Supply and Demand Part 6

--4. _The Supply of Labor in General_. The efficiency of labor may be regarded as affecting either the demand for labor on the one hand or the supply of it on the other, according as we look at the matter from the worker's or the employer's standpoint. The employer is concerned with the labor costs per unit of his output, the worker is concerned with the wages he receives. An increase in the efficiency of labor may, and usually will, mean both a decrease in labor costs to the employer and an increase in the earnings of the worker. It is thus wholly to the good. But the effects of an increase in the supply of labor in the sense of a growth in the numbers of the population are far more dubious. Unaccompanied by an increase in the _demand_ for labor, it _must_ result in a diminished remuneration for the individual worker. To some extent indeed the demand for labor would almost certainly be increased. The supply of Capital may expand, perhaps proportionately, perhaps more than proportionately to the increase in population. But one factor of production, as we have seen, is not capable of such expansion. This is the factor of Land, or Natural Resources. It is the limitation of this factor which gives rise to what we have most of us heard of as The Law of Diminishing Returns. It is this that is the essence of the problem of Population, portrayed in somber hues more than a hundred years ago by Malthus.

This problem will form the subject of the sixth volume of the present series. In the meantime it may be suggested that we are easily credulous if we suppose that the problem has been finally disposed of by the peculiar progress of an abnormal century. But that experience has at least destroyed the view that there _need be_, or even is in fact in Western countries, a relation between real wages and the numbers of the people so close and direct that an improved standard of living must be temporary only, doomed to destroy itself by the increased population it engenders. One may perhaps go further and say that it is doubtful even in what direction changes in remuneration will influence the aggregate supply of labor. When we pa.s.s to "what should be," it is plain that there is nothing whatever to be said for the sort of relation indicated above. The view once widely held that the principle of population must inevitably keep the ma.s.s of people close to the verge of the bare means of subsistence was no statement of a desirable ideal. It was a nightmare; a nightmare none the less though it may haunt us yet. It is far from fanciful to suggest that it is because this relation is so obviously _not_ "what should be" that it may be ceasing to hold true in fact. But it would be very fanciful indeed to maintain that as yet "what should be" is represented by the actual population. Thus, just as with capital, so with labor, there is no reason to suppose that the aggregate supply is determined by any fundamental economic law, or corresponds in practice to what is socially desirable.

--5. _The Apportionment of Labor among Places_. Again, as with capital, it is when we turn to the _apportionment_ of labor between different employments that both economic law and social ideal make their appearance. It will be well, however, to consider briefly in the first instance the different question of its apportionment between places. This was hardly necessary in the case of capital, because the possibilities of foreign investment are very numerous and easy: the mobility of capital is thus sufficiently strong (once again it is only _marginal_ adjustment that is necessary) to establish over at least a large part of the world something near to a uniform rate of interest. But this is not the case with labor. People do indeed move from place to place within a country, and from one country to another, in response to economic opportunities. That even the latter movement may be a considerable thing, the present population of the United States is a striking testimony. But obviously the mobility is very incomplete. Here, then, we have what we might _loosely_ call an economic law that labor tends to "flow" (as it is sometimes unhappily phrased) to those places where it can command the highest reward; we have this tendency in evidence, but it is far too weak to enable us to lay down what would deserve more strictly the t.i.tle of an economic law, that in the long run the reward of the same kind of labor is roughly equal in all places. Perhaps we can say this for many districts in a single country; but for few countries is this true as between all their districts. As between countries, it is not remotely true.

Here, however, the imperfection of economic law is balanced by an extreme uncertainty as to the ideal. Perfect mobility of labor may be _economically_ desirable in a very narrow sense of the term; but it opens out a vista of racial, national and cultural problems, into which it will be better for us not to enter here. We must take for granted the population of a country, like that of the world, as a given fact.

When we do this, the question of its remuneration is on all fours with the more general question discussed above. That the remuneration of the labor of a country is mainly governed by the relations between demand and supply is an inexorable fact. In view of the international mobility of capital, the main distinctive factor in the demand for the labor of a particular country is the supply of natural resources, which it knows how to use. Where the natural resources are great relatively to the population, there wages will rule high; where the converse is true, wages will rule low. This result of economic a.n.a.lysis is abundantly confirmed by experience. The relatively high wages in the new world, the low standard of living in the densely populated East; the economic history of Ireland are so many object-lessons of its truth.

