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PRINCIPLES OF
POLITICAL ECONOMY








THE LIBRARY

OF

THE UNIVERSITY

OF CALIFORNIA

RIVERSIDE

GIFT OF
Dr. Gordon Watkins







#nrtwn . Waikbta



PRINCIPLES OF
POLITICAL ECONOMY



BY

THOMAS NIXON CARVER
"i



GINN AND COMPANY

BOSTON NEW YORK CHICAGO LONDON
ATLANTA DALLAS COLUMBUS SAN FRANCISCO



COPYRIGHT, 1919, BY THOMAS NIXON CAKVER
ALL RIGHTS RESERVED



gftt fltfttnaum jPrt8<

G1NN AND COMPANY PRO-
PRIETORS BOSTON U.S.A.



TO

ALL THOSE

WHO CARE TO SEE THEIR COUNTRY
GROW STRONG AND GREAT



INTRODUCTION

At no period in the history of democracy have men been
compelled to think so seriously about the question of the
strength of democratic nations as at the present time. At no
time was it ever so plain that the question of national strength
is largely an economic one. It is the purpose of this book to
examine the economic foundations of our national strength
and to point out some of the more direct methods of improve-
ment, to the end that our democratic nation, and all democratic
nations, may grow prosperous and great in all the elements of
national greatness.

This result can never be achieved unless the people them-
selves understand the economic principles upon which national
prosperity and greatness depend. Subject peoples may ignore
these principles, relying upon their rulers to supply the neces-
sary economic knowledge and expertness. Democratic peoples
have no one to depend upon but themselves ; therefore they
must know for themselves the leading principles of the science
of political economy.



