Economics, Volume 1: Economic Principles E-Book

Frank A. Fetter

• Herausgeber: Jazzybee Verlag
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2020

Seitenzahl: 784

Beschreibung

Professor Fetter's 'Economic Principles' is the first half of a two-volume treatise on economics. The second half 'Modem Economic Problems' deals with the applications of principles. In general Professor Fetter's theory may be described as mechanistic and Austrian. To call it mechanistic signifies that, like the usual type of economic theory, it treats the industrial and business system as being somewhat analogous to a mechanism, in that the operations of this system are explained in terms of practically contemporaneous causes and effects without reference to the changes in its structure which take place with the passage of time. Here " mechanistic " is substituted for the less appropriate "deductive" as a description of the classical type of theory. Mechanistic explanation contrasts especially with " genetical " explanation, though it seems doubtful if a precise line can in the last analysis be drawn between the two. Fetter's book shows a pride in its own novelties, but as far as methodology is concerned it is as mechanistic as the work of Ricardo, or the theory of interest of Irving Fisher, or the theory of distribution of John Bates Clark. And this is as it should be. For economics is best described as the study of the structure and action of the industrial system, with an object in view, namely, that of making us good judges of questions of the policy of the state (or of any body of persons, such as organized labor or capital) toward the industrial system. That is, the touchstone of importance and relevancy in economics is applicability to questions of public policy. It is on the strength of this test of relevancy that Fetter's methodology is pronounced the right one. It is also merely the dominant methodology of all the leading general texts past and present.

Leseprobe

Economics

Volume 1: Economic Principles

FRANK A. FETTER

Economics Volume 1, Frank A. Fetter

Jazzybee Verlag Jürgen Beck

86450 Altenmünster, Loschberg 9

Deutschland

ISBN: 9783849657956

www.jazzybee-verlag.de

[email protected]

This work is licensed under a Creative Commons Attribution 4.0 International License. The original file can be accessed under https://fee.org/media/30376/fetter-franka-economicprinciples.pdf.v. For more information regarding this license please revert to https://creativecommons.org/licenses/by/4.0/. Front Design based on an artwork by By Debangana.mukherjee - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=66449688.

CONTENTS:

FOREWORD TO ECONOMISTS AND TEACHERS. 1

PART I: ELEMENTS OF VALUE AND PRICE.. 4

CHAPTER 1: PURPOSE AND NATURE OF ECONOMICS. 4

CHAPTER 2: CHOICE AND VALUE.. 11

CHAPTER 3: GOODS AND PSYCHIC INCOME.. 19

CHAPTER 4: PRINCIPLES OF EVALUATION... 25

CHAPTER 5: TRADE BY BARTER.. 34

CHAPTER 6: MONEY AND MARKETS. 39

CHAPTER 7: PRINCIPLES OF PRICE.. 48

CHAPTER 8: COMPETITION AND MONOPOLY.. 55

PART II: USANCE AND RENT.. 65

CHAPTER 9: AGENTS FOR CHANGING STUFF AND FORM... 65

CHAPTER 10: AGENTS FOR EFFECTING  CHANGES OF PLACE AND TIME   74

CHAPTER 11: CONSUMPTION AND DURATION... 81

CHAPTER 12: THE PRINCIPLE OF PROPORTIONALITY.. 89

CHAPTER 13: THE CONCEPT OF USANCE-VALUE.. 99

CHAPTER 14: THE RENTING CONTRACT.. 105

CHAPTER 15: PRINCIPLES OF RENT.. 116

PART III: VALUABLE HUMAN SERVICES, AND WAGES. 124

CHAPTER 16: HUMAN BEINGS AND  THEIR ECONOMIC SERVICES  124

CHAPTER 17: CONDITIONS FOR EFFICIENT LABOR.. 133

CHAPTER 18: THE VALUE OF LABOR  AND THE CHOICE OF OCCUPATIONS  143

CHAPTER 19: PRINCIPLES OF WAGES. 152

PART IV: TIME-VALUE AND INTEREST.. 167

CHAPTER 20: TIME-PREFERENCE.. 167

CHAPTER 21: RATE OF TIME-PREFERENCE.. 176

CHAPTER 22: MONEY AND CAPITALIZATION... 186

CHAPTER 23: CAPITALIZATION OF MONETARY INCOMES. 193

CHAPTER 24: SAVING AND BORROWING... 201

CHAPTER 25: CAPITALIZATION AND INTEREST.. 211

PART V: ENTERPRISE AND PROFIT.. 220

CHAPTER 26: ENTERPRISE.. 220

CHAPTER 27: MANAGEMENT.. 227

CHAPTER 28: PROFITS AND COSTS. 238

CHAPTER 29: VARIOUS SHADES OF PROFITS. 250

CHAPTER 30: COSTS AND COMPETITIVE PRICES. 258

CHAPTER 31: MONOPOLY-PRICES; LARGE PRODUCTION.. 267

PART VI: DYNAMIC CHANGES IN ECONOMIC SOCIETY.. 279

CHAPTER 32: THE PROBLEM OF POPULATION... 279

CHAPTER 33: VOLITIONAL DOCTRINE OF POPULATION.. 290

CHAPTER 34: DECREASING AND INCREASING RETURNS. 298

CHAPTER 35: BASIC MATERIAL RESOURCES: THEIR USE, CONSUMPTION, AND CONSERVATION   311

CHAPTER 36: MACHINERY AND WAGES. 321

CHAPTER 37: WASTE AND LUXURY.. 329

CHAPTER 38: ABSTINENCE AND PRODUCTION.. 339

CHAPTER 39: VALUE THEORY AND SOCIAL WELFARE.. 350

ENDNOTES: 359

FOREWORD TO ECONOMISTS AND TEACHERS

The general texts in political economy from the middle of the nineteenth century have been to a remarkable degree conventionalized. The ambition of successive writers has been “to modernize Mill” rather than to modernize economics. Books continue to appear, repeating with little essential change the theoretical system of the English classical school. Their innocuous references to more recent constructive criticism have little purpose but to evidence the erudition of the authors and their spirit of Christian charity.

