Economics for Helen

We now come to that part of Economics which has most effect upon human society, and the understanding of which is most essential to sound politics. It is not a difficult point to understand. The only difficulty is to keep in our minds a clear distinction between what is called economic law, that is, the necessary results of producing wealth, and the moral law, that is the matter of right and wrong in the distribution and use of wealth.

Some people are so shocked by the fact that economic law is different from moral law that they try to deny economic law. Others are so annoyed by this lack of logic that they fall into the other error of thinking that economic law can override moral law.

You have to be warned against both these errors before you begin to approach the subject of Rent, Profit and Subsistence. Only when we have worked out the principles of these three things can we come back again to the apparent clash between economic law and moral law, the understanding of which is so very important in England to-day.

The motive of production is to satisfy human needs, and the simplest case of production is that of a man working for himself and his family as a settler in a new country. He cuts down wood and brings it where it is wanted; he builds a hut and a bridge with it; he stacks it ready to burn for fuel. The wealth he thus produces by his labour goes to him and his, and because the labour he has to expend is what impresses him most about the process, he calls the wealth produced at the end of it: “Wealth produced by his labour.” He thinks of his labour as the one agent of the whole affair, and so it is the one immediate human agent; but, as we have seen, there are two other agents as well. His mere labour (that is, the use of his brain and his muscles) would not have produced a pennyworth of wealth, but for two other agents: Natural Forces (or Land) and Capital. And we shall find when we look into it that the wealth he thus produces and regards as one thing is also really divided into three divisions: one corresponding to each of the three agents which produce wealth.

Being a settler living by himself and possessing his own land and his own implements, he controls all he produces and does not notice the three divisions. But three divisions there are none the less present in all wealth produced anywhere, and these three divisions do not correspond to the moral claim man has to the result of his labour. They are divisions produced by the working of economic law, which is as blind and indifferent to right and wrong as are the ordinary forces of nature about us.

These three divisions are called RENT, INTEREST (or Profit) and SUBSISTENCE. In order to see how these three divisions come about we must take them in the order of Subsistence first, then Interest, then Rent.

1. Subsistence.

In any civilisation you will find a certain amount of things which are regarded as necessaries. In any civilisation it is thought that human beings must not be allowed to sink below a certain level, and a certain amount of clothes of a certain pattern, a certain amount of housing room and fuel, and a certain amount of food of a certain kind are thought the very least upon which life can be conducted. Even the poorest are not allowed to fall below that standard. This does not mean that no one is allowed to starve or die of insufficient warmth. It means that any particular civilisation (our own, for instance, or the Chinese) has its regulation minimum and lets men die rather than fall below it. This “certain amount,” below which even the poorest people’s livelihood is not allowed to fall, is called THE STANDARD OF SUBSISTENCE.

Most people when they first think of these things imagine that there is some very small amount of necessaries which, all over the world, and at all times, would be thought absolutely essential to man. But it is not so. The standard set is always higher than the mere necessity of keeping alive would demand.

For instance, we in this country put into our standard of necessity clothes of a rather complicated pattern. We should not tolerate the poorest people going about in blankets. They must have boots on their feet, which take a lot of labour and material. We should not tolerate the poorest people going about barefooted, as they do in many other countries, nor even with sandals. It is not our custom. They may die of wet feet through bad leather boots and bad, thin clothing of our complicated pattern, but they must not wear wooden shoes or walk barefoot or go about in blankets.

Again, we do not live on anything at random, but upon cooked meat and a certain special kind of grain called wheat. There are some grains much cheaper than wheat; but our custom demands wheat even for the poorest, if there is not enough wheat there is a famine, and famine is preferred by society to the giving up of the wheat standard. Again, we insist upon even the poorest having a certain amount of protection against the weather in the way of houses, which must be up to a certain standard. We do not tolerate their living in holes in the ground or mud huts.

One way and another we have set up a certain standard of subsistence even for the poorest; and every community in history has, at all times, lived under this idea of a MINIMUM STANDARD OF SUBSISTENCE. This is so true that people will suffer great inconvenience, even to famine, as I have said, rather than give up the standard of subsistence. When people are too poor to afford this least amount of what we think necessaries effort is made to supply them by doles or a poor rate, or something of that kind; but the standard is not abandoned.

Well, this Minimum Standard of Subsistence is the first division in the Wealth produced. The prosperous man, tilling his own land and possessed of his own capital, consumes, of course, much more than the bare standard of subsistence would allow. He eats more food and better food, and has more and better clothes and house room and fuel and the rest than the mere standard of subsistence of his civilisation demands. Nevertheless, even in his case the standard of subsistence is there. It is a minimum below which, if things went wrong, he would not fall. Ask him to fall below it and he would simply fail to do so. He would try to produce that minimum amount of wealth in some other way, or if he could not do that he would die.