CONTENTS

PART ONE. THE UNDERLYING CONDITIONS OF
NATIONAL PROSPERITY

CHAPTER PAGE

lir^WEALTH AND WELL-BEING 12

III. SELF-INTEREST 22

IV. COMPETITION 37

V. LAW AND GOVERNMENT 50

VI. MORALS AND RELIGION 64

VII. THE GEOGRAPHICAL SITUATION 78

PART TWO. PRODUCTION
SECTION A. THE PRODUCTIVE FORCES
VIII. THE PRIMARY FACTORS OF PRODUCTION . 8q



IX. THE QUALITY OF THE PEOPLE 101

X. THE DIVISION OF LABOR 119

XI. POWER . 132

XII. LAND 142

XIII. CAPITAL 155

XIV. THE ORGANIZATION OF BUSINESS 168

Xr"THE BALANCING OF THE FACTORS OF PRODUCTION . . 181

SECTION B. THE PRODUCTIVE INDUSTRIES

XVI. THE EXTRACTIVE INDUSTRIES 193

XVII. THE GENETIC INDUSTRIES 208

XVIII. THE MANUFACTURING INDUSTRIES 221

XIX. TRANSPORTATION 233

XX. MERCHANDISING 245

XXI. PERSONAL AND PROFESSIONAL SERVICE 255

vii



viii PRINCIPLES OF POLITICAL ECONOMY

PART THREE. EXCHANGE

CHAPTER , PAGE

XXrf VALUE ................ 265

XXIII. SCARCITY . ^ . . ........ r . . 281

XXIV. MONEY ....... ........ 292

XXV. BANKING ..... . . ......... 304

XXVI. MARKETING. . . . . . . ''.' . '. ..... 318

XXV-lL-EcoNOMic CRISES ......... .... 329

XXVIII. FREE TRADE .............. 338

XXIX. PROTECTIONISM ............. 348

PART FOUR. THE DISTRIBUTION OF WEALTH

XXX. THE LAW OF VARIABLE PROPORTIONS ..... 365

XXXI. THE GENERAL NATURE OF THE WAGE QUESTION . 378

XXXII. WHAT DETERMINES THE RATE OF WAGES? . . . 388

XXXIII. THE ORGANIZATION OF LABORERS ....... 400

XXXIV. THE RENT OF LAND ............ 409

XXXV. THE SOURCE OF INTEREST ......... 418

XXXVI. THE COST OF CAPITAL AND ITS PRICE ..... 429

XXXVII. PROFITS ................ 441

PART, FIVE. THE CONSUMPTION OF WEALTH



THE MEANING AND IMPORTANCE OF CONSUMPTION . 453

XXXIX. RATIONAL CONSUMPTION ..... ..... 461

XL. LUXURY ................ 472

CONTROL OF CONSUMPTION ....... 486

. THE BATTLE OF THE STANDARDS ....... 495

PART SIX. PUBLIC FINANCE

XLIII. TAXATION ............... 503

XLIV. THE FINANCING OF A WAR ......... 514



CONTENTS ix

PART SEVEN. REFORM

CHAPTER PAGE

XLV. COMMUNISM r, T

XLVI. SOCIALISM , c < ,

54*

XLVII. ANARCHISM rrr

XLVIII. THE SINGLE TAX . S 6 3

XLIX. CONSTRUCTIVE LIBERALISM 572



INDEX



PART ONE

THE UNDERLYING CONDITIONS OF NATIONAL
PROSPERITY



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CHAPTER I
ECONOMY

What it means to economize. To economize is to choose
among several different things which one would like to have,
giving up the things for which one cares less in order to have
the thing for which one cares more. Necessity forces this
kind of choosing not only upon individuals but also upon
communities and nations. Economics is the name given to
a body of principles which govern the practice of economy
in its broadest sense.

This choosing of what one will have takes on many and
various forms. It may be a question as between play and
work or between different kinds of work, different kinds of
play, or different objects which one might purchase with one's
limited money or purchasing power. The problem is always
how to use one's 'time, one's working power, or one's money
in such a way as to accomplish the most in the promotion of
one's interest or the fulfillment of one's hopes and purposes.
This is a problem, however, not for the individual alone but
for the community, the nation, and the world at large. The
community and the nation, like the individual, have common
interests which can be promoted only by common effort.
How to use the energy of the community and of the nation
economically, that is, in such a way as to accomplish the
largest and best possible results, is a problem of the greatest
possible importance. In a democracy especially it is fully as
important that the citizen should understand how the com-
munity and the nation may economize their energies and
achieve the utmost in the way of civilization and well-being

3



as it is that he should understand how he may economize his
own individual energy and accomplish the utmost in the pro-
motion of his own interest and the fulfillment of his hopes.
Moreover, the former is a vastly greater and more difficult
problem than the latter. It will require a broad, careful, and
systematic study of economic principles instead of a narrow,
piecemeal, haphazard study of individual problems in economy.

When you are asked to do a certain thing and you reply
that you have not time, you are sometimes merely trying to
be polite. You may really mean that there is something else
which you would rather be doing with your time, or which
you feel that it is more important that you should do, than
the thing you are asked to do. In other words, you have
not time and energy enough to do everything you would like
to do or that others would like to have you do. You must
leave many things undone, and you must, therefore, choose
rather carefully the few things that you think most impor-
tant or that would cause you the most inconvenience or
pain if you left them undone. In order that you may do
these few and important things, you must refuse to do any-
thing else that would interfere. That is what it means to
economize time and energy. It is choosing to do the more
important things, leaving the less important things undone.
Economizing in the use of money is only one special form of
economizing time and energy, since money represents the
products of time and energy.

Why we have to economize. In saying that you do not have
time to do a certain thing, you are stating one of the most
fundamental facts of life ; namely, the great and ever-present
fact of scarcity. It is this fact which compels us to economize,
which compels us to make our limited fund of energy and our
limited time go as far as they will. To waste time or energy
is to fail to supply ourselves with some of the things we want.
To waste things that have already been produced is no worse
than to waste the time and energy that might have produced



ECONOMY 5

more of the same things. Wasting time and energy is not
necessarily remaining idle, though it may mean that. It may
also mean the doing of less important things when there are
more important things to be done. If one had unlimited
time and energy, or if one had the time and energy necessary
to do everything one would like to do, so that the doing
of one thing never prevented the doing of anything else that
was worth doing, economy would be unnecessary. If that were
true, human life and human history would be very different
from anything we now know, and this world would be so unlike
the present world that none of us would recognize it.

