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The question of the residual share. In view of all that has
been said, it is safe to conclude that profits are made up of
what is left after the other shares are paid. This does not
mean, however, that profits are a residual share. This term
residual share has been discussed in a good many treatises
on economics. By a residual share is meant the only share



448 PRINCIPLES OF POLITICAL ECONOMY

which is not determined independently. It has sometimes been
argued, for example, that inasmuch as rent is determined by a
law of rent which works independently of other laws of distri-
bution, and since wages are determined by the standard of
living which likewise is supposed to work independently of
other laws of distribution, and since the rate of interest tends
to work uniformly through the community, regardless of minor
changes, profits are therefore undetermined by any law but
are merely what is left over after the other shares are accounted
for. It is quite as easy to show that any other share is a
residual share in this sense as it is to show that profits are a
residual share.

Many years ago Walker pointed out that profits are deter-
mined by a law similar to the law of rent as applied to land.
Profits, according to this law, are determined by the difference
between the productivity of a given business man and that of
the least efficient business man who could manage to stay in
business. The latter was called the no-profit business man or
entrepreneur, and he occupied a position analogous to the no-
rent land on the margin of cultivation. A more efficient busi-
ness man, however, could reduce the cost of production somewhat
lower than this no-profits man, or else produce a better product
which would sell at a higher price. Herein lay his opportunity,
and his only opportunity, for profits. Assuming that he paid
the same rate of wages and interest and a rent which was pro-
portional to the advantage of the site, his only chance of doing
better than the other man was to organize these factors more
effectively and to supervise them more diligently by effecting
economies which the other man was unable to effect. He
would then find himself in the possession of a surplus. Be-
ginning with profits and accounting for them by this differen-
tial law, Walker proceeded to show that rent and interest were
also determined by definite laws. This left only wages to be
accounted for. Therefore he assumed that wages were a
residual share.



PROFITS 449

One may, however, prove by the same process that either
rent or interest is a residual share. It all depends on which
share you consider last in the series. The result of this,
moreover, has resolved the whole doctrine of a residual share
into an absurdity. Since the independent business man, or the
entrepreneur, is the only one whose income is not the result
of specific bargaining, and since he is the only one who does
not sell his services for a definite price, he may be said to re-
ceive whatever is left over. The laboring man bargains for a
definite rate of wages ; whether the business is making a profit
or a loss, he gets these wages as long as the contract stands.
The capitalist lends his capital at a definite rate of interest
and gets that rate of interest so long as the business keeps
going, whether it is making a profit or a loss. Similarly with
the landowner. But the entrepreneur is the only one whose
income hinges on the question of profit or loss for the business
as a whole.

The business man the chief bargainer. Every participant in
a competitive enterprise is more or less a bargainer, but the
independent business man is the chief bargainer of all. When
the laboring man has bargained for a rate of wages, the rest of
his work consists not in bargaining but in working ; and when
the capitalist has bargained for a rate of interest, that is the
end of his bargaining ; so with the landlord. But the inde-
pendent business man is the bargainer per se ; he bargains for
everything, his raw materials, his help, his capital, his inter-
est, and he also bargains with the purchasers of the product.
He is the unbought buyer of everything and the unsold seller
of everything connected with the business. It therefore hap-
pens that skill in bargaining is one of the greatest elements in
his success in securing profits. Bargaining, however, consists,
in the first place, in investing, and the investment of capital
is a very delicate operation. To invest successfully one must
foresee the future needs of the community as expressed in the
demands of the market. To err at this point is to fail.



450 PRINCIPLES OF POLITICAL ECONOMY

Because of the disinclination of the average man toward
taking the ordinary business risk, the competition is somewhat
intense for the safe positions of the laborer and the lender of
capital. The intensity of this competition tends to keep their
shares somewhat lower than they would otherwise be, but this
disinclination makes the competition somewhat less intense
among the business men who have to assume the chief risks.
This, in turn, leaves them with somewhat larger incomes than
they would get if the risks were less irksome and the competition
more intense. The surplus income which comes to them in
this way is called profits.



