 Chapter 6 of Principles of Economics, Book 3 This is a LibriVox recording. All LibriVox recordings are in the public domain. For more information or to volunteer, please visit LibriVox.org. Recording by IC Jumbo. Principles of Economics, Book 3 by Alfred Marshall. Chapter 6 Value and Utility Section 1. We may now turn to consider how far the price which is actually paid for a thing represents the benefit that arises from its possession. This is a wide subject on which economic science has very little to say, but that little is of some importance. We have already seen that the price which a person pays for a thing can never exceed, and seldom comes up to that which he would be willing to pay rather than go without it, so that the satisfaction which he gets from its purchase generally exceeds that which he gives up in paying away its price, and he thus derives from the purchase a surplus of satisfaction. The excess of the price which he would be willing to pay rather than go without the thing over that which he actually does pay is the economic measure of this surplus satisfaction. It may be called consumer's surplus. It is obvious that the consumer's surpluses derived from some commodities are much greater than from others. There are many comforts and luxuries of which the prices are very much below those which many people would pay rather than go entirely without them, and which therefore afford a very great consumer's surplus. Good instances are matches, salt, a penny newspaper or a postage stamp. This benefit which he gets from purchasing at a low price, things for which he would rather pay a high price than go without them, may be called the benefit which he derives from his opportunities or from his environment, or to recur to a word that was in common use a few generations ago from his conjuncture. Our aim in the present chapter is to apply the notion of consumer's surplus as an aid in estimating roughly some of the benefits which a person derives from his environment or his conjuncture. Footnote. This term is a familiar one in German economics and meets a need which is much felt in English economics. For opportunity and environment, the only available substitutes for it are sometimes rather misleading. By conjuncture, says Wagner, Grundegung, edition 3, page 387, we understand the sum total of the technical, economic, social and legal conditions, which in a mode of national life, folks wirtschaft, resting upon the division of labour and private property, especially private property in land and other material means of production, determine the demand for and supply of goods, and therefore their exchange value. This determination being as a rule, or at least in the main, independent of the will of the owner of his activity and his remissness. End of footnote. Section 2. In order to give definiteness to our notions, let us consider the case of tea purchased for domestic consumption. Let us take the case of a man who, if the price of tea were twenty shillings a pound, would just be induced to buy one pound annually, who would just be induced to buy two pounds if the price were fourteen shillings, three pounds if the price were ten shillings, four pounds if the price were six shillings, five pounds if the price were four shillings, six pounds if the price were three shillings, who the price being actually two shillings does purchase seven pounds. We have to investigate the consumer's surplus which he derives from his power of purchasing tea at two shillings a pound. The fact that he would just be induced to purchase one pound if the price were twenty shillings proves that the total enjoyment or satisfaction which he derives from that pound is as great as that which he could obtain by spending twenty shillings on other things. When the price falls to fourteen shillings he could, if he chose, continue to buy only one pound. He would then get for fourteen shillings what was worth to him at least twenty shillings, and he will obtain a surplus satisfaction worth to him at least six shillings, or in other words a consumer's surplus of at least six shillings. But in fact he buys a second pound of his own free choice, thus showing that he regards it as worth to him at least fourteen shillings, and that this represents the additional utility of the second pound to him. He obtains for twenty-eight shillings what is worth to him at least twenty shillings plus fourteen shillings, i.e. thirty-four shillings. His surplus satisfaction is at all events not diminished by buying it, but remains worth at least six shillings to him. The total utility of the two pounds is worth at least thirty-four shillings, his consumer surplus is at least six shillings. Some further explanations may be given of this statement, though in fact they do little more than repeat in other words what has already been said. The significance of the condition in the text that he buys the second pound of his own free choice is shown by the consideration that if the price of fourteen shillings had been offered to him on the condition that he took two pounds he would then have to elect between taking one pound for twenty shillings or two pounds for twenty-eight shillings, and then his taking two pounds would not have proved that he thought the second pound worth more than eight shillings to him. But as it is he takes a second pound paying fourteen shillings unconditionally for it, and that proves that it is worth at least fourteen shillings to him. If he can get buns at a penny each, but seven for six pounds, and he elects to buy seven, we know that he is willing to give up his sixth penny for the sake of the sixth and seventh buns, but we cannot tell how much he would pay rather than go without the seventh bun only. It