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VI B 10 to




THE LIBRARY

OF

THE UNIVERSITY

OF CALIFORNIA

LOS ANGELES



THE COMMON SENSE OF
ECONOMIC SCIENCE



FROM
MILLS & BOON'S LIST



Common Sense Self-Help. A Study in
tlio Economics of Mind Power. By
EDJirsD Dane, LL.B. Fcap. 8vo.
2a. M. net.

The History and Adventures of a Penny.

Hy EuMiND Dank, LL.B. Fcap. 8vo.
2a. Gd. uft.

How to Make a Fortune ; or, The Art of
Growing Money. By One Who Has
Grown it. Fcap. 8vo. 2s. Qd. net.

Take It in Time. Talks on Thrift for
Boya and Girls. By the Author of
" How to Make a Fortune." Fcap.
8vo. 2a. 6d. net.

Other People's Money. By " A Trustee."
Second Edition. Fcap. 8vo. 2s. Qd.
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Life Without Money. By the Author of
" Life Without Servants." With a
Coloiu'ed Wrapper. Fcap. Svo. 2s. 6d.
net.



THE COMMON SENSE

OF ECONOMIC

SCIENCE



BY

EDMUNDi^ANE, LL.B.

Author of "The History and Adventures of a Penny,
"Common Sense Self- Help "



MILLS & BOON, LIMITED

49 RUPERT STREET

LONDON, W.I



PuhUihed IQ22



Prinltd in Grtat Britain by Butler & Tanner, Frame and London



\il.S



PREFATORY NOTE

A FEW words may, by way of preface, be said on
the aim of this book and on its method. The
'::"aim is to set out the leading truths and principles of
\: Economics in a form that makes them easy to grasp ;
^ the method is, by way of proof or illustration, to appeal,
'-'^- as far as necessary, alike to science and to history.
It has, in not a few treatises on Economics, been the
practice to lay down abstract propositions and defini-
tions and then to go on, if not to prove, at least to
argue in support of them. The practice renders the
study diJBEicult. Definitions there must be, but terms
should first be explained and understood. Unfortu-
' nately, again, arguments relied upon have been too
^^ often merely quantitative. The element of quality
o which ahke in the production, exchange and distribu-
^ tion of Wealth influences the dealings and ideas of
men at least as much as quantity, has too frequently
been overlooked. In some aspects of Economics it
is very important, and merely quantitative arguments
are, at best, no more than half-truths. It is for these
j^j reasons mainly that Economics has earned the name
^ of the " dismal science."

^ But Economics, when the phenomenon of human
^ society, and the natural laws governing its welfare, are

9



aH8578



PREFATORY NOTE

understood is the very reverse of dismal. No study is,
on tlio coiitrnry, more fascinating. This book is not
and doe.s not profess to bo more than an outline, but
I have tiiouglit it advisable to sketch the true work-
ings of the world's monetary and financial system,
since there have been few expositions of it in an ele-
mentary form. The outline shows the intimate links
between that system and common welfare. When he
has read this book, the reader, I hope and believe, will
not only be interested in Economic inquiry, but will
Ix' al)le to pursue it further with critical intelligence.

E. D.
London. May, 30, 1922.



10



CONTENTS



CHAP. PAOE

I First Principles . . . . . .17

Tho World Naturally a Wilderness — Cattle and Food
Plant Improvements — Origin and Economical Effect of
Agricultixre — True Theory of the Struggle for Existence
— Man's Creative Ability — The Human, or Rational
Type of Life has an Immensely Widened Power of
Adaptation — The Human Struggle for Existence on a
Plane by Itself — Division of Labour — Its Influence on
Production — Division of Labour and Co-operation
Complementary — Incretising Value of Mind in Civilised
Life — Human Wants not Fixed or Limitable — Three
Leading Aspects of Economic Truth — Society an Organ-
ism — The Natural Law of Society — Origin and Growth
of Right and Common Security — Society Multiplies Meana
of Subsistence — Origin of the Arts — The True Social
Law the Key to Economic Problems — Relationship of
Economics to Politics and Ethics — The Economic
System not an Invention of Men — Why Economic Lawa
are Beyond Human Caprice — The Opening of a
New Era — Rival and Alternative Economic Systems
Imaginary.

