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This text makes practical application of the theories
treated in "Principles of Economics" to' such matters
as money, banking, international trade, labor organiza-
tions, agricultural economics, trusts, taxation, insurance,
immigration, and similar topics. The book was com-
pletely revised in 1922; hence it considers economic
matters in the light of the changed conditions following
the World War. The volume is equipped with charts,
diagrams, statistical tables, reference reading lists, and
other numerous helps for both the teacher and the

8 vo 611 pages Price $2.75

Economics tDolume 1













1. Purpose and nature of economics 3

2. Choice and value 12

3. Goods and psychic income 22

4. Principles of evaluation 31

5. Trade by barter 42

6. Money and markets 50

7. Principles of price 61

8. Competition and monopoly 73


9. Agents for changing stuff and form 89

10. Agents for effecting changes of place and time .... 101

11. Consumption and duration Ill

12. The principle of proportionality 122

13. The concept of usance-value 135

14. The renting contract 143

15. Principles of rent 158


16. Human beings and their economic services 171

17. Conditions for efficient labor 184

18. The value of labor and the choice of occupations . . . 197

19. Principles of wages 211


20. Time-preference 235

21. Rate of time-preference 248

22. Money and capitalization 262

23. Capitalization of monetary incomes 273

24. Saving and borrowing 285

25. Capitalization and interest 300



26. Enterprise 317

27. Management 327

28. Profits and costs 343

29. Various shades of profits 358

30. Costs and competitive prices 369

31. Monopoly-prices; large production 381


32. The problem of population 399

33. Volitional doctrine of population 414

34. Decreasing and increasing returns 426

35. Basic material resources: their use, consumption, and con-

servation 442

36. Machinery and wages 456

37. Waste and luxury 468

38. Abstinence and production 482

39. Value theory and social welfare 500

Index . 515


The author's "Principles of Economics" published in 1904
aimed to present a unified theory of distribution under the
conditions of the modern price system. Value, rent, wages,
and interest were for the first time in a general text treated
as different manifestations of the same general principles,
not as contrasted phenomena each governed by a law of a
different nature. The present text develops this plan fur-
ther and seeks to bring out more clearly on the theoretical
side important distinctions such as those between the indi-
vidual psychology of value and market price, static and
dynamic conditions, temporary and more permanent changes,
commercial and welfare problems.

This text of "Economic Principles" seeks to answer the
practical needs of our society as it is today better than does
the older analysis which has become conventionalized in col-
lege texts. Illustrations of principles are drawn almost en-
tirely from contemporary American conditions. A number
of practical applications of the principles are treated in a
second volume "Modern Economic Problems" (revised 1922 ),
dealing with the facts, theories, and public policies relating to
money, banking, international trade, labor organizations,
agricultural economics, trusts, taxation, insurance, and other





1. Definition of economics. 2. Economics contrasted with the nat-
ural sciences. 3. Science as abstraction. 4. Science and art. 5.
Place of economics among the sciences. 6. Subdivisions of economics.
7. Economy in the sense of the subject studied. 8. Economy not
parsimony. 9. Social aims of economics. 10. Economics in a democ-
racy. Note on Economic laws and other terms.

1. Definition of economics. Economics may be defined,
briefly, as the study of men earning a living; or, more fully,
as the study of the material world and of the activities and
mutual relations of men so far as all these are the objective
conditions to the gratification and to the welfare of men. The
ideas of most persons on this subject are vague, yet it would
be very desirable if the student could approach this study
with an exact understanding of the nature of the questions
with which it deals. Until a subject has been studied, however,
a definition in mere words but slightly aids in marking it off
clearly in our thought. The student must first try to see
the general field of facts and of human interests that eco-
nomics covers.

2. Economics contrasted with the natural sciences.
Economics may be contrasted with the natural sciences, which
deal with material things and their mutual relations. A defi-
nition that suggests clear and familiar thoughts to the student
seems at first much more difficult to get in economics than in
the natural sciences. These deal with concrete, material things



which we are accustomed to see, handle, and measure. If a
child is told that botany is a study in which he may learn
about flowers, trees, and plants, the answer is fairly satisfying,
for he at once thinks of many things of that kind. When, in
like manner, zoology is defined as the study of animals, or
geology as the study of rocks and the earth, the words call
up memories of many familiar objects. Even so difficult and
foreign-looking a word as ichthyology seems to be made clear
by the statement that it is the name of the study in which one
learns about fish. It is true that there may be some misun-
derstanding as to the way in which these subjects are studied,
for botany is not in the main to teach how to cultivate plants
in the garden, nor ichthyology how to catch fish or to propa-
gate them in a pond. But the main purpose of these studies
is easily made clear at the outset; it is to know about the
natural objects themselves. It is true that as each science
is pursued, and knowledge widens to take in the manifold and
various forms of life, the boundaries of the special sciences
become not more but less sharp and definite.

In contrast with these, economics is one of the social sciences
which deal with the inner nature of men and with men's
relations in society. These are less tangible facts we are
tempted to say that they are less familiar than are the ma-
terials with which the natural sciences deal. But the truth
may be that social acts and relations are more familiar to
our thought than is the subject matter of the physical sciences.
Every hour in the streets and stores one may witness thou-
sands of acts, such as bargains, labor, and payments, that are
the data of economic science. Their very familiarity causes
us to overlook their deeper meaning.

3. Science as abstraction. A science by its very nature
as science is concerned primarily with abstractions rather than
with concrete objects. To think scientifically is to think ab-
stractly. Abstraction is a certain way of looking at things;
it is looking at their qualities. It is more difficult to think
abstractly than it is to think of concrete things. It implies


an analysis, a taking-apart of things to get at their components,
and a grouping of these parts into some general idea not an
easy task for most minds. Economics singles out for study
those aspects of the world which have to do with man 's desire
for the things about him and the use that he makes of them.

Economics "as the study of the material world" also has
to do with all of those things which are the subject-matter
of the natural sciences; but only in a secondary way. It
studies them only as they are related to man's welfare, or as
they affect his valuation of things ; only in so far as they are
related to the central subject of economic interest, the earning
of a living.

4. Science and art. Like every other field of study,
economics has two aspects, one of science, the other of art;
the one of knowledge, the other of action; the one of prin-
ciples, the other of their application. Each science seeks to
study and to understand the world in some aspect, to reduce
the multitude of facts to order, and to understand their rela-
tions. Thus, astronomy has succeeded in counting a large
number of heavenly bodies, classifying them as stars, planets,
comets, etc., has come to understand their relations in space,
distances, direction, and speed of movement, etc. On this
science is based such practical arts as navigation, regulation
of the calendar, determination of the exact time, prediction of
eclipses, etc. Thus, likewise, physics, chemistry, the various
branches of biology, psychology, etc., are concerned first, and
merely as science, with the truth regardless of its application.
Then, however, whatever truth is discovered may be found to
be capable of some uses or applications, either in the hands of
the scientists themselves or in the hands of another body of
men, variously named practical workers, technicians, and
inventors, who develop the art side of the subject. The history
of civilization abounds with evidence showing that the work
of the group of scientific workers continually pursuing truth
for its own sake (work little esteemed by the world in
general), is indispensable for the continued progress in the


practical arts. Just outside the circle of attained scientific
knowledge is a fringe of possible practical applications. But
unless other and still other discoveries were made, practical
progress in the arts would lose its source of inspiration.

5. Place of economics among the sciences. Economics
seeks the reason, connection, and relations in the great multi-
tude of acts arising out of the dependence of men on the world
of things and of other men. Economics has to study men in
two sets of relations, as is indicated in the definition: the
relation on the one hand of man to material (non-human)
things about him, and on the other hand to other men with
whom he has "economic" dealings. In so far as economics
is concerned with the former, the relation of man to his ma-
terial environment, economics borders on some phases of each
of the engineering sciences, and of the natural sciences, as
geology, botany, zoology, and (in considering how these things
affect man) physiology and psychology.

In so far as economics is concerned with the mutual rela-
tions of men in business, it becomes one of the group of social
sciences. The word "social" comes from the Latin socius,
meaning a fellow, comrade, companion, associate. The social
sciences deal with men and their relations with each other.
As men living together have to do with each other in a great
many different ways, and enter into a great many different re-
lations, there arise many different social problems, and the
several social sciences of politics, law, ethics, and economics.
Each of these attempts to study social relations in some one
important aspect, that is, to view them from some one stand-
point. Politics treats of the form and working of govern-
ment, and is mainly concerned with the question of power or
control of the individual's actions and liberty. Law treats of
the rules of the sovereign state controlling the actions of men
(criminal jurisprudence), and of the principles guiding the
interpreting of the contracts into which men see fit to enter
in their economic affairs (civil jurisprudence). Ethics treats
the question of right and wrong, and the moral aspects of


men's acts and relations with each other. As compared with
these, economics is a much less purely social science ; it has to
do almost constantly with the material environment as well
as with the social environment in which men live.

The attempt to distinguish between the fields occupied by the
various social sciences discloses at once a fundamental unity
existing among them. The acts of men are closely related in
their lives, but they may be looked at from different sides.
The central thought in economics in its social aspect is the
business relation, the relation of men in working together, or
in exchanging their services and material goods. In pursu-
ing economic inquiries we come into contact with political,
legal, and ethical considerations, all of which must fie recog-
nized before a final, practical answer can be given to any ques-
tion. Nevertheless, the province of economics is limited. It
is because of the feebleness of our mental power that we divide
and subdivide these complex questions and try to answer cer-
tain parts before we seek to answer the whole. Whoever at-
tempts this final and more difficult task should rise to the
standpoint of the social philosopher.

6. Subdivisions of economics. Economics in its most
general sense includes various subdivisions. First is domestic
economics (household economics), the modern equivalent of
oiko-nomos, first used by Xenophon as the name for a set of
rules to help the housekeeper or steward of an estate. The
typical Greek household, however, was a large estate with
slaves, almost a little state in itself, carrying on nearly all the
arts and crafts. The term political economy (as economic
politique) was first used in France in the eighteenth century
to express the set of rules or principles to guide the king and
his counselors in the control of his country, which was thought
of much as if it were the king's private estate. Of late the
term "economics," as expressing better a broadening con-
ception of the subject, and at the same time as less likely to
be confused with politics, has been gradually displacing the
term political economy. It is used with various adjectives in-


dicating the field covered; for example, domestic economics,
household economics, corporation economics, national econom-
ics, political economy, world-economy, etc.

7. Economy in the sense of the subject studied. We
have chosen for our purpose to define economics as a " study, ' '
a body of knowledge, a science. But as in the case of various
other sciences, its name is used also to indicate the body of
facts and group of persons which are studied. One person
(like Robinson Crusoe, on his desert island) constitutes an in-
dividual economy. There are, in such a case, no personal rela-
tions to study, but only the relations of man to his environ-
ment. A group of persons thought of together with all their
material environment and in their relations with each other,
forming something of an economic unity, constitute a social
economy. The economic affairs of a family constitute a family
or domestic economy, and those of a nation a political, or a
national, economy.

8. Economy not parsimony. It should hardly be neces-
sary to. warn against giving to the word "economy" the mean-
ing of (the act or the quality of) parsimony. Economy im-
plies good management, making the best of whatever means
one has, and this is not stinginess, tho the thriftless and
the self-seeking are always prone to impute it as such to
others. Economy as a mode of action is parallel to economics
as the science that seeks to arrive at such general rules and
principles as will lead to the best results in the use of the
resources and services of individuals, families, and nations.

It is true that there are different standards by which to
judge what is "best"; sometimes a merely pecuniary stand-
ard of business profit to the individual is taken, and this
may come close to mere avarice. Again, a standard of true
welfare for the nation or for the race may be taken. These
two views may be, and often are, in conflict, and it is a part of
the task in this study to keep before the mind as clearly as
possible the difference between these standards. The one
standard is that of individual pecuniary, acquisitive eco-


nomics; the other that of public industrial, productive eco-
nomics. 1

9. Social aims of economics. Economics is often defined
as the science of wealth. Partly because of this, and partly
because of the unfortunate confusion of the individual and of
the social points of view, it has been characterized as a "gospel
of Mammon." But, in the main, economics must be under-
stood as a social study for social ends, not a selfish study for
individual advantage. The individual interest must be recog-
nized, but treated as within, and subordinate to, the larger
social interests. Certainly some of the lessons of economics
may be of practical value to men in active business, and
training in economics is increasingly deemed a helpful prep-
aration for many special callings. Many economic "princi-
ples" are but the general statement of those ideas that have
been approved by the experience of business men, of states-
men, and of the masses of men. Economics is not dreamed
out by the closet philosopher, but more and more it is the
attempt to describe and comprehend the interests and the
action of the practical world in which men must live. Many
men are working together to develop this study those who
collect statistics and facts bearing on all kinds of practical
affairs, and those who search through the records of the past
for illustrations of experiments and experiences that may
help us in our life to-day.

10. Economics in a democracy. With the growth of
the modern state, with the increasing importance of business,
and of industrial and commercial interests, as compared with
changes of dynasty or the personal rivalries of rulers, eco-
nomic questions have grown in relative importance. In our
own country, particularly since the subjects of slavery and of
states' rights ceased to absorb the attention of our people, eco-
nomic questions have pushed rapidly into the foreground. In-
deed, it has of late been more clearly seen that many of the
older political questions, such as the American Revolution and

i This distinction is developed in Part VI, especially in ch. 39.


slavery, formerly discussed almost entirely in their political
and constitutional aspects, were at bottom largely questions of
economic rivalry and of economic welfare. The remarkable
increase in the attention given to this study in colleges and
universities since the beginning of the last quarter of the nine-
teenth century is but the index of the greatly increased in-
terest and attention given to it by citizens generally.

The conception of political economy as the term was first
used, has been modified wherever unlimited monarchy has
given way to the rule of the people. In a democracy there is
need for a general diffusion of knowledge, if the economic
policy and legislation of the State is to be intelligent. The
power now rests not with the king and a few counselors, but
in the last resort with the people, and therefore the people
must be acquainted with the experiences of the past, must so
far as possible have economic knowledge to enlighten them in
their choice of men and of measures.


Economic laws and other terms. In the science of economics some
general ideas and statements are attained, and are called variously laws,
principles, theories, hypotheses, and doctrines. These terms are used
somewhat loosely, and we may note the general meaning that we are
to attach to them.

Law originally meant (1) the binding custom or practice of a com-
munity; then came to mean (2) a rule laid down and enforced by some
authority, as the State (acting through the political law-making body),
or as divine will; (3) a statement of an order or relation of phenomena
which appears to hold under the given conditions. Economic laws have
this last meaning; they are not made and enforced by man, but are
discovered as the true order inherent in things. Often in the physical
sciences law in this sense suggests a pretty definite arithmetic state-
ment (i.e., Newton's law of gravitation, Kepler's law, etc.), but it
is used generally of an orderly recurrence. In economics the term is
frequently applied, as in the phrases, law of diminishing returns,
Gresham's law of money, etc.

Principle meant (1) beginning; then (2) source, or origin; (3) a
fundamental truth; (4) an elementary proposition. Law and prin-
ciple are used almost interchangeably, tho it would seem better to


speak of principle when a more elementary statement is meant, and
a law when the statement is more complex. Throughout this book the
preference is generally given to the word principle rather than law in
cases where there is good usage favorable to both.

Theory meant ( 1 ) contemplation ; then ( 2 ) the general explanation
of a body of facts, or group of phenomena; in other words, a plan or
scheme of thought constructed to fit the facts so far as they are
known. The popular use of the term theory to mean some plan of
action, especially a poorly thought out plan sure to fail, should have no
place in our discussion. It is an error to contrast theory and practice
as the impracticable versus the practical. They should be contrasted
only as idea, or explanation, versus action, or execution. Good theory
then, usually goes with good practice and bad theory with poor prac-
tice. Usually when it is said that a thing is true in theory but false in
practice, what is meant is that the theory is untrue, based on purely
imaginary conditions and hence will not work. Science has to do with
theory; art has to do with practice.

Hypothesis, often used interchangeably with theory, may be distin-
guished from it; it is a provisional conjecture regarding the relations
of certain phenomena, whereas a theory is a hypothesis which has under-
gone a large measure of verification.

Doctrine meant originally (1) that which is taught, usually by a
group of thinkers; hence (2 a body of principles. In such expressions
as the law of rent, the theory of rent, and the doctrine of rent, the
terms are well nigh synonymous, and the preference for the use of
"doctrine" in certain cases rather than theory or principle, resulted
more or less from the historical accident that a theory became connected
in thought with a group of thinkers (that is, was taught by them, as
Malthusian doctrine, the Ricardian rent doctrine, the free-trade doctrine
of the Manchester School, etc.).


1. Choice; its origin. 2. Development of conscious choice. 3.
The idea of scarcity. 4. Valuation. 5. One's own labor as a valu-
ation unit. 6. Crusoe's scale of valuations. 7. Choice before and
after valuation. 8. Value. Notes on Aspects of things chosen, Vari-
ous meanings of scarcity, Value and valuations.

1. Choice ; its origin. The world of industry, as we
look out upon it, appears to be alive with motion, like a bee-
hive. In the crowded harbor, the busy railroad yard, the
noisy steel mill, the bustling department store, we see a cease-
less and bewildering activity. In all this movement and ap-
parent confusion, there is, however, a large degree of order
and a pretty regular succession of events which reflects a suc-
cession of choices that men are making.

These choices are not always and entirely the result of de-
liberate and conscious calculation. They are determined in a
very great degree by habit or by instinct. Every living crea-
ture has a nervous organization of some sort plants as well
as the lowest forms of animals. This nervous organization has
a pretty definite "set" or habit of response toward its en-
vironment; that is, the nerves react in certain ways to ex-
ternal stimuli. The seed in moist soil germinates; it sends
rootlets into the earth in search of water and of the particu-
lar soil-elements which it by nature "chooses"; it sends
stock and leaf upward into the light and air, it spreads or

Online LibraryFrank A. (Frank Albert) FetterEconomics (Volume 1) → online text (page 1 of 43)