Frank A. (Frank Albert) Fetter.

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THE PRINCIPLES OF ECONOMICS

WITH APPLICATIONS TO PRACTICAL PROBLEMS

BY

FRANK A. FETTER, PH.D.

PROFESSOR OF POLITICAL ECONOMY AND FINANCE,
CORNELL UNIVERSITY


NEW YORK
THE CENTURY CO.
1904

Copyright, 1904, by
THE CENTURY CO.

THE DEVINNE PRESS


TO THE STUDENTS
OF THREE UNIVERSITIES
- INDIANA, STANFORD, AND CORNELL -
FOR WHOM, WITH WHOM, AND BY WHOSE AID
THIS BOOK CAME TO BE WRITTEN




CONTENTS


PART I

PAGE
THE VALUE OF MATERIAL THINGS 1-169


DIVISION A - WANTS AND PRESENT GOODS

CHAPTER

1 THE NATURE AND PURPOSE OF POLITICAL ECONOMY: NAME
AND DEFINITION; PLACE OF ECONOMICS AMONG THE
SOCIAL SCIENCES; THE RELATION OF ECONOMICS TO
PRACTICAL AFFAIRS 3

2 ECONOMIC MOTIVES: MATERIAL WANTS, THE PRIMARY
ECONOMIC MOTIVES; DESIRES FOR NON-MATERIAL ENDS,
AS SECONDARY ECONOMIC MOTIVES 9

3 WEALTH AND WELFARE: THE RELATION OF MEN AND
MATERIAL THINGS TO ECONOMIC WELFARE; SOME IMPORTANT
ECONOMIC CONCEPTS CONNECTED WITH WEALTH
AND WELFARE 15

4 THE NATURE OF DEMAND: THE COMPARISON OF GOODS
IN MAN'S THOUGHT; DEMAND FOR GOODS GROWS OUT
OF SUBJECTIVE COMPARISONS 21

5 EXCHANGE IN A MARKET: EXCHANGE OF GOODS RESULTING
FROM DEMAND; BARTER UNDER SIMPLE CONDITIONS;
PRICE IN A MARKET 30

6 PSYCHIC INCOME: INCOME AS A FLOW OF GOODS; INCOME
AS A SERIES OF GRATIFICATIONS 39


DIVISION B - WEALTH AND RENT

7 WEALTH AND ITS DIRECT USES: THE GRADES OF RELATION
OF INDIRECT GOODS TO GRATIFICATION; CONDITIONS OF
ECONOMIC WEALTH 46

8 THE RENTING CONTRACT: NATURE AND DEFINITION OF
RENT; THE HISTORY OF CONTRACT RENT AND CHANGES
IN IT 53

9 THE LAW OF DIMINISHING RETURNS: DEFINITION OF THE
CONCEPT OF (ECONOMIC) DIMINISHING RETURNS; OTHER
MEANINGS OF THE PHRASE "DIMINISHING RETURNS";
DEVELOPMENT OF THE CONCEPT OF DIMINISHING RETURNS 61

10 THE THEORY OF RENT: THE MARKET VALUE OF THE
USUFRUCT: DIFFERENTIAL ADVANTAGES IN CONSUMPTION
GOODS; DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS 73

11 REPAIR, DEPRECIATION, AND DESTRUCTION OF WEALTH:
RELATION TO ITS SALE AND RENT: REPAIR OF RENT-BEARING
AGENTS; DEPRECIATION IN RENT-EARNING
POWER OF AGENTS KEPT IN REPAIR; DESTRUCTION OF
NATURAL STORES OF MATERIAL 81

12 INCREASE OF RENT-BEARERS AND OF RENTS: EFFORTS OF
MEN TO INCREASE PRODUCTS AND RENT-BEARERS;
EFFECTS OF SOCIAL CHANGES IN RAISING THE RENTS
OF INDIRECT AGENTS 90

