 Book 2, chapter 1 of Principles of Economics. This is a LibriVox recording. All LibriVox recordings are in the public domain. For more information or to volunteer visit LibriVox.org. This reading by Carl Manchester 2007. Principles of Economics by Alfred Marshall. Book 2, Some Fundamental Notions. Chapter 1, Introductory. Section 1. We have seen that economics is on the one side a science of wealth. And on the other, that part of the social science of man's action in society, which deals with his efforts to satisfy his wants, insofar as the efforts and wants are capable of being measured in terms of wealth, or its general representative, i.e. money. We shall be occupied during the greater part of this volume with these wants and efforts, and with the causes by which the prices that measure the wants are brought into equilibrium with those that measure the efforts. For this purpose, we shall have to study in Book 3, wealth in relation to the diversity of man's wants, which it has to satisfy, and in Book 4, wealth in relation to the diversity of man's efforts by which it is produced. But in the present book, we have to inquire which of all the things that the result of man's efforts and are capable of satisfying man's wants are to be counted as wealth, and into what groups or classes these are to be divided. For there is a compact group of terms connected with wealth itself and with capital, the study of each of which throws light on the others, while the study of the whole together is a direct continuation, and in some respects a completion of that inquiry as to the scope and methods of economics on which we have just been engaged. And therefore, instead of taking what may seem the more natural course of starting with an analysis of wants and of wealth in direct relation to them, it seems on the whole best to deal with this group of terms at once. In doing this, we shall of course have to take some account of the variety of wants and efforts, but we shall not want to assume anything that is not obvious and a matter of common knowledge. The real difficulty of our task lies in another direction, being the result of the need under which economics, alone among sciences, lies of making shift with a few terms in common use to express a great number of subtle distinctions. Section 2. As Mil says in logic book 4, quote, the ends of scientific classification are best answered when the objects are formed into groups, respecting which a greater number of general propositions can be made and those propositions more important than those which could be made respecting any other groups into which the same things could be distributed. End quote. But we meet at starting with the difficulty that those propositions which are the most important in one stage of economic development are not unlikely to be among the least important in another if indeed they apply at all. In this matter, economists have much to learn from the recent experiences of biology and Darwin's profound discussion of the question, origin of species chapter 14, throws a strong light on the difficulties before us. It turns out that those parts of the structure which determine the habits of life and the general place of each being in the economy of nature are as a rule, not those which throw most light on its origin, but those which throw least. The qualities which a breeder or a gardener notices as eminently adapted to enable an animal or plant to thrive in its environment are for that very reason likely to have been developed in comparatively recent times. However, those properties of an economic institution which play the most important part in fitting it for the work which it has to do now are for that very reason likely to be in a great measure of recent growth. Instances are found in many of the relations between employer and employed, between middleman and producer, between bankers and their two classes of clients, those from whom they borrow and those to whom they lend. The substitution of the term interest for usury corresponds to a general change in the character of loans, which has given an entirely new keynote to our analysis and classification of the different elements into which the cost of production of a commodity may be resolved. Again, the general scheme of division of labour into skilled and unskilled is undergoing a gradual change. The scope of the term rent is being broadened in some directions and narrowed in others and so on. But on the other hand we must keep constantly in mind the history of the terms which we use, for to begin with this history is important for its own sake and because it throws lights on the history of the economic development of society and further even if the sole purpose of our study of economics were to obtain knowledge that would guide us in the attainment of immediate practical ends we should yet be bound to keep our use of terms as much as possible in harmony with the traditions of the past in order that we might be quick to perceive the indirect hints and the subtle and subdued warnings which the experiences of our ancestors offer for our instruction. Section 3 Our task is difficult. In physical sciences indeed, whenever it is seen that a group of things have a certain set of qualities in common and will often be spoken of together, they are formed into a class with a special name and as soon as a new notion emerges a new technical term is invented to represent it. But economics cannot venture to follow this example. Its reasonings must be expressed in language that is intelligible to the general public. It must therefore endeavour to conform itself to the familiar terms of everyday life and so far as possible must use them as they are commonly used. In common use almost every word has many shades of meaning and therefore needs to be interpreted by the context. And as Badgett has pointed out, even the most formal writers on economic science are compelled to follow this course for otherwise they would not have enough words at their disposal. But unfortunately they do not always avow that they are taking this freedom. Sometimes perhaps they are scarcely even aware of the fact themselves. The bold and rigid definitions with which their expositions of the science begin lull the reader into a false security. Not being warned that he must often look to the context for a special interpretation clause he ascribes to what he reads a meaning different from that which the writers had in their own minds and perhaps misrepresents them and accuses them of folly of which they had not been guilty. Footnote. We ought, quote, to write more as we do in common life where the context is a sort of unexpressed interpretation clause. Only as in political economy we have more difficult things to speak of than in ordinary conversation we must take more care, give more warning of any change and at times write out the interpretation clause for that page or discussion lest there should be any mistake. I know that this is difficult and delicate work and all that I have to say in defence of it is that in practice it is safer than the competing plan of inflexible definitions. Anyone who tries to express various meanings on complex things with a scanty vocabulary or fastened senses will find that his style grows cumbrous without being accurate that he has to use long perifrases for common thoughts and that after all he does not come out right for he has half the time at falling back into the senses which fit the case in hand best and these are sometimes one, sometimes another and almost always different from his hard and fast sense. In such discussions we should learn to vary our definitions as we want just as we say let x, y, z mean now this and now that in different problems and this though they do not always avow it is really the practice of the clearest and most effective writers end quote, budgets postulates of English political economy Cairns also, logical method of political economy combats quote the assumption that the attribute on which a definition turns ought to be one which does not admit of degrees end quote and argues that quote to admit of degrees is the character of all natural facts end quote, end footnote. Again most of the chief distinctions marked by economic turns are differences not of kind but of degree at first sight they appear to be differences of kind and to have sharp outlines which can be clearly marked out but a more careful study has shown that there is no real breach of continuity it is a remarkable fact that the progress of economics has discovered hardly any new real differences in kind while it is continually resolving apparent differences in kind into differences in