--6. _The Apportionment of Labor among Social Grades_. The question of the apportionment of the labor of a country among different employments falls under two heads. Some differences of occupation are a.s.sociated particularly in Great Britain with differences of what we know as cla.s.s. The movement of labor between different social grades is clearly a very different thing from its movement between different occupations in the same grade. The grades themselves are not easy to define: not a little ingenuity has been expended on the attempt, and perhaps the best brief cla.s.sification that has been put forward is one which divides labor into the following four grades:--

(1) Automatic manual labor.

(2) Responsible manual labor.

(3) Automatic brain workers.

(4) Responsible brain workers.

But the matter is one perhaps for the satirist of manners rather than the economist. It suffices for our purpose that the distinctions, however vague, are very real.

It is obvious the mobility of labor between the occupations of a platelayer and a barrister is not very great. It may seem perhaps to be even smaller than it is. For here it is important to bear in mind a general consideration which is equally applicable to horizontal movements within any social grade. There may be a considerable movement of labor between different employments without any individual worker having to change his occupation. The personnel of any industry is constantly changing. At one end, men die, retire, or are pensioned off; at the other end, young recruits are taken on. By a diversion of the new recruits from one employment to another, a radical change can be made in the occupational census in a comparatively short s.p.a.ce of time. It is in this manner that such movement as takes place is largely effected at the present time. Within the ranks of the professional cla.s.ses, a man does not commonly leave the profession to which he has been trained. But his _choice_ of profession is determined by him or his parents not solely on pecuniary grounds but usually with an anxious scanning of the general prospects, which include pecuniary advantages together with many other things. The same thing is true in no small measure of manual wage-earners. This general consideration must be borne in mind throughout the remainder of this chapter.

But even the sons of platelayers do not commonly practise at the bar. The obstacles in the way are various and subtle. Many of them are ideas, inherited from a bygone epoch, about keeping other people "in their proper stations," which the whole drift of circ.u.mstance, and the spirit of the age are rapidly wearing down. In the new world such obstacles are rare. But an obstacle of a more tangible and formidable kind arises from the fact that the liberal professions and many business careers require a long and expensive education and training, which the platelayer is quite unable to afford to give his son.

Now this expense of training is highly relevant not only to "what is,"

but to "what should be." It includes, it should be observed, a negative as well as a positive element; a long period of waiting before income begins, as well as the actual outlay on educational and other charges. When the burden both of the waiting and the positive costs must be borne either by the individual or the family, there are few people who would seriously dispute that this goes to justify, on grounds of fairness as well as of expediency, a higher level of annual remuneration later on; though many people would doubtless argue that the amenities and dignities of the professions should be taken into account on the other side. But the same consideration makes it a matter of legitimate doubt whether it would be desirable, even as an ideal, that the community should provide so completely the costs of training and of maintenance in the waiting period, as to make it no longer "fair" that the individual should be remunerated more highly than workers in less expensive occupations. For this would mean that more labor would be absorbed in the former employments than in principle would be socially desirable, for reasons which the argument of the next chapter will make plain. But the most desirable number of doctors, barristers, teachers, etc., is not a thing which can be settled on purely economic grounds, and it is unprofitable to carry further this particular line of thought. Few people would advocate, as an ultimate ideal, that the remuneration of the professional grades of labor should exceed that of lower grades by _more_ than the extra expense of training and waiting they involve. That the excess is usually greater than this at the present time seems very probable: though it is a matter on which it is very hard to generalize. But it would certainly be far greater than it is if the principle of _laissez-faire_ ruled supreme in these affairs. Fortunately it does not, and has never done so. Even before the days of free elementary education, the endowment of education was not unknown. The ancient public schools and universities, which have come down to us from the Middle Ages, are a standing witness to what in this field a far poorer community thought fit to do. Their systems of scholarships and exhibitions, no less than their courts and towers, deserve our notice. For these were designed to form what we now call "a ladder" by which talent could climb from the humblest origins to the callings which then seemed the summit either of spiritual or of worldly ambition.

This reference to "talent" makes it well to consider here a factor which necessarily complicates, though it does not substantially affect, the whole argument of the present chapter. There are differences of natural ability, which no education or training can obliterate, which it should rather be their business to excite. These differences are a.s.sociated to a great extent with differences of occupation; they _should be_ so a.s.sociated far more closely than in fact they are. They are also a.s.sociated with differences of remuneration even within the same occupation; "what should be" here is a question which we may excuse ourselves from discussing. The principle which, however vague, is sufficient for our present purpose is that the same _natural ability_ should command the same reward in all occupations, subject to differences which should not exceed the differences of educational cost and initial waiting they involve. We cannot a.s.sert, as an economic law, that this is generally true in fact. If ever it becomes true, it will be due not to "_laissez-faire_," or "free compet.i.tion," but to social arrangements, which express a sense of what is right.

