Journal of Economic Studies

Emerald Article: Nicholas Kaldor's Notes on Allyn Young's LSE Lectures

1927-29
Roger J. Sandilands

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 Editor's Introduction Editor's
Introduction

It is always a tragedy when a prominent scholar is struck down in his prime,

the fruits of his labours only partly harvested. It is particularly poignant in the
case of the American economist, Allyn Abbot Young, who in March 1929 died 3
suddenly in London, aged 52, of pneumonia following influenza. For, as Nicholas
Kaldor was to observe many years later, one reason why the full measure of
the man has not been adequately appreciated was that his work "was so many
years ahead of its time that the progress of economic thought has passed it
by"[l]. Things may have been different if he had had more time to develop
the full implications of his insights than was to be given him.
It may be added that Young was a naturally very modest man, generous to
a fault in helping others, always acknowledging his debt to previous thinkers
and underplaying the significance of his own contributions. Also, the work for
which he is best remembered, if at all, is his Presidential Address to Section
F of the British Association for the Advancement of Science in 1928, "Increasing
Returns and Economic Progress", which dealt with the opportunities for
sustained, long-term economic growth. This appeared on the eve of the severest
economic depression the modern world had witnessed. Therefore it soon
appeared to have little relevance to the problems of the day; and soon the
Keynesian revolution would be sweeping away all before it.
At the time of Young's death, Nicholas Kaldor was a student at the London
School of Economics where Young had been lured from Harvard in 1927 for
a three-year term by the School's director, Sir William Beveridge. Beveridge
had scoured the English-speaking world for a prestigious scholar to fill the Chair
of Political Economy, vacated by Edwin Cannan upon his retirement in 1926.
Fortunately, Kaldor took extensive notes of Young's lectures for, when he died,
in the hasty departure from London of his wife, who was blind, many of his
papers were lost. Thus, a book on money and credit which he had in preparation
never appeared. He was also planning a book on the fundamentals of economic
theory. According to a moving tribute to him that appeared in the American
Economic Review, in June 1929,
. . .no one was better qualified for this ambitious task. Everything that he wrote bore the
marks of independent thought, keen discrimination, ripe judgment, a background of much
more than could be set forth at the moment. And everything bore the marks of the literary
craftsman. He had the gift of rounded and dignified utterance; not so pellucid as to save the
need of attention and reflection, always allusive, but always urbane, and of unmistakable
intellectual distinction.
These qualities shine through in Kaldor's splendid notes from Young's LSE
lectures. Hitherto these notes have been seen by only a few scholars, which
is a great pity for they throw invaluable light on the way that Young's ideas
were developing at the time of his death[2]. We are therefore most grateful
Journal of to Professor A.P. Thirlwall, Kaldor's biographer and literary executor, for
Economic permission to publish them here.
Studies These notes are particularly valuable because the comparative neglect of
17,3/4 Young's work may be due not only to the fact that Young's published work was
not very extensive, but also because much of what he wrote around the time
of his death was either lost or published in relatively obscure or inaccessible
publications, such as the Encyclopaedia Britannica (14th edition, 1929) and The
4 Book of Popular Science[3] where two lengthy pieces of his appeared
posthumously and unsigned. Some of these contributions are of outstanding
brilliance and for this reason we are also very grateful to the Encyclopaedia
Britannica for permission to reproduce his eleven entries which superbly
complement or are complemented by Kaldor's notes of Young's LSE lectures.
We are also reproducing one of his two contributions to the Book of Popular
Science, on "big business", which elaborates on the nature of the internal and
external economies that together produce the increasing returns from economic
progress which was the theme of his celebrated British Association address
in 1928.
Unfortunately space limitations prevent us from also reproducing that address,
but since it was published in The Economic Journal in 1928, it is already relatively
accessible. Most scholars also have ready access to Economica, 1928, where
Young's inaugural lecture at the LSE, "English Political Economy", was
published, and which also should be read in conjunction with the notes on his
lectures. We are, however, by kind permission of Blackwells, reproducing Sir
William Beveridge's memorial tribute to Allyn Young which was published in
Economica, April 1929, and also the obituary that appeared in the London Times
on 8 March 1929, courtesy of The Times Newspaper Group.
These writings and the lecture notes clearly reveal why Young's reputation
stood so high at the time of his death. He was clearly a man of massive erudition,
steeped in the writings of all the prominent past and contemporary economic
thinkers, from the Greeks through to the mercantilists, the writers of the classical
school and also the neo-classicists, particularly Marshall, Pareto, Walras, Jevons,
Cournot, Edgeworth, Wicksteed, Pigou, and Ohlin. Bertil Ohlin, who attended
one of Young's courses at Harvard in 1922-23, wrote in 1978: "I am inclined
to believe that he was a man who knew and thoroughly understood his subject
— economics — better than anyone else I have met"[4].
Few, also, could match Young's skill in handling statistics, or had his awareness
of the importance of statistics in illuminating the nature of economic relationships
and trends, and of the importance of greater investment in the collection of
economic data to aid in research and policy making and in pointing to new lines
of enquiry. Young served as President of the American Statistical Association
in 1917, and of the American Economic Association in 1925.
Born in Kenton, Ohio, on 18 September 1876, Allyn Young entered Hiram
College at 14 and at 17 was the youngest student on record to graduate from
the college after studies in Latin, German, French, mathematics and physical
sciences. He then worked as a printer for some years until he had earned enough
money to continue his education, entering the graduate programme in economics
at the University of Wisconsin in 1898. There he so impressed his teacher, Editor's
Richard T. Ely — with whom he would later collaborate to produce America's Introduction
most successful textbook, Outlines of Economics — that he secured for him
a position on the staff of the Twelfth Census in Washington, where he formed
friendships with Wesley Mitchell, Thomas Adams and Walter Willcox. Thereafter
he held a number of academic posts, notably at Stanford, where in 1906 he
was appointed chairman of the newly endowed economics department, and at
Cornell where he taught from 1913 until 1920. He was a visiting professor at 5
Harvard in 1910-11 and in 1920 was persuaded to accept a permanent position
there.
During these years Young made a number of outstanding contributions to
the fields of demography and statistics, value theory, the theory and practice
of money and banking, public utility regulation, index numbers, and the problem
of post-war reparations [5]. He was a member of the economics team that
accompanied President Wilson to the Paris Peace Conference in 1918.
Independently, he and Keynes arrived at an identical estimate of Germany's
capacity to pay — ten billion dollars — although he defended President Wilson
against Keynes's later criticism that he had been bamboozled by Clemenceau
and Lloyd George into accepting a dishonourable peace.
No account of Young's contributions to economics is complete without
reference to his legendary influence as a teacher on a generation of brilliant
students. At Cornell he supervised Frank H. Knight's thesis, "The Theory
of Business Profits", which, revised with Young's help, later appeared as Risk,
Uncertainty and Profit (1921). He performed a similar service at Harvard for
Edward H. Chamberlin whose book, The Theory of Monopolistic Competition,
though not published until 1933, is referred to by Young in his LSE lectures
as recorded by Nicholas Kaldor. Kaldor, of course, was himself another of Young's
students upon whom he stamped a life-long impression. It is clear from Kaldor's
LSE notes that many of his later contributions to economics — for example,
on the role of speculation, on community indifference curves, and on the
irrelevance of much of "equilibrium" theory to an understanding of the dynamics
of growth — were inspired by what he learned from Young[6].
At Harvard, Young's courses on "Money and Banking" and "History of Modern
Economic Doctrines" became famous among graduate students. One of the
students who took both these courses, between 1925 and 1927, was Lauchlin
Currie, whose recollections of Young as a teacher are published below. Currie
dedicated his masterly work, Supply and Control of Money in the United States
(1934) to the memory of Young. Soon after, Currie moved from Harvard to the
Federal Reserve Board in Washington with the newly appointed Governor,
Marriner Eccles. There he applied the ideas of his book on monetary policy
— which sharply criticised the structure of the Federal Reserve System and
the policies of its board for prolonging, if not for precipitating, the Great Depression
of the 1930s — in his drafting of the 1935 Banking Act which shifted the centre
of power from New York to Washington and created a true central bank for the
United States. In 1939 Currie became the first professional economist to work
in the White House, as adviser to President Roosevelt, a position he held
Journal of until Roosevelt's death in 1945. Like Kaldor, Currie later became a prominent
Economic adviser to developing countries and, again like Kaldor, though with some very
Studies important differences, developed policy prescriptions based partly on the insights
learned from Allyn Young on the relationship between "increasing returns and
17,3/4 economic progress" [7].
Peter Newman has noted that Young's 1928 paper on increasing returns:
. . .is not quite the isolated phenomenon that it appears. Several of his contributions to the
6 great 14th edition (1929) of the Encyclopaedia Britannica are consistent with the approach
taken in (1928), particularly his entry on capital. This is not surprising, for the chief analytical
innovation in (1928), as distinct from its new "vision" of economic progress, was to make
the degree of roundaboutness depend primarily not on the rate of interest but on the scale
of production, taken in a broad sense[8].
Newman went on to quote a short passage from the entry on capital "as a
modest but inadequate substitute for reading the paper itself". We are pleased
to give that opportunity now to more people.
It will be seen from Young's papers and lectures that he is remarkably modern
in his grasp of the tools of neo-classical marginalist theory, including the
conditions of general equilibrium in production and consumption. He was
intimately familiar with the works of Walras, Pareto, Jevons, Wicksteed, Cournot,
Edgeworth, Marshall, Pigou and Ohlin, as well as those of the older classical
economists such as the physiocrats, Smith, Ricardo, J.B. Say, Thornton, Marx,
John Stuart Mill, and Henry George. As the tribute in the June 1929 American
Economic Review indicated:
Within the range of economics there was hardly a field in which he was not eminently
competent. From the most refined theoretical niceties to the most complicated realistic
situations, his grasp was secure and his judgment keen. He was a mathematician of the highest
order; a statistician attentive to the concrete phenomena underlying the bare figures as well
as to the most exacting requirements of refined technique; conversant with economic history;
alive to the remarkable and often unique phenomena which have unrolled themselves before
our eyes during these first three decades of the twentieth century; above all, a master of
the principles of economics, steeped in the great literature of the subject, its method, its
relation to other disciplines. With this complete grasp of his chosen subject, he combined
an interest and comprehension in a wide range of others — not only history and politics,
but natural science, philosophy, and literature. He had picked for himself an abundant linguistic
equipment. Not least, he had a deep, warm interest in music; was no mean performer on
the organ,. and at one stage in his career supplemented a slender income by playing that
instrument. He knew all the great composers and their works, enjoyed and judged a great
interpretation. Here, as in his intellectual work, he valued the old without belittling the new.
His work is impressive for the way in which he combines elements of static
equilibrium analysis with the grand vision of the older economists of long-run
dynamic growth. He weighs up the optimism of Adam Smith against the
pessimism of Malthus. The law of diminishing returns receives due consideration,
but Young is always conscious of the drawbacks of the "one thing at a time"
approach that underlies such "laws". It is a commonplace that the law of
diminishing returns may be offset or forestalled by technical progress. It was
not a commonplace to suggest, as Young did with increasing eloquence in his
late writings and lectures, that the greater bulk of technical change is not a
happy accident or chance offsetting of the law of diminishing returns but is a
process engendered by the very process of growth itself.
 Thus he uses the tools of indifference curves and marginal production Editor's
conditions to go beyond general equilibrium economics to develop a theory of Introduction
equilibrium dynamics, or a theory of growth based on increasing returns as
limited by the size of the market and, by implication, as brought out by Lauchlin
Currie, by the growth of the size of the market. If growth begets growth, then
fast growth sustains fast growth. But slow growth is also self-perpetuating unless
the endogenous circle can be interrupted by some benign exogenous shock
or policy change that works on the size of the market, or on real demand in 7
the sense of J.B. Say[9].
Young's British Association address in 1928, to which he refers on several
occasions in his LSE lectures, draws on his analysis of the theory of value as
determined by the interaction of real ("displacement") costs and consumer
preferences at an ever-shifting margin. It also draws on his ideas on distribution,
in which factors are paid not because they are productive but because they are
scarce. But you do not create wealth by creating scarcity. Thus the link between
productivity and rewards is very tenuous. In the process of growth the relative
scarcity of different factors is altered. This affects factor prices which in turn
alters the optimum proportioning of factors in the production process. In particular,
as growth proceeds labour becomes relatively scarce and this makes it more
economic to substitute more roundabout, capitalistic methods which, because
these are more productive, also permit the continuance of growth.
Growth involves production on a larger scale overall,·and this also makes
capitalistic methods more economical. But it also promotes greater specialisation
byfirmand by industry and even by country. It stimulates new ways of organising
production, it calls forth inventions, and it extends the range of products. It
may or may not increase the average size of firm or plant. In either event, the
main type of economy that lowers production costs is not internal but external
to the individual firm, individual industry or even, it might be added, the individual
country.
Many of the economies achieved by individual firms, industries or countries
are the external economies of other firms, industries and countries, on both
the supply and demand side. Consequently, these other units are then more
able and willing to adopt other new methods and become yet more productive.
Thus, growth breeds growth in a process of cumulative causation that is explained
by the interacting elements of marginal productivity and marginal rates of
substitution and transformation in consumption and production. The blend is
a tour de force.
Young's perception of the economic system as a dynamic organon the disparate
parts of which interact and grow, but which is also subject to pathological
breakdowns associated with monetary and real dislocations or maladjustments,
is dazzling in its range and depth. His stress on the dangers of the pervasive
fallacy of composition is particularly instructive. For example, in Lecture VI
he asks us to contrast Say's "supply is demand" with Marshall's supply and
demand curves. These latter hold only ceteris paribus and cannot be integrated
to give the whole economic structure. Young was clearly reluctant to employ
the "curve apparatus" to depict his vision of the "togetherness of economic
Journal of phenomena", and did so only out of deference to convention. For him the true
Economic supply schedule (as distinct from a short-run "particular expenses curve")
Studies was downward sloping, and is almost the same construct as the demand curve,
17,3/4 because an increase in supply was an increase in (reciprocal) demand which
in turn extended the opportunities for cost-cutting specialisation in its various
manifestations.
Likewise, in his critique of the marginal productivity theory of wages (Lecture
8 XXVIII), Young admonishes: "one should not fix one's eyes too narrowly on
the way an individual entrepreneur apportions his expenses. One cannot apply
an additive process, andfinda picture of the whole economy". In other lectures
on marginal productivity theory (November and December 1927), there is
tantalising discussion of the conditions that determine competitive and
monopolistic equilibrium levels of output and employment. As one would expect
from the supervisor of Edward Chamberlin's PhD dissertation, he demonstrates
what was, for that time, a pioneering awareness of the profit-maximising,
marginal-revenue-equals-marginal-cost condition for the individual enterprise,
subject to constraints imposed by the size of market demand and degree of
competition. He distinguished the value of the marginal product of the individual
firm from the marginal value of the total product of the industry (or, where
relevant, the monopolistic firm). In the face of inelastic demand, prices may
fall faster than costs and call for a contraction of output even though costs are
above the potential minimum. Thus Young seems never to lose sight of the
macroeconomic context of microeconomic behaviour.
For similar reasons his criticism of Marshallian consumers' surplus is
devastating:
Marshall's concept retains significance only as long as you take one thing at a time. Really
there is nothing in the concept at all, except that we all gain when improvements in industrial
processes make costs less, and we are able to demand a larger supply of goods with the
same amount of sacrifice or exertion. We are better off, but how much better off is
unmeasurable (Lecture XIV).
And on rent he says:
From the social standpoint, rent is not a cost, the payment of rent is a means whereby land
is apportioned between its competing uses. . .Thus "rent enters into cost" and "rent does
not enter into cost" are both true, but relate to different aspects or problems concerned
with the data of costs and prices (Lecture on Rent, 6 December 1927).
One final example, among many others that could be given: in his lecture on
industrial crises, 1 May 1928, he expresses scepticism about the importance
that Keynes, Cassel and Hawtrey attached to the rate of interest:
Actual industrialists (and bankers) deny that variations in the rate of interest influence the
extent of their operations, providing their competitors pay the same. It is the "market" on
which they count.
That Young's life was cut short in its prime was clearly a great loss to the
economics profession. It is hoped that by bringing together some of his last
writings in a more accessible form than hitherto, together with Nicholas Kaldor's
and Maurice Allen's sparkling notesfromhis LSE lectures, modern economists Editor's
will be better placed to appreciate his greatness and to develop the implications Introduction
of his insights.
Notes and References
1. Kaldor, N. (1972), "The Irrelevance of Equilibrium Economics", The Economic Journal,
Vol. 82, December, p. 1243.
2. Excerpts from these notes are given in a paper by Charles P. Blitch in History ofPolitical 9
Economy, Vol. 22 No. 3, Fall 1990, Blitch explains that because Young died before the
end of the class that Kaldor was taking in 1928-29, Kaldor's notes include many that
were originally taken by Maurice Allen in the previous year.
3. The Book of Popular Science (1929), Vol. 15, Grolier Society, New York.
4. See Blitch, C.P. (1983), "Allyn A. Young: A Curious Case of Professional Neglect", History
of Political Economy, Vol. 15 No. 1, p. 14. Other good biographical sketches of Young
are given by Dorfman, J. (1959), The Economic Mind in American Civilization, Viking
Press, New York, Vol. 4; and Newman, P., "Allyn Abbot Young", The New Palgrave,
Macmillan, London, Vol. 4, pp. 937-9.
5. The papers by Blitch, Dorfman, and Newman, ibid., list much of Young's published work,
including the collection of his papers in Economic Problems New and Old (1927), Houghton
Mifflin, Boston. Curiously, however, none of these mention An Analysis of Banking
Statistics for the United States, (1928), Harvard University Press, Cambridge, which was
an important contribution.
6. See, for example, Kaldor, N. (1972), op. cit., and his 1985 Arthur M. Okun Memorial
Lectures, Economics without Equilibrium (1985), Cardiff University Press, Cardiff,
especially pp. 63-79.
7. See Currie, L. (1981), ' Allyn Young and the Development of Growth Theory'', Journal
of Economic Studies, Vol. 8 No. 1, pp. 52-60; and (1986)"Sources of Growth", World
Development, Vol. 14 No. 4, pp. 541-7. The present writer has also discussed extensively
the interpretations of Young's work by Currie, Kaldor and others in The Life and Political
Economy of Lauchlin Currie (1990), Duke University Press, Durham, NC, especially
chapters 12 and 13.
8. Newman, P., (1987), op. cit., p. 939.
9. Currie, L., (1981), op. cit.,

