FIFTH LESSONTHE PRODUCTIVE PROCESS
TheProductive Process in Economics is a complicated sequence of activities in the bringing forth by Man, from and upon Natural Resources, of Artificial Objects. It begins with initiatory adaptations of natural raw materials; it ends with deliveries of finished products to ultimate consumers, in accordance with their demands.
Finished products may be catalogued in general terms as food, clothing, dwellings, luxuries and other Artificial Objects which have come into the possession of ultimate consumers for the satisfaction of their wants. Drawn from Natural Resources, these products return to Natural Resources in the course of their consumption, though not necessarily to the identical places from which they were drawn.
Their substance is indestructible. Man can no more destroy an atom of the physical universe than he can create one. His powers in Consumption as in Production are limited toalteringNatural Resources in location and form. The essential Economic difference between Production and Consumption is that Production alters natural objects so as to adapt them to the satisfaction of human wants, whereas Consumption alters Artificial Objects in the process of satisfying those wants. Production is the drawing forth by Man of Artificial Objects from and upon Natural Resources; Consumption is the passing back by Man of Artificial Objects to Natural Resources.
With the processes of Consumption the science of Economics has nothing to do. Its functions end with delivery to final consumers. Whenever Consumptionis declared to be a phase of Economics, thoughtful consideration will ascribe the declaration, not to the processes of Consumption but to the preceding demand for Artificial Objects to consume.
The human demand for Artificial Objects to consume is the incentive to the Productive Process. Production, therefore, and demand for Consumption, are Economic correlatives, Production having Consumption for its object, demand for Consumption depending upon Production for satisfaction. Without Production by Man, there could be no Artificial Objects to consume; without Consumption by Man, there would be no incentive to produce.
Production must, of course, precede Consumption. No Artificial Object can be consumed before it has been produced. But demand for Consumption as certainly precedes Production. An opposite inference might be drawn from the fact that particular Artificial Objects are often produced in advance of specific demand for them. In fact, however, the output is always in response to demand, either actual or probable—like the outflow from a reservoir of water which follows the inflow but to which there would be no inflow were it not for anticipated demand. Production in advance of actual demand indicates nothing more than that the producers are confident that such demand exists in embryo. If they err, the Products have no market; if they have guessed aright, the volume of Products increases to meet the demand. By and large, then, demand for Consumption regulates Production; or, in Economic phrasing, supply in Production is determined by demand for Consumption.
Being continuous, the human demand for Artificial Objects to consume stimulates continuous Production; being progressive, it promotes improvement in Productive methods and accomplishments.
The Productive Process is accomplished by Man’s exertions, mental and physical, each of those forms of exertion being dependent upon the other.
In that connection Man is governed by natural law, a manifest law of human nature. It resembles the familiar law of external nature in obedience to which physical force advances along the line of least resistance. The former, the Economic law, may be concisely, accurately and indisputably expressed in these terms: Men seek to satisfy their Economic desires with the least exertion.
The validity of that generalization is sometimes questioned on the basis of the fact that men often seek to satisfy their desires with excessive exertion. But is that true? Is it not at best only apparently true? Although for the purpose of satisfying a desire for something, one were to walk three miles when he might reach his goal and satisfy his desire by a shortcut only one mile long, but which is unknown to him or is haunted by a dreadful ghost or infested with predatory men or savage animals, or so reputed to be, he would nevertheless be seeking to satisfy his desire with the least exertion. To risk contact with a ghost or a robber or savage beasts would add much more to his exertion mental and physical, than a walk of three miles for the satisfaction of a desire that might be satisfied by a walk of one. The statement that men seek to satisfy their desires with least exertion is to be read with the interpretation that they do so with the least known and the least dreaded exertion; also that the desire may include effort for the sake of effort, for effort desired as in exercise for health’s sake or exertion for the sake of play.
The Economic principle that men seek to satisfy their desires with least exertion does not imply thatall men, or any of them know what the least possible exertion is. It is least only in their more or less biased or ignorant judgment. There is no contention that they do satisfy their desires with least exertion. The contention is that they naturally seek to do so. Critics of this natural law of Economics should have a care lest they fail to “see the forest for the trees.”
Like the principle in physics to which it is analogous this law of Economics involves the element of least resistance. As in physics the line of least resistance may not be a straight line, although that is its tendency, so in Economics it may not be a direct line. Nor may it be the same line from generation to generation. Precisely as in physics physical obstacles may divert a line from direct to crooked, so in Economics such obstacles as customs, habits, superstitions and ignorance may cause analogous diversions. But as the physical line of least resistance, though not always the shortest by foot rule measurement, is the shortest considering obstacles, so the Economic line of least exertion is as straight as habit, custom, superstition, advice, ignorance, and other obstacles permit.
Let the principle be tested by Money measurements. Will any sane man pay $100 to satisfy any Economic desire of his which he knows he can satisfy as perfectly for $75, or $80, or $90, or even more than $90 so it be less than $100? Certainly not. Then the Economic law in question may be expressed in terms of Money. Instead of saying that men seek to satisfy their Economic desires with least exertion, we may express the same natural law by saying that men seek to satisfy their Economic desires at the lowest Money cost. Both statements have the same meaning. The only difference between them is that the latter is expressedin terms of Money measurement whereas the former is expressed in terms of human effort.
Another familiar demonstration of this natural Economic law that men both individually and in the mass seek to satisfy their Economic desires with least exertion, is the human craving for Labor-saving invention. Could any more comprehensive exemplification of the natural law in question be demanded? Why does mankind crave Labor-saving methods for producing Artificial Objects from and upon Natural Resources, if there be no law of human nature which impels mankind to seek satisfaction of Economic desires with least exertion? John Orr concisely sums up this Economic law in these words: “Very strong and deep is the desire of men to find the easiest way of doing things.”4
4“Short History of British Agriculture,” By John Orr. Oxford University Press, 1922.
