Part 1
Transcriber’s Note: Italics are enclosed in _underscores_. Additional notes will be found near the end of this ebook.
The Basic Facts of Economics
A COMMON-SENSE PRIMER FOR ADVANCED STUDENTS
[Illustration]
By LOUIS F. POST
[Illustration]
_Author’s Edition_
WASHINGTON, D. C. 2513 TWELFTH STREET, N. W. 1927
_Price Fifty Cents_
Copyright, 1927, by LOUIS F. POST
PRESS OF COLUMBIAN PRINTING CO., INC.
BINDING BY GEO. A. SIMONDS & CO. WASHINGTON, D. C.
Accurate Observation and Clarity of Thought are the Prime Requisites of Economic Study
PUBLICATION COMMITTEE
ANDREW P. CANNING, _Chairman_, Chicago, Ill.
JAMES H. BARRY, San Francisco, Calif.
GEORGE A. BRIGGS, Los Angeles, Calif.
MRS. EDWARD O. BROWN, Chicago, Ill.
EDMUND VANCE COOKE, Cleveland, Ohio.
STOUGHTON COOLEY, Los Angeles, Calif.
OTTO CULLMAN, Chicago, Ill.
MRS. ANNA GEORGE DE MILLE, New York City.
JAMES H. DILLARD, Charlottesville, Va.
ROBERT E. GRAVES, Chicago, Ill.
ANGELINE LOESCH GRAVES, Chicago, Ill.
WILLIAM C. HARLLEE, Washington, D. C.
LEWIS J. JOHNSON, Cambridge, Mass.
FENTON LAWSON, Cincinnati, Ohio.
WILEY WRIGHT MILLS, Chicago, Ill.
C. L. MOULTON, Glen Ellyn, Ill.
JACKSON H. RALSTON, Palo Alto, Calif.
WALTER I. SWANTON, Washington, D. C.
EDWARD N. VALLANDIGHAM, Chestnut Hill, Mass.
JOHN Z. WHITE, Chicago, Ill.
TABLE OF CONTENTS
PAGE
PREFACE vii
FIRST LESSON--ECONOMICS 1
SECOND LESSON--MONEY 9
THIRD LESSON--TRADE 17
FOURTH LESSON--THE BASIC FACTS 27
FIFTH LESSON--THE PRODUCTIVE PROCESS 40
I. HUMAN FACTORS 42
II. NATURAL RESOURCE FACTORS 50
III. ARTIFICIAL OBJECTS 52
IV. SECONDARY CATEGORIES 56
1--CAPITAL 56
2--TRADE 60
3--UTILITY, VALUE, MONEY, PRICE, BANKS 63
4--BALANCES OF TRADE 67
V. AN ILLUSTRATION OF THE PRODUCTIVE PROCESS 70
SIXTH LESSON--DISTRIBUTION 74
I. WAGES FOR LABOR 75
II. RENT FOR LANDOWNERSHIP 83
III. TRADE 91
IV. MONEY 94
SEVENTH LESSON--REVIEW 97
QUESTIONS FOR SELF-EXAMINATION 101
PERSONAL ACKNOWLEDGMENTS 103
PREFACE
The purpose of this common-sense explanation of Economic phenomena is to disclose and emphasize those comprehensive and familiar primary facts which embody the myriads of secondary facts that are involved in Economic science. To avoid confusing those complicated details is to promote the clear thinking which every Economic problem demands, be the problem one of collegiate study, of political policy, or of business importance.
The following pages aim, therefore, at encouraging all thoughtful citizens so to classify the details of the general subject in their own minds as to enable them to avoid centering their mental vision upon Economic trees so intently that they cannot see the Economic forest as a whole. It aims also at discouraging the opposite inclination to view the Economic forest so exclusively as a whole that the Economic trees of which it is composed cannot be distinguished.
L. F. P.
The Basic Facts of Economics
A COMMON-SENSE PRIMER FOR ADVANCED STUDENTS
FIRST LESSON
ECONOMICS
On the surface, Economics appears to be the science of making money.