Roger J. Sandilands
University of Strathclyde,
Glasgow, UK, and National University of Singapore
Journal of
Economic
Recollections of Allyn Young
Studies Lauchlin Currie
17,3/4 University of the Andes, Bogota, Colombia

I suppose that Lord Kaldor and I were the last surviving active economists
10 who shared the good fortune of having had Allyn Young as a teacher; he at
the London School of Economics, 1928-29, and I at Harvard, 1925-27. I am
grateful that the young Kaldor took and preserved such excellent class notes,
though a little reproachful of the older Kaldor for not making them more widely
available and at an earlier date. But I likewise reproach myself for not preserving
notes on Young's course on monetary theory which I attended and which would
have supplemented these notes. It was the course in which I was to be his
assistant upon his return from his visiting professorship at the LSE.
Kaldor took exceptionally good notes and a sense of Young's incisive handling
of a wide range of difficult topics is preserved and will undoubtedly stimulate
present-day readers of this collection. Despite the more complex treatment
in modern textbooks, the basic issues of economics have not changed. Young's
treatment, even as noted by a student, is direct, simple, and thought provoking.
Dozens of examples might be cited. I will cite only a sample; "Labour has value
because it produces things that have value"; "Profits are that form of income
which is contingent and not contractual. . .A complete theory of economic change
and friction is needed to give a complete theory of profits"; "Relative costs
determine how far consumers can and will follow their preferences; preferences
determine what costs will be encountered"; "Fundamentally there is no
difference between productivity and scarcity''; "Seeking for equilibrium under
increasing returns is as good as looking for a mare's nest. The matter cannot
be explained by this curve apparatus, which does not see things 'in their
togetherness' "; "One does not produce 'value'; the market 'values' what
one produces"; "Profits are the 'reward of enterprise' where this means taking
advantage of maladjustments, taking chances and acting on reasoned
probabilities. . .More lose than gain but subjectively the majority anticipate great
incomes. Socially, it is more important that 'prizes' be obtainable than obtained".
I could go on almost indefinitely.
The notes are relatively brief in their direct references to the theory of growth
set forth in his contemporary Presidential Address to Section F of the British
Association for the Advancement of Science, but nevertheless do help illuminate
this important theme. His Presidential Address was, and is, a truly profound
statement that merits reading and rereading. He did not call it a new theory
but he must have realised that it was. Similarly, his inaugural lecture on assuming
his chair at the LSE had some profound things to say on the nature of economic
theory, of its relation to policy, and the respective roles of observations, concepts,
inferences and the use of quantitative data. These works should be read together
with the Notes to gain a fuller sense of his wide-ranging interests and
contributions. Likewise, in his contributions to the Encyclopaedia Britannica
he stated most daring things so simply. He was not so much modest as he Recollections
was completely self-assured. Withal he was most generous and went out of of
his way to find things to praise in others' work. Allyn Young
A student who has thought over the questions raised and the alternatives
presented in these lectures will, in doing so, have passed the first great step
in becoming an economist. He will distrust easy solutions and will have acquired
a willingness to apply theory. And all this in predominantly verbal logic with
a minimum of statistical data and algebraic equations and diagnosis that fill 11
"modern" texts. Young's wide interest in and knowledge of all economic
problems is evident. Even in a student's notes, and after many years, the reader
is certain to encounter profound and provocative treatment of a wide variety
of themes.
Professor Young was the most inspiring teacher I ever had. While Frank
Taussig, Young's contemporary at Harvard, was a fine teacher, for example,
inasmuch as he aroused heated discussions on such abstruse topics as what
BÖhm-Bawerk really meant, his impact on me was that economic theory was
complete and it was up to the student not to criticise or contribute but to try
to master that theory. The enquiring mind of Young, on the other hand, gave
me a feeling that the field was wide open and that it was possible and proper
to criticise and explore new and different approaches. In short, he inspired
as well as taught.
He was a great teacher in another way. He never yielded to the temptation
of being brusque or of getting a laugh at the expense of a student. No matter
how irrelevant or even stupid a question might be, he would invariably give it
grave consideration.
Some years ago I was asked by Professor Charles Blitch for some reflections
on Young as a teacher and they may be of interest here. They are dated February
1979 and are reproduced below.

Background
I was a graduate student in economics at Harvard from 1925 to 1927, having
taken my BSc (Econ) from the London School of Economics, in 1925, where
I concentrated in theory under Edwin Cannan. I immediately enrolled in Ec
11, Taussig's famous course in theory, and planned to write my thesis and
specialise in international trade. After taking Young's course in money and
banking (Ec 38), however, my interest shifted and I chose a thesis in this field.
I became more and more attached to Young, consulted him on various teaching
openings elsewhere and was eventually recommended by him as an instructor
at Harvard in his own field, money and banking. By that time, he had decided
to accept a visiting professorship at the London School of Economics and it
was understood that, if his recommendation was accepted, I would be his
assistant on his return from England, but that in the meantime I would assist
John Williams in the undergraduate course (Ec 3) and whoever was filling in
at the graduate school in this field.
Young's premature death, therefore, was a double and severe blow. Not only
did I lose my most admired and inspirational teacher but also my patron, and
Journal of the system at Harvard at that time worked on a patron-protege basis. A man
Economic in myfield,Seymour Harris, had just been appointed and was the protege of
Studies the chairman of the department, Harold Burbank, which effectively closed the
17,3/4 door to promotion for me. Williams was a good friend, but never really considered
me as his man.

Some Personal Recollections

12 Perhaps the most enduring lesson I learned from Young was that the subject
was wide open to modifications and improvements. He gave the impression
of thinking as he went along. He continually opened up exciting vistas. He was
so assured that it never occurred to him to bluff or put on a show, and so gentle
and considerate that he never made a student feel he had made a stupid remark.
I would rather timidly offer some half-baked observation. Young would gaze
intently at me, fall into a brown study and then, as likely as not, say "That
is extraordinarily interesting. What you undoubtedly have in mind is..." and
you would sit marvelling that you had such profound thoughts in mind! I never
heard him score a point or make the questioner look a bit ridiculous — something
which I took very much to heart in my own subsequent teaching.
I recall one essay examination in which I spent three-quarters of my time
busily elaborating a point of view. At that juncture, I decided I was wrong. What
to do? I explained my predicament and, as hastily as I could, outlined how I
would have handled the matter if I had had the time. Young gave me an A and
complimented me on my courage in reversing my field. You can imagine the
impression this made on a young graduate student!
After his invitation to London, we became closer as I was the only LSE student
at Harvard and he was curious about the School and its staff and kept questioning
me on these matters.
He was a big man with a large head and, though he rarely laughed, his eyes
were friendly and had characteristically a twinkle. I recall one day watching him
with some amusement as he walked across busy Harvard Square in a brown
study, oblivious to traffic.
You have undoubtedly heard the story that he had planned to go into astronomy
but decided that his mathematics was not good enough. Another story he told
was of the only man he had ever met who was interested in knowledge purely
for the sake of knowledge. He was a man he encountered in the library at Ithaca,
stolidly reading through the Encyclopaedia Britannica but who complained to
him that by the time he finished topics under " C " he was forgetting those
under "A". The moral was, of course, that knowledge is to be used, and its
accumulation must be directed to a purpose.
I dedicated my first book, The Supply and Control of Money (1934), to him.
Contribution to My Thinking
After 50 years I do not recall specific points. I should say that Young's enduring
contribution concerned more an attitude of mind. I gained more confidence
and was not so impressed by authority. He gave me more courage to think
things out for myself. I find a note, written on 18 October 1926, stating that
"a five minute talk with Young sets me up for the day".
 The Great Depression followed too closely on his Presidential Address to Recollections
Section F of the British Association, and his presentation was so modest and of
unassuming that I do not think I appreciated what truly profound things he was Allyn Young
there saying. It was only much later when I was giving a course on seminal
writings that I had occasion to return to it and realised how important were
the points he was making. In my most recent writings on the nature of growth
I have linked his name with that of Adam Smith. Also, in recent years, I have
had a friendly disagreement with Kaldor on what was lacking in Young's address 13
but this, as yet, has not seen the light of day.
It is interesting to speculate on the position he would have taken in the Great
Depression. I am sure that he would immediately have seen the fallacy of
composition in the argument of the budget balancers. The logic of his 1928
Economic Journal article would have led him to stress the role of demand and
the ultimate consumer and to downgrade the independent role of "confidence"
in itself rather than as a reflection of demand. Of all the people at Harvard,
I think that he would have been the most open minded to the Keynesian point
of view. But he might have felt, with Viner, that a deliberate unbalancing of
the budget might have resulted in a flight of capital. Unfortunately, I have no
current notes on his attitude to Keynes and the overvaluation of sterling.
Sir William Beveridge was in Cambridge in early January 1927 and Young then
agreed to go to the LSE and follow my old teacher Cannan for about three
years, with the intention of then returning to Harvard. In the same note where
this was jotted down I referred to Young as "a genius" and on 8 March, I spoke
about "revering Young above all men in the world".
The unutterably sad account of his last hours when, in his delirium, he lectured
constantly, indicates his complete absorption in his work.
Journal of
Economic Allyn Abbot Young:
Studies
17,3/4
In Memoriam
14 From The London Times, Friday, 8 March 1929
Professor Allyn Young, Professor of Political Economy in the University of London
since 1927, died suddenly at his residence in Kensington from pneumonia aged 52.
Young's premature death deprives economic scholarship in England and the
United States of one of its most outstanding personalities. It is seldom that
a man of mature years, enjoying the highest reputation as a thinker and teacher
and holding a professorship at the leading university of his country, will undertake
the risk associated with translation to a new sphere of endeavour in another
country. Happy in his work and in his students, he succeeded also in winning
the admiration and esteem of his professional colleagues, who mourn the
departure of a master and of a friend.
Like so many other distinguished Americans, Allyn Young was a Middle
Westerner, of New England descent. Educated at Middle Western institutions,
especially at Wisconsin, a centre of economic learning made famous by Richard
Ely and J.R. Commons, he went to the East rather late. His first professorship
was at Leland Stanford, then followed a short spell at Washington, followed by
the seven fruitful years at Cornell, which laid the foundation for his enormous
influence in the American academic world. Thereupon he held a professorship
at Harvard for seven years, and even after he came to this country in 1927
Harvard held his affection to the end. No Harvard man could have been prouder
of his university than was Young, who came to it at the very height of his power.
In addition to his academic work, Young had played an important part in the
recent administrative history of the United States, having been chief of the
Economic Section of the American Peace Delegation in 1918-19, in close touch
with American Departments of State and also with the economic activities of
the League of Nations. He had held many posts of honour, and his English
colleagues were delighted when his acceptance of the Chair of Political Economy
in the University of London gave them the opportunity of electing him to the
presidency of Section F of the British Association at its Glasgow meeting in 1928.
A profound scholar, Young possessed also the charm of personality. Of
imposing stature, with a noble head and kind and penetrating eyes, he won
his way to the hearts of students not by any of the gifts of the orator, but by
the sense that he gave of a complete command of his subject and by a kindliness
of disposition which made him take endless pains on their behalf. No man was
more ready to see all the sides of an argument; he had none of the intellectual
arrogance which sometimes accompanies great mental gifts; and if he ever felt
anger it was with those who refused to acknowledge merit in the work of other
schools or of modern writers of a tendency opposite to the received tradition.
These qualities of mind and character, which made him a great teacher, made
him also the most sympathetic and helpful of colleagues. No one could go to In Memoriam
Young without receiving enlightenment, and, since his range of knowledge was
extraordinary, without the impression that here was a man who was an absolute
master in his chosen field.
To describe Professor Young, as he was sometimes described, as an American
"Marshallian economist" is to do him injustice. The sphere of mere theory
was only one of many fields which interested him, but in the sphere of pure 15
theory, if he worshipped any gods at all, he was inclined, at least in those later ,
years, to rate most highly the names of Cournot, of Pareto, and of Edgeworth.
He had of recent months been feeling his way anew; the Marshallian method
of approach, of "one thing at a time", seemed to him to be definitely mistaken,
and in conversation with colleagues within the last few weeks he urged that
much of the fundamental work in pure theory needed to be done afresh. The
quality of his analytical work can be gathered from his celebrated controversy
with Professor A.C. Pigou, which led the latter, as he himself has pointed out,
to "modify substantially my view of diminishing returns". But analytical
economics was not the main, or the sole, note of his scientific preoccupations.
His profound interest in monetary problems had led him to make a close study
of the English classical economists, especially of Ricardo, for whose architectonic
mind in the sphere of monetary and foreign trade theory he always expressed
the greatest admiration. Traces of Young's influence in this department of
economic theory will be found in the many admirable studies of monetary and
allied subjects issued in the Harvard Economic Series in recent years. It was
his interest in banking questions and in applied statistics which led him to the
writing of the elaborate study of banking statistics, published by the Harvard
Press last year.
Like Edgeworth, whom he so greatly admired, Young found the writing of
a systematic treatise difficult, and had only recently begun the writing of the
two books, one on Money, the other on Theory, which he hoped would occupy
the remainder of his academic life. His very considerable written work lies
scattered in the periodical Press, and is not, therefore, easy of access to the
non-specialist. The catholicity of his interests can happily be judged from the
volume of collected essays which he published under the title of his Economic
Problems: New and Old in 1927 — a collection which ranges from the discussion
of reparations and the practical problems of the Federal Reserve system to a
classical disquisition on Jevons and the critical handling of the theory of index
numbers.
Professor Young married in 1904, and the sympathy of his American and
English friends will be extended to his wife, who survives him, and to his son,
who is now in America.
A memorial service will be held at Saint Clement Dane's Church, Strand
on Monday at 11.45. The American Ambassador will read the lesson.

© Times Newspapers Ltd. Reprinted with kind permission.

Journal of From Economics, April 1929
Economic Address by Sir William Beveridge, at Memorial Service, in the Church of
Studies Clement Danes, 11 March 1929.
17,3/4 Death comes in many ways. Sometimes it is a longed-for setting free from pain.
Sometimes neither sought nor feared it comes to those who have played out
their parts, comes gently as they sit and watch — or smiling do not watch —
the new players on the stage. Sometimes it cuts short promise unfulfilled,
16 uncertain. Now and again it strikes one who in the fullness of proved strength
is bearing his share and more of life's varied burdens. Such as this last is the
death that we lament today. We mourn one who till five days ago was the sole
stay of his home, a main pillar of our School, a builder of science and of
understanding among nations.
Allyn Abbot Young from earliest manhood found one call after another pressed
on him for help. As to the kind of work that he would do, he never really wavered;
the life of thought and teaching and help to the coming generations was his
by deepest nature. The University of Wisconsin, fine home of free traditions,
made him an economist. Three great universities in his own land he then served
in turn — Stanford, Cornell, Harvard. Before he went to the last of these he
had been called on for public work of first importance, in the Great War and
after. At the end of his seven years at Harvard he held a position of enormous
influence; the economic faculties of America were filled with men who had
learned to venerate him as students; his fellow economists in all the world looked
on him as a leader. When in London two or three years ago the time came
to find a successor to Edwin Cannan, and fill the gap left by withdrawal of an
influence and inspiration of thirty years, our thoughts went easily to Allyn Young.
When we knew that he, who had the choice of universities in his own land,
who already held the best that it could offer, was ready to come to us, that
he thought it an honour to be asked, we felt that a turning point had been reached
in our own history, a milestone of progress and recognition passed.
What were the secrets of this power and fame of Allyn Young? Great mental
gifts he had, but so have others who never make their mark. Vast and varied
learning he had, but so have many in whom learning dies. Moving and impressive
speech he had, but this is a trick that most can learn. Of the arts by which
men commonly seek success he had none. He did not seek success. What
brought it to him in abundance?
First, was the high standard of scientific work that he set for himself as for
others. He was at once the kindest of men and the severest of judges. He did
not hasten himself to pour out books; he would not write till he was ready.
One element in our tragedy today is that now at last at 52 years of age he had
felt himself ready, and had all his plans for two great works on monetary and
economic theory. These would have been the rich harvest of the coming years.
Second, he was by taste a great teacher, interested in young minds, able
to make them share his own sense of the high issues involved in what they
studied with him, believing and making them believe in the importance and
the possibility of finding truth.
 Third, there was in him a total lack of certain things which the gods do not In Memoriam
always remember to leave out when they mix god-like reason with human clay.
He had no envy, jealousy, or harshness; of sarcasm, cynicism or flippancy he
was incapable. Sensitive he was, but with the sensitiveness not of vanity but
of most genuine diffidence. He was ever the last person, not the first, to be
persuaded of his own successes; to me it will be a delight to remember how
in the latest talk we had together, he spoke of happiness in his work in London,
and admitted at last his feeling that it was going well. 17
Just eighteen months ago, Allyn Young came here — the first of his countrymen
to hold a full professorial post in London. He came to us promised for three
years; we were gladly bound to him for life if he would stay. That was not to
be in any case. He was too faithful a son of America and Harvard; only two
weeks ago he told me that he had declined a superbly generous offer elsewhere,
but that we must not count on him for London. He was a faithful son of America.
He was also a good citizen of the world; he gave long hours and anxious thought
to its economic reconstruction. No man more certainly made one feel that he
and all wise men were one universal brotherhood. No man could have slipped
more swiftly and unobtrusively into our company and our hearts. He made the
world his home, because he carried everywhere the faithfulness and gentleness,
the readiness to take new burdens, which marked his private life.
Allyn Young — deliberate, poised, wise, tender, firm of purpose — Allyn Young
is taken from us. He was a man of whom his home, our School, his science,
the whole world and the cause of human understanding had need. He is taken
and we are left groping, bewildered under the varied burdens that his broad
shoulders bore, impoverished by his loss. Yet life goes on, and all his burdens
must be taken up. Impoverished by his loss, how much poorer in facing the
future should we be, if we had never known him, never learned from him how
simple and gentle is greatness, how compelling a mistress is science, how power
and affection come to those who seek only service.