DIVISION C - CAPITALIZATION AND TIME-VALUE

13 MONEY AS A TOOL IN EXCHANGE: ORIGIN OF THE USE OF
MONEY; NATURE OF THE USE OF MONEY; THE VALUE OF
TYPICAL MONEY 98

14 THE MONEY ECONOMY AND THE CONCEPT OF CAPITAL: THE
BARTER ECONOMY AND ITS DECLINE; THE CONCEPT OF
CAPITAL IN MODERN BUSINESS 108

15 THE CAPITALIZATION OF ALL FORMS OF RENT: THE PURCHASE
OF RENT-CHARGES AS AN EXAMPLE OF CAPITALIZATION;
CAPITALIZATION INVOLVED IN THE EVALUATING
OF INDIRECT AGENTS; THE INCREASING ROLE OF CAPITALIZATION
IN MODERN INDUSTRY 118

16 INTEREST ON MONEY LOANS: VARIOUS FORMS OF CONTRACT
INTEREST; THE MOTIVE FOR PAYING INTEREST 131

17 THE THEORY OF TIME-VALUE: DEFINITION AND SCOPE
OF TIME-VALUE; THE ADJUSTMENT OF THE RATE OF TIME-DISCOUNT 141

18 RELATIVELY FIXED AND RELATIVELY INCREASABLE FORMS
OF CAPITAL: HOW VARIOUS FORMS OF CAPITAL MAY
BE INCREASED; SOCIAL SIGNIFICANCE OF THESE DIFFERENCES 152

19 SAVING AND PRODUCTION AS AFFECTED BY THE RATE OF
INTEREST: SAVING AS AFFECTED BY THE INTEREST RATE;
CONDITIONS FAVORABLE TO SAVING; INFLUENCE OF THE
INTEREST RATE ON METHODS OF PRODUCTION 159


PART II

THE VALUE OF HUMAN SERVICES 171-355


DIVISION A - LABOR AND WAGES

20 LABOR AND CLASSES OF LABORERS: RELATION OF LABOR
TO WEALTH; VARIETIES OF TALENTS AND OF ABILITIES
IN MEN 173

21 THE SUPPLY OF LABOR: WHAT IS A DOCTRINE OF POPULATION?
POPULATION IN HUMAN SOCIETY; CURRENT ASPECT
OF THE POPULATION PROBLEM 184

22 CONDITIONS FOR EFFICIENT LABOR: OBJECTIVE PHYSICAL
CONDITIONS; SOCIAL CONDITIONS FAVORING EFFICIENCY;
DIVISION OF LABOR 195

23 THE LAW OF WAGES: NATURE OF WAGES AND THE WAGES
PROBLEM; THE DIFFERENT MODES OF EARNING WAGES;
WAGES AS EXEMPLIFYING THE GENERAL LAW OF VALUE 205

24 THE RELATION OF LABOR TO VALUE: RELATION OF RENT
TO WAGES, RELATION OF TIME-VALUE TO WAGES; THE
RELATION OF LABOR TO VALUE 215

25 THE WAGE SYSTEM AND ITS RESULTS: SYSTEMS OF LABOR;
THE WAGE SYSTEM AS IT IS; PROGRESS OF THE MASSES
UNDER THE WAGE SYSTEM 226

26 MACHINERY AND LABOR: EXTENT OF THE USE OF MACHINERY;
EFFECT OF MACHINERY ON THE WELFARE AND WAGES
OF THE MASSES 236

27 TRADE-UNIONS: THE OBJECTS OF TRADE-UNIONS; THE
METHODS OF TRADE-UNIONS; COMBINATION AND WAGES 245

DIVISION B - ENTERPRISE AND PROFITS

28 PRODUCTION AND THE COMBINATION OF THE FACTORS: THE
NATURE OF PRODUCTION; COMBINATION OF THE FACTORS 257

29 BUSINESS ORGANIZATION AND THE ENTERPRISER'S FUNCTION:
THE DIRECTION OF INDUSTRY; QUALITIES OF A BUSINESS
ORGANIZER; THE SELECTION OF ABILITY 265