This “Standard of Subsistence,” which is to be found in its various shapes in every civilisation, may be called “The Worth While of Labour.” Human energy would not be forthcoming, the work would not get done, unless at the very least the person doing the work got this Standard of Subsistence. In England to-day it is set for a man and his family at something like 35s. to 40s. a week. One way and another, counting for allowance in rent and overtime and so on, even the poorest labourer gets that, and if he did not get it labour would stop. Our civilisation would run to famine and plague rather than go below this minimum.

Another way of putting it is this: Under the standard of subsistence in our civilisation in England a man must, on the average, produce something like £2 worth of economic values a week, otherwise it is not worth while living, not worth while going on.

I say “on the average.” A great many people, of course, produce nothing. But there must be an average production of that amount to keep society going at all, merely in labour, that is, in human energy and brains. As a fact, of course, the average production is much higher. But it could not fall to less than this without the production of wealth gradually coming to an end.

It is very important to recognise this principle in Economics, for it is nearly always misunderstood, and it makes a great difference in our judgment of social problems. You often hear people speaking as though the subsistence of their fellows might fall to any level so long as they had so much weight of food and amount of warmth as would keep them alive. But it is not so. Every society has its own standard, and will rather have men emigrate or die than fall below it: and that standard is the basis of all production. It must be satisfied or production ceases.

2. Interest.

Now, if this “Worth While of Labour” was all that had to be considered, things would be a great deal simpler than they are. Unfortunately, there is another “worth while” from which one cannot get away, and which makes the second division in the produce of wealth. This is the “Worth While of Capital”: called “Profit” or “Interest.”

We must be careful not to mix up “Interest on Money,” that is, the word “interest” in its ordinary conversational use, with true economic interest. Interest on money does not really exist. It is either interest on Real Capital (machines, stores, etc.) for which the money is only a symbol, or else it is usury, that is, the claiming of a profit which is not really there; and what usury is exactly we shall see later on. The thing to remember here is that there is no such thing in Economic Science as Interest on Money.

We have seen that Capital cannot come into existence unless somebody saves. We have also seen that since it is always being consumed and must be replaced, the saving has got to go on all the time, if the production of wealth (to which capital is necessary) is to continue.

Now, as you will see in a minute, capital cannot be accumulated without some motive. You only accumulate capital by doing without a pleasure which you might have at a certain moment, and putting it off to a future time. You go without the immediate enjoyment of your wealth in order to use it for producing further wealth. That means restraint and sacrifice.

But restraint and sacrifice require some motive. Why should a man, or a society, do without a present enjoyment if the sacrifice is not to be productive of future good?

What happens is this: A man says: “On my present capital I can produce so much wealth. If I accumulate more capital I shall, in the long run, have a larger income. I will therefore forgo my present pleasure. I will add to my capital and have more income in the future through my present self-restraint.” Or again: “If I don’t keep up my capital by continual saving to replace what is consumed in production I shall gradually get less income.”

But here comes in a very important law of Economics called “The Law of Diminishing Returns.” After a certain point, capital as it accumulates, does not produce a corresponding amount of extra wealth. It produces some more, but not as much in proportion. For instance, if you till a field thoroughly with the use of so many ploughs and horses and so on, you will get such and such a return. If you add a great deal more capital in the shape of food for more labourers and more tillage till you treat the land as a sort of garden, you produce more wealth from that field; but though you may have doubled your capital you will not have doubled your income. You will only have added to it, say, half as much again. If you were to double your capital again, making four times your original amount, using a lot more food for labourers and a lot more implements, you would again have a larger produce, probably, but perhaps only double your original amount: Four times the original amount of capital, and only twice, say, the old income.

So the process goes on; and in all forms of the production of wealth this formula applies, and is true: “The returns of increasing capital, so long as the method of production is not changed, get greater in amount, but less in proportion to the total capital employed.”

Men developing a certain section of natural forces get 10 per cent. on a small capital, perhaps 5 per cent. on a larger one; on a still larger one only 2½ per cent., and so on, if they apply that capital to the same section of natural forces and in the same manner.

Well, this advantage which a man gets by adding to his capital at the expense of present enjoyment can be measured.

For instance, a man owning a farm and tilling it himself gets a harvest of 1,000 sacks of wheat. In order to get this result he must have capital at the beginning of every year—ploughs and horses, and sacks of grain and what not—worth altogether 10,000 sacks of wheat. His income, in wheat, is one-tenth of his capital. Every ten sacks of capital produces him an income of one sack a year. He says to himself: “If I were to plough the land more thoroughly and put on a lot more phosphates and slag and get new, improved machinery I might get another fifty sacks a year out of the land, but this new capital will have to be saved.”