PART FIVE
THE CONSUMPTION OF WEALTH

Which has to do with the utilization of wealth in the satisfaction of human

desires, and the reaction of this utilization upon the general prosperity and

strength of the nation



CHAPTER XXXVIII

MEANING AND IMPORTANCE OF CONSUMPTION

Two meanings of the word consumption. There have been
two meanings given by economists to the term consumption of
wealth. By one group it has been made to include any utili-
zation of wealth in which the wealth is worn out, used up, or
destroyed in the process ; by another group it is denned as
meaning only such utilization as gives direct satisfaction to a
consumer. Under the first definition coal is consumed when
it is burned to make steam for the running of machinery as
well as when it is burned to supply warmth for the comfort
of the human body. Under the second definition only the
latter use of coal would be called consumption. Those who
hold to the first definition are compelled to divide consump-
tion into two kinds, namely, productive consumption and un-
productive consumption. It is always explained, however, that
the term unproductive consumption does not mean useless or
unnecessary consumption. It means that wealth thus consumed,
in contradistinction to that which is productively consumed, is
not used up in the process of producing other wealth. It is
used rather for the final purpose for which all wealth is com-
monly supposed to be produced, namely, the direct satisfaction
of human desires or needs. 1

The tendency among recent writers is to use the term con-
sumption in the narrower sense. By the consumption of wealth
under this definition is meant the culmination of the whole
economic process, namely, the satisfaction of human desires.
Wealth which is worn out or used up in the process of

1 Compare the author's article on " Consumption " in the Encyclopedia
Americana.

453



454 PRINCIPLES OF POLITICAL ECONOMY

production is not itself yielding satisfaction to consumers
directly. It is yielding it indirectly, or helping to produce
other things which will satisfy consumers directly.

The purpose of the user is the determining factor. Under
modern conditions goods are used either for direct satisfaction
or for the getting of an income. If they are being used for
the getting of an income, they are not being consumed in the
economic sense. The physician's automobile which is used in
his profession is being worn out, but it is not being consumed
in this sense. When the same automobile is used for his own
enjoyment or that of his family, it is being consumed. Again,
a thing may be in the process of consumption even though it
is being used up very slowly. A diamond which is used as an
article of pleasure or adornment is in the process of consump-
tion, even though it may never be really worn out ; but when
it is a part of the stock of the jeweler, like the rest of his stock,
it is being used for the purpose of getting an income. A sub-
stantial piece of furniture, when used for direct satisfaction, is
being consumed ; but while it is in a furniture store, the imme-
diate purpose of the owner is to gain a profit from it rather
than to enjoy it, and therefore it is not yet in the process of
consumption. In short, the consumer of an article is the one
whose desires it satisfies directly. The article begins being
consumed whenever it begins satisfying a consumer's desires
directly, that is, when it has passed through all the channels
of business and trade, where it is used for the purpose of
getting an income, and comes into the possession of someone
for whose satisfaction it is designed.

Importance of consumption. Most textbook writers on eco-
nomics have regarded the consumption of wealth as a depart-
ment of the subject coordinate with such departments as
production, exchange, and distribution. None of them, however,
has given as much space to it as to those other departments.
The reason has apparently been the general opinion that con-
sumption is essentially an individual matter, with which the public



MEANING AND IMPORTANCE OF CONSUMPTION 455

has had little or no concern. Laws relating to consumption
have been called sumptuary laws, and have generally been con-
demned or only half-heartedly approved. There is a growing
opinion, however, that consumption is quite as important, from
its effect on national prosperity, power, and greatness, as any
department of economics. Even the regulation of consump-
tion, as in the case of laws regulating or prohibiting the use of
alcoholic beverages, is becoming popular. Probably no move-
ment of the present day in America is quite so popular or so
democratic as the prohibition movement.

