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ELEMENTS OF ECONOMICS



ELEMENTS
OF ECONOMICS



BY

A. G. FRADENBURGH

PROFESSOR OF HISTORY AND POLITICS, ADELPHI COLLEGE

AND PROFESSOR OF ECONOMICS IN BROOKLYN BRANCH, COLLEGE OF

CITY OF NEW YORK



CHARLES SCRIBNER'S SONS

NEW YORK BOSTON CHICAGO



* '

F 7



COPYRIGHT, 1921, BY
CHARLES SCRIBNER'S SONS



THE SCRIBNER PRESS

A



PREFACE

This book is designed to be an introduction to the science
of economics. Technical discussions and difficult termi-
nology have been avoided. The author has endeavored
to write a book of practical value to the student, but is
convinced that any practical work must be founded upon
sound theory.

There are many economic questions upon which there
may be differences of opinion. Both sides of most dis-
puted questions are given. Students should be encour-
aged to draw their own conclusions after weighing the
evidence.

While the experience of most teachers of economics has
convinced them that one book should be followed as a
guide, students should read references in other works.
Fortunately there are many excellent books perhaps
too difficult in parts for the beginner containing many
chapters that can be read with profit by even an imma-
ture student. Among many works suitable for reference
purposes the following are especially recommended: Bui-
loch, Introduction to the Study of Economics ; Carver, Prin-
ciples of Political Economy ; Ely, Outlines of Economics ;
Fetter, Principles of Economics; Seager, Introduction to
Economics ; and Turner, Introduction to Economics.

Grateful acknowledgment is made to the publishers and
authors of copyrighted books for permission to use selec-
tions. The Macmillan Company has given permission to



47970



vi PREFACE

print certain quotations from Ely's Outlines of Economics,
Spargo's Socialism, Taussig's Principles of Economics, and
Plehn's Introduction to Public Finance.

Prentice-Hall, incorporated, has authorized the use of
selections from Gerstenberg's Economics of Business, and
Ettinger and Golieb's Credits and Collections. Harcourt,
Brace & Co. have granted permission to use selections
from David Friday's Profits, Wages and Prices.

Ginn & Company have given permission to quote a se-
lection from Commons's Trade Unionism and Labor Prob-
lems.

The selections from Wolfe's Practical Banking are used
with the permission of the La Salle Extension University
of Chicago, Illinois.

To Richard T. Ely, the author is indebted for the use of
a selection from Problems of Today, a work which is now
unfortunately out of print.

To Professor E. E. Proper, of the Bay Ridge High
School, Brooklyn, and to Miss Amanda Edson, of Emerson
Hall, Brooklyn, the author is indebted for helpful sugges-
tions. Grateful acknowledgment is made to Mr. H. K.
Twitchell, President of the Chemical National Bank of
New York, and Mr. G. Foster Smith, President of the
Nassau National Bank of Brooklyn, for assistance in the
chapters on credit and banking.

A. G. FRADEXBURGH.
BROOKLYN, NEW YORK,
July 15, 1921.



CONTENTS

CHAPTER I

THE NATURE OF ECONOMICS

PAGE

THE SOCIAL POINT OF VIEW ECONOMIC DEPENDENCE UPON
OTHERS THE ORGANIC NATURE OF SOCIETY THE SUBJECT-
MATTER OF ECONOMICS ECONOMICS AND OTHER SCIENCES
THE DIVISIONS OF ECONOMICS ECONOMIC MOTIVES SUM-
MARY I

CHAPTER II

SOME CHARACTERISTICS OF MODERN ECONOMIC SOCIETY

PRIVATE PROPERTY PRIVATE ENTERPRISE INHERITANCE
VESTED RIGHTS DIVISION OF LABOR AND EXCHANGE
FREEDOM OF LABOR FREEDOM OF CAPITAL RESTRIC-
TIONS ON FREEDOM OF LABOR AND CAPITAL COMPETITION
MONOPOLY CUSTOM SUMMARY IO

CHAPTER III

WANTS AND THEIR SATISFACTION

ELEMENTARY WANTS CULTURAL WANTS ADVERTISING
CREATES WANTS GOODS FREE GOODS AND ECONOMIC
GOODS THE CONSUMPTION OF GOODS PRESENT AND FU-
TURE GOODS USEFUL AND HARMFUL CONSUMPTION
PUBLIC WEALTH SUMMARY 19