--7. _The Apportionment of Labor among Occupations_. When we pa.s.s to the apportionment of labor among different occupations in the same social grade, the same principle as to "what should be" applies in a simpler form. Equal natural ability should command an equal reward in all occupations; a.s.suming that differences in cost of training can be ignored. The reward must, of course, be interpreted not in terms of money only but of "real wages," with allowance for the varying amenities of different tasks. Now it was here that the extreme advocates of _laissez-faire_ made one of their cardinal mistakes. They a.s.sumed that this ideal would be best secured by "perfect compet.i.tion." The employer would choose the worker who would come for the lowest wage; the worker would choose the employer who would pay him the highest wage; and so, by a process similar to the higgling of a commodity market, the desirable uniform wage-level would become established. But in fact the conditions of the labor market differ greatly from those of a commodity market. People are ignorant, do not look ahead, cannot afford to risk the loss of a job, however wretched, which they happen to have got. For reasons such as these, a considerable departure from _laissez-faire_ is necessary in order to realize the theoretical results of _laissez-faire_. To prevent the putting of boys in large numbers into "blind alley" occupations, you must supplement the foresight of parents with Juvenile Employment Exchanges and After-Care Committees. To secure a proper uniformity of wages within the same occupation, you must have trade unions. To secure a proper uniformity between different occupations, you must have again trade unions, or, failing them, Trade Boards.

That the actions of trade unions are very largely of this type is a fact insufficiently appreciated by the middle-cla.s.s public. The elaborate system of piece-rate lists which has been evolved in the Lancashire cotton industry is primarily designed to secure the same wage for workers of equal efficiency in all mills, irrespective of the degree to which the machinery is antiquated or up to date. This result is wholly to the good: not only does it secure "fairness" for the worker, it stimulates the employer wonderfully to efficiency. The same result could never be secured so effectively by the free play of compet.i.tion. But this tendency, which is easily the predominant element in the trade union regulations of the cotton trade, is at least an important element in the policy of "The Common Rule" of all trade unions, though it may often be mixed up with the more questionable tendency to eliminate differences of pay for differences of natural ability, and the unquestionably bad tendency to discourage output. As between different occupations, the insistence of a trade union that wages must be leveled up towards the wages obtaining in similar trades acts again as a far more powerful force than compet.i.tion.

But the actions of trade unions are by no means wholly of this type. They often serve rather to secure still higher wages for workers who, comparatively speaking, are already highly paid. It makes little difference whether this effect is secured directly by wage demands, or indirectly by restricting the right of the entry to the trade. In either case the consequences are the same, and there should be no ambiguity as to their nature. They are certainly bad for the community, certainly bad for the _other_ workers of the grade, almost certainly bad for the workers of the grade regarded as a whole. The higher wages must raise the money costs of production, and result, sooner or later, in fewer workpeople being employed in that occupation; larger numbers must accordingly seek employment elsewhere; and this cannot but depress the wage rates of less strongly organized trades. Thus the effect is twofold: a larger proportion of workpeople will be employed in badly paid occupations; and the wages there will be lessened.

The power of a strong trade union to secure wage advances of this type is considerable, but it must not be exaggerated. Trade unions employ as a matter of course devices which, in the case of trusts, we regard as the extremest weapons of monopoly. To say, "If you buy from anyone except us, you must not buy at a lower price than ours," which Messrs. J. & P. Coats are represented as having done, is a.n.a.logous to insisting that if non-unionists are employed, it shall be at the trade union rate, as every trade union very properly insists. To say, "You must buy _only_ from us," the method of the boycott, as it is called, is a.n.a.logous to the very common refusal to work with non-unionists at all. But in one important respect the tactical position of a trade union is weaker than that of an ordinary combination. It has usually got a buyers' combination up against it, in the shape of an a.s.sociation of employers. The latter will be governed in their att.i.tude towards the workpeople's demands, not only by immediate expediency, but also by their own sense of "what should be"; and they will usually resist demands for wages greatly in excess of those obtaining in comparable trades. In this way, the tendency for workers of the same efficiency to receive the same real wages in all employments is far stronger than might at first sight appear.

If we had to rely for this result upon trade unions alone, it would be highly problematical. For here a psychological curiosity emerges, which, familiar and intelligible as it is, is none the less a curiosity. So far from still higher wages for well-paid workpeople being regarded in the world of manual labor as detrimental to the interests of other workpeople, it has become almost a point of honor to believe the contrary. A wage dispute in a particular trade is conceived as an engagement in a far-flung battle between Capital and Labor, in which success at any part of the line will facilitate the victory of the whole army. This conception contains a measure of truth, as regards immediate and purely temporary effects; though, even here, it is made to seem unduly plausible by the recurrence of trade cycles, which cause wages at any time to move in the same direction all along the line. But, if the foregoing a.n.a.lysis has been appreciated, the essential falsity of this notion should be evident.