Meantime, from 1870 on, critical studies had shown not only the historical relativity but the logical fallacy of a large part of the older treatment. A body of esoteric economic doctrine developed, discussed only by the initiated, and merely hinted at in undergraduate instruction. So far as this newer thought affected the presentation of economics in the general texts and to college classes it was only in negative and superficial ways, such as substituting the novel soporific locutions of the marginal utility school for the older catch-words of “cost of production.” Indeed, it was impossible for the individual teacher of economics to incorporate the newer ideas into his elementary courses, except in this desultory way, until they had been put into more positive, systematic, and teachable form. It seems to have been for lack of this essential development that many virile teachers have made the laudable tho vain attempt to teach the fundamental to beginners by a method misnamed inductive. This has involved a false analogy with the natural sciences, in which induction is the method of advanced research, and not of elementary instruction.

The author’s “Principles of Economics” published in 1904 was the imperfect result of a decade of labor and experimentation to accomplish this neglected task. No enumeration will be made here of the features in which the treatment differed from preceding texts except to call attention to some of the novel terms and conceptions that since that time have gained a considerable measure of acceptance: psychic income, the renting contract, the relation of repairs and conservation to the land supply, time-preference, the investment concept of capital, the capitalization theory of interest, the volitional theory of population, and the psychological theory of crises. The aim was to present a unified theory of distribution, in which value, rent, wages, and interest were treated merely as different manifestations of a general theory of value, not as separate laws each of a different nature. Despite the limitations in this pioneer attempt, it was cordially received, and especially by many of the younger progressive economists. While the parts which treat of these subjects have remained substantially unchanged for eleven years, the book has run through five different impressions and editions.

The present text on Economic Principles seeks to carry forward to their logical conclusions the ideas of that part of the earlier book which dealt with the fundamentals in the theory of distribution. The changes are numerous both in the general plan and in details. The work has been animated by the conviction that there is a body of economic principles which is, or ought to be, capable of systematic statement for college students and for the general reader, and that a grounding in principles and a discipline in the power of clear analysis of economic concepts is an essential preparation for the satisfactory study of the so-called practical questions.

The first purpose of the author has been to make the statement of principles fit the practical needs of our society as it is now, in America, and as it is developing, rather than as it was in England in 1815. At the same time he has extended the scientific analysis by replacing the cruder physical classification of economic factors into land, capital and labor, with the classification of the essential economic qualities of agents (as, analogously, physics treats of the properties of mechanics, heat, light, motion, etc., and not of sticks, coal, gas, bullets, etc., as such). Further, he presents here a quite new statement of the theory of value, one in accord with the modern volitional psychology, thus eliminating entirely the old utilitarianism and hedonism which have tainted the terms and conceptions of value ever since the days of Bentham. The basis of value is conceived to be the simple act of choice and not a calculation of utility. Even the phrase “marginal utility” is definitely abandoned.

The more thoro analysis of the economic properties of goods and actions has shown the need of new terms and of new definitions for old terms, as in the cases of usance, the separable use, rent, labor-income, time-preference, capital, interest, abstinence, consumptive, durative, and many other expressions. It is hoped that this revision of fundamental concepts, as well as the new treatment of enterprise and profits, the fuller statement of the capitalization theory of interest, and the separation of the dynamic from the static theory, will be found helpful to teachers and acceptable in the end to all economic students.

A clear distinction is drawn throughout this volume between value and price in one class of cases and between value and utility in another. Each of the first four parts begins with the individual aspect of the problem of choice (subjective value) and concludes with the study of the commercial or price aspect. The fifth part deals with enterprise which, as the investment function, is purchaser of uses and services and the payer of the various contractual incomes,—the reward of which, therefore, from its very nature, can be only of a non-contractual character. The distinction between value and utility marks the contrast between the personal, acquisitive, aspects of value, which are the subject of the first five parts, and the “utility” and social welfare aspects which are treated in part six.

A number of the practical applications of the principles have been reserved for a second volume, which will deal with the facts, theories, and public policies relating to money, banking, international trade, labor organization, the trust problem, taxation, insurance, etc.

I cannot undertake to express individually my many obligations to fellow teachers, to graduate students, and to other friends for the stimulation, appreciation, and coöperation that have so greatly aided in the development of this work. I must, however, gratefully make an exception in the case of my colleague Professor W. M. Adriance, to whom is due a special acknowledgment for his numerous and valuable criticisms and suggestions.

F. A. F.

Princeton, N. J.

September, 1915

PART I: ELEMENTS OF VALUE AND PRICE

CHAPTER 1: PURPOSE AND NATURE OF ECONOMICS

§ 1. Definition of economics. Economics may be defined, briefly, as the study of men earning a living; or, more fully, as the study of the material world and of the activities and mutual relations of men so far as all these are the objective conditions to the gratification and to the welfare of men. The ideas of most persons on this subject are vague, yet it would be very desirable if the student could approach this study with an exact understanding of the nature of the questions with which it deals. Until a subject has been studied, however, a definition in mere words but slightly aids in marking it off clearly in our thought. The student must first try to see the general field of facts and of human interests that economics covers.

§ 2. Economics contrasted with the natural sciences. Economics may be contrasted with the natural sciences, which deal with material things and their mutual relations. A definition that suggests clear and familiar thoughts to the student seems at first much more difficult to get in economics than in the natural sciences. These deal with concrete, material things which we are accustomed to see, handle, and measure. If a child is told that botany is a study in which he may learn about flowers, trees, and plants, the answer is fairly satisfying, for he at once thinks of many things of that kind. When, in like manner, zoölogy is defined as the study of animals, or geology as the study of rocks and the earth, the words call up memories of many familiar objects. Even so difficult and foreign-looking a word as ichthyology seems to be made clear by the statement that it is the name of the study in which one learns about fish. It is true that there may be some misunderstanding as to the way in which these subjects are studied, for botany is not in the main to teach how to cultivate plants in the garden, nor ichthyology how to catch fish or to propagate them in a pond. But the main purpose of these studies is easily made clear at the outset; it is to know about the natural objects themselves. It is true that as each science is pursued, and knowledge widens to take in the manifold and various forms of life, the boundaries of the special sciences become not more but less sharp and definite.