4“Short History of British Agriculture,” By John Orr. Oxford University Press, 1922.
The earliest expression of this principle was by Henry George in 1879. Alluding to Political Economy, the term by which Economics was then identified, he wrote: “It lays its foundations upon firm ground. The premises from which it makes its deductions are truths which have the highest sanction; axioms which we all recognize; upon which we safely base the reasoning and actions of every-day life, and which may be reduced to the metaphysical expression of the physical law that motion seeks the line of least resistance—viz., that men seek to gratify their desires with the least exertion.”5
5“Progress and Poverty: An Inquiry into the Cause of Industrial Depressions, and of Increase of Want With Increase of Wealth. The Remedy.” By Henry George. New York: D. Appleton and Company. 1883.
5“Progress and Poverty: An Inquiry into the Cause of Industrial Depressions, and of Increase of Want With Increase of Wealth. The Remedy.” By Henry George. New York: D. Appleton and Company. 1883.
In the Economic realm all human exertion is usually and appropriately distinguished by the technical term “Labor.” This Economic term for human exertion inthe production of satisfactions for human wants has been much abused by colloquial interpretations. So interpreted, Labor is often limited in meaning to the exertions of persons hired in “lower class” pursuits for fixed “wages.” For somewhat “higher” grades of service, “salaries” instead of “wages” are paid. For self-employers still other terms are colloquially used, such as “profits” for the services of merchants and manufacturers and contractors; “fees” for the services of lawyers and physicians; “commissions” for the services of salesmen and brokers; and “discounts” for the services of bankers. Those verbal variations are of course admissible for such secondary purposes as private business may require; but for fundamental or general Economic distinctions which concern the whole human family, they are recklessly undiscriminative and hopelessly confusing. This lack of discrimination is attributable to a tendency in Economic study toward devotion to infinite detail regardless of precise generalization.
The result is a confusion of fundamentally different objects in messy categories, such as Labor with Labor-products; such as Labor-products with Natural Resources; such as income from Natural Resources with income from Labor—as, for instance, “Land” (Natural Resources) with “Capital” (Artificial Objects). It is like thinking of oil and water as a chemical compound when they happen to be in the same receptacle.
Fundamental conclusions in Economics cannot be based upon unassorted details. Students must concentrate their study upon the big facts, the Basic Facts, those primary categories which distinctively classify the whole swarm of secondary facts. Well enough it may be not to start out with assumed principles, nor with the scientific substitute known as “hypotheses;” but all rational study of Economicsmust begin with the Basic Facts and proceed thence to a consideration of details with reference to their basic relations.
The distinctive phase of the present Lesson with reference to human exertion is exertion of the Economic type. Whatever its kind as matter of secondary classification, all human exertion comes within the meaning of the comprehensive Economic term for human service, which, as already stated, is Labor.
No more truly in the Labor category are the services of “wage-workers” than are those of farmers, of manufacturers, of merchants, of brokers, of bankers, of architects, of lawyers, of physicians, of engineers, of authors, publishers, teachers, or the services of any other useful workers who participate in the intricate processes of Economic production. All are within the Labor category. Be the Economic service whatever it may which any human being—from inventor to chattel slave—contributes to the satisfaction of human wants, such service belongs in the same basic category with every other Economic service. Consequently, it must be identified in fundamental Economic classification by the same technical term.
What term may be best for that purpose is of minor importance, if of any importance at all, since names are for identification rather than description. Consequently, the technical term Labor, adopted long ago by Economists of the highest rank to identify human service in Economics, is fully justified regardless of its descriptive qualities. Even as a descriptive term, what other word could better identify human service as a whole?
Among the outstanding minor classifications of Labor is Business, and to this another attaches which some advanced students in Economics classify by itself fundamentally. The latter is the service of the “entrepreneur”or “enterpriser.” As a secondary classification this distinction is probably useful; but for comprehensive Economic study it is as useless as “carpenter” or “bricklayer” would be. Worse yet, it is misleading.
The “enterpriser” is a worker whose compensation for service is not fixed but depends upon the profitableness of the enterprise he pursues, which may be any business venture from mining or manufacturing to merchandizing, and in any capacity from employer seeking “profits” to salesman on “commission.” To eliminate this type of Economic service from the fundamental Labor category in Economic science is not only useless and misleading but also absurd. The fact that the “enterpreneur’s” service may or may not prove profitable to himself—the fact, in other words, that when he enters upon an enterprise he “takes chances” as to compensation—does not alter the Economic character of his functioning. He is none the less nor any the more in the Man category of Economics in contradistinction to the Natural Resource category and the Artificial Objects category. The only Economic difference, essentially, between him and the “common laborer” or “wage-worker”—except that one may be more serviceable than the other, individual for individual—is that the compensation of the “common laborer” or “wage-worker” is nominally secured by contract, whereas the “enterpriser’s” is contingent; and this difference is not fundamental. To take the “enterpriser” out of the Labor category in Economics by assigning him to a fourth fundamental category, is to trifle with Economic classifications. Why extend the basic categories of Economics from Natural Resources, Artificial Objects and Man, to Natural Resources, Artificial Objects, Man and Enterprisers?