is sometimes objected that as he increases his purchase the urgency of his need for his earlier purchases is diminished, and their utility falls, therefore we ought to continually redraw the earlier parts of our list of demand prices at a lower level as we pass along it towards lower prices, i.e. to redraw at a lower level our demand curve as we pass along it to the right. But this misconceives the plan on which the list of prices is made out. The objection would have been valid if the demand price set against each number of pounds of tea represented the average utility of that number. For it is true that if he would pay just twenty shillings for one pound, and just fourteen shillings for a second, then he would pay just thirty-four shillings for the two, i.e. seventeen shillings each on the average. And if our list had had a reference to the average prices he would pay, and had set seventeen shillings against the second pound, then no doubt we should have had to redraw the list as we passed on. For when he has bought a third pound the average utility to him of each of the three will be less than that of seventeen shillings, being in fact fourteen shillings and eight pounds if, as we go on to assume, he would pay just ten shillings for a third pound. But this difficulty is entirely avoided on the plan of making out demand prices which is here adopted, according to which his second pound is credited not with the seventeen shillings which represents the average value per pound of the two pounds, but with the fourteen shillings which represents the additional utility which a second pound has for him. For that remains unchanged when he has bought a third pound of which the additional utility is measured by ten shillings. The first pound was probably worth to him more than twenty shillings. All that we know is that it was not worth less to him. He probably got some small surplus even on that. Then the second pound was probably worth more than fourteen shillings to him. All that we know is that it was worth at least fourteen shillings and not worth twenty shillings to him. He would get therefore at this stage a surplus satisfaction of at least six shillings, probably a little more. A ragged edge of this kind, as mathematicians are aware, always exists when we watch the effects of considerable changes as that from twenty shillings to fourteen shillings a pound. If we had begun with a very high price, had descended by practically infinitesimal changes of a farthing per pound, and watched infinitesimal variations in his consumptions of a small fraction of a pound at a time, this ragged edge would have disappeared. End of footnote. The fact that each additional purchase reacts upon the utility of the purchases which he had previously decided to make has already been allowed for in making out the schedule and must not be counted a second time. When the price falls to ten shillings, he might, if he chose, continue to buy only two pounds and obtain for twenty shillings what was worth to him at least thirty-four shillings, and derive a surplus satisfaction worth at least fourteen shillings. But in fact he prefers to buy a third pound, and as he does this freely we know that he does not diminish his surplus satisfaction by doing it. He now gets for thirty shillings, three pounds, of which the first is worth to him at least twenty shillings, the second at least fourteen shillings, and the third at least ten shillings. The total utility of the three is worth at least forty-four shillings, his consumer's surplus is at least fourteen shillings, and so on. When at last the price has fallen to two shillings, he buys seven pounds, which are severally worth to him not less than twenty, fourteen, ten, six, four, three, and two shillings, or fifty-nine shillings in all. This sum measures their total utility to him, and his consumer's surplus is at least the excess of this sum over the fourteen shillings he actually does pay for them, i.e. forty-five shillings. This is the excess value of the satisfaction he gets from buying the tea, over that which he could have got by spending the fourteen shillings in extending a little his purchase of other commodities, of which he had just not thought it worth while to buy more at their current prices, and any further purchases of which, at those prices, would not yield him any consumer's surplus. In other words, he derives this forty-five shillings worth of surplus enjoyment from his conjuncture, from the adaptation of his environment to his wants in the particular matter of tea. If that adaptation ceased, and tea could not be had at any price, he would have incurred a loss of satisfaction at least equal to that which he could have got by spending forty-five shillings more on extra supplies of things that were worth to him only just what he paid for them. Foot-Net Professor Nicholson, Principles of Political Economy, Volume 1, and Economic Journal, Volume 4, has raised objections to the notion of consumer's surplus, which have been answered by Professor Edgeworth in the same journal. Professor Nicholson says, Of what avail is it to say that the utility of an income of, say, one hundred pounds a year is worth, say, one thousand pounds a year? There would be no avail in saying that. But there might be use, when comparing life in Central Africa with life in England, in saying that although the things which money will buy in Central Africa may on the average be as cheap there as here, yet there are so many things which cannot be bought there at all that a person with a thousand a year there is not so well off as a person with three or four hundred a year here. If a man pays one penny toll on a bridge, which saves him an additional drive that would cost a shilling, we