In contrast with these, economics is one of the social sciences which deal with the inner nature of men and with men’s relations in society. These are less tangible facts—we are tempted to say that they are less familiar—than are the materials with which the natural sciences deal. But the truth may be that social acts and relations are more familiar to our thought than is the subject matter of the physical sciences. Every hour in the streets and stores one may witness thousands of acts, such as bargains, labor, and payments, that are the data of economic science. Their very familiarity causes us to overlook their deeper meaning.

§ 3. Science as abstraction. A science by its very nature as science is concerned primarily with abstractions rather than with concrete objects. To think scientifically is to think abstractly. Abstraction is a certain way of looking at things; it is looking at their qualities. It is more difficult to think abstractly than it is to think of concrete things. It implies an analysis, a taking-apart of things to get at their components, and a grouping of these parts into some general idea—not an easy task for most minds. Economics singles out for study those aspects of the world which have to do with man’s desire for the things about him and the use that he makes of them.

Economics “as the study of the material world” also has to do with all of those things which are the subject-matter of the natural sciences; but only in a secondary way. It studies them only as they are related to man’s welfare, or as they affect his valuation of things; only in so far as they are related to the central subject of economic interest, the earning of a living.

§ 4. Science and art. Like every other field of study, economics has two aspects, one of science, the other of art; the one of knowledge, the other of action; the one of principles, the other of their application. Each science seeks to study and to understand the world in some aspect, to reduce the multitude of facts to order, and to understand their relations. Thus, astronomy has succeeded in counting a large number of heavenly bodies, classifying them as stars, planets, comets, etc., has come to understand their relations in space, distances, direction, and speed of movement, etc. On this science is based such practical arts as navigation, regulation of the calendar, determination of the exact time, prediction of eclipses, etc. Thus, likewise, physics, chemistry, the various branches of biology, psychology, etc., are concerned first, and merely as science, with the truth regardless of its application. Then, however, whatever truth is discovered may be found to be capable of some uses or applications, either in the hands of the scientists themselves or in the hands of another body of men, variously named practical workers, technicians, and inventors, who develop the art side of the subject. The history of civilization abounds with evidence showing that the work of the group of scientific workers continually pursuing truth for its own sake (work little esteemed by the world in general), is indispensable for the continued progress in the practical arts. Just outside the circle of attained scientific knowledge is a fringe of possible practical applications. But unless other and still other discoveries were made, practical progress in the arts would lose its source of inspiration.

§ 5. Place of economics among the sciences. Economics seeks the reason, connection, and relations in the great multitude of acts arising out of the dependence of men on the world of things and of other men. Economics has to study men in two sets of relations, as is indicated in the definition: the relation on the one hand of man to material (non-human) things about him, and on the other hand to other men with whom he has “economic” dealings. In so far as economics is concerned with the former, the relation of man to his material environment, economics borders on some phases of each of the engineering sciences, and of the natural sciences, as geology, botany, zoölogy, and (in considering how these things affect man) physiology and psychology.

In so far as economics is concerned with the mutual relations of men in business, it becomes one of the group of social sciences. The word “social” comes from the Latin socius, meaning a fellow, comrade, companion, associate. The social sciences deal with men and their relations with each other. As men living together have to do with each other in a great many different ways, and enter into a great many different relations, there arise many different social problems, and the several social sciences of politics, law, ethics, and economics. Each of these attempts to study social relations in some one important aspect, that is, to view them from some one standpoint. Politics treats of the form and working of government, and is mainly concerned with the question of power or control of the individual’s actions and liberty. Law treats of the rules of the sovereign state controlling the actions of men (criminal jurisprudence), and of the principles guiding the interpreting of the contracts into which men see fit to enter in their economic affairs (civil jurisprudence). Ethics treats the question of right and wrong, and the moral aspects of men’s acts and relations with each other. As compared with these, economics is a much less purely social science; it has to do almost constantly with the material environment as well as with the social environment in which men live.

The attempt to distinguish between the fields occupied by the various social sciences discloses at once a fundamental unity existing among them. The acts of men are closely related in their lives, but they may be looked at from different sides. The central thought in economics in its social aspect is the business relation, the relation of men in working together, or in exchanging their services and material goods. In pursuing economic inquiries we come into contact with political, legal, and ethical considerations, all of which must be recognized before a final, practical answer can be given to any question. Nevertheless, the province of economics is limited. It is because of the feebleness of our mental power that we divide and subdivide these complex questions and try to answer certain parts before we seek to answer the whole. Whoever attempts this final and more difficult task should rise to the standpoint of the social philosopher.

§ 6. Subdivisions of economics. Economics in its most general sense includes various subdivisions. First is domestic economics (household economics), the modern equivalent of oiko-nomos, first used by Xenophon as the name for a set of rules to help the housekeeper or steward of an estate. The typical Greek household, however, was a large estate with slaves, almost a little state in itself, carrying on nearly all the arts and crafts. The term political economy (as économie politique) was first used in France in the eighteenth century to express the set of rules or principles to guide the king and his counselors in the control of his country, which was thought of much as if it were the king’s private estate. Of late the term “economics,” as expressing better a broadening conception of the subject, and at the same time as less likely to be confused with politics, has been gradually displacing the term political economy. It is used with various adjectives indicating the field covered; for example, domestic economics, household economics, corporation economics, national economics, political economy, world-economy, etc.

§ 7. Economy in the sense of the subject studied. We have chosen for our purpose to define economics as a “study,” a body of knowledge, a science. But as in the case of various other sciences, its name is used also to indicate the body of facts and group of persons which are studied. One person (like Robinson Crusoe, on his desert island) constitutes an individual economy. There are, in such a case, no personal relations to study, but only the relations of man to his environment. A group of persons thought of together with all their material environment and in their relations with each other, forming something of an economic unity, constitute a social economy. The economic affairs of a family constitute a family or domestic economy, and those of a nation a political, or a national, economy.

§ 8. Economy not parsimony. It should hardly be necessary to warn against giving to the word “economy” the meaning of (the act or the quality of) parsimony. Economy implies good management, making the best of whatever means one has, and this is not stinginess, tho the thriftless and the self-seeking are always prone to impute it as such to others. Economy as a mode of action is parallel to economics as the science that seeks to arrive at such general rules and principles as will lead to the best results in the use of the resources and services of individuals, families, and nations.