A similar classification of Business itself—which, bythe way, is usually managed by “enterprisers”—would likewise be absurd and trifling as well as confusing. What is legitimate Business but human service? And what else in Economic classification fundamentally can human service be but Labor? Business is in the Man class of Economics in contradistinction to the Natural Resource class and the Artificial Objects class. No other fundamental classifications are possible. Consequently, the activities of Business classify themselves naturally in the domain of Economics as Labor.
And so of the professions.
So, too, of every other kind of human service in the Productive Process, whether the service take on such direct forms of Production as making Artificial Objects and such as delivering them from hand to hand or place to place, or such indirect forms as promoting the comfort, the enjoyment, the health, the education, the cleanliness or what not (provided it be Economically legitimate), of such human workers as literally do make or deliver Artificial Objects. All are in the Labor category.
Labor comprises, too, the serviceable operations of partnerships as such; also of corporations, of chambers of commerce, of labor unions; the services of schools and churches and theaters and social clubs; of political parties and religious societies—every kind of corporate service, in short, including the service of governments—to the extent that such service contributes, in addition to the contributions of its constituents in their individual capacities, to the production of Artificial Objects.
And Production—let the reference to this fact be not overlooked—comprises Delivery throughout the whole Productive Process to and including its termination in delivery to ultimate consumers. Railwayworkers and sailors and storekeepers and household servants and waiters at hotels and restaurants and all their Economic associates from employer to “menial,” are producers as truly as are farmers, mechanics or manufacturers.
Human services of the corporate type, as well as those of the individual distinctively, are too numerous and too intricately woven together to permit of detailed consideration here. It is enough to note that far and away as some of them may at a glance seem to be from the Productive Process in Economics, they will be found upon intelligent inquiry—except as they may be more or less perverted in operation—to be in the Economic category of Labor. That is to say, they are human factors in the Production of Artificial Objects from and upon Natural Resources.
One kind of corporate service, a comprehensive kind, should perhaps be given brief special consideration for the double purpose of illustrating the Productive functions of every variety of corporate service and of explaining the Economic characteristics of that outstanding one of all. This particular kind is Government.
The “business” of Government, to use a colloquialism, the Labor of Government, to use the technical Economic term, is comprehensive and effective in the Productive Process to the degree—a reservation that applies to all other subclassifications of Labor, from the lowest grade of “hired man” to the most powerful partnership or corporation, from the most awkward apprentice to the shrewdest business “enterpriser,”—that its functions are wisely and fairly devoted to the task.
Governments are legislative, executive and judicial agencies of social wholes. It is their function to contribute service to the production of Artificial Objectsby preserving public order, defining and protecting private rights, distinguishing and conserving common rights, and managing or providing for the management of common affairs. To the degree that governments faithfully exercise their legitimate public functions and refrain from interfering with legitimate private functions, they contribute to the Productive Process. This is demonstrated by observable Economic results. Wherever Government approximates a realization of its functions, Economic conditions are manifestly better than where it neglects or abuses them. Evidently, then, Government is a form of human service which, like all other human service forms, belongs as an Economic factor in the Labor category.
And as with Governments, so is it with all other organizations in so far as their organic activities tend to promote good order, fair dealing, righteous social adjustments, peace, and general Economic prosperity.
The essential considerations with reference to Labor may be compactly summarized in these terms: (1) Labor can create nothing; it can onlyproduce, by altering the forms and locations of natural substances. (2) Nothing but Labor can so produce. (3) Labor is therefore the sole directing factor in the production of Artificial Objects from and upon Natural Resources.
In the foregoing discussion of the relation of Labor in its broad Economic meaning to the Productive Process, it has been necessary, as a precaution in the interest of clear thinking, to give warning that the technical term Labor is often blurred in its significance by colloquial or business interpretations. A like warning is necessary with reference to the technical term for Natural Resources. This term, adopted long ago and quite appropriate and distinctive, is Land.
If it be said that Labor applied to Land produces Artificial Objects, the Economic meaning is the same precisely as if it were said that Artificial Objects are produced by Man from and upon Natural Resources. But all rational Economic meaning departs from the statement if indefinite colloquialisms or loose business terms be substituted for the precise technical terms.
Yet the technical term Land, like the technical term Labor, suffers in significance from a variety of colloquial and indefinite business interpretations. Indiscriminately it may mean open prairie land, or improved farms, or vacant building-lots, or buildings and the lots on which they stand, or all of them together. The absurdity of such undiscriminating interpretations is obvious to any one who reflects upon the significance of the three Basic Facts of Economics—Man, Natural Resources and Artificial Objects.
Such colloquial and business-habit confusions of the technical Economic term Land, like similar confusions with reference to the technical Economic term Labor, often mislead advanced students of Economics as well as “the man on the street.” In any serious consideration of the Productive Process it is of the utmost importance that the Basic facts be kept distinctively and definitely in mind.
As Labor in Economics means service by and for Man, and nothing else, so Land in Economics means neither more nor less than any and all Natural Resources. It is the technical Economic term for the Natural Resource factor in the Productive Process.
Without Land, Labor would be powerless to produce Artificial Objects. But Land is abundant in all varieties. Trees grow in forests, minerals repose in the earth, the soil offers itself to the farmer, the sea to the sailor, solid ground to the builder, flowing streams to all. Together with the winds, the lightning,the snow, the rain and all the other subtle and mysterious forces of Nature, those Natural Resources respond freely to the multifarious energies, the broadening knowledge of natural law, and the intensifying skill of Labor. They are among the natural substances and forces which are comprehended in the word Land as a technical Economic term.
As Labor is the active factor in the production of Artificial Objects, so Land is the corresponding passive factor.
Unless the category of Artificial Objects (which are the continuous outcome of the Productive Process) be treated with like fidelity to the meaning of technical Economic terms, there will still be confusion and consequent bafflement in Economic study.
