Economics for Helen

You will notice that all about you living beings are occupied in changing the things around them from a condition where they are less to a condition where they are more useful to themselves.

Man is a living being, and he is doing this kind of thing all the time. If he were not he could not live.

He draws air into his lungs, taking it from a condition where it does him no good to a condition where it keeps him alive. He sows seed; he brings food from a distance; he cooks it for his eating. To give himself shelter from the weather he moulds bricks out of clay and puts them together into houses. To get himself warmth he cuts down wood and brings it to his hearth, or he sinks a shaft and gets coal out of the earth, and so on.

Man is perpetually changing the things around him from a condition in which they are less useful to him into a condition where they are more useful to him.

Whenever a man does that he is said to be creating, and adding to, Human Wealth: part of which is Economic Wealth, that is Wealth suitable for study under the science of Economics.

Wealth, therefore, that thing the nature and growth of which we are about to study, is, so far as man is concerned, the result of this process of changing things to man’s use, and it is through looking closely at the nature of this process that we get to understand what is necessary to it, and what impedes it, and how its results are distributed among mankind.

We must next go on to think out how wealth is so produced. We have already seen what the general statement on this is: Wealth is produced by man’s consciously transforming things around him to his own uses; and though not everything so transformed has true Economic Wealth attaching to it (for instance, breathing in air does not produce Economic Wealth), yet all Economic Wealth is produced as part of this general process.

Now when we come to examine the Production of Wealth, we shall find that three great separate forces come into it; and these we shall find to be called conveniently “Land,” “Labour” and “Capital.”

Let us take a particular case of the production of Economic Wealth and see how it goes forward. Let us take the case of the production of, say, 100 sacks of wheat.

1. Land.

A man finds himself possessed of so much land, and when he sets out to produce the 100 sacks of wheat, the following are the conditions before him.

There are natural forces of which he takes advantage and without which he could not grow wheat. The soil he has to do with has a certain fertility, there is enough rainfall to make the seeds sprout, and so on.

All these natural forces are obviously necessary to him. Though we talk of man “creating” wealth he does not really create anything. What he does is to use and combine certain natural forces of which he is aware. He has found out that wheat will sprout if it is put into the ground at a particular season, and that he will get his best result by preparing the ground in a particular manner, etc. These natural forces are the foundation of the whole affair.

For the sake of shortness we call all this bundle of natural forces (which are the very first essential to the making of wealth) “LAND.” This word “Land” is only a conventional term in Economics, meant to include a vast number of things beside the soil: things which are not Land at all; for instance, water power and wind power, the fertility of seed, the force of electricity, and thousands of other natural energies. But we must have some short convenient term for this set of things, and the term “Land” having become the conventional term in Economic Science for all natural forces, it is now the useful and short word always used for them as a whole: the reason being, I suppose, that land, or soil, is the first natural requisite for food—the most important of man’s requirements, and the place from which he uses all other natural forces.

We say, then, that for the production of wealth the first thing you need is the natural forces of the world, or “Land.”

2. Labour.

But we next note that this possession of natural forces, our knowledge of how they will work, and our power of combining them, is not enough to produce wealth.

If the farmer were to stand still, satisfied with his knowledge of the fertility of the soil, the quality of seed, and all the rest of it, he would have no harvest. He must, as we have said, prepare the land and sow the seed: only so will he get a harvest at the end of his work. These operations of human energy which end in his getting his harvest are called “LABOUR”: that is, the application of human energy to natural forces. There are no conditions whatsoever under which wealth can be produced without natural forces or “land;” but there are also no conditions whatsoever under which it can be produced without “labour,” that is, the use of human energy. Even if a man were in such a position that he could get his food by picking it off the trees, there would still be the effort required of picking it. We say, therefore, that all wealth comes from the combination of LAND and LABOUR: That is, of natural forces and human energy.

3. Capital.

At first sight it looks as though these two elements, Land and Labour, were all that was needed; and a very great deal of trouble has been caused in the world by people jumping to this conclusion without further examination.

But if we look closely into the matter we shall see that Land and Labour alone are not sufficient to the production of wealth in any appreciable amount. The moment man begins to produce wealth in any special fashion and to any appreciable extent, a third element comes in which is as rigorously necessary as the two others; and that third element is called CAPITAL.

Let us see what this word “CAPITAL” means.

Here is your farmer with all the requisite knowledge and the natural forces at his disposal. He has enough good land provided him to produce a harvest of 100 sacks of wheat if he is able and willing to apply his manual labour and intelligence to this land. But he must be kept alive during the many months required for the growth of the wheat. It is no use his beginning operations, therefore, unless he has a stock of food; for if he had not such a stock he would die before the harvest was gathered. Again, he must have seed. He must have enough seed to produce at the end of those months one hundred sacks of wheat. So we see that at the very least, for this particular case of production, the natural forces about him and his own energies would not be of the least use to the production of the harvest unless there were this third thing, a stock of wheat both for sowing and for eating.

But that is not all. He must be sheltered from the weather; he must be clothed and he must have a house, otherwise he would die before the harvest was gathered. Again, though he might grow a very little wheat by putting in what seed he could with his hands into a few suitable places in the soil, he could not get anything like the harvest he was working for unless he had special implements. He must prepare the land with a plough; so he must have a plough; and he must have horses to draw the plough; and those horses must be kept alive while they are working, until the next harvest comes in; so he must have a stock of oats to feed them with.

All this means quite a large accumulation of wealth before he can expect a good harvest: the wealth attaching to clothes, houses, food, ploughs, horses for a year.