This appearance is due, however, to a careless recognition and erroneous application of the fact that Economic accomplishments are measured by money standards and expressed in money terms.
When, for example, a builder builds, he builds to make money. Money measures the Economic extent of what he is doing, and money terms express its Economic desirability. They also express and measure his motive, which is the compensation he can command in the currents of trade.
A merchant makes money when he manages a profitable business.
So does a manufacturer.
Farmers make money when they sell their produce profitably. Nor only when they sell it, but also while they cultivate it; for every day’s growth adds to the money measurement of a crop.
Wage-workers by the day, the week or month, and salary-workers by the year, also workers on commission or for percentages or for profits, make more or less money as working opportunities are more or less plentiful, and wages or salaries or percentage totals and profit totals are consequently higher or lower.
Engineers, lawyers, physicians, architects, dentists, clergymen, teachers--all professional workers,--make money to the extent of the marketability of the services they offer.
And investors, do they not invest by money measurements and in money terms for the purpose of obtaining Economic incomes measured by money and expressed in terms of money?
Manifestly, the immediate object of everybody’s activity in the field of Economics is to make money.
Does one desire food? By making money he gets food. Does one desire clothing? He gets it by making money. Does he wish for housing, furnishings, automobiles, railway or steamboat transportation, necessaries of any kind, luxuries of whatever variety, household service, professional service, legislative or judicial service, mechanical service, mercantile service, clerical service? By making money he gets them. Does one wish for slaves? If slavery be an institution of his time and place, he may have slaves by purchases with the money he makes. Should he be a slave himself, he may purchase his freedom with money if he can get it. Does land-ownership appeal to one? Let him make money and he can buy land. Whatever object the Economic field may offer for the satisfaction of human desires, that object is attainable by making money. In no other way can it be attained through Economic processes.
If gifts be cited as exceptions let the fact be noted that giving is not an Economic process. It lacks the element of exchange or trade. So, too, of theft in any of its forms. In genuine Economics there must be two gainers in every trade. There is no such science as Economics of the Forty Thieves variety.
Even in such seeming exceptions to the Economic importance of money as are offered by barter, in which no money passes and no money accounting is made, comparisons of the objects thus directly exchanged are nevertheless contemplated by the exchangers in terms of money. The owner of a horse that might sell for two hundred dollars, would not barter it for a horse that could sell for only one hundred--not unless he got “boot” enough to even up the money difference to his satisfaction. Nor would the boy with a two-dollar penknife “swap even” for a one-dollar jackknife. It is only when the two horses or the two knives seem to their respective owners to be approximately equal by money measurement that an “even swap” is conceivable.
Another seeming exception to the money-making characteristic of Economics depends upon individual isolation. That isolated individuals may gather food and improvise shelter and clothing without thinking of them in terms of money, is true enough; but the activities of persons thus isolated are not Economic exceptions, for the science of Economics is a social science. Although some Economic phases or phenomena may be picturesquely and aptly illustrated by reference to the experience, actual or imaginary, of isolated individuals like Robinson Crusoe on his island, states of human isolation are outside the limits of Economics.
Inasmuch, then, as the object of the human factor in the science of Economics is to make money, and as there can be no science of Economics without the human factor, Economics is comprehensively and accurately definable, on the surface, as the science of making money.
But making money in the Economic sense must be distinguished from narrower uses of the phrase. To manufacture coins legitimately, as at a mint, is to “make money,” but only in one Economic particular--only in the narrow mechanical sense in which weaving cloth is “making cloth.” Like weaving cloth, it is but an item in the multitudinous phenomena of that money-making which superficially defines the science of Economics. The same observation is applicable to the occupations of engraving and of printing paper currency legitimately.
Illegitimate makings of either paper currency or coin, like all other forms of forgery, are not in any sense making money within the purview of Economic science. They are varieties of theft, and Economic science excludes theft of every kind, even legal kinds, such as slavery. This exclusion is not for moral reasons, it may be well to interject for the benefit of such advanced students of Economics as recoil from mixing moral principles with Economic science. It is due to the fact that exchange, or trade--an essential element in Economics,--is in theft utterly lacking.