Reprinted with kind permission of Basil Blackwell Ltd.

Journal of
Economic Nicholas Kaldor's Notes on
Studies
17,3/4
Allyn Young's LSE Lectures,
1927-29
18
LECTURE I
A definition of economics is best formulated not in terms of its subject matter,
but in terms of the interests which prompted its founders: "Economics is the
science concerned with the communal problems of society." It deals primarily
with the intricate relation of the processes of wealth-getting by different
individuals, and the way each process affects general welfare; with "the social
aspects of the interplay of economic activities". The first premise of economics
— and of any rational discussion of human problems — is the assumption of
a natural order.
So long as men's economic activities reflected their institutionally-determined
position, e.g. serfs, there was no room for economics. The problems were
juristic not economic, as is seen in medieval discussions, and Aristotle's ethics
of trade. He considered the way trade fitted into what he took to be a natural
or rational order of society. But his ideas of that order scarcely correspond
to modern views — activities being then praised according to whether they
did or did not fit in with the structure of the Greek family, and the Greek state.
Aristotle's criteria were never drawn from an unbiased survey of the economic
consequences of economic activities. The change from this treatment was due
to the transformation of the economic state of society — the "rise of modern
capitalism", the "competitive system", "free business enterprise", the
terminology generally according with the views of the author. The medieval
belief in the invariability of the social structure needed to be broken. The
dominant factor was the growth of trade [1].
The commercial revolution preceded the industrial revolution, for with the
growth of trade industrial specialisation became advantageous. The new industrial
and economic situation led to inventions, not vice versa. Then, with the
expansion of markets, and the extension of the division of labour, the welfare
of each man became increasingly dependent on an increasing number of
"foreigners". Certain common interests developed. Now those interests, and
the way in which they could be furthered, were the questions to which political
economy tried to give an answer. Questions of public policy arose, and so
economics was born — though the old name, "political economy", is the more
descriptive.
Prior to economics proper, there was much writing on fiscal questions among
all manner of men: Hume, Bodin and Berkeley (philosophers); Sully and Vauban
(public administrators); Petty and North (men of affairs). At one point or another

[Editor's clarificatory notes are inserted inside square brackets.]

they probed deeply, but they were too heavily handicapped by lack of a scientific Allyn Young's
organon, "a general inclusive view of the mechanism and structure of economic LSE Lectures,
society", to which each problem can be related, to consider not only its 1927-29
immediate, but more remote aspects, so that their writings were partial and
shortsighted. They failed to develop and systematise. For example, the problem
for mercantilism, as seen in Colbert [seventeenth century French statesman]
and Burleigh [sic William Cecil, Lord Burghley, Elizabethan statesman], Cromwell
and Frederick the Great[2], was to unify the leavings of feudalism into nations. 19
Its emphasis on the "favourable balance of trade" was not through identifying
money with wealth, but was an aspect of undue emphasis in the increase of
money profits, caused in turn by a confusion of communal welfare with the
prosperity of the trading classes, and the immediate rather than the enduring
interests of the merchants at that (e.g. low interest rates associated with low
wages — cff. Mitchell to British Chamber of Commerce; contrast with Pigou).

LECTURE II
The physiocrats' contribution is probably inferior to that of some of their
predecessors[3]. But their significance is that they saw the economic process
as a whole: they realised it was possible to envisage the economic order as
a continuous process. The welfare of the community was measured not by the
profits of trade, but by the excess of annual produce over its cost. This excess
appears in agriculture. It all really involved the subsistence theory of wages
and the view that, under competition, profits tend to a minimum. There is a
great contrast between the physiocratic opinion of merchants as "sterile" and
the mercantilist idealisation of them. The physiocrats thought in feudal terms;
they explained that landowners got their incomes not for economic services,
but for state services. It followed from their view of agriculture as alone
productive that, regarding public finance, a single tax on land was the most
economical. But it was all based on a mistaken analysis of costs. How could
one apply the physiocratic doctrine in a new country? And they had
inconsistencies in their measurement of product and costs (i.e. the measurement
of product in terms of physical units must be distinguished from measurement
in terms of money value).
Smith posited the same question as the physiocrats but dealt with it in a
different fashion. Yet the physiocratic influence appears in such statements as
"in agriculture nature works with man". Smith saw the real source of wealth
in the "annual labour" which wealth increases as labour is more effective, the
difficulties of which are summarised in "division of labour depends on the extent
of the market" [4]. His main achievement was the unification of the apparent
chaos of the competitive system. Ever since Smith this picture has been generally
seen. He was no complete upholder of laissez-faire. Jean-Baptiste Say [France,
1767-1832] and Karl Heinrich Rau [Germany, 1792-1870] developed and popularised
him abroad.
The development of English political economy was determined largely by the
nature of the problems met by contemporary industry and post-Napoleonic wars
period. There is an apparent paradox in that the economics which developed
Journal of was that of normal tendencies (Ricardo and Mill). But one can draw a biological
Economic analogy. A knowledge of the organism in health is needed before pathology can
Studies develop. Comparing the work of this period with the Wealth of Nations one
17,3/4 sees the relative importance of those problems now known as value and
distribution, giving rise to the classification of the factors of production. For
modern theory one's classification had best depend on the problems in hand.
It has been suggested that the tripartite classification reflected the social
20 structure of the day, and also that it was influenced by the English legal distinction
between capital and land. But this is scarcely important. In England a hundred
years ago, as today, certain problems presented themselves which make this
classification important. Classifications are made rather to reach an end than
to recognise "facts".
Value was generally held to be in close relation to the cost of production.
Ricardo held that va/vb = ca/cb, Marx that va = ca and vb = cb. The earlier
economists thought, as did H.J. Davenport[1861-1931], that they meant not money
costs but real costs (see Lecture XXX). The problem was how to define "costs"?
At first, "costs" were assumed to be proportional to labour, then capital caused
difficulty — Senior's "abstinence" was ultimately included. It was here came
the break with the Marxists.
LECTURE III
Distribution was also held to be determined by costs. The long-run standard
of living wage theory was a cost-of-production theory of the value or price of
labour, and rested on the Malthusian population theory that population would
increase as fast as the standard of living would permit[5]. One may discuss
relative wages in terms of supply and demand, but wages in general involve
the circumstance that, under modern conditions, supply in itself creates a large
part of the demand. A larger supply is a larger demand, so a discussion of general
wages should not be put in terms of supply and demand. The real question
is whether an increase in the supply of labour will cause an increase in the
per capita product of labour. Under normal Western conditions, not abnormal
as in present-day Great Britain, an increase in population should in the long
run bring increasing returns.
Rent was not fixed according to real costs for (1) land, in any given country,
had no supply price, and (2) rent was determined by the differential principle.
So rent was neither determined by cost nor a determining element of cost —
"rent does not enter into cost". Then came the law of diminishing returns,
which was given four meanings in Cambridge [6]. Primarily it was an agricultural
statement, contrasting with manufactures. That contrast was due to the fact
that the possibility of improvement in agriculture seemed small. Under the
Ricardian theory, after diminishing returns have set in, labour must get an
increasing[7] share of the total product, rents will rise corresponding to the
diminution in returns, so profits must decline[8]. Contrast the pessimistic attitude
of Ricardo the financier with the attitude of Mill, hoping for greater social stability
in the face of this future.
Further scrutiny shows that the law of diminishing returns is merely a view
of proportions. The concept of "optimum" proportions then immediately
 Allyn Young's
LSE Lectures,
1927-29

21

suggests itself. The old doctrine had social significance, the new is more or
less the elaboration of a truism.
Let Y be the number of units of y applied to a fixed quantity of other factors;
and X be the total product. At first the return per unit y added increases, then
decreases, and finally the absolute total product decreases.
Similarly, the average product per unit at first increases, then decreases; i.e.
where diminishing returns have set in from the average
standpoint. Then, on this integral product curve, marginal returns decrease
from the point where = 0.
A further exercise in graphics can be obtained by relating the marginal returns
curve to this total returns curve, i.e:
Let the product = x (quantity of factors)
= x(x)
The average product

If < 0 then decreasing average returns have set in.

If x"(x) <0 then decreasing marginal returns have set in.

M.A.[9]
The classics turned aside from this long-time view only in two cases. These
were wages, where they theorised in terms of the useful phrase (adopted from
the business world) "supply and demand"; and secondly, money.
Journal of LECTURE IV
Economic The wage fund viewed what is essentially a dynamic problem as if one could
Studies view all the influences concerned in a moment of time. Hence it overlooked
17,3/4 the fact that an increased demand for products was, in the long run, an increased
demand for labour. Yet the theory has some remaining significance.
(1) An increased demand for labour may not produce a proportionate increas
22 in real wages, unless there has been an accumulation of capital.
For example, at the end of industrial fluctuations, low interest rates stimulate
long-period undertakings, and so there is an increased demand for labour. The
volume of money wages increases, but not of consumers' goods, so prices
rise [10]. (Hawtrey stresses the middlemen; Young, fixed capital — at the same
time a fall in wage rates is possible.)
The maladjustment between the demand for labour and the supply of finished
goods is equilibrated in the long run.
(2) When there is a large capital supply, product per unit of labour is greate
But the wage-fund outlook overlooked the fact that capital did not remain constant
as labour varied; and its attitude towards increasing capital ignores credit
influences. The "wages fund" is not wholly accumulated in advance.
The classical short-time monetary theory was the quantity theory, which
was an expansion of the long-period gold-cost-of-production theory in terms
of short-run supply and demand.
The importance given by the classics to banking and foreign trade is
noteworthy, especially the Ricardian theory of international trade. If international
values are determined by the real cost of production one is met with the difficulty
that labour costs in China and England are not comparable. Further profitable
trade may exist where one country has all-round lower costs. So develops the
theory of comparative costs [which stipulates that] there will be exchange in
those goods where A's advantage over B is greater than in respect of those
goods imported into A. But surely domestic trade, just as much as international
trade, is governed by comparative costs — which hold good where absolute
costs cannot. Modern economics therefore emphasises opportunity, better called
displacement, costs. (See Wicksteed and Henderson.) This approach increases
the value of the mathematical economists.
In a way, the comparative cost theory of the classics was the most important
part of their work. It is a cost notion which gives added force to Smith's dogma
that the territorial division of labour was the best for world welfare — and hence
laissez-faire. It must be noticed that in the classical writers' minds laissez-faire
took a second place to competition. They meant not laissez-faire which leads
to some monopoly, but laissez-faire such that competition was kept going. And
Ricardo's pessimism was not (only?) selfish; Senior, too, was sceptical not hostile
(towards factory acts, etc.).
Regarding the critical schools of thought there are two main sorts. Those
who are critics because they are bad economists and, secondly, the romanticists
who do not come into a scientific category; it is ethical, aesthetic or emotional.
The valuations they attach to one thing rather than another decide their
position, e.g. Adam Müller [1779-1829] a German romanticist; John Ruskin Allyn Young's
[1819-1900]; Spam [sic Othmar Spann], a follower of Müller] in Vienna now; LSE Lectures,
etc. Many of them are devout Roman Catholics, on aesthetic and historical rather 1927-29
than doctrinal grounds, probably because they have a weakness for the Middle
Ages. They do not attack economics on its own grounds but the premises implicit
in economics, e.g. the conception of "wealth" in a competitive society. The
romanticist would prefer an ordered society, where economic values are
subordinated to ethical or religious considerations. Compare Ruskin: "How can 23
any noble thing be wealth except to a noble person?'' A criticism not of economics
but of individuals[11]. Then Sismondi [Swiss economist and historian (1773-1842)]
and his critical school — "making money and only incidentally making goods"
— comes midway between orthodoxy and the socialists. They claimed that
orthodox theory was an excessive sophistication of the facts.

LECTURE V
Another angle of attack came from the historical school. List, Roscher and Knies
regarded the structure of a nation's economic life as an historical category,
claiming that the ' 'general laws'' of theory need be related to the concrete facts
of a nation's economic growth, and that the wisdom of particular economic
policies is relative to place and time. Apart from Knies, the founders of the
above school made the historical method doctrinaire [12]. But such a method
is essentially arbitrary, based on a priori assumptions. The extent of facts are
as yet far too small to give significant generalisations. Their work is more
aesthetic appreciation than scientific. In fact the concept of "stages" in economic
life (cff. Roscher hunting, pastoral, etc.) came from the Greeks, not from
historical research. They reached the conclusion, for example, that Adam Smith's
laws applied to a stage of society beyond that of contemporary Germany, which
therefore needed protection. But this was only a clumsy way of reaching the
same views that are expressed in ordinary economics under "encouragement
of infant industries" (cff. the then interest in the Roman Empire).
At the same time the school emphasised state intervention. In France and
England the mechanical view of the community, with the state as a utilitarian
regulator predominated. But in Germany the Hegelian tradition emphasised,
a priori, the importance of the state. There is surely a logical contradiction
between historical determinism and voluntarism; the historical school rode two
horses at once. Hegelianism looked on individual activities as controlled by social
institutions, and at the same time expressing the will of the state. But it did
give a needed emphasis to the institutional view of society (e.g. money). The
modern institutionalist is actually emphasising one side of the dual truth of
history. Modern economic history gives excellent ground for such research.
(Contrast the contractual view of society of the practical men, the classical
economists, with the institutional view of philosophers.)

Methods of Economics
It is claimed by many people — e.g. Urwick (British Association, 1928) — that
economics is a priori and deductive and that it developed from psychological
Journal of postulates. The objection usually settles around the concept of "economic man".
Economic But "economic man's" behaviour is only strictly self-regarding in respect of
Studies certain aspects of market dealings. The classical economists even underestimated
17,3/4 the extent to which reason influences human actions. cff. Smith's wages and
Malthus's population theory, which did not assume people were always rationally
self-regarding. Concerning the psychology supposed to be involved, one can
deduce nothing from such postulates. "Men desire wealth" means nothing in
24 itself. It is a mere tautology.
The data economists use are:
(1) Observed facts regarding the behaviour of men in all classes of activities
which have economic consequences.
(2) General records of economic phenomena and events, production, trade,
prices, etc. (cff. Ricardo and inflation during the Napoleonic wars).
Class (2) often gives excellent information concerning class (1). (cf. Malthus).
The earlier economists presented their facts to show that known phenomena
(2) could be interpreted with the known facts of class (1). They rather tended
to emphasise (1), while modern economists stress (2) — but of course the
older economists used (2) extensively (as in the psychological theory of prices
and the mania explanation of the trade cycle. This theory is not so much based
on knowledge of mob psychology as deduced from the fact of crises). The two
classes of facts are essentially mutually dependent in theoretical economics.
One explains the unknown in terms of the familiar (as with Newton's gravitational
explanations). The increase of statistics will probably change the content of
economics, but not its logical method. Carefully interpreted statistics should
provide a more reliable and sensitive theory than one built on a study of individual
behaviour. The economic science of the immediate future will give a larger place
to the study of aggregates and averages. But of course a new political arithmetic
must not be assumed to develop; an average is an historical event. (e.g. Raymond
Pearl's forecasts need to be supplemented by analysis; ditto trade cycles.)

General Character of Changes in Recent Theory

Theoretical and applied economics are equally practical, though the former deals
less with immediate problems and, on the whole, less with particular problems.
Abstract theory is not a description, but an approximation, its generalisations
forming an instrument whereby (effects of) economic changes can be foreseen.
The analysis of value and distribution has changed. Older economists treated
long-run relations from the cost standpoint; other matters were subsumed under
the facile supply and demand. Modern economic analysts analyse supply and
demand, especially the relatively neglected demand side (e.g. Jevons, Menger
and Walras — though they had been anticipated in their development of Smith's
antithesis). Of course neither use value nor exchange value are objective
qualities.