But time and energy are in a sense convertible into goods
and commodities; that is, into the products of industry which
are the means of satisfying our desires. Therefore, when we
say that we cannot afford a certain article, we mean very much
the same thing, fundamentally, as when we say that we have
not time to do a certain thing. In both cases we are merely
stating the great fact that it is necessary to economize, to
choose what we will do with our limited energy or our limited
money to the exclusion of other things. The fact that time
and energy are insufficient to enable us to do everything that
we might like to do makes it certain that we cannot produce
everything that we should like to have, and that, if we could,
we should not have time to do something else. If we were
to work all the time, we should have no time to play; and
everybody likes to play that is, everybody worth mention-
ing. We must therefore choose whether to deprive ourselves
of the opportunity to play in order to get certain goods that
we want, or to reduce somewhat the number of goods we con-
sume in order to have more time to play. Again, if one works
too long on one kind of goods, one has less time and energy
left to produce others-. At every step in the life of every nor-
mal human being, therefore, he is confronted with some prob-
lem in economy. As already stated, the necessity for economy
grows out of the scarcity of something or other, either time



6 PRINCIPLES OF POLITICAL ECONOMY^

and energy, on the one hand, or some form of material goods,
on the other. Find an individual who experiences no lack or
scarcity of anything, and I will show you an individual who
has no need for economy ; but you will look a long time
before you find him.

Getting and spending. In the practical everyday life of the
average person problems of economy are mainly focused on the
problems of getting and spending, of income and expendi-
ture, or of business and the household. If one's income is
less than one would like to have it, it means that one's desires
run beyond one's income. Such an individual therefore tries,
first, to increase his income and, second, to get as much good
out of it as he-can ; that is, to spend it as wisely as he knows
how. This is true not only of every individual and every
family but also of every organization, even the State itself,
and it is even true of all the people as distinct from their
government. The greater part of the time and energy of the
people of this world is spent on these matters, but it is spent
in a great variety of ways.

A glance at the diagram at the beginning of this chapter
will give one a general idea of all the forms in which the prob-
lem of income and expenditure presents itself. The reader will
get, at the same time, an idea of the principal branches of the
great science of economics, for economics is, in one aspect,
simply the study of the problem of income and expenditure.
This problem is in turn the problem of economizing time and
energy, on the one hand, and goods, on the other. Another
way of saying it would be that it is the effort to make things
that are scarce go as far and accomplish as much as possible.

Economics, household management. Originally the word
economics meant "the principles of household management." It
comes from the two Greek words, ot/co?, "a house," and i>eyu&>,
" manage." It was simply a study of the principles of house-
hold management. In Xenophon's treatise on this subject he
discusses the management of a simple rural household, in



ECONOMY 7

which the business that furnishes the income is united with
the home in which the income is spent or utilized. In fact,
it was the kind of rural household that some men now living
can still remember, where nearly everything consumed in the
household was produced on the farm, so that there was com-
paratively little buying and selling. In such a household the
problems of income and expenditure, of business and home
life, are not very widely separated. The income was made up
of the products of the farm and not of the money for which
they were sold, because they were not sold at all. The expendi-
ture, if such it may be called, was merely the utilization of those
products, and not the spending of money, because there was
no money to spend. In the broadest sense, as we shall see a
little later, that is what constitutes the income and expenditure
of the people as a whole. Individuals may buy and sell among
themselves, but the people as a whole consume their own
products. In recent times, especially in our cities, the busi-
ness that is the source of income is so widely separated from
the home, where the income is utilized, as to make them seem
like different problems altogether. In fact, we now have two
distinct subjects, or branches, of private economics, known
respectively as business economics and home economics. That
these two branches, which the Greeks regarded as parts of the
same subject, are now so sharply separated is a sign that we
have gone a long way from the condition in which business
and life were united, toward a condition in which they are to
be completely divorced. This should make us ponder seri-
ously, because, while it is doubtless in many ways a good
tendency, it is in other ways a bad one.