degree we shall meet with many instances of the evil that may be done by attempting to draw broad, hard and fast lines of division and to formulate definite propositions with regard to differences between things which nature has not separated by any such lines Section 4 we must then analyse carefully the real characteristics of the various things with which we have to deal and we shall thus generally find that there is some use of each term which has distinctly greater claims than any other to be called for its leading use on the ground that it represents a distinction that is more important for the purpose of modern science than any other that is in harmony with ordinary usage this may be laid down as the meaning to be given to the term whenever nothing to the contrary is stated or implied by the context when the term is wanted to be used in any other sense, whether broader or narrower, the change must be indicated even among the most careful thinkers there will always remain differences of opinion as to the exact places in which some at least of the lines of definition should be drawn the questions at issue must in general be solved by judgements as to the practical convenience of different courses and such judgements cannot always be established or overthrown by scientific reasoning there must remain a margin of debatable ground but there is no such margin in the analysis itself if two people differ with regard to that they cannot both be right and the progress of the science may be expected gradually to establish this analysis on an impregnable basis footnote when it is wanted to narrow the meaning of a term that is in logical language to diminish its extension by increasing its intention a qualifying adjective will generally suffice but a change in the opposite direction cannot as a rule be so simply made contests as to definitions are often of this kind A and B are qualities common to a great number of things many of these things have in addition the quality C and again may the quality D while some have both C and D it may then be argued that on the whole it will be best to define a term so as to include all things which have the qualities A and B or only those which have the qualities A B C or only those which have the qualities A B D or only those which have A B C D the decision between these various courses must rest on considerations of practical convenience and is a matter of far less importance than a careful study of the qualities A B C D and of their mutual relations but unfortunately this study has occupied a much smaller space in English economics than controversies as to definitions which have indeed occasionally led indirectly to the discovery of scientific truth but always by roundabout roots and with much waste of time and labour end footnote end of book 2 chapter 1 chapter 2 of principles of economics book 2 this is a LibriVox recording all LibriVox recordings are in the public domain for more information or to volunteer please visit LibriVox.org principles of economics book 2 by Alfred Marshall chapter 2 wealth one all wealth consists of desirable things that is things which satisfy human wants directly or indirectly but not all desirable things are reckoned as wealth the affection of friends for instance is an important element of well-being but it is not reckoned as wealth except by a poetic license let us then begin by classifying desirable things and then consider which of them should be accounted as elements of wealth in the absence of any short term in common use to represent all desirable things or things that satisfy human wants we may use the term goods for that purpose desirable things or goods are material or personal and immaterial material goods consist of useful material things and of all rights to hold or use or derive benefits from material things or to receive them out of future time thus they include the physical gifts of nature land and water, air and climate the products of agriculture, mining, fishing and manufacture buildings, machinery and implements, mortgages and other bonds shares in public and private companies all kinds of monopolies, patent rights, copyrights also rights of way and other rights of usage lastly opportunities of travel access to good scenery, museums etc or the embodiment of material facilities external to a man, though the faculty of appreciating them is internal and personal a man's non-material goods fall into two classes one consists of his own qualities and faculties for action and for employment such for instance his business ability, professional skill or the faculty of deriving recreation from reading or music all these lie within himself and are called internal the second class are called external because they consist of relations beneficial to him with other people such for instance where the labour dues and personal services of various kinds which the ruling class is used to require from their serves and other dependents but these have passed away and the chief instances of such relations beneficial to their owner nowadays are to be found in the goodwill and business connection of traders and professional men again goods may be transferable or non-transferable among the latter are to be classed a person's qualities and faculties for action and employment that is his internal goods also such part of his business connection as depends on personal trust in him and cannot be transferred as part of his vendible goodwill also the advantages of climate, light, air and his privileges of citizenship and rights and opportunities of making use of public property those goods are free which are not appropriated and are afforded by nature without requiring the effort of man the land in its original state was a free gift of nature but in settled countries it is not a free good from the point of view of the individual wood is still free in some Brazilian forests the fish of the sea are free generally but some sea fisheries are jealously guarded for the exclusive use of members of a certain nation and may be classed as national property oyster beds that have been planted by men are not free in any sense those that have grown naturally are free in every sense if they are not appropriated if they are private property there are still free gifts from the point of view of the nation but since the nation has allowed its rights in them to become vested in private persons they are not free from the point of view of the individual and the same is true of private rights of fishing and rivers but wheat grown on free land and the fish that have been landed from free fisheries are not free for they have been acquired by labour two we may now pass to the question which classes of a man's goods are to be reckoned as part of his wealth the question is one as to which there is some difference of opinion but the balance of argument as well as of authority seems clearly to incline in favour of the following answer when a man's wealth is spoken of simply and without any interpretation clause in the context it is to be taken to be his stock of two classes of goods in the first class are those material goods to which he has by law or custom private rights of property in which are therefore transferable and exchangeable these it will be remembered to include not only such things as land and houses furniture and machinery and other material things which may be in his single private ownership but also any shares in public companies the venture bonds, mortgages and other obligations which he may hold requiring others to pay money or goods to him on the other hand the debts which he owes to others may be regarded as negative wealth and they must be subtracted from his gross possessions before his true net wealth can be found services and other goods which pass out of existence in the same instant that they come into it are of course not part of the stock of wealth in the second class are those immaterial goods which belong to him are external to him and serve directly as the means of enabling him to acquire material goods thus it excludes all his own personal qualities and faculties even those which enable him to earn his living because they are internal and it excludes his personal friendships in so far as they have no direct business value but it includes his business and professional connections the organization of his business and where such things exist his property and slaves this use of the term wealth is in harmony with the usage of ordinary life and at the same time it includes those goods and only those which come clearly within the scope of economic science as defined in book 1 in which may therefore be called economic goods for