In general, we find that man, when he is setting out on a particular piece of production of wealth, is absolutely compelled to add to his energies, and to the natural forces at his disposal, a third element consisting of certain accumulations of wealth made in the past—an accumulation of food, clothing, implements, etc.—without which the process of production could not be undertaken. This accumulation of ALREADY-MADE WEALTH, which is thus absolutely necessary to production, we call CAPITAL.

It includes all kinds of wealth whatsoever which man uses WITH THE OBJECT OF PRODUCING FURTHER WEALTH, and without which the further wealth could not be produced. It is a reserve without which the process of production is impossible. Later on we shall see how very important this fact is: for every healthy man has energy, and natural forces are open to all, but capital can sometimes be controlled by very few men. If they will not allow their capital to be used, wealth cannot be produced by the rest; therefore those who, by their labour, produce wealth may be driven to very hard conditions by the few owners of Capital, whose leave is necessary for any wealth to be produced at all.

But all this we must leave to a later part of our study. For the moment what we have to get clearly into our heads are these three things: (1) Natural Forces, (2) Human Energy, and (3) Accumulated stores and implements, which are called, generally, for the sake of shortness: LAND, LABOUR and CAPITAL. In the absence of any one of these three, production of Wealth is impossible. All three must be present; and it is only the combination of all three which makes the process of producing economic values possible.

POINTS ABOUT CAPITAL.

There are three important things to remember about Capital.

1. The first is that what makes a particular piece of wealth into capital is not the kind of object to which the economic value attaches, but the intention of using it as capital on the part of the person who controls that object; that is, the intention to use it for the production of future wealth. Almost any object can be used as capital, but no object is capital, however suitable it be for that purpose, unless there is the intention present of using it as capital. For instance: One might think that a factory power engine was always Capital. The economic values attaching to it, which make an engine worth what it is are nearly always used for the production of future wealth, and so we come to think of the engine as being necessarily capital simply because it is an engine, and the same is true of factory buildings and all other machinery and all tools, such as hammers and saws and so on.

But these things are not capital in themselves; for if we do not use them for the production of future wealth they cease to be capital. For instance, if you were to put the engine into a museum, or to keep a hammer in remembrance of someone and not use it, then it would not be capital.

And this truth works the other way about. At first sight you would say, for instance, that a diamond ring could not be capital: it is only a luxurious ornament. But if you use it to cut glass for mending a window it is capital for that purpose.

2. The second important thing to remember about Capital is that, being Wealth, it is at last consumed, as all other Wealth is. Capital is consumed in the process of using it to make more Wealth, and as it is consumed it has to be replaced, or the process of production will break down. Take the case of the farmer we gave just now. He had to start, as we saw, with so much Capital—horses and a plough and a stock of wheat and a stock of oats, etc.; and only by the use of this capital could he procure his harvest of 100 sacks of wheat at the end of the year; but if he is going on producing wheat year after year he must replace the wastage in his capital year after year. His stock of wheat for food and for seed will have disappeared in the year; so will his stock of hay and oats for keeping his horses. His plough will be somewhat worn and will need mending; and his horses, after a certain time, will grow old and will have to be replaced. Therefore, if production is to be continuous, that is, if there are to be harvests year after year, each harvest must be at least enough to replace all the wastage of capital which goes on during the process of production.

3. The third thing to remember about Capital is that Capital is always the result of saving: That is, the only way in which people can get Capital is by doing without some immediate enjoyment of goods, and putting them by to use them up in creating wealth for the future. This ought to be self-evident; but people often forget it, because the person who controls the capital is very often quite a different person from the person who really accumulated it. The owner of the capital is very often a person who never thinks of saving. Nevertheless, the saving has been done by someone in the past, and saving must go on the whole time, for if it did not the Capital could not come into existence, and could not be maintained once it was in existence.

Suppose, for instance, a man inherits £10,000 worth of Capital invested in a Steamship Company.

This means that he has a share in a number of hulls, engines, stocks of coal and food, and clothing for the crews, and other things which have to be provided before the steamships can go to sea and create wealth by so doing.

All this capital has been saved by someone. Not by the man himself; he has merely inherited the wealth—but by someone.

Someone at some time, his father or whoever first got the capital together, must have forgone immediate enjoyment and put by wealth for future production, or the capital could not have come into existence. Thus, if the first accumulator of the capital had used his wealth for the purchase of a yacht in which to travel for his amusement, the labour and natural forces used in the production of that yacht would have made wealth consumed in immediate enjoyment, and it would not have been used for future production as is a cargo ship.

In the same way this capital, once it has come into existence in the shape of cargo ships and stocks of coal and the rest, would soon disappear if it were not perpetually replenished by further saving. The man who owns the shares in the Steamship Company does not consciously save year after year enough money to keep the capital at its original level.

Nevertheless, the saving is done for him. The Directors of the Company keep back out of the total receipts enough to repair the ships and to replenish the stocks of coal, etc., and they are thus perpetually accumulating fresh capital to replace the consumption of the old. How true it is that all Capital is the result of saving by someone, somewhere, we see in the difference between countries that do a lot of saving and countries that do little. Savages and people of a low civilisation differ in this very much from people of a high civilisation. They want to enjoy what they have the moment they have it, and they lay by as little as possible for the future; only just as much as will keep them going. But in a high civilisation people save capital more and more, and so are able to produce more and more wealth.

Now let us sum up in some more Formulæ what we have learnt so far.—