do not say that the penny is worth a shilling, but that the penny, together with the advantage offered him by the bridge, the part it plays in in his conjuncture, is worth a shilling for that day. Were the bridge swept away on a day on which he needed it, he would be in at least as bad a position as if he had been deprived of eleven pence. End of footnote. Section 3 In the same way, if we were to neglect for the moment the fact that the same sum of money represents different amounts of pleasure to different people, we might measure the surplus satisfaction which the sale of tea affords, say in the London market, by the aggregate of the sums by which the price is shown in a complete list of demand prices for tea exceeds its selling price. Footnote. The footnote is accompanied by a graph which depicts a demand curve. The horizontal axis is OX, the vertical axis has a point D at the top left. There is a line curving down from D at the top left to the bottom right, ending at D prime. The line is steep at the top left and less steep at the bottom right. Several points and lines also appear. Point A is near the bottom right of the curve. Point H is on the horizontal axis directly below A. Point P is further up the curve between points A and D. Point M is on the horizontal axis directly below point P. Point C is on the vertical axis directly to the left of point A. There are lines from A to H, from P to M, and from A to C, and the line AC crosses the line PM at a point marked R. Let us then consider the demand curve D, D prime for tea in any large market. Let OH be the amount which is sold there at the price HA annually, a year being taken as our unit of time. Taking any point M in OH, let us draw MP vertically upwards to meet the curve in P and cut a horizontal line through A in R. We will suppose the several pounds numbered in the order of the eagerness of the several purchasers, the eagerness of the purchaser of any pound being measured by the price he is just willing to pay for that pound. The figure informs us that OM can be sold at the price PM, but that at any higher price not quite so many pounds can be sold. There must be then some individual who will buy more at the price PM than he will at any higher price, and we are to regard the OM-th pound as sold to this individual. Suppose for instance that PM represents four shillings, and that OM represents a million pounds. The purchaser described in this text is just willing to buy his fifth pound of tea at the price four shillings, and the OM-th or millionth pound may be said to be sold to him. If AH and therefore RM represent two shillings, the consumer surplus derived from the OM-th pound is the excess of PM, or four shillings, which the purchaser of that pound would have been willing to pay for it over RM the two shillings which he actually does pay for it. Let us suppose that a very thin vertical parallelogram is drawn, of which the height is PM, and of which the base is the distance along OX that measures the single unit or pound of tea. It will be convenient hence forward to regard price as measured not by a mathematical straight line without thickness as PM, but by a very thin parallelogram, or as it may be called a thick straight line, of which the breadth is in every case equal to the distance along OX which measures a unit or pound of tea. Thus, we should say that the total satisfaction derived from the OM-th pound of tea is represented or, on the assumption made in the last paragraph of the text, is measured by the thick straight line MP. That the price paid for this pound is represented by the thick straight line MR, and the consumer surplus derived from this pound by the thick straight line RP. Now let us suppose that such thin parallelograms, or thick straight lines, are drawn from all positions of M between O and H, one for each pound of tea. The thick straight lines thus drawn, as MP is, from OX up to the demand curve, will each represent the aggregate of the satisfaction derived from a pound of tea, and taken together thus occupy and exactly fill up the whole area DOHA. Therefore, we may say that the area DOHA represents the aggregate of the satisfaction derived from the consumption of tea. Again, each of the straight lines drawn, as MR is, from OX upwards as far as AC, represents the price that actually is paid for a pound of tea. These straight lines together make up the area COHA, and therefore this area represents the total price paid for tea. Finally, each of the straight lines drawn, as RP is, from AC upwards as far as the demand curve, represents the consumer surplus derived from the corresponding pound of tea. These straight lines together make up the area DCA, and therefore this area represents the total consumer surplus that is derived from tea when the price is AH. It must be repeated that this geometrical measurement is only an aggregate of the measures of benefits which are not all measured on the same scale except on the assumption just made in the text. Unless that assumption is made, the area only represents an aggregate of satisfactions, the several amounts of which are not exactly measured. On that assumption only, its area measures the volume of the total net satisfaction derived from the tea by its various purchasers. End of footnote. This analysis, with its new names and elaborate machinery, appears at first sight laboured and unreal. On closer study it will be found to introduce no new difficulties and to make no new assumptions, but only to bring to light difficulties and assumptions that are latent in the common language of the marketplace. In this, as in other cases, the apparent simplicity of popular phrases veils a real complexity, and it is the duty of science to bring out