Yet such fidelity is sadly lacking. There is an unfortunate tendency to indulge in the same colloquial trifling and business habits of speech with the technical term for this Basic Fact as with the technical term for the Man factor and the technical term for the Natural Resource factor. Although Wealth is the generally accepted technical term for Artificial Objects, careless uses of this term have well nigh obliterated its technical significance.
Technically it is correct to say that Wealth is produced by Labor applied to Land. This means neither more nor less than that Artificial Objects are produced from and upon Natural Resources by mental and physical exertions of Man. So used and understood, those technical terms enable us to trace Economic details in the Productive Process easily and accurately through all their complexities from origin to destination. We have but to assign them to their respective categories or Basic Facts and always tothink of them in that connection. Yet, as with Labor and Land, so with Wealth. Colloquializations and arbitrary business meanings of this specific technical term multiply complexities and make Economic confusion worse confounded.
By colloquial usage and in business accounts the word “wealth”—“capital” when used as a sub-classification of Wealth, that is, Wealth devoted to the production of more Wealth—has taken on a variety of misleading connotations. In business accounts, for example, whatever will bring a price to the owner is accounted Wealth, or Capital as a sub-classification of Wealth, whether the object of the price be a building, a domesticated animal, a slave, a vacant building-lot, an unused agricultural area, or an improved and cultivated farm. Some of those items of “wealth” or “capital” do belong, Economically, in the Wealth category, buildings and domesticated animals being among them; but many fall wholly or in part into one or the other of the two other categories, Labor and Land.
Evidently the science of Economics, which comprehends the interests of all and not merely those of a private business, cannot classify slaves as Wealth. Since they are not and cannot be Artificial Objects, but are human beings, they belong of necessity in the Man or Labor category. They differ radically from animals. In the wild state animals belong Economically in the category of Land (Natural Resources) as truly as wild vegetation does; in the domesticated state they are Wealth (Artificial Objects) as truly as produced vegetation is; and if used to produce Wealth they are Capital (Wealth used for the production of Wealth) as truly as machinery is. But slaves in their “wild state” are not Natural Resources for the use of Man, as wild animals are; they are human beings, and as such they belong in the Man category.
As used in business accounts and colloquially, the word “wealth” does, as indicated above, include some kinds of true Economic Wealth, such as “store goods,” buildings, farm produce, machinery and other Artificial Objects. But in those undiscriminating uses it also includes such Natural Resources (Land) as mineral deposits, water fronts, building sites, railroad rights of way; also mere titles to various kinds of property interests, such as bonds, mortgages, deeds, bank balances, money in hand and corporation stocks.
Some of the Economically desirable things which are included colloquially and for business accountings in the term “wealth” are truly Wealth in the technical Economic sense, let us repeat, since they are Artificial Objects produced by Man from and upon Natural Resources—that is to say, by Labor from and upon Land. But others are not at all in the Wealth category, and putting them there has no other Economic result than confusion. Such of them as consist solely of Natural Resources belong in the Land category. Artificial Objects alone belong in the Wealth category. Deeds, mortgages, bank balances, money in hand, corporation stocks and the like, belong in no Economic category at all below the surface of customary titles to property. They are nothing but evidences of legal title to property of any kind—Natural Resources, Artificial Objects, Man himself when and where ownership of Man by Man is conventional.
To illustrate that species of confusion, for the importance of precise discrimination in Economic thought cannot be overemphasized in Economic study, a farm is often accounted “wealth” or “capital” in colloquial and business usage. So of its purchase “price” or “value,” and also of a mortgage upon it. Yet its purchase price and a mortgage are merely evidences of title to property. Neither of them is Wealth orCapital within the meaning of precise Economic terminology. If they were, the more the mortgages upon a farm the more valuable it would be. A farm the purchase price of which is ten thousand dollars would be worth fifteen thousand if it were mortgaged for five, and seventeen if it carried a second mortgage for two. And that would be absurd. The farm itself really consists of a combination of Artificial Objects and Natural Resources—that is to say, of Wealth and also of Land—two radically different things as matter of Economic discrimination. Its site is a Natural Resource, its untilled soil is a Natural Resource, the space which it and its surrounding atmosphere occupy are Natural Resources. All those characteristics are in the Land category. But its artificial enrichments of soil by tillage or other human activity, and artificial replacements of exhausted or partly exhausted fertility, the fencing and the ditching and the buildings, what are they? what can they be but Artificial Objects, and therefore in the Wealth category? Nor is this conclusion vitiated by the fact that permanent improvements of the soil or location by means of drainage or “made land” or the like may with lapse of time lose their artificial characteristics in consequence of an ultimate natural merging with the site.
A different type of illustration, though identical in Economic terminology, would be an urban residence or a building for business. Its site, the enveloping atmosphere, the space—all these are in the Economic category of Natural Resources or Land. But the building is an Artificial Object and therefore in the category of Wealth. If the building burn down or be torn down, then the property—the site and the space it commands—is in the category of Land alone. In no respect can the site and the space it commands be Wealth in the technical Economic sense—in thediscriminative sense which identifies basic differences.
In that sense nothing is or can be Wealth except Artificial Objects produced by Man from and upon Natural Resources. The common characteristic of Wealth in the technical Economic sense is that it consists of natural substances which have been adapted by human exertion to human uses. Another term would serve as well, but no term would serve if used also to designate something radically different.
In Economic analysis Wealth takes on two aspects. They are distinguishable by secondary classifications. One is Wealth in the possession of consumers; the other is Wealth in process of utilization by Labor for the production of further Wealth. For the former no technical Economic term is in use; for the latter the technical Economic term is Capital.