30 COST OF PRODUCTION: COST OF PRODUCTION FROM THE ENTERPRISER'S
POINT OF VIEW; COST OF PRODUCTION FROM
THE ECONOMIST'S STANDPOINT 273

31 THE LAW OF PROFITS: MEANING OF TERMS; THE TYPICAL
ENTERPRISER'S SERVICES REVIEWED; STATEMENT OF THE
LAW OF PROFITS 282

32 PROFIT-SHARING, PRODUCERS' AND CONSUMERS' COÖPERATION:
PROFIT-SHARING; PRODUCERS' COÖPERATION; CONSUMERS'
COÖPERATION 292

33 MONOPOLY PROFITS: NATURE OF MONOPOLY; KINDS OF
MONOPOLY; THE FIXING OF A MONOPOLY PRICE 302

34 GROWTH OF TRUSTS AND COMBINATIONS IN THE UNITED
STATES: GROWTH OF LARGE INDUSTRY IN THE UNITED
STATES; ADVANTAGES OF LARGE PRODUCTION; CAUSES
OF INDUSTRIAL COMBINATIONS 312

35 EFFECT OF TRUSTS ON PRICES: HOW TRUSTS MIGHT
AFFECT PRICES; HOW TRUSTS HAVE AFFECTED PRICES 323

36 GAMBLING, SPECULATION, AND PROMOTERS' PROFITS: GAMBLING
VS. INSURANCE; THE SPECULATOR AS A RISK TAKER;
PROMOTER'S AND TRUSTEE'S PROFITS 333

37 CRISES AND INDUSTRIAL DEPRESSIONS: DEFINITION AND
DESCRIPTION OF CRISES; CRISES IN THE NINETEENTH
CENTURY; VARIOUS EXPLANATIONS OF CRISES 345

PART III

THE SOCIAL ASPECTS OF VALUE 357-563

DIVISION A - RELATION OF PRIVATE INCOME
TO SOCIAL WELFARE

38 PRIVATE PROPERTY AND INHERITANCE: IMPERSONAL AND
PERSONAL SHARES OF INCOME; THE ORIGIN OF PRIVATE
PROPERTY; LIMITATIONS OF THE RIGHT OF PRIVATE
PROPERTY 359

39 INCOME AND SOCIAL SERVICE: INCOME FROM PROPERTY;
INCOME FROM PERSONAL SERVICES 370

40 WASTE AND LUXURY: WASTE OF WEALTH; LUXURY 381

41 REACTION OF CONSUMPTION ON PRODUCTION: REACTION
UPON MATERIAL PRODUCTIVE AGENTS; REACTION UPON
THE EFFICIENCY OF THE WORKERS; EFFECTS ON THE
ABIDING WELFARE OF THE CONSUMER 392

42 DISTRIBUTION OF THE SOCIAL INCOME: THE NATURE OF
PERSONAL DISTRIBUTION; METHODS OF PERSONAL DISTRIBUTION 402

43 SURVEY OF THE THEORY OF VALUE: REVIEW OF THE PLAN
FOLLOWED; RELATION OF VALUE THEORIES TO SOCIAL
REFORMS; INTERRELATION OF ECONOMIC AGENTS 412

DIVISION B - RELATION OF THE STATE TO INDUSTRY

44 FREE COMPETITION AND STATE ACTION: COMPETITION AND
CUSTOM; ECONOMIC HARMONY THROUGH COMPETITION;
SOCIAL LIMITING OF COMPETITION 422

45 USE, COINAGE, AND VALUE OF MONEY: THE PRECIOUS
METALS AS MONEY; THE QUANTITY THEORY OF MONEY 431

46 TOKEN COINAGE AND GOVERNMENT PAPER MONEY: LIGHT-WEIGHT
COINS; PAPER MONEY EXPERIMENTS; THEORIES
OF POLITICAL MONEY 443

47 THE STANDARD OF DEFERRED PAYMENTS: FUNCTION OF THE
STANDARD; INTERNATIONAL BIMETALLISM; THE FREE-SILVER
MOVEMENT IN AMERICA 453