It is true that there are different standards by which to judge what is “best”; sometimes a merely pecuniary standard of business profit to the individual is taken, and this may come close to mere avarice. Again, a standard of true welfare for the nation or for the race may be taken. These two views may be, and often are, in conflict, and it is a part of the task in this study to keep before the mind as clearly as possible the difference between these standards. The one standard is that of individual—pecuniary, acquisitive economics; the other that of public—industrial, productive economics. Ref. 002

§ 9. Social aims of economics. Economics is often defined as the science of wealth. Partly because of this, and partly because of the unfortunate confusion of the individual and of the social points of view, it has been characterized as a “gospel of Mammon.” But, in the main, economics must be understood as a social study for social ends, not a selfish study for individual advantage. The individual interest must be recognized, but treated as within, and subordinate to, the larger social interests. Certainly some of the lessons of economics may be of practical value to men in active business, and training in economics is increasingly deemed a helpful preparation for many special callings. Many economic “principles” are but the general statement of those ideas that have been approved by the experience of business men, of statesmen, and of the masses of men. Economics is not dreamed out by the closest philosopher, but more and more it is the attempt to describe and comprehend the interests and the action of the practical world in which men must live. Many men are working together to develop this study—those who collect statistics and facts bearing on all kinds of practical affairs, and those who search through the records of the past for illustrations of experiments and experiences that may help us in our life to-day.

§ 10. Economics in a democracy. With the growth of the modern state, with the increasing importance of business, and of industrial and commercial interests, as compared with changes of dynasty or the personal rivalries of rulers, economic questions have grown in relative importance. In our own country, particularly since the subjects of slavery and of states’ rights ceased to absorb the attention of our people, economic questions have pushed rapidly into the foreground. Indeed, it has of late been more clearly seen that many of the older political questions, such as the American Revolution and slavery, formerly discussed almost entirely in their political and constitutional aspects, were at bottom largely questions of economic rivalry and of economic welfare. The remarkable increase in the attention given to this study in colleges and universities since the beginning of the last quarter of the nineteenth century is but the index of the greatly increased interest and attention given to it by citizens generally.

The conception of political economy as the term was first used, has been modified wherever unlimited monarchy has given way to the rule of the people. In a democracy there is need for a general diffusion of knowledge, if the economic policy and legislation of the State is to be intelligent. The power now rests not with the king and a few counselors, but in the last resort with the people, and therefore the people must be acquainted with the experiences of the past, must so far as possible have economic knowledge to enlighten them in their choice of men and of measures.

Note

Economic laws and other terms. In the science of economics some general ideas and statements are attained, and are called variously laws, principles, theories, hypotheses, and doctrines. These terms are used somewhat loosely, and we may note the general meaning that we are to attach to them.

Law originally meant (1) the binding custom or practice of a community; then came to mean (2) a rule laid down and enforced by some authority, as the State (acting through the political law-making body), or as divine will; (3) a statement of an order or relation of phenomena which appears to hold under the given conditions. Economic laws have this last meaning; they are not made and enforced by man, but are discovered as the true order inherent in things. Often in the physical sciences law in this sense suggests a pretty definite arithmetic statement (i.e., Newton’s law of gravitation, Kepler’s law, etc.), but it is used generally of an orderly recurrence. In economics the term is frequently applied, as in the phrases, law of diminishing returns, Gresham’s law of money, etc.

Principle meant (1) beginning; then (2) source, or origin; (3) a fundamental truth; (4) an elementary proposition. Law and principle are used almost interchangeably, tho it would seem better to speak of principle when a more elementary statement is meant, and a law when the statement is more complex. Throughout this book the preference is generally given to the word principle rather than law in cases where there is good usage favorable to both.

Theory meant (1) contemplation; then (2) the general explanation of a body of facts, or group of phenomena; in other words, a plan or scheme of thought constructed to fit the facts so far as they are known. The popular use of the term theory to mean some plan of action, especially a poorly thought out plan sure to fail, should have no place in our discussion. It is an error to contrast theory and practice as the impracticable versus the practical. They should be contrasted only as idea, or explanation, versus action, or execution. Good theory then, usually goes with good practice and bad theory with poor practice. Usually when it is said that a thing is true in theory but false in practice, what is meant is that the theory is untrue, based on purely imaginary conditions and hence will not work. Science has to do with theory; art has to do with practice.

Hypothesis, often used interchangeably with theory, may be distinguished from it; it is a provisional conjecture regarding the relations of certain phenomena, whereas a theory is a hypothesis which has undergone a large measure of verification.

Doctrine meant originally (1) that which is taught, usually by a group of thinkers; hence (2 a body of principles. In such expressions as the law of rent, the theory of rent, and the doctrine of rent, the terms are well nigh synonymous, and the preference for the use of “doctrine” in certain cases rather than theory or principle, resulted more or less from the historical accident that a theory became connected in thought with a group of thinkers (that is, was taught by them, as Malthusian doctrine, the Ricardian rent doctrine, the free-trade doctrine of the Manchester School, etc.).

CHAPTER 2: CHOICE AND VALUE

§ 1. Choice; its origin. The world of industry, as we look out upon it, appears to be alive with motion, like a beehive. In the crowded harbor, the busy railroad yard, the noisy steel mill, the bustling department store, we see a ceaseless and bewildering activity. In all this movement and apparent confusion, there is, however, a large degree of order and a pretty regular succession of events which reflects a succession of choices that men are making.

These choices are not always and entirely the result of deliberate and conscious calculation. They are determined in a very great degree by habit or by instinct. Every living creature has a nervous organization of some sort—plants as well as the lowest forms of animals. This nervous organization has a pretty definite “set” or habit of response toward its environment; that is, the nerves react in certain ways to external stimuli. The seed in moist soil germinates; it sends rootlets into the earth in search of water and of the particular soil-elements which it by nature “chooses”; it sends stock and leaf upward into the light and air, it spreads or climbs or twines according to its nature. The chick picks its way out of the shell, and then instinctively (by its inborn nature) picks at any particle it sees. It finds some objects “good” and it eats them; it finds others “bad” and it rejects them. It thus adds to its instinctive choice the choice resulting from experience.