that latent complexity, to face it and to reduce it as far as possible, so that in later stages we may handle firmly difficulties that could not be grasped with a good grip by the vague thought and language of ordinary life. It is a common saying in ordinary life that the real worth of things to a man is not gauged by the price he pays for them, that, though he spends for instance much more on tea than on salt, gets salt is of greater real worth to him, and that this would be clearly seen if he were entirely deprived of it. This line of argument is but thrown into precise technical form when it is said that we cannot trust the marginal utility of a commodity to indicate its total utility. If some shipwrecked men, expecting to wait a year before they were rescued, had a few pounds of tea and the same number of pounds of salt to divide between them, the salt would be the more highly prized, because the marginal utility of an ounce of salt, when a person expects to get only a few of them in the year, is greater than that of tea under like circumstances. But under ordinary circumstances, the price of salt being low, everyone buys so much of it that an individual pound would make him little additional satisfaction. The total utility of salt to him is very great indeed, yet its marginal utility is low. On the other hand, since tea is costly, most people use less of it and let the water stay on it rather longer than they would if it could be got at nearly as low a price as salt can. Their desire for it is far from being satiated, its marginal utility remains high and they may be willing to pay as much for an additional ounce of it as they would for an additional pound of salt. The common saying of ordinary life, with which we began, suggests all this, but not in an exact and definite form, such as is needed for a statement which will often be applied in later work. The use of technical terms at starting adds nothing to knowledge, but it puts familiar knowledge in a firm compact shape ready to serve as the basis for further study. Harris, on coins, 1757, says, Things in general are valued not according to their real uses in supplying the necessities of men, but rather in proportion to the land, labour and skill that are requisite to produce them. It is according to this proportion nearly that things or commodities are exchanged one for another, and it is by the said scale that the intrinsic values of most things are chiefly estimated. Water is of great use, and yet ordinarily of little or no value, because in most places water flows spontaneously in such great plenty as not to be withheld within the limits of private property, but all may have enough, without other expense than that of bringing or conducting it, when the case so requires. On the other hand, diamonds, being very scarce, have upon that account a great value, though they are but little use. End of footnote. For the real worth of a thing might be discussed with reference not to a single person, but to people in general, and thus it would naturally be assumed that a shillings worth of gratification to one Englishman might be taken as equivalent with a shillings worth to another, to start with, and until cause to the contrary were shown. But everyone would know that this was a reasonable course only on the supposition that the consumers of tea and those of salt belonged to the same classes of people, and included people of every variety of temperament. Footnote. There might conceivably be persons of high sensibility who would suffer specially from the want of either salt or tea, or who were generally sensitive, and who would suffer more from the loss of a certain part of their income than others in the same station of life. But it would be assumed that such differences between individuals might be neglected, since we were considering in either case the average of large numbers of people, though of course it might be necessary to consider whether there were some special reason for believing, say, that those who laid most store by tea were a specially sensitive class of people. If it could, then a separate allowance for this would have to be made before applying the results of economical analysis to practical problems of ethics or politics. End of footnote. This involves the consideration that a pound's worth of satisfaction to an ordinary poor man is a much greater thing than a pound's worth of satisfaction to an ordinary rich man. And if instead of comparing tea and salt, which are both used largely by all classes, we compared either of them with champagne or pineapples, the correction to be made on this account would be more than important. It would change the whole character of the estimate. In earlier generations, many statesmen, and even some economists, neglected to make adequate allowance for considerations of this class, especially when constructing schemes of taxation, and their words or deeds seemed to imply a want of sympathy with the sufferings of the poor, though more often they would use simply to a want of thought. On the whole, however, it happens that by far the greater number of the events with which economics deals affect in about equal proportions all the different classes of society, so that if the money measures of the happiness caused by the two events are equal, there is not in general any very great difference between the amounts of the happiness in the two cases. And it is on account of this fact that the exact measurement of the consumer's surplus in a market has already much theoretical interest, and may become of high practical importance. It will be noted, however, that the demand prices of each commodity, on which our estimates of its total utility and consumer's surplus are based, assume that