LECTURE VI
In analysing demand, distinctions between various types of action are irrelevant
to economics. The only meaning left in such phrases as "men act so as to
maximise happiness" is tautological. The diminishing utility curve is not a Allyn Young's
deduction from psychological hedonism but an induction from experience. By LSE Lectures,
putting a psychological premise in front of it, we are tacking the experience 1927-29
on to a philosophy but the philosophy is not essential[13]. Take Pareto's analysis
for example. He starts with the concept of ophelimity, changes it into a
mathematical symbol, and then cuts even that out. In substance, Pareto's process
(1) assumes hedonistic behaviour; (2) deduces from this "utility" curves; (3)
reaches supply and demand curves. But he might as well have started from 25
the other end, taking the general shape of supply and demand curves as given
in the market.
The central point of the new distribution analysis is that the values of the
factors merely reflect the value which consumers attach to final products of
such factors. (Contrast old economics: value because of labour cost. Present
theory: labour has value because it produces things that have value.) Thus the
Austrian theories of imputation developed. If the demand of consumers for,
say, bread was a demand for a definite fixed amount of labour, a definite fixed
amount of land, etc., imputation would be simple. But there are alternative
methods of production, "the principle of substitution", so that, in addition to
the factors that play on consumers' choices directly, we have this further
complication of the substitution of factors inter se — i.e. besides the utility
function we have the production function.
One general principle which helps is the law of decreasing productivity, a
generalisation of the agricultural law of diminishing returns. If, as labour tends
to increase for a given amount of land, the return per unit of labour tends to
decrease, then it must be true that the amount of the product dependent on
the use of any unit of land becomes smaller when land tends to increase relatively
to labour. This is the old notion stated in another way. (The law of diminishing
productivity can be paralleled by various electrical phenomena — e.g. "phase
rule" in chemistry, which was reached by purely mathematical processes.
Economics' special law of diminishing productivity can be "explained" similarly.)
Its significance for distribution theory concerns imputation. The relatively
plentiful agent has relatively little per unit dependent on it. Various phraseological
objections have been raised against the idea of specific productivity. But in the
physical sciences one may speak of "causes"; it is the variable factor that counts.
The result is the "product" of a factor, when the factor is the final cause.
Otherwise A is the result of all things antecedent to it. The theory has developed
from practice. So what labour earns depends on the value of what it produces;
under free competition, therefore, there is a tendency towards equality of values
in all activities. (Re this simplification cff. gunnery(?). Note objection re porter's
wages in Philadelphia.) The theory must not be interpreted as involving any
ethical justification of the competitive system, except as a corrective to the
even more erroneous theory that rewards are in no way connected with
productivity.
Any summary of the salient points of economic theory makes it seem more
remote than really is the case, except in mathematical economics which alone
can show the interdependence of economic quanta, and so put the enquirer
Journal of on his guard against oversimplification (e.g. even Marshall's supply and demand
Economic curves hold ceteris paribus, and cannot be integrated to give the whole economic
Studies structure, cff. Say's 'Supply is demand' with Marshall's curves.)
17,3/4
LECTURE VII
There has also been a much greater emphasis given to interest and profits.
The classical treatment tended to obscure the difference between them (though
26 see Ricardo and Mill). "Profits of trade" are explicitly stated to cover the rate
of interest on loanable funds, and later writers generalising interest into discount
of future goods sometimes miss the point of the old analysis. In some ways,
most recent theory has tended to return to the classical treatment. Davenport's
cost of production theory of interest — with cost determined by the expenses
incurred in the running of banks — is a return to the classical money market
view. Schumpeter's analysis of a static and frictionless world leads him to hold
that there profits and interest are lacking; which suggests that interest is a
derivative of profits — again the classical theory. But it is important to notice
that this abolition of interest in the static state assumes that the replacement
of capital requires no saving, and so does not demand interest payment. The
production process is steady, outlay is constant, the reward constant. Time,
in effect, is eliminated.
The new importance of interest theory comes largely from the attack on it
by Marxism. The greatest influence on the theory has been BÖhm-Bawerk's
Kapital und Zins. He deals with the question of why interest must be paid,
a point the classics took for granted. With the development of interest theory,
the concept of "profits" became narrowed. Wages, interest, etc., need to be
deducted from earnings, leaving positive or negative pure profits. (As regards
charging interest as a cost, note the New York bank where the exchange section
was charged with "opportunity costs" — rate in call loan market.) Profits are
about the only form of income which is not contractual but contingent; in fact
one might as well define profits as "that form of income which is contingent
and not contractual". Profits are not imputable to any particular cause, as is
land rent for example. A complete theory of economic change and friction is
needed to give a complete theory of profits.
At present, the generalisations of economics constitute an organ of proved
effectiveness — by its prediction value. The test of any science is its capacity
to predict the outcome of a given change or interference. No science grows
abstractly out of pure reasoning, but is moulded by the actual problems in which
interest lies. As new problems have appeared to economists, the nature and
scope of economics has changed; it is both more inclusive and qualitatively
different. This is exemplified by labour problems which before 1900 were only
discussed under "theory of wages"; now trade unionism, collective bargaining
and "hours", etc., all rank as individual problems.
The classical economists' emphasis on the economic mechanism suggests
that they held that mechanism to be self-sufficient. But, in fact, no first-rate
economist ever was an upholder of laissez-faire — though some second-rate
economists were: e.g. Bastiat. (Distinguish laissez-faire from competition.)
Yet classical economists concerned themselves more with what the government Allyn Young's
could not do, rather than with what it could do. Modern economics takes up LSE Lectures,
the opposite view. However questions of practical politics are always a balancing 1927-29
of advantages, and outside purely scientific investigation. Yet economics goes
a long way in its analysis — e.g. those monopolies which can and those which
cannot be prevented. All the same, great contrasts between an "old" and a
"new" economics are ridiculous, as exemplified by "equilibrium economics"
versus "trade cycle" economics as in Foster and Catchings. But see Mill. The 27
chief characteristic of existing economics is its greater realism.
The older economists viewed money merely as a tool; prices were money
expressed as exchange values — which inverts the truth. They were perfectly
correct from their standpoint, but that standpoint has obtained reduced
importance [14].

LECTURE VIII
Wealth is either a stock or fund or a flow over a period of time. The annual
flow of income may be considered as consisting of all the commodities which
pass into the hands of their final consumers, together with personal services.
This gives what we may call the flow of consumers' income or consumers'
dividend. It is important to distinguish this from the annual product. The two
overlap, for both include work which comes to fruition during the year. But
the one includes work which is completed during the year, the fruits of past
work; and the other, unfinished goods which will reach maturity in future years.
In a static state the distinction between the two would not be important, for
their money values would always be precisely equal. The time-lag between the
start of production and thefinishedproduct being a constant, the production
of each year equals the income of each year. Clark and Schumpeter hold that
this constant time interval may be treated as if it did not exist. (cff. their view
of interest.) But it is this time lag that involves saving. In a dynamic society,
where saving grows relative to consumption, the consumers' dividend is the
smaller of the two.
Communal welfare is better measured by annual product than by consumers'
dividend (cff. a company's total income and distributed profits). The money
value of the annual product equals the money value of the net incomes received
by consumers during the year, and so lends itself better to statistical
investigations[15]. (cff. National Bureau of Economic Research, which measured
annual product via (1) production statistics, and (2) the total amount of money
incomes received by independent investigations, and obtained an agreement
within 3 per cent, then found in one calculation a 10 per cent error — and so
presumably in the other.) Taussig's rather curiously framed wages theory is
due to the fact that he thinks of production as an addition to consumers' incomes,
whereas others think of (marginal) product of labour as an addition to annual
product.
Wealth is an aggregate of scarce and valuable things. It is always valued
prospectively. Compare Jevons, "Bygones are bygones", which leads him to
underemphasise costs. (At any one moment, past costs are irrelevant; but
Journal of looking into future, future costs are very important.) Wealth can only be totalled
Economic in terms of its money value. It is always something owned, as total wealth at
Studies one particular time is the total of existing property rights (cf. Fisher). Where
17,3/4 intangible assets like shares, mortgages, etc., are included the corresponding
liabilities must be set off against them. In seeking to find the wealth in a unit[16]
account must be taken of the net balance of international indebtedness.
It has been suggested that unappropriable "wealth" must be considered in
28 the estimation of a country's economic wellbeing. It should be counted in the
sense that a country is better off with greater amounts of natural resources,
but in a valuation no account should be taken of such resources. They have
already affected the value of appropriable goods, and are already taken into
account (this is illustrated by the case of the Thames where, if access to ports
was taxed, a new source of individual wealth would be opened up, but incomes
of docks, etc., would decrease). Switzerland, for example, already capitalises
her scenery in the best way. While it is necessary that a thing should be scarce
to be valuable, wealth may be increased by abundance. (Note this contrast
between personal and social interest. cff. Sismondi). (Apropos, re Young's essay
on "Limitations of the Value Concept" [17], he "now attaches less importance
to the fact that value is imputed price". The method is necessary, for example,
in taxation.)

LECTURE IX: "UTILITY"

Ricardo, in answer to Say's criticism that he neglected the importance of
' 'utility'', said it could be taken for granted that a good must have utility. "Utility''
has come in for a good deal of psychological criticism. However it is not judged
by any objective standard, but merely by subjective valuations. The utility of
an article is the desire it arouses in an individual to obtain or retain it. Only
when completely rational conduct exists does the capacity to excite desire of
obtaining equal the capacity to excite desire of retaining. Diminishing utility
gives a logical foundation for the laws of demand. But it is merely a generalisation
regarding obvious aspects of the way in which men apportion their resources.
Certain kinds of phenomena occur in the market; and individuals behave in a
certain way. Then it appears there is a definite consistency between these two
observations; so neither is deduced from the other. It is merely shown that
obscure market phenomena are related to familiar and simple knowledge (as
shown by Newton's law of gravity, and celestial phenomena explained in terms
of familiar events).
The progressively diminishing importance attached by a consumer to
successive increments of goods relates to a particular time, with a particular
income, and given tastes. Some tastes are strengthened by repeated
satisfactions, but these are relatively unimportant. Diminishing utility has two
aspects:
(1) Absolute. The absolute element relates to those goods the demand for
which, arising out of bodily appetites, is satiable. So dinner table
illustrations merely show one unimportant aspect of diminishing utility.
 Allyn Young's
LSE Lectures,
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29

(2) Relative. Where those goods which, for example, minister to the desire
for distinction are concerned, the only sense in which diminishing utility
exists is that comparative costs per additional unit increase as the number
of units consumed increases. Figure 2 shows the usual curve.
Journal of What really happens is that as you go towards the right of this curve you
Economic go further to the left on the curves of other commodities. It is a misleading
Studies curve. It is better to show the displacement cost curve as indicated in Figure 3.
17,3/4 The relative aspect of diminishing utility applies to all commodities, and all
consumption. The absolute aspect applies only to those goods which have, for
some reason, "necessary" uses.
Marginal utility is the importance to the consumer of the last unit which he
30 finds it worth acquiring. Contrast with the marginal or final degree of utility
"the ratio of the increase in total utility to the increase in the quantity of the
commodity at the margin beyond which the consumer does not go". One's
expenditure is such that the utilities of what is got for the marginal money units
spent for different purposes are equal. Jevons puts this theorem forward as
a categorical imperative!
Two formal theories develop from these concepts:
(1) As above (the marginal degrees of utility of different commodities are equal).
(2) For any one consumer, the marginal degrees of utility tend to be
proportionate to the prices which he has to pay — and (so) inversely
proportionate to the exchange values of the goods which he acquires.
Since different consumers pay the prices, it follows that the marginal degrees
of utility to different consumers are proportionate:
i.e. to A, du/ds M : du/ds N= du/ds M : du/ds N to B
We have to accept what Wicksteed calls the "communal scale". It is at once
independent of any one of us, and yet the outcome of the preferences of us all[18].

LECTURE X: VALUE
Distinctions have been made between exchange value, subjective value and
imputed price.
(1) Exchange Value
Exchange value is the relative importance which the community as a whole,
manifesting its preferences through the market, attaches to a particular
commodity in comparison with other commodities. It is expressed by the
quantity of other commodities for which a unit of that commodity can be
exchanged, or preferably as a ratio of exchange. This question of quantum or
ratio is a verbal difference only. It is only really important in connection with
index numbers, and yet not even there if one's methods are complete[19].
The notion of general exchange value rests on an inclusive view of all different
exchange values. It implies in itself not only a fairly complete market, but
something approaching order or equilibrium in that market. Money price is
conceived as:
(1) One of the different specific exchange values of the given commodity.
(2) General exchange value expressed in money, which thus serves as a
common denominator.
Since barter is non-existent, the conception of exchange value is really derived Allyn Young's
from that of price. But the conception is useful since (1) some aspects of LSE Lectures,
economic problems are simplified by the barter assumption, (2) it is sometimes 1927-29
desirable to separate the effects in prices from the monetary side from changes
within the price system (i.e. value in money need not correspond to (other)
exchange values. cff. value of money and index numbers).
Cournot insisted that value was always a ratio, so that there was no "value
of money" apart from the value of goods, yet one can disentangle absolute 31
changes in value. Measuring time along the horizontal scale, and price on the
vertical scale, one calculates average displacement through a period of time,
and one averages geometrically "as in astronomy". What astronomical method
Young has not discovered. Apparently none in La Place. Where net displacement
exists, an absolute change in the value of money has occurred. {Note: Young
claims that his abandonment of the central theme of "Limitations of the Value
Concept" is partly due to rereading Cournot.)

(2) Subjective Value

To an individual, at the margin all subjective values are equal — i.e. utility.
Davenport claims that subjective value is relative utility. If this is so, it supports
the displacement aspect of utility. The concept of subjective value entered
economic theory through the Austrian writers who used the term Grenznutze
— marginal uses. Having objective connotations, they needed another word
to point to the values of these uses. It is an unnecessary conception or term.
Ultimately it is only utility.

(3) Imputed Price

Imputed price is an estimate of the amount of money for which a commodity
could be sold or bought (cff. Irving Fisher). Value in this sense is not the price
that could be got at by a forced sale, but an estimate of the price that would
be obtained in due course, with no accelerating of supply and demand. What
is meant when it is said that the price of a good is above or below its value
is that, because of temporary excess of supply or demand, or because buyers
or sellers lack knowledge which if known would affect their offers, the present
price is out of line with what the future price will probably be. Value here is
what price "ought to be"; "ought" not as used by the scholastics, but according
to market equilibrium.

LECTURE XI
The Greeks accepted without question the view that exchange value was
measured by labour. Similarly in the Middle Ages. So it is misleading to talk
of the labour theory of men like Smith, who took it for granted. (Note: Smith
has, in one chapter, three different labour theories: (1) labour-embodied; (2)
labour-commanded; and (3) labour-saved theory.) Ricardo's theory was different
from Smith's. His long-run theory was that generally exchange value would be
proportionate to embodied labour. His equilibrium act [sic] of values was that
Journal of value would be high enough to cover maximum costs at the no-rent margin,
Economic so land rent is a surplus. Regarding capital Ricardo held the concept of capital
Studies as stored up labour, and recognised that this embodied labour would not be
17,3/4 supplied without profits or interest, as well as repayment of wages, all of which
entered into the supply price of capital. So making an "heroic" abstraction
that, in general, past and present labour was combined in like proportions, he
reduced capital to labour costs. It should be noticed that this was nearer the
32 truth in his day than now. Yet it bothered his conscience a good deal. (Regarding
these abstractions, "pure" economics is not quite on a par with Euclidean
geometry. That geometry touches experience at one important point, while
Euclidean economics touches experience at many points. Ricardo's system has
quite as good a basis as Pantaleoni's.)
Ricardo's third assumption is the difficulty. How can one reduce different
labour to one standard? Different abilities, different kinds of attractiveness, can
only be fused by grading or weighting in accordance with the different values
their product commands in the market. This makes Ricardo's theory a circular
argument. He held that relative wages do not vary much over a long period,
and are determined pretty generally by market conditions. It can be conceived
that the qualitative differences between different kinds of labour are distributed
among the labouring class at any given time by the general economic structure
and environment and heredity. These circumstances are quite apart from those
that play on the demand for labour in any given industry[20]. The demand which
gives value to one kind of labour as opposed to another is then not from one
particular industry, but from the general industrial process. In considering certain
large problems it is convenient to think in terms of labour (e.g. international
trade) but, of course, from the point of view of pure theory, one cannot avoid
the fact that labour is apportioned between different tasks only in proportion
as its products are valued. (The aforementioned difficulties are those one always
encounters in finding a relation between value and real costs. In fact the difficulties
increase when attempting to express interest in labour terms.)
Marxian theory is expressed in quanta; Ricardo's in terms of ratios. They
therefore bear no relation. Marx was rather grounded in Smith (as evidenced
by certain phrases common to both, e.g. "Profits deducted from the full product
of labour") though in fact Marx got his ideas from a group of English socialists
writing after Smith and Ricardo.
Dissatisfied with cost theories, other economists sought to find the explanation
of value in marginal utility. Such a position illuminates some aspects of the
problem, but it is quite as one-sided as cost-of-production theory. Relative costs
determine how far consumers can and will follow their preferences. Preferences
determine what costs shall be encountered.

LECTURE XII
It may be concluded, then, that at present there is no possibility of forming
a doctrine in terms of absolute costs — though it is to be hoped such a theory
will ultimately appear. On the whole, costs have been insufficiently considered.
Some marginal theories implicitly consider costs, and the real point of Sraffa's[21]
 Allyn Young's
LSE Lectures,
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33

article, which has so stimulated Pigou, was to suggest the importance of costs.
Those costs most directly related to value are displacement costs. Varying costs
are a technical condition. It is best to think of increasing and decreasing returns
as displacement costs. Decreasing returns exist where the increase of one
product is to be had only at the sacrifice of proportionally greater quantities
of other products (see Figure 4).
In the figure the negatively inclined curve ee' shows decreasing returns; the
community can have either (ax.by); or (a'x.b'y). ff' is a constant cost curve;
ii' is a curve of increasing returns. This shows varying returns in the most
Journal of general way, conditions which any value theory must include. If we assume
Economic a multidimensional surface to show n variables a complete equilibrium could
Studies be shown.
17,3/4 On the consumers' side, "diminishing utility" can be shown by a collective
indifference curve (for expositional purposes). Now this indifference curve can
be combined with the cost curves (see Figure 5) where ee' is the cost curve,
and II' the indifference curve. Then there will be (generally) equilibrium where
34 ee' is a tangent to II'. If ff' is the cost curve[22], production will move towards
the right until it is at a tangent to another indifference curve. So that, given
the technical conditions and existing preferences, one gets a system of values
which cannot be explained wholly in terms of consumers' preferences. It is
a case of relative costs versus relative elasticities of demand.