II Wealth and the Creation of Wealth . 31

Wealth the Means of Weal — Production and Consump-
tion Spring from the Same Motives and Causes — Physical
and Mental Wants — The Tree of Industry — Inter-rela-
tionship of the Great Trades — The Structure of Industry
Organic — Natural Causes Simple but Efficient — Division
and Sub-division of Industries — Variations Due to
Differences of Natural Resoiu-ces and Climate — Origin
of Commerce — Its Future — Wealth Potential and
Actual — Ratio between Potential and Actual Wealth —
No Practicable Limit to Potential Wealth — Welfai-e
Depends on the Rate at which Potential Wealth becomes
Actual — Saving and Intensification of Hmnan Physical
Effort — The Human Mind the True Fovintain of Richea
— Definition of Wealth.

11



CONTENTS



CBAP.



PAOK



HI Value, and the Production op Value. . 41

Production of Wealth ftnd Exchange of Wealth Insepar-
able — Means of Estimating Wealth — Definition of
Value — Marx's Distinction between Use Value and
Exchange Value — Exchange Value a General Estimation
of I'ncfulncas or Desirableness — Form of Wealth least
Variable in Value Adopted as Measure — Use of the
I'rccio\iH Motnls for Computing Exchange Values — The
Production of Values in Industrj- — Values Created by
Increase or Adaptation of Materials — All Work that
Creates Values Productive — The Motive of Production.



IV Labour 47

The Elements of Production — The Inseparable Trio
of Labour, Capital and Natural Resources — Labour's
Two Constituents of Quantity and Quality — The Quality
of I^l>our Improves its Production in Quantity — Labour
C'omprchcnsivo and Complex — Improvement in Pro-
duction Translat.es Labour from Unskilled to Skilled
— Knowledge Means Riches — Effects of Steam Power,
Electricity and Machinery — Tlie Surplus of Modern
Civilisation — The Fear of Over-production — Why a
Fallacy — Over-production Duo to DifiBculties or Defects
of Exchango^luvention and Science have Humanised
Labour — Rise of Labour in Quality and Skill only
Possible through Saving Labour in Quantity — How
New Openings for Skilled Labour are Made — Effects of
the Division and Sub-division of Labour — Machine
Processes and Thinking Processes — Real Value of
Human Labour Lien in its Intelligence — Mental Work
and Manual Work Inseparable— Productive Capacity
of the World's Population.

V Capital 60

Consumable Wealth, and Wealth in More or Less Last-
ing Forms — Margin over Primary and Immediate Needs
— Money an Embodiment of Value in Convenient Fofm
— Why Savable^Wealth Takes Other and More or Less
feasting Forms in Proportion as the Ability to Produce
Consumables Exceeds their Consumption — The Borrow-
ing and Lending of Monej' — Interest a Charge for Ser-
vice Plus Risk — Wealth either Passive or Active —
Active when Used to Produce More Wealth — Definition
of Capital — Active and Passive Capital — Invested and
Liquid Capital — The Relationship between these
Forms — Ratio of Active Capital to Passive — Effects
of Increasing or Decreasing the Ratio of Active Capital —
Influence on the Quality and Variety of Production —
The Function of Active Capital in Industry — Money

12



CONTENTS

OH&P. PAGE

More Potential as Civilisation Rises — Economically
Labour is the Employer and Capital the Employed —
Function of Banks and Bankers — Translation of Passive
into Active Capital — Joint-Stock Investment — Its
Economic and Social Importance — Conflicts of Capital
and Labour a Misnomer.

VI Natueal Resoueces ..... 73

The Most Important of Natural Resources the Fertility
of the Earth's Soil — Improvement of Land the Basis of
Industry — Rights to Land the Outcome of Repression
of Wrongs — Rights Create the Initial Value of Land as
Wealth — The Evolution of Tenure — Public and Private
Ownership — Economic Effects — Improvement Value
of Land — Situation Value of Land — Fertility Value —
Mineral Value — Rent of Land — Rent of Land Analogous
to Interest and Why — Building Rents — Site Rents —
Royalties — Rent of Land and Surplus of Production —
The Metayer System — Effects of Advance in Agriculture
— And of Improvement in Transport — Land Ownership
not an Economic Monopoly — The Theory of Henry
George — The Social Desiderata — Advantages and Dis-
advantages of State Ownership — State Tenancy with
Security of Teniu-e a Freehold — Situation Value imder
Free Contract — Nationalisation and Municipalisation.

VII Exchange and Cureency . . . .84

Economic Benefits of Exchange — With Civilised Life
Specialisation of Callings more Extended and Complete
— Specialisation a Saving of Time and Effort — Its Mean-
ing in Terms of Human Welfare — The Evolution of
Exchange — Money as a Medium — Its Utility — Analysis
of Exchange — The Economic Motive of Exchange —
Mutuality of Advantage — Effects of the Use of Currency
on Serfdom and Villeinage — Origin of Acceptances and
Bills of Exchange — The Mercantile Code — Circulation
of Bills of Exchange — Currency Debasement Origin of
Sterling — The Sterling Bill the International Money of
Merchants — Commercial Utility and Importance of
Discounts — International Trade, like National, Carried
On Through a Medium — Illustrations of International
Exchange — International Trade has the Freedom and
Facility of Sales and Purchases for Money.

