies; and we can now go on to bring the other class under the same principles. To begin with, the whole distinction is only a matter of degree. We think of three great spending departments, food, furniture, and clothing, as representing respectively commodities that disappear after a single application to their purposes, commodities which survive an indefinite number of usings, and the intermediate class of commodities, which can be used many times, but which we should not speak of, even loosely, as permanent. But, strictly speaking, nothing is permanent; and perhaps nothing but an explosive is “consumed” or used up instantaneously, even in a popular sense. The process of eating a mouthful of food occupies a certain amount of time, and in the case of all infusions, such as tea, there may be repeated uses of the same thing, on a down scale of excellence, just as there is in the case of clothes. The careful housewife may make her sticks of cinnamon flavour a custard, and then enter into some other confection; and she will not consider that the virtues of a bag of root ginger have been exhausted after the one use of flavouring her rhubarb jam. Thus in the matter of durability and repeated use the classes of food and clothes overlap; for a calf’s foot may be used several times in making successive batches of jelly, and a pair of white kid gloves can only be used a few times, and that on a downward scale of distinction; while a white tie can hardly be used twice. From the kid gloves we may mount by as small steps as we please, through muslin trimmings and what not, to a coat or frock which may be worn for six or twelve months, and the dress-coat or velvet gown that may serve a person of retiring or economical habits for twenty years or more. When we come to furniture, the single class of lighting appliances may offer us varieties running from the Japanese lanterns that will only survive a few uses, to a great lampstand that will never need to be renewed. So, too, the estimated life of a chair may run from a few months to fifty years or more. The distinction we are dealing with, therefore, is purely relative, and as soon as we begin to examine our actual budgets we shall find that even this relative distinction does not correspond at all closely with any actual distinction in our methods of administration. Coal is a perishable article, and when we use a lump we use it up (though its consumption extends over an appreciable period of time), whereas a suit of clothes survives many successive usings; yet it may very well be that if we have suitable premises we shall buy coal for six months in one order; and, on the supposition that a suit of clothes also lasts for six months, we may be buying clothes and coals at the rate of so much the half-year, just as we are buying milk at the rate of so much per day, although each portion of coal is used up by a single application, and each article of clothing stands repeated wear. This observation may put us in the way of clearing up the whole matter. Let us suppose that a man’s six months’ stock of coal is six tons and that it costs £1 a ton, and further that his suit of clothes costs £5:5s.; that milk is 4d. per quart, and that the average amount taken in the house is a quart and a half a day. Now it will be observed that although we buy our coal and our clothes only once in six months, we consume a portion of the coal and use the clothes every day. We may be said therefore to be consuming milk at the rate of 6d. a day, using up clothes at the rate (by a very close approximation) of 7d. a day, and coal at the rate of 8d. a day. And this is obviously the proper way in which to look at the matter from the point of view of the scientific analysis of administration of resources. Everything should be reduced to a question of rate of supply. In the case of milk most householders have no choice but to purchase day by day: fresh milk cannot be stored in any ordinary sense. Coals may be bought by the scuttleful, the cwt., the ton, or the truck-load, according to convenience; but you cannot get and use up your 7d. worth of clothes day by day as you want it. The forms of purchase, then, are dictated partly by the nature of the commodity, partly by the custom of the trade, and partly by the convenience of the purchaser. But in considering the budget for the year there is no difficulty of principle whatever in bringing into exact comparison and equilibrium the supply of commodities which perish with a single use and that of commodities which are relatively permanent. The apparent difficulty disappears still more completely when we remember that “buying” is not the same thing as “paying,” and that the housewife who orders, and in that sense buys, her milk day by day, or even twice a day, probably pays for it weekly or monthly, and possibly at longer intervals than in the case of her coals or many articles of dress. In all cases alike the scientific basis is “rate of supply.” All else is secondary.

The same principles apply to yet more permanent articles of use. The more solid articles of furniture, some of which we have perhaps inherited from our parents or ancestors, expensive books of reference, and so forth, gradually become relatively or absolutely unserviceable, and though any one of them may have to be replaced only once in a lifetime or not even that, yet we can form a general estimate of how much to allow per year, on the general account, for maintaining and replacing these expensive and relatively permanent articles, so far as it lies in our general scheme to do it at all. In the same way, if we wish not only to maintain but to increase our stock of articles that may be expected to last all our lives and beyond, we can in like manner make regular provision for successive purchases. And since so much a year is also so much a day, we may regard ourselves as spending, say, 6d. a day on milk and 1s. a day on things that will never require replacing in our time. The desire for milk and the desire to add to our stock of durable possessions are both capable of being temporarily assuaged or gratified, but neither of them of being permanently extinguished or sated, and we minister to both so as to equate their marginal urgency with the terms which the market offers.