it includes all those things external to a man which one belong to him and do not belong equally to his neighbors and therefore are distinctly his in which two are directly capable of a money measure a measure that represents on the one side the efforts and sacrifices by which they have been called into existence and on the other the wants which they satisfy three a broader view of wealth may indeed be taken for some purposes but then recourse must be had to a special interpretation clause to prevent confusion thus for instance the carpenter's skill is as direct a means of enabling him to satisfy other people's material wants and therefore indirectly his own as are the tools in his workbasket and perhaps it may be convenient to have a term which will include it as part of wealth in a broader use pursuing the lines indicated by Adam Smith and followed by most continental economists we may define personal wealth so was to include all those energies faculties and habits which directly contribute to making people industrially efficient together with those business connections of any kind which we have already reckoned as part of wealth in the narrow reuse of the term industrial faculties have a further claim to be regarded as economic in the fact that their value is as a rule capable of some sort of indirect measurement the question whether it is ever worthwhile to speak of them as wealth is merely one of convenience though it has been much discussed as if it were one of principle confusion would certainly be caused by using the term wealth itself when we desire to include a person's industrial qualities wealth simply should always mean external wealth only but little harm in some goods seem likely to arise from the occasional use of the phrase material and personal wealth four but we still have to take account of those material goods which are common to him with his neighbours and which therefore it would be a needless trouble to mention when comparing his wealth with theirs it may be important for some purposes and especially for comparisons between the economic conditions of distant places or distant times these goods consist of the benefits which he derives from living in a certain place at a certain time and being a member of a certain state or community they include civil and military security and the right and opportunity to make use of public property and institutions of all kinds such as roads gaslight etc and the rights to justice or to a free education the townsmen and the countrymen have each of them for nothing many advantages which the other either cannot get at all or can get only at great expense other things being equal one person has more real wealth in its broadest sense than another if the place in which the former lives has a better climate better roads, better water more wholesome drainage and again better newspapers, books and places of amusement and instruction house room, food and clothing which would be insufficient in a cold climate maybe abundant in a warm climate on the other hand that warmth which lessens men's physical needs and makes them rich with but a slight provision of material wealth makes them poor in the energy that procures wealth many of these things are collective goods that is goods which are not in private ownership and this brings us to consider wealth from the social as opposed to the individual point of view five let us then look at those elements of the wealth of a nation which are commonly ignored when estimating the wealth of the individuals composing it the most obvious forms of such wealth are public material property of all kinds such as roads and canals buildings and parks, gasworks and waterworks though unfortunately many of them have been secured not by public savings but by public borrowings and there is the heavy negative wealth of a large debt to be set against them but the themes has added more to the wealth of England than all its canals and perhaps even than all its railroads and though the themes is a free gift of nature except in so far as its navigation has been improved while the canal is the work of man yet we ought for many purposes to reckon the themes a part of England's wealth German economists often lay stress on the non-material elements of national wealth and it is right to do this in some problems relating to national wealth but not in all scientific knowledge indeed wherever discovered soon becomes the property of the whole civilized world and may be considered as cosmopolitan rather than a specifically national wealth the same is true of mechanical inventions and of many other improvements in the arts of production and it is true of music but those kinds of literature which lose their force by translation may be regarded as in a special sense the wealth of those nations in whose language they are written and the organization of a free and well-ordered state is to be regarded for some purposes as an important element of national wealth but national wealth includes the individual as well as the collective property of its members and in estimating the aggregate some of their individual wealth we may save some trouble by omitting all debts and other obligations due to one member of a nation from another for instance so far as the English national debt and the bonds of an English railway are owned within the nation we can adopt the simple plan of counting the railway itself as part of the national wealth and neglecting railway and government bonds altogether but we still have to deduct for those bonds etc issued by the English government or by private Englishmen and held by foreigners and to add for those foreign bonds etc held by Englishmen cosmopolitan wealth differs from national wealth much as that differs from individual wealth in reckoning it, debts due for members of one nation to those of another may conveniently be omitted from both sides of the account again just as rivers are important elements of national wealth the ocean is one of the most valuable properties of the world the notion of cosmopolitan wealth is indeed nothing more than that of national wealth extended over the whole area of the globe individual and national rights to wealth rest on the basis of civil and international law or at least of custom that has the force of law an exhaustive investigation of the economic conditions of any time and place requires therefore an inquiry into law and custom and economics owes much to those who have worked in this direction but its boundaries are already wide and the historical and juridical basis of the conceptions of property are vast subjects which may best be discussed in separate treatises 6 the notion of value is intimately connected with that of wealth and a little may be said about it here the word value says Adam Smith has two different meanings and sometimes expresses the utility of some particular object and sometimes the power of purchasing other goods which the possession of that object conveys but experience has shown that it is not well to use the word in the former sense the value that is the exchange value of one thing in terms of another at any place in time is the amount of that second thing which can be got there and then in exchange for the first thus the term value is relative and expresses the relation between two things at a particular place in time civilized countries generally adopt gold or silver or both as money instead of expressing the values of lead and tin and wood and corn and other things in terms of one another we express them in terms of money in the first instance and call the value of each thing thus expressed its price if we know that a ton of lead will exchange for 15 sovereigns at any place in time while a ton of tin will exchange for 90 sovereigns we say that their prices then and there are 15 pounds and 90 pounds respectfully and we know that the value of a ton of tin in terms of lead is 6 tons then and there the price of everything rises and falls from time to time place to place and with every such change the purchasing power of money changes so far as that thing goes if the purchasing power of money rises with regard to some things and at the same time falls equally with regard to equally important things its general purchasing power or its power of purchasing things in general has remained stationary this phrase conceals some difficulties which we must study later on but meanwhile we may take it in its popular sense which is sufficiently clear and we may throughout this volume neglect possible changes in the general purchasing power of money thus the price of anything will be taken as representative of its exchange value relatively to things in