The Principles of Economics Part 2

Welfare, in an immediate or narrow sense, is the same as gratification of the moment; in a broader sense, it means the abiding condition of well-being. We have here a distinction very much like that often made between pleasure and happiness. If we think of only the present moment, welfare is the absence of pain, and the presence of the pleasureable feeling; but if we consider a longer period in a man's life or his entire lifetime, it is seen that many things that afford a momentary gratification do not minister to his ultimate, or abiding, welfare.

Moralists and philosophers often have dwelt on this contrast. The difference is ill.u.s.trated by the thoughtlessness and impulsiveness of a child or savage as contrasted with the more rational life of those with foresight and patience.

[Sidenote: Economics first studies wealth]

Wealth, in the general economic sense, is judged with reference to gratification rather than with reference to abiding welfare. It is the first duty of the economist not to preach what should be, but to understand things as they are. He must, in studying the problem of value, recognize any motive that leads men to attach importance to acts and things. He will therefore take account of abiding welfare and of immediate gratification to exactly the degree that men in general do, and the sad fact is that the present impulse rules a large part of the acts of men. Whether tobacco or alcohol or morphine minister to the abiding happiness of those who use them does not alter the immediate fact that here and now they are sought and an importance is attached to them because of their power to gratify an immediate desire.

[Sidenote: Then wealth and welfare]

5. _In studying the question of social prosperity, however, we must rise to the standpoint of the social philosopher and consider the more abiding effects of wealth._ Wants may be developed and made rational, and the permanent prosperity of a community depends upon this result.

Any species of animal that continued regularly to enjoy that which weakens the health and strength would become extinct. Any society or individual that continues to derive gratification, to seek its pleasure, in ways that do not, on the average, minister to permanent welfare, sinks in the struggle of life and gives way to those men or nations that have a sounder and healthier adjustment of wants and welfare. We touch here, therefore, on the edge of the great problems of morals, and while we must recognize the contrast that often exists in the life of any particular man between his "pleasures" and his health and happiness, we see that there is a reason why, on the whole, and in the long run, these two cannot remain far apart. The old proverbs, "Be virtuous and you will be happy," "Honesty is the best policy," and "Virtue is its own reward,"

have a sound basis in the age-long experience of the world. Cynics or jesters may easily disprove these truths in a mult.i.tude of particular cases.

[Sidenote: Freemen are not economic wealth]

6. _Wealth does not include such personal qualities as honesty, integrity, good health._ Some economists speak of these as "internal goods," but it is far better not to speak of free men or of their qualities as wealth. Many difficulties arise from such a use of the term in practical discussion. One of the most important of all distinctions to maintain in economics is that between material things and men. Only in the case of human slavery may persons be counted as economic wealth.

It is a different thing, however, to consider human services as wealth of an ephemeral kind at the moment they are rendered. We are, thus merely recognizing that men may bear at the given moment the same relation to our wants as do material things.

-- II. SOME IMPORTANT ECONOMIC CONCEPTS CONNECTED WITH WEALTH AND WELFARE

[Sidenote: Popular meaning of useful]

1. _Utility, in its broadest usage, is the general capability that things have of ministering to human well being._ The term is evidently one without any scientific precision. It expresses only a general or average impression that we have in reference to the relation of a cla.s.s of goods to human wants. Every one would agree to the statement that "water is useful," thinking of the fact that it is indispensable to life and that it ministers to life in a mult.i.tude of ways. But what of water in one's cellar, water soaking one's clothes on a cold day, water breaking through the walls of a mountain reservoir and carrying death and destruction in its path? The poison that is doing what we at the moment desire, we call useful; that doing what we would prevent, we call harmful. Noxious weeds become "useful" by the discovery of some new process by which they can be worked into other forms, though they may still continue to be noxious in many a farmer's fields. The utility of anything, therefore, is seen to be of a relative and limited nature. The term "utility" in popular speech is very inexact. It can be employed in economic discussion only when carefully modified and defined.

[Sidenote: Kinds of goods]

2. _Goods consist of all those things objective to the user which have a beneficial relation to human wants._ They fall into several cla.s.ses. We may first distinguish between free and economic goods. Free goods are things that exist in superfluity, that is, in quant.i.ties sufficient not only to gratify, but to satisfy all the wants that may depend on them.

Economic goods are things so limited in quant.i.ty that all of the wants to which they could minister are not satisfied. The whole thought of economy begins with scarcity; indeed, even the conception of free goods is hardly possible until some limitation of wants is experienced.

Practical economics is the study of the best way to employ things to secure the highest amount of gratification. The problem itself arises out of the fact that many things are used up before all wants dependent on them are completely satisfied.

A distinction is often made between consumption and production goods, or it may be better to say immediate and intermediate goods. Consumption goods are those things which are immediately at the point of gratifying man's desires. Production goods are those things which are not yet ready to gratify desires; some of them, being merely means of securing consumption goods, never will themselves immediately gratify desire.