Now the larger any single item of expenditure is, and the rarer and less easily calculable the occurrence or recurrence of the necessity for it, the finer and wider judgment it needs to provide for it wisely, and the more shall we need to have command of resources for a considerable period in advance in order that our administration may be truly economical. This is a point of such great importance in itself and one that throws so much light on some of the darkest places of economic science, that we must dwell on it in some detail. Moreover, it will not really divert us from our direct subject of investigation, which is concerned with bringing into line, for the sake of administrative comparison and balancing, of branches of expenditure which appear at first sight difficult to express on the same scale.

Let us take the case of a young woman who has 14s. a week, that is 2s. a day, or £36:10s. a year. She certainly cannot under ordinary circumstances afford to buy a piano, yet she might well have a cultivated taste for music, and might make one £18 piano give her pleasure for some twelve or fourteen years. If she could extend her payments for it over the whole of this period they would amount to about a penny a day, and there might be no other way of spending the penny that would equally add to her happiness. If she had in hand at the present moment the whole of the resources she will actually command during the next ten or fifteen years, and having no prospect of any addition to them, had to make them meet all her requirements for that period, she would buy a piano, and would be wise to do so. She would have 1s. 11d. a day to spend on everything else (including the occasional tuning of the piano), and would value her pennyworth of piano a day as much as any other pennyworth. But if she only receives her payments daily or weekly, then in order to buy the piano within a year she would have to save half her income, that is 1s. a day, which, of course, would involve, during that year, much more than twelve times the discomfort of saving a penny a day. Thus the total expenditure on a piano, if concentrated within a year, would involve a far heavier sacrifice than if spread over twelve years or more. By spreading the saving over two years instead of one, she can lighten not only the daily but the total sacrifice, but it would still be very heavy, and she will be without the piano during all the time of saving, so that the whole of the satisfaction she would have derived from it during that period is lost.

Let us generalise our conclusion. There will be some article or articles—a house, a suite of dining-room furniture, works of art, or what not—that will render us services over a longer period than that covered by the ordinary commodities—food, clothes, current literature, and so forth,—which we purchase currently. In order to spend economically we must have so much in hand that we can choose our own time to buy the expensive and permanent things, and can spread the corresponding sacrifice of other alternatives evenly over the whole period for which they last us. Hence the double disadvantage under which persons with small incomes labour. Not only do their means enable them to command a smaller physical total of things desired, but any large expenditure has to be provided for by sacrifices concentrated into a shorter period than that over which the services obtained will extend. And this involves a disproportionately deep trenching upon other branches of expenditure. The smaller physical total of purchases therefore suffers a further deduction in psychological efficiency; and, in order to avoid ruinous psychological waste, the poor man may often have to go without things which he could well afford to secure, were he in full command of even his small income for the year on 1st January. Had he been in that happy position, then at the end of the year he would have spent no more than he will actually have spent, but he would have spent it differently, and he would have got more out of it.

This principle will be found, at a later period of our investigations, to give us a partial clue to the mystery of “interest.” Even wealthy men may be in a position in which it would be an advantage to them to be further in advance of their normal expenditure than they actually are, and they will be willing to pay a premium to any one who will place them in this advantageous position; but as for the poor, their lives would be on a far lower level of comfort even than they are, were there not a number of agencies at work by means of which the provident amongst them can get a little in advance, and the improvident can secure—at a heavy price, perhaps, but still at a possible one—the advances, in some form of credit, needed to enable them to meet heavy isolated expenses. Yet, in spite of everything, the sacrifice involved to a really poor family in the purchase of such an article as a pair of boots is severer than it is easy for the well-to-do to realise. It may have to be taken out of one week’s food and may mean something near starvation for that week; whereas if it could have been spread over the whole period during which the boots last, the privation involved would have been comparatively light, not only day by day, but in its whole sum. Moreover, purchase in small quantities is, for many obvious reasons, expensive purchase, and cheap articles are often less worth their price than expensive ones. Yet the extreme importance to the poor man of not spending much at once may make it good husbandry to get a succession of cheap and bad articles rather than one good one. An expenditure of £2 in a single year may be so palpably heavier in its incidence than the expenditure of £1 in each of two successive years, that a man may wisely prefer to spend £1 in each of three successive years rather than £2 in one year and nothing at all in the other two. In this sense he has to be wasteful. “Economy is a luxury of the rich.”

