Chapter II: Part I: The Elements (1)

THE ELEMENTS

Economics is the name which people have come to give to the study of Wealth. It is the study by which we learn how Wealth is produced, how it is consumed, how it is distributed among people, and so on. It is a very important kind of study, because it often depends upon our being right or wrong in Economics whether we make the whole State poorer or richer, and whether we make the people living in the State happier or not.

Now as Economics is the study of Wealth, the first thing we have to make certain of is, _What Wealth is_.

I

WHAT IS WEALTH?

The Economic definition of Wealth is subtle and difficult to appreciate, but it is absolutely essential to our study to get it clear at the outset and keep it firmly in mind. It is through some muddlement in this original definition of wealth that nearly all mistakes in Economics are made.

First, we must be clear as to what Wealth is _not_.

Wealth is never properly defined, for the purposes of economic study, by any one of the answers a person would naturally give off-hand. For instance, most people would say that a man’s wealth was the money he was worth. But that, of course, is nonsense; for even if there were no money used his possessions would still be there, and if he had a house and cattle and horses the mere fact that money was not being used where he lived would not make him any worse off.

Another and better, but still a wrong, answer is: “Wealth is what a man possesses.”

For instance, in the case of this farmer, his house and his stock and his furniture and implements are what we call his “wealth.” In ordinary talk that answer will do well enough. But it will not do for the strict science of Economics, for it is not accurate.

For consider a particular case. Part of this man’s wealth is, you say, a certain grey horse. But if you look closely at your definition and make it rigidly accurate, you will find that _it is not the horse itself which constitutes his wealth, but something attaching to the horse_, some quality or circumstance which affects the horse and gives the horse what is called its _value_. It is this _Value_ which is wealth, not the horse. To see how true this is consider how the value changes while the horse remains the same.

On such and such a date any neighbour would have given the owner of the horse from 20 to 25 sacks of wheat for it, or, say, 10 sheep, or 50 loads of cut wood. But suppose there comes a great mortality among horses, so that very few are left. There is an eager desire to get hold of those that survive in order that the work may be done on the farms. Then the neighbours will be willing to give the owner of the horse much more than 20 or 25 sacks of wheat for it. They may offer as much as 50 sacks, or 20 sheep, or 100 loads of wood. Yet the horse is exactly the same horse it was before. The wealth of the master has increased. His horse, as we say, is “worth more.” _It is this_ WORTH, _that is, this ability to get other wealth in exchange, which constitutes true Economic Wealth_.

I have told you that the idea is very difficult to seize, and that you will find the hardest part of the study here, at the beginning. There is no way of making it plainer. One has no choice but to master the idea and make oneself familiar with it, difficult as it is. _Wealth does not reside in the objects we possess, but in the economic values attaching to those objects._

We talk of a man’s wealth or a nation’s wealth, or the wealth of the whole world, and we think at once, of course, of a lot of material things: houses and ships, and pictures and furniture, and food and all the rest of it. But the economic wealth which it is our business to study is not identical with those _things_. Wealth is the sum total of the _values_ attaching to those things.

That is the first and most important point.

Here is the second: Wealth, for the purposes of economic study, _is confined to those values attaching to material objects through the action of man, which values can be exchanged for other values_.

I will explain what that sentence means.

Here is a mountain country where there are few people and plenty of water everywhere. That water does not form part of the Economic _wealth_ of anyone living there. Everyone is the better off for the water, but no one has _wealth_ in it. The water they have is absolutely necessary to life, but no man will give anything for it because any man can get it for himself. It has no _value in exchange_. But in a town to which water has to be brought at great expense of effort, and where the amount is limited, it acquires a value in exchange, that is, people cannot get it without offering something for it. That is why we say that in a modern town water forms part of _Economic Wealth_, while in the country it usually does not.

We must carefully note that wealth thus defined is NOT the same thing as well-being. The mixing up of these two separate things--well-being and economic wealth--has given rise to half the errors in economic science. People confuse the word “wealth” with the idea of well-being. They say: “Surely a man is better off with plenty of water than with little, and therefore conditions under which he can get plenty of water for nothing are conditions under which he has _more wealth_ than when he has to pay for it. He has more _wealth_ when he gets the water free than he has when he has to pay for it.”

It is not so. Economic wealth is a separate thing from well-being. Economic wealth may well be increasing though the general well-being of the people is going down. It may increase though the general well-being of the people around it is stationary.

The Science of Economics does not deal with true happiness nor even with well-being in material things. It deals with a strictly limited field of what is called “Economic Wealth,” and if it goes outside its own boundaries it goes wrong. Making people as happy as possible is much more than Economics can pretend to. Economics cannot even tell you how to make people well-to-do in material things. But it can tell you how exchangeable Wealth is produced and what happens to it; and as it can tell you this, it is a useful servant.

That is the second difficult point at the very beginning of our study. _Economic Wealth consists in_ EXCHANGEABLE _values, and nothing else_.

We must be as clear on this second point as we have made ourselves upon the first, or we shall not make any progress in Economics. They are both of them unfamiliar ideas, and one has to go over them many times before one really grasps them. But they are absolutely essential to this science.

Let us sum up this first, elementary, part of our subject, and put it in the shortest terms we can find--what are called “Formulæ,” which means short and exact definitions, such as can be learnt by heart and retained permanently.

We write down, then, two Formulæ:

1. =Wealth is made up, not of things, but of economic values attaching to things.=

2. =Wealth, for the purposes of economic study, means ONLY exchange values: that is, values against which other values will be given in exchange.=

II

THE THREE THINGS NECESSARY TO THE PRODUCTION OF WEALTH--LAND, LABOUR AND CAPITAL

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.--

1. =All production of Wealth needs three things: (_a_) Natural forces, (_b_) Human energy, and (_c_) an Accumulation of wealth made in the past and used up in future production.=

2. =These three are called, for shortness: (_a_) Land, (_b_) Labour, (_c_) Capital.=

3. =The last, Capital, (_a_) depends for its character on the intention of the user, (_b_) is consumed in production, (_c_) is always the result of saving.=

III

THE PROCESS OF PRODUCTION

You have seen how the production of wealth takes place through the combination of these three things, LAND, LABOUR AND CAPITAL, and you have also seen how the wealth so produced consists not in the objects themselves, but in the economic values attached to the objects.

Now we will take a particular instance of wealth and show how this works out in practice and what various forms the production of wealth takes.

Wealth, as we have seen, arises from the transposing of things around us from a condition where they are less to a condition where they are more useful to our needs.

Let us take a ton of coal lying a thousand feet down under the earth and no way provided of getting at it. A man possessing that ton of coal would not possess any wealth. The coal lying in the earth has no economic value attaching to it whatsoever. It has not yet entered the process whereby it ultimately satisfies a human need.

A shaft is sunk to get at that coal, and once the coal is reached a first economic value begins to attach to it. Next, further labour, capital and natural forces are applied to the task of hewing the coal out and raising it to the surface. This means that yet more economic values are attached to the ton of coal. These we express by saying that the ton of coal at the bottom of the mine, just hewed out, is worth so much--say 15/-; and later at the pit head is worth so much more--say £1. But the process of production of wealth is not yet completed. The coal is needed to warm you in your house, and your house is a long way from the pit head. It must be taken from the pit head to your house, and for this transport further labour, natural forces and capital must be used, and these add yet another economic value to the coal.

We express this by saying that the ton of coal _delivered_ (that is, at your house) is worth not £1, which it was at the pit head, but £1 10s.; and in this example we see that transport is as much a part of the production of wealth as other work. We also see a further example of the truth originally stated that wealth does not consist in the object itself but in the values attached to it. The ton of coal is there in your cellar exactly the same (except that it is broken up) as it was when it lay a thousand feet under the earth with no way of getting to it. In your cellar it represents wealth. In possessing it you are possessing wealth to the amount of 30s. You could exchange it against 30s. worth of some other thing, such as wheat. But the wealth you thus possess is not the actual coal, but the values attaching to the coal. These economic values are being piled up from the very beginning of the process of production until the process of consumption begins.

Here is another case which shows how the process of production will add values to a thing without necessarily changing the thing itself.

Suppose an island where there is a lot of salt in mines near the surface, but with very poor pasture and very little of it; most of the soil barren and the climate bad. On the main-land, a day’s journey from the island, there is good soil and pasture and a good climate, but there is no salt. Salt is a prime necessity of life, and it comes into a lot of things besides necessaries. To the people of the main land, therefore, salt, which they lack, is of high value. To the people of the island it is of low value, for they can get as much of it as they want, with very little trouble. Meanwhile, meat is of very high value to the people of the island, who can grow little of it on their own soil, while it is of much less value to the people of the main-land, who have plenty of it through their good pastures and climate. Here we have, let us say, 100 tons of salt in the island and 100 tons of meat on the main-land. A boat takes the 100 tons of salt from the island to the main-land and brings back the meat from the main-land to the island. Here wealth has been created on both sides, although no change has taken place in the articles themselves except a change in position. Both parties, the islanders and the main-land people, are wealthier through the transaction, and this is a case where _exchange_ is a direct creator of wealth, and the transport effecting the exchange is a creator of wealth.

Strictly speaking, everything done to increase the usefulness of an object right up to the moment when consumption begins is part of the production of wealth. For instance, wealth is being produced from the moment that wheat is sowed in the ground to the moment when the baked loaf is ready for eating, and the wealth expressed by the loaf, that is, the values attaching to it, are made up by all the processes of adding values from the first moment the seed was sown. When you eat a sixpenny loaf you are beginning to consume values created by the sowing of the wheat and its culture and its harvesting and grinding, and the working of the flour into dough, and the baking, and created by every piece of transport in the process, the carting of the sheaf into the rick, the carting thrashed wheat to the mill, the taking of the flour to the baker, the taking of the baked loaf to your house, and even the bringing of the loaf from the larder to your table. Every one of these actions is part of the production of wealth.

There is attaching to the process of the production of wealth a certain character which we appreciate easily in some cases, but with much more difficulty in others. We have already come across it in discussing Capital. It is this:

_All wealth is consumed._

This is universally true of all wealth whatsoever, though the rate of consumption is very different in different cases.

The purpose of nature is not the purpose of man. Man only creates wealth by a perpetual effort against the purpose of nature, and the moment his effort ceases nature tends to drag back man’s creation from a condition where it is more to a condition where it is less useful to himself.

For some sorts of wealth the process is very rapid, as, for instance, in the consumption of fuel, or in the wasting of ice on a hot day. Man with an expenditure of his energy and brains applied to natural forces, and by the use of capital, has caused ice to be present under conditions where nature meant there to be no ice--a hot summer’s day.

He has brought it from a high, cold place far away; or he has kept it from the winter onwards stored in an ice house which he had to make and to which he had to transport it; or he has made it with engine power. But the force of nature is always ready to melt the ice when man’s effort ceases.

The moment man’s effort ceases, deterioration, that is, _the consumption of the wealth present_, at once begins. And this truth applies at the other end of the scale. You may make a building of granite, but it will not last for ever. The consumption is exceedingly slow, but it is there all the same. And whether the consumption takes place in the service of man (as when fuel is burnt on a hearth) or by neglect (as when a derelict house decays) it is always _economic consumption_.

We may sum up in the following Formulæ:--

1. =Transport and Exchange, quite as much as actual work on the original material, form part of the Production of Wealth.=

2. =All Wealth is ultimately consumed: that is, matter having been transposed by man from a condition where it is less to a condition where it is more useful to himself, is dragged back from a condition where it is more to a condition where it is less useful to himself.=

IV

THE THREE PARTS INTO WHICH THE WEALTH PRODUCED NATURALLY DIVIDES ITSELF--RENT, INTEREST, SUBSISTENCE

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.

(Of course, we must be careful to distinguish between the case of
a private man increasing his investments and the general increase
of capital as applied to an unchanging area of natural forces. John
Smith having £1,000 invested at 5 per cent. can save another £1,000
and another and many more, and still get 5 per cent. But that is
because he is saving and makes up for others wasting, or because
his saving is so small a proportion of the total Capital of Society
that it has no appreciable effect. But if the total Capital of
Society be thus increased the Law of Diminishing Returns eventually
comes into play.)

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.