CHAPTER IV

CONSUMPTION OF WEALTH FURTHER CONSIDERED

THE LAW OF SATIETY THE LAW OF DIMINISHING UTILITY
THE LAW OF VARIETY THE ECONOMIC ORDER OF CON-
SUMPTION CONSUMER'S GOODS AND PRODUCER'S GOODS

NECESSARIES COMFORTS LUXURIES LUXURIES DO NOT

vii



viii CONTENTS

PAGE

INCREASE DEMAND FOR LABOR FAMILY BUDGETS ENGEL's

LAW SOME RECENT FAMILY BUDGETS MINIMUM-WAGE
LAWS SUMMARY , 24

CHAPTER V

THE PRODUCTION OF WEALTH

NATURE OF PRODUCTION PERSONAL SERVICES NON-PRO-
DUCERS FACTORS IN THE PRODUCTION OF WEALTH NA-
TURE LAND AS PROPERTY THE INFLUENCE OF THE LAND
UPON THE PEOPLE INCREASE IN LAND THE INFLUENCE
OF THE CONSUMER UPON PRODUCTION THRIFT VERSUS
EXTRAVAGANCE SUMMARY 39

CHAPTER VI

LABOR AND POPULATION

TEMPORARY LOWERING OF EFFICIENCY OF LABOR DIVISION
OF OCCUPATION AND DIVISION OF LABOR ADVANTAGES OF
THE DIVISION OF LABOR DISADVANTAGES THE GEO-
GRAPHICAL DIVISION OF OCCUPATION CAUSES FOR GEO-
GRAPHICAL DIVISION OF OCCUPATION INCREASE IN POP-
ULATION-^-NATURAL GROWTH OF POPULATION THE MAL-
THUSIAN THEORY OF POPULATION IMMIGRATION AMER-
ICANIZATION SUMMARY 50

CHAPTER VII

THE NATURE AND USE OF CAPITAL

CAPITAL AND CAPITAL GOODS FIXED AND CIRCULATING
CAPITAL FREE AND SPECIALIZED CAPITAL PUBLIC AND
PRIVATE CAPITAL THE ROUNDABOUT PROCESS OF PRODUC-
TION CAPITAL FORMATION REPLACEMENT FUNDS SUM-
MARY 66

CHAPTER VIII

MARKETS, VALUE, AND PRICE

DEMAND AND SUPPLY ELASTIC AND INELASTIC DEMAND
THE LAW OF SUBSTITUTION SUBJECTIVE VALUE MARKET



CONTENTS k

PAGE

VALUE WHEN THERE ARE MANY PURCHASERS AND ONE
SELLER MARKET VALUE WHEN THERE ARE MANY SELLERS
AND ONE BUYER MARKET VALUE WHEN THERE ARE MANY
BUYERS AND MANY SELLERS COMPETITION NOT ALWAYS
PERFECT MARKET VALUE OF COMPLEMENTARY GOODS
THE MARKET VALUE OF FUTURE GOODS THE RELATION
OF COST OF PRODUCTION TO VALUE THE MARGINAL PRO-
DUCER THE EXAMPLE OF OIL WELLS A COMPLICATED ONE
RESTATEMENT OF THE LAW OF VALUE SUMMARY . . 72

CHAPTER IX

THE ORGANIZATION OF INDUSTRY

THE ENTREPRENEUR INDIVIDUAL PROPRIETORSHIP PART-
NERSHIPS LIMITED PARTNERSHIPS CORPORATIONS
STOCKS AND BONDS PROFIT-SHARING WELFARE WORK
CO-OPERATION AS A METHOD OF PRODUCTION INDUSTRIAL
DEMOCRACY THE RELATION OF THE STATE TO INDUSTRY
SUMMARY 86

CHAPTER X

THE PRINCIPAL AMERICAN INDUSTRIES HUNTING,
FISHING, MINING, AND LUMBERING

CLASSIFICATION OF ECONOMIC INDUSTRIES EXTRACTIVE
AND GENETIC INDUSTRIES HUNTING FISHING MINING
LUMBERING TIMBER DEPLETION AND PRICES SUMMARY IOI