It will readily be seen from what has been said above that the hire and purchase-by-hire systems are, in principle, perfectly intelligent attempts to mitigate the secondary as distinct from the primary disadvantages of small earnings. They can, at best, only mitigate, they cannot overcome them, for the hire system sells and does not give the privilege of extending the period of payment, and of corresponding economies, over a convenient period. Moreover, if the purchase by deferred payment opens opportunities of wise expenditure to the wise, it also greatly enlarges the opportunities of foolish expenditure to the foolish. A foolish idea may fascinate for a time, but if severe and sustained self-restraint is necessary for carrying it out, it will soon correct itself. If it can be instantly realised by mortgaging the future, a new risk is created. Moreover, the effort needed to make the requisite economies and encounter the requisite privations over a short period and the sense of security in an unmortgaged future may well call up reserves of energy and mental reactions which would have lain dormant and wasted had the more seductive path been followed. An exultant sense of power may be very cheaply bought by the loss of some ease and calculating self-complacency. But it remains true that judicious hiring or borrowing is often the best husbandry.

It is easy now to understand the vital part that hire plays in most of our lives. It enables us to bring into easy comparison our expenditures on the purchase of rapidly perishable things, and on the hire of relatively permanent ones. Hire is indeed the most ordinary means, especially for the relatively poor man, of reducing expenditure per ten years or per lifetime to the form of expenditure per year, per quarter, per week or per day. It brings his payings into close and convenient correspondence with his usings of commodities, and different branches of his expenditure thus become easily comparable. Perhaps the house he lives in is the most permanent thing that the average man habitually uses, yet he has no difficulty whatever in equating his expenditure on “house” with his expenditure on meat, coals, or dress, because in most cases he hires his house. Whereas the purchase of a grand piano may seriously perplex his finances for the year in which it takes place, because he does not hire but buys it.

It should be carefully noted that the problem of hire we have now been dealing with is not entirely coincident with the problem of large units, though it is closely allied with it; and we must examine the distinction between the two before we can completely understand the rationale of hiring. The woman who would be delighted to give £18 for a piano if it would only involve the withdrawal for some twelve years of 1d. a day from her other expenditure, would perhaps even under those conditions prefer to give £9 (involving the expenditure of a ½d. a day only) for half the use of the piano; and that for the reasons that have already been explained, connected with the principle of declining marginal significance. She would still, therefore, even if the difficulty of laying down the lump sum were overcome, be under the difficulty presented by the large unit; and it would only be by some such method as combining with a friend for the joint use of the piano (which might be subject to objections of its own) that she could meet the difficulty. There are, however, other cases in which this difficulty too may be met by the system of hire. A hansom cab, for instance, may be hired for a single drive—that is to say, it may be shared between an indefinite number of persons. Thus the advantage of hire over purchase may be analysed into two elements, either or both of which may be present in any given transaction. Hire may meet the difficulty of large units, relieving a man from the necessity of choosing between going without a thing altogether or supplying himself with a commercial or natural unit of it, when what he would prefer would be to purchase half or a quarter or a hundredth of the opportunities it puts at his command for half or a quarter or a hundredth of the price. And hire (or payment by instalments) may also meet the incidental, as distinguished from the essential, disadvantages of a small income by enabling a man to pay week by week for that week’s proportion of the use of an expensive thing which he does not wish to share with others, but which he cannot afford to pay for all at once in advance of his use of it. For either of these advantages it will, of course, be worth his while to pay a sum proportionate to their significance. Thus, while you are spending 6d. a day on milk and 8d. a day on coals, you may be spending at the rate of 3s. a day on houseroom, trams, railway plant, etc., and of this 3s. more than half may perhaps be spent, and well spent, day by day, or quarter by quarter, not in payments for the things you are using, but in payments for the privilege of taking them in the fractions, with the partnerships, and by the instalments, which suit your convenience. This is an adjustment which we seldom analyse, but which we perhaps carry out with as much accuracy as any other adjustments of our expenditure; and it comes into distinct and conscious consideration when a man debates whether he shall buy a house instead of renting one, or shall set up a carriage or a motor instead of travelling by cab, by tram, or by rail.