The importance of the consumption of wealth is further
emphasized by the consideration that as many and as dire
calamities have overtaken nations and peoples because of their
irrational habits of consumption as because of inefficient sys-
tems of production, exchange, or distribution. In fact, con-
sumption reacts powerfully upon all the other departments,
particularly upon distribution. The standard of living of the
laboring classes, which is a part of consumption, has much the
same influence upon the price of their labor as that exercised by
the cost of production upon the price of a material commodity.
Again, the rate of the accumulation of capital, upon which so
many things depend, is largely determined by the habits of
consumption. The effect of luxury upon industry and general
national strength is one of the largest of all questions. These
illustrations are enough to show that the subject of consump-
tion deserves the most careful study and the most serious
treatment which economists can give it.

Ratio of consumption to production. In a profound and illu-
minating article on War and Economics, 1 Dr. E. V. Robinson
calls attention to the fact that in any country, when its produc-
tion exceeds its consumption, the result is economic progress,
but that when consumption exceeds production, the result is
economic retrogression. When production exceeds consump-
tion, wealth is accumulating and taking on durable forms ; when

1 Political Science Quarterly, Vol. XV (December, 1900), p. 581.



456 PRINCIPLES OF POLITICAL ECONOMY

consumption exceeds production, the national wealth shrinks,
and the nation lives on its accumulated capital and, moreover,
allows its accumulated fund of durable wealth to deteriorate.
Since it spends no time in keeping its durable wealth in repair
or its volume intact, but spends all of its time in producing
ephemeral goods for immediate self-gratification, its great archi-
tectural monuments, if it has any, sink into decay ; no time
is spent in preserving them. Its buildings become dilapidated
for the same reason. Its soil becomes depleted because no
energy is spent in conserving its fertility. The people live as
it were from hand to mouth, and everything tends downwards.

When production exceeds consumption, on the other hand,
not only are durable forms of wealth conserved kept in repair
and intact but they are continually improved and new forms
produced. There is energy to spare from the work of produc-
ing ephemeral articles for immediate consumption. Here time
is devoted to permanent works and new forms of construction.
Durable goods multiply in quantity, capital accumulates, more
and better tools and equipment are provided, and productive
power accumulates by a kind of geometrical progression.

Whether, in the nation at large, production exceeds con-
sumption or not depends on the general habits of the average
person. If the average person demands large quantities of
those things which supply physical and temporary satisfaction,
such as luxurious food and drink, fashionable clothing, and
expensive amusements, there will be a tendency for consump-
tion to exceed production. If, however, the average citizen is
satisfied with the kind of food which nourishes, and increases
strength and efficiency, with clothing which affords comfort and
convenience, with amusements which are inexpensive and which
tend to preserve the health, strength, and agility of both mind
and body, there will be a tendency for wealth to accumulate.

Other factors are, however, involved. There might be a
population with simple habits such as we have indicated, but
with no desire for the durable satisfactions of life and with



MEANING AND IMPORTANCE OF CONSUMPTION 457

little energy to be devoted to production. Such a population
would necessarily remain in a low state of civilization. It would
not provide abundantly either for the temporary or for the per-
manent means of satisfaction, but would remain in sloth and
squalor. But if, in addition to the simple habits of consump-
tion so far as food, clothing, and amusements were concerned,
the average person possessed an intense desire for durable
goods, for architecture, libraries, schools, and other civilizing
agencies, the conditions would be favorable to the accumulation
of wealth and to all forms of economic progress. If, in addi-
tion to all these, the average person were energetic and not
disinclined toward work, if he were willing to study hard
and work hard, and if his motives were such as to drive his
mind and body at high speed, the conditions would be still
more favorable. This combination of favorable conditions would
make progress almost inevitable. Nothing except a geological
cataclysm or a world war would prevent such a people from
advancing in the arts of civilization.