In the Economic sense, making money is making it for all concerned in any particular process, and not for one or more of the parties at the expense of the others. No art of getting something for nothing can be within the scope of Economic science. One-sided methods of making money, whether frankly labeled “theft” or “gambling,” or shrewdly disguised in spurious business ethics, are alien to Economic money-making. Within the domain of Economics no money-making transaction belongs unless it involves the making of money by all parties to the transaction.
To make money in that mutual sense is to augment the supply or the serviceableness of whatever commodities money terms may measure and express, and of the portions or shares of all who contribute to the augmentation.
In phrasing more complete than that of “making money,” Economics is the science of making money by earning it. Getting money without earning it is related to Economics only in a science-disturbing sense. It disturbs the normal Economic relations of effect to cause in the production and dissemination of humanly desirable objects. To realize the truth of that statement, the student need only momentarily conceive of theft as universal. Since universal theft as an Economic phenomenon would be utterly destructive of normal Economic relationships, of beneficial effects from normal causes, so must theft to any extent operate destructively to that extent. The only thinkable relation of theft to Economics is analogous to the relation of murder to the human race. That Economic study may comprise considerations of how to exclude stealing from Economic customs, does not go to prove that stealing is a factor in Economic science. It goes no farther than to prove that stealing may become an Economic parasite.
Even as a parasite, stealing could hardly have wormed its way to the Economic border line, much less across it, but for a disposition among advanced students to confuse normal Economic phenomena with arbitrary business customs.
“Business” might indeed be the nearest approach to a synonym for “Economics.” It would be an exact synonym but for one variation. Whereas Economics relates to a comprehensive social organism which (notwithstanding “scientific” contentions to the contrary) is subject to natural laws of human association (sequences of cause and effect), Business is but a limited collection of individual interests or private organizations that are influenced and largely governed by arbitrary customs. These customs may or may not be in harmony with the normal relations of cause and effect in Economics. And as to each particular business, it is operated, as accountants frankly admit, only “for the benefit of its proprietor.”[1]
[1] The quotation is from “Modern Business”, by Thomas W. Mitchell, Ph. D. New York: Alexander Hamilton Institute. 1918–1919.
In some of its vulgar connotations Business might very well answer to the insolent definition that it consists in the adventures of sprightly gentlemen trying to sell nothing for something to other sprightly gentlemen who are trying to buy something for nothing. In so far, however, as that definition may be appropriate, it applies only to business abuses, not to Business as a possible synonym for Economics. It defines Business only as theft might define morality.
To be a closer synonym for Economics, Business must deserve a definition relating its customs to natural Economic law (a subject to be considered in a later Lesson) and extending its functions more completely to universal mutual service. Moreover, its definition must widen the Business concept so as to include all kinds of such service. Business can no more exclude from its realm particular Business specialties, though that be customary, than it can include the operations of “confidence men,” as it is sometimes supposed to do. Its functions are not limited to commerce, nor to banking, nor to any other of those Business specialties to which careless speech, and sometimes snobbish thought, tend to narrow the meaning of the word.
Business is that function of social life which includes all serviceable specialties. Such terms as “commercial,” “mercantile,” “industrial,” “agriculture,” “labor,” “the professions,” and so on, denominate specializations or sections or subsidiary departments of Business, not Business as a whole. They are useful for subclassification; but, like all subclassifications, whether in Economics or in any other science, they are misleading when perverted into general terms for primary or fundamental or comprehensive categories. The term Business, like the term Economics, should include them all. Every kind of service necessitates busy-ness; and serviceable busy-ness, what is that but Business?