Suppose I could build or buy a house for a certain price. I estimate the period during which I shall live in it at twenty years; it may be either more or less, but I consider twenty years a suitable term at which to estimate the probabilities. I divide the whole cost of the house by eighty, and so arrive at the amount per quarter which, on the estimated probabilities, the house will cost me. I add a quarterly sum for maintenance. Further, the value which the house will have when I die may not be a matter of indifference to me. I shall be glad to leave it to my heirs, and the significance to me now of leaving this sum to them when I die I estimate at a certain figure. I divide this too by eighty, and subtract the quotient from the quarterly figure I had before obtained. Thus I arrive at the net quarterly sum which the enjoyment of the house during my life, as estimated at twenty years, will cost me. How much more than this shall I be willing to pay quarterly for rent of the same or an equally eligible house, the landlord being responsible for all repairs? Let us suppose, for the sake of argument, that the pleasure of the sense of possession and security on the one hand, and the relief of knowing that I am not tied to a house on the other, just balance each other.

Why should I be willing to pay any more in the way of rent than the sum arrived at by the above process of estimate? If buying a house would not disturb other branches of my expenditure, then there is, at this stage of our inquiry, no obvious reason; for I can pay down the lump sum at once, and I can then spread the relinquishing of other alternatives over the whole twenty years, just as well as I could if I paid quarter by quarter. But if, for example, I can only anticipate resources for ten years, then if I pay the lump sum I shall have to concentrate the relinquishing of the other alternatives into a period of ten years. During that period the quarterly sum of relinquishments will be twice as high, and therefore more than twice as serious and significant as the like quarterly sum would have been quarter by quarter throughout the twenty years. It is true that at the end of the ten years I shall have done all the relinquishing and shall have none at all left to do during the remaining ten. Thus I shall be poorer for the first ten years and richer for the second ten years than if I had been able to distribute the corresponding relinquishment of other alternatives over the whole period of enjoyment of the house. But the disadvantages of the period of concentrated economy will more than balance the advantages of the second period; for to make a quarterly payment twice as great is to make it more than twice as irksome. Consequently I should be willing to pay a premium for the privilege of taking my relinquishments over a period of twenty instead of over a period of ten years.

If I can anticipate resources only for five years, the yet more severely concentrated economies will rise still further in proportion, and I shall be willing to pay a still higher premium for the privilege of distributing them over the whole twenty years; and if I could not anticipate at all, but should have to save up the money, say over a period of five years, to buy the house before I got it, then I should not only be making concentrated economies in other things for those five years, but I should also be without the house all that time, and should be paying rent for another. So that as my power of anticipating expenditure that would otherwise be extended over the whole period diminishes, I am willing to pay a higher and higher premium for the privilege of extending the period of payment quarter by quarter over the whole period of enjoyment.

This principle determines how much I shall be willing to pay for the privilege, but how much I shall actually have to pay for it in the market is quite another matter. Our example of the tea has shown that these two questions—how much I should be willing to pay, and how much I shall have to pay—are perfectly distinct, and the conditions which determine the latter we have not yet examined. But whatever the terms are, and however they are fixed, I shall in each case consider whether they are good enough for me; and if they are, I shall secure the privilege of spreading my payments over the period of enjoyment, or of paying for the fraction of an article that I use, instead of for the whole of it, and shall therefore rent a house instead of buying or building, shall take cabs or ‘buses instead of setting up a carriage, and shall travel by train instead of motoring.