other things remain equal while its price rises to scarcity value, and when the total utilities of the two commodities which contribute to the same purpose are calculated on this plan, we cannot say that the total utility of the two together is equal to the sum of the total utilities of each separately. Footnote. Some ambiguous phrases in earlier editions appear to have suggested to some readers the opposite opinion, but the task of adding together the total utilities of all commodities, so as to obtain the aggregate of the total utility of all wealth, is beyond the range of any but the most elaborate mathematical formulae. An attempt to treat it by them some years ago convinced the present writer that even if the task be theoretically feasible, the result would be encumbered by so many hypotheses as to be practically useless. Attention has already, pages 100, 105, been called to the fact that for some purposes such things as tea and coffee must be grouped together as one commodity, and it is obvious that if tea were inaccessible people would increase their consumption of coffee, and vice versa. The loss that people would suffer from being deprived both of tea and coffee would be greater than the sum of their losses from being deprived of either alone, and therefore the total utility of tea and coffee is greater than the sum of the total utility of tea calculated on the supposition that people can have recalls to coffee, and that of coffee calculated on a like supposition as to tea. This difficulty can be theoretically evaded by grouping the two rival commodities together under a common demand schedule. On the other hand, if we have calculated the total utility of fuel with reference to the fact that without it we could not obtain hot water to obtain the beverage tea from tea leaves, we should count something twice over if we added to that utility the total utility of tea leaves reckoned on a similar plan. Again, the total utility of agricultural produce includes that of plows, and the two may not be added together, though the total utility of plows may be discussed in connection with one problem, and that of wheat in connection with another. Other aspects of these two difficulties are examined in five and six. Professor Patton has insisted on the latter of them in some able and suggestive writings, but his attempt to express the aggregate utility of all forms of wealth seems to overlook many difficulties. End of footnote. Section four. The substance of our argument would not be affected if we took account of the fact that the more a person spends on anything, the less power he retains of purchasing more of it or of other things, and the greater is the value of money to him. In technical language, every fresh expenditure increases the marginal value of money to him. But though its substance would not be altered, its form would be made more intricate without any corresponding gain, for there are very few practical problems in which the corrections to be made under this head would be of any importance. Footnote. In mathematical language, the neglected elements would generally belong to the second order of small quantities, and the legitimacy of the familiar scientific method by which they are neglected would have seemed beyond question had not Professor Nicholson challenged it. A short reply to him has been given by Professor Edgeworth in the Economic Journal for March, 1894, and a fuller reply by Professor Barodne in the Giornale d'Eglì Economisti for September, 1894, of which some account is given by Mr. Sanger in the Economic Journal for March, 1895. As is indicated in Note 6 in the Mathematical Appendix, formal account could be taken of changes in the marginal utility of money if it were desired to do so. If we attempted to add together the total utilities of all commodities, we should be bound to do so. That task is, however, impracticable. End of Footnote. There are, however, some exceptions. For instance, as Sir R. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them that they are forced to curtail their consumption of meat and the more expensive farinaceous foods. And bread, being still the cheapest food which they can get and will take, they consume more and not less of it. But such cases are rare. When they are met with, each must be treated on its own merits. It has already been remarked that we cannot guess at all accurately how much of anything people would buy at prices very different from those which they are accustomed to pay for it, or in other words, what the demand prices for it would be for amounts very different from those which are commonly sold. Our list of demand prices is therefore highly conjectural, except in the neighbourhood of the customary price, and the best estimates we can form of the whole amount of the utility of anything are liable to large error. But this difficulty is not important practically. For the chief applications of the doctrine of consumer surplus are concerned with such changes in it as would accompany changes in the price of the commodity in question in the neighbourhood of the customary price. That is, they require us to use only that information with which we are fairly well supplied. These remarks apply with special force to necessaries. Footnote. The notion of consumer surplus may help us a little now, and when our statistical knowledge is further advanced, it may help us a great deal to decide how much injury would be done to the public by an additional tax of six pence a pound on tea, or by an addition of 10% to the freight charges of a railway. And the value of the notion is but little diminished by the fact that it would not help us much to estimate the loss that would be caused by a tax of 30 shillings a pound