Considered comprehensively, then, and excluding parasitical adhesions, Business might be, as some advanced students of Economic phenomena suppose it to be, another name for Economics. In the scholastic sense, Economics is the more orthodox term; in the practical sense Business could better express the idea. Both terms might have practically the same meaning if considerately used. Honest Business, inclusive of all serviceable activities--service for service, to adopt a phrase in definition of Business--would be identical with Economics. Either, like the other, may be described superficially as the process of the science of making money.
Quite consistently with the foregoing survey, Economics has been described as the science of “mankind making a living.” This definition, too, excludes the solitary life by limiting Economic science to cooperative mankind--in other words, to Economic association. It, too, identifies Economics and legitimate Business; for only through legitimate Business activities can cooperative mankind make a living. It, too, excludes theft in all its forms and guises; for so much of a living as some may make by any kind of theft, others must lose as victims of theft. It, too, brings Economics on the surface and Business on the surface within the definition of “the science of making money;” for only by means of money measurements in money terms does or can mankind in the mass make its living.
But making money is only a surface fact in Economics. It is but a means to the end. By no possibility can it be rationally regarded as the ultimate object. The ultimate object of Economics is earning the living that money will buy. Both the object and the method lie below the surface of money-making. To Economics, making money is somewhat as book-keeping is to a commercial business. It is the surface expression of all underlying Economic phenomena.
Before those phenomena can be thoughtfully observed and studied, the relation to them of money-making must be keenly scrutinized and intelligently considered.
SECOND LESSON
MONEY
What is Money? and what are its functions? Money is the medium of trade, its denominations the language.
Resting on the surface of Economic phenomena, Money and Money terms spread over the whole of the Economic area. All subsurface phenomena in Economics are measured in trade by Money units; the details of trading transactions are discussed and recorded in Money terms.
Money terms vary with localities. In the United States, Money talks in terms of “dollars;” in Great Britain in terms of “pounds sterling;” in France in terms of “francs;” in Germany of “marks;” elsewhere in local terms too numerous for other than encyclopedic description. But the value measurements that Money makes of commodities in the processes of trade are everywhere, at any given time, practically the same.
For lack of stability those measurements do vary from time to time with confusing effect. To compare them with measuring rods for length, breadth and thickness, it is as if yards, feet and inches were constantly contracting and expanding with reference not only to the magnitude of measurable objects but also to one another. Precisely in that way does Money in fact fluctuate. It always has, and unless scientifically standardized, it always will.
Nevertheless, whatever the fluctuations and local discrepancies of Money may be, it everywhere talks, when its language is translated, to the same general Economic effect at any given time. Stabilized, as it might be, it would talk to the same general Economic effect everywhere and all the time.
What language is to thought, Money terms are to trade. The trading transactions of the whole world are effected by means of Money standards and in the language of universally interpretable Money terms.
Conventionally defined, Money consists of coins minted by governments from precious metals more or less alloyed. Those forms are supplemented, however, with subsidiary forms commonly known as “currency.”
There is an Economic theory that metal coins alone are Money, paper currency being but promissory notes redeemable in coin. This theory is useful for testing Money media by coinage standards. But with reference to nearly if not all purposes of current trade, the intrinsic value of the Money piece is of slight Economic importance, or would be if Money were stabilized.
What counts in Economic measurements is Money denominations--Money language rather than Money pieces. For in the world-wide processes of trade, only a slight proportion of either metal coin or paper currency passes from hand to hand. Nearly all Money measurements are entered in books of account; and in these the debits and the credits so nearly offset one another, by and large, that the difference as a whole is too slight for consideration in passing down from the Money surface of Economics to the basic facts. A common and impressive exemplification is afforded by clearinghouse statistics. These show that the enormous banking transactions in Money terms which merge at the clearings daily, are balanced off with a trifling percentage of tangible Money.
Let the fact be emphasized then, that in defining Money as the medium of trade, Money terms rather than Money forms are to be understood as the trading medium.