VIII Ceedit and the Function of Credit . . 97

Definition of Credit — Instrimients of Credit — The
Mercantile Code the International Charta of Commerce
— Negociability — Origin of Bank Notes — " Cover " and
Convertibility — The Structure of Credit — Origin of the

13



CONTENTS

Cheque System — Advantage of the Uee of Cheques —
Ratio of Lcgnl Tender Currency to Commercial Turnover
—Credit System Kconomisoa Currency and B'acilitates
Exchange — Moileru Cxirrency Dolmsemcnts — Issues of
Legal Tender Paper Monev — Inflation and its Conse-
quencCA — I'uhlic Loans N\'ithout Interest — The Sup-
poaed Creation of Banking Credits — Its Real Meaning —
How Active Capital is Liquidated for War Purposes —
Resultant Increaao of Legal Tender Currency — How
Forced into Circulation — Fiat " Money — Its Effects
on Contract — And on Prices and Wages — Ordinary
Banking Credit not Inflationary — Distinction between
Legal Tender Currency in Gold and in Paper — Instru-
ments of Credit wljen Based on Value do not Affect
Prices— Effect of the Use of Instruments of Credit on
Industry and Trade.

IX Commerce ant) Commercial Policy . .116

Commerce Creates Values by Means of Transport —
Increases and Extends the Utility of Commodities —
Influence of the Cost and Speed of Transport — And of
the Electric Telegraph — Commerce Carried On for
Mutual Advantage — Commodities always Tend to Seek
the Best Miirket — Monetary Facilities — The Adjustment
of Supply to Uemand^-Cycles of Trade Prosperity and
Depression — The True Preference of Commerce — The
Tendency to Seek the Beat Market the Origin of All
Foreign Trade — Trend of Trade to Become More and
More International — Tariffs — The Tariff for Revenue,
and the Protective Tariff — Relationship between
National and Foreign Trade — Effects of Foreign Trade
on Home Prices — And on Earnings and Employment —
Tariff Wars — Xo DitTerenco in Principle between
Foreign Trade and Home Trade — Summary of the
Economic Influences of Protection — Demand under
Protective Conditions never that under Free Exchange
Conditions — Cases where Tariffs may be Advisable.

X Theories of Trade . . . . .131

Opposition to Free Exchange— The Mercantile Theory —
\\ hy Discredited — Freedom of Exchange Not a Theory —
The Balance of Trode — Visible and Invisible Exports —
Tlie Equilibrium of Commerce — International Exchanges
of Uoods and Services — Illustrations — The Trade
Balances of Great Britain, U.S.A., and India — Payment
of External National Debts — Settlements of Balances —
The Gold Standard — Bi-metallism — Rates of Exchange
— Movements of Gold ond their Influence on Exchange
Rates — The Arbitrage Points — Commercial Utility of
Gold Movements.

i-i



CONTENTS

CHAP. PAOB

XI Supply and Demand . . . . .143

Defects of the Current Theory — Relationship of Quantity
and QuaUty — Influence on Quality of Abundance and
Scarcity — The True Law of Supply and Demand — Recip-
rocal and Equal — How Supply Creates Demand — The
Education of Wants — Influence of Demand upon Supply
Threefold in Regard to Quantity, Quality and Variety —
Efforts to " Corner " Supply — Weak and Strong Fea-
tures of Trusts and Cartels — Monopoly always Tends to
Change and Vary Demand — Dumping — Its Effects
Exaggerated — The Lowest Production Costs those of
the Most Efficient Industries — Futility of Anti-dumping
Legislation — Currents of International Trade.

XII Prices 160

The Influences that Govern Prices and Wages Funda-
mentally the Same — Five Elements of Price — All Prices
Governed by Three Conditions, Plus Risk — Effects of
Quantity on Price Movements — World Prices and
Forward Contracts — Grading of Commodities — Quality
and Adaptability — Choiceness — Rarity — Changes in
the Value of Gold — Their Causes and Consequences —
The Theory of Gustav Cassel — Why Other Commodities
are Priced in Terms of Gold and not Vice Versa — Slow
Movement of Gold Value Changes — Influence of Gold
Output on Prices — Counter -influence of Production and
Transport — The Basis of Exchange Reckonings —
Parity — Key to the Exchange Puzzle — A Gold Basis of
Ciurency Steadies Prices — Paper Currencies Aggravate
Price Fluctuations — Purchasing Power Parity.