§ 2. Development of conscious choice. Every human being starts on his life of choice in just this way, with a fund of natural impulses, a capacity for certain instinctive reactions. The new-born child cries when hungry or uncomfortable, and it does not know in advance (the first time) what it is crying for. It is moved by mere impulse, tho we say loosely that it “knows” well enough when it gets the right thing. Some food it rejects, other food it takes; and its mere impulse has now become a vague aversion or a vague desire. Very quickly it learns to associate the presence of some object with this or with that choice, and reaches for it, cries for it, giving now a very definite direction to the impulse which it feels. Feeling directed in this way upon some particular object or action is called desire. If we speak of this as a “conscious desire,” we mean not that the person is reflecting on the nature of the desire, but simply that he is conscious of the presence of the thing, and that he desires it. As the child grows older, choice becomes vastly more complex, but all human choice is the development of the first simple impulsive acts. The difference in this matter between man and the animals lies in the degree to which the original fund of impulses is strengthened or weakened by experience and training, and is modified by the greater growth of forethought, imagination, and reason. As the man attains his maturity, deliberate calculation enters more and more into the making of choice. Yet the instinctive and habitual elements of choice continue to be very potent.

Tastes change with age, are trained, are influenced by custom, by example, and by suggestions of many kinds, and are given a wider range by wealth, travel, and opportunity. But choice is ruled fundamentally by instinct; one likes what he likes; de gustibus non disputandum est.

Choice develops in this way as it is directed upon each of the great classes of things with which man is surrounded; clothing, houses, furniture, horses, automobiles, books, etc. It operates also upon the actions of the man himself. He reaches out or withdraws his hand; he seeks or he shuns; he labors to make or to destroy, to possess or to get rid of. Thus the choice among one’s own acts is intertwined with one’s choice of things. Ref. 003

§ 3. The idea of scarcity. Now we are not likely to feel a very keen desire for a particular thing unless the supply of it at our disposal is relatively limited. The air which we breathe is essential to life. But the air is all around us, and ordinarily in boundless abundance. Moreover, we breathe by reflex or automatic action of the muscles without conscious attention. The result is that we do not ordinarily feel a desire for air. But in a crowded room where there is a real scarcity of fresh air relative to our need for it, our desire for a breath of fresh air may become very keen indeed. Under such circumstances the air takes on a very different importance as an object of choice. Our impulsive actions and our thought are directed toward getting it. The diver in his diving suit must make this his first and most constant interest; the drowning man tragically feels this need.

The scarcity which we are now discussing is such a limitation in the number or quantity of objects that not all desires can be met then and there by the amount of goods available. In the numberless cases where some desires are not met or are only partially met, we are under the necessity of making a choice as to which desires shall be met. This involves a choice—and therefore a comparison—among things. Ref. 004

§ 4. Valuation. If we choose one thing rather than another it is plain that for us the first thing has the greater importance. For one cause or another (instinct, training, experience, imagination, judgment) it weighs more in the scale of our choice than the thing which is rejected. Now in our daily life we are constantly making comparisons of this sort between things. Few of us—if any—are able to secure all the things which we desire. We are under the necessity of choosing among the various possibilities. We are, therefore, under the recurring necessity of comparing one thing with another, and in so doing, we assess or estimate one thing in terms of the quantity of the other thing. Such an expression of the importance of one object of choice in terms of another we may call a valuation.

Fig. 1. Choice Between Two Objects. Ref. 005

A comparison of this sort between things may take the form of a mere vague preference without any exact quantitative expression of the degree to which the one thing is more important to us than the other. (Fig. 1.) We prefer one object, X, to another object, Y, without attempting to express even to ourselves the exact strength of the preference. On the other hand, our valuations may and usually do take the form of definite mathematical ratios. In the early American fur trade, for example, a beaver skin came by convention to be used as a unit in terms of which the relative importance of other things (e.g., other furs, food supplies, etc.) was expressed. The other things were measured as multiples (or fractions) of the unit.

Suppose, now, that in a similar way, we were to take a number of things, X, Y, M, N, O, P, and Q (taking, of course, a definite amount and grade of each) and were to make an exact estimate of their respective degrees of importance. The accompanying diagram may be used to express in a graphic way the mathematical relations of the importance of any one expressed in terms of any one of the others. As a matter of convenience we may settle upon a particular one, Q, as a common unit for expressing or measuring the importance of each of the others in turn. This, in fact, is exactly what the fur-traders did. And we do the same in our use of a monetary unit as our standard for the expression and comparison of the relative importance of things.

Fig. 2. Order of Choice Among Several Objects.

Viewed as the reflection of an act of choice, a valuation of goods appears to be a very simple fact. Yet underlying this simplicity would be found ordinarily a number of complex motives. Each valuation is a focus of many influences, a resultant of many conditions, some in the environment, and some in the nature and in the feeling of man. According as there is more or less of the various things to choose, and according as the person is more or less hungry or tired or cold or elated or downcast, any particular object may appear to be more or less important, may thus have a greater or less valuation.

§ 5. One’s own labor as a valuation unit. A valuation involves more than a comparison between external objects. Often one’s own labor is brought into the comparison. Choice frequently has to be made with reference to the limited strength and time of the subject, his laboring force. Here there is a twofold comparison; a good is compared with the labor required to secure it as well as with another good. When we are face to face with nature, and goods are to be secured only through our own labor applied to various materials, we are likely to estimate things habitually in terms of our own labor. Labor may under these circumstances become a common unit for the valuation of external things.

§ 6. Crusoe’s scale of valuations. The economy of Robinson Crusoe serves to illustrate the problems which the individual has to solve when the relation is between man and nature, and not between man and man.

The unfailing interest which old and young find in the story of Crusoe is largely due to the convincing naturalness of the tale. Each reader feels that he would have done just the same things in just the same order, if he were in the same plight and had been cast ashore as the story relates.