Public income and expenditure. But the problem of income
and expenditure is a serious question for the public as a whole
as well as for the private citizen. The State gets its income
from different sources and by different methods from those
pursued by the individual, but income is as necessary to a
State as to a citizen. In order that its limited income may



8 PRINCIPLES OF POLITICAL ECONOMY

go as far as possible and accomplish the greatest possible
good, the question of public expenditure must be studied with
the greatest care. It is scarcity in this case, as well as in the
case of the individual, which makes economy necessary. If we
could imagine a State with an unlimited income, which we
cannot, so that when it spent money for one purpose it was
not necessary to refrain from spending money for any other
purpose, there would, of course, be no occasion for public
economy. Xenophon, who wrote our oldest treatise under the
title of " Economics," also wrote a treatise on " The Revenues
of Athens." In the former work he was well within the field
of private economics, but in the latter he had got well over
into the field of public economics. This branch of public eco-
nomics, or political economy (that is, the branch which deals
with the revenues and expenditures of the State, or with what
has been called the housekeeping of the State), is commonly
called public finance. It will readily be seen that there is a
close resemblance between public finance, which deals with the
income and expenditure of the government, and private eco-
nomics, which deals with the income and expenditure of the
private family.

Social well-being. But there is another branch of public
economics which is broader than public finance ; that is, the
branch which deals with the general problem of social wealth
or well-being. This branch deals neither with the income and
expenditure of the individual family as such nor with those
of the government as such. It deals rather with the income
and expenditure of the people as a whole. This is called
social economy or social economics. It is the most impor-
tant study for the real statesman or nation builder. Since in
a democracy everyone is a nation builder, in a small way at
least, in that he helps to determine the policy of the nation,
it is of the greatest possible importance that everyone should
study the problems of social economy as well as those of
public finance and private economics.



ECONOMY 9

The management of the king's household. A good illustra :
tion of the importance of this subject is found in the studies
of a group of scholars who, some hundreds of years ago, were
studying the problem of providing for the king's household.
These were the finance ministers of certain kings of Euro-
pean countries. They are now sometimes called the cameral-
ists. Having charge of the affairs of the king's household,
they were, in a sense, studying private economics ; but since
the king was a public functionary, deriving much of his
revenue from taxation and other public sources and perform-
ing many of the acts of government, these finance ministers
were, in another sense, studying public economics. At any
rate, they were severely put to it to find revenue enough to pay
the expenses of the royal household or to keep the expenses
within the royal revenues ; that is, to balance income and
expenditure. These were problems in economy. How to get
as large an income as possible with the limited energy at their
disposal, and how to expend that income so as to add the
maximum to the resources of the king's household, were
very serious problems.

The social income. The more they studied this problem,
the more clearly they saw that in order to increase the royal
income the people over whom the king ruled must be made
prosperous ; that is, the social income must also be increased.
" Poor people, poor king " came to be an axiom in public
finance. Therefore attention was given to the problem of in-
creasing the social income or of promoting the prosperity of
all the people. Later writers have given their chief attention
to this part of the problem. In the outline at the beginning
of this chapter this is called social economy.