XIII Wages and Profits 180

Wages not Determined Merely by the Supply of Laboui-
in Quantity — Quality an Essential Element of All Ser-
vices — True Economic Estimation of the Cost of Labour
— Ratio of Cost to Result — The Quality of Labour
Raised by Lowering its Cost to Result — The Cheapest
Labour Earns the Highest Wages — Effect of Cheapened
Production on Demand and of Demand upon Wage
Rates — Benefits Balanced between Producer and Con-
sumer — Results of Increasing the Ratio of Sldlled to
Unskilled Labour — The Law of Diminishing Return
in Regard to Wages — Influence of L^sage and Custom on
Wages — Wages Raised by Improvement in Production
and Fall in the Rate on Money — The Benefit of Im-
proved Production both Direct and Indirect — A General
Rise in Wages Accompanies a General Fall in Prices —
Influence on Wages of Dear and Cheap Capital — The
" Trustification " of Industry — The Test of Prosperity —
Prices more Sensitive to Increase or Decrease of Pro-
duction than Wages.

15



CONTENTS



CHAP.

XIV



The Distribution of Wealth

Population and Subsistence — Fallacy of the Theory of
Mnlthus — Increase of Population Nntiu-ally Adjusts
iLsolf to Subsistence and the Rate of Increase Varies
Accordingly — ^The True Law of Population and Sub-
sistence — The Pareto Line of Relative Incomes — Tha
Tendency of Wealth is to Difluse ItseK — Improvement
and Progress in Production and Freedom of Exchange
Make for Equality — Real Causes of Inequality — Increas-
ing Difference between the Rewards of Efficiency and
Inefficiency — Contrasts between Thrift and Waste —
Moans of Production Less and Loss Monopolised — True
and False Equality — Wealth Weeds Out the Unfit even
more than Poverty — The Political Temptation of Wealth
— Social Charges and Leakages — The Principles of Taxa-
tion — Taxation Reduces Incomes and Increases Prices —
Taxes on Capital — Effect on Industry and Employment
— State Benefits.



PASB

204



16



CHAPTER I
FIRST PRINCIPLES

The World Naturally a Wilderness — Cattle and Food Plant
Improvements — Origin and Economical Effect of Agri-
culture — True Theory of the Struggle for Existence —
Man's Creative Ability — The Human, or Rational Type
of Life has an Immensely Widened Power of Adaptation —
The Human Struggle for Existence on a Plane by Itself
— Division of Labour — Its Influence on Production —
Division of Labour and Co-operation Complementary —
Increasing Value of Mind in Civilised Life — Human
Wants not Fixed or Limitable — Three Leading Aspects
of Economic Truth — Society an Organism — The Natiu-al
Law of Society — Origin and Growth of Right and Common
Security — Society Multiplies Means of Subsistence —
Origin of the Arts — The True Social Law the Key to
Economic Problems — Relationship of Economics to
Politics and Ethics — The Economic System not an
Invention of Men — Wliy Economic Laws ax'e Beyond
Human Caprice — The Opening of a New Era — Rival and
Alternative Economic Systems Imaginary.

VERY simple, yet very important, the first prin-
ciples of Economics, clearly understood and
correctly stated, will be found the key to many
apparent enigmas. It has been common to start off
with an abstract definition as, for example, that
Economics is the science of the production, exchange,

17 B



THE COIVIMON SENSE OF ECONOMIC SCIENCE

and distribution of wealth. The better procedure,
however, is to set out from facts.

Our first fact is that in a state of nature the earth
is a wilderness. Land, in the natural state undrained,
is, where not barren, covered with wild growth.
Neither cattle nor the common food plants, as now
known, are Nature's unaided products. They are
the outcome of human skill and art. Nature, imaided,
jDroduces buffalo. As different are the wild wheat
plant and the wild oat from the cultivated varieties.
By art and by selection over a prolonged period of
time the buffalo has become the shorthorn, the Here-
ford, and other breeds of stock ; the wild wheat plant
and the wild oat have been transformed into descend-
ants yielding ten times the increase. The wild varieties
produce up to 20 grains ; the cultivated varieties will
bear up to 200 grains.

How did these changes come about ? In his struggle
for existence Man has passed from hunting to pastoral
piu'suits, from pastoral pursuits to cultivation, from
cultivation to manufacture ; from manufacture to
commerce. These changes have been slow. But we
now know that civilisation is of vast antiquity.