Capital is a highly important technical term in Economics. It must not be confused, therefore, with the same word as loosely used in business accounts, where, like the term for its parent category, Wealth, it mingles such essentially different things as Wealth and Land—Artificial Products and Natural Resources. And, as observed in a preceding paragraph, not only such different things as Wealth and Land, but in some circumstances Labor also.
Such undiscriminating uses of the term Capital are doubtless defensible enough in business accountings; for in private business anything may be thought of as business “capital” if it can be summarized in terms of Money. But for Economics as a comprehensive social science, the dumping into the same basic category of such radically different things as Labor, Landand Wealth—Man, Natural Resources and Artificial Objects—is indefensible and miraculously confusing.
Limited strictly to distinguishing Wealth consumed in the process of producing more Wealth—Artificial Objects devoted to further production of Artificial Objects,—the term Capital is a convenient subclassification of some kinds of Wealth. To appreciate that characterization one need but think, for instance, of any sort of productive machinery. Is it not an Artificial Object? Is it not produced by Labor? Is it not produced from and upon Land? Is it not used by Labor upon Land for further production of Artificial Objects? And are not those observations true also of seed gathered and saved for planting? of minerals mined for metal? of metal to be transformed into productive machinery? of food material turned into food at a restaurant? Are they not true of every kind of intermediate product—from Machinery (which, though finished as machinery, is only an intermediate factor in the process of producing Wealth for ultimate consumption), back to the rawest of artificial raw materials and forward through all gradations to the food on a dinner table, the clothing on a diner’s body, the floor under his feet and the roof over his head?
One obsession regarding Capital, even when the term is used with Economic accuracy, is that it consists of saved Wealth. There is no such process, in any literal sense, as saving Wealth—Artificial Objects—except for ripening or reproduction purposes. Even for those purposes the saving is in the nature of using, its object being the production of more Wealth rather than preserving this Wealth. Any saving of Wealth in the Economic sense, consists in utilizing it in the Productive Process.
Are art objects exceptional? Not such as are relativelyreproducible. Only “uniques” are exceptions, if indeed they may be regarded as within the boundaries of Economics. Saved over long periods, hundreds upon hundreds of years in some instances, these would seem to be out of the field of contemporary Economics. What gives them their extraordinary value? The same kind of non-Economic sentiment, on a higher plane, perhaps, that gives extraordinary value to heirlooms. Such products are not Wealth in the Economic sense any more than sacred tombstones are. Though produced by Man from and upon Natural Resources, they cannot be satisfactorily reproduced. They are closer to the nonproducible Natural Resource category than to the reproducible Wealth category.
That titles to Wealth may be saved is true enough. But in no extensive sense can Wealth itself be saved. Unless consumed in the production of more Wealth, or in the satisfaction of human desire, Wealth goes to waste.
Titles to Wealth, except such as are specific like the title to a particular house, are titles not to existing Wealth but to future Wealth. A title to a house, being specific, testifies to property rights in a particular structure which is in process of consumption. A title to its site is not a title to Wealth, but to Land, which, however, may be exchanged for Wealth. Such general titles as Money obligations declare, are titles to anything upon the market when demanded, including Wealth that may have been produced years after the total consumption of everything for which the Money title was originally exchanged. One’s “savings” in the form of Money or credits are not Wealth produced but titles to Wealth not yet delivered to him, and perhaps yet to be produced.
Only in the sense of withholding for use or of using or permitting its use in further Production of Wealth,is Wealth actually saved; and such saving is part of the Productive Process. It is a dedication of that portion of produced Wealth to service in the production of further Wealth. Wealth so dedicated is Capital.
A familiar example is seed saved for sowing. Also seed sown for growing. And seed in the barn awaiting the sowing season, that too is Capital. Seed in the field sprouting and growing and producing grain for the coming harvest, is likewise Capital. The ripened grain ready for harvest is Capital in turn, for it, too, is Wealth to be utilized in the production of more Wealth—bread or seed or both.
And so of mechanisms, which grow not as seeds do but only as the hand of the mechanic coaxes them into shape. When, for example, a machine which aids in the flouring of grain is produced, he who owns the machine owns Capital. He has saved it by putting purchasing power into a productive implement instead of putting it into ultimate products for his own consumption. Owning the machine, he owns bread-producing Capital. Using it, he consumes it in the production of bread.
A coffeemill, for further illustration, is a machine produced by Labor from and upon Land, which, when Labor uses it for grinding coffee (another product of Labor from and upon Land) brings the latter product nearer in serviceability to the ultimate consumer.
For a complex illustration, consider a railway passenger car. It is Wealth because it is an Artificial Object produced by Labor from and upon Land. But does it fall into that subdivision of Wealth which is distinguished as Capital—Wealth used for the production of more Wealth? As to its owners it is Capital, for they are using it to increase their share of Wealth in process of production; but as to the aggregate ofsocial Wealth, its passengers, if not using it for productive purposes, are consuming Wealth unproductively. To the extent that the passengers are not on productive missions, but are gratifying their own wants, a passenger-car is in Economic contemplation Wealth in process of ultimate consumption to satisfy wants; to the extent that its passengers are on productive missions it is Wealth devoted to the Production of more Wealth, and therefore in the subcategory which is distinguished as Capital. The fact that part of its use is for Production and another for enjoyment does not disturb the principle which distinguishes Capital from Wealth in process of ultimate consumption for the satisfaction of wants.
Capital is Wealth in forms that are consumed in the further or better production of Wealth toward final forms for ultimate consumption. To save such Wealth in the sense of preventing its consumption would be to waste it; but to permit its consumption in the Productive Process is to give it serviceability.