on tea, or a 10-fold rise in freight charges. Reverting to our last diagram, we may express this by saying that if A is the point on the curve corresponding to the amount that is won't to be sold on the market, data can be obtained sufficient for drawing the curve with tolerable correctness for some distance on either side of A. Though the curve can seldom be drawn with any approach to accuracy right up to D. But this is practically unimportant because in the chief practical applications of the theory of value, we should seldom make any use of a knowledge of the whole shape of the demand curve if we had it. We need just what we can get, that is a fairly correct knowledge of its shape in the neighborhood of A. We seldom require to ascertain the total area DCA. It is sufficient for most of our purposes to know the changes in this area that would be occasioned by moving A through small distances along the curve in either direction. Nevertheless, it will save trouble to assume provisionally, as in pure theory we are at liberty to do, that the curve is completely drawn. There is, however, a special difficulty in estimating the whole of the utility of commodities, some supply of which is necessary for life. If any attempt is made to do it, the best plan is perhaps to take that necessary supply for granted and estimate the total utility only of that part of the commodity which is in excess of this amount. But we must recollect that the desire for anything is much dependent on the difficulty of getting substitutes for it. C note six in the mathematical appendix. End of footnote. Section five. There remains another class of considerations which are apt to be overlooked in estimating the dependence of well-being upon material wealth. Not only does a person's happiness often depend more on his own physical, mental and moral health than on his external conditions, but even among these conditions, many that are of chief importance for his real happiness are apt to be omitted from an inventory of his wealth. Some are free gifts of nature, and these might indeed be neglected without great harm if they were always the same for everybody. But in fact, they vary much from place to place. More of them, however, are elements of collective wealth which are often omitted from the reckoning of individual wealth, but which become important when we compare different parts of the modern civilized world and even more important when we compare our own age with earlier times. Collective action for the purposes of securing common well-being, as for instance in lighting and watering the streets, will occupy us much towards the end of our inquiries. Cooperative associations for the purchase of things for personal consumption have made more progress in England than elsewhere, but those for purchasing the things wanted for trade purposes by farmers and others have until lately been backward in England. Both kinds are sometimes described as consumers' associations, but they are really associations for economising effort in certain branches of business and belong to the subject of production rather than consumption. Section six. When we speak of the dependence of well-being on material wealth, we refer to the flow or stream of well-being as measured by the flow or stream of incoming wealth and the consequent power of using and consuming it. A person's stock of wealth yields by its usance and in other ways an income of happiness, among which of course are to be counted the pleasures of possession. But there is little direct connection between the aggregate amount of that stock and his aggregate happiness. And it is for that reason that we have throughout this and the preceding chapters spoken of the rich, the middle classes and the poor as having respectively large, medium and small incomes, not possessions. In accordance with a suggestion made by Daniel Bernouy, we may regard the satisfaction which a person derives from his income as commencing when he has enough to support life and afterwards as increasing by equal amounts with every equal successive percentage that is added to his income and vice versa for loss of income. Footnote. That is to say, if 30 pounds represent necessaries, a person's satisfaction from his income will begin at that point. And when it has reached 40 pounds, an additional one pound will add a tenth to the 10 pounds which represents its happiness yielding power. But if his income were 100 pounds, that is 70 pounds above the level of necessaries, an additional seven pounds would be required to add as much to his happiness as one pound if his income were 40 pounds. While if his income were 10,000 pounds, an additional 1,000 pounds would be needed to produce an equal effect. Compare note eight in the appendix. Of course, such estimates are very much at random and unable to adapt themselves to the varying circumstances of individual life. As we shall see later, the systems of taxation which are now most widely prevalent follow generally on the lines of Bernouy's suggestion. Earlier systems took from the poor very much more than would be in accordance with that plan. While the systems of graduated taxation which are being foreshadowed in several countries are in some measure based on the assumption that the addition of 1% to a very large income adds less to the well-being of its owner than an addition of 1% to smaller incomes would, even after Bernouy's correction for necessaries has been made. It may be mentioned in passing that from the general law that the utility to any one of an additional one pound diminishes with the number of pounds he already has, there follow two important practical principles. The first is that gambling involves an economic loss even when conducted on perfectly