[Sidenote: Value is utility given precision]

3. _Value, in the narrow personal sense, may be defined as the importance attributed to a good by a man._ The vagueness and inexactness of the word "utility," or the word "good," disappears when we reach the word "value." It is not a usual relation or a vague degree of benefit sometimes present and sometimes absent, but it refers to a particular thing, person, time, and condition. Value is in the closest relation with wants, and in this narrow sense depends on the individual's estimate. From the meeting and comparison of the estimates of individuals, arise market values or prices, which are the central object of study in economics.

CHAPTER 4

THE NATURE OF DEMAND

-- I. THE COMPARISON OF GOODS IN MAN'S THOUGHT

[Sidenote: Wants and goods must be constantly adjusted]

1. _As wants differ in kind and degree, so goods differ in their power to gratify wants._ This general and simple statement unites the leading thoughts of the two chapters preceding. Confirmation of its truth may be found in observation and experience. The purpose of this chapter is to show how, starting from the general nature of wants and the nature of goods, we can arrive at an explanation of the exchange of goods.

Recognizing the simple but fundamental fact stated at the opening of this paragraph, an exchange may be seen to be a rational and a logical result when men are living together in society.

[Sidenote: Ripe and unripe goods]

2. _Immediately enjoyable goods are the first objective things whose value is to be explained._ Goods come into relation with wants in a mult.i.tude of ways. Some things will not gratify a want until after the lapse of a long time, as ice cut in December and stored for summer use.

Other things will never themselves directly gratify a want, but will be of help in getting things that do; such are the young fruit trees planted in the orchard, and the hammer that will be used to drive nails in a house that will shelter men. Still other things are gratifying wants at this moment, or are ready for use and will be used up in a very short time; examples of such are the food on the table and in the pantry, and the cigar in the pocket. All these things are called goods, because of their beneficial relation to man's desires, but the relation is very immediate in some cases, very remote in others. The value of all goods is to be explained, but the explanation will be more or less complex according to the directness or indirectness of their relation with wants. As it is the power of goods to gratify wants that alone causes value to be attributed to them, those goods which are ripest, which are ready to gratify wants, are nearest to the source of an explanation. The value of unripe enjoyments must be traced to some expected gratification as its cause or basis. In order to attack the difficulties one by one we will, therefore, in the following discussion, deal first with this cla.s.s of ripe, consumable goods, as food, personal services, enjoyments of any sort that are immediately available. The explanation of these cases of value must precede that of cases in which the relation to wants is less obvious and direct.

[Sidenote: The law of diminishing utility]

3. _As the amount of any good increases, after a certain point the gratification that the added portions afford decreases._ This is called the law of the diminishing utility of goods or of the decreasing gratification afforded by goods. The reason for the truth of this proposition is found in the very nature of man and his nervous organization. Any stimulus to the nerves, however pleasant at first, becomes painful when long continued or increased unduly. The trumpet too distant at first for the ear to distinguish its notes, may swell to pleasing tones as it approaches, until at length its volume and its din may become absolutely painful. If we were to express the degree of gratification by a curve, we should see the curve rising gradually to a maximum, and then falling somewhat suddenly and becoming a negative quant.i.ty, when pain, not pleasure, resulted. The same change could be ill.u.s.trated by any sensation or by any of men's activities.

The proposition must be understood as applying to the gratification resulting from each added portion of the sensation. There is a maximum point in the gratification afforded by any nerve-stimulus. A man coming in from the winter's storm and holding out his hands before the fire, feels an intense pleasure in the grateful warmth; a few moments later, the same heat becomes unpleasant. In winter we wish for a moderation of the temperature; on the sultry days of summer, we think of a cool breeze as the most to be desired of all things. Whether the temperature rises or falls, there is a point beyond which the change is no longer an addition to, but a subtraction from, pleasure. A man, however hungry at first, may be made miserable if forced to eat beyond his capacity. Each added portion of the good consumed contributes to the gratification up to a certain point. The sum of these pleasurable sensations may be called the total gratification, which finally reaches satisfaction or fullness. Then begins what may be called in algebraic phrase a "negative gratification" which, if it becomes large enough, will make the total gratification a negative quant.i.ty. Each added portion, dose or increment beyond a certain point reduces thus the welfare of the user. One may have too much of a good thing.

[Sidenote: The marginal utility]

4. _Marginal utility is the gratification afforded by the added portion of the good._ The marginal dose, increment, or portion is that which may be logically considered as coming last in the case of any good or group of goods divisible into small parts. In considering the strict theory of the case, in order to get at the principle involved, the doses may be spoken of as infinitesimally small. The marginal utility expresses the importance that men attach to one unit of this kind of goods under the particular circ.u.mstances at the moment existing, and not under certain conceivable conditions which do not in fact exist or need to be taken into account by the persons affected. The marginal unit of a h.o.m.ogeneous supply cannot be considered to have a greater utility than any other unit at the moment, and therefore the product of the marginal utility by the number of units, gives the total measure of importance of the supply then and there, and this is the value.