Let us consider the changes a little more in detail.
Hunting taught man the advantage of taming and
preserving certain breeds of animals. His suppUes of
food and, where needed, of clothing, then became more
assured. Flocks and herds became his primitive
wealth. In turn need of pasture led him to see that,
drained and cultivated, land could be made to yield
more abundantly. So Httle by little agriculture
came into being. Adaptation of land for pasture,

18



FIRST PRINCIPLES

cultivation of land for human food, improvement in
the breeds of cattle and flocks, went on side by side
with the selection of plants.

In that connection take another fact. The nitrogen
of the Earth's atmosphere, by slow but constant
chemical action, penetrates the soil, and aided by the
action of water, unites with the carbon constituents
of the soil to produce the food of plants. What then
happens when the soil is loosened and turned by the
spade or the plough ? The process of fertihsation is
speeded up, and there is done in one season what
Nature, unassisted, would hardly do in a hundi-ed
seasons.

What has been the effect of all this ? By agriculture
at the present day land can be made to yield, acre
for acre, up to 1,000 times the casual foodstuff glean-
ings of a wilderness.

To increase thus the yield of land is, for pro-
ductive purposes, exactly the same thing as
multiplying its area. Economically that fact is
very important.

There is a theory which puts the human struggle for
existence and the brute struggle for existence on the
same plane. The theory is bad reasoning. To exist,
the brute must destroy either plant life or other animal
life for food. But Man ages ago rose from the merely
destructive to the creative level. The distinction
between the two is radical, and any and every system
of alleged Economics which ignores the distinction is
worthless.

The distinction is founded on the further fact that
Man has not only a rational mind, but a body and

19



THE COMMON SENSE OF ECONOMIC SCIENCE

physical powers in conformity with it. He is, in
short, the rational type of life.

It is a condition of the existence of life in the physical
form that it must adapt itself to its environment.
The rational type of life has an enormously
widened power of adaptation. Human intelligence,
skill, and art have brought about an increase of the
means of subsistence that Nature alone could not
encompass. Apart from intelligence and the gains
of knowledge handed down neither cattle, nor the full
resources of the soil, nor forests, nor minerals, nor the
powers of water, heat and electricity could have been
utilised. They would have been all there, but they
would have all been going to waste.

As the physical wants of man are food and warmth,
and as warmth means both clothing and shelter, so
apart from intelligence, human life on this globe must
have remained, as it once was, limited to a few favoured
spots, and very limited even there.

But by turning the resources of Nature to account
human life has been enabled to spread over the whole
globe. And that process is still going on. So far are
the resources of Nature from having been made use
of to the full that the field for their further utilisation
is even yet beyond computation. In every Age men
have believed themselves at the end of the journey.
They are not even in sight of the end.

These then are among the first truths of Econo-
mics that human intelligence places the human
struggle for existence on an entirely different
plane from that of other forms of life and that the
preservation, increase, and welfare of human life

20



FIRST PRINCIPLES

are bounded only by the extent to which Man
can make use of natural resources.

We pass on to another aspect. Seeing that human
sustenance is the result of human intelHgence, how does
Man's abihty to produce grow ? The reply is by sub-
division of labour. If every man had, unhelped, to
supply all his own wants, human life could never have
risen above the lowest level of primitive penury, and
the lives of all would have remained for ever confined
to one poor, narrow, and uniform groove. The great
advantage of rational mind lies clearly enough in
communication with other rational minds. Because
of this, division of labour was early seen at once to
lighten labour, and to enlarge its results.

This is another process that is continuous. Not only
is time and effort saved, but specialisation of crafts
and callings is the secret of skill. Slow and elementary
in primitive societies, it is for that reason quickened
as civiHsation rises, and is most elaborated in ad-
vanced societies. And so long as there is progress
in civilisation it is not a process any resistance can
arrest.

Division and sub -division of labour conse-
quently is characteristic of human life everywhere.
There is no other way in which production can
be improved.

Science discloses that differentiation of function and
co-operation between the organs of any living structure
are complementary one of the other. Each implies
the other. We also find that the higher the vital
activity is the more complex the structure is, and that
the more complex the structure is the more marked

21



THE COMMON SENSE OF ECONOMIC SCIENCE

is the specialisation of functions, and the more com-
plete the interdependence between the parts.

Illustrated as these principles are in the life of
man as nn individual, they are not less illustrated
economically in the life of human societies.

How illustrated ? Division and sub-division of
callings and crafts — specialisation of function — fosters
variety of skill and talent. But from that very fact
co-operation — which means interdependence — becomes
of greater mutual advantage. Thus, together, sub-
division and co-operation afford more and more open-
ings for the resources and activities of mind.

It has been supposed that co-operation can be
artificially imposed while sub-division is controlled


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