He carefully saves on every harvest, exchanging the wheat for the things he needs in the way of new capital, until, after a few years, the implements and the phosphates and slag and the rest on his land, and all his other capital is worth much more than it used to be.

Instead of being worth only one thousand sacks, his capital is now worth two thousand sacks, and he gets the reward for his putting by and doing without immediate enjoyment in the shape of a larger harvest. But though he has doubled his capital he has not doubled his income. Instead of the old income of 100 sacks of wheat he is now getting 150 sacks of wheat. Thus though his income is larger, the proportion of that income to the total capital is less. For 1,000 sacks of capital he got 100 sacks of wheat at harvest; but now for 2,000 sacks of capital he only gets 150 sacks at the harvest. Or (as we put it in modern language), his income is no longer 10 per cent. on his capital, but 7½ per cent. only. He has a larger income, but it is smaller in proportion to the capital invested.

Now, although the 2,000 of capital invested is thus bringing him in a smaller proportion of income than the old 1,000 did, he thinks it worth while: because he is at any rate getting more income; 150 sacks instead of only 100. But there must come a time when he will no longer think it worth while to go on saving. Supposing he finds, for instance, that after taking all the trouble to accumulate and apply to his land capital to the value of 10,000 sacks of wheat, he gets only 200 sacks, that is 2 per cent. annual reward for all this saving, he will not think it good enough, and he will stop saving. The point where he stops, the return below which he does not think it worth while to save, marks the minimum profits of capital. A man is delighted, of course, to have more profit than this if he can. But the point is, he will not take less. Rather than make less than a certain proportion of income to his capital he will stop saving, and spend all he has in immediate enjoyment.

It is this obvious truth which makes the second great division in the produce of wealth. You must, as we have seen, produce enough to keep labour going. That is, you must produce enough to satisfy the standard of subsistence in your society; but you must also produce enough more to keep capital accumulating. You must produce, over and above subsistence, whatever happens to be the amount of profits for which capital will accumulate in any particular society (with us, to-day, it is about 5 per cent.).

It is very important to observe that this second division, Profit, or Interest, must always be present, no matter how the capital is owned and controlled, no matter who gets the profit.

Some people have thought that if you were to take capital away from the rich men who now own most of it and to give it to the politicians to manage for everybody, this division, Profit, would disappear. But it is not so. The people who were managing the capital for the benefit of everybody would have to tell the electors that they could not have all the wealth produced to consume as they chose: a certain amount would have to be kept back, and people would only consent to have a certain amount kept back on condition that they got an advantage in the future as a reward of their immediate sacrifice. Even if you had a Despot at the head of the State who cared nothing for people’s opinions, this division of profit would still be there; for it would be mere waste to accumulate capital at a heavy sacrifice to himself and his subjects, unless it produced a future reward.

If the Despot said, “This year you must do without half your usual amount of leisure and without half your usual amounts, pay double for your cinemas and for your beer, and all that in order to earn one hundredth more leisure and amusements next year,” it would be found intolerable.

So it comes to this: There are always present in the process of production two agents, Capital and Labour, and each of these must have in one form or another its “Worth While,” otherwise it won’t go on. You must satisfy the “Worth While of Labour” and you must satisfy the “Worth While of Capital.” If you do not, labour stops working and capital stops accumulating, and the whole business of production breaks down.

3. Rent.

We arrive through this at the third division, Rent.

Under some circumstances the “Worth While of Labour” and the “Worth While of Capital” can just barely be earned, and no more. Under those circumstances production will take place, but under worse circumstances it will not.

For instance, where there is very light, sandy soil near a heath a man finds that by putting a thousand pounds of capital on to a hundred acres of land he can get his bare subsistence and £50 worth of produce over: 5 per cent. on his capital. It is worth his while to cultivate that land, just barely worth his while. He also possesses land on a still more sandy part over the boundary of the heath itself. He calculates that if he were laboriously to save another £1,000 and take in 100 acres of the new, worse land, he would make the bare subsistence of the labour employed upon it, but only £10 extra, that is, only 1 per cent. on his new capital. He would say: “This is not worth while,” and the too-sandy bit of land would go uncultivated.

When the conditions are such that the capital and labour applied to them just get their worth while and no more, those conditions are said to be “on the margin of production,” which means that they are the worst conditions under which men in a particular society will consent to produce wealth at all. Put them on conditions still worse, and they will not produce.

Now the existence of this Margin of Production creates the third division in Wealth, which is called RENT.