CHAPTER XI

THE PRINCIPAL INDUSTRIES OF THE UNITED STATES
STOCK-RAISING AND AGRICULTURE

STOCK-RAISING AGRICULTURE INTENSIVE AND EXTENSIVE

CULTIVATION THE LAW OF DIMINISHING RETURNS IN
AGRICULTURE THE MARGINAL PRODUCT OF LABOR AND
CAPITAL SCIENTIFIC AGRICULTURE URBAN AND COUNTRY
POPULATION DECLINE IN RURAL POPULATION SIZE OF
FARMS MARKETING OF FARM PRODUCTS SUMMARY . . 11



x CONTENTS

CHAPTER XII

PAGE

MANUFACTURING

THE INDUSTRIAL REVOLUTION THE FACTORY SYSTEM THE
EXTENSION OF THE FACTORY SYSTEM TO AMERICA THE
FACTORY SYSTEM STILL BEING EXTENDED TENDENCY TO-
WARD PRODUCTION ON A LARGE SCALE ADVANTAGES OF
THE SMALL PRODUCER MACHINERY AND LABOR THE LAW
OF DIMINISHING RETURNS IN MANUFACTURING SUMMARY 137

CHAPTER XIII

TRANSPORTATION

THE TURNPIKE PERIOD THE REVIVAL OF LONG-DISTANCE
ROADS CANAL-BUILDING RAILROADS RAILROAD COMPE-
TITION RAILROAD ABUSES PUBLIC REGULATION OF RAIL-
ROADS THE RAILROADS AND THE GREAT WAR WATER
TRANSPORTATION THE MERCHANT MARINE ACT OF IQ2O
TRADE ON THE GREAT LAKES SUMMARY 146

CHAPTER XIV

MERCHANDIZING

TRADE PRODUCES UTILITY IMPORTANCE OF MERCHANDIZ-
ING STORAGE THE HIGH COST OF SELLING SALESMAN-
SHIP ADVERTISING THE PRINCIPLE OF " CAVEAT EMP-
TOR" SUMMARY l6l

CHAPTER XV

INSURANCE

WHAT IS INSURANCE ? FIRE INSURANCE THE CONTRACT
PREVENTION OF FIRE LLOYDS LIFE INSURANCE THE
LIFE-INSURANCE POLICY DIVIDENDS THE SCIENTIFIC
BASIS OF LIFE INSURANCE STATE SUPERVISION OF IN-
SURANCE OLD AGE INSURANCE ACCIDENT INSURANCE
INSURANCE AGAINST SICKNESS THE USUAL OBJECTIONS
TO STATE INSURANCE OF WORKING MEN GROUP INSUR-
ANCE SUMMARY 170



CONTENTS xi

CHAPTER XVI

PAGE

MONEY

WHAT IS MONEY? WHAT MONEY DOES MONEY AS A ME-
DIUM OF EXCHANGE MONEY AS A MEASURE OF VALUE
MONEY AS A STANDARD FOR DEFERRED PAYMENTS QUALI-
TIES NECESSARY FOR GOOD METALLIC MONEY COINAGE
SEIGNIORAGE AND BRASSAGE FREE COINAGE GRESHAM's
LAW BIMETALLISM IN THE UNITED STATES INTERNA-
TIONAL BIMETALLISM SUMMARY . l8o

CHAPTER XVII

PAPER MONEY

VARIETIES OF PAPER MONEY REDEEMABLE PAPER MONEY
IRREDEEMABLE PAPER MONEY FIAT MONEY BANK-NOTES
THE NATIONAL BANKING SYSTEM ELASTIC CURRENCY
THE FEDERAL RESERVE SYSTEM ISSUES OF CURRENCY BY
FEDERAL RESERVE BANKS MONEY IN CIRCULATION IN
THE UNITED STATES SUMMARY 1 90

CHAPTER XVIII

MONEY AND PRICES

THE QUANTITY THEORY OF PRICES EFFECTS OF CHANGES
IN THE VOLUME OF CURRENCY THE MULTIPLE STANDARD
INFLATION AND CONTRACTION INDEX NUMBERS THE
STABILIZED DOLLAR SUMMARY 2OO