I was wet and cold, and had no dry clothes to put on, no food to eat, not a friend to help me. . . . I had but a knife and a pipe. . . . Where was I to go for the night? . . . I went to a tree and made a kind of nest to sleep in. Then I cut a stick to keep off the beasts of prey in case they should come. . . . The next day . . . I swam up to the wreck which was in a sand bank. My first thought was to look around for some food . . . and I ate some of it as I went to and fro, as there was no time to lose. There was, too, some rum, of which I took a good draught, and this gave me heart. . . . I fell to work to make a raft. I found some bread and rice, a Dutch cheese, and some dried goat’s flesh, . . . some fresh clothes and four guns, . . . with these I put to sea . . . and brought the raft safe to land with all her freight. . . .

The next day, as there was still a great store of things left in the ship, which would be of use to me, I thought I ought to bring them to land at once, for I knew that the first storm would break up the ship. . . . The first thing I sought was the tool-chest; and in it were some bags of nails, spikes, saws, knives, and such things; but best of all I found a stone to grind my tools on. There were two or three flasks, some large bags of shot, and a roll of lead. There were some spare sails too, which I brought to the shore.

Now that I had two freight of goods on hand, I made a tent with the ship’s sails, to stow them in, and cut the poles for it from the wood.

The next day I had no great wish for work, but there was too much to be done for me to dwell long on my sad lot. Each day, as it came, I went off to the wreck to fetch more things and I brought back as much as the raft would hold. . . .

The last time I swam to the wreck I found some tea and some gold coin; but as to the gold it made me laugh to look at it. “O drug,” said I; “thou art no use to me! I care not to save thee. Stay where thou art till the ship goes down; then go thou with it.” Still I thought I might as well just take it. . . .

I have said not a word of my pets. You may guess how fond I was of them, as they were all the friends left to me. I brought a dog and two cats from the ship.—(Adapted from the abridged edition, published by H. Altemus, Philadelphia.)

Crusoe knew not at what moment the waves would sweep into the sea whatever was left. He had scant strength and time for the task. His labor was to be so distributed that he might save from the wrecked ship the most valuable contents. Did he choose well? First, to preserve his life he found a tree to sleep in, and a stick to ward off wild beasts. Then at the ship he took food, clothing, weapons and tools, and made a place to store them safe; and finally came gold and pets. We see how he ranks them then and there, and how different is the scale from that he had before. His remark about the gold is whimsically suggestive of the old lingering standards of choice, and of the dim hope that he might return to live among men, and thus resume his old scale of values.

§ 7. Choice before and after valuation. It is usual to speak of the valuation which a person has (or holds or makes) of an object as preceding choice; but evidently this is not so in the case of instinctive choice, and many choices have in a measure this impulsive character. In case of a choice of a thing by a person for his own use the valuation is simply the resultant of choice; it is the arithmetic expression necessarily involved in the action and reveals to the person himself what he has done, how he values the object, rather than determines his action.

In a great many business transactions, however, one is not choosing for his own desires, but is trying to forecast the valuations of others to whom he will sell. There is often, in such cases, a long and careful attempt to express in exact figures the relative importance of different objects before a choice is finally made. In other cases the valuations precede the choice, when a conscious calculation is made of the relative effectiveness of things (heating power, food-value, etc.) and the relative difficulty of getting them (cost in money, distance to carry, etc.). In this sense of a careful estimate of the importance of a thing for business purposes, we speak of an assessor’s valuation of property for purposes of taxation, an appraiser’s valuation of imports, and a merchant’s valuation of his stock-in-trade. This kind of commercial valuation usually precedes choice by merchants. Ref. 006

§ 8. Value. Now as a choice is made and a valuation is thus expressed, the person choosing feels that there is a certain quality in the thing which evokes or determines his choice. This quality of importance which things have when they are the subjects of man’s choice is value. Broadly understood value may be of many kinds: moral (the quality in actions calling for approval or disapproval), religious (the quality in actions, sentiments, and beliefs reflecting what the persons believe to be the will of the deity), esthetic (the quality in objects that accords with the canons of good taste in color, form, sound, etc.). Economic value is but one species of the larger genus of value. It is the quality in an object in the environment to influence a man’s action in respect to the control and use of the object. We ascribe this quality to the object that motivates our choice. Bread, meat, dress, houses, land, gold, carriages, slaves, the labor of hired servants, each object is said by you to have (economic) value, just because you feel and know that it sways your behavior in relation to itself. Value in this sense is not inherent or intrinsic in anything; it goes and comes, it grows and wanes, according to the intensity of the desire. It may have existence for one economic subject and not for another. It is not to be thought of as something in a thing before man makes it an object of choice. The logical order is: first, choice; secondly, a valuation by necessary implication; third, value—the quality imputed to the object. Yet in real life these are but three phases, absolutely contemporaneous, of the same thing. Value is but the abstract quality which we attach to the thing in our thought, because of the way it makes us behave in its presence. Value is fundamentally a reflection of the individual choice, though many individuals may have a similar choice, and by their interrelations mutually influence each other’s valuations in remarkable ways. Objects have their physical qualities independent of man’s choice; the apple has form, weight, the texture and skin which to the eye look red, and the chemical elements that give a certain flavor and taste. These singly or combined are not value, tho each has its part in determining under varying conditions, whether the apple is to have also the quality of value. There are as many problems of economic value as there are ways of choosing between economic objects. Their study makes up a large part of economics. Ref. 007

Notes

Aspects of things chosen. Choice itself has a number of aspects and is made in reference to one or another quality of goods and acts (when certain other qualities are for the time equal or may be left out of consideration). The four chief aspects of choice relate to stuff, form, place, and time, as follows: (1) Choice of kinds of things (the simplest case being choice among things present and chosen for their immediate use and enjoyment), as choice between different kinds of objects, such as food and clothing, apples and oranges; or again the things may be of the same general kind but of different qualities, as apples differing in sweetness, smoothness, and in color; or the objects may be of different sizes or be in different quantities. (2) Choice of form, as an apple cut and pared rather than one uncut, or cooked food rather than uncooked food, or a made garment rather than the unmade cloth and materials. (3) Choice of the place, as an apple here rather than on the tree or on a distant farm, a pail of water in the house rather than at the well, home for one’s self rather than the roadside at dusk with home still miles away, etc. (4) Choice of the time at which goods of a certain kind shall come into one’s control, or that acts should be done, as choice of food at once when hungry rather than later, or of rainfall after a drought rather than during a flood, or the choice involved in keeping of food for winter instead of eating it all in the fall, etc.