Price[23]
Prices are not properly conceived as objective facts. They are not so much
"real occurrences" (Whitehead) as aspects of "real occurrences". A price can
be conceived either as a ratio between the quantity of money (exchanged) and
the quantity of goods: or as the actual quantity of money exchanged for a quantity
of goods. The first conception is the better, but it has distinct difficulties. In
particular,
(1) Let quantity of goods be q and quantity of money, m. Then price is m/q.
Mathematically this is the same whether we speak of unit prices or not.
Yet, in dealing with index numbers, generalisations from particular
instances have caused trouble.
(2) In some markets price is stated as q/m. Dealing with unit prices, in the
one the unit is money, in the other goods. With index numbers results
vary according to whether q/m or m/q is taken. A hidden weighting is
introduced. When the fractions are added up the ratios you get differ
as you have different quantities of commodities.
(3) Some prices cannot be expressed in ratios. Take unique goods; what
is the quantity of the good? In any case the measurements we use (yards,
etc.) are purely arbitrary. Some people hold that since prices are
measured in heterogeneous units, prices are heterogeneous, and so
"average price" is a meaningless phrase! The difficulty is that the
standards of working out the quantities of different commodities are
standards of counting, not capable of addition.

Price as a Ratio of Quantities and as a Ratio of Values

Where q1 and q2 are quantities of commodities, p = q1/q2. Speaking of money
prices, q becomes money. Some writers develop theorems in terms of the values
of commodities:
Given Va and Vb are the values of A and B, then the price of A in B is Va/Vb
and of B in A, Vb/Va.
Say mVa = nVb, then pa = n/m and pb = m/n.
 Prices are inversely proportional to the quantity exchanged; and pa.pb = 1. Allyn Young's
Each price is the reciprocal of the other (see Walras). LSE Lectures,
There is more in this than might appear. Price does appear to us as a ratio 1927-29
between quantities, but economics, for convenience, emphasises it as a ratio
between values. It must not be supposed, however, that values are determined
before exchange (cff. B.M. Anderson). It is a heroic abstraction. We do not
mean that value is antecedent to price but that, in respect to a particular
transaction, the limits within which the exchange ratio can vary are 35
predetermined by the general state of the market (compare Marshall's demand
curves, in which the marginal utility of money is assumed not to alter). It is
essential that this is all that is meant when price is spoken of as a ratio of value.
Economic theory of price seeks to:
(1) Find the interrelations between the prices of particular goods and
services, and the way changes in production, etc., affect these prices
directly and indirectly.
(2) Study general movements of prices from a higher to a lower level, and
vice versa. These being absolute changes in the value of money they
can be studied more conveniently by studying the changed relations
between the supply of money and credit and the volume of trade and
production.
In recent years, the distortions accompanying changes in the general level, due
to different elasticities of movement of price, have been particularly studied[24],
and are, of course, questions closely related to industrial fluctuations.
Commodity prices are not the only prices considered but also those of
distributive shares. Profits cannot completely be regarded as a price.
LECTURE XIII
"Demand price" is the price at which a specified quantity of goods will be
taken off the market. The older economists in saying that "prices are determined
by supply and demand" used common concepts which they themselves did
not scrutinise carefully.
They had in mind that p = f(s.d.), more particularly, one aspect of it — i.e.
changes in supply and demand and what effect they have on price. J.S. Mill
first attempted to give precision to the notion. "Price will always be, or tend
to be, at that point where supply equals demand." There he considers price
not so much as/(s.d.), but rather supply and demand as functions of price (s =
f(p): d = /(p)). And this is more than changing the dependent and independent
variable; it is not the same statement.
Taking Mill's tendency statement prima facie, it is a tautology; but it really
implies a generalisation about the character of supply and demand functions.
Marshall then used curves to give Mill's statement greater precision. (Cournot
and Jenkin (first of all) had already used curves.) Cairnes, however, favoured
the older conception of supply and demand varying and so affecting price.
Regarding these curves, the negatively sloping demand curve is really a
generalisation from the market. It is implicit, not explicit, in Mill. Notice that
Marshall violated mathematical convention by using price as the independent
variable and yet measured price vertically. Contrast Cournot's curves.
Journal of On Marshall's curve, demand equals the amount that will be purchased at
Economic a given price, and really means hypothetical purchases. Movement up and down
Studies the curve does not mean a change in demand. While the older economists were
talking about changes in demand, with Marshall this can only be shown by shifting
17,3/4 the whole curve. (Note certain economists who attempted to discuss the effects
of reparation payments on the demand for goods in terms of a demand curve.
What is really wanted is shifting demand curves.) In modern economic literature
36 "demand" is used in two senses:
(1) The amount that will be bought at a particular price.
(2) Demand relating to that general condition of demand, in the ' 'schedule''
sense.
It is, however, better to use "demand" only in this second sense, and speak
of purchases or amount bought as defined in (1) above.
Then there is the question of elasticity of demand, the general shape of the
"demand" curve. Unit elasticity is taken as the zero point. The curve of unit
elasticity is a rectangular hyperbola. Marshall's representation was "shown"
by Dalton to involve a slip. The unit elasticity curve is meant to show a constant
outlay situation, but Marshall's measurement was point' elasticity, and arc
elasticity under such conditions would not be unity. But if elasticity is measured
relatively rather than absolutely, e.g. if a logarithmic curve is used, the difference
disappears.
Consider the summation or integral curve, in which the vertical line equals
Marshall's rect-areas, the total amount paid. Then the demand curve is of the
shape illustrated in Figure 6.
It is ee' or possible e1e'1. Then unit elasticity is shown by a line parallel to
the base (EE'). The negatively inclined curve, ee', shows an inelastic demand;
and e1e'1 shows an elastic demand. It is a useful type of curve since the demand
curve for many "goods" is generally that depicted in Figure 7.
 Allyn Young's
LSE Lectures,
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37

If you consider that the displacement costs vary (see the notes on utility), the
marginal utility of money changes, then the demand curve might turn back on
itself (as shown in Figure 8). (This effect was excluded by Marshall since he
impounded in ceteris paribus any changes in the marginal utility of money. But
he considered it in his (barter) discussion of international trade.) The effect
is especially important regarding economic progress; this sort of thing probably
does happen again and again.
These demand curves raise an indefinite number of problems. For example,
Wicksteed and Davenport prefer one curve instead of separate supply and
Journal of demand curves. It is more than a problem of graphics. Recent statistical
Economic determination of empirical laws of demand got expressions showing quantity
Studies sold as a function of price, from which the elasticity of demand can be
17,3/4 determined. (Lehfeldt, for example, in the Economic Journal gave the elasticity
of demand for wheat.) Such knowledge is highly important, for example, in regard
to reparations. A government-guaranteed price depends for its success on the
elasticities of demand in domestic and export markets. One could write on the
38 failure of the Stevenson rubber restriction scheme solely in terms of elasticity
of demand and supply. Similarly in regard to problems of dumping and protective
tariffs {re forecasting, cff. Moore; and cotton, German Statistical Bureau; and
pork).
These statistics use (1) the figures for total production in different successive
years, and (2) figures of prices in different markets in successive years. This
being a process in time, the question is how to eliminate time? First of all one
eliminates the effects of changes in the purchasing power of money, and then
gets rid of other generally disturbing causes. The question arises as to whether
these are supply or demand curves. Apparently 5 appears as f(p); but these
are not really supply curves. For last year's prices affect this year's supply
more than this year's prices. From this point of view, therefore, they are demand
curves, showing the prices at which different amounts can be sold. Yet the
quantity "supplied" in speculative markets must also be considered. All this
speculative selling is cancelled out in the curve. You assume the amount produced
is the supply. On the demand side, not only consumers' demand is considered,
but also those who produce and do not sell (an example of this would be potatoes:
(i) producer's consumption, (ii) seed, (iii) cattle consumption, (iv) not harvested,
etc.); and, as with supply, you ignore speculative demand.
So the curve (in Figure 9) does not mean that at price OH, Op will be transferred; Allyn Young's
OP is both 100 large and 150 small[sic]. Its inclusion of the demand for holding LSE Lectures,
leads to (is) the concepts of producers' and buyers' reservation prices. 1927-29
Thus the concept of "supply and demand" is far more complex than might
appear prima facie. One must distinguish between demand in the sense of
purchases and in the sense of general conditions of demand (i.e. d= f(p)). In
the first case p changes, in the second f. Further, there is a distinction between
demand as related to transfer — i.e. market apportionment of a given supply 39
of goods — and demand as a name for the force which determines that so much
of particular goods shall be produced. We miss some fundamental problems
when we use either Wicksteed's or Marshall's curves only. The important aspect
is the efficacy of "demand" in evoking production (cff. similar proportions [sic
propositions?] as regards long-period supply curves).

LECTURE XIV
The conception of consumer's surplus is valuable for the light it throws on what
the demand curve really means. According to Marshall, as shown in Figure
10, consumer's surplus would be:
∫ox ydx - xy
But this does not hold for two distinct reasons: (1) Marshall made an elementary
slip. He confuses his own demand curve with a utility curve. Utility curves go
back to Jevons who introduced the notion. They are made up by adding "uses".
Increments of importance being added [would be] decreasing since the wants
become progressively less important (relative to other things). If you make
it a curve, any point shows or measures the addition made to total satisfaction
as the quantity of the good increases.
Journal of
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Studies
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40

The fundamental thing in the utility curve is the whole area between the curve
and the axes. Jevons regarded this area as total utility, hence his marginal degree
of utility expression was du/dx. (See Figure 11 and notes supra.)
But when we pass from this to the demand curve (Figure 10) it only means
that at the price OY, ON units will be bought and at price OY', ON' units will
be bought. But it does not mean that if the market could be segregated ON
units could be sold at price OY, and NN' units at OY'. (cff. boots illustration.
One at £2.2.0., two at £1.1.0.; not one at £2.2.0. and one at £1.1.0. Similarly
coal illustration: v. "Note on International Trade", Q.J.E. 1925 (Young)[25].)
One would be able to sell ON at OY and ON' (ON + V) at OY' (where V
= AW).
In short, Marshall makes a wrong assumption in his view of price
differentiation. His attempt to dodge this objection with his tea illustration[26]
is really no counter. It is, of course, perfectly clear that some consumer's surplus
does exist in this case, but it is not measurable.
(2) This second, different, point is a development from Hobson (whom Young
suggests "is not given the right he deserves"). In his Distribution[27] he made
a point that might have disposed of the notion for good. He pointed out that
the surplus must not be counted more than once. (For example, take the case
of a man who wishes to make a journey in which there are four stages, and
which he could make even if it cost him £1,000. Then by offering, say, £950
at each stage he might gain, in the Marshallian system, a surplus of £3,800
on a £1,000 journey.) All the lesson Hobson drew from this was that if you
have a series of interrelated actions you must take them together, not separately.
He would have agreed to consumer's surplus on the journey "as a whole".
But one can go further. You have to take everything together. What you give
for any one thing depends partly on what you give for everything else. Marshall,
however, neglected the extent to which what you pay for one good enters into
expenditure on other goods: he held that ∫oxydx - xy was relatively
unimportant, i.e. the marginal utility of money is a constant. This involves that Allyn Young's
certainly you cannot add together the Marshallian surpluses in different lines LSE Lectures,
of consumption. In other words, Marshall's concept retains significance only 1927-29
as long as you take one thing at a time [28]. Really there is nothing in the concept
at all, except that we all gain when improvements in industrial processes make
costs less, and we are able to demand a larger supply of goods with the same
amount of sacrifice or exertion. We are better off, but how much better off
is unmeasurable. Therefore: 41
(1) The demand curve does not express the same generalisation as the utility
curve.
(2) The demand curve relates to one commodity taken by itself: the prices
of other commodities being assumed to be what they are. You cannot
think of simultaneous Marshallian demand curves; they cannot be
integrated. The exact relation between two demand curves depends on
their relative elasticities.
Particular Expenses and Supply Curves
The interpretation of the ordinary supply curve (as shown in Figures 12, from
Cournot, and 13, from Marshall) depends on the period of time taken into
account. If one takes a limiting curve, one corresponding to the short-period
demand curve, it shows an instant of time. It will be like the hypothetical demand
Journal of curve as it will show the prices at which different quanta of goods would be
Economic supplied. However,
Studies (1) If we abstract the actual social-economic mechanism, i.e. the distinction
17,3/4 between producers and consumers, and have mere members dealing with one
another, then this supply curve may be considered as a demand curve. Suppliers
are people who want other commodities. Each supply curve is the reciprocal
of a demand curve, so it could be represented by an ordinary demand curve
42 for money. There is no difference in principle between short-period demand
and short-period supply curves.
(2) If we look at it from the social-economic standpoint there are people who
sell not because they want other commodities for themselves. Then the supply
curve is not quite like a demand curve. The important thing in shaping this
curve is not the diminishing utility of money to suppliers; yet the curve would
rise, not because of ultimate costs of production, but because of (i) a physical
shortage of supply so that, in a short period, to bring further goods into the
market is expensive; and (ii) dealers have the distribution of demand through
time in mind. Take the agricultural products speculative market; the
circumstances which determine whether the dealer will sell now depend on
his estimate of what he would get by waiting. This supply curve is related to
a normal distribution of demand in time curve. In other words, it does not bear
much relation to any long-period supply curve (i.e. the stock and produce
exchanged in day-to-day transactions for a short period are not much help in
finding what determines long-period prices). It is most important not to confuse
this supply curve with a particular expenses curve of Marshall (Figure 14 [29]).
OH is the amount produced annually; AHis,the equilibrium price. The producer
of the OHth unit has no differential advantage, but the producer of the OMth
unit has no differential advantage, but the producer of the OMth has such
advantages which permit him to produce at a cost of MP. The particular expenses
curve is the locus of M, the greatest advantages being at the right (left?) [301.
 Allyn Young's
LSE Lectures,
1927-29

43

The curve rises from the fact that not all producers have the same costs. If
there were a random distribution of costs, average costs would be distributed
normally and the curve would appear as in Figure 15.
Empirical evidence — government figures — has shown that the actual curve
is frequently as in Figure 16. It gives concrete significance to the concept of
marginal firms, from which the considerable bulk of the product comes. (Marshall
had no such figures.) But it cannot be interpreted as a supply curve. It does
not follow that those producing at the lowest expense will sell at the lowest
price. On the contrary, they may sell at the highest price and it is the maximum-
cost people who would be willing to sell low. The lowest cost producers are
in a position to hold out. If there is any correlation between this and a supply
curve, it is probably an inverse correlation[31].
Journal of LECTURE XV
Economic Curve of supply of an industry under given conditions (Figure 17). If the price
Studies AP is sufficient to evoke a supply OA, then, given a sufficient amount of time
17,3/4 for the necessary enlargements and reconstructions of the industry, a larger
supply can be produced at the price A'P'. We abstract outside improvements,
unexpected developments, etc., those improvements which would have taken
place apart from the growth of the industry — though it is a moot[32] point
44 how far these exist. Take the so-called "revolutionary changes" of the industrial
"revolution". Modern economic history emphasises the way the increasing
markets led to development. It is an interesting question how far pure science
is a function of industry, and how far it goes under its own momentum. (Note
thesis, "Connections between the Growth of Pure Science, Applied Science,
and Increasing Returns''). It might be a good thing to drop the word ' 'invention''
from our vocabulary; the adapting engineer is the important man. But this must
not be understood as preaching a deterministic theory of inventions.
Yet this curve gives rise to many difficulties:
(1) It relates not to a particular establishment, but to a particular industry.
If it is applied to firms, monopoly would be the outcome.
(2) Sometimes it cannot even be related to an industry, but to a particular
product. For sometimes the splitting up of an industry is the only way
increasing returns can be obtained (e.g. printing trades, as described
in Young's Presidential Address[4]). Differentiation is more characteristic
of modern industry than integration. Integration is only characteristic
of certain special industries[33]. (Thesis, "Study in Economic History
on the Basis of Successive Censuses of Occupations" [34].)
(3) But sometimes even the product will not do. Products change, and new
products appear. Social change takes place partly by the substitution of
new products which achieve the same end (e.g. the carriage, automobile;
manuscript, printed book). There then follows the question as to how
 far we can relate the changing product to something more fundamental Allyn Young's
than the external object — e.g. utility, psychic income. This is a LSE Lectures,
fundamental problem when measuring different welfares in different 1927-29
periods. But where possible it is better to keep to the product.
Then there is the question of what is the relation of this curve to short-time
curves. How can this be shown graphically? And would you take this curve to
mean average costs or marginal costs of production? (Marginal costs here 45
meaning the costs of production which, at any given time and price, it is just
worth bearing.) Marshall took, in effect, average costs by using the
"representative firm". He distinguished between its average and marginal costs
but apparently held that the distinction became blurred in the long run. The
Representative Firm is merely an expository device to aid in understanding
this curve; it is the vehicle through which external economies — those outside
a particular industry but to which the representative firm has access — affect
supply. (Robbins'[35] article is "overcritical"; he does not appreciate it as an
expository device; the question is perhaps one "hardly worth wasting an article
on in the Economic Journal".)
Seeking for equilibrium conditions under increasing returns is as good as
looking for a mare's nest. Certainly the matter cannot be explained by this
curve apparatus, which does not see things "in their togetherness". For
example, how variations of the cost of M (the good considered in the curve)
affect other goods and their prices.
If, in Figure 18, the demand curve DD' cuts SS' as given, and does not change,
there is no particular difficulty. Equilibrium is at X. That is, this construction
is all right so far as the forces taken into account go. But it is a highly abstract
situation, for DD' is closely connected with the supply curves of other industries,
and if the demand for these other supplies is elastic, then increasing production
of M is likely to alter the supply of other goods, and so DD' tends to shift
(indefinitely) to the right, (v. Glasgow[British Association] Address). But there
may be equilibrium at any given time, dependent not only on the production
Journal of
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Studies
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46

of M but of other goods. The main point is that DD' is the reciprocal of supply
curves in other industries, showing alternative uses of productive resources.
Where the situation is as in Figure 19, slowly increasing output causes
increasing difference between supply price and demand price. So is the price
set between the limits of the two prices? It is a very important problem in the
sense that many times in the history of modern industry, especially in times
of rapid expansion, a situation arises where the cost curve moves away from
the demand curve, giving a chance for profits. Now,
(1) This "sellers' market" invites middlemen to insert themselves into the
situation. This should be contrasted with the optimistic view held by some
writers of the distribution of resources by competition. Under dynamic conditions
there are always, at any given time, large elements of maladjustment from an
equilibrium situation. The extent of the departure is disguised by the creation
of new and socially unnecessary costs. The usual theory of profits
overemphasises that taking of risks; some profits, such as those, represent
merely picking plums. The middlemen create costs, and look as if they were
earning their living, which of course they are from an individual but not social
standpoint. The position gives rise to a false appearance of prices equalling
costs where, rather, costs tend to equal prices (e.g. goods with special
characteristics, branded goods sold at a high price; cff. also banking theory).
"In times of industrial prosperity the world is full of such people." (Compare
the number of middlemen during the currency troubles in Hungary.)
(2) The second effect is that producers themselves try to take advantage,
and increase production. If they follow the SS' line (shown in Figures 19 or
20) the maladjustment will merely increase. But in fact they use plants to a
maximum, etc., taking short cuts to increased production. The curve SS'
assumes warehousing, labour supply, etc., increase at the same rate as the
industry, and that the industry is adapting itself as regards management, etc.,
So that in fact the cost curve actually turns up (see Figure 20).
 Allyn Young's
LSE Lectures,
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47