So with all other details of the Productive Process, from natural raw materials to and including delivery to ultimate consumers. Capital is produced by Labor from and upon Land and in forms of Wealth—either Artificial materials or Artificial contrivances—which, being adapted and devoted to further Production of Wealth, are part of Labor’s artificial materials or mechanism or both—Wealth produced for augmenting Productive power. In Economic phrasing, Wealth used in the Production of Wealth is Capital.
Another prominent sub-classification of secondary facts involved in the Productive Process is inseparably associated with Capital. This subordinate category is Trade, to which our attention was directed inthe second stage of our delving down from the surface of Economics to its Basic Facts.
Trade is an essential part of the Productive Process in Economics. It is inseparable from Labor specialization. If some Labor be devoted to the Production of one kind of Artificial Objects, one kind of Wealth—food, for instance—the producers of such Wealth must satisfy their desires by trading with other kinds of Labor specialists—clothing producers, for instance—for what the latter make and the former do not make. Evidently, then, the more minutely Labor takes on specialized activities, the more extensive and intensive must Trade become. And when, as in our civilization, Labor is so minutely specialized that nobody can satisfy his Economic desires by his own productive activities directly, Trade is an indispensable part of the Productive Process.
In form it is an interchange of commodities; but in essence it is, as already explained, an interchange of Labor functions—of human services.
Springing out of a manifestation of natural law which is rightly distinguished in Economics as “division of labor,” and thus inspiring and facilitating specialization in the Production of Wealth, Trade is a natural phenomenon. Within manifest limits and without extra exertion two producers can produce more than twice as much as one, four more than twice as much as two, and so on, subject only to the limitations of Natural Resources. By exchanging products they therefore naturally multiply their productive powers.
For a crude illustration, is it not plain that two frontiersmen working cooperatively can build a habitation for each quicker and better than either could build one for himself? Or two messengers, each charged with one errand a mile away in one direction from a central point and another a mile away in theopposite direction, can they not do the four errands twice as quickly and easily, even if not more than twice, if they divide their functions? By such division each messenger would walk one mile out and one back, two for each and four in all, delivering four messages; whereas, without such division, each would travel two miles out (one in each direction) and two miles back, four for each and eight in all. In addition to the saving of time and energy, each will have saved productive capabilities too subtle for specific enumeration.
The principle of those illustrations applies to the whole Productive Process. By division of Labor, that is to say, by Labor specialization, Economic accomplishment is multiplied beyond all the possibilities of isolated individual production.
But division of Labor would be useless were it not for Trade. Each of those frontiersmen must trade his share in the other’s habitation for the other’s share in his habitation; each of those messengers must exchange his claim to compensation for delivering one of the other’s two messages for the other’s claim to compensation for delivering one of his. This, then, is the sum and substance of Trade in Economics—adjustments of compensation for specialized Production through division of Labor.
The effect is magical. By division of Labor and Trade the single individual becomes a vital part of a comprehensive human organism, of a greater man, of the Social or Economic Man—a Man of almost infinite Economic powers.
Those two kinds of Economic energy, making and trading, permeate the multitudinous phenomena of that Productive Process in the course of which Man draws forth Artificial Objects from and upon Natural Resources, for the satisfaction of human desires; or,to use the technical Economic terms, in the course of which Labor produces Wealth from and upon Land.
In connection with division of Labor and Trade we are brought into contact with the phenomena of Economic Utility and Economic Value.
Utility is an absolute term indicative of essential desirability. Value is a relative term indicative of the relative Utility of commodities; or, more precisely, of the degree of desirability of one variety of Labor or Land or form of Wealth in comparison with other varieties. One variety of Labor or of Land or of Wealth may be twice as desirable as another, unit for unit, in which case one unit of the former will exchange in Trade for two units of the latter. Thus the relative Utility of a Commodity is indicated in Trade by its Value.
For measuring Value in all its variations from least to greatest and comparing these in the Productive Process, the Economic instrumentality is Money, that surface layer of Economics through which we passed in our exploration down to the Basic Facts; and the synonym for Value in terms of Money is Price.
By way of illustrating Utility, Value and Price, one may say of a quantity of Wealth in the specific form of wheat, that it has Utility because it can be productively advanced to food or be used as seed for the production of more wheat and so of more food; that it has Value because its desirability is a subject of comparison with the desirability of other desirable things in Trade; and that it commands Price because it can pass from owner to owner through Trade in terms of Money. Or of Land in the specific form of a building-site, one may say that it has Utility, for it will afford natural support for the foundations of adwelling or a store or a factory or a railroad right-of-way, and command the natural light and the air within its boundaries; that it has Value because it can be exchanged for other Land or for Artificial Objects; and that it has Price because Money or credit in Money terms may be had for it upon transfer in Trade.
Yet a commodity may have the highest degree of Utility without having Value or commanding a Price; or it may have great Value and command a high Price though of little Utility.
Let us observe here a difference in meaning, often ignored by advanced students, between the terms “utility” and desirableness. Thoughtfully considered, “utility” defines an absolute quality, whereas “desirableness” indicates a varying relationship. This obvious difference is often confused by such terms as “total utility” for Utility, and “marginal utility” for degrees of desirableness. For an example, the “total utility” of water is great, because by natural law man cannot live without water. Yet an abundant supply of water may reduce its “marginal utility” to zero. On the other hand, the “total utility” of diamonds is slight, whereas their “marginal utility,” due on the one hand to their scarcity and on the other to human vanity, is great. Such distinctions as “total utility” and “marginal utility” are nothing but subclassifications of Utility. They serve no better purpose for fundamental Economic study than the distinction which “utility” and “desirability” express without as much risk of confusing thought. Water, for example, is none the less useful because it is abundant, even though its abundance seems to lessen the desire for it relatively to desire for scarcer things. As to water, nothing is really lessened but desire relatively to supply. Nor does the scarcity of diamonds add an iotato their Utility. It adds only to the relative demand for them and therefore only to their Value in Trade.