These choices occur in many combinations and degrees of difficulty and complexity. It is a large part of the task of economics to study in detail the large groups of choices which are thus made.

Various meanings of scarcity. In economics the idea of scarcity is (as is shown above) connected with limitation relative to the desire for the objects. But “scarce” has other meanings. Sometimes it is that of rare, or uncommon (which usually, tho not always, implies desirability), as a scarce plant, a scarce butterfly, or a scarce stamp. Scarcity means also a small amount compared with the average or usual; it is said that wheat is scarce the year of a poor harvest tho there are millions of bushels of it, and conversely that “wheat is not scarce,” when there is a good harvest; yet in relation to choice it is merely less scarce than usual.

Value and valuation. The words value and valuation are frequently used interchangeably without much harm; yet for great precision it would usually be better to distinguish between them. The essential meaning of value as given in § 8 (a quality imputed to an object by a man) is individual, that is, it relates to a particular person. The meaning is somewhat different when value and market value are used for convenience to express a valuation, that is, some one’s estimate (as a statistician’s, an official’s) of the amount of goods in terms of price, such as the value of the imports and of the exports, the total value of the wheat crop of the country, the value of all the outstanding stock of a corporation. This valuation is obtained by multiplying the whole number of units of goods, shares of stock, etc., by the price in a single transaction. This valuation is not to be confused with price; price is an actual amount of money paid, whereas the valuation is an estimate of the total number of dollars for which all the articles could have sold, if they had changed hands at that price. In fact, in many cases, many of them did not change hands at that time.

CHAPTER 3: GOODS AND PSYCHIC INCOME

§ 1. Inherent physical nature of things. Man has to take the physical nature of things as he finds it. He can, to be sure, make certain changes in the relative positions of particles or masses of matter. He can decompose a chemical compound into its elements; he can change iron into steel, and with this construct elaborate machinery; he can make clothing of vegetable fiber; he can cut a canal through an isthmus that united two continents. He can, in short, make many changes in his physical environment and, within limits, he can adjust it to his liking. But the physical and chemical forces of the world, acting in ways which we express as natural laws, are beyond the power of man to change. He may rise above the earth in a balloon, or even travel through the air in a heavier-than-air machine. But the force of gravitation is acting upon him during every moment of his flight. Material things differ in their specific gravity, in their power to reflect rays of light, or to absorb or transmit heat. They differ also in their chemical qualities. Niter, charcoal, and saltpeter, combined in certain proportions, form an explosive. Other proportions give other results. Solids combine to form gases and liquids unite to form solids, and these qualities and reactions of material things are for men ultimate truths of chemistry. Sunshine acts on living bodies, whether plant, animal, or man, in certain ways. Some plants are nourishing food for animals, others are poisonous. If man were not living on the earth, things would, so far as we can conclude, have the same physical and chemical qualities, and mechanical laws would be the same as at present. They are not governed by the will of man. Man can, however—and does—slowly learn the nature of things, and as he does so he makes choices among them, uses them for his purposes, combines, separates, and adapts them so that he may better bring about the results he desires. The fitness of things for accomplishing man’s desires is what makes them objects of choice.

§ 2. Free goods and economic goods. We have already seen that some things, even such as are indispensable to existence, may yet, because of their abundance, fail to be objects of desire and of choice. Such things are called free goods. They have no value in the sense in which the economist uses that term. Free goods are things which exist in superfluity; that is, in quantities sufficient not only to gratify but also to satisfy all the desires which may depend upon them. The air about us is ordinarily a good of this kind. Water, too, tho in certain places and at certain times where it is scarce it takes on a value, is in many places so abundant that it falls in the category of free goods. The same is true at certain times and places of firewood, fruits, and other things, when there chances to be a surplus, relative to the desires of men. In such cases both the portions which are used and the other portions are without value—are free goods.

There is always something puzzling about this as one begins to think about it. It seems unreasonable to say that diamonds, laces, cigarettes, have value, and air and water have not. But the explanation is simple. Tho we must have air to live, and tho every breath we draw is to supply this need, our attention need not ordinarily be given to the matter of the supply of air at all. So long as it is present in abundance, the desire for it has no chance to rise to noticeable intensity, and remains constantly at the zero point. Men do not concern themselves about that which they have in superfluity—unless indeed the excess causes them some discomfort. It is well that they do not, for a wise direction of effort can take place only when men think mainly of the things that are lacking and direct their efforts toward securing them.

Most kinds of enjoyable things are constantly being used up before every use dependent on them can be made. Our stocks of such things become therefore the objects of our choice. We strive to use them with some care and attention. Such goods are called economic goods, being the goods which have value and therefore must be economized. As we have already seen, a certain thing may be a free good at one time because of its abundance and at another time it may be an economic good because of its scarcity.

§ 3. Harmful objects. Beyond the boundary of economic goods and of free goods there lies an anti-economic environment, the harmful: destructive lightning, floods, poisons, vermin, pests of locusts, disease-breeding swamps, wild beasts, human enemies, and many other ills of earth. While some water continues to be “a good,” other water may be “an ill,” flooding one’s cellar, or soaking one’s clothes on a cold day, or breaking through the walls of a mountain reservoir and carrying death and destruction in its path. Pure air may come as a tornado, fire may destroy our dwelling, growing woods may cover the fields needed for tillage, iron may crush the foot or cut the hand. And so, anything may become harmful, while in turn the “harmful” may become useful. Poison helps rid the house of vermin, disease germs may be made to serve as antitoxins, noxious weeds may, by the discovery of some new process, be worked into useful forms, tho they may still continue to be harmful in many a farmer’s field.

§ 4. Value and true welfare. It will be noticed that the things that are valued, the things that we call economic goods, are things that have a relation to the choices or desires of men. It must not be thought, however, that they are of necessity conducive to real welfare, either generally or permanently, as the term “good” might seem to imply. In many cases they may be so, but what shall we say of the pistol which the highwayman points at his victim, or of the poison with which the lunatic kills his friend, or of the opium for which the miserable victim would give his birthright, or of the whisky which is ruining the happiness of the drinker and of his family? For the individual these things, being the objects of choice and desire, have value, and the term “economic goods” has been extended to cover things of this sort. The economist, however, must not overlook the injurious results of such uses, and in his final judgments on economic welfare must endeavor to see a larger good than that of the moment and of the individual desire.