Exchange. In one sense, as already pointed out, the social
income is the annual production of the nation. So there
was a tendency at first to give chief attention to the subject
of production, but it was soon discovered that in social econ-
omy exchange was an important factor. In studying thq



10 PRINCIPLES OF POLITICAL ECONOMY

internal economy of an individual household, whether a pri-
vate or a royal household, exchange among the members could
be left out of account ; but in studying the internal economy
of a whole nation it could not be left out of account, for the
obvious reason that the citizens of the nation did a great deal
of exchanging among themselves. This is particularly true of
the modern nations. Buying and selling has come to be so
large a part of the economic life of the people that for a long
time it seemed to many students to be the most important
aspect of economic life. So there came a time when the
chief emphasis was laid upon exchange rather than upon
production. Indeed, it was assumed for a time that produc-
tion would almost take care of itself ; that is, each individual
would look after his own part in it if only the government
would provide him safe and open markets and a convenient
medium of exchange in the form of money and sound banking
facilities.

Distribution of social income. Still later, another problem
was discovered to be of equal or greater importance. Like the
problem of exchange, this was one which could also be ignored
in the study of private economics. It is the problem of the
division of the products of industry among the workers. When
a large number of people take part in the production of a given
commodity, say shoes, the question as to how much of the
value of the shoes shall go to each person or group of persons
is of the utmost importance in social economy. The farmer,
the -miller, and the baker, as well as the carrier, have all had
something to do with the production of a loaf of bread. It is
very important to know-how much of the value of the bread
goes to each of those who have had a part in its production.
This is called the problem of distribution ; as you will see, it
is somewhat different from the problem of exchange, though
very closely related to it. Such questions as the wages of dif-
ferent classes of laborers, the rent of land, the interest on capi-
tal, the profits of enterprise, are parts of the general problem



ECONOMY 1 1

of distribution. During the last fifty years, it is fair to say,
more emphasis has been laid upon the subject of distribution
than upon either production or exchange.

The utilization of the social income. While the consump-
tion of the people has been recognized as the utilization of the
social income, and therefore as a thing important in itself, yet
students have almost ignored it as a branch of the science of
economics. One reason has doubtless been the feeling that
every individual would better be left to consume his income
as he liked, whether he did it wisely or foolishly, beneficially
or harmfully. Attempts to control or direct his consumption
have been called sumptuary laws. By pronouncing these words
with a wry face such attempts may be discredited, that is, for
a time. Meanwhile, however, every progressive community
has gone right on passing sumptuary laws, in one form or
another, sometimes to the great advantage of the people, some-
times to their disadvantage. Students are therefore becoming
convinced that the consumption of wealth merits a great deal
of study, that it is going to be controlled and directed by the
State whether we like it or not, and that whether it is con-
trolled and directed wisely or unwisely will depend upon how
carefully and intelligently it is studied. In fact, a few are
already beginning to discover that consumption is more impor-
tant than production, exchange, or distribution, possibly more
important than all three combined.



CHAPTER II

WEALTH AND WELL-BEING

What are economic goods? Before we can go very far in
our study of income and expenditure, or of production and
consumption, we must get a fairly clear idea as to the sort
of things that make up income, or the sort of things that
men try to produce. When it was stated in the last chapter
that the necessity for economy arose out of the fact of scarcity,
it might have been guessed at once that the things that make
up one's income in a strictly economic sense are the things
that are scarce. More accurately, perhaps, we should say that
the only things we try to produce are the things of which
we do not have enough. It may sound a little queer at first
for one to say that his income consists of things that are
scarce, or things of which he does not have enough. It
will therefore be necessary to spend some time in making this
point absolutely clear ; otherwise we shall never be free from
error and confusion. As a matter of fact, the very first step
toward a true understanding of the nature of wealth is a clear
perception that wealth in the economic sense consists of things
that are scarce and so need to be economized. When it is
said that the necessity for economy grows out of scarcity, and
that we only try to produce the things that are scarce, we do
not imply that everything is scarce. Some very useful things
are very abundant, so abundant that everyone can have all
he wants ; and when he gets all he wants, no one else is



Online LibraryThomas Nixon CarverPrinciples of political economy → online text (page 1 of 48)