48 BANKING AND CREDIT: FUNCTIONS OF A BANK; TYPICAL
BANK MONEY; BANKS OF THE UNITED STATES TO-DAY 462

49 TAXATION IN ITS RELATION TO VALUE: PURPOSES OF TAXATION;
FORMS OF TAXATION; PRINCIPLES AND PRACTICE 471

50 THE GENERAL THEORY OF INTERNATIONAL TRADE: INTERNATIONAL
TRADE AS A CASE OF EXCHANGE; THEORY OF
FOREIGN EXCHANGES OF MONEY; REAL BENEFITS OF
FOREIGN TRADE 480

51 THE PROTECTIVE TARIFF: THE NATURE AND CLAIMS OF
PROTECTION; THE REASONABLE MEASURE OF JUSTIFICATION
OF PROTECTION; VALUES AS AFFECTED BY PROTECTION 491

52 OTHER PROTECTIVE SOCIAL AND LABOR LEGISLATION:
SOCIAL LEGISLATION; LABOR LEGISLATION 504

53 PUBLIC OWNERSHIP OF INDUSTRY: EXAMPLES OF PUBLIC
OWNERSHIP; ECONOMIC ASPECTS OF PUBLIC OWNERSHIP 514

54 RAILROADS AND INDUSTRY: TRANSPORTATION AS A FORM OF
PRODUCTION; THE RAILROAD AS A CARRIER; DISCRIMINATION
IN RATES ON RAILROADS 525

55 THE PUBLIC NATURE OF RAILROADS: PUBLIC PRIVILEGES
OF RAILROAD CORPORATIONS; POLITICAL AND ECONOMIC
POWER OF RAILROAD MANAGERS; COMMISSIONS TO CONTROL
RAILROADS 534

56 PUBLIC POLICY AS TO CONTROL OF INDUSTRY: STATE
REGULATION OF CORPORATE INDUSTRY; DIFFICULTIES OF
PUBLIC CONTROL OF INDUSTRY; TREND OF POLICY AS TO
PUBLIC INDUSTRIAL ACTIVITY 544

57 FUTURE TREND OF VALUES: PAST AND PRESENT OF ECONOMIC
SOCIETY; THE ECONOMIC FUTURE OF SOCIETY 555

QUESTIONS AND CRITICAL NOTES 565

INDEX 595




PREFACE


This book had its beginning ten years ago in a series of brief
discussions supplementing a text used in the class-room. Their purpose
was to amend certain theoretical views even then generally questioned by
economists, and to present most recent opinions on some other questions.
These critical comments evolved into a course of lectures following an
original outline, and were at length reduced to manuscript in the form
of a stenographic report made from day to day in the class-room. The
propositions printed in italics were dictated to the class, to give the
key-note to the main divisions of the argument. Repeated revisions have
shortened the text, cut out many digressions and illustrations, and
remedied many of the faults both of thought and of expression; but no
effort has been made to conceal or alter the original and essential
character of the simple, informal, class-room talks by teacher to
student. To this origin are traceable many conversational phrases and
local illustrations, and the occasional use of the personal form of
address.

The lectures, at the outset, sought to give merely a summary of widely
accepted economic theory, not to offer any contribution to the subject.
While they were in progress, however, special studies in the evolution
of the economic concepts were pursued, and the manuscript of a book on
that more special subject was carried well toward completion. That work,
which it is hoped some time to complete, was, for several reasons, put
aside while the present text was preparing for publication. The economic
theories of the present transition period show many discordant
elements, yet the author felt that his attempt to unify the statement
of principles, in an elementary text explaining modern problems, and
consistent in its various parts, helped to reveal to him both
difficulties and possible solutions in the more special theoretical
field. The unforeseen outcome of these varied studies is an elementary
text embodying a new conception of the theory of distribution, an
outline of which will be found in Chapter Forty-three. It is, in brief,
a consistently subjective analysis of the relations of goods to wants,
in place of the admixture of objective and subjective distinctions found
in the traditional conceptions of rent, interest, and price.