The term utility properly expresses the idea of this fitness (a quality) of things to conduce to real welfare quite apart from the subject’s knowledge at the time or of his choice. This is in accord with usage as well in biology (for example, in discussing the utility of certain organs) as in the moral sciences (for example, in studying the utility of certain institutions). We should beware of the very frequent confusion of the terms value and utility, and throughout we shall connect the idea of value with choice and not with utility. Later, in considering the more lasting effects that wealth has, either upon the individual or upon society, utility has its place.

§ 5. Gratification of desire. We have already seen that there is in our desires for things an impulsive or an instinctive element. But with our growth through childhood into maturity, experience accumulates, and our choices among things and our desires for things come to have in them elements of memory, calculation, imagination, and reason. We desire an article of food partially because we have already tasted it and imagination recalls the sensation which it gave us. We desire a plow because our reasoning powers tell us that the plow will assist us in growing the crop which is to serve as food. So as we develop intellectually it comes about that judgment dominates our desires to a very considerable degree. Now if we have a desire for a thing, and succeed in securing it, a change takes place in our desire. This change we call gratification. (Or if the desire is completely met, we speak of the change as the satisfaction of the desire.) It is the sensation (feeling) which accompanies the getting of the thing desired. Ref. 008

§ 6. The idea of income. Desire is a mental reaching out for things. The fulfilment of desire involves the securing of the objects of desire, and this brings us to the idea of income. We find the term used in a number of different senses. Income may consist of certain concrete goods which come in to a person during a given period—such as bread, butter, meat, clothing, etc., the quantity of which is expressed in physical units, such as bushels, pounds, yards, etc. A stream of goods of this sort is sometimes called “real” income in contrast with monetary (or pecuniary) income, which is a certain sum of money—or its equivalent in credit—received by a person within the period under consideration. If this terminology seems to imply that monetary income is less “real” than an income consisting of food, clothing, etc., the explanation is that a money income is but a means to an end. It is likely to be used to purchase all sorts of concrete goods—such as food and clothing—which are the real objects of desire. However, in the commercial world, and in ordinary life, we are very much in the habit of expressing income as a sum of money accruing within a period. This is perhaps the sense in which the term is most frequently used.

§ 7. Psychic income. A closer consideration, however, discloses the fact that there are many desirable results which cannot be included either under “real” or under “monetary” income. Many choices made by men are not directed to securing material objects. The term real income can hardly be strained to include the services of the hired laborer, the man’s own direct services to himself, the valued social esteem which leads one to take a lower salary for harder work, etc. It is difficult to estimate such things in monetary terms or in terms of other concrete goods, and often the attempt to do so is not made. For we are dealing here with things which are in the realm of feeling. We may call them psychic income, and we may define the term psychic income as desirable results produced in the realm of feeling by valuable objects or by valuable changes in the environment which accrue to or affect an economic subject within a given period.

We have here reached something fundamental in our analysis. It is not merely that many items of income take this form and this form only—not being embodied in any tangible shape. But concrete, tangible objects (monetary or non-monetary), are regarded as income, as something desirable, just because their ultimate effect is to bring about such changes in the realm of feeling as we are now discussing. The food that we eat banishes the sensation of hunger. Clothing protects us from the cold, gives the feeling of being well-dressed, etc. The musical instrument creates, through our nerves of hearing, the pleasurable feelings of harmony. The beautiful picture, the automobile, the pleasure yacht—all the many kinds of concrete goods which man desires—are objects of desire to him because of their capacity to affect the sensory system, and, through that, his mental life. It is clear, therefore, that any adequate enumeration of the group of things which we call income must take careful account of these psychic elements. The estimate of a man’s income merely in dollars may leave out items which are of the greatest significance to him. A man will work for a certain salary in an occupation that he enjoys who might refuse several times the amount in a less enjoyable or actually disagreeable line of work. A family may choose to live in a small house in a particular neighborhood, rather than in a larger house with greater physical comforts in a less attractive neighborhood. A girl who can live at home may accept what would otherwise be an inadequate wage—an income which would not support her if she lived elsewhere.

§ 8. Motivating force of psychic income. It may be seen that (anticipated) total psychic income is what motivates our economic activity—at least as far as this activity is determined by conscious purpose. There are men holding public office to whom the salary received is an insignificant consideration. They are paid largely in public esteem, or in their own consciousness of duty well performed. And in as far as men work for material rewards—money or goods—their ultimate ends are not material. They are in the realm of the psychic. Except to the miser, money is not an end in itself (if it is even in that case). Nor are stocks and bonds, or real estate, or even clothing and food, ends in themselves. Man’s psychic life is the thing which is of ultimate concern to him, and all these things appeal to him because of their relation to that complex of sensations and feelings of which his psychic life is composed.

§ 9. The personal equation in psychic income. The magnitude of the stream of psychic income depends in large measure on the natural temperament, on acquired habits of life and thought, and on the state of health of the individual. One person gets delight from small things; another is miserable in the midst of luxury. In 1913 the richest man and wife in Switzerland committed suicide together because they felt that they had nothing to live for; whereas the mass of the hardworking Swiss with their scanty material incomes, are as joyous and contented as any people in the world. Nothing can equalize these subjective differences between individuals, but each individual, in his choice, compares things with reference to their psychic income-value to himself; he does not judge them merely by their physical or by their pecuniary measurements. But when in moralizing strain, we say that the source of happiness is within oneself, we speak within limits. For the most joyous and optimistic of persons must have some of “this world’s goods” or life itself becomes impossible.

§ 10. Desire-streams and income-streams. It is not enough, however, that we should have a supply of goods at a given time; we need an “income stream.” Our desires are nearly all recurrent. Hunger, tho fully satisfied, returns again. One circus does not last the boy a lifetime. New clothing quickly becomes old. We weather one storm only to feel an equal need of shelter from the next. To meet this series of desires and wants we require a pretty regular flow of goods and services.