It is an illusion, which should receive no endors.e.m.e.nt, either tacit or express, in any work on economics. The general wage level of a country cannot be regarded (except temporarily, and within narrow limits) as a function of the efficiency of labor organization; it depends on the far deeper economic facts set out in --3 above.

Let us now try to summarize the conclusions of this section. There _is_ a tendency towards a uniformity of real wages for workers of the same grade and of the same efficiency. This tendency is not due to compet.i.tion alone. It is helped by many acts of a collective kind, arising from a sense of "what should be"; it is obstructed by other acts of a like kind, where the sense of "what should be" is based on imperfect understanding. The more people act in accordance with "what should be," and the better their understanding, the more will this tendency approximate to an accurate economic law.

--8. _Women's Wages_. The wages of women represent a problem of great public interest, upon which the principles laid down in this chapter have a most important bearing, and which in its turn serves to ill.u.s.trate these principles further. It has been suggested that male and female labor can be regarded as a strong case of Joint Supply, and the suggestion is not merely facetious. The essential point, that the proportions of available male and female labor are fairly constant (not that they may not alter with time and circ.u.mstances, but that they are essentially independent of the conditions of demand) holds true not only of a country as a whole, but hardly less of a particular district. If men and women are to be regarded as separate grades, they are grades between which immobility is complete. Now men and women differ in many ways which affect both the demand for and the supply of their services. On the one hand, far fewer women wish to enter business employments of any kind, as women have plenty of work that must be done at home. On the other hand, though women can do many kinds of work as well as or better than men, it so happens that for much the greater number of services, which are in large demand in the business world, men are the more efficient. Incidentally, it happens that many occupations which women _might_ do as well as men are closed to them by exclusive regulations. The resultant of these forces is that men and women are for the most part employed in different occupations, and the scale of payment in women's occupations is far lower than that in men's. Of this last fact singularly small complaint is made.

It is otherwise, however, when we come to occupations where men are either wholly or partially employed, where women are at least approximately as efficient as men, and where the barriers to their entry are at least formally removed. There a ferocious controversy rages over what is known as the principle of "equal pay for equal work." It is easy to understand why the male trade unionists in, let us say, the engineering trades, should support this claim. It is also, indeed, _intelligible_ why the enthusiasts for Women's Rights should urge it; but it is much more doubtful whether they are wise. Possibly they are wise enough in their generation, since it might not serve them on this matter to get across the men. But it is clearly not prudential considerations of this kind by which they are mainly actuated. They make the demand, with extreme intensity of feeling, as a demand for fundamental justice. They are also very obviously inspired with the belief (similar to the illusion which is a point of honor with the male trade unionist) that high wages for women in well-paid occupations will help to raise the wages of sweated women workers in other trades.

Now, here again, any lack of candor would be inexcusable. The effect of this policy on the wages in women's trades is certainly to reduce them. The policy serves, as powerfully as any trade union custom, to restrict the entry of women into the men's employments, and often spells virtual exclusion. For the "equal efficiency" may be approximate only, and there may be advantages in male labor from the employer's standpoint which are none the less important, because they are not easy to define. Moreover, from the employer's standpoint, the efficacy of female labor will be largely a matter for _experiment_, and "equal pay" will give him no inducement to experiment at all. The diminished number of women in these occupations (as compared with what might have been) increases the number who must fall back on the purely women's trades; and it _must_ serve to reduce the wages there, where organization is by no means strong. I am far from a.s.serting that this consideration is conclusive against the principle of "equal pay for equal work" (though I think it conclusive against a rigid interpretation of it); for other matters, such as the standpoint of the male trade unionist must be taken into account. But the reactions on the wages in women's trades permit of no ambiguity.

In occupations of another type, the issue takes a somewhat different form. In the teaching profession, "equal pay" would not exclude the women; it would be far more likely to exclude the men. For, though the advocates of the principle would declare that their intention is that the salaries of women should be leveled up to those of men, it is more probable that the ultimate outcome would be a leveling down.

Educational authorities have the ratepayer and the taxpayer to consider; and, apart from this, they have their own interpretation of "what should be." To pay a woman less than a man for the same work may seem glaringly unfair; but it is not very clear why a woman, who is an elementary school teacher, should be paid much more than, say, a hospital nurse, merely because in the former case a number of men happen also to be employed. In fact, there is a clashing of equities in this connection; and there is little doubt which of them the educational authorities would prefer. A leveling down of the men's salaries would make it all but impossible to attract men of the desired type into the profession, and would thus lead to the virtual extinction of the male elementary school teacher. This might seem in a narrow sense to be economically desirable. Why should not men take their services to the tasks for which they can command a higher reward, and which women cannot do as well? But whether this would be desirable in the true interests of education is a far more doubtful matter. And this is the real problem of "equal pay for equal work" for male and female school teachers. The reader will notice that I have refrained from alluding to the controversy as to whether men should receive more on the grounds that they have wives and families to maintain. That, although a most absorbing issue, is not the real issue in practice at the present time. The real issue is a clashing between a sense of "what should be" on obvious general grounds and a sense of "what should be" in the particular, derived from the very patent and general "what is" that men receive as a rule far higher pay than women.

CHAPTER X

THE REAL COSTS OF PRODUCTION

--1. _Comparative Costs_. Beneath the great diversity of the considerations which are applicable to the different agents of production, certain general conclusions emerge from the a.n.a.lysis of the last four chapters. In no case did we find that the aggregate supply of the agent was determined by clear and certain economic laws, possessing any fundamental significance. The supply of natural resources is a fixed thing, quite independent of the efforts or the desires of man. However the supply of capital and the supply of labor may react under present conditions towards economic stimuli, these reactions possess no quality of inevitability and bear no clear relation to "what should be." The supply of risk-bearing responds perhaps more decidedly to the prospects of increased reward; but it is so intimately a.s.sociated with special knowledge and the qualities of business enterprise, as to leave some uncertainty attaching even to this conclusion. When, on the other hand, we turn to the apportionment of these factors among different uses, we find relations which are both clear and fundamental. Laws emerge which state at once not only "what is" or at least "what tends to be," but also "what should be"; and it is the fact that they taste "what should be" that gives them their fundamental character.

These conclusions enable us to give a general answer to the question which was raised at the end of Chapter V: What are the ultimate real costs to which the money cost of production correspond? The attempt has often been made to relate money costs to such things as the effort of working and the sacrifice of waiting. The existence of such costs is beyond dispute. Much saving does mean a sacrifice of immediate enjoyment to the man who saves. Most labor is irksome and disagreeable in itself, and involves strain and wear and tear; while all labor means a deprivation of the utility of leisure. Workpeople, moreover, do not grow on gooseberry bushes, but must be fed and clothed from the cradle; and their rearing and maintenance represents a real cost which someone must incur.

But the existence (or the importance) of such costs is one thing, their relation to money costs is another. In Chapter VIII we saw how difficult it was to establish any clear relation between the rate of interest and the sacrifice of saving. The costs of labor present similar difficulties. The relative irksomeness of two occupations may affect the relative wages which will rule in the two cases; so, certainly, will the differences in the cost of education and training which they require. But these are matters which concern the _apportionment_ of labor between different employments. There is no good reason to suppose that the general wage-level would be reduced, merely because work as a whole became less irksome, or involved a smaller physical or mental strain. The supply of people is not determined by the same kind of influences as is the supply of a commodity. Parents do not produce children for the sake of the wages which the children will receive when they go out to work; or, if this happens, we rightly regard it as a horrible anomaly. In so far as parents are affected by economic conditions it is by their own economic conditions; the question is rather one of how many children they can afford to have, than of a balancing of the cost to them against the incomes which their children may subsequently acquire. But other considerations enter in; and, in fact, it is doubtful how the aggregate supply of labor will react to changes in prosperity.

Finally, the supply of land involves neither effort nor sacrifice; and, among our money costs, we have to account for the item of the rent of land. To dispose of this difficulty by arguing that rent does not enter into marginal costs (in any sense which is not equally true of wages and profits) is to lose contact with reality. Thus the attempt to explain money costs in terms of the costs of producing the ultimate agents of production leads us into a quagmire of unreality and dubious hypothesis. For a systematic theory, which will rest on firm foundations, we must interpret money costs in very different terms.

The real costs which the price of a commodity measures are not absolute, but comparative. Marginal money costs reduce themselves in the last a.n.a.lysis to the payments which must be made to secure the use of the requisite agents of productions. These payments _tend_ to equal the payments which the same agents could have commanded in alternative employments. The payments which they could have commanded in alternative employments, tend in their turn to equal the derived marginal utilities of their services in those employments. It is thus the loss of _Utility_ which arises from the fact that these agents of production are not available for alternative employments that is measured by the money costs of a commodity at the margin of production.