Marshall says the original (Figure 19) SS' curve represents the fact that cost
per unit of output may be reduced as output grows, given time for the
organisation of industry. But that is exactly the problem: how much time? The
Marshallian statement is really meaningless. The "period of time" is relative
to costs, and the costs are relative to the period of time. Otherwise it is clear
that if OA can be produced at price OP and OA' at price OP' (see Figure 17)
what is there to prevent it from being done? In other words, why not follow
the counsel of some rationalisers and "put British industry in shape"? But,
even if one could see ahead, and plan and co-ordinate industry — each growing
industry supplying a market for the other's goods — it would not be done.
For the changes made are costly, and how costly depends on how long a time
is taken. Say it is carried out in ten years, it would disrupt the social life of
the country. Some industries would be abandoned, unemployment would occur,
the population would need to be shifted from one place to another. And there
would be enormous capital costs. The amount of capital required would be
immense; for a time the country would need to live on next to nothing. You
would cut far too deeply into the supply of present goods.
On the other hand if it was undertaken over a long period, by the time OA'
was arrived at, changes in demand and invention would make it, perhaps, all
worth nothing. If the period is too short, costs are too high; if the period is
too long, advantages are lost. What is the right time? In fact it is determined
by what industrialists can see looking ahead, versus costs as appearing in the
form of the rate of interest. The market balances displacement costs against
the increased product visible just ahead in the future.
Given any point on the graph there are a myriad of (future) supply curves
according to the period selected. A long-period supply curve is meaningless
apart from the particular length of time considered: the curve is relative to
the rate at which increasing returns exist. On the other side you cannot postulate
a constant demand curve for a good over a long period. It would shift as a result
of the very forces which are shifting the supply curve. We need a theory of
Journal of an equilibrium rate of progress. Probably the optimum rate of progress which
Economic will keep the supply curve close up to the demand curve.
Studies
17,3/4 LECTURE XVI
It would be interesting to know how firms actually determine their output.
Ordinary "accounts" tell the truth — for a purpose. A study of day-to-day
expenditures and receipts would be useful. The complexity of the situation lies
48 in the distinction between prime and supplementary costs. Figure 21 shows
the (moderately short period) cost curve of a firm. Clearly this is-a marginal
cost curve and must be distinguished from increasing returns in the general
sense. Then, when the output has reached a certain point, a further outlay
on plant, etc., is needed, the curve rises sharply, and falls gradually once more.
The general tendency of the curve may be up or down, and this shows
"increasing" or "decreasing" costs. This is not an accurate way of representing
how expenses are distributed in time in a representative establishment, but
it is a useful expository device. (Railways make a good example, cff. single track
railway in USA with white posts.)
Now suppose pp' (Figure 21) is the normal price of the commodity produced.
While it is the price just needed to cover long-run expenses, yet looking at
any particular establishment at any given time, great deviations from it are found,
and also great deviations between the marginal costs of different firms. It would
apparently pay to cut prices and increase output. A good many writers claim
that this shows a defect of the present economic system; i.e. "underproduction
is a chronic disease of modern industry". But this underproduction is rather
a feature of a state of growth. Plant cannot grow by infinitesimals; the
representative firm generally has more power than is necessary for immediate
needs. It shows progress rather than depression and is evidently, in the long
run, productive and economical or it would not be done (e.g. a new railway
where underproduction is a normal concomitant of growth).
 Allyn Young's
LSE Lectures,
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49

The question remains, why should not the individual firm carry the price from
pp' to p1'? (Figure 21). Why not take Jevons' phrase "bygones are bygones"
literally? Why is competition not self-destructive? There would be bankruptcies
as supplementary costs could not be covered by all at p1'. (cff. those socialist
writers who claim competition tends towards monopoly.) The problem can best
be approached by comparing monopolistic conditions with competitive conditions.
Take two competing railway lines, having no experience of what railway policy
ought to be, and no railway tribunal. Each gets half the traffic: then one, by
cutting rates slightly, could get the other lion's share. A relatively small difference
in price would divert trade so long as there is no "goodwill". The other cuts
back, and so on. There is no stop to this process of price-cutting except prime
costs. Prime costs are, so to say, the rational point; but of course prices will
go lower if the situation is one of industrial warfare, not competition (e.g. the
Lake Eyrie service, where the cost of a journey from Cleveland to Detroit fell
from $2 to $1 to 75c to 50c to 25c with a free dinner. This finally resulted in
combination and agreement).
Certainly, when a firm cuts its price to p1p1' (see Figure 22) its total money
income may increase and it is apparently better off. But its net excess over total
costs is lowered, for, in the long run, supplementary costs must be covered.
In the case of railways, when traffic grows, "supplementary costs" become prime
costs, i.e. all costs are prime costs if you take a right period of time. Livenz
showed that if stretches of 40 years were taken, with USA railways "fixed"
charges grew at the same rate as "variable costs". Each increment in traffic,
therefore, played its part in bringing about an increase in "fixed charges".
When railways do compete they compete on the basis of prime costs, which
leads to bankruptcy or monopoly (as American railway history shows). The
same holds good of local public services. In America, an attempt was made
to regulate its public services by competition. The only result was that various
people took advantage of it (e.g. J.E. Addex "convinced" various cities — e.g.
Boston, Buffalo — that they needed a rival gas company. Then let himself be
Journal of bought out). The characteristics necessary for competition to be self-destructive
Economic have not yet been clearly stated. There appear to be three:
Studies (1) The commodity sold must be standardised. There must be no "goodwill"
17,3/4 on one side or the other, so that the price cutting may be effective —
this is a necessary, not a sufficient condition.
(2) For physical and technical reasons the number of competitors must be
50 small. Compare transport: an indefinite number of lorries, but railways
are limited, physically, by the number of valleys, gaps, etc., and technically,
by the number of possible termini. Initial costs generally are so high
that they are not worth bearing unless a certain proportion of the traffic
is assured. With public services, the duplication of services is generally
impossible, or evidently wasteful.
(3) At any given time the proportion of fixed or supplementary costs to prime
costs must be high. (As shown above, then the firm may make an increase
in production without a proportionate increase in costs, so that under
competition it would pay any one company to cut prices down to the
point where additional production expenses are covered with a profit,
although no contribution to general expenses is made.)
Conditions (2) and (3) work together. If there are a small number of competitors
a lower proportion [of fixed to prime costs] will be sufficient to lead to monopoly
than where there are a large number of competitors. (3) is found in competitive
industries — e.g. agriculture, steel. On the other hand, where there are a large
number of competitors and condition (1) exists, price-cutting by one firm will
lead to its being so "swamped" that its costs will rise largely.
One writer has suggested that economic theory began by assuming all
industries were competitive, then it learned to see railways were a special
category, while a soap factory was not. Finally, it found that railways and soap
factories were not very different. But surely they are: the essential difference
being the number of suppliers in the different industries. The soap manufacturer
would find his marginal costs being driven above selling price if he indulged
in price-cutting. There are two circumstances that reinforce this comparative
stability. (1) Businessmen are either more rational or less rational than we
commonly think, for they attach great importance to past costs. (An example
of this was given by Boston department stores in 1920, which, when wholesale
prices fell, did not cut retail prices until restocking was necessary, or an important
competitor bought at these lower prices.) (2) The accountant's costing devices
spread these variable costs, so that they are distributed through time. In other
words, the discipline of modem costing makes business men think not in terms
of (marginal) prime costs, but of his aggregate costs. So far as he follows the
Figure 22 curve, it is to minimise losses rather than to maximise "gains".

LECTURE XVII
At this point two paths of further analysis present themselves: (1) To discuss
the nature of increasing and decreasing returns; or (2) to discuss monopoly
price. We will adopt the second.
 "Monopoly" means unified control, especially in respect of price. It does not Allyn Young's
necessarily apply only to production; a buyer's monopoly with its price policy LSE Lectures,
may exist. The criterion is always price, as other aspects are ultimately reducible 1927-29
to this. Monopoly also relates always to a reproducible good. If there is only
one of its kind, its owner has a monopoly but the principles under which price
is determined are simple, though the underlying psychology may be complex.
To use "monopoly" here is meaningless. Speak of "unique goods" in this sense,
not "monopolised goods". 51
Certain important problems arise with respect to the bases on which monopoly
can rest. The Marxian doctrine was that competition is everywhere self-
destructive. His interpretation of history, or rather his application of his
interpretation to present tendencies, involved the assumption that, as competition
was self-destructive, control would be in ever fewer hands. Finally we would
have the monopoly owner versus the completely expropriated class.
Liefmann[36] "writes very well in describing German cartels, but not so well
where theory is concerned". He holds that competition is self-destructive. Some
courts have suggested that every competitor wants a monoply. But is every
competitor a monopolist in embryo, potentially? The limiting form of pure
competition is agriculture but no farmer seeks to monopolise the world wheat
supply (yet cff. the McNary-Haugen Bill[37]).
Prices being what they are, it is good for every competitor to maximise his
product — so price-fixing under competition is shaky. A monopolist, on the
other hand, attempts to operate directly upon price. This leads to an entirely
different business policy and economic effects. The maximisation of profits is
different, then, according to whether the producer accepts competition or hopes
to establish a monopoly. In the latter case, firms must either assimilate their
competitors, or destroy them (e.g. by imitating competitors' products, obtaining
special favours, etc.). The law recognises these distinctions; i.e. the effects
of competition are:
(1) Incidental — legally accepted.
(2) The primary objective being "destruction" — unfair competition (cff.
banker, courts decided in terms of "motive" [38]). The real distinction
in motives gives rise to a real distinction in methods. So one may reject
Liefmann.
Does the individual firm, as it grows, accumulate advantages and economies
by reason of its growth, so that its growth tends to become cumulative? That
is, do increasing returns show themselves generally in respect of the operation
of individual firms, in contrast to the industry as a whole? In general, except
in certain very special types of industry, the disadvantages accumulate more
rapidly than the advantages as the individual firm increases. So "capitalistic
monopoly" is not to be found, nor can there be other than a short-lived monopoly
of such a type.

Causes Giving Rise to Monopolies

Artificial Monopolies
Generally these are created by the state, whether publicly or privately owned
Journal of — e.g. the GPO and railways (these two industries are of such a nature that
Economic they tend to monopoly anyway). But there are fiscal and sumptuary monopolies
Studies for public health, morals, etc. — "Matches" are a true artificial monopoly, cff.
17,3/4 winning money. Where the artificial monopoly is not publicly owned, it may
exist on various grounds, e.g. Elizabethan monopolies (cff. Statute against
Monopoly[1624]). Nowadays, this type of monopoly is rare, but where they
do exist, they are probably fiscal. Non-fiscal artificial monopolies may be for
52 the public good — e.g. copyrights, patents.
Copyrights are the most defensible. Otherwise it would not be possible for
publishers to give adequate royalties to authors. But copyright laws are abused.
The rights could not be in perpetuity, as immense fortunes would be established.
The American laws are absurd (cff. Encyclopaedia Britannica).
This does not apply to patents, where the hope is to encourage "inventions".
However, the device does not fit in well with the modern situation. The immense
proportion (99 per cent) of patents are utterly useless (cff. printing press. Two
springs totalling one lb. instead of at least seven hundred lbs.). Secondly, the
most important improvements in methods of production are not patentable —
i.e. developments of pure (and applied) science. An example of this is the steam-
engine which, at first, was empirical; then Joule determined heat expansions
and engines developed. But Joule's work was not patentable. Similarly Faraday:
note Edison — Modern wireless has really to go to Hertz and Crorthes. The
adapter gets the patent, e.g. Seldon patents and automobiles. Note the
development of automobiles. They had appalling chassis until Panhard, in the
late nineteenth century, suggested nearly every modern feature of automobiles.
But he held no patents. Further, the old process of "inventing", whatever that
was, is less important than systematic progress and research in pure science.
Its application to particular problems is a matter of applied science. With the
complications of industry, one patent is valueless unless it is used with another
(e.g. wireless). The system is hopelessly intricate. We can probably do away
with patents and not much retard development.

LECTURE XVIII
In Russia we have a state monopoly of education. A good example of sumptuary
monopoly. It prevents the sale of harmful educational commodities. As regards
concessions in Russia, it may be noted that if its oil reserves were given over
to one group there would only be a monopoly in markets contiguous to the
source. Oil has, in general, a world market. So a real petrol monopoly requires
an international combine.