The beginning of the systematic study of economics, like the first steps
in a language, is difficult because of the entire strangeness of the
thought, and it is not to be hoped that any pedagogic device can do away
with the need of strenuous thinking by the student. The aim, however, in
the development of this theory of distribution, has been to proceed by
gradual steps, as in a series of geometrical propositions, from the
simple and familiar acts and experiences of the individual's every-day
life, through the more complex relations, to the most complex,
practical, economic problems of the day. The hope has long been
entertained by economists that a conception of the whole problem of
value would be attained that would coördinate and unify the various
"laws," - those of rent, wages, interest, etc. This solution has here
been sought by a development of recent theories, the unit of the complex
problem of value being the simplest, immediate, temporary gratification.

Possibly some teachers will observe and regret the almost entire absence
of critical discussions of controverted points in theory, which make up
so large a part of some of the older texts. The more positive manner of
presentation has been purposely adopted, and only such reference is made
to conflicting views as is needed to guard the student against
misunderstanding in his further reading. The author would not have it
thought that he doubts the disciplinary value of economic theory or its
scientific worth for more advanced students, for, on the contrary, he
believes in it, perhaps to an extreme degree; but, for his own part, he
has become convinced of the unwisdom of carrying on these subtle
controversies in classes of beginners. The inherent difficulties of the
subject are great enough, without the creation of new ones.

The fifty-seven chapters represent the work of the typical college
course in elementary economics, allowing two chapters a week, and a
third meeting weekly for review and for the discussion of questions,
exercises, and reports. The subject is so large that the text is, in
many places, hardly more than a suggestive outline. In class-room work
it should be supplemented by other sources of information, such as
personal observation by the students (many of the questions following
the text serving to stimulate the attention); visits to local
industries; interchange of opinions; examples given by the teacher;
study and discussion, in the light of the principles stated in the text,
of some such problems as are suggested in the appended list of
questions; collateral reading; the preparation of exercises and the use
of statistical material from the census, labor reports, etc.; history
and description of industries; history of the growth of economic ideas.
Suggestions, from teachers, of changes that will make the text more
useful in their classes, will be thankfully received by the author.

Lack of space makes it impossible to mention by name the many sources to
which the writer is indebted. Special acknowledgment, however, is
gratefully made to C. H. Hull, of Cornell University; to E. W. Kemmerer,
now of the Philippine Treasury Department, and to U. G. Weatherly, of
Indiana University, who have read large portions of the manuscript, and
have made many valuable suggestions; to W. M. Daniels, of Princeton
University, who has read every page of the copy, and to whom are due the
greatest obligations for his numerous and able criticisms both of the
argument and of the expression; to R. C. Brooks, now of Swarthmore
College, for a number of the questions in the appended list, and for
helpful comments given while the course was developing; and to R. F.
Hoxie and to A. C. Muhse, whose thoughtful reading of the proof has
eliminated many errors. For the defects remaining, not these friendly
critics, but the author alone, should be held accountable.

No book on economics can to-day satisfy everybody - "Or even anybody,"
adds a friend. But with this book may go the hope that what has been
written with love of truth and of democracy may serve, in its small way,
both to further sound economic reasoning and to extend among American
citizens a better understanding of the economic problems set for this
generation to solve.

FRANK A. FETTER.

Ithaca, N. Y., August, 1904.




THE PRINCIPLES OF ECONOMICS




PART I

DIVISION A - WANTS AND PRESENT GOODS




CHAPTER I

THE NATURE AND PURPOSE OF POLITICAL ECONOMY


§ I. NAME AND DEFINITION

[Sidenote: Verbal definition of economics]

1. _Economics, or political economy, 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 gratifying desires._ To
define, means to mark off the limits of a subject, to tell what
questions are or are not included within it. 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 cannot greatly aid in marking it off
clearly in our thought. The essential thing for the student is to see
clearly the central purpose of the study, not to decide at once all of
the puzzling cases.