To repeat, then, the assertion made above, a commodity may have the highest degree of Utility without having Value or commanding a Price; or, it may have great Value and command a high Price though of little Utility.
For further illustration of Value and Utility thus defined, nothing has greater Utility—greater “total” Utility, if that professorial term be preferred—than the sun; but the sun has no Value except as its Utility is controlled by ownership of Land favorably situated with reference to it; for it cannot be exchanged in Trade for anything else. Nor has it Price, for Money cannot buy it. Though it may be bought and sold to some degree indirectly through the buying and selling of Land which controls the sun’s utility to that degree, this value is not sun-value but Land Value.
Yet all commodities—whether in the Wealth class, as a house or food; or the Land class, as a natural building-site, or an ore deposit, or soil fertility, or the sun to the degree that its light and heat are owned through ownership of Land—have Utility, Value and Price. The last of the three is expressed in terms of Money.
Money is the common medium of Trade. Where and when Money is in use, he who wishes to trade a hat for shoes need not hunt for somebody who has shoes but wants a hat instead; all he need do is first to find some one who has shoes and wants Money. And since persons who want Money (which as a common medium of Trade is in effect everything in the channels of Trade) are so many in comparison with those who at a given time want shoes, Money infinitelydiminishes the difficulties of trading commodities.
Money is also a common denominator of Value, as we have already observed. Without it each of us would be obliged to express the Value of each exchangeable object in the complicated terms of all other exchangeable objects. We should have to say, for example, that a hat has the Value of a pair of shoes or of a chair or of an umbrella and so on; that a pair of shoes has the Value of a hat or of a chair or of an umbrella, and so on; that a chair has the Value of an umbrella or of a pair of shoes or of a hat and so on; and that an umbrella has the Value of a hat or a pair of shoes or of a chair and so on. And then we should have to complicate the comparisons with specifications of quality. But Money terms obviate the necessity for such vague and multifarious Value comparisons as are here merely hinted at. They enable us to say that a hat, a pair of shoes, a chair, an umbrella are each of the Value of five dollars, or a pound sterling, or so many francs, according to the names and fidelity to financial standards of Money pieces in the places where we engage in Trade, and according also to the quality of the commodities specified.
It should, however, be here repeated and emphasized, that Money pieces in whatever form, be it coin or scrip, are themselves of slight practical importance in the ramifications of Trade. Not tangible Money, but the Money terms which measure and express the relative Values of commodities—these play the great part.
In adjustments of Trade outside the pocketmoney class of transactions, Money pieces do not serve to the extent of five per cent. Nearly all those adjustments are effected by means of Money terms in booksof account and through the medium of checks and drafts and notes and bills of exchange. These are in effect orders upon banks (one of the forms of Labor) for the transfer of credits recorded in their books of account.
Banking is an improvement upon Money pieces in Trade, very much as Money pieces are an improvement upon crude barter. It lifts the Money-piece customs of Trade to book-keeping levels. If everybody were a bank depositor, and every bank were connected with every other by a perfected clearinghouse system, all necessity for Money pieces, except for “pocket cash,” would vanish. In that event the check and the promissory note and the bill of exchange, operating as orders to the book-keepers of banks and clearinghouses, would effect transfers of debits and credits the world over so that all Trade would be barter systematized—plain barter freed from the obstructions incident to barter in primitive Economic circumstances. Except for the use of “pocket cash,” Money pieces of every kind, whether metal or paper, would be like children’s toys to grown-ups.
Out of worldwide Trade, which, like Trade in narrower circles is effected by means of Money terms in books of account and through the medium of drafts by creditors upon debtors, a subclassification has evolved in Economics of the business-customs type. This subclassification alludes to a situation in Trade between the people in the aggregate of one country and those of the other countries of the world, in which the balance for that country is at any given time on the credit side. Its exports exceed its imports. This situation is known in the business circles of creditor countries as a “favorable balance of trade.”
The suggestion that such balances are favorable is doubtless true with reference to banking and some other business relationships. Business must be better with banking, apparently at least, when the buying and the selling of drafts on the people of foreign countries is brisk than when it is dull. It must be better, also, with exporters who draw the drafts and sell them. The drawing and the selling of drafts against foreign balances is surely a more profitable occupation when there is an excess of exports to draw against than when the balance of trade is the other way. It must be even more satisfactory in those connections when the excess of exports is continuous.
But as matter of comprehensive Economics, in which not only bankers and exporters but also all the other Wealth-producers of a country are concerned, it cannot be true that a perpetual credit balance of international trade is a favorable balance. In international trading, as in trading between individuals (which, by the way, international trading in the last analysis is), the aggregate of exports and of imports must counter-balance. Otherwise the producers of the exports, considered as a whole, must be engaged in foreign trade at a loss. They give more Value than they get. Surely, trading at a loss is not favorable trading.
Would a farmer prosper if every year he sold a thousand dollars’ worth of his products and got back only eight hundred dollars’ worth of other products? Wouldn’t that depend upon how much credit to him had piled up in account-books as a result? If none, wouldn’t he have exchanged his products at the rate of $10 for $8? How long would a farmer prosper if he considered that kind of balance of trade as favorable?