Preference for durable goods. It is to be borne in mind that
the motives and desires of people are fundamental to this prob-
lem. Any people can have as much progress and as high a
state of civilization as they desire, provided they desire them
strongly enough and are willing to pay the price. If the peo-
ple of ancient Athens had preferred to spend their time, their
energy, and their money on ephemeral satisfactions rather than
on the architectural adornment of their city, they could have
done so. If they had so chosen, they could probably, for sev-
eral centuries, have consumed somewhat more luxurious food
and drink, worn more expensive clothing, and amused them-
selves in more costly ways. But because they chose rather to
spend their money and their energy on durable goods, they
left the world richer than they would have done if they had
made the ignoble choice.

The same comment may be made upon the people of vari-
ous medieval cities, who cared so much for their religion that



458 PRINCIPLES OF POLITICAL ECONOMY

they were willing to spend their money, time, and energy in
building cathedrals as monuments to their religious faith. They
could have chosen otherwise. They could for centuries have
had more luxurious food and drink, adorned their bodies with
more expensive clothing, and had more of their time for self-
amusement. But they did not choose in this way, and because
they did not, the world still possesses their great architectural
monuments. Similarly, any city of to-day can be as fine and
beautiful as it wants to be, provided it is willing to pay the
price. If it chooses not to build durable forms of satisfaction,
it may go on consuming luxuries in many forms, and it may
go on amusing itself, multiplying holidays, and enjoying vari-
ous other forms of waste ; but if it is willing to live on the
products of a part of the people, in order that the remain-
der may be employed in building for the future, there need
scarcely be any limit to its possibilities for civilization and cul-
ture. If it chooses to follow the example of those cities of the
past that became great and left something to show that they
once existed, something to justify that existence, it will
merely be choosing to consume from day to day, and from gen-
eration to generation, less than it produces, in order that a part
of the productive energy of each generation may build for the
future. That spells progress. If it chooses otherwise, it will
never leave anything to show to future generations that it once
existed, much less to justify that existence. The life history of
its citizens could be briefly summarized in these words : They
were born to breed and die, like the insects of the hour, gen-
eration after generation, in endless and unprofitable repetition.

Value of a man. From the standpoint of progress the value
of the individual . depends on the excess of his production over
his consumption. The following formula will determine with
mathematical accuracy how much a person is worth from the
standpoint of national prosperity : V P C.

In this formula V stands for value, that is, the value of the
man ; P stands for his production ; C, for his consumption.



MEANING AND IMPORTANCE OF CONSUMPTION 459

Thus the formula reads, The value of the man equals his
production minus his consumption. In the cases where his
consumption exceeds his production his value is negative ;
he is a drag on progress, and the world will at least save
his victuals when he leaves it.

The whole life is the unit. Lest this be too hastily inter-
preted, it should be pointed out that a human life as a whole,
and not a fragment of it, should be regarded as a unit. The
consumption of a child exceeds his production ; but this does
not condemn him. So, likewise, during the declining years of
those who reach a good old age, consumption may exceed
production ; but this does not condemn the life. If the life as
a whole produces more than it consumes, it leaves the world
richer by that difference.

Again, production should be given a very wide interpre-
tation. One may produce without handling material goods of
any kind, but by inspiring the productive virtues in others,
by teaching productive skill to other people, by scientific inves-
tigation, by transmitting knowledge, and in various other ways.
If, after making all allowance for these different forms of pro-
ductivity, the mature individual in sound health finds that he
is producing less than he is consuming, it is time for him to
begin to consider his ways and to experience a change of heart.
He needs to be converted from a waster into a producer.