CHAPTER XIX

BANKING AND CREDIT

THE BANKING FUNCTIONS THE DEPOSIT FUNCTION
LOANS AND DISCOUNTS BANK RESERVES KINDS OF BANKS
WHAT IS CREDIT? PROMISSORY NOTES BOOK- AC-
COUNTS ACCEPTANCES BONDS CHECKS CERTIFIED
CHECKS THE CLEARING-HOUSE SYSTEM BILLS OF EX-
CHANGE AND DRAFTS THE USE AND ABUSE OF CREDIT
SUMMARY 206



xii CONTENTS

CHAPTER XX

PAGE

INDUSTRIAL DEPRESSIONS AND CRISES

TRUE EXPLANATION OF REGULAR OCCURRENCE OF CRISES
OVER-PRODUCTION AND CRISES CROP FAILURES AND
CRISES THE RELATION OF MIDDLEMEN TO CRISES THE
BANKS AND CRISES SUMMARY 22O

CHAPTER XXI

INTERNATIONAL TRADE

NATURE OF INTERNATIONAL TRADE THE FOREIGN TRADE
OF THE UNITED STATES BALANCE OF TRADE PAYMENT
OF INTERNATIONAL OBLIGATIONS THE EDGE ACT AND THE
WEBB-POMERENE ACT SUMMARY 227

CHAPTER XXII

RESTRICTIONS ON INTERNATIONAL TRADE

TARIFFS THE INFANT-INDUSTRIES ARGUMENT THE HOME-
MARKET ARGUMENT THE WAR ARGUMENT THE TARIFF
AND WAGES THE ANTI-DUMPING ARGUMENT A PROTEC-
TIVE TARIFF INVITES RETALIATORY TARIFFS THE PROTEC-
TIVE TARIFF AND MONOPOLIES WHO PAYS THE TARIFF?
PROTECTION SELDOM INCREASES THE TOTAL INDUSTRIES
OF A COUNTRY CONCLUSION SUMMARY 237

CHAPTER XXIII

MONOPOLIES

DEFINITION OF MONOPOLY MONOPOLY PRICES CLASSIFI-
CATION OF MONOPOLIES PERSONAL MONOPOLIES PRI-
VATE LEGAL MONOPOLIES PATENTS COPYRIGHTS PUB-
LIC LEGAL MONOPOLIES NATURAL MONOPOLIES NATURAL
MONOPOLIES OF LOCATION NATURAL MONOPOLIES BY
NATURE OF THE BUSINESS THE WATER MONOPOLY GAS
AND ELECTRIC SERVICE THE TELEPHONE BUSINESS
STREET RAILROADS PUBLIC VERSUS PRIVATE OWNERSHIP
OF NATURAL MONOPOLIES PUBLIC CONTROL OF NATURAL
MONOPOLIES LIMITS TO REGULATION OF PRICES RAIL-
ROAD MONOPOLIES THE TRANSPORTATION ACT OF IQ2O
GOVERNMENT CONTROL OF RAILROADS TRUSTS, OR CAPI-



CONTENTS xiii

PAGE

TALISTIC MONOPOLIES WHAT IS A TRUST? ANTI-TRUST
LAWS SUMMARY 246

CHAPTER XXIV

RENT

DEFINITION OF RENT LAND ON THE MARGIN OF CULTIVA-
TION IS THERE " NO-RENT LAND"? RENTS OF AGRICUL-
TURAL LANDS DO NOT AFFECT PRICES DO AGRICULTURAL
RENTS ALWAYS RISE? URBAN RENTS CHANGES IN
URBAN RENTS SUMMARY 263

CHAPTER XXV

WAGES

LIMITS OF WAGES REAL AND NOMINAL WAGES THE DE-
MAND AND SUPPLY OF LABOR TIME WAGES PIECE WAGES

RATE-OF-SERVICE WAGES NON-COMPETITIVE GROUPS
ADAM SMITH'S REASONS FOR DIFFERENCES IN WAGES

SUMMARY 272

CHAPTER XXVI

LABOR PROBLEMS

THE OPEN VERSUS THE CLOSED SHOP STRIKES SYMPA-
THETIC STRIKES GENERAL STRIKES LOCKOUTS ARBITRA-
TION BOYCOTTS CHILD-LABOR LAWS WOMEN WAGE-
EARNERS THE EIGHT-HOUR DAY SUMMARY . . . .279

CHAPTER XXVII

LABOR ORGANIZATIONS

THE SERVICES OF LABOR ORGANIZATIONS THE RISE OF
LABOR ORGANIZATIONS IN THE UNITED STATES THE
AMERICAN FEDERATION OF LABOR THE INDUSTRIAL WORK-
ERS OF THE WORLD THE LOYAL LEGION OF LOGGERS AND
LUMBERMEN SUMMARY .291

CHAPTER XXVIII

INTEREST

WHY INTEREST IS PAID INTEREST AS A REWARD FOR WAIT-
ING PURE AND GROSS INTEREST THE RATE OF INTEREST
LONG AND SHORT TIME LOANS USURY LAWS INTEREST NOT
THE ONLY INDUCEMENT TO SAVING SUMMARY . . . 300



xiv CONTENTS

CHAPTER XXIX

PAGE

PROFITS

NATURE OF PROFITS THE ENTREPRENEUR AS A RISK TAKER
THE NATURE OF BUSINESS RISKS CLASSES OF ENTRE-
PRENEURS DIFFERENTIAL PROFITS EXTRAORDINARY
PROFITS WAR PROFITS SUMMARY 306

CHAPTER XXX

SOME PROPOSED RADICAL ECONOMIC CHANGES

THE SINGLE TAX ARGUMENTS AGAINST THE SINGLE TAX-
ANARCHISM COMMUNISM SOCIALISM ARGUMENTS FOR
SOCIALISM EXAMINED SUMMARY 313

CHAPTER XXXI

PUBLIC FINANCE

PUBLIC AND PRIVATE FINANCE COMPARED THE BUDGET
GROWTH IN PUBLIC EXPENSES PUBLIC REVENUE ADAM
SMITH'S CANONS OF TAXATION DIRECT AND INDIRECT
TAXATION TAXES ON IMPORTS EXCISE TAXES INCOME
TAXES INHERITANCE TAXES TAXES ON REAL ESTATE
TAXES ON PERSONAL PROPERTY A PROGRAM OF TAXA-
TION EXEMPTIONS FROM TAXATION TAXES ON SALES

PUBLIC DEBTS THE LIBERTY AND VICTORY LOANS SUM-
MARY 325

CHAPTER XXXII

SOCIAL AND ECONOMIC BETTERMENT

RECENT SOCIAL AND ECONOMIC PROGRESS METHODS OF
ECONOMIC PROGRESS INCREASED PRODUCTION SHOULD
BENEFIT ALL 345

APPENDICES

APPENDIX I INDUSTRIAL REPRESENTATION PLAN OF THE
FACTORY OF THE GOODYEAR TIRE AND RUBBER COM-
PANY, AKRON, OHIO 351

APPENDIX II AMERICANIZATION WHAT IS IT ? . . . 356

INDEX 359



ILLUSTRATIONS

PAGE

Chicago water front 43

Desert land made fertile by irrigation 45

Skilled workmen in a Chicago packing-house 53

A stock certificate 91

Coal production of the United States 105

Production of iron ore in the United States 106

Bakersfield oil region in California 109

Timber depletion no

A "skidder machine" in

Destruction by forest-fire 115

Corn production of the United States 121

Wheat production of the United States 122

Unloading cotton 123

Cotton production of the United States 1 24

Machinery in use on a Western farm 125

Farm lands in New England and Montana 129

Scene in a Detroit automobile factory 143

Mitchell Point on the Columbia River highway .... 147

Barges on the Mississippi River 151



xvi ILLUSTRATIONS

PAGE

An ocean liner and an express-train '. 155

The "curb" market on Broad Street, New York .... 165

A promissory note secured by collateral 208

A promissory note and draft 211

A trade acceptance . . 213

A bank acceptance 214

A certified check 215

A foreign bill of exchange 231

A commercial letter of credit 233

Map illustrating rent . . . . . . 265

A city apartment-house and a suburban house .... 267

Cartoon illustrating war expenses 339

Selling liberty bonds in New York 341



ELEMENTS OF ECONOMICS



THE ELEMENTS OF ECONOMICS

CHAPTER I
THE NATURE OF ECONOMICS

Economics treats of man in his relation to wealth. It
tells how men make a living and how they may make a
better living. It is concerned with the production of
wealth, how wealth is divided among the various members
of the community, and, how wealth is used. It has also
to do with plans for a larger production of goods, a more
equitable distribution, and a more rational and more eco-
nomic consumption.

Not many years ago the subject was called Political
Economy. Some authors still prefer this title, but Eco-
nomics is the more appropriate term, inasmuch as many
subjects discussed in economics are not at all political.

The Social Point of View. Most people consider their
own economic well-being as of first importance. This
is natural. The economist, however, looks at all things
from the social point of view, that is, "the greatest good
to the greatest number." The individual economic inter-
est is often opposed to the social interest. For example,
a few years ago the Louisiana State Lottery was a profitable
enterprise for a small group of men. Its operations were
opposed to the economic interests of a majority of the



2 THE ELEMENTS OF ECONOMICS

people of Louisiana and of the nation and to the moral
interests of all. The State of Louisiana, in refusing to per-
mit the company to continue in business, rendered an eco-
nomic as well as a social service. Then, again, the owners
of a cotton-mill might benefit by employing child labor,
but the public would not benefit.

Economic Dependence upon Others. In earlier times
every family was, to a large extent, independent of every
other family. It produced its own food, made its own
clothing, and lived in its own house supplied with water
from its own well and lighted with candles made from the
tallow of its own sheep. Such was the condition in America
during colonial times.

Now all is changed. No one is economically indepen-
dent. Each of us renders some service or produces some
commodity for others and receives payment in money with
which to purchase the goods we need. Recently a popular
magazine showed, even for a simple meal, our dependence
upon others:

"The pepper came from ten thousand miles away. It
grew on a little bush about eight feet high, which must
have had a growth of at least five years. The pepper was
picked green, it had to be dried in the sun, and this meant
employing women. It took one ship and a thousand miles
of railroad to bring the pepper to the United States. The
tea on the table came from China and the coffee from
South America. The codfish had to be brought from
Maine. Men had to be employed to catch the fish; other
men and women were employed in drying, packing, and
boxing it, and it, too, had to make a long railroad journey.
The flour of which the bread was made was grown in



THE NATURE OF ECONOMICS 3

Dakota; some one owned the land, and that meant the
investing of capital; and then he had also to pay wages
to working men. The wheat had to be ground, and the
building of the mill and the plant, or machinery, meant
more money invested. The millers had to be paid; coopers
had to be paid for making the barrels; and, of course, the
wood of which the barrels were made had to be cut and
sawed and shaped, and this meant the employing of more
men. Then the flour had to be shipped over the railroad
and handled again by cartmen before it came into the
house. The salt came from the Indian Reservation in
the northwestern part of New York State. The canned
peaches came from California, and they too represented
the employment of capital and labor. The spices in the
cake came from the Spice Islands in the Indian Archi-
pelago."

The only items on the table which could be produced
within the county where the meal was eaten were corn
bread, butter, and buttermilk. It is estimated that the
little meal represented directly or indirectly the employ-
ment of five hundred millions of dollars of capital and of
five millions of men.

The Organic Nature of Society. Our dependence upon
others has caused society, which includes all of us, to be
regarded as an organism, just as the human body is an
organism. Some parts of this social organism do one thing
and some another. The services of each part are necessary
to the welfare of the whole. Suppose, for example, the
railroads fail to bring us food and fuel. Then the whole
social organism suffers. Just as the human body cannot
do its work if the nervous system is out of order, so



4 THE ELEMENTS OF ECONOMICS

society depends upon its nervous system the telegraph
and telephone lines. We are truly our brother's keep-
ers.

The Subject-Matter of Economics. Economics deals
with subjects in which every one is interested. Such sub-
jects as the protective tariff, public ownership of railroads,
money and banking, stocks and bonds, labor problems, and
monopolies are of concern to each of us. The main object
in the study of economics is to teach us to think correctly
on economic questions.