This conception of ultimate costs encounters an instinctive repugnance, arising from a mistaken sense of logical symmetry, which it will be well to examine. Cost, it is objected, so interpreted loses its character as an independent ent.i.ty. It is merely something derived from utility. Now in the earlier chapters of this volume, we found reason to be impressed with the general symmetry which pervades the relations of demand and supply. Moreover, when we considered the case of ordinary commodities we found that at the back of demand and giving rise to it was utility; at the back of supply, and limiting it, was cost. The general symmetry between demand and supply thus seemed almost to imply a fundamental symmetry between utility and cost. If, then, cost in the last a.n.a.lysis is derived from utility, does not this make nonsense of the symmetry between demand and supply, or, if we cling to this last symmetry as a demonstrable truth, must we not refuse to admit that cost can be derived from utility?

This is one of those false dilemmas which supply the wiseacres of the world with a plausible case for distrusting the logical faculty. If we have good reason for believing that both of two apparently inconsistent things are true, the explanation is seldom that one of them is really false; it is more usually that they are not really inconsistent. So it is here. The symmetry between demand and supply is very great, and we should always look to see if it holds good, but it is by no means perfect, and it is in the last a.n.a.lysis that it most notably fails. It is most important to distinguish clearly between the utility and the cost of a commodity as two separate and independent things. In Chapter V, it will be remembered, we did not permit ourselves to derive the costs of producing cotton lint from the utility of cotton-seed. The refusal to do so was essential to clear thought; it led to some very useful practical corollaries. But to derive the cost of a commodity from the utility of something which is produced _with_ it, as part of the same productive process; and to derive the cost from the utilities which the agents, which help to produce it, possess for other purposes, are two entirely different things. In works on International Trade, the reader will discover that the comparative nature of real costs is so unmistakable that a Doctrine of Comparative Costs is expounded with much formality at the outset. This doctrine is apt to prove somewhat puzzling, when we have to deal with it as an apparent exception to the general tenor of economic theory. Its difficulties disappear when we realize clearly that the real cost of _anything_ is the curtailment of the supply of other useful things, which the production of that particular thing entails.

--2. _The Allocation of Resources_. However strange the above conception may seem, there should be no doubt that this cost is very "real." Here the irregularities and maladjustments of the economic world, the recurrence of trade depressions and the like, do much to obscure a clear vision of the essential realities. At a time when there is much unemployment, and much machinery standing idle, it is so clear to common sense that we _could_ produce more of some particular thing without diminishing the supply of other things, that any apparent statement to the contrary may perhaps seem the height of academic pedantry. But let me ask the reader to consider with an open mind a familiar parallel. During the recent war there was inevitably much waste and muddle in the utilization of the military resources of the Allies. Some regiments would be kept inactive for long periods, not for purposes of rest or training, but owing to some defect of organization. In the manufacture of munitions, an insufficient appreciation of the principles of joint demand led to the piling up of excessive stores of certain materials, which were useless until commensurate supplies of the complementary factors could be obtained. It is unnecessary to multiply examples. The waste of both man-power and material was immense. But the allocation of these resources between, for instance, the various theaters of war was none the less a very real problem, which gave rise to much engrossing controversy. It was an axiom that the more resources you employed in Mesopotamia or in Palestine, the less resources remained available for France. No one thought of maintaining that, as long as there was any waste of these resources, so long as there remained any men to be "combed out" of unessential industries, you could pour troops and munitions into Salonika without stopping to consider the needs of other theaters of war. Such a notion would have been clearly imbecile, for the sufficient reason that the sending of armies to Salonika would do nothing in itself to secure (however much it might incidentally stimulate) the more efficient use of the resources which remained.

Now this is precisely a.n.a.logous to the problem of the allocation of our resources for the purpose of peace. Notwithstanding all the wastes and maladjustments of the economic system, the use of resources to produce one commodity _does_ in general curtail the production of others. The mere launching of a new business enterprise does no more than the sending of an army to Salonika, to eliminate waste in the remainder of the economic organism. Unemployment, broadly speaking, is a function not of the magnitude of the normal demand for labor (which affects rather the wage-level), but of fluctuations in the demand for labor; fluctuations from one day to another as at the docks, from one season to another as in the building trades, above all from one period of years to another as in the cycles of general trade boom and depression. Nothing will diminish unemployment which does not serve to diminish these fluctuations. A new business will not, as a rule, have any such effect. If it is launched during a trade depression (a most unusual proceeding), it may temporarily absorb unemployed labor and idle materials. But when the next boom comes, it will be using, though presumably to greater advantage, labor and materials which, but for it, would have been employed for other purposes. Meanwhile the causes making for unemployment will be unaffected. Miscalculations will still be made, the building trades will still become slack in the winter, the casual methods of engaging dock laborers will still continue, trade cycles will still recur, while beneath them, and concealed by them, some industries will expand and others will decay.

Thus, like the armies at Salonika, the new business would in effect divert resources from elsewhere.

This truth needs to be firmly grasped in mind. It is this that makes it in general unsound policy to subsidize industries, either directly or indirectly, by means of a protective tariff. It is this, indeed, that supplies the answer to half the economic fallacies that are always current.

The allocation of resources so as to yield the maximum effect was rightly recognized as one of the most vital and difficult of our war-time problems. To cope with it, the Allied peoples devised one instrument after another, and finally evolved the Supreme Allied Council. The a.n.a.logous problem in the economic world of peace time is no less important and far more difficult; but there is nothing to correspond to the Supreme Allied Council. There we rely upon a co-operation which, as was stressed in Chapter I, is unco-ordinated.

That co-operation has been evolved by the mutual compet.i.tion of innumerable business concerns, controlled by men largely animated by the motive of pecuniary profit. But it has not been evolved wholly by such means: and how far that compet.i.tion or that motive of profit is essential to its efficiency are questions with which this volume has not been in any way concerned. The economic laws, the relations between utility, and price and cost, with which it has been occupied, are an entirely different matter; and these _are_ essential to the efficiency of any system of society. For if the marginal utility of a commodity is equal to its marginal cost, and if this marginal cost is composed of payments to the various agents of production at least as great as they could have obtained if they had been used otherwise, this amounts to saying that the agents of production are so utilized as to yield the maximum utility; and this is the same thing as saying that they are so utilized as to produce the maximum wealth.

--3. _Utility and Wealth_. Upon this last point it is important to be quite clear. An increase in wealth seems a solid, tangible reality; something, which, however much we may scorn it in our more precious moods, we recognize, for a rather poor community, to be an important object of endeavor. But an increase in utility seems a vague, impalpable notion, hardly deserving the same practical concern. None the less the two things are identical. We greatly deceive ourselves if we suppose wealth to be an objective reality. It is true that, when we get behind the money in which it is measured, we come upon commodities, like food and clothes and houses and factories, which seem comfortably solid and objective things; but we also come upon many services, like those of gardeners and doctors and hospital nurses, which we are bound to reckon as part of our wealth, although they are not embodied in any tangible commodities. Moreover, although material commodities are objective realities in themselves, and in many of their properties, they are _not_ objective realities in their property as wealth. A pair of boots is an objective fact; so is the number of pairs in existence at any time, so is their size, their weight, the quant.i.ty of leather or of paper which they happen to contain. But the wealth which those boots represent is not an objective fact. It depends upon the opinion which men and women entertain as to their utility; and these opinions take us into the subjective regions of human psychology. Let us suppose, for instance, that we calculated, on the basis of present prices, that the boots in existence at the present time represented 1/1000 part of our total wealth. Suppose, then, that a miracle were to happen; that the skies opened and rained boots upon us, of every size and shape and pattern, until we had 1000 times as many boots as we had before. Could we say that our total real wealth had been doubled? Clearly we could not. To obtain boots for nothing, and to wear a new pair every week, would make us somewhat better off, but not twice as well off as we were previously. In other words, the real wealth of a thousand times as many boots as we have now, is not a thousand times as great as the wealth of the present number of boots. We are, indeed, practically restating the Law of Diminishing Utility; and this perhaps is enough to show that wealth is fundamentally the same thing as utility.

Another point, however, is worth noting. Our real wealth would be somewhat increased in the case supposed; but if we were to turn to the money measure of wealth, the opposite result would be far more likely, For the price of boots would most likely fall to nothing, and the total value of boots, in the commercial sense, would accordingly be nothing also. This shows that money values may be a most imperfect measure of aggregate wealth; for what money values represent is the product of the quant.i.ty of the commodity and its _marginal_ utility, while aggregate wealth is _total_ utility, which is a very different thing. This, it may be observed, makes all attempts to compare the wealth of different countries or different times, and no less to construct Index Numbers of Prices, imperfect of necessity, and arbitrary in their foundations.