general or in other words as representative of its general purchasing power but if inventions have increased man's power over nature very much then the real value of money is better measured for some purposes in labour than in commodities this difficulty however will not much affect our work in the present volume which is only a study of the foundations of economics end of chapter 2 man cannot create material things in the mental and moral world indeed he may produce new ideas but when he is said to produce material things he really only produces utilities or in other words his efforts and sacrifices result in changing the form or arrangement of matter to adapt it better for the satisfaction of wants all that he can do in the physical world is either to readjust matter so as to make it more useful as when he makes a log of wood into a table or to put it in the way of being made more useful by nature as when he puts seed where the forces of nature will make it burst out into life it is sometimes said that traders do not produce that while the cabinet maker produces furniture the furniture dealer merely sells what is already produced but there is no scientific foundation for this distinction both produce utilities and neither of them can do more the furniture dealer moves and rearranges matters so as to make it more serviceable than it was before and the carpenter does nothing more the sailor or the railway man who carries coal above ground produces it just as much as the miner who carries it underground the dealer in fish helps to move on fish from where it is of comparatively little use to where it is of great use it is true that there are often more traders than are necessary and that whenever that is the case there is a waste but there is also waste if there are two men to apply which can be well worked by one man in both cases all those who are at work produce though they may produce but little some riders have revived the medieval attacks on trade on the ground that it does not produce but they have not aimed at the right mark they should have attacked the imperfect organization of trade particularly of retail trade footnote production in the narrow sense changes the form and nature of products trade and transport change their external relations end footnote consumption may be regarded as a negative production just as man can produce only utilities so he can consume nothing more he can produce services another immaterial products and he can consume them but as his production of material products is really nothing more than a rearrangement of matter which gives it new utilities so his consumption of them is nothing more than a disarrangement of matter which diminishes or destroys its utilities often indeed when he is said to consume things he does nothing more than to hold them for his use while as senior says they are destroyed by those numerous gradual agents which we call collectively time footnote political economy page 54 senior would like to substitute the verb to use for the verb to consume end footnote as the producer of wheat is he who puts seed where nature will make it grow so the consumer of pictures of curtains and even of a house or a yacht does little to wear them out himself but he uses them while time wastes them another distinction to which some prominence has been given but which is vague and perhaps not of much practical use is that between consumers goods called also consumption goods or again goods of the first order such as food clothes etc which satisfy wants directly on the one hand and on the other hand producers goods called also production goods or again instrumental or again intermediate goods such as plows looms and raw cotton which satisfy wants indirectly by contributing towards the production of the first class of goods footnote thus flour to be made into cake when already in the house of the consumer is treated by some as a consumers good while not only the flour but the cake itself is treated as a producers good when in the hand of the confectioner Carl Manger Volkswagen Schaftler Chapter 1, Section 2 says bread belongs to the first order flour to the second a flour mill to the third order and so on it appears that if a railway train carries people on a pleasure excursion also some tins of biscuits and milling machinery and some machinery that is used for making milling machinery then the train is at once in the same time a good of the first, second, third and fourth orders end footnote all labor is directed towards producing some effect for those some exertions are taken merely for their own sake as when a game is played for amusement they are not counted as labor we may define labor as any exertion of mind or body undergone partly or wholly with a view to some good other than the pleasure derived directly from the work footnote this is Jeven's definition theory of political economy Chapter 5 except that he includes only painful exertions but he himself points out how painful idleness often is most people work more than they would if they considered only the direct pleasure resulting from the work but in a healthy state pleasure predominates over pain in a great part even of the work that is done for hire of course the definition is elastic an agricultural laborer working in his garden in the evening thinks chiefly of the fruit of his labors a mechanic returning home after a day of sedentary toil finds positive pleasure in his garden work but he too cares a good deal about the fruit of his labor while a rich man working in like manner though he may take a pride in doing it well will probably care little for any pecuniary saving that he affects by it end footnote and if we had to make a fresh start to regard all labor is productive except that which failed to promote the aim towards which it was directed and so produced no utility but in all the many changes which the meaning of the word productive has undergone it has had special reference to stored up wealth to the comparative neglect and sometimes even to the exclusion of immediate and transitory enjoyment and an almost unbroken tradition compels us to regard the central notion of the word as relating to the provision for the wants of the future rather than those of the present footnote thus the mercantilists who regarded the precious metals partly because they were imperishable as wealth in a fuller sense than anything else regarded as unproductive or sterile all labor that was not directed to producing goods for exploitation in exchange for gold and silver the physiocrats thought all labor sterile which consumed an equal value to that which it produced and regarded the agriculturalist as the only productive worker because his labor alone as they thought left behind it a net surplus of stored up wealth Adam Smith softened down the physiocratic definition but still he considered that agricultural labor was more productive than any other his followers disregarded this distinction but they have generally adhered though with many differences in points of detail to the notion that productive labor is that which tends to increase accumulated wealth a notion which is implied rather than stated in the celebrated chapter of the wealth of nations which bears the title on the accumulation of capital or on productive and unproductive labor compare Traverse Twists progress of political economy section 6 and the discussions on the word productive in J.S. Mills essays and in his principles of political economy and footnote it is true that all wholesome enjoyments whether luxurious or not are legitimate ends of action both public and private and it is true that the enjoyment of luxuries affords an incentive to exertion and promotes progress in many ways but if the efficiency in nature of industry are the same the true interest of a country is generally advanced by the subordination of the desire for transient luxuries to the attainment of those more solid and lasting resources which will assist industry in its future work and will in various ways tend to make life larger this general idea has been in solution as it were in all stages of economic theory and has been precipitated by different riders into various hard and fast distinctions by which certain trades have been marked off as productive and certain others as unproductive for instance many riders even of recent times have adhered to Adam Smith's plan of classing domestic servants as unproductive there is doubtless in many large houses a super abundance of servants some of whose energies might with advantage to the community be transferred to other uses but the same is true of the greater part of those who earn their livelihood by distilling whiskey and yet no economist has proposed to call them unproductive there is no distinction in character between the work of the baker who provides bread for a family and that of the cook who boils potatoes if the baker should be a confectioner or fancy baker it is probable that he spends at least as much of his time as the domestic cook does on labor that is unproductive in the popular sense of providing unnecessary enjoyments whenever we use the word productive by itself it is to be understood to mean productive of the means of production and of durable sources of enjoyment but it is a slippery term and should not be used where precision is needed footnote among the means of production are included the necessary series of labor but not ephemeral luxuries and the maker of Isis is thus classed as unproductive whether he is working for a pastry cook or a servant in a country house but a bricklayer engaged in building a theater is classed as productive no doubt the division between permanent and ephemeral sources of enjoyment is vague and unsubstantial but this difficulty exists in the nature of things and cannot be completely evaded by any device of words we can speak of an increase of tall men relatively to short without deciding whether all those above five feet nine inches are classed as tall or only those above five foot ten and we can speak of the increase of productive labor at the expense of unproductive without fixing on any rigid and therefore arbitrary line of division between them if such an artificial line is required for any particular purpose it must be drawn explicitly for the occasion but in fact such occasions seldom or never occur and footnote or want to use it in a different sense we must say so for instance we may speak of labor as productive of necessaries etc productive consumption when employed as a technical term is commonly defined as the youth of wealth in the production of further wealth and it should properly include not all the consumption of productive workers but only that which is necessary for their efficiency the term may perhaps be useful in studies of the accumulation of material wealth but it is apt to mislead for consumption is the end of production and all wholesome consumption is productive of benefits many of the most worthy of which do not contribute to the production of material wealth footnote all the distinctions in which the word productive is used are very thin and have a certain air of unreality it would hardly be worthwhile to introduce them now but they have a long history and it is probably better that they should dwindle gradually out of use rather than be suddenly discarded the attempt to draw a hard and fast line of distinction where there is no real discontinuity in nature has often done more mischief but has perhaps never led to more quaint results than in the rigid definitions which have been sometimes given of this term productive some of them for instance lead to the conclusion that a singer in an opera is unproductive but that the printer of the tickets of admission to the opera is productive while the usher who shows people to their places is unproductive unless he happens to sell programs and then he is productive senior points out that a cook is not said to make roast meat but to dress it but he is said to make a pudding a tailor is said to make cloth into a coat a dyer is not said to make a change produced by the dyer is perhaps greater than that produced by the tailor but the cloth in passing through the tailor's hands changes its name in passing through the dyer is it does not the dyer has not produced a new name nor consequently a new thing political economy page 51, 2 and footnote this brings us to consider the term necessaries it is common to distinguish necessaries, comforts and luxuries the first class including all things required to meet wants which must be satisfied while the latter consists of things that meet wants of a less urgent character but here again there is a troublesome ambiguity when we say that a want must be satisfied what are the consequences which we have in view if it is not satisfied do they include death or do they extend only to the loss of strength and vigor in other words are necessaries the things that are necessary for life or those which are necessary for efficiency the term necessaries like the term productive has been used elliptically the subject to which it refers being left to be supplied by the reader and since the implied subject has varied the reader has often supplied one which the writer did not intend and thus misunderstood his drift in this as in the proceeding case the chief source of confusion can be removed by supplying explicitly in every critical place that which the reader is intended to understand the older use of the term necessaries was limited to those things which were sufficient to enable the laborers taken one with another to support themselves and their families Adam Smith and the more careful of his followers observed indeed variations in the standard of comfort and decency and they recognize that differences of climate and differences of custom make things necessary in some cases which are superfluous in others footnote compare Carver principles of political economy page 474 which called my attention to Adam Smith's observation that customary deficiencies are in effect necessaries end footnote but Adam Smith was influenced by reasonings of the physiocrats based on the condition of the French people in the 18th century most of whom had no notion of any necessaries beyond those which were required for mere existence in happier times however a more careful analysis has made it evident that there is for each rank of industry at any time and place a more or less clearly defined income which is necessary for merely sustaining its members while there is another and larger income which is necessary for keeping it in full efficiency footnote thus in the south of England population has increased during the last 100 years at a fair rate allowance being made for migration but the efficiency of labour which in earlier times was as high as that in the north of England has sunk relatively to the north so that the low waged labour of the south is often dear than the more highly paid labour of the north we cannot thus say that the labour in the south have been supplied with necessaries unless we know in which of these two senses the word is used they have had the bare necessaries for existence and the increase of numbers but apparently they have not had the necessaries for efficiency it must however be remembered that the strongest labourers in the south have constantly migrated to the north and that the energies of those in the north have been raised by their larger share of economic freedom and the hope of rising to a higher position C. McKay in charity organization journal February 1891 end footnote it may be true that the wages of any industrial class might have sufficed to maintain a higher efficiency if they had been spent with perfect wisdom but every estimate of necessaries must be relative to a given place and time and unless there be a special interpretation of the clause to the contrary it may be assumed that the wages will be spent with just that amount of wisdom forethought and unselfishness which prevails in fact among the industrial class under discussion with this understanding we may say that the income of any class in the ranks of industry is below its necessary level when any increase in their income would in the course of time produce a more than proportionate increase in their efficiency consumption may be economized by a change of habits but any stinting of necessaries is wasteful footnote if we considered an individual of exceptional abilities we should have to take account of the fact that there is not likely to be the same close correspondence between the real value of his work for the community and the income which he earns by it then there is in the case of an ordinary member of any industrial class and we should have to say that all his consumption is strictly productive and necessary so long as by cutting off any part of it he would diminish his efficiency by an amount that is of more real value to him or the rest of the world than he saved from his consumption if a newton or a watt could have added a hundredth part to his efficiency by doubling his personal expenditure the increase in his consumption would have been truly productive as we shall see later on such a case is analogous to additional cultivation of rich land that bears a high rent it may be profitable though the return to it is less than in proportion to the previous outlay end footnote some detailed study of the necessaries for efficiency of different classes of workers will have to be made when we come to inquire into the causes that determined the supply of efficient labour but it will serve to give some definiteness to our ideas if we consider here what are the necessaries for the efficiency of an ordinary agricultural or of an unskilled town labourer and his family in England in this generation they may be said to consist of a well drained dwelling with several rooms warm clothing with some changes of under clothing pure water a plentiful supply of cereal food with a moderate allowance of meat and milk and a little tea etc some education and some recreation and lastly sufficient freedom for his wife from other work to enable her to perform properly her maternal and her household duties if in any district unskilled labour is deprived of any of these things its efficiency will suffer in the same way as that of a horse that is not properly tended or a steam engine that has an inadequate supply of coals all consumption up to this limit is strictly productive consumption any stinting of this consumption is not economical but wasteful in addition perhaps some consumption of alcohol and tobacco and some indulgence in fashionable dress are in many places so habitual that they may be said to be conventionally necessary since in order to obtain them the average man and woman will sacrifice some things which are necessary for efficiency their wages are therefore less than are practically necessary for efficiency unless they provide not only for what is strictly necessary consumption but include also a certain amount of conventional necessaries footnote compare the distinction between physical and political necessaries in James Stewart's inquiry AD 1767 221 and footnote the consumption of conventional necessaries by productive workers is commonly classed as productive consumption but strictly speaking it ought not to be acol passages a special interpretation clause should be added to say whether or not they are included it should however be noticed that many things which are rightly described as superfluous luxuries do yet to some extent take the place of necessaries and to that extent their consumption is productive when they are consumed by producers footnote thus a dish of green peas in March costing perhaps 10 shillings is a superfluous luxury but yet it is wholesome food and does the work perhaps of three penny worth of cabbage or even since variety undoubtedly conduces to health a little more than that so it may be entered perhaps at the value of four pence under the head of necessaries and that of nine shillings and eight pence under that of superfluities and its consumption may be regarded as strictly productive to the extent of one fortieth in exceptional cases as for instance when the peas are given to an invalid the whole ten shillings may be well spent and reproduce their own value for the sake of giving definiteness to the ideas it may be well to venture on an estimate of necessities rough and random as they must be perhaps at present prices the strict necessaries for an average agricultural family are covered by 15 or 18 shillings a week for conventional necessaries by about five shillings more for the unskilled laborer in the town a few shillings must be added to the strict necessaries for the family of the skilled workmen living in town we may take 25 or 30 shillings for strict necessaries and ten shillings for conventional necessaries for a man whose brain has to undergo great continuous strain the strict necessaries are perhaps 200 or 250 pounds a year if he is a bachelor but more than twice as much if he has an expensive family to educate his conventional necessaries depend on the nature of his calling and footnote end of section 3 in a primitive community each family is nearly self-sufficing and provides most of its own food and clothing and even household furniture only a very small part of the income or coming in of the family is in the form of money when one thinks of their income at all only a very small part of the income or coming in of the family is in the form of money when one thinks of their income at all one reckons in the benefits which they get from their cooking utensils just as much as those which they get from their plough one draws no distinction between their capital and the rest of their accumulated stock to which the cooking utensils and the plough alike belong but with the growth of a money economy there has been a strong tendency to confine the notion of income to those incomeings which are in the form of money including payments in kind such as the free use of a house free coals, gas, water which are given as part of an employee's remuneration and in lieu of money payments in harmony with this meaning of income the language of the marketplace commonly regards a man's capital as that part of his wealth which he devotes to acquiring an income in the form of money or more generally to acquisition by means of trade it may be convenient sometimes to speak of this as his trade capital which may be defined to consist of those external goods which a person uses in his trade either holding them to be sold for money or applying them to produce things that are to be sold for money among its conspicuous elements are such things as the factory and business plant of a manufacturer that is his machinery his raw material any food, clothing and house room that he may hold for the use of his employees and the goodwill of his business to the things in his possession must be added those to which he has a right and from which he is drawing income including loans which he has made on mortgage or in other ways a demand over capital which he may hold under the complex forms of the modern money market on the other hand debts owed by him must be deducted from his capital this definition of capital from the individual or business point of view is firmly established in ordinary usage and it will be assumed throughout the present treaties whenever we are discussing problems relating to business in general in particular to the supply of any particular group of commodities for sale in the open market income and capital will be discussed from the point of view of private business in the first half of the chapter and afterwards the social point of view will be considered if a person is engaged in business he is sure to have to incur certain outgoings for raw material the higher of labour etc and in that case his true or net income is found by deducting from his gross income the outgoings that belong to its production anything which a person does for which he is paid directly or indirectly in money swells his nominal income while no services that he performs for himself are commonly reckoned as adding to his nominal income but though it is best generally to neglect them when they are trivial account should for consistency be taken of them when they are of a kind which people commonly pay for having done for them thus a woman who makes her own clothes or a man who digs in his own garden or repairs his own house is earning income just as would the dressmaker, gardener or carpenter who might be hired to do the work in this connection the term of which we shall have to make frequent use hereafter the need for it arises from the fact that every occupation involves other disadvantages besides the fatigue of the work required in it and every occupation offers other advantages besides the receipt of money wages the true reward which an occupation offers to labour has to be calculated by deducting the money value of all its disadvantages from that of all its advantages and we may describe this true reward as the net advantages of the occupation the payment made by a borrower for the use of a loan for say a year is expressed as the ratio which that payment bears to the loan and is called interest and this term is also used more broadly to represent the money equivalent of the whole income which is derived from capital it is commonly expressed as a certain percentage on the capital some of the loan whenever this is done the capital must not be regarded as a stock of things in general it must be regarded as a stock of one particular thing money which is taken to represent them thus 100 pounds may be lent at 4% that is for an interest of 4 pounds and if a man employs in business a capital stock of goods of various kinds which are estimated as worth 10,000 pounds in all then 400 pounds a year may be said to represent interest at the rate of 4% on that capital on the supposition that the aggregate money value of the things which constitute it has remained unchanged he would not however be willing to continue the business unless he expected his total net gains from it to exceed interest on his capital at the current rate these gains are called profits the command over goods to a given money value which can be applied to any purpose is often described as free or floating capital when a man is engaged in business his profits for the year are the excess of his receipts from his business during the year over his outlay for his business the difference between the value of his stock of plant, material etc at the end and at the beginning of the year is taken as part of his receipts or as part of his outlay according as there has been an increase or decrease of value what remains of his profits after deducting interest on his capital at the current rate allowing where necessary for insurance is generally called his earnings of undertaking or management the ratio in which his profits for the year stand to his capital is spoken of as his rate of profits but this phrase like the corresponding phrase with regard to interest assumes that the money value of the things which constitute his capital has been estimated and such an estimate is often found to involve great difficulties when any particular thing as a house, a piano or a sewing machine is lent out the payment for it is often called rent and economists may follow this practice without inconvenience when they are regarding the income from the point of view of the individual trader but as will be argued presently the balance of advantage seems to lie in favor of reserving the term rent for the income derived from the free gifts of nature whenever the discussion of business affairs passes from the point of view of the individual to that of society at large and for that reason the term quasi-rent will be used in the present volume for the income derived from machines and other appliances for production made by man that is to say any particular machine may yield an income which is of the nature of a rent and which is sometimes called a rent though on the whole there seems to be some advantage in calling it a quasi-rent but we cannot properly speak of the interest yielded by a machine if we use the term interest at all it must be in relation not to the machine itself but to its money value for instance if the work done by a machine which cost 100 pounds is worth 4 pounds a year net that machine is yielding a quasi-rent of 4 pounds which is equivalent to interest at 4% on its original cost but if the machine is worth only 80 pounds now it is yielding 5% on its present value this however raises some difficult questions of principle which will be discussed in book 5 next to consider some details relating to capital there has been classed as consumption capital and auxiliary or instrumental capital and though no clear distinction can be drawn between the two classes it may sometimes be convenient to use the terms with the understanding that they are vague where definiteness is necessary the terms should be avoided the explicit enumeration should be given the general notion of the distinction which the terms are designed to suggest can be gathered from the following approximate definitions consumption capital consists of goods in a form to satisfy once directly that is goods which afford a direct sustenance to the workers such as food, clothes house room, etc auxiliary or instrumental capital is so called because it consists of all the goods that aid labour in production under this head come tools machines, factories, railways docks, ships, etc and raw materials of all kinds but of course a man's clothes a system in his work and are instrumental in keeping him warm and he derives a direct benefit from the shelter of his factory as he does from the shelter of his house we may follow mill in distinguishing circulating capital which fulfills the whole of its office in the production in which it is engaged by a single use from fixed capital which exists in a durable shape and the return to which is spread over a period of corresponding duration the customary point of view of the businessman is that which is most convenient for the economist to adopt in discussing the production of goods for a market and the causes which govern their exchange value but there is a broader point of view which the businessman no less than the economist must adopt when he studies the causes which govern the material well-being of the community as a whole ordinary conversation may pass from one point of view to another without any formal note of the change for if a misunderstanding arises it soon becomes manifest and confusion is cut short by a question or a volunteered explanation but the economist may take no risks of that sort he must make prominent any change in his point of view or in his uses of terms his path might have seemed smoother for the time if he had passed silently from one use to another but in the long run better progress is made by a clear indication of the meaning attached to each term in every doubtful case let us then during the remainder of this chapter deliberately adopt the social in contrast with the individual point of view let us look at the production of the community as a whole and at its total net income available for all purposes that is let us revert nearly to the point of view of a primitive people who are chiefly concerned with the production of desirable things and with their direct uses and who are little concerned with exchange and marketing from this point of view income is regarded as including all the benefits which mankind derive at any time from their efforts in the present and in the past to turn nature's resources to their best account the pleasure derived from the beauties of the rainbow or the sweet taste of the fresh morning air are left out of the reckoning not because they are unimportant nor because the estimate would in any way be vitiated by including them but solely because reckoning them in would serve no good purpose while it would add greatly to the length of our sentences and the prolixity of our discussions for a similar reason it is not worthwhile to take separate account of the simple services which nearly everyone renders to himself such as putting on his clothes though there are a few persons who choose to pay others to do such things for them their exclusion involves no principle and time spent by some controversial writers on discussing it has been wasted it simply follows the maxim de minimis non curat lex a driver who not noticing a pool in his way splashes a passerby is not held to have done him legal injury though there is no distinction in principle between his act and that of another who by a similar lack of attention did serious harm to someone else a mans present labour yields him income directly when devoted to his own use and he looks to be paid for it in some form or another if he devotes it as a matter of business to the service of others similarly any useful thing which he has made or acquired in the past or which has been handed down to him under the existing institutions of property by others who have so made or acquired it is generally a source of material benefit to him directly or indirectly if he applies it in business this income generally appears in the form of money but a broader use of this term is occasionally needed which embraces the whole income of benefits of every sort which a person derives from the ownership of property however applied it includes for instance the benefits which he gets from the use of his own piano equally with those which a piano dealer would win by letting out a piano on hire the language of common life while a verse to so brought a use of the term income as this even when discussing social problems yet habitually includes a certain number of forms of income other than money income the income tax commissioners count a dwelling house inhabited by its owner as a source of taxable income though it yields its income of comfort directly they do this not on any abstract principle but partly because of the practical importance of house room partly because the ownership of a house is commonly treated in a business fashion and partly because the real income accruing from it can easily be separated off and estimated they do not claim to establish any absolute distinction in kind between the things which their rule includes and those which it excludes Jevons regarding the problem from a purely mathematical point of view was justified in classing all commodities in the hands of consumers as capital but some writers while developing this suggestion with great ingenuity have treated it as a great principle and that appears to be an error in judgment a true sense of proportion requires us not to burden our work with the incessant enumeration of details of secondary importance of which no account is taken in customary discourse and which cannot even be described without offending against popular conventions this brings us to consider the use of the term capital from the point of view of inquiries into the material well-being of society as a whole Adam Smith said that a person's capital was that part of his stock from which he expects to derive an income and almost every use of the term capital which is known to history has corresponded more or less closely to a parallel use of the term income in almost every use capital has been that part of a man's stock from which he expects to derive an income by far the most important use of the term capital in general ie from the social point of view is in the inquiry how the three agents of production land that is natural agents labour and capital contribute to producing the national income or the national dividend as it will be called later on and how that income is distributed among the three agents and this is an additional reason for making the terms capital and income correlative from the social as we did from the individual point of view accordingly it is proposed in this treaties to count as part of capital from the social point of view all things other than land which yield income that is generally reckoned as such in common discourse together with similar things in public ownership such as government factories the term land being taken to include all free gifts of nature such as mines, fishery etc which yield income thus it will include all things held for trade purposes whether machinery raw material or finished goods theatres and hotels home farms and houses but not furniture or clothes owned by those who use them for the former are and the latter are not commonly regarded as yielding income by the world at large as is shown by the practice of the income tax commissioners this usage of the term is in harmony with the common practice of economists of treating social problems in broad outline to start with and reserving minor details for later consideration it is in harmony also with their common practice of taking labour to include those activities and those only which are regarded as the source of income in this broader use of the term labour together with capital and land thus defined are the sources of all that income of which account is commonly taken in reckoning up the national income social income may be estimated by adding together the incomes of the individuals in the society in question whether it be a nation or any other group of persons we must however not count the same thing twice if we have counted a carpet at its full value we have already counted the values of the yarn and the labour that were used in making it and these must not be counted again and further if the carpet was made of wool that was in stock at the beginning of the year the value of that wool must be deducted from the value of the carpet before the net income of the year is reached while similar deduction must be made for the wear and tear of machinery and other plant used in making it this is required by the general rule with which we started that true or net income is found by deducting from gross income the outgoings that belong to its production but if the carpet is cleaned by domestic servants or at steam scouring works the value of the labour spent in cleaning it must be counted in separately for otherwise the results of this labour would be altogether omitted from the inventory of those newly produced commodities and conveniences which constitute the real income of the country the work of domestic servants is always classed as labour in the technical sense and since it can be assessed on block at the value of their remuneration in money and in kind without being enumerated in detail its inclusion raises no great statistical difficulty there is however some inconsistency in omitting the heavy domestic work which is done by women and other members of the household where no servants are kept again suppose a landowner with an annual income of 10,000 pounds hires a private secretary at a salary of 500 pounds who hires a servant at wages of 50 pounds that if the incomes of all these three persons are counted in as part of the net income of the country some of it will be counted twice over and some three times but this is not the case the landlord transfers to his secretary in return for his assistance part of the purchasing power derived from the produce of the land and the secretary again transfers part of this to his servant in return for his assistance the farm produce the value of which goes as rent to the landlord the assistance which the landlord derives from the work of the secretary and that which the secretary derives from the work of the servant are independent parts of the real net income of the country and therefore the 10,000 pounds and the 500 pounds and the 50 pounds which are their money measures must all be counted in when we are estimating the income of the country but if the landlord makes an allowance of 500 pounds a year to his son that must not be counted as independent income because no services are rendered for it and it would not be assessed to the income tax as the net payments on account of interest etc due to an individual net i.e. after deducting those due from him to others are part of his income so the money and other things received net by a nation from other countries are part of its income the money income or inflow of wealth gives a measure of a nation's prosperity which untrustworthy as it is is yet in some respects better than that afforded by the money value of its stock of wealth for income consists chiefly of commodities in a form to give pleasure directly while the greater part of national wealth consists of the means of production which are of service to the nation only in so far as they contribute to producing commodities ready for consumption and further though this is a minor point consumable commodities being more portable have more nearly uniform prices all over the world and the things used in producing them the prices of an acre of good land in Manitoba and Kent differ more than those of a bushel of wheat in the two places but if we look chiefly at the income of a country we must allow for the depreciation of the sources from which it is derived more must be deducted from the income derived from a house if it is made of wood then if it is made of stone a stone house counts for more towards the real richness of a country than a wooden house which gives equally good accommodation again a mine may yield for a time a large income but be exhausted in a few years in that case it must be counted as equivalent to a field or a fishery which yields a much smaller annual income but will yield that income permanently in purely abstract and especially in mathematical reasoning the terms capital and wealth are used as synonymous almost per force except that land proper for some purposes be omitted from capital but there's a clear tradition that we should speak of capital when considering things as agents of production and that we should speak of wealth when considering them as results of production subjects of consumption and as yielding pleasures of possession thus the chief demand for capital arises from its productiveness from the services which it renders for instance in enabling wool to be spun and woven more easily than by the unaided hand or in causing water to flow freely wherever it is wanted instead of being carried laboriously in pales though there are other uses of capital as for instance when it is lent to a spin thrift which cannot easily be brought under this head on the other hand the supply of capital is controlled by the fact that in order to accumulate it men must act prospectively they must wait and save they must sacrifice the present to the future at the beginning of this book it was argued that the economist must forgo the aid of a complete set of technical terms he must make the terms in common use serve his purpose in the expression of precise thought by the aid of qualifying adjectives or other indications in the context if he arbitrarily assigns a rigid exact use to a word which has several more or less vague uses in the marketplace he confuses businessmen and he is in some danger of committing himself to untenable positions the selection of a normal use for such terms as income and capital must therefore be tested by actually working with it end of principle of economics book 2