The problems on which we have been engaged have led us to consider special cases of balancing present privations against future immunities, and we have seen how it may often be worth while to escape proximate privations at the cost of incurring remote ones. If there is a question between paying £10 a quarter for twenty years on the one hand, or £20 a quarter for ten years and nothing for the other ten, we may consider it in this way:—Taking £10 a quarter for ten years as fixed and not open to question, I have the alternative of adding the other payment of £10 a quarter for ten years either concurrently or successively at my option; that is to say, I can escape a payment in the remote future by making a payment in the proximate future, or
vice versa. If I choose, under these conditions, to pay in the remote rather than the proximate future, it is not, so far as the data shew, because the one is near and the other is far, but because the near payment would have to be made under less favourable conditions than the far payment, and is therefore intrinsically more irksome, for it would have to be encountered at a less favourable margin. If the choice were between £10 a quarter for twenty years, and nothing for the first ten years but £20 a quarter for the last ten, it would still be good economy to make payments of £10 at the more favourable margin and secure immunity from payments which would have to be made at a less favourable margin, though now the favourable conditions would be near and the unfavourable ones far. Thus the very same principles of prudence may make one man save money in his early married life in order to have it when he wants it more in the future, for his children’s education, and may make another (or even the same) man rent a house instead of buying it, because if he defers the expenditure of the greater part of the sum he will have to pay altogether, he will pay it over a period in the future during which he can better spare it than he could spare it in the lump at present.

The advantage that I derive, then, from commanding resources in advance, in such cases as we have been considering, is not the advantage of a near as against a far, but the advantage of a greater as against a less, satisfaction; and we must carefully distinguish these cases from others in which the nearness or farness of the satisfactions or privations is the very matter we are considering. This is not so in the case of those commodities which we habitually buy in large and use in small quantities, for in such cases ordinary prudence estimates the significance of a unit in the future just as high as that of a unit in the present. We do not, as a rule, burn coal more freely because our cellar has just been filled, or eat more potatoes because we have just got in a fresh sack; or if we do, it is only by a slight and hardly perceptible mental reaction which we clearly recognise as illusory. And if we find that we have a general sense of relief and tendency to expatiate as soon as we have drawn our quarter’s salary, and a corresponding sense of contraction towards the end of the quarter, we distinctly recognise this as a sign of faulty administration and foresight. In a word, the fact of remoteness or proximity should not, and within limits does not, in itself affect our estimate of the significance of things that are really of even and continuous importance to us. But very often remoteness involves uncertainty, so that we are not prepared to estimate a possible want in the remote future on the same terms as a certain want in the present or a highly probable one in the proximate future. Indeed, whether I buy fewer potatoes at this stall in order that I may in five minutes’ time buy more plums at that; or whether I spend less in the market to-day altogether that I may spend more on my holiday six months hence; or whether I spend less in the whole year to make provision for the education of my children if they live to want it, or for my old age if I ever reach it, I am always estimating future wants of more or less remoteness and uncertainty (for I shall not use even the potatoes for some hours, and events may happen that will prevent my using them at all), and am always balancing them against each other and asking at what price I care to renounce relatively certain satisfactions in order to provide for relatively uncertain ones; and I am always making smaller or larger provision for some contingency according to whether the terms are harder or easier. Though in many cases this element of uncertainty in the future is negligible, in many others it is of high importance.

Finally, in closing our preliminary investigation of the balancing of present against future satisfactions and dissatisfactions, we have to note that, in addition to the rational reasons for rating one above the other which we have examined, there is the irrational factor of mere inability to realise the future or to resist a present impulse; and there is also the rarer but by no means unknown tendency to yield to a morbid dread of future distresses, or to gloat morbidly over future satisfactions, and in either case to overestimate the future in terms of the present. But throughout the whole range of these selections between present and future, or near and far, we are always in the presence of the two principles of declining marginal significance, and the regulating effect of the terms upon which alternatives are offered. Rational considerations, by their very nature, weigh alternatives and take them only at what they seem to be worth; and as they are taken at different margins they will appear to be worth more or less; and even the most improvident or morbidly foreboding temper will refuse terms that go beyond a certain degree of extravagance, and will be to some extent blunted in its keenness by successive gratifications or provisions. Thus, whether I am wise or foolish, as my provision for the present rises in comparison to my provision for the future, or
vice versa, the marginal significances of the two and the terms on which I shall be ready to equate them against each other will change.

The principle of marginal adjustments, then, runs through all the administration of our resources. Large and small units, consumption of swiftly perishable and use of relatively permanent commodities, purchase and hire, desires and projects for the present and the future, material and spiritual needs, all come under its sway. Terms upon which alternatives are offered and declining marginal significance as supplies increase are the universal regulators of our choice between alternatives.