--4. _Criteria of Policy_. The point has now been reached at which we must take into account the very important fact which was mentioned at the close of Chapter III. The maximum utility which the laws of supply and demand tend to bring about is a maximum _total_ utility indeed, but one still measured in terms of money. An unequal distribution of wealth destroys any necessary correspondence between that and the maximum _real_ utility. This consideration, however, does not affect the general validity of the conclusion that the laws of supply and demand represent what is socially desirable now or under any system. For what is at fault here is the distribution of wealth; and it is that which should be changed, in so far as it is possible to do so. Now it is important to realize that whenever it is possible to supply a commodity to poor people below cost price, it is possible to alter the distribution of wealth, for that in effect is what is done. Purchasing power, which may be taken from richer people by taxation, or which may be obtained from "collective" profits on other trading, is in effect transferred to the poor people in question, though the transference is coupled with the condition that the purchasing power must be expended in a particular way. It is _in general_ desirable that the transference should be made without this condition being attached. To this general statement, exceptions indeed exist so numerous and important as possibly to justify a great extension of social expenditure of this type. Education should certainly be provided free of charge, there are strong arguments for subsidizing housing; the provision of milk to expectant mothers, the feeding of school children, such instances can be multiplied into a very extensive list. But it is important to observe that in each case the justification of the policy rests in the presumption that the service supplied is one which it is particularly important that the beneficiaries should have, _as compared with_ the other things upon which they might have preferred to expend the equivalent purchasing power, had it been transferred to them without conditions. Where there is no such presumption, as surely there is none in the case of the great bulk of commodities, the relation between price and marginal cost should be rigidly maintained; it is the distribution of purchasing power which we should rather seek to alter. How far is it possible to alter that?

I suppose that it is inevitable that many readers will have concluded that the preceding chapters must be taken to mean that the distribution of wealth is not susceptible of any appreciable change. I would remind those readers of an important distinction upon which impatient people have sometimes based a complaint against economists. The economist, it is said, a.n.a.lyses with great pomp and ceremony the laws governing the distribution of wealth among the agents of production, but says practically nothing about the distribution between individuals and cla.s.ses, which is the only thing of any real interest to practical people. Now the economist concentrates on the agents of production for the very good reason that it is only with respect to them that any clear and certain laws as to distribution can be laid down. Into the distribution between individuals and cla.s.ses there enter other and variable factors, governed by no fundamental economic law; and _here_, the conclusion should at once suggest itself, is the field for action designed to alter the distribution of wealth. What is possible or desirable in this field, it is again not the purpose of this volume to discuss. It is an obvious, even if not a very helpful conclusion that an increase in the habit of saving among weekly wage-earners might, without appreciably affecting the distribution between Capital and Labor, greatly modify the resulting distribution between social cla.s.ses. But questions as to how far it might be possible or justifiable to achieve a similar result by the use of the weapon of taxation, by changes in inheritance laws, or by the public ownership of industry take us into a far more uncertain and controversial sphere. The difficulties and objections which present themselves are familiar and formidable; but they are of quite a different order from the economic laws which we have been examining. The laws themselves do not ent.i.tle us to make any dogmatic p.r.o.nouncement upon these large issues of social policy.

But this is not to deprive these laws of practical importance. They represent essential criteria of sound policy in the sphere of social reorganization no less than in ordinary business. In our days a curious obsession has led many people to disparage these criteria, as though they were the sordid prejudices of a stupid tradesman. Because it has been found a matter of obvious practical convenience to maintain the roads out of taxation or of rates, and to dispense with charges for their use, it is suggested that the same principle should be applied to the railways. Or, more commonly, because it has been found convenient to make the same charge for the carrying of letters between Land's End and John o' Groats as between Hampstead and Highgate, it is suggested that _this_ principle should be applied to railway rates and fares. It may be well, therefore, to point out that the justification of uniform postal charges rests upon the facts: (1) that the costs of collection, sorting, etc., are so large a part of the costs of carrying a letter, that the real cost between John o'

Groats and Land's End does not differ from that between Hampstead and Highgate by as much as might at first sight appear, (2) that the charges in any case are very small; so that (3) the avoidance of the small degree of taxes and bounties which the present system implies is not worth the book-keeping expenses which differential charges would involve. It should be obvious that these considerations apply to the railways with a greatly diminished force. They might possibly justify what is known as the "zone" system of charges, i.e. uniform rates within certain narrow areas. But the notion of uniform rates throughout Great Britain conjures up a vision of trains taking coal from South Wales to Scotland, and others taking coal from Scotland to South Wales, in accordance with the slightest preferences of the consumers, and without regard to the extra real cost involved, on a scale to which the "wastes of compet.i.tion" afford no parallel. It would in fact achieve the essential folly of "sending coals to Newcastle." These considerations, however, are not what interest the advocates of the postal principle. They seem to recommend the obliteration or the confusion of the relations between price and cost as a superior ideal. It is important to be clear what exactly this ideal involves.