Precisely so with international trading. The onlydifference is that in the farmer illustration we have a solitary individual, whereas in international trade we have many individuals grouped in national wholes. In comprehensive Economics that difference is no difference at all.
A credit balance between national communities is simply the difference in Value remaining after all international trading to a given date has been entered in the books of account. If that balance be on the credit side of one of the nations, the creditor individuals of the creditor nation may draw against it. To them it is a favorable balance, in book-keeping terms. But if it is never to be paid off with imports, which seems to be the aspiration of those who applaud so-called “favorable balance of trade” theories, is it not in truth an unfavorable balance?
If the reply be that the balance will be paid in gold, what difference does that make in any comprehensive Economic sense? Gold itself is a product of Labor applied to and upon Land. To import it in payment of international balances would be precisely the same, Economically, as importing other products of Labor.
Some private businesses may prosper through “favorable” balances of trade, but Business everywhere and as a whole, Business in the comprehensive sense of the science of Economics, must find “favorable” balances of that unbalanced kind extremely unfavorable to the people of every nation as a whole and to most producers individually.
International balances of trade are but aggregates of individual balances. The favorableness or unfavorableness of either kind depends upon difficulties of collection. If, for illustration, an individual has a credit balance in his account at a bank, it is a favorable balance provided he may “check it out” at will in payment for products or services; but to the extentthat obstacles to his “checking out” are put in his way, the balance has an unfavorable aspect. If the obstacles be prohibitive—a 100 per cent stamp tax, for illustration,—the credit balance would be decidedly unfavorable. It would be unfavorable in less degree only as the stamp-tax was reduced from 100 per cent, down to 50 per cent or 25 per cent or 1 per cent. The depositor would have sold more value than he could buy; that is, he would have “exported” from his products more than he could “import” from the products of others.
A like conclusion is inevitable in the aggregate of world trading. To the extent that exports of Wealth are not offset by imports of Wealth, to that extent every trading balance is unfavorable. The Economic benefit of credit balances of all kinds, whether individually or in community totals, depends upon ease of collection.
By means of the primary and the subsidiary categories described and illustrated in this Lesson, all the tangled data of the Productive Process in Economics may be readily unraveled. Consider for further illustration the Productive phenomena involved in so simple a specimen of Wealth (Artificial Objects) as a needle in the hands of a house-wife engaged in mending family clothing.
She bought the needle at a retail store along with many other needles gathered together in a bunch—a “paper of needles.”
How did that “paper of needles” get into the stock of the retail store? It came with other commodities from a wholesale store. How? By a railway train, on the complicated structure and management of which, as well as upon the roadbed, the track and thestation houses, a great variety of Labor had been expended.
Where and how did the wholesale store get that needle? Directly or indirectly, and by similar complicated methods of transportation, from a needle factory.
How did the needle factory get it? Its workers made it. How? By means of machinery, Artificial Products—Wealth used as Capital for the production of further Wealth.
Of what did those workers make the needle? Steel. Where did the steel come from? From transformations of iron in a steel mill. The iron? From iron ore. The ore? From natural deposits in the earth.
By what magic was all that brought about? By an infinite variety and complexity of specialized Labor, which, applied to a variety of special kinds of Land (Natural Resources)—in country, town and city,—produced all the Wealth (Artificial Objects) necessary for the production of more Wealth, namely the Capital; and this consisted of implements and structures made from and upon Land by Labor; of implements and structures for the production of those implements and structures, also made from and upon Land by Labor; of transportation facilities of many kinds similarly made and operated. Also buildings for stores as well as factories—all in a confusion of industrial specialties that can be unraveled only by generalizing the details in accordance with natural law as disclosed by the Basic Facts.
Let that unraveling be done and still we may be bothered by collateral problems to which those details give rise—banking, for instance, and book-keeping all along the productive lines.
To follow in detail the ramifications of the Production of that needle from the first effort of Labor towhich it owes its existence, to its delivery at the retail store in a “paper of needles” to the house-wife in whose deft hands we find it, would drive even a magician mad. But all confusion is banished if we classify the multitudinous details according to their natural characteristics respectively, as Labor, Land and Wealth.
And as of the details of that needle’s production, so of all Economic details, from least to greatest, from simplest to most complex, throughout the labyrinthine intricacies of the Productive Process in Economics. To study separately all the Economic constituents of even the simplest civilized habitation and their respective relations to it, Economically, one would need training in many different kinds of specialties, from forestry to decoration. Yet systematic Economic thinking assigns every Economic detail to three categories which can be studied without risk of confusion. It need hardly be again explained that those three categories are Labor, Land and Wealth. Every constituent of such a habitation, no matter how minute, is assignable for primary Economic study to one or another of those Basic Facts—to Land for the site, and for all the rest, from architectural designing to decorative completion, to composites of Land and Labor.
Likewise of every other human contrivance for human satisfactions. In multitudinous detail it is an inexplicable mystery except to an all comprehensive body of experts, and even to them if they ignore the Basic Facts. Yet every complexity disappears when the details are assigned to their appropriate natural categories of Man as the sole producer, Natural Resources as the sole basis and source of production, and Artificial Objects as the product; or, reverting to technical Economic terms, when the confused details are appropriately assigned to Labor as the Productivepower, to Land as the basis and source of Production, and to Wealth as the Product.
All Economic details, from least to greatest, from simplest to most complex, from most familiar to most mysterious, throughout the labyrinthine intricacies of the Productive Process in Economics, are like the details in the Economic history of the house-wife’s needle of our illustration. What the points of the compass are to navigation, or the four fundamental divisions of arithmetic to mathematics, such are the three Basic Facts to the Productive Process in Economics.