fair and even terms. For instance, a man who having 600 pounds makes a fair even bet of 100 pounds has now an expectation of happiness equal to one half that derived from 700 pounds and half that derived from 500 pounds. And this is less than the certain expectation of the happiness derived from 600 pounds. Because by hypothesis, the difference between the happiness got from 600 pounds and 500 pounds is greater than the difference between the happiness got from 700 pounds and 600 pounds. Compare note nine in the appendix and Jevons LC chapter four. The second principle, the direct converse of the first is that a theoretically fair insurance against risks is always an economic gain. But of course, every insurance office after calculating what is a theoretically fair premium has to share in addition to it enough to pay profits on its own capital and to cover its own expenses of working among which are often to be reckoned very heavy items for advertising and for losses by fraud. The question whether it is advisable to pay the premium which insurance offices practically do charge is one that must be decided for each case on its own merits. End of footnote. But after a time, new riches often lose a great part of their charms. Partly, this is the result of familiarity which makes people cease to derive much pleasure from accustomed comforts and luxuries though they suffer greater pain from their loss. Partly, it is due to the fact that with increased riches there often comes either the weariness of age or at least an increase of nervous strain and perhaps even habits of living that lower physical vitality and diminish the capacity for pleasure. In every civilized country there have been some followers of the Buddhist doctrine that a placid serenity is the highest ideal of life that it is the part of the wise man to root out of his nature as many wants and desires as he can that real riches consist not in the abundance of goods but in the paucity of wants. At the other extreme are those who maintain that the growth of new wants and desires is always beneficial because it stimulates people to increased exertions. They seem to have made the mistake, as Herbert Spencer says, of supposing that life is for working instead of working for life. Footnote. See his lecture on the gospel of relaxation. End of footnote. The truth seems to be that as human nature is constituted man rapidly degenerates unless he has some hard work to do some difficulties to overcome and that some strenuous exertion is necessary for physical and moral health. The fullness of life lies in the development and activity of as many and as high faculties as possible. There is intense pleasure in the ardent pursuit of any aim whether it be success in business, the advancement of art and science or the improvement of the condition of one's fellow beings. The highest constructive work of all kinds must often alternate between periods of over strain and periods of lassitude and stagnation. But for ordinary people, for those who have no strong ambitions whether of a lower or higher kind, a moderate income earned by moderate and fairly steady work offers the best opportunity for growth of those habits of body, mind and spirit in which alone there is true happiness. There is some misuse of wealth in all ranks of society and though speaking generally we may say that every increase in the wealth of the working classes adds to the fullness and nobility of human life because it is used chiefly in the satisfaction of real wants. Yet even among the artisans in England and perhaps still more in new countries there are signs of the growth of that unwholesome desire for wealth as a means of display which has been the chief bane of the well-to-do classes in every civilised country. Laws against luxury have been futile but it would be again if the moral sentiment of the community could induce people to avoid all sorts of display of individual wealth. There are indeed true and worthy pleasures to be got from wisely ordered magnificence but they are at their best when free from any taint of personal vanity on the one side and envy on the other as they are when they centre round public buildings, public parks, public collections of the fine arts and public games and amusements. So long as wealth is applied to provide for every family the necessaries of life and culture and an abundance of the higher forms of enjoyment for collective use so long the pursuit of wealth is a noble aim and the pleasures which it brings are likely to increase with the growth of those higher activities which it is used to promote. When the necessaries of life are once provided everyone should seek to increase the beauty of things in his possession rather than their number or their magnificence. An improvement in the artistic character of furniture and clothing trains the higher faculties of those who make them and is a source of growing happiness to those who use them. But if instead of seeking for a higher standard of beauty we spend our growing resources on increasing the complexity and intricacy of our domestic goods we gain thereby no true benefit no lasting happiness. The world would go much better if everyone would buy fewer and simpler things and would take trouble in selecting them for their real beauty being careful of course to get good value in return for his outlay but preferring to buy a few things made well by highly paid labour rather than many made badly by low paid labour. But we are exceeding the proper scope of the present book The discussion of the influence on general well-being which is exerted by the mode in which each individual spends his income is one of the more important of those applications of economic science to the art of living.