The value of goods, as has been indicated, is the measure of the dependence felt by men on a portion of the outer world, as the condition of gratifying their wants. From the very nature of wants, which reside in feelings, a dependence that is not felt, a relation between things and gratification that is not recognized, can have no influence on value. Now, it is at this margin of supply that dependence is felt. Men do not concern themselves about that which they have in superfluity--unless, indeed, the excess causes them some discomfort. It is well that they do not, for a wise direction of effort can only take place when men think mainly of their need of things that they want, and want most, and direct their efforts toward securing them.

[Sidenote: From marginal utility to value]

The diminishing utility of successive portions (doses or increments, as they are called) may be represented by a curve of utility.

[Ill.u.s.tration: _Scale of Supply_]

The diagram is constructed on the hypothesis that a tenth unit of a certain good would have a utility expressed as 36; a fifteenth unit of 30, etc., and that the value of the whole supply is estimated according to these marginal units. Of course if the conditions were that "all or none" was to be taken, the result would be different.

Unit of Supply Marginal Utility Value of Whole Supply 10 36 360 15 30 450 20 25 500 30 19 570 40 15 600 50 10 500 60 5 300

This diagram is frequently used, and it is important to guard against some misunderstandings. The marginal unit of any given supply--for example, ten units--is not any particular unit, it is any one of the ten units. In the presence of nine units of the good the person or persons find all the various wants that are dependent on that good gratified to such a degree that the tenth unit has an importance expressed by 36. But as this last or marginal unit of supply may be used for any of the purposes, the importance of each and every unit likewise will be expressed by 36. Any one of the units, when once present is, in a logical sense, a marginal unit. When, however, it is a question of increasing the supply, some one unit may properly be looked upon as marginal. The dependence felt by men on the whole group is the product of the units by the marginal utility. As the number of units increases, the marginal utility decreases, until at length it may reach zero, and the total value would be nothing. A point of maximum value evidently will be found somewhere between the two extremes.

[Sidenote: Only one marginal utility at one moment]

Note carefully that on the one diagram are represented a large number of marginal utilities which never exist at one and the same moment. At any one moment there is a given number of units and there is but one marginal utility, and this is the same for each of the units. It is quite erroneous to say that when there are 30 units the utility of the tenth unit is 36; of the twentieth, 25; of the thirtieth, 19. It is equally incorrect to say that when there are 60 units the "total utility" is equal to the area between the right angle and the curve a-g, while the value is equal to the rectangle below and to the left of the point g. The curve from a-g but marks the height of marginal utilities that have no existence when the supply is 30. The "total utility," often spoken of in this connection, if it has any existence certainly cannot be calculated. The diagram must be understood as representing indicatively at any given moment but one marginal utility, the same for every unit of like goods. The other perpendicular lines are expressed in the conditional mood; they are what the marginal utility would be were the numbers of units different.

[Sidenote: Changing feelings changes utility]

5. _Since goods possess utility only as they gratify wants, it follows that if wants change, the utility changes._ Utility does not rest unchanging in the goods as something "intrinsic," but it depends on the relation of goods to men. This truth, unrecognized for many centuries, is now seen to be fundamental to the whole problem of value. The portions of a good added later do not appeal to the same man as the earlier portions. The man has been changed by what he has enjoyed. In changing his feelings, goods have also changed his wants. Hence, the added portions of the good are changed in respect to their utility or power to gratify a man's wants. Though physically and chemically, _i.e._, in every material way, they are exactly like the earlier portions, they cannot have the same want-gratifying power until he again changes, for they are not in the presence of the same feelings.

Wants are constantly shifting; different kinds of goods are compared in man's thought and arranged on a scale at every moment according to their felt utility. An increase in the amount of a good will drop the marginal utility of the added portions down the scale of usefulness for the next moment. When we rise in the morning, we want our breakfast; the breakfast eaten, another breakfast does not appeal to us. Our tasks done, we take a boat-ride or go golfing; then, appet.i.te returning, we are tempted to our dinner. And thus from hour to hour wants are gratified, are altered and are shifted, until, wearied with the day's labor and pastimes, we go to rest. In a well-ordered life, in an advanced economic society, the means for gratifying our wants as they arise are provided in advance. The changing series of desires is met by a changing series of goods. Life has been defined as a constant adjustment of inner relations to outer conditions. Economic life is therefore like physical life, a constant adjustment; and this adjustment of goods but reflects the shifting and adjustment of feelings.

[Sidenote: Choice is constantly shifting]

6. _The subst.i.tution of goods in men's thought is the shifting of the choice from a good that does not give the highest gratification economically possible at the time, to another good that does._ The shifting that takes place on the scale of gratification makes it necessary for man to shift constantly his choice of goods. This again is the problem of "economy." Waste results when goods continue to be used to secure a lower degree of gratification, if they might be used to secure a higher. The change of choice may be because of a change in the man, or because of a change in the quality or the quant.i.ty of the goods; or because of a change in the ratio at which the goods can be secured.

-- II. DEMAND FOR GOODS GROWS OUT OF SUBJECTIVE COMPARISONS

[Sidenote: Desire may become demand]