When a customer at a retail store buys a supply of groceries, his payment may be made in Money pieces, either metal or paper. Yet it may be made instead with a check drawn against his bank balance, or through a charge to his account in the retailer’s books. If paid in Money pieces, either at the time of purchase or later, some if not all of those pieces will go to the storekeeper’s bank and be credited to him in Money terms on the books of the bank. If the payment be made by check, the amount of the check will be entered in the storekeeper’s bank account as if it were a payment in Money pieces instead of Money terms. Be such transactions as they may, however,--cash payments or check payments or drafts or promissory notes--tangible Money plays on the whole but a small part.
From purchases by customers at retail stores back to wholesalers; back of wholesalers to manufacturers of finished products and of unfinished products and of tools and of every other kind of merchantable object; back to land-owners for the sources of supply and the sites for production and delivery; back to farmers, to miners, to transportation agencies, to a vast though scattered army of wage-workers; through many a complicated series of accounts at stores, factories, mines, real-estate offices, railway and steamship offices, banks, clearinghouses--must we wend our way if we would investigate the processes of trade in detail. Yet only in slight degree do those processes involve the use of Money forms. Though coinage standards play their part, almost all trading transactions are made in Money terms and not with Money pieces.
In the process, then, of making a living, mankind trades commodities in terms of Money rather than in its forms, doing so principally through financial accounts. Peering into the details of those accounts (as professional accountants and other business specialists must often do when examining the particulars of their respective specialties), however useful this may be within the limits of the specialization, is always futile and often confusing or misleading for purposes of Economic study or investigation as a whole. In Economics the purpose is not to understand the technical details of business specialties simply. It is chiefly to relate those details to one another by determining their respective Economic categories so that the whole subject may be reasoned about comprehensively.
Some business specialties may necessitate a knowledge in detail of the physical characteristics of sugar, for instance, or of cotton; but what an understanding of the science of Economics requires in such particulars is an intelligent grasp of the nature of sugar or cotton with reference to fundamental Economic categories--whether they are human, or natural, or artificial,--and to what extent, therefore, they are Economically related to all other commodities in the realm of trade. For into one or the other of those three categories, all the myriads of Economic details assemble themselves.
For purposes of Economic specialization, this assignment of details to categories is not enough; but without it no specialization is dependable. Some such identification of particular facts with reference to their fundamental differences or identities, is absolutely necessary for accurate observation of Economic phenomena and clearness of Economic thought; and are not accurate observation and clarity of thought the prime requisites of Economic study?
Not to make those identifications and differentiations is to turn Economics into the hopeless mixture of “masses of particular unexplained facts” which John Morley deplored as characteristic of a certain type of Economic science. “Scraps and pickings of reality” are worse than useless in any study of Economic science unless harmoniously classified according to their respective fundamental characteristics.
This comment does not mean that Economic details are to be ignored except for classification, even by non-specialists. Far from that. It means that they are to be thoughtfully considered and accurately classified for further and comparative consideration. To illustrate: Mankind must be regarded as a class or category in Economics; but not according to personal or individual capabilities, idiosyncracies, or social, business, or legal status. To the business specialist, the personal qualities of an associate or assistant are important; but Economics as a comprehensive science, the science of all “mankind making a living,” knows those special distinctions only in a secondary sense. It is concerned primarily with the individual man only as a unit in the human mass--only from the fact that he is in the human category and not in one or more other Economic categories. So of all Economic facts. To study Economic details without reference to Economic generalizations might be likened to studying an alphabet without reference to language, or numerals without reference to mathematics. Economic problems are not problems of how one individual may make a living at the expense of others. Such problems belong in the plundering pursuits. In Economics the basic problem is how all may make a living at the expense of none.
To that problem business details give no clew, unless the details be assigned to fundamental Economic categories. Piling up details without assigning them is, as Henry James the Elder wisely expressed it, to “sink the truth in endless confusion.” The last person in all the world from whom to get the basic facts of Economics is the business specialist, for he habitually limits his observations to his own specialty. Perhaps, however, a certain type of Economic teacher may be equally untrustworthy in that respect--the teacher who, though he imitates the physical scientist in devotion to details, disregards the physical scientist’s fidelity to the relations of cause and effect.