Boarders at the national table. Dairymen sometimes use
the term boarder to describe a cow whose feed and care cost
more than her milk is worth. Every wise dairyman tries to
get rid of his boarders and keep only those cows whose produc-
tion exceeds their consumption. The formula V=P C applies
very clearly to the value of the cow. A wise farmer would
not keep a horse whose production did not exceed his con-
sumption. A manufacturer would discard a machine which
required so much power, care, oil, repairs, etc. as to exceed
the value of its product. It would seem that men ought to be
held to at least as high a standard as that to which cows,



460 PRINCIPLES OF POLITICAL ECONOMY

horses, and machines are held. A man who falls below that
standard is as much of a drain upon his country as is the cow,
horse, or machine.

The class of boarders includes not simply the tramps and
beggars but everyone else who is not usefully engaged, even
though he or she lives upon his wife's or her husband's earn-
ings, his wife's or her husband's fortune, or upon inherited
wealth. The class includes even others. Even those who are
somewhat usefully engaged may be consuming such expensive
products, and may require so many servants to wait upon them,
as to use up more man power than they replace by their own
work. As a mere exercise in patriotism, therefore, every ma-
ture person should ask himself seriously whether the country is
the gainer or the loser by reason of his existence, whether the
cost of keeping him is greater than the advantage, whether
the man power required to produce for him and take care of
him is not greater than the man power which he contributes
to the nation's fund of productive energy by his own work.

The conservation of man power. The importance of this con-
sideration is peculiarly clear at the moment when this is being
written (December, 1917), when all the liberal nations are at
death grips with a military autocracy whose limitless ambition
threatens to overwhelm the democratic world. The necessity
of conserving every ounce of our man power is upon us. We
see clearly now that anyone who is not usefully engaged is a
menace rather than a help to us in the struggle. The food
alone which such a person consumes is acutely needed, to say
nothing of the man power which he requires in other ways.

Even those who are usefully engaged ought to feel that luxu-
rious consumption on their part is an interference with the
plans and purposes of their country. To consume unnecessary
luxuries is to require an unnecessary quantity of man r3ower to
produce for us. This is little short of a crime when that man
power is so intensely needed for the trenches, for the war
industries, and for food production.



CHAPTER XXXIX

RATIONAL CONSUMPTION

Difference between a high and a rational standard of living.
Economists have generally classified standards of living on the
basis of their cost or expense. A high standard of living has
meant merely an expensive standard ; a low standard of living
has meant simply a cheap standard. Very little attention has
been given to the difference between a rational and an irrational
standard. By a rational standard of living is meant one which
increases the margin between one's production and one's con-
sumption. In the formula V=PC, as given in the pre-
ceding chapter, the most valuable man is one in whom P
exceeds C by the greatest margin. The purpose of the present
chapter is to contend that the most rational standard of living
is one which produces the most valuable man.

This margin of difference between P and C would be in-
creased, of course, either by decreasing C, by increasing P, or
by doing both at the same time ; that is, if, without reducing
in any degree a man's efficiency as a producer, he were to re-
duce his cost of living, he would thereby be adding to his
value from the standpoint of progress. To that extent he
would enable the community to produce more than it con-
sumed. He would thus be a factor in the accumulation of
productive power or of the durable products of civilization. If,
however, by reducing his cost of living, he at the same time
reduced his productive efficiency in the same proportion,
there would, of course, be no gain, and there might be some
loss involved. If, on the other hand, by spending more on
himself, especially on books and other means of education, on
tools, or on more nourishing food, he were able to increase

461



462 PRINCIPLES OF POLITICAL ECONOMY

his productive efficiency, his increase in consumption would
more than justify itself.

From this point of view the problem for every individual
is to adopt that standard of consumption which will leave the
largest margin between production and consumption. From
the same point of view it would frequently be necessary that
one man should spend more on himself than another would be
justified in doing. Take, for example, a great surgeon, whose
time is exceedingly valuable, not only to himself but to the
community he serves. He might very properly keep an auto-
mobile, a chauffeur, and other time-saving devices and agencies.
He might even keep a valet to look after his clothes. If these



Online LibraryThomas Nixon CarverPrinciples of political economy → online text (page 37 of 48)