Economics and Other Sciences. Every science is in
some way related to economics. For example, arithmetic
is used in the conduct of the smallest business. The higher
mathematics are employed by surveyors, architects, me-
chanical and electrical engineers. Statistics form the scien-
tific basis of the life-insurance business and are used by
business men in calculating costs and determining the re-
sults of advertising campaigns. Chemistry and physics
must be known by the scientific farmer as well as by those
who engage in manufacturing. Among the social sciences
sociology and history are most closely related to economics.
Sociology is the science which treats of man in his relations
with his fellow men. Economics may be considered as
that branch of sociology which has to do with how men
make a living. History is of such importance to economics
that every historian must be something of an economist
and every economist must be well versed in history. The
English historian Freeman once said that "History is past
politics and politics is present history." Many modern
historians would also say that history is past economics
and economics is present history.



THE NATURE OF ECONOMICS 5

The Divisions of Economics. Economics may be re-
garded as consisting of three sections: (i) Consumption
of wealth, (2) production of wealth, (3) distribution of
wealth.

1. The consumption of wealth deals with the use or
using up of goods. Some goods, like edibles, are used in
one process and are known as perishable goods. Others,
like a house, may be used for many years and are known as
durable goods.

2. Production has to do with making things ready for
use. Nature furnishes raw material, but man must gather
it and prepare it. The relation between production and
consumption of wealth is close. Goods are produced in
order that they may be consumed. Demand results in
goods being supplied. But a supply sometimes creates a
demand. The desire for a means of flying led to the in-
vention of the airplane, but the production of airplanes
produced a demand for them among persons who had never
before considered the possibility of flying.

3. Distribution deals with the incomes which the
various members of society receive. Rent, wages, interest,
and profits are the subjects discussed in considering the
distribution of wealth. Most of the great economic ques-
tions of to-day refer to distribution. For example, the
interests of labor and capital are identical in the production
of wealth. Both are interested in a large production, for
the more produced the more there will be to divide; but
when it comes to distribution their interests often seem to
clash. The capitalist thinks the laborer wants more than
his just share, and the laborer thinks the capitalist is the
offender, and often both condemn the landlord as a con-



6 THE ELEMENTS OF ECONOMICS

scienceless profiteer. TQ secure such a distribution of
wealth as will be most fair to all parties is an economic
ideal toward which progress is being made.

Economic Motives. Men are impelled to work by a
variety of motives and these motives are found in different
proportions with different men. Self-interest is a powerful
motive to induce men to work, but this is usually an en-
larged self-interest. The pleasure of a night at the opera
is more than doubled by sharing it with another. The
same is true of a trip to Europe, an automobile ride, or
anything that can give pleasure to a member of the family
or to a friend. The phrase " economic man" was coined
to describe a man wholly influenced by his own selfish
interests. Such a man, if he ever existed, has fortunately
been rare. The normal man works that he may secure
necessities, comforts, and luxuries for himself and that
he may provide a competence which will support him in
ill fortune and in old age. But what he wishes for himself
he doubly wishes for his wife and children and others de-
pendent on him.

Social esteem is also a powerful motive. Men like to be
well thought of in the community in which they live and
will shun employments which their friends and companions
regard as dishonorable or degrading. Social esteem ex-
plains why girls prefer to work in a factory rather than as
domestic servants, even though the hours of labor and
other conditions may be equal. The profession of law is
held in high esteem, and every lawyer wants to be success-
ful not only because of the income which success will in-
sure but because of the standing his profession will afford
him in his community. A successful lawyer wants to be-



THE NATURE OF ECONOMICS 7

come a judge, though his income as a judge may be much
less than he could obtain as a lawyer.

Another motive to economic activity is the desire for
employment. For real men and women a certain amount
of activity is pleasurable. For them loafing is the hardest
kind of work. Many a man keeps at work because he likes
to be employed when it is no longer necessary for him to-
work.

The instinct for association is another motive for activ-
ity. People want to do what others are doing, and in the
United States, where most people are working, it is the
fashion to work. In some countries, where there is a large
leisure class and where work is not held in such high es-
teem, a part of the population finds association in idleness.