[Sidenote: Natural sciences deal with material things]

2. _A definition that suggests clear and familiar thoughts to the
student seem at first much more difficult to get in any social science
than in the natural sciences._ These deal with concrete, material things
which we are accustomed to see, handle, and measure. If a mere 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 zoölogy 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 misunderstanding 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 propagate them in a pond. But the main purpose of these
studies is clear at the outset from these simple definitions. Indeed, as
the study 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.

[Sidenote: Economics studies some social acts and relations]

Political economy, on the other hand, as one of the social sciences,
which deal with men and their relations in society, seems to be a very
much more complex thought to get hold of. We are tempted to say that it
deals with less familiar things; but the truth may be, as a thoughtful
friend suggests, that the simple social acts and relations are more
familiar to our thought than are lions, palm-trees, or even horses.
Every hour in the streets or stores, one may witness thousands of acts,
such as bargains, labor, payments, that are the subject-matter of
economic science. Their very familiarity may cause men to overlook their
deeper meaning.

Many other definitions have been given of political economy. It has been
called the science of wealth, or the science of exchanges. Evidently
there are various ways in which wealth may be considered or exchanges
made. The particular aspects that are dealt with in political economy
will be made clear by considering two other questions, the place of
economics among the social sciences and the relation of economics to
practical affairs.


§ II. PLACE OF ECONOMICS AMONG THE SOCIAL SCIENCES

[Sidenote: Economics contrasted with the natural sciences]

1. _Political economy, as one of the social sciences, may be contrasted
with the natural sciences, which deal with material things and their
mutual relations, while it deals with one aspect of men's life in
society, namely, the earning of a living, or the use of wealth._ It is
true that political economy also has to do with plants and animals and
the earth - in fact, with all of those things which are the
subject-matter of the natural sciences; but it has to do with them only
in so far as they are related to man's welfare and affect his estimate
of the value of things; only in so far as they are related to the one
central subject of economic interest, the earning of a living.

[Sidenote: Character of the social sciences]

2. _The social sciences deal with men and their relations with each
other._ The word "social" comes from the Latin socius, meaning a fellow,
comrade, companion, associate. As men living together have to do with
each other in a great many different ways, and enter into a great many
different relations, there arise a great many different social problems.
Each of the social sciences attempts to study man in some one important
aspect - that is, to view these relations from some one standpoint.

Man's acts, his life, and his motives are so complex that it is not
surprising that there has been less definiteness in the thought of the
social sciences, and that they have advanced less rapidly toward
exactness in their conclusions, than have the natural sciences. This
complexity also explains the discouragement of the beginner in the early
lessons in this subject. Usually the greatest difficulties appear in the
first few weeks of its study. The thought is more abstract than in
natural science; it requires a different, I will not say higher, kind of
ability than does mathematics. But little by little the strangeness of
the language and ideas disappears; the bare definitions become clothed
with the facts of observation and recalled experiences; and soon the
"economic" acts and relations of men in society come to be as real and
as interesting to the student as are the materials in the natural world
about him - often, indeed, more interesting.

[Sidenote: Economics, politics, law, and ethics]

3. _Political economy is related to all the other social sciences, it
being the study of certain of men's relations, while politics, law, and
ethics have to do with other relations or with relations under a
different aspect._ Politics treats of the form and working of government
and is mainly concerned with the question of power or control of the
individual's actions and liberty. Law treats of the precepts and
regulations in accordance with which the actions of men are limited by
the state, and the contracts into which they have seen fit to enter are
interpreted. Ethics treats the question of right or wrong, studies the
moral aspects of men's acts and relations. The attempt just made to
distinguish between the fields occupied by the various social sciences
betrays at once the 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 is the business
relation, the relation of men in exchanging their services or material
wealth. In pursuing economic inquiries we come into contact with



Online LibraryFrank A. (Frank Albert) FetterThe principles of economics, with applications to practical problems → online text (page 1 of 50)