WEALTH AND WELFAEE

BY

A. 0. PIGOU, M.A.PHOFESSOE OF POLITICAL ECONOMT IN THE UNITEBSITT OF CAMBRIDGE

AUTHOR OF ' THE PRINCIPLES AND METHODS OF INDUSTRIAL PEACE '

'PROTECTIVE AND PREFERENTIAL IMPORT DUTIES,' ETC.

* Discontent, to be effective, must be shot with the colours of hope.'Charles Booth.

MACMILLAN AND CO., LIMITEDST. MARTIN'S STKEET, LONDON

1912

rib77)

?\,^loD^^-COPYRIGHTV

TO

DR ALFEED MAESHALL

PREFACE

Several years ago I began to study the causes of unemploy-

ment. It soon became apparent, however, that these causes

are so closely interwoven with the general body of economic

activity that an isolated treatment of them is scarcely practi-

cable. Hence the gradual growth and more extended scope of

the present volume. The drift of the argument is indicated

in a brief and incomplete manner in the Analytical Table of

Contents. This table, however, is not a summary, and, in-

deed, it deliberately ignores the more difficult parts of the

discussion. It should, therefore, only be used as a guide to

the pages on which the different topics treated in the text

may be found. I have endeavoured so to arrange the book

that the main body of it may be intelligible to readers other

than professional economists. Such readers, however, are re-

commended to omit Chapter III. of Part I., and Chapters I.,

VIII., X., XI., and XII. of Part II.

In a work covering so wide a iield, and attempting to

bring into an ordered unity so many different aspects of

economic life, I cannot hope to have avoided altogether error

and ambiguity. For protection against these dangers I owe

viii WEALTH AND WELFAEEmuch to Mr. J. M. Keynes, of King's College, Cambridge, and

Mr. Donald W. Corrie, of the Inner Temple, both of whomhave very kindly read the whole book, either in manuscript

or in proof. I am also indebted to Mr. Corrie for the com-

pilation of the Index.

A. C. PIGOU.

King's College, Cambridge,

September 1912.

ANALYTICAL TABLE OF CONTENTS

PAET I

WELFAEE AND THE NATIONAL DIVIDEND

CHAPTER I

WELFARE AND ECOKOMIC WELFAREPAGE

1. Welfare can belong only to states of consciousness ... 3

2. Economic welfare is that part of total welfare which consists insatisfactions connected with the earning and spending of the nationaldividend ........ 3

3-6. Instances can be multiplied, in which economic causes affectingeconomic welfare in one way afifeot total welfare in a differentway. Nevertheless, there is a presumption that conclusions abouteffects upon economic welfare will hold good also of effects on totalwelfare ........ 4

7. And reasonably adequate conclusions about effect upon economicwelfare can often be obtained by economic science, in spite ofthe partial and limited character of that science . .11

CHAPTER II

ECONOMIC WELFARE AND THE NATIONAL DIVIDEND

1, For the most part economic causes act upon economic welfare, notdirectly, but through the national dividend . . .14

2-3. The gross national dividend consists of the annual flow of thosegoods and services that can be brought easily into relation witha money measure ...... 14

WEALTH AND WELFAEEPAGE

4-7. And the true net national dividend consists of the gross nationaldividend minus an appropriate allowance for depreciation ofcapital .... ^^

8. If a cause is introduced, which makes for an increase in the aggregatesize of the net national dividend, provided that the absolute share

of no group of members, in terms of the commodities which thatgroup is accustomed chiefly to consume, decreases, the economicwelfare of the community as a whole is likely to be augmented . 20

9-10. If a cause is introduced, which makes for an increase in theabsolute share of relatively poor groups of persons (in terms of the

commodities which those groups are accustomed chiefly to con-sume), provided that the magnitude of the aggregate nationaldividend does not decrease, economic welfare is likely to beaugmented ........ 24

11. If a cause is introduced, which diminishes the" variability, orinequality in time, of the dividend, and especially of that part ofit which accrues to the poorer classes, economic welfare is likelyto be augmented ....... 32

CHAPTER III

THE MEASUREMENT OP THE DIVIDEND AND IT8 PARTS

1. Since the dividend is made up, not of a single commodity, but ofmany commodities varying in quantity, it is necessary to findsome way of measuring changes in its magnitude . . .33

2. If we suppose the money income of the community to be constant,such a measure is equivalent to the reciprocal of an index numberof general prices ....... 34

3-16. The remainder of this chapter, therefore, is concerned with theproblem of constructing, so far as that is possible, an indexnumber, such that its reciprocal shall move in the same directionas the quantity of economic welfare... .35

CHAPTER IV

THE NATIONAL DIVIDEND AND THE QUALITY OP THE PEOPLE

1. The conclusions reached in the second chapter must now be reviewedin the light ofmodern biological knowledge

. . .52 2. That knowledge warrants the belief that general welfare and

economic welfare alike could be increased by measures restrictingpropagation among the obviously degenerate. This belief, however,is additional to, and does not disturb, our results . . .53

CONTENTS xiPAGE

3. It is sometimes held that modern biology, by demonstrating thedominant part played by heredity, as compared with environment,has proved economic inquiries, which are, in the main, concernedwith environment, to be unimportant. Reasons are offered forthe rejection of this view ...... 56

4. It is sometimes held, further, that the advantage to economic welfare,claimed in the second chapter to result from (1) an increase in themagnitude and (2) an improvement in the distribution of thenational dividend, are cancelled by indirect biological effect . 61

5-6. Reasons are offered for the rejection of these views . . 62

CHAPTER V

The method of discussion to be followed is outlined . . 66

PART II

THE MAGNITUDE OF THE NATIONAL DIVIDEND

CHAPTER I

PAEETO'S LAW

1. Certain statistical investigations by Professor Pareto seem, at firstsight, to suggest that the magnitude and the distribution of thedividend are rigidly bound together, in such wise that it is im-possible for the dividend as a whole and the real income of thepoor to move otherwise than in the same direction . . 71

2-3. This view, however, cannot be derived from Professor Pareto'sstatistics ........ 72

4. In order to determine how far causes affecting the magnitude andthe distribution of the dividend act harmoniously in respect ofthese two things, we need, therefore, to investigate the broadproblem of distribution ..... 77

CHAPTER II

PKODUCTION AND DI8TRIBDII0N

1. Distribution of income among people is analytically quite distinctfrom the distribution among factors of production of economictext -books. Nevertheless, no great error is introduced, if we

identify the income of the poorer classes with the receipts of thefactor labour ...... 78

xii WEALTH AND WELFAEEPAGE

2. The general run of causes affecting the magnitude of the nationaldividend act through (1) changes in the quantity or technical

efficiency of non-labour, (2) changes in the quantity or technical

efficiency of labour ... '9 3-13. In an elaborate discussion, it is argued that, broadly speaking,

causes acting through the supply of non-labour are harmonious,

in the sense that they are likely to affect the magnitude of thenational dividend and the aggregate real earnings of labour in thesame direction . . . . 80

14-15. And the same conclusion is reached concerning causes that actthrough the supply of labour . ... 92

16. Hence, we conclude generally that economic welfare will be in-creased by causes which increase, and diminished by causes whichdiminish, the magnitude of the national dividend . . 95

NOTE TO CHAPTER II

Uncertainty-Bearing as a Factor of Production . . 95

CHAPTER IIITHE MASNITUDE OF THE DIVIDEND AND EQUALITY OF

MARGINAL NET PRODUCTS

1-4. It is generally, but not universally, true that the nationaldividend would be reduced below its natural size by causesmaking the marginal net products of resources in different usesunequal. In general, the more nearly equal marginal net productsin aU uses are, the larger the dividend is likely to be . 104

CHAPTER IV

HINDRANCES TO EQUALITY OF MARGINAL NET PRODUCTSDUE TO IMPERFECT MOBILITY

1. In the present and two following chapters it is assumed provisionallythat self-interest, if not interfered with, tends to make themarginal net products of resources equal in all uses ; and inquiryis made as to how far this tendency is checked by "impedimentsto mobility" ....... 109

2. The popular conception of "impediments to mobility" and of theireffect is confused and inadequate ..... 110

3-10. A somewhat elaborate analysis of the problem is attempted 110

11. We conclude that anything, which, either improves judgment asto the comparative advantages of production in different parts of

CONTENTS

the industrial field, or lessens the cost of movement from onepart of that field to another, is likely to bring about greaterequality among marginal net products, and, therewith, in accord-ance with the reasoning of the preceding chapter, an enlargementof the national dividend. Illustrations are given . . . 122

12. The above result, however, does not justify the inference that cheapening, whether of knowledge or of movement, in the senseof a transference of the cost of it from the persons who reap thebenefit to the State or other public body, is likely to lead to anenlargement of the dividend . ... 125

NOTE TO CHAPTER IVMobility and Unemployment ...... 127

CHAPTER VHINDBANCBS TO EQUALITY OF MARGINAL NET PRODUCTS DUB TO

IMPERFECT DIVISIBILITY OF THE UNITS IN TERMS OF WHICH TRANS-ACTIONS ARE CONDUCTED

1. When the units in which transactions are made are large, or whenthey are compounded of two factors in a fixed proportion, the ten-dency of self-interest to make the marginal net products of eachfactor equal in all uses is obstructed .... 129

2. In modem times the size of the unit, in which transactions in respectof capital take place, has been reduced, partly with the help ofthe Stock Exchange....... 130

3. The compound character which formerly belonged to this unit hasalso, in great part, been eliminated, by arrangements which thegreat growth of securities adapted to serve as collateral hasfacilitated ..... . . 131

CHAPTER VI

HINDRANCES TO EQUALITY OF MARGINAL NET PRODUCTS DUE TOTHE RELATIVE VARIABILITY OF INDUSTRY

i1-2. A given system of impediments to mobility is likely to involve

greater inequality between the marginal net products of resourcesatdifierent points, the more variable, relatively to one another, are

the demands for the services of resources at these points . . 135

j 3-8. As a first step towards an analysis of the influences by which therelative variabilityof a country's industries is governed, a discussion

is attenipted of the influences by which the absolute variability of

xiv WEALTH AND WELFAREPAGE

the demand for labour and waiting in an individual industry isdetermined.... l^^

9. It is shown that the influences laid bare in this discussion, in con-

junction with certain further influences, control also the extentto which the demands for labour and waiting at different pointsvary relatively to one another ..... 145

CHAPTER VII

HINDRANCES TO EQUALITY OF MARGINAL NET PRODUCTS DDE TO DIVER-GENCES BETWEEN SOCIAL NET PRODUCT AND PRIVATE NET PRODUCT

1-2. Private net product and social net product are distinguished. Inso far as self-interest tends to bring about equality of marginalprivate net products in different fields, equality among marginalsocial net products is obstructed, whenever marginal private andmarginal social net products diverge. Some sorts of divergenceoccur under simple competition, further sorts under monopolisticcompetition, and yet further sorts under bilateral monopoly . 148

3. Under simple competition divergences may arise out of the customaryform of certain contracts ...... 149

4-6. Illustrations are given from the various kinds of contracts that aremade between landlords and tenants and between employers andemployed ........ 150

7-9. Divergences may also arise independently of contractual relations,in respect of forms of investment which render incidental uncom-pensated services or disservices to the general public. Illustrationsare given . .... 158

10. These divergences can be mitigated by a judicious employment oftaxes and bounties ....... 164

11. Under monopolistic competition further divergences arise in con-nection with resources invested in advertisement

. . . 165

12-14. Under bilateral monopoly divergences arise in respect ofresourcesdevoted to " bargaining " and to fraudulent practices. Thes^ canbe mitigated to some extent by penal laws.... 168

CHAPTER VIIITHE EQUALITY OF MARGINAL NET PRODUCTS IN DIFFERENT USES

UNDER SIMPLE COMPETITION

1. Hitherto it has been provisionally assumed that self-interest tends,so far as it is not obstructed, to make the marginal private netproducts of resources in different uses equal. In passing to an

CONTENTS

investigation of the validity of this assumption, we may con-veniently neglect the distinction between marginal private andmarginal social net product, and speak, without qualification, ofmarginal net products ...... 172

2-5. A difficult argument shows that, under conditions of simple com-petition, in industries of increasing returns, the marginal netproduct tends to exceed, and in industries of diminishing returnsto fall short of, the marginal net product yielded in industries ingeneral ........ 174

6. And, when the various producers in an industry are not situatedsimilarly, the marginal net products of resources invested atdifferent centres within the same industry tend, except underconstant returns, to be different ..... 177

7. It is possible, by resort to taxes and bounties, diflFerential andotherwise, to mitigate these divergences .... 178

CHAPTER IX

THE CONDITIONS OF MONOPOLISATION

1. It will presently be necessary to inquire how far marginal net productsin different uses tend to equality under monopoly. As a pre-liminary to this inquiry, the conditions which determine theappearance of monopolistic power need to be considered . . 180

2. Circumstances which, when the aggregate scale of an industry isgiven, make it structurally economical for the typical individualestablishment to be large, are favourable to the advent ofmonopolistic power...... 180

3. So also are circumstances which make it structurally economical forthe typical individual unit of business management (embracing,perhaps, a number of establishments) to be large . . . 182

4. So also are conditions under which amalgamation is able greatly toreduce expenses by cutting down competitive advertisement . 184

5. So also is the existence of a highly inelastic demand for any com-modity, since this implies the possibility of large gains if mono-polisation takes place. The influences by which the degree ofelasticity of demand for different commodities is determined arediscussed ........ 185

6. On the other hand, anything that renders it difficult for negotiationsaiming at amalgamation to be opened up is unfavourable to theadvent of monopolistic power . . . . .189

7. And the same thing is true of those obstacles to agreement whicharise out of conflicting claims about " participation " . . 19Q

xvi WEALTH AND WELFAEE

CHAPTER XMONOPOLISTIC COMPETITION

PAGE

1. Under monopolistic competition, self-interest does not tend to makethe marginal net product of resources in the industry affectedequal to the marginal net product of resources in general . . 192

2-4. Kather, it leaves this marginal net product indeterminate over arange, the extent of which depends upon certain influences that arebriefly discussed ....... 192

CHAPTER XISIMPLE MONOPOLY

1-3. Under simple monopoly ^Zms restriction of entry to the industryaffected, it is probable that the marginal net product of resourcesin that industry will diverge from the marginal net product ofresources iu general more widely than it would do under simplecompetition . ...... 195

4. And, if the entry to the monopolised industry is not restricted, thenational dividend will suffer in another way . 197

CHAPTER XIIDISCRIMINATING MONOPOLY

1. Under certain conditions monopolists are able to charge discriminat-ing prices ........ 199

2-4. The nature of these conditions, which depend essentially uponthe non-transferability of the commodities afifected, is discussed . 199

5-7. Of three distinguishable forms of discriminating monopoly, theonly one of practical importance is discriminating monopoly of thethird degree, under which different prices are charged betweenmarkets, the composition of which is determined otherwise thanby the monopolist's own choice .... 202

8-16. Under discriminating monopoly of the third degree, plus restric-tion of entry to the industry affected, the output may, not improb-ably in certain circumstances, approach more nearly to the quantitycalculated to make the marginal net product of resources in thatindustry equal to the marginal net product of resources in general,than it would do under simple monopoly ; but it is unlikely toapproach more nearly to this quantity than it would do undersimple competition . . ... 206

17. Circumstances are, however, conceivable, in which it may do this 212

CONTENTS xvii

mi - PAGE) 18. The effect is examined of a peculiar class of agreement concerning

price discriminations, entered into by sellers who are in competitionwith one another . ..... 213

CHAPTER XIII

THE SPECIAL CASE OF RAILWAY RATES

1. The discussion of the preceding chapter throws light on the con-troversy between advocates of " the cost of service principle " and" the value of service principle " in respect of railway rates . 215

2-4. This controversy is obscured by the popular view that the carri-age of copper and the carriage of coal, or the carriage of coaldestined for A and the carriage of coal destined for B, over a givenpiece of line, are "joint products." This view is incorrect

. 215

5. The meaning in practice of "the costof service principle" is explained 219

6. The meaning in practice of "the value of service principle" isexplained ........ 222

7. " The cost of service principle " corresponds to simple competition,and "the value of service principle" to discriminating monopolyof the third degree....... 228

8. In general, the former is the more advantageous to the nationaldividend ; but, as stated in the preceding chapter, circumstancesmay arise in which the latter is the more advantageous . . 229

9-10. These circumstances, however, are much less common thanwriters on railway economics usually suppose . . . 231

NOTE TO CHAPTER XIII

Thb Zone System. ..... .235

CHAPTER XIV

purchasers' ASSOCIATIONS

i 1. The preceding chapters have shown that, in many industries,neither simple competition, nor monopolistic competition, norsimple monopoly, nor discriminating monopoly will make themarginal net product of resources invested in them equal to themarginal net product of resources in general. We have next toinquire whether this result can be secured by resort to the deviceof Purchasers' Associations...... 237

i2. The answer is clearly in the affirmative ; but no inference follows

as to the effect on the national dividend, until the comparative

advantages in respect of productive efficiency of Purchasers' Associa-

tions and ordinary commercial businesses have been ascertained . 237b

xviii WEALTH AND WELFAEEPAOE

3. Not much light can be thrown on that matter by historicalexamples ........ 238

4-5. Purchasers' Associations hare advantages in respect of production,so far as they save costs in advertisement, bargaining and safe-guards against fraud ...... 239

6. They are, however, at a serious disadvantage, in so far as the sizeto which they individually attain must be determined, in greatpart, by considerations irrelevant to economic efficiency . . 241

7-9. The importance of this disadvantage in regard to various sorts ofindustry is discussed ...... 242

10. It is concluded that the field practically open to Purchasers' Asso-ciations is strictly limited, and that the study of further remediesfor the imperfections of ordinary business forms is, therefore, stillrequired ........ 244

CHAPTER XV

STATE INTERVENTION

1. The present and two following chapters are concerned with tlieremedy of State intervention in industry .... 246

2. There is no reason why this should be confined to those industrieswhose operation requires resort to the right of eminent domain . 246

3. The mere failure of private industry, when left free from Stateinterference, to maximise the national dividend, does not of itselfwarrant intervention, for this might make things worse . . 247

4. Certain modern developments have, however, rendered govern-mental agencies better fitted for intervention than they were informer times........ 249

CHAPTER XVI

PUBLIC CONTEOt OP MONOPOLY

1. This chapter is concerned with attempts by the State so to controlprivate monopoly that supply shall be adjusted to demand, and thenational dividend shall, therefore, be as large as it would be undersimple competition....... 251

2-3. Among indirect methods of control, after reference to a device ofminor importance, the policy of maintaining actual competitionby refusing to allow rival concerns to combine is discussed

. 251

4. A second indirect method of control is embodied in the policv ofmaintaining jpofewMaZ competition. This is worked by penalisingthe "clubbing" devices of cut-throat competition, or destructivedumping, and of boycott

. .... 257

CONTENTSPAGE

5-6. The nature and effect of these" clubbing " devices are explained . 258

7. In spite of many difficulties, it is probable that legislation directedagainst them, if carefully prepared, may, at all events, lessen theextent to which they are employed... . 261

8. But such legislation, even if successful in its immediate object,would not serve completely to maintain potential competition . 264

9-11. The inadequacy of indirect methods of control leads to the sug-gestion of direct methods designed to fix price and output at thelevel proper to simple competition..... 265

12. It is, however, exceedingly difiBcult for the State to enforce theobservance of the conditions it imposes .... 267

13-16. And it is equally difficult for it to decide rightly what conditionsto impose ; though certain devices are available by which this diffi-culty can be partially overcome ..... 268

CHAPTER XVII

P0BLIC OPERATION OF INDnSTRIES

1. The difficulty of satisfactory public control over monopolistic andcertain other industries suggests that the national dividend mightbe increased by the public operation of these industries, providedthat this would not involve serious loss of economy in production 273

2. The economic efficiency of public and of joint-stock operation ofindustry cannot be successfully compared by reference to statistics 274

3. The efficiency of management in the two cases is likely to bepretty much the same .... . 275

4. But, first, under public operation there is a danger that the operat-ing authority may be tempted to maintain its enterprise by theuse of unfair uncommercial methods at the expense of rival enter-prises capable of satisfying the same wants more cheaply . . 276

5. Secondly, under public operation efficiency is likely to sufferthrough an undue restriction of the supply of the factor of produc-tion uncertainty-bearing ...... 281

6-7. Thirdly, efficiency is likely to suffer through the establishment ofunits of management of an uneconomical size ; though, in certaincases, where the normal state of things is monopolistic competition,

public operation is, in this respect, superior to joint - stockoperation ... .... 284

8. The inferiority in respect of productive efficiency, which thusattaches, in general, to public operation, has to be balanced

against the inferiority of public control in respect of the most

economical adjustment of supply to demand. The result worksout differently for different industries and at different times . 287

XX WEALTH AND WELFAEE

PART III

THE DISTRIBUTION OF THE NATIONAL DIVIDEND

CHAPTER I

INTRODUCTORYPAGE

1. The following part is concerned with attempts to improve thedistribution of the dividend by the deliberate transference ofresources from the relatively rich to the relatively poor, firstthrough interference with the natural course of wages, as paid toparticular poor persons, and secondly through taxation and soforth. ....... 293

2. It can be shown that, in general, transferences brought about ineither of these ways will only increase the real income of the poorin the long run, provided that they do not diminish the nationaldividend ........ 293

3. The order of topics to be discussed in the succeeding chapters isindicated ...... 294

CHAPTER IIPOEMS OF INTERFERENCE WITH THE NATURAL COURSE OF WAGES

1. Interference with the natural course of wages at any point may takethe form of the establishment of an artificial wage-rate, involvingeither a small or a large element of differentiation . . 296

2, Even piece-wages in general imply some differentiation in favour ofinferior workpeople....... 296

3-4. Under time-wages, when no excessive rigidity is maintained, butattempts at adjustment of payment to efiiciency are made, a some-what larger element of differentiation is present . . . 297

5. Under a rigid time-wage of so much per hour for all workers, a muchlarger element of differentiation is present.... 301

CHAPTER IIIMETHODS AVAILABLE FOR RAISING THE WAGE-RATE AT ANT POINT

ABOVE THE NATURAL LEVEL

1. The principal means by which attempts are made to raise the rateof wages of any group of workpeople above the natural level aretrade -union diplomacy, legislative action and pressure on thepart of consumers ....... 303

CONTENTS xxiPAGE

2. These attempts may easily succeed in their immediate object ofmaking the real wage-rate enjoyed by the group in questionhigher than it would naturally be. They are, however, liableto direct evasion ... . . 305

3. They are also liable to indirect evasion, through the migration ofbetter workpeople to districts where higher wage-rates are paid . 307

4. The real question is whether, and under what conditions, they willsucceed in their ulterior object of transferring resources fromrelatively rich to relatively poor persons. In Chapter V. thisquestion will be discussed in reference to artificial wage-rates of anon-differential character ...... 308

CHAPTER IVMETHODS OP ENGAGEMENT OP LABOUR

1. The answer to the question just proposed depends partly on themethods in accordance with which workpeople are engaged in theindustry where the artificial wage-rate is established . 309

2. These methods may be distinguished according as they involve theconcentration of the work that is available upon a small numberof men, or the spreading of it among many men . . . 309

3. The influences determining the degree in which concentration orspreading shall prevail may be divided into three groups, relatedrespectively to (1) the nature of the work performed, (2) thenature of the demand for labour as regards iiuotuations, and(3) the range covered by the typical individual centre of engage-ment. ........ 311

4. Skilled occupations are more favourable to the concentration methodof engagement than unskilled occupations.... 311

5. In respect of skilled and unskilled occupations alike, fluctuations inthe demand for labour tend to discourage this method . . 315

S 6. But the existence in the occupation of a few large centres ofengagement, as distinguished from many small centres, tends toencourage it . . . . . . . . 316

7. This last circumstance suggests a consideration relevant to thepolicy pursued by Labour Bureaus... . 318

CHAPTER VTHE POWER OP A NON - DIPPERENTIAL ARTIFICIAL WAGE-RATE IN A

PARTICULAR OCCUPATION TO TRANSFER RESOURCES PROM THERELATIVELY RICH TO THE RELATIVELY POOR

1. The question, whether the establishment of a non- differentialartificial wage-rate at any point can succeed in its ulterior objectof transferring resources from the relatively rich to the relatively

xxii WEALTH AND WELFAREPAGE

poor may be considered first on the assumption that the com-modity produced at this point is consumed exclusively by othersthan members of the working classes . . . 320

2. The real earnings of that group of workpeople for whom the arti-ficial rate has been secured will be increased, if the demand fortheir services has an elasticity less than unity . . . 320

3. The magnitude of the elasticity of demand for the services ofdifferent groups of workpeople is determined by various circum-stances, the principal among which are discussed . . 321

4. If there is perfect mobility between different parts of the industrialfield, and if the attractiveness to labour of each part is measuredby the average earnings of the workpeople assembled there, thereal earnings of the w^orkpeople as a whole are increased by theestablishment of an artificial wage-rate at any point, when theelasticity of the demand for labour at that point is less than unity 325

5. In an occupation where the methods of engagement are such thatwork is spread evenly among all the men attached to it, theattractiveness of the occupation is measured by the averageearnings of the workpeople assembled there . . . 326

6. In an occupation where the work is spread more or less at randomamong the men attached to it, attractiveness may be larger, ascompared with average earnings, than it is elsewhere. In thiscase the establishment of an artificial wage-rate is likely to beless favourable to the real earnings of the workpeople as a wholethan it would be under the even spreading method .

. 327

7. In an occupation where the concentration method of engagementprevails, the establishment of such a rate is likely to be morefavourable than it would be under the even spreading method . 329

8. The same proposition holds good of an occupation entrance intowhich is obstructed by obstacles in the way of mobility . . 330

9. When account is taken of the fact that a great part of the productof one group of workpeople is usually consumed by other work-people, it becomes clear that the establishment of an artificialwage-rate at any point is less likely to be successful in bringingabout a transference of resources from the relatively rich to therelatively poor than the preceding considerations, taken alone,would suggest ...... 332

CHAPTER VIa?HE POWER OF A DIPFERBNTIAL ARTIFICIAL WAGE-RATE IN A PARTICDLAB

OOCDPATION TO TRANSFER RESOURCES FROM THE RELATIVBLT RICHTO THE RELATIVELY POOR

1. An artificial wage-rate containing a differential element cannotmake the aggregate earnings of the workpeople as a whole

CONTENTS xxiiiPAGE

SO large as they might be made by some non-differential artificialwage-rate ........ 334

2. Further, differentiation in the wage-rate in favour of inferior work-people implies a concentration of work and wages upon thosewho are not inferior....... 335

3. This proposition, which can be deduced from general considerations,is supported by statistical evidence .... 336

4. It follows that a differential artificial wage-rate is much less likelythan a non-differential artificial wage-rate to advantage economicwelfare ........ 339

CHAPTER VIITHE ULTIMATE EFFECTS OF TRANSFERENCES BROUGHT ABOUT BY

ARTIFICIAL WAGB-BAIES

1. It has now been established that a real transference of resourcesfrom the relatively rich to the relatively poor can, in somecircumstances, be effected through the establishment of anartificial wage-rate. Will such transference react beneficiallyupon the national dividend, and, therefore, ultimately, on thereal income of the poor ? . . . . . . 341

2. Such a result is possible, but is unlikely. In general, the reactionwill be injurious ....... 341

3. Even, however, when this is the case, it is still possible to defendthe establishment of an artificial wage-rate for the lowest class oflabour as a supplementary form of Poor Relief . . 343

CHAPTEK VIIIDIRECT TRANSPERBNOBS OF RESOURCES FROM THE RELATIVELY RICH

TO THE RELATIVELY POOR

1. We now pass to attempts to transfer resources from the relativelyrich to the relatively poor by direct action on the part of philan-thropists or the State ..... 346

2. It is sometimes denied that such transference is possible, on theground that any absorption of resources from the rich must causethem to diminish to a corresponding extent their expenditure inemploying labour. This is invalid .... 346

3. It is also sometimes objected that such transference is impossible,unless the beneficiaries are at the same time prevented from con-tinuing to work at industry. This also is invalid . . 347

4. Transference of this kind being thus obviously possible, inquirymust be made into the effect on the magnitude of the nationaldividend of (1) the fact of it, (2) the expectation of the fact of it . 349

xxiv WEALTH AND WELFAEE

CHAPTER IX

THE EFFECTS OF THE FACT OF DIRECT TRANSFERENCES FROM THE

RELATIVELY ETCH TO THE RELATIVELY POORPAGE

1. From the point of view of this chapter a transference of resources

from the relatively rich to the relatively poor means a substitution

of commodities consumable by the poor for commodities consum-

able by the rich and for machines . ... 361

2. The reduction in the consumption of the rich will leave their

efficiency practically unchanged. AVhether the national dividend

will be increased, therefore, depends partly on how large a fractionof the resources transferred to the poor is taken from machines andpartly upon the comparative return obtainable from investment in

machines and in the persons of the poor .... 351

3. The fraction of resources taken from machines is larger whenresources are absorbed by death duties than when they areabsorbed by income tax ...... 352

4. Concerning the absolute magnitude of this fraction we are not, how-ever, able to make any statement, except that the fraction willalways be somewhat less than unity .... 354

5. Whether the rate of return from resources turned over for consump-tion by the poor is greater or smaller than the rate which wouldhave been yielded by them in the form of machines depends uponthe conditions by which a transference of resources is accompanied,and the categories of poor persons to whom it is made . . 354

6. The return to the marginal pound invested in the efficiency of thepoor is probably much greater than the return to the marginalpound invested in the efficiency of machines. This suggests thatresources, if transferred, would obtain an increased return . 355

7. But the suggestion depends on the assumption that the poor wouldinvest new resources in themselves in a competent manner ; and,in fact, they are not likely to do this .... 356

8. Hence, if transferred resources are to yield an increased return, the

act of transference must be accompanied by control and direction,through the enforcement of conditions on assisted persons . 358

9. Certain propositions concerning the nature of these conditions arelaid down ........ 360

10. Even when control is exercised, resources transferred to thedefective and the old are not likely to yield a return as largeas they would have yielded in the form of machines. Butresources transferred in such wise as to preserve normal men inmiddle life from sickness and unemployment, and, still more,resources transferred to build up the bodies and minds of normalchildren, are practically certain to yield a return much larger thanthis ......

.362

CONTENTS

CHAPTER X

THE EFFECTS OF THE EXPECTATION OP DIRECT TRANSFBEBNCBSFROM THE RELATIVELY RICH

PAGE 1. The expectation of voluntary transferences from the relatively rich

implies the discovery of a further desired use for resources, and sostimulates the supply of effort and waiting . . . 365

2-3. Voluntary transferences are involved in many schemes of mutualinsurance ..... . . 366

i. They can also be induced by a judicious employment of honours anddecorations ... . . . 369

5. The expectation of coercive transferences from the relatively richwill not check the supply of effort and waiting, if the trans-ferences are effected by the taxation of true rents or of windfalls . 869

6. The expectation of transferences, effected through taxes that strikeresources which are consumed and resources which are saved atthe same rate, will check the supply of effort, but not, directly,the supply of waiting ..... 370

7. Nor will they, if reasonably arranged, check the supply of effort toany large extent . . . . . 372

8. The expectation of transferences effected through taxes thatdifferentiate against resources which are saved may, however,seriously check the supply of waiting .... 373

9. But this statement does not apply to transferences effected throughpostponed taxes, such as death duties . . . 375

CHAPTER XITHE EFFECTS OP THE EXPECTATION OP DIRECT TRANSFERENCES TO

THE EBLATrVELT POOR

1. The effects of the expectation of transferences to the relativelypoor differ according as the transferences (1) do not differentiateeither against or in favour of slackness on the part of the poor,(2) differentiate against slackness, or (3) differentiate in favour ofslackness ........ 379

2. Examples of non-differential transferences are cited . . . 379

3. The expectation of some kinds of non-differential transference does,but the expectation of other kinds does not, check the supply ofindustrial effort on the part of the poor .... 382

4. Examples of transferences which differentiate against slackness, andthe expectation of which will, therefore, tend to increase thenational dividend, are cited ..... 383

WEALTH AND WELFAEEPAGE

5. The main part of the transferences that are made under the PoorLaws of modern States differentiate iu favour of slackness on thepart of the poor ; for their amount varies inversely with the pro-

vision which certain poor persons make for their own sustenance . 384

6. Differentiation in favour of small provision through insurance is not

equivalent to differentiation in favour of slackness in contributing

to build up the national dividend ..... 385

7. The injurious effect on the dividend of the expectation of trans-ferences that differentiate in favour of slackness can be mitigatedby deterrent conditions ...... 388

8. The character proper to these conditions is discussed . . 389

CHAPTER XII

A NATIONAL MINIMUM

1. The establishment of a national minimum, may at the same timediminish the national dividend and increase the aggregate realincome of the relatively poor ..... 393

2. By a national minimum is understood an objective minimum ofconditions in all departments of life, below which the fortunes ofno citizen are allowed to fall ..... 394

3. Economic welfare is best promoted by the establishment of anational minimum at such a level that the direct good resultingfrom the marginal transference to the poor just balances theindirect evil brought about by the consequent reduction of thedividend ........ 395

4. It follows that the national minimum should be set higher when acountry is wealthy than when it is poor . . 396

PART IV

THE VARIABILITY OF THE NATIONAL DIVIDEND

CHAPTER IECONOMIC WELFARE AND THE VARIABILITY OP THE INCOME OP

THE REPRESENTATIVE "WORKING MAN

1. The economic welfare of a group of individuals is larger, the moreevenly the consumption of the representative member of thatgroup is distributed through time..... 401

2. And the joint economic welfare of two groups, each of which is moreor less homogeneous, is increased if a system of reciprocal

CONTENTS xxviiPAGE

transferences is established between them, in such wise as todiminish the variability of consumption of the poorer of the two . 402

3. It follows that any arrangement which, other things being equal,diminishes the variability of consumption of the representativeworking man, even though it be by way of reciprocal trans-ferences which increase the variability of the consumption of theother classes, tends to make economic welfare larger . . 402

4-6. This conclusion is fortified by a consideration of the indirectevil incidents, including the evil of intermittent employment,which variable consumption on the part of a poor man usuallyimplies ........ 403

7. A proposition analogous to that laid down as regards the cmiswmption,holds good also as regards the real income of the representativeworking man ....... 406

CHAPTER II

INSURANCE

1. Diverging from the main argument, we observe that, when thevariability of the income of the representative working man isgiven, arrangements which diminish the variability of his con-sumption increase economic welfare .... 408

2-3. One such arrangement is mutuality and another is saving . 408

4. These two methods are often combined in practice under the formof insurance........ 410

5. The field over which insurance can be made operative is limited byimportant technical considerations..... 410

6. And it is further limited by lack of forethought and so forth onthe part of the poor....... 412

7. This circumstance suggests that the State could increase economicwelfare by either encouraging or compelling poor persons to insure 415

8. The respective advantages of encouragement and compulsion arecompared . ...... 417

CHAPTER III

VARIABILITY IN THE REAL INCOME OP THE REPRESENTATIVE WORKINGMAN IN RELATION TO VARIABILITY IN THE AGGREGATE REALINCOME OF THE WORKING CLASSES

1. We now revert to the main argument .... 420

2. The variability of the real income of the representative working manis not necessarily diminished by a cause which diminishes thevariability of the demand for, and earnings of, labour as a whole . 420

xxviii WEALTH AND WELFAEEFAOE

3. It is, however, diminished by the generality of ordinary economiccauses which have this effect, and throughout the following Part,

with the exception of the last chapter, attention is confined to

these causes . . ..... 421

CHAPTER IV

THE VARIABILITY OP GENERAL PRICES

1. Since the variability of the real earnings of labour as a whole is

modiiied by the fact that the purchasing power of money isvariable, the causes of this variability need to be studied . . 423

2. The determinants of it are (1) the variability of the demand formoney, (2) the variability of the supply of money, and (3) theelasticity of the supply of money ..... 423

3. The causes to which variability in the demand for money is dueare discussed .... . 424

4-9. The circumstances, including the currency and banking arrange-ments, by which the elasticity of the supply of money is deter-mined, are discussed in some detail . . . 425

10-11. The causes to which variability in the supply of money is dueare discussed ....... 432

12-13. When a variation takes place in the demand schedule formoney, which, it is known, will only last a short time, there isalways a tendency for the supply schedule to vary in such a wayas to reduce the consequent movement in general prices . . 435

14. This circumstance suggests that general prices, or, in other words,the purchasing power of money, might be rendered much lessvariable than it is by the introduction of a system under whichthe supply of money should be authoritatively regulated in theinterests of stability . . ... 437

CHAPTER VCAUSES THAT BRING ABOUT VARIATIONS IN THE REAL INCOME

OF THE WORKING CLASSES

1. Reverting again to the main argument, we note that the variabilityof the real income of the working classes is made somewhat largerthan it would otherwise be by the fact that working-class con-sumption largely consists of commodities of especially variablesupply ........ 439

2. Apart from this, variations in the real earnings of the working classesas a whole may be initiated either by spontaneous variations inthe volume of the national dividend or by spontaneous variations

CONTENTS xxixPAGE

in the comparative attractions exercised by the rival uses ofimmediate consumption, storage and investment in the purchaseof labour ...... . 440

3. The process by which these variations react to bring about variationsin the real income of the working classes is explained . . 441

4-5. And the manner in which the process is modified by themediation of the monetary system is indicated . . . 442

CHAPTER VI

THE VAHIABILITT OF THE BODNTY OF NATURE AND OFFOREIGN DEMANDS

1-2. The causes of spontaneous variations initiated in the volume ofthe national dividend arise, from the standpoint of a particularcountry, out of variations in the bounty of nature and variationsin the desire of foreigners for its exports ; and the resultingvariability is likely to be smaller, the more numerous are thesources of production and of demand . . . 447

3. The variability of the bounty of nature is likely to be smaller, thesmaller is the extent to which the things we sell and buy are of akind largely affected by natural forces outside human control . 449

4. The variability in the desire of foreigners to purchase our exportsdepends upon certain circumstances, which are discussed . . 451

5. And attention is drawn to the influence of the elasticity of thisdemand . . . . . 451

CHAPTER VII

THE VARIABILITY OF ERROR IN BUSINESS FORECASTS

1. The causes of spontaneous variations initiated in the comparativeattractiveness of the investment use are, in the main, equivalentto those which bring about variations in the expectationsof business men concerning the absolute profitableness ofinvestment ... . . 453

2. Among them are the causes of variations in the error of businessmen's expectations ... . . 454

3. The magnitude ofthese variations is affected by (1) the characteristicform of modern industry, (2) the quality of the persons whoseforecasts are practically operative, (3) the reactions upon oneanother of difTerent persons' forecasts, and (4) the reproductivepower of the errors that are born . . . 455

XXX WEALTH AND WELFAEEPAGE

i. The characteristic form of modern industry includes the practice ofexchange and the fact of " prospectiveness. " Both these things

enhance the variability of error . . 455

5. The quality of persons whose forecasts are practically operative isaffected by the admission, on the one hand, of professionalfinanciers and, on the other, of speculating members of thegeneral public ....- 457

6-7. Mutual reactions upon one another of the forecasts of differentpersons increase the variability of error. In modern industrythey are strengthened by that interdependence among businessfirms which is set up by debtor-creditor relation . . . 459

8-9. The reproductive power of the errors that are born also increasesthe variability of error. It is strengthened by the influence of themonetary system and of rashness in the working of the creditsystem . ... . 462

CHAPTEE VIII

THE EELATION BETWEEN THE CAUSES OF VARIATIONS AND THE VARIA-BILITY OF THE REAL EARNINGS OF THE WORKING CLASSES

1. The variability of the resources invested in the purchase of labourdepends, not only upon the variability of the dividend and of theattractions exercised by different uses, but also upon (1) theorder in which individual variations in each of these things occurand (2) the correlation, if any, that exists between the two seriesof variations , ..... . 467

2. In so far as individual variations tend to be arranged in successionsof upward variations followed by successions of downward varia-tions, the resultant variability of the earnings of labour isenhanced ...

. .. 468

3. In fact there is some tendency towards this arrangement in thevariations that occur' both in the bounty of nature and in thecomparative attractiveness of different uses . . . 469

4. In so far as upward (and downward) movements in the bounty ofnature are correlated positively with upward (and downward)movements in the comparative attraction exercised by theinvestment use, the resultant variability of the earnings of labouris enhanced........ 470

5. In fact there is some tendency towards positive correlation betweenthese two sets of movements

. .

. . .471 6. Some discussion is offered as to the relative importance of the

different influences that are responsible for the variability of theaggregate real earnings of labour

. . 472

CONTENTS xxxi

CHAPTER IX

PHILAKTHROPIC AND STATE ACTION DESIGNED TO LESSEN THEVARIABILITY OF THE DEMAND FOB LABOUR

PAGE 1. Philanthropic or State action diminishing the variability of the real

earnings of labour as a whole need not always diminish the varia-bility of the real earnings of the representative working man. Theconditions in which it will do this have now to be studied 476

2. The preliminary objection that philanthropists and the State areimpotent to diminish the variability of the real earnings of labouras a whole may be set aside as invalid .... 477

3. As was indicated in Chapter III. , devices, which diminish thevariability of the real earnings of labour in all parts (collectively)of the industrial field, otherwise than by increasing it in somepart, necessarily diminish the variability of the real earnings of therepresentative working man ..... 478

4. Such devices may be adopted through the dovetailing, by groupsof associated consumers, of an essentially variable partial demandinto the interstices of the general demand.... 479

5. They may also be adopted by employers of labour . . . 481

6. Devices, which diminish the variability of the real earnings oflabour in all parts (collectively) of the industrial iield, by intro-ducing variations in one part to compensate existing variations inanother part, are not certain to diminish the variability of thereal earnings of the representative working man, but are morelikely to do this, the more perfect is the mobility of labour . 483

CONCLUSION . . . . 487B

INDEX . . . .... 489

PAET I

WELFARE AND THE NATIONAL DIVIDEND

CHAPTEE I

WELFARE AND ECONOMIC WELFAEE

1. "If I am asked 'What is good?' my answer is thatgood is good, and that is the end of the matter. Or, if Iam asked ' How is good to be defined ? ' my answer is thatit cannot be defined, and that is all I have to say about it." ^

"Welfare means the same thing as good. It, too, cannot bedefined, in the sense of being analysed. At the same timewe can say, and, indeed, it is the chief task of ethics to say,

whether, and in what way, particular things belong to welfare.For the purpose of this volume it is sufficient to lay down onthis subject two propositions : first, that welfare includesstates of consciousness only, and not material things orconditions : secondly, that welfare can be brought under thecategory of greater and less. This is all that need be saidhere concerning welfare in general.

2. Of welfare in general economic welfare is one part.It is welfare arising in connection with the earning andspending of the national dividend, or, in other words, of thoseparts of the community's net income that enter easily intorelation with the measuring rod of money. Economic wel-fare, however, does not contain all welfare arising in thisconnection. Various good and bad qualities indirectly as-sociated with income-getting and income-spending are excludedfrom it. It does not include the whole psychic return, whichemerges when the objective services constituting the nationaldividend have passed through the factory of the body ; ^

1 G. E. Moore, Principia Ethica, p. 6.2 Of. Fisher, Capital and IncoTne, p. 168.

4 WEALTH AND WELFAEE parti

it includes only the psychic return of satisfaction.

Thus, economic welfare is, as it were, a part of a part of

welfare.

3. This heing so, it is plain that welfare may changewhile economic welfare remains the same ; and that a givenchange in economic welfare will seldom synchronise with an

equal change in welfare as a whole. This circumstance might

seem, at first sight, to render the study of economic welfareunimportant. To conclude thus, however, would be to mis-conceive the whole purpose of economic investigation. Thatpurpose is not primarily scientific, if by science we intendthe single-eyed search after knowledge for its own sake. Itis rather practical and utilitarian, concerned chiefly to laybare such parts of knowledge as may serve, directly orindirectly, to help forward the betterment of social life.

Hence, the failure of economic welfare to act as a baro-meter of total welfare is of but slight importance. For, what

we wish to learn is, not how large welfare is, or has been,but how its magnitude would be affected by the introductionof causes, which it is in the power of statesmen or privatepersons to call into being. The failure of economic welfareto serve as an index of total welfare is no evidence that thestudy of it will fail to afford this latter information : for,though a whole may consist of many varying parts, so that achange in one part never measures the change in the whole,yet the change in the part may always affect the change inthe whole by its full amount. If this is the case, the practicalimportance of economic study is fully established. It willnot, indeed, tell us how total welfare, after the introductionof an economic cause, will differ from what it was before;but it will tell us how total welfare will differ from what itwould have been if the cause had not been introduced. Thateconomic science may provide this important information isa possibility. Is the possibility realised in fact ? To theview that it is so realised two serious objections may beurged, and must be studied.

4. The first objection is an obvious one. It is thatcauses influencing the satisfactions and dissatisfactions, whicharise in connection with income, are not confined in their

OHAP. I WELFAEE AND ECONOMIC WELEAEE 5

effect to these things, but modify also other parts of welfare.Since the modifications thus brought about are not taken intoaccount by our study, we are not entitled to infer that, becauseone specified cause would add more to economic weKare thananother specified cause, therefore it would add more to totalwelfare. Nor may we even infer that, because a specified causewould increase economic welfare, therefore it would increase totalwelfare. For, the non-measured effect on non-economic welfaremight modify, or even outweigh, the measured effect on economicwelfare. Furthermore, full justice is not done to thisobjection, when it is merely stated in terms of possibility.For, we know definitely that, in many cases, economic causes doinfluence non-economic welfare, both directly and indirectly, ina very important degree.

Let us look first at direct effects. Every conscious state isa complex of many elements, and includes not only satisfactionsbut also cognitions, emotions and desires. This being so, it isnatural to expect that causes operating to change satisfac-tions may, either in the same act or as a consequence of it,alter some of these other elements. This is, in fact, whathappens. For example, if the commodity which satisfies somedesire becomes more common, it will often result that thisdesire, through experience of realisation, becomes more intense.But, if the desire is in itself good or bad, a growth in itsintensity will alter welfare, and this alteration will beadditional to any that takes place through satisfaction. Norare desires the only things that may be collaterally affectedby changes in the economic environment. The core of feelingand purpose, which we call people's character, is susceptible,especially in youth, of modification either towards good ortowards evil. The surroundings of work react upon thequality of life.^ Ethical quality is affected by the occupa-tionsmenial service, agricultural labour, artistic creation,

^'

' The Plymouth Cordage Company of Massachusetts found that, in conse-quence of surrounding their factory with lawns and shrubberies, and covering itswalls with creepers, ' the employes took home with them the lessons we wereendeayouring to teach. They started to fix up their own grounds ; walks thathad never seen the edging knife were edged, and lawns were carefully cut,which at once began to lend an entirely different character to the homes of theemployes.' "Meakin, Model Factories ami Villages, pp. 79-80.

6 WEALTH AND WELFAEE paet i

independent as against subordinate economic positions/

monotonous repetition of the same operation, and so on

into which the desires of consumers impel the people whowork to satisfy them. It is affected, too, by the influencewhich these people exert on others, with whom they may bebrought into personal relations.^ The social aspect ofChinese labour in the Transvaal and of the attempt byAustralian pastoralists to maintain the convict system, as asource of labour supply,' have relevance to welfare. Thehuman relations that arise out of industrial relations arealso relevant. The esprit de corps and interest in the fortunesof the firm, which animate the workpeople in establishmentswhere the personal intercourse of employers and employed iscordial, besides leading to increased production of wealth, isin itself an addition to welfare. Nor is this all. Closelyinterwoven with the quasi-patriotic sentiment, which arises inconnection with some kinds of industrial arrangement, theremay be found another important non-economic good

sympathetic and friendly feeling between man and man. Aslarge-scale industry extended during the eighteenth andnineteenth centuries, employers and employed became moredistant in station, and their opportunities of meeting oneanother diminished. In the wake of this inevitable physicalseparation, there followed in some cases a moral separation

"the personal alienation of the employer from his fellow-menwhom he engages to work for him in large numbers." * Thisspirit of hostility was an obvious negative element broughtabout in non-economic welfare by an economic cause ; and thepartial suppression of it through Boards of Conciliation andCopartnership arrangements is an equally obvious positiveelement. Yet again, economic causes affect that non-economicpart of welfare, which is associated with family life or inter-

1 Thus, it is important to notice that machinery, as it comes to be moreelaborate and expensive, makes it, pro tanto, more difficult for small men,alike in industry and agriculture, to start independent businesses of their own.Cf. Quaintance, Farm Machinery, p. 58.

2 Mr. Eowntree, for example, rightly emphasises the important influencewhich the overlookers may exert on the moral tone of persons employed in afactory. Cf. Industrial Betterment, pp. 10-11.

2 Cf. V. S. Clark, The Labimr Movement in Australia, p. 32.^ Oilman, A Dividend to Labour, p. 15.

CHAP. I WELFARE AND ECONOMIC WELFAEE 7

national comity. The unity of interest and occupation whichcharacterises the farm family, as distinguished from the town-dwelling family/ the sociability and the opportunities formutual education, both formal and informal, attached tomembership of co-operative stores, the coarsening influence ofover-crowded houses, the possible destruction of sympathybetween kindred peoples through pro-tariff or anti-tariffdisputation, the possible contamination of judicial or ad-ministrative activity by the poison of covert bribery, all thesethings are relevant. So also, finally, is the reflex influenceupon people's characters produced by such things as publicmuseums and even municipal baths.^ This very real elementin welfare will only be counted in economic welfare in thespecial case, in which one group of people devote income topurchasing things for other people. When they do this, theyare likely to take account of the total effect, and not merelyof the effect on the satisfactions of those people,especially ifthe said people are their own children. As Sidgwick acutelyobserves : " A genuine regard for our neighbour, when nothampered by the tyranny of custom, prompts us to give himwhat we think really good for him, whereas natural self-regard prompts us to give ourselves what we like." ^ In thiscase, therefore, the gap between the effect on economic welfareand the effect on total welfare is partially bridged. In manycases, however, it is not so bridged.

Let us now turn to indirect effects. Causes that modifyeconomic welfare may influence other parts of welfare, notdirectly, but indirectly through objective conditions of welfareother than the national dividend. The most important ofthese conditions are the services rendered by certain objectsof natural beauty, and those rendered by certain people,for which money payment is not made. The effect ofeconomic caxises on objects of natural beauty is illustrated by

' Cf. Proceedings of the Americaih Economic Association, vol. x. pp. 234-5.2 Cf. Darwin, Municipal Trade, p. 75.' Practical Ethics, p. 20. Of. Effertz : "Ce que les int^ressds savent

gen^ralement mieux que les non-int&ess^s, ce sont les moyeiis propres k r&iliserce qu'ils croient toe leur int^ret. Mais, dans la determination de I'int^ret lenon-interesse voit gdneralement plus olair."

Antagonismes ^onomiques, p.237-8.

8 WEALTH AND WELFAEE pakt i

the frequent desolation of beautiful scenery through the hunt

for coal or gold, the desecration widely wrought by uncon-trolled smoke from factories, and the degraded form frequentlyassumed by public advertisements.^ Effects on the servicesrendered by certain people occur whenever economic causes,such as Poor Law or factory regulations, or fluctuations in thedemand for men's labour, divert women workers from factorywork or paid home-work to unpaid home-work, in attendanceon their children, economical preparation of the family meals,repair of the family clothes, thoughtful expenditure of house-keeping money, and so on.^ It is clear that, in cases of thiskind, the changes that appear in economic welfare result almostentirely from the definition we have selected for that term,and do not represent any considerable change in total welfare.It may be well, however, to add that, though there occurs regu-larly a large absolute amount of unpaid work, which does notenter into incomethe philanthropic work, for example, ofunpaid organisers, church workers, Sunday school teachers, thescientific work of disinterested experimenters, the political workof many among the leisured classes, and so forthit is probablynot the case that economic causes bring about any large amountof transference between unpaid and paid occupations. Conse-quently, the qualification proper to inferences concerning totalwelfare from facts about economic welfare is probably not solarge under this head as it might be thought to be at firstsight.

5. The second objection is of a more recondite character.The methodological principle at the basis of economic science,and that which separates it from the other social sciences, isthe reference which it makes to a measure, namely, money. This

' The Advertisement Regulation Act, 1907, allows local authorities to frameby-laws designed to prevent open-air advertising from affecting prejudiciallythe natural beauty of a landscape or the amenities of a public park or pleasurepromenade. It is not, we may note in this connection, a decisive argumentagainst underground, and in favour of overhead, systems of tramway power wiresthat they are more expensive. The London County Council have deliberatelychosen the more expensive underground variety.

2 It must be noted, however, that, according to the investigators employedby the Royal Commission on the Poor Laws, a plan of liberal relief to widowswith children adopted in Glasgow sometimes led to mere gossip and bad habits."So many of the women are devoid of domestic or other interest that work forwages IS a positive safeguard."Report, p. 154.

CHAP. I WELFAEE AND ECONOMIC WELFAEE 9

measure, however, can only be brought into relation withsatisfactions and dissatisfactions through the medium ofdesires and aversions. Consequently, in order to make use ofour measure, we are driven to define a given quantity ofsatisfaction as the satisfaction of a desire of given intensity.When a desire of greater intensity is satisfied, we say there ismore satisfaction than when a desire of less intensity is satis-fied, and vice versa. This is, of course, in itself an entirelylegitimate proceeding. When, however, satisfaction is definedin this way, it is essential to observe that, though satisfactionremains a part of welfare, an addition to satisfaction, or to theeconomic welfare which is comprised of satisfaction, does notnecessarily imply, even when everything else remains thesame, any addition, much less an equivalent addition, tototal welfare. In order that this implication should holdgood, it would be necessary that the satisfaction of desires ofequal intensity should always involve, in themselves and apartfrom their effects, equal measures of "good." It is easilyshown, however, that the required equivalence may fail ineither of two ways.

First, let us suppose, to take the strongest case, that

the object of desire is always desired as a means to good andwith an intensity proportionate to the good which it is ex-pected to yield. In this case a given addition to satisfaction,in the sense defined above, will not yield a correspondingaddition to welfare, when the expectations that have beenformed are erroneous ; and expectations are frequentlyerroneous.

Secondly, as a matter of fact, objects of desire are notdesired with an intensity proportionate to the "good" ex-pected to result from them. The point is illustrated in aspecial case by Sidgwick's remark : " I do not judge pleasures[and the case is clearly the same with satisfactions other thanpleasures] to be greater and less exactly in proportion as theyexercise more or less influence in stimulating the will toactions tending to sustain or produce them." ^ In like manner,Franz Brentano writes : " The actual presence of love by nomeans testifies unconditionally to the worthiness of the object

' Methods of Ethics, p. 126.

10 WEALTH AND WELFAEE parti

to be loved. ... It frequently happens that a person, even

while loving something, confesses himself that it is unworthy

of his love

:

Video meliora proboque,Deteriora sequor." ^

This point is obviously of large practical importance. Together

with opinions as to the relative ignorance of the poor, it lies

at the basis of arguments, such as those advanced by Mr. Leverin favour of prosperity-sharingwhere employers decide in

what form the workmen shall take their extra gainsasagainst profit-sharing,^ and of the kindred arguments oftenemployed in defence of the sanitary clauses of the FactoryActs, governmental prohibition of truck, and compulsoryinsurance. In wider fields its significance is equally clear.Imagine, for example, that a statesman is considering how farinequality in the distribution of wealth influences welfare.

He will reflect that the satisfaction of some of the desiresof the rich, such as gambling excitement or luxurioussensual enjoyment, or perhaps, in respect of Easterncountries, opium-eating, is ethically inferior to the satisfactionof primary physical needs, to the securing of which thecapital and labour controlled by the demand of the rich would,if transferred to the poor, probably be devoted. On the other

1 Origin of the Knowledge of Right and Wrong, p. 17.2 Under profit-sharing Mr. Lever holds "that most of the extra money

received by the men is either absolutely wasted personally, or in luxuries whichdo not materially improve the living conditions, so that the wife and familyoften fail entirely to benefit therefrom. In place, therefore, of merely sharingits profits with its employes, this firm endeavours to share with them the resultsof prosperity, by laying aside yearly a proportion of its profits to be invested forthe benefit of all, not to be divided among them and thus lost sight of. " (Meakin,Model Factories and Villages, p. 428.) Again: "The benefits of prosperity-sharing may be applied to labour in a great variety of ways. . . . One of thebest methods ... is to be found in building cottages to be let at low rentals.This plan is most effective in elevating and bettering the conditions of labour,and has the additional advantage of ensuring that the wives and children shallshare in it. . . . Contributions may be made towards the building of clubs,recreation halls, institutions, summer holidays, winter entertainments, sick andburial societies. ... By contributing to objects such as these, labour enjoys thefullest liberty in managing its own institutions outside the business, whilstmanagement is maintained in its proper place inside the business. " (Lever,Econxymic Review, Jan. 1901, pp. 62-3.) There can be little doubt that, under apolicy of this sort, wisely carried out, a given sum of money will react moreforcibly on the quality of workpeople than it would do if simply handed over tothem in the form of coin.

OHAP. I WELFAEE AND ECONOMIC WELFAEE 11

hand, he will reflect that other satisfactions purchased bythe richthose, for example, connected with literature andartare perhaps ethically superior to satisfaction of primaryneeds, and certainly superior to that part of the satisfactionof the poor which is derived from excessive indulgence instimulants.

6. The discussion of the two preceding sections makesit plain that anything in the nature of rigid inference fromeffects on economic welfare to effects on total welfare is out ofthe question. In certain oases the divergence between the twoeffects will be insignificant, but in others it will be very wide.Nevertheless, I submit that, in the absence of special knowledge,there is room for a judgment of probability. When we haveascertained the effect of any cause on economic welfare, wemay, unless, of course, we have evidence to the contrary, regardthis effect as prolally equivalent in direction, though not inmagnitude, to the effect on total welfare ; and, when we haveascertained that the effect of one cause is more favourable

than that of another cause to economic welfare, we may, on thesame terms, conclude that the effect of this cause on totalwelfare is probably more favourable. In short, there is apresumption,what Professor Edgeworth calls an " unverifiedprobability,"that. conclusions about the effect of an economiccause upon economic welfare will hold good also of the effecton total welfare. The burden of proof lies upon those whohold that, in any particular case, this presumption should beoverruled.

7. The above result suggests prima facie that economicscience, when it shall have come to full development, is likelyto^furnish a powerful guide to practice. Against the acceptanceof this suggestion there remains, however, one considerableobstacle. When the conclusion set out in the precedingsection is admitted to be valid, a question may still be raisedas to its practical utility. Granted, it may be said, that theeffects produced by economic causes upon economic welfare areprobably, in some measure, equivalent to those produced ontotal welfare, we have really gained nothing. The effectsproduced upon economic welfare cannotthe argument runs

be ascertained beforehand by those partial and limited investi-

12 WEALTH AND WELFAEE pakt i

gations, which alone fall within the scope of economic science.

The reason for this is that the effects upon economic welfare

produced by any economic cause are likely to be modified

according to the character of the non-economic conditions, which,

in one form or another, are always present, but which economicscience is not adapted to investigate. The difficulty is statedvery clearly by J. S. Mill in his Logic. The study of a part ofthings, he points out, cannot in any case be expected to yield

more than approximate results : " Whatever affects, in anappreciable degree, any one element of the social state, affects

through it all the other elements. . . . We can never eitherunderstand in theory or command in practice the condition ofa society in any one respect, without taking into considerationits condition in all other respects. There is no socialphenomenon which is not more or less influenced by everyother part of the condition of the same society, and therefore,by every cause which is influencing any other of the con-temporaneous social phenomena."^ In other words, theeffects of economic causes are certain to be partially dependenton non-economic circumstances, in such wise that the samecause will produce somewhat different economic effects accord-ing to the general character of, say, the political or religiousconditions that prevail. So far as this kind of dependenceexists, it is obvious that causal propositions in economics canonly be laid down subject to the condition that things outsidethe economic sphere either remain constant or, at least, donot vary beyond certain defined limits. Does this condi-tion destroy the practical utility of our science ? I hold that,in respect of nations in a reasonably stable state ofgeneral culture, like those inhabiting Western Europe, themeasure in which the condition fails is not, in general, largeenough to render the results reached by economic inquiryother than reasonably good approximations to truth. This isthe view taken by Mill. While fully recognising " the para-mount ascendancy which the general state of civilisation andsocial progress in any given society must exercise over all thepartial and subordinate phenomena," he concludes that theportion of social phenomena, in which the immediately

1 Logic, ii. p. 488.

CHAP. I WELFAEE AND ECONOMIC "WELFAEE 13

determining causes are principally those that act throughthe desire fpr wealth, " do mainly depend, at least in the firstresort, on one class of circumstances only." He adds that,"even when other circumstances interfere, the ascertainmentof the effect due to the one class of circumstances alone is asufficiently intricate and difficult business to make it ex-pedient to perform it once for all, and then allow for theeifect of the modifying circumstances; especially as certainfixed combinations of the former are apt to recur often, inconjunction with ever varying circumstances of the latterclass." ^ I have nothing to add to this statement. If it isaccepted, the difficulty discussed in the present section need nolonger give us pause. It is not necessarily impracticable toascertain by means of economic science the approximate effectsof economic causes upon economic welfare. The bridge thathas been bidlt in earlier sections between economic welfareand total welfare need not, therefore, rust unused.

1 Logic, ii. pp. 490-91.

CHAPTEE II

ECONOMIC WELFARE AND THE NATIONAL DIVIDEND

S 1. In the preceding chapter some study has been made ofthe effects produced by economic causes, immediately uponeconomic welfare, and ultimately upon total welfare. Wehave now to notice that few causes operate upon economicwelfare directly. In general, they operate indirectly through

the magnitude of the national dividend, and through itsdistribution between different persons and between differentparts of time. The problem of this chapter is to determinein broad outline the relations subsisting between changes ineconomic welfare and changes in certain quantitative aspectsof the dividend. Before this is attempted, however, some

closer study of the dividend itself must be attempted.

2. The ultimate elements of which the dividend is com-posed consist of objective services, some of which are renderedthrough commodities, while others are rendered direct. Inreckoning up these elements, we must be careful not to countthe same thing twice overnot to enter in our inventory, forexample, both the services of the baker and the loaf thatthese services bake, or both the railways of the country andthe value of railway shares. Under this head difficulties ofsome importance need to be overcome. Their nature may beillustrated from the recent official attempt, not, indeed, tomake an inventory of the national dividend, but to estimate,in part, its money value. In the Preliminary Eeportissued in connection with the Census of Production, theDirector summarises the method followed to avoid doublecounting as follows : " The result of deducting the total cost

u

OH. II ECONOMIC WELFAEE AND THE DIVIDEND 15

of materials used and the amount paid to other firms for workgiven out from the value of the gross output for any oneindustry or group of industries is to give a figure which may,for convenience, be called the ' net output ' of the industry

or the group. This figure expresses completely and withoutduplication the total amount, by which the value of theproducts of the industry or group, taken as a unit, exceededthe value of the materials purchased from outside; i.e. itrepresents the value added to the raw materials in the courseof manufacture. This sum constitutes for any industry thefund from which wages, salaries, rents, rates, taxes, deprecia-tion and all other similar charges, as well as profits, have tobe defrayed." ^ By adding together the net products of all theindustries of the country, along with the net products ofthe country's capital invested abroad, we obtain a catalogue ofthe whole dividend expressed in terms of money. If doublecounting is obviated by methods of this kind, there is noobjection in principle to including the two sorts of servicesdistinguished abovethose rendered through commodities andthose rendered directunder the term " goods and services."When this term is properly guarded and qualified, its meaningis precisely the same as that which Professor Fisher andothers intend to signify by the term " services." The choicebetween the two terms is a matter, not, as Professor Fisherappears to suggest,^ of principle, but of convenience. Per-sonally, while recognising the awkwardness of wide departurefrom business usage, I am inclined to prefer the shorter andsimpler term " services."

3. It is, again, a matter of convenience, and not ofprinciple, to determine whether all or some, and, if some,what services or goods and services shall be reckoned as partsof the national dividend. As indicated at the beginning ofthe preceding chapter, I propose here to follow Dr. Marshall'susage and to include only such items as can be brought easilyinto relation with a money measure. The test of easinessagain, I derive, still following Dr. Marshall, from the practiceof the British Income Tax Commissioners. Hence, I include

1 [Cd. 4896], p. 6.2 The Nature of Capital and Income, pp. 105-6.

16 WEALTH AND WELFAEE parti

everything that people buy with money income, together withsuch services as a man obtains from a house owned andinhabited by himself. But, " the services which a personrenders to himself and those which he renders gratuitouslyto members of his family or friends ; the benefits which hederives from using his own personal goods [such as furnitureand clothes], or public property such as toll-free bridges, arenot reckoned as parts of the national dividend, but are left tobe accounted for separately." ^ Our decision to use the termnational dividend in this restricted significance must notbe forgotten when we proceed to argue that a diminutionin the dividend, in general, implies a diminution in economicwelfare.

4. Our next problem is of more substantial significance.Certain services have been separated off by the two precedingparagraphs as prima facie belonging to the national dividend.Among these services, however, closer reflection exhibits twodistinct groupsservices that are converted into psychic incomeforthwith, and services that are devoted to the constructionof instruments for yielding other services, which will be con-verted into psychic income in the future. It is a questionof some difficulty to decide whether both these groups arereally eligible, or whether the latter ought to be excludedaltogether, or whether some part of both ought to be excluded.The whole body of these services we may call, if we will, thegross national dividend. Our problem then assumes the form

:

" What part of the gross national dividend constitutes the true,net, national dividend ?

"

5. To this problem two principal solutions have beengiven by Dr. Marshall and Professor Fisher respectively.Dr. Marshall writes : "The labour and capital of the country,acting on its natural resources, produce annually a certainnet aggregate of commodities, material and immaterial, in-cluding services of all kinds. This is the true net annualincome or revenue of the country, or the national dividend." ^

But, he adds elsewhere : " If we look chiefly at the incomeof a country, we must allow for the depreciation of the sources

' Marshall, Principles of Economics, Gt\ ed. p. 524.2 Ibid. p. 523.

OH. II ECONOMIC WELFAEE AND THE DIVIDEND 17

from which it is derived." ^ In other words, Dr. Marshall'sview is that the true net national dividend comprises thewhole of the gross dividend, minus such part as would suf&ceto maintain the country's capital intact. It may, therefore,according to circumstances, be either greater or less than thesum of services devoted to immediate consumption during theyear ; if new capital is created, it will be greater than that sum,whereas, if renewals and repairs are neglected, it will be less.Professor Fisher, on the other hand, placing in the forefrontof his argument the proposition that savings are in no circum-stances income, claims unequivocally to identify the nationaldividend with those services, and those only, that enter directlyinto consumption. According to him. Dr. Marshall's nationaldividend represents, not the dividend that actually is realised,but the dividend that would be realised if the country's capitalwere maintained. These two things are, indeed, materiallyequivalent in the special case where resources are set aside,whether in renewals of obsolescent plant or in depreciationfunds, to an extent that exactly offsets the depreciation incapital that occurs. In practice, however, it is extremelyrare for the two things to be materially equivalent, and it isimpossible for them to be analytically equivalent.

6. There can be no question that, in point of logicalcompactness. Dr. Marshall's definition labours under a seriousdisadvantage. In a thorough-going stationary state there isno ambiguity or difficulty about the conception of what isrequired to maintain capital intact. If a particular sort ofmachinery wears out in ten yearsTaussig's estimate for theaverage life of machinery in a cotton mill ^it is obvious thatthe net national dividend over ten years falls short of thegross dividend by the value of this machinery. Again, in sofar as the growth of any sort of crop wastes the productivepowers of the soil, the net dividend falls short of the grossdividend by the cost of returning to the soil those chemicalingredients that have been removed.^ Again, when minerals

' Principles of Economics, p. 80.* Quarterly Journal of Economics, 1908, p. 342.^ Professor Carver writes of the United States : " Taking the country over,

it is probable that, other things equal, if the farmers had been compelled tobuy fertilisers to maintain the fertility of their soil without depletion, the whole

C

18 WEALTH AND WELFAEE pakt i

are dug out of the ground, a deduction should be made equal

to the excess of the value, which the minerals used during

the year had in their original situation (theoretically

represented by the royalties paid on their working), over

the value which whatever is left of them possesses to the

country after they have been used. If "using" means

exporting in exchange for imports that are not used as capital,

this latter value is zero. If, on the other hand, it means

working up into some enduring instrument, the value of the

mineral after use will be greater than the value it had in the

mine, and, in order to obtain the net from the gross dividend,

we shall need to add, and not to subtract, something.All this is simple enough. When, however, we are con-

cerned, not with an imaginary stationary state, but with the

condition of affairs that actually exists, the mere maintenance

of the physical efficiency of our plant is no longer obviously

equivalent to the maintenance of our capital intact. Machinery

that has become obsolete because of the development of im-

proved forms is not really left intact, however excellent its

physical condition ; and the same thing is true of machineryfor whose products popular taste has declined. If, however,

in deference to these considerations, we decide to make anallowance for cases of obsolescence, we are exposed to the retort

that this concession logically implies the recognition of the

value, and not the physical efficiency, of instrumental goods asthe object which is to be maintained intact. But, it is thenurged, the value of instrumental goods, being the present value

of the services which they are expected to render in the future,necessarily varies with variations in the rate of discount.Is it really a rational procedure so to define the net national

dividend that its relation to the gross dividend shall

depend on a circumstance of this kind ? No doubt, we canand do protest vigorously against the stretching of our conces-sion upon this logical Procrustes' bed. We assert that capitalis maintained intact in our sense, when physical depreciation

industry would have become bankrupt. . . . The average farmer had never(up to about 1887) counted the partial exhaustion of the soil as a part of thecost of his crop " (Sketch of American Agriculture, p. 70). Against thiscapital loss has to be put, however, the capital gain due to the fact of occupationand settlement of the land.

CH. II ECONOMIC WELFAEE AND THE DIVIDEND 19

and depreciation through obsolescence have been made good,whether the rate of discount has varied or not. This is adefinite position, and one that renders the conception of thenet national dividend, which is linked up with it, reasonablyprecise. Nevertheless, we are bound to confess that this con-ception is in the nature of a compromise and does not presentthose clear-cut logical facets, with which the rival conceptionof Professor Fisher confronts us.

7. The issue between these two conceptions of thedividend cannot, however, be