Natural Monopolies
The most obvious type of such monopoly is that based on some unique natural
resource, e.g. Kimberley mines. The real test of monopoly is power over price
and, in the Kimberley mines case, its owners can substantially affect prices,
so that they have an effective monopoly (though there are limits). Take the
Nickel Combination. Nickel is found only in Ontario and New Caledonia. The
Melchett combination was effected, so a world monopoly results. This is not
altogether a natural monopoly, but at least it is a monopoly made possible by Allyn Young's
a natural limitation of supply, e.g. land surrounding a harbour "monopoly" LSE Lectures,
competing with other harbours. The existence of differentials, however, does 1927-29
not create a monopoly. Land ownership is therefore no monopoly, although there
are certain features of monopoly in land ownership, e.g. sole entry to a city,
and railway line. Again urban sites give a monopoly relative to the surrounding
market. A farmer using better land sells in the same market as a farmer using
poor land; only by altering his supply can he affect prices, and his supply is 53
so small that his influence is negligible. The retail trader on the other hand,
has advantage of location, accumulated goodwill, which differential advantages
give him an opportunity — unlike the farmer, who has a producing policy —
to have a price policy. Within the region of that price policy he is a monopolist.
(v. Chamber's[sic] about to be published book "Monop. Competition".
[Chamberlin's book was not published until 1933. Ed.])
In the old days some monopolies were based on secrecy — e.g. the original
Bessemer process — but these had a very limited range.
The third type of monopoly arises from those conditions which make
competition self-destructive. It is held above that, in most cases, producers
adapt their output, etc., to the assumption that competition will continue. So,
except for the element of quasi-monopoly in trade, competition is the general
rule. But in certain classes of industry competition fails.
(See notes supra where: (1) a high proportion of overhead: variable costs
exist; (2) conditions exist limiting the number of competitors; (3) there is no
opportunity for goodwill to develop — e.g. Cunard Line, which has passenger
goodwill, though this does not go far towards explaining its important goods
traffic. "Shipping" is a potentially monopolistic industry but, so far, the tramp
steamer has kept competition alive.)
It is sometimes suggested that this type of industry shows "increasing
returns". But this certainly does not hold — e.g. telephones with their increasing
cost. Inter alia, items (l)-(3) above are responsible, and these must not be
confused with increasing returns. The trouble is that competition fixes no price
point high enough to do more than cover prime costs. In those other industries
where price remains high enough to cover all costs, it seems due to the fact
that to lower one's price shifts up one's output so much that overhead charges
have to be increased, and of course covered.
It is often suggested that the possession of large resources gives the producer
a monopoly, but this just misses the point (cff. socialist literature, and the writings
of the apologists for the trust movement). Where apparently supporting
phenomena are observed, they can always be traced to some other source than
mere size. Ford, for example, has a "monopoly" only of his own type. If it
was legal to copy his car, he would rapidly lose his monopoly. For the economics
of the Ford car come largely from the circumstance that many cars of one design
are built, not that many are built in one plant. Subsidiary industries develop,
supplying to assembling manufacturers. Most of the advantages of increasing
returns can be had in an industry that is not consolidated — such, in fact, is
the typical modern industry. Take the cotton industry. It depends on industries
manufacturing machinery, dye-stuffs, etc., railways. The advantages of
Journal of consolidation are not, generally speaking, those of increasing returns. Rather
Economic they are those of increased specialisation, those of reorganisation, not mere
Studies increase of size in the operating units. But this, of course, must not be confused
17,3/4 with, for example, Keynes's suggestion for combination among cotton spinners.
That referred only to short-time consolidation.
LECTURE XIX
54 There is no problem where there has been more loose thinking than in this
of increasing returns. Agriculture is generally put aside as an industry of
decreasing returns, increasing costs. It does not in itself involve that, taking
an individual farmer, he cannot extend his production except at a more than
proportionate cost. That theorem may also be true (v. infra) but it is not contained
in the first, which refers to the product as a whole. Then increasing returns
is sometimes confused with the fact that, in general, an industry is so equipped
that it can increase its production without immediately proportionate increase
of costs. But surplus productive capacity is a normal and necessary condition
of economic progress. We must build in advance when we invest for the future,
and wait for demand to catch up.
The reduction of costs in a firm increasing its output *is not due to any
connection between prime and supplementary costs but to totally different
causes. Large production, not large scale production, permits increasing returns.
Some industries never seem to show any increasing returns, e.g. agriculture.
The fairly small size of farms depends partly on legal (e.g. inheritance) and
general historical reasons, but largely it would appear on the fact of diminishing
returns to management, [which] depend in turn on technical factors. Agriculture
produces standardised products but does not use standardised instruments.
The work done on a farm is very unevenly distributed throughout the year.
In e.g. the American automobile industry profits often depend on knowing the
production programme for the year, so that there is a regular output over the
whole period. Now, if the farmer operated wholly by hand labour, he would
need sufficient labour to meet the peak, i.e. overhead costs would be high.
So it would appear that there is a connection between the average size of the
family and the average size of the farm — the family being an overhead cost
anyway.
A discussion as to the optimum firm in any particular industry cannot then
be settled in general terms, but in the light of particular technical conditions,
e.g. printing. The tendency is towards larger firms; and [in] paper-making, the
smallest firms must be able to possess one of the large and highly expensive
machines. Certainly, since overhead costs increase with prime costs, there is
more scope for the larger establishments to economise on their supplementary
charges. But the small printer need have no overhead charges, i.e. he need
keep no stocks of paper, etc., so that he can cut prices below his larger rivals.
So the proportion of overhead to prime costs, increasing as the firm grows,
is one of the factors determining the optimum size of the firm. Notice that sowing
cotton has been a virtually monopolised industry for years. In the boot and
shoe industry, the only advantage of large firms over small is a selling advantage.
In heavy iron and steel, chemicals cartels have succeeded relatively. Why? And
why is there always a cartel in oil? Very few extremely large firms. What is Allyn Young's
the difference between petrol and coal, that makes wasteful competition LSE Lectures,
everywhere in coal and yet leads to combination in oil?
1927-29
LECTURE XX
Trade and Industrial Agreements
The legal status of agreements bears upon economic position and structure.
English laws were founded not on the statute of monopolies, but on restrictions 55
regarding the restraint of trade. Forestalling was held to be as bad as regrating.
It was a healthy regard for their own monopolistic trade as much as hostility
to others' monopoly, or monopoly as such, which led to the old common law
against engrossing. Common law against restraint of trade arose from contracts
by which one hampered oneself against competing. It was legally held to be
bad because (1) the community lost the benefits of efficient traders; and (2)
the individual lost his power to support himself as he could best. Finally it was
held that if the restraint was no more than was necessary to preserve the main
purpose of the contract it was legal (as shown by the eighteenth century decisions
of Mansfield[39]). Combinations of two or three individuals into partnership
is generally legal, and English law is generally more lenient to combinations,
etc., than is American law. For example, if there was an amalgamation of shipping
companies and the managers of the amalgamated lines agreed not to enter the
shipping trade again. Such a contract would be held legal in England but, in
America, if the purpose of the contract was to create a monopoly then it would
not be legal. On the Continent, especially in German countries, it would probably
be upheld; if it was not it would not be because it was a monopoly, but because
it was that particular monopoly.

Forms of Contract to Attain Monopoly

(1) Agreement upon prices either by establishing a board to state prices
from time to time or by basing prices as a percentage above cost of say,
raw cotton, if it referred to textile industries. Question: if each firm knows
its competitors' prices is this tantamount [to] agreement? Does the
increase of knowledge lead to bettercompetition?Or does no price-cutting
occur? Or does it depend on the industry? If competition is atomistic,
then competition is heightened. If there are relatively few firms, it may
lead to monopoly, especially if supported by a tacit understanding. Take,
for example, the case of the US steel combination. An injunction was
taken against this group because the price of steel had not changed over
a period. The steel combination was able to show it had a decreasing
share of the total output of steel, and so could not be held responsible.
It came out that Judge Gary, the President of the Combination, gave
monthly dinners at which he announced what prices his group would
demand during the following month. The injunction was needed against
Gary dinners. Steel is often a combined industry.
(2) Appointment of a common selling agent.
(3) Agreement to limit output — the second method generally involves the
third.
Journal of (4) Divide territories. This is possible for world trade or domestic trade
Economic where plants are geographically scattered.
Studies (5) Pool profits. This leads to an interest in seeing[that] your competitor
17,3/4 profits as much as that you should. But like (2) and (3) it is found that
these agreements, unless legally maintained, are very difficult to enforce.
Yet some price-cutting to obtain trade may occur under this, so as to
lead to an increased share in the aggregate amount of profits to be
56 distributed. These agreements of course represent a good opportunity
for one independent producer (especially in agriculture. In America the
demand for cotton is inelastic. So combination is useful for farmers as
a whole, but it never works. There are three stages of knowledge:
gullibility, self-interest, indifference.) In English-speaking countries
reliance is on "gentlemen's agreements", "one that no law will protect".
On the Continent, however, these agreements are legal, hence cartels.
As regards the term "Trust" (now used loosely): originally, in 1870, the Standard
Oil Company acquired the property of its competitors and appointed three
lawyers as trustees. A Board was established in 1880, but it was declared illegal
in 1890 [Sherman Act] since it was considered to be a way of restraining trade.
Also, the Sugar Trust, New York, has brought trusts into disrepute. Actual
decision rested on the fact that a company cannot delegate the control of its
affairs (for example, enter into partnership); however, parting with its shares
to the Board delegated control. Argument that the company had not delegated
control, but that individual shareholders had, was not admitted. The courts
not accepting the distinction.
But companies can sell to a holding company, so the effort to repress trusts
must not be in legal terms but through finding their economic basic nature.
It is very doubtful whether "artificial" monopoly can be maintained against
competitive forces unless there is some underlying natural monopoly. Now the
question remains whether artificial monopolies are in accordance with general
economic welfare.

LECTURE XXI
The advantages attributed to a large-scale industry are sometimes productive,
sometimes competitive. So far as they are productive they are economies
socially. But competitive advantages are not necessarily social. For example,
buying raw material at low prices through large-scale buying:
(1) The seller may be willing to accept a lower price on the large turnover.
(2) The large buyer can exert pressure, even to the extent of "unfair
competition".
Take for example the Standard Oil Company which was content with something
short of real monopoly. It held 85 per cent of the petroleum output, which
looked better to the public. It seems that it rested in part on differential
advantages such as specialfields,oil pipes, etc. But its various forced contracts
counted. Standard Oil got its railway rates lowered, first of all by crude
differentiation. Then lower rates were given from points where the Standard
Oil Company was situated. When that in its turn was stopped, a big allowance, Allyn Young's
a reduction in rates, was made to the company for the cars supplied. All this LSE Lectures,
suggests that the merely large size of the corporation got it competitive 1927-29
advantages which corresponded to no real social economies. Power to compete
is not power to produce efficiently.
At this time the oil was chiefly kerosene, which was sold from town to town
by the company's agents. They cut prices in any one market where there was 57
a competitor, i.e. they segregated markets dealing in a standardised commodity,
over large areas. At the same time the Bankers' Trust controlled most tobacco.
"Spearmint", (a brand of chewing tobacco) was popular in Tennessee,
Oklahoma, and other fundamentalist regions. The Tobacco Corporation started
a proper price war with a ' 'battle-axe'' brand. They also gave selling advantages
and high discounts to traders all over the country who favoured their products.
Probably the Standard Oil Company had such advantages that its destructive
competition expenses were more than offset by its monopoly profits. Whereas
in the tobacco industry, technical conditions — with continuously latent
competition — made it improbable that monopoly could have been established.
It could never have suppressed competition without undue expense.
Thus, the harmless phenomena of trade in general become very harmful when
carried out on a large scale, as exemplified by price-cutting. The German statute
against unfair competition includes price-cutting — thusmaking"sales" illegal.
Earlier English law protected the trader against inroads on his trade through
unfair competition. Holmes stated, "do not construe methods of competition
as illegal when they are not combined with a plan to form monopoly. . .The
common dishonesties of trade are not illegal".
The German Kartels do not generally involve unified production; there is a
separate limited liability company which is the central executive of the cartel.
The apologists argue that competitive costs go [down] and that production is
extended. However, this latter depends on the size of the market. The apologists
thereupon encourage discrimination, "what the traffic will bear", and dump
abroad. They claim that dumping at prime costs plus profits — home purchasers
supplying supplementary costs — is a net gain, that it leads ultimately to lower
prices. Does this hold? (see notes infra)[40].

LECTURE XXII
Determination of Monopoly Price
Temporarily ignoring costs, take Figure 23 where the monopolist will maximise
at OM'MY. In Figure 24, however, where the curve represents gross revenue
and net (in the absence of costs), then the monopolist willfixprices at SS'/OS'
so that 5, the maximum point, is reached. This is approximately what the owner
of a patent would do. But the question would be complicated because the seller
of this commodity, using the patent, is almost certain to be a monopolist. In
that case, in general the aggregate consumers' prices will be less than if there
had been a single situation[41].
Journal of
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Studies
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58

If the monopolists' costs are constant, then, as in Figure 25, the vertical distance
between the gross revenue curve and the cost line is maximised, i.e. it settles
at the point where the tangent to the gross revenue curve is parallel to the
cost curve.
Similarly, if the cost curves are of the types C1C1' and C2C2' (as shown in
Figure 26) the position implies that net profits are maximised, and the necessary
equalising of marginal costs and marginal receipts. (Note: Some solution is certain,
since the curve of (marginal) gross revenue must ultimately begin to fall.)
 Allyn Young's
LSE Lectures,
1927-29

59

But the monopolist does not know the demand function for his product, nor
his cost function accurately (Note the greatly increasing number of business
investigations in the States, and elsewhere). Further, whether the cost curve
is such that increasing returns exist — i.e. a large market making capitalistic
methods profitable — then it may ultimately pay the monopolist not to aim for
the immediate maximisation of his net revenue. The longer the period the
monopolist considers, the lower probably will be the price that he sets. Further,
the ignorance of his supply and demand functions makes him raise prices slowly,
if at all. Public opinion counts for a great deal, so that in fact monopoly prices
are not so high as the theory would suggest they are.
Journal of Taxation of Monopolists
Economic The use of monopoly situations as a first approximation is highly convenient.
Studies One avoids any difficulties with increasing returns, and the other simplications
17,3/4 can be easily managed.
Theorems
(1) Tax on net profits cannot be shifted on to the consumer.
60 There is elasticity within the limits of the previous "softness" of the monopoly
price. The tax may give the moral, or immoral, courage to raise prices to a
maximum.
(2) Tax per unit of product will be shifted.
The price being changed so that both monopolist and purchaser bear part of
the burden, as in Figure 27 where:
OC — cost curve
O.CT — cost and tax curve
OR — gross revenue curve
Y1/X1 — price before tax
Y2/X2 — after tax
The effects of taxes can best be shown using constant cost curves. Extremely
instructive information can be obtained by the construction of some of the
innumerable diagrams along these lines.
Taking secondary effects into account, theorem (1) should be further limited.
The reduction of profits will probably lower the rate of growth of the plant as
the reinvestment of capital will tend to decrease. In the long run this will affect
production (cff. present discussion re income tax. But do not overemphasise
this factor[42]).
Duopoly Allyn Young's
Suppose "two monopolists" — so there is duopoly. Take Cournot's case. (Note LSE Lectures,
the critic who gave the further help of supposing our two producers are cousins.) 1927-29
The price most profitable for either depends on the price the other charges.
There are four solutions:
(1) They find a price lower than monopoly price, and higher than competition
price, from which neither will vary. 61
(2) They will be forced to combine.
(3) The problem is indeterminate (Edgeworth).
(4) They will, without combination,finallyrest upon the same price as if
they had been in combination as a monopoly. (This Young prefers).
Each solution is correct, merely the premises differing. It depends on how far
each producer takes account of what he does or [sic] his rival.
LECTURE XXIII
Price Discrimination
The opponents of cartels claim that discrimination between domestic and foreign
markets gives foreigners an undue share of the benefits of combination. The
apologists retort that the home consumer is benefited in the long run, since
otherwise the same output could not be maintained and prices would be still
higher. The following must be considered:
(1) Assuming the cartel enjoys a monopoly, will their price be reduced
because of foreign sales, or because of something else?
(2) The securing of the (claimed) increasing returns means an increased
use of capital. Who supplies this capital?
As regards (2) above, the buyer has to pay a high price. Capital is supplied
out of profits. Take a monopoly buyer and a monopoly seller, for instance. The
seller says the high price is in the buyer's benefit in the long run since a larger
output will give a lower price. The buyer responds by saying, rather than levy
tribute from me, why not take me into partnership? However, he would then
find it did not pay to invest the required capital. (Note: This sketch of a theory
— developed in Lecture XXVI — according to Young involves the assumption
that the buyer's demand is both elastic and inelastic!)
(The position is quite different from that of an infant industry. There the increased
returns set in sharply after a certain point has been reached. This discussion rests
on the assumption that society can discount the future in a different way from
individuals. If the producers really thought it would pay, they could get the required
capital easily, and expand. Instead they allow the consumers to raise the capital
by levying on them via prices. So the community's discount rate is lower than
the individual's.) (This was stated by Young in criticising a paper read to him on
31 January 1929. The lecture was on 1 February.)
One begs the question in measuring the advantage to the domestic consumer
in terms of lower prices. One wants to measure net advantage. Borrowing
Robertson's useful term, the capital is raised by an imposed levy from the
consumers.
Journal of Stabilising Agricultural Prices — Price Discrimination
Economic It has been suggested that the government should establish "fair prices" —
Studies invariably high relative to present prices — for agricultural produce. The
17,3/4 government board would purchase goods via buying agencies, dumping abroad
what it is compelled to buy.
It should then be asked if aggregate money income would be larger than if
this price discrimination policy did not exist, taking into account the loss in
62 dumping.
It depends entirely on particular circumstances. Taking into account one-three
year repercussions, we find:
Wheat. (1) Domestic (USA) demand for wheat is inelastic, so the gross receipts
from domestic sales can be increased. (2) American wheat exports form a
relatively small percentage of the world supply, so dumping should not greatly
lower the foreign price. Some loss is involved for world producers, but not to
American (but note Sir J. Stamp's observations on the McNary-Haugen Bill.
Ignoring the supply side, he said the Bill was economically feasible).
Cotton. But cotton is in a very different state. (1) Domestic demand is again
inelastic. (2) But America exports a very large percentage of world supply, so
dumping would involve a heavy loss. The net profit, if any, would be very small.
Manufacturers in the States would then be paying more than those in Lancashire,
so some tariff, or bounty compensation, would be needed for American
manufacturers in respect of cotton that enters the export market.
Maize. American production is extremely large. (I) Domestic demand is quite
elastic. (2) The foreign market is small, and distinctly inelastic (Hungary and
Austria are just about the only maize-using European countries). Dumping would
therefore involve heavy loss, and a net loss would result here.
As regards the above commodities, it should be borne in mind that retaliatory
tariffs could possibly be introduced.
Then consider elasticity of supply. A monopolist who can control supply will
generally gain by differential prices, though competitors probably will not.
Markets can be segregated (1) in space, (2) in time, and (3) by classifying the
goods produced, slightly altering the character of the product and altering prices
more than in proportion to cost.
Take the book publishing trade, for example, in which all three methods are
practised: (1) Books published simultaneously in England and America are
generally more highly priced in the States, due to the structure of the demand
curve. (2) First of all, an expensive edition is produced, then a cheaper edition,
then a very cheap edition; finally the copyright is sold to a very cheap publisher.
(3) "Fifty on vellum signed by the author."
The area of price to be tapped by price discrimination cannot neatly be shown
by the usual demand curve. As an example, in Figure 28, let AP be the most
profitable price to a monopolist if he had to sell at a non-discriminatory price.
Perhaps he would fix his eye on the Marshallian consumers' surplus (see Lecture
 Allyn Young's
LSE Lectures,
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63

XIV). Say he can discriminate to A'P'. He will gain extra profits as measured
by the shaded area. If he discriminates again to A"P",profits here are represented
by the rectangle [near] P". If Marshall's analysis is correct there are net gains
but:
(1) Because markets cannot be completely segregated it will not be possible
to sell as much as OA' at the price A'P' (cff. German cartels). Some
of the potential buyers at the higher prices are in the domestic market,
others are in the foreign.
(2) By reason of selling some part of the product at higher prices, the amount
that can be sold at the low price AP is reduced by an indefinite quantity.
People buy X at A'P' or Y at AP. Say you can now sell only A"A'" at AP, (not X
at A'P' and (Y - X) more if they can get it at AP). The question is whether
(even neglecting any cost variations) the "extra" profits will offset the losses
on this reduction of sale from OA to OA"'. The "consumers' surplus" melts away
when the astute monopolist tries to tap it.
So price policy, when monopolistic competition exists, is different from when
there is just a monopolist, e.g. publishers and the demand for books. The same
with theatres, cff. opera. Differences in seats, and differences in respect of
time. Though there it is often a case of minimising losses.
LECTURE XXIV
Monopoly theory suggests the working of competitive trends. The neatest analysis
is that suggested by Edgeworth in Mathematical Psychics and in Marshall's
Mathematical Appendix, with its apples and nuts illustration. As depicted in Figure
29 0Ia and OIb are indifference curves or, preferably, "curves of indifferent
bargains" for two dealers. A market with only two members does not necessarily
Journal of
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Studies
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64

lead to a definite set of exchange values. Within thefieldof these curves the
bargain is determined on hasard [sic]. Relative elasticities of demand are taken
into account in plotting the curves of indifferent bargains. As soon as the first
bargain is made, neither X nor Y will make now a worse bargain, so we have
a new field, with new boundaries, the relative marginal utilities of the
commodities to each having changed (Figure 30). Finally they come up against
the contract curve, where the marginal utilities of the commodities are in the
same ratio for each of them.
Thus barter does not lead to determinate prices. But, as the number of traders
increases, determinateness is approached. If the two traders are just temporarily
isolated[43] and each is bargaining with money, which has a known value to
each, then a definite point will be reached. When money is issued, X and Y Allyn Young's
can be compared with a system of values already well determined[44]. LSE Lectures,
Attempts have been made to apply this analysis to collective bargaining with 1927-29
the assumption that wages are indeterminate where trade unions exist. Certainly
there will be a field where bargaining can secure advantages. But this
construction exaggerates the fundamentals of such a situation. For both sides
have limiting facts — the character of the demand for the final product, alternative
use of resources, etc. Under given conditions there is a fixed demand for the 65
product of an industry, and to this demand both employers and employed must
adjust themselves. Bowley has shown[41] that under these conditions the prices
reached are determinate, even if both sides are monopolistic. (With certain
limitations.) His is the analysis of bilateral monopoly to be applied[45].