Rent is the surplus over and above the minimum required by labour and capital out of the total produce. (We must be careful, as we saw in the case of “Interest” not to confuse true economic Rent with “Rent” in the conversational sense. Thus what is called “the rent” of a house is part of it true economic rent, but part of it interest on the accumulated or saved wealth, the Capital of its bricks and mortar and building.)

Take the case of a seam of coal, which at one end of its run crops out on the surface, a couple of miles on is only 1,000 feet below the surface, but dips down gradually until, within twenty miles, it is 10,000 feet below the surface.

Under the conditions of the society in which the coal is being mined, and in the state which the science of mining has reached, it is found that, at a depth of 5,000 feet, this seam is just worth while mining: that is, the capital which has to be accumulated for sinking the shafts and bringing the miners up and down from their work, and raising the coal to the surface, and providing subsistence for the miners at their work, just barely gets the profit below which it would not be worth while to use it.

A shaft sunk at this depth, for instance, and the machinery and stores cost £10,000, and when you get the coal to the surface that coal will pay the standard of subsistence of the labourers and leave £500 profit for capital; that is, 5 per cent. Capital will not accumulate if it gets less than 5 per cent. Labour will not be exercised if it gets less than its standard subsistence; therefore, the coal which lies farther along the seam, deeper than 5,000 feet, will be left untouched. It is not “worth while” to sink a shaft to try and get it. It is “below the Margin of Production.”

What happens to the coal in the places where it gets nearer and nearer to the surface? Obviously, it is better worth while to sink shafts there than it is at 5,000 feet. You only want the same amount of labour for cutting the coal out, whether it is 5,000 feet below the surface or 2,000, and you want much less capital and labour in sinking the shafts and bringing the coal to the surface and getting the miners up and down. There is, therefore, a surplus. Thus with a shaft only 2,000 feet deep you need, say, only £5,000 worth of capital to get £500 worth of coal over and above the subsistence of the labourers. 5 per cent. on £5,000 is £250—so in that case there is a benefit of an extra £250 after the “worth while” of Capital and Labour are satisfied. Over and above what is just the “worth while” of capital and labour for getting the coal you have in the shallower mines extra value, and that extra value gets larger and larger as the distance of the coal from the surface gets less and less. The deepest mine is on what we call “the margin of production.” It is just worth while to work it. The surplus values in all the shallower mines are called RENT. If a landlord owned the coal in quite a shallow part where it was within a thousand feet of the surface, he could say to the labourers and the owners of capital who were coming to dig it out: “The mine which is working at 5,000 feet is just worth your while. If you work here at 1,000 feet you will have a great deal more than 5 per cent. on your capital, and the subsistence of labour is just the same. All this extra amount of values, however, I must have, otherwise you shall not work my coal.”

Since the Capitalists are content to accumulate capital for a return of 5 per cent. and the labourers to work for their subsistence, the extra amount is paid to the landlord. If one set of people refuse to pay it, there will always be another set of people who will be content to pay it and this extra amount or surplus is called “Economic Rent,” which is something, of course, much more strictly defined than, and different from, what we call Rent in ordinary conversation.

Or again, take three farms of equal area but varying fertility. Each requires £1,000 capital to stock it and five labourers to work it. The £1,000 capital demands £50 a year profit. The five labourers need £500 in a year to meet their standard of subsistence. The poorest farm raises just £550 worth of produce a year. The next best raises £750, and the best one £950 worth. Then there is no economic rent on the first; it lies on the “margin of production.” There is £200 economic rent a year on the second, and £400 on the third.

We can sum the whole thing up and say that on the mass of all production there are three charges:

These three divisions are always present whenever wealth is produced. The same man may get all three at once, as happens when a farmer works good land which is his own. Or again, when one man owns the fertile land and another man provides the capital, and yet another man provides the labour, the three divisions appear as three incomes of Labourer, Farmer and Landlord receiving separately Wages, Profit and Rent. Whether these divisions appear openly, paid to different classes of men, or whether they are concealed by all coming into the same hands, they are present everywhere and always. That is a fixed economic law from which there is no getting away.

Always remember that these economic laws are in no way binding in a social sense. They are not laws like moral laws, which men are bound to obey. They are certain mathematical consequences of the very nature of wealth and its production, which men must take into account when they make their social arrangements. It does not follow because Rent or Interest are present that such and such rich men, or the State, or the labourers, have a right to them. That is for the moralist to decide; and men can in such matters make what arrangements they will. All economic science can tell us is how to distinguish between the three divisions, and to remember that they are inevitable and necessary. But we must wait until a little later on to discuss social rights and wrongs under Applied Economics and continue here for the present to confine ourselves to the Elements of economic law alone.