Railway Rates
Railway rates offer the best example of monopoly price. In general there are
different kinds of competition that may affect railway rates:

(1) Competition of Parallel Lines

Where the same termini exist, this always leads to monopoly. Competition,
if it shows its head, must be destructive — cff. efforts of governments to keep
competition going; also cff. temporary and permanent dumping. Obviously this
is not a factor in determining rates, since it removes itself.

(2) Competition of Roundabout Routes

This has caused difficulty in France, i.e. competition between A to B, and A
(DC)B, as in Figure 31. If the roundabout route is relatively weak, and much
competition not possible, then the situation may continue. Generally, some
agreement against rate-cutting is reached, e.g. the Lake Eyrie railway, which
could only be put on its feet by a thorough bankruptcy. It gave a 10 per cent
differential.
Then compare Figure 31 with the Canadian Pacific Railway. In this case it
was actually cheaper to send goods round on its line than on the trans-continental
Journal of
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Studies
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66

route from Chicago. Ultimately an agreement was reached whereby Canadian

Pacific were not to charge less than 95 per cent of the cost of sending goods
by the direct route!
The Chicago Great Western Railway is an example of a railway within a
triangular situation (see Figure 32), being the shortest distance between no
two points. It was a very poor railway, and got no traffic at equal rates; it needed
a 20 per cent differential. There was continual rate war until the Government
intervened.

(3) Competition of Alternative Modes of Transport

This may or may not be a matter of great concern. Rates for gravel and such
things from London transported along the coast are kept down by water
competition, cff. Danube and Rhine during the last century. Here, the
Government wanted to encourage Rhine transport, so railway rates were made
high. People are economically obtuse in regard to water transport, through some
notion that water transport is inherently cheap. It may be very expensive. Water
routes very rarely pay their way, except in the case of Suez and Panama, where
other routes by water are shortened — which suggests that they are probably
not socially economical.
This form of competition may be partly subsumed under (2). Take the
Mississippi, for example, where there is little water transport, railway rates
in parallel lines being cheaper. The railway, then, is both competitive, since
the river certainly permits transport, and monopolistic.

LECTURE XXV
Figure 33 represents a general map of the USA. At one time rates from anywhere
in A to the Pacific coast were the same. But say one wanted to go to the generally
interesting region of San [Francisco] and Salt Lake City, one would have to pay
the charge up to the Pacific coast and, in addition, the charge from the coast
back to the chosen spot. This being the method of getting the most while just
dodging the water competition.
 This does not suggest that the greatest social net profit is being achieved. Allyn Young's
Some costs are incurred for which a relatively small payment is made, and vice LSE Lectures,
versa. The railway defence is that their charges are based on joint cost. 1927-29
(4) Competition of Markets
A railway is interested in making transport, contrary to society. So a railway
left to itself brings about unnecessary costs, cff. costs of bringing English and
American cars to Australia. Also cff. rates on domestic traffic, and (lower) rates 67
on import and export traffic. (Note: German railways had a lower "export" rate
pre-war: and American railways also.) Often when a tariff on imports has been
imposed, rates on that commodity are lowered. It is curious that the railways
should be allowed to offset partially the effects of the tariff. One finds too that
rates from anywhere within quite a large zone to a large market are the same.
Similarly the rates between two markets are sometimes kept low; cff. post-
civil war in the USA when it was cheaper to send corn to the Atlantic from
the west of Chicago than from places only 400 miles from the Atlantic coast.
The railway companies wanted to raise western land values. When charges for
corn transport were too high, producers changed their production to another
commodity. This competition of substitutes is highly relevant to the question
of how far transport rates can be raised.

Theory of Railway Rates

A theory of railway rates must be normative as well as descriptive. There are
various theories.

(1) "Postal Charge'' System

Here the charge is the same per ton, in the same classification, apart from
mileage. One economist has argued that the purpose of transport is to annihilate
distance! But this system of annihilating distance is on a par with ostrich tactics.
The social cost of the transport would be there whether one liked to take it
into account or not. There would be an enormous amount of waste transport.
Journal of Where local transport is worked on these lines, cars, etc., with aflatrate, there
Economic is a tendency against urban concentration. An uneconomic distribution of
Studies population, and an uneconomic massing of markets in the centre of the city,
17,3/4 result. (Note: the real postage stamp system, in the postal services, is on a
different plane, since transport charges form a small proportion of total costs.)

68 (2) Distance Principle

There are different kinds of distance to be taken into account: uphill, places
where railway building was expensive, etc. Further, for administrative reasons,
distances are measured in zones. The formula: R = T + rD develops (where
R = Rate; T = Terminal charges; D = Distance; r = some factor). Classification
is another problem. Call this rather the "cost principle"?[46]

(3) Traffic Principle

"What the traffic will bear". "Value of service principle"? The point is that
it is the value, as distinct from the cost of a service, which determines these
rates.
If we adopt joint-cost analysis, then perhaps charging what the traffic will
bear may be socially justifiable. If monopoly discrimination is the fundamental
determinant, then the cost of transport principle should be adopted, with
Government-controlled rates. In the long run, railways are not entirely industries
of joint cost. The supplementary costs vary, and are apportionable, so that
monopoly discrimination is the (long-run) characteristic of railway rates.

LECTURE XXVI
Hadley, in his book on rail transport[47], gives a case where discrimination was
made between rates on oysters from two different ports to a city. If the situation
he specifies was permanent, the discrimination might be allowed as it is an
adjustment to a given situation. If the city and its demand were to grow, however,
and the oyster traffic increase, new rail facilities would be necessary. Each part
of the traffic should then pay the costs it entails and the case for discrimination
disappears. Socially, it would be better to confine the industry (here, oysters)
to a place where it can pay all its share in the aggregate social costs it involves.
From the short-run standpoint, the gains in a railway are quasi-rents. But,
from a long-run view, it is better that each section of the traffic should contribute
to those costs of which it is a partial cause. What are prime and supplementary
costs depends on the length of the view taken. Much can be done to determine
costs — ' 'the element of expense brought into being by a certain traffic''. Some
costs are left over as joint costs, but these are relatively small, and no large
errors appear if these are apportioned relatively to ascertainable costs. However,
take the railway from Chicago to the pine forests as an example. It had little
to carry after the forests were gone: it was on a par with land, or Marshall's
meteoric stones[48]. So rates become low, and the previously forested area
was developed agriculturally. But if transport had increased rapidly, so that more
overhead was needed, then the rates should cover such expenditure.
 There is a similar problem with cartel dumping. Assume (1) that the cartel Allyn Young's
has genuinely increasing returns if the scale of output is substantially increased, LSE Lectures,
and the scale of the industry can be altered accordingly; (2) rule out 1927-29
"inventions"; (3) say the cartel makes domestic, e.g. German, prices relatively
high, selling abroad at prices unprofitable if applied to the whole output, but
nevertheless sufficient to cover prime costs. The industry's profits then come
from domestic sales. The industry grows, and part of the increasing profits
are put back into the industry. There is a general lowering of costs, and so 69
it will generally become profitable for the cartel to lower German prices. Assume
that domestic prices are lowered, while prices abroad are not reduced in
proportion — the differential is reduced. So conceivably, in the long run, the
domestic consumer is better off than if this differential had not existed. The
gaining of the advantages then is apparently due to the possibility of sales in
the foreign market. Such is the apology — at its best — for cartels.
Now consider that the assumptions above are not true. Over a long period
the foreign market will extend, and there is no particular reason why the policy
of discriminatory prices should cease to be the profitable one for cartels. Some
lowering of the domestic price might occur. But one would not expect the
differential to decrease; possibly au contraire. It depends partly on the length
of time the cartel takes into account. Further, who has paid for these economies
of production? The increasing market makes increasing returns possible because
it makes certain roundabout methods profitable. The degree of roundaboutness
depends on the size of the market. This increasing roundaboutness has to be
paid for. At any given time, looking forward, the gains of enlarging the plant
must be just about equal to the cost of enlarging the plant. Looking back, one
sees an apparent net gain. This required capital comes from (1) new investments
drawn in by the hope of monopoly profits; and from (2) the re-investment of
profits.
High prices, therefore, act as a levy on the consumers of the product. The
question arises whether it is socially desirable for this industry to expand at
the expense of (1) foregone consumers' satisfactions and (2) other investments
that would have been made if the cartel had not charged such high prices. It
is a doubtful or meaningless theorem that economic welfare is maximised if
the ratio between spending and saving is left in the hands of individual consumers.
In any case, the cartel substitutes for this criterion the decision of its organisers.
Why should one hold that this is a social policy to be advocated? Why determine
social policy by looking at one industry at a time? The forced development of
any one industry displaces, in part, the development of other industries, and
of some present consumption. Some industries might properly be forced, but
the decision should not be left in the hands of its organisers. A group of
industrialists and bankers, seeing a chance of profits, is not the ground from
which develops that nice adjustment of private and social net products
competition is said to produce.
Wiedenfehldt states[49] that the cartels have "not been a success, except
in the heavy industries". Precisely the type of industry where the tendency
towards monopoly is always ascertainable. Otherwise cartels are unsuccessful
financially, or unsuccessful as a cartel. It is very doubtful if a "rationalisation"
Journal of policy is a sound one, and it is never very sure what the motives underlying
Economic this sort of movement are. In general, the profit motive, but, nonetheless, an
Studies adulterated profit motive, cff. America. The hope is to secure the profits of
17,3/4 the stock market due to public faith in the economies of combination, rather
than to secure the economies of combination itself. From 1895 to 1905 much
money was made by organising and selling trusts: "The small manufacturer
sells to the big company: the company to the trust: the trust to the trustful".
70 Further, from the beginning of modern trade and industry, businessmen have
always sought a sheltered position, in tariffs, monopoly, etc. It is hard to know
how far "rationalisation" comes from a desire for such a sheltered position.
The movement for international cartels has its origin in the desire of industrialists,
whose cartels have already gone far, to extend their cartels. The foreign market
gives trouble, competition, so get an international cartel. Again, if the industry
is a sheltered industry, then the argument for private enterprise disappears.
The word "enterprise" becomes of very little significance. Competition does
apply a very rough test of "success".
Sometimes it is suggested that industrial fluctuations would be avoided via
cartels, that price stability is better than no price policy. This is altogether
fallacious. You don't get general industrial stability by stabilising everything.
Where everything is competitive, one industry can stabilise its prices; e.g. trade
unions and wage stability. But if every industry was in the hands of a cartel,
and every cartel fixed its price, demand would change just the same; new wants
would appear; foreign trade would alter. But the brunt of change would not
be absorbed by altered prices. What would result would be unemployment,
and over-employment, in curiously maladjusted ways. One industry would be
highly prosperous and another would suffer deficits. Price changes are often
the most economical way of meeting changed conditions, from the social
standpoint. No progress would be made under the above conditions. Even with
one cartel-fixed price, greater instability may result in other parts of the price
system.

LECTURE XXVII
Yet, one may admit that, where there is a significant difference between prime
and supplementary costs, it is true that a cartel may, in a very short run, sell
abroad at a lower price without injuring domestic buyers, and possibly to their
advantage (see Figure 34).
In the figure, dealing only with the domestic market, X will be the output
and Y/X the price.
OG = domestic gross revenue curve
CpCp' = prime cost curve
CC = total cost curve (supplementary costs being constant).
Now let the cartel take into account the foreign markets (see Figure 35). The
cartel will now maximise separately net revenue from the foreign markets, the
 Allyn Young's
LSE Lectures,
1927-29

71

only costs to be taken into account being prime costs, K. They will sell X1
units in exchange for a revenue Y1,the price accordingly being Y1/X1. OG,
etc., as in Figure 34.
FF' - foreign gross revenue curve
X1 = amount sold in foreign markets
Y1 = gross revenue received in foreign markets.
The position involves that the fixed plant was not already being fully used. It
is a highly temporary situation. The real problem is a long-time one as plant
increases. There, the case that price will fall becomes, relatively, a little stronger.
Journal of But there is no a priori reason to hold that the domestic consumer will, in the
Economic long run, be advantaged by monopoly with dumping, as opposed to competition
Studies and non-dumping export trade. Economic theory gives no general proof here.
17,3/4 The results of analysis depend on ad hoc technical conditions of the industry.
Summing up, contrast the disadvantages of monopoly price with the economies
of large production. Most apologists for cartels confuse the short-time situation
(as in Figure 35) with the long-time situation where long-run economies are
72 a circumstance.
(The above lectures have concentrated on a few problems. But their purpose
was merely to show methods of analysis. Specialisation in economic theory
is no worse than elsewhere.)

Some Aspects of the Distribution of Wealth

There are two broad conceptions: [annual product and annual consumers'
' 'dividend"]. In an abstraction of the continuing economic process, a distinction
between the two should be emphasised. Real incomes come out of the annual
consumers' dividend, while money incomes are received for contributions to
the annual product. The truth of the old wages-fund doctrine is best explained
in terms of this fact (cf. rising prices[50]).
There must be some sort of balance, at any given time, between the two.
They are equal in a static society; but when the economy is progressing, and
the consumers' dividend lags behind, balance must still be kept. Contributions
to the annual product are claims on the consumers' dividend. Part of these
claims are used to hold part of the annual product, or natural resources, until
they increase in value. If the ratio of investment increases, a larger part of present
worth is put into the form of increasing the annual product. If vice versa, the
desire for holding falls, and there are relative changes in prices for holding and
prices of consumers' goods. The importance of this is:
(1) When we talk of productive services, we generally define productivity
in terms of the value of the increment of product to the annual product.
So Taussig's "discounted product of labour" merely thinks of his ultimate
contribution to the consumers' dividend. Most economists think of the
present value of this future increment to consumers' dividend.
(2) It throws some light on the rate of interest — the maintenance of a balance
between these two. As the balance is affected the rate varies.
(3) Our credit mechanism being what it is, and unknown variations existing
in production, weather, etc., there are bound to be unpredictable variations
in this balance. All the theories of industrial fluctuation so far put forward
resolve themselves into this, whether Hawtrey's theory, or the view
that the crisis is due to the overproduction of goods, or Mitchell's
emphasis on the discrepancy between prices and costs at one stage of
the cycle as contrasted with an opposite relative movement at another
stage. Alternatively, take the heterodox view that consumers' money
incomes are inadequate, so that they cannot buy the product of industry.
This resolves itself into the thesis that the supply of goods to be held
 as capital tends to increase disproportionately to the demand for holding. Allyn Young's
So long as the demand for holding keeps up with the production of LSE Lectures,
production goods, everything goes well. But if maladjustments appear,
it is not through the monetary basis, but maladjustments between the 1927-29
kinds of things we, as buyers, using our equities, want, and the kinds
of things being produced.
LECTURE XXVIII 73
It is perhaps a truism that maladjustments between the two elements are the
phenomena of industrial fluctuations but, like the equation of exchange, it is
a useful truism.
In most modern treatments of distribution one finds much about productivity
[on this see also, Lecture VI]. One speaks of the productivity of a unit of
resources. This is in contrast to the Austrians' "imputation". The difference
is that they speak in terms of units of product, not units of resources. Therefore
there is no ultimate difference. Perhaps "imputation" analysis is preferable.
Productivity theories merely insist that there is a relation between "product"
and the distribution of the annual product, and that the relation is one of
dependence. It has been much misunderstood. Some have tried to think of
the real contribution of labour, and so forth. Others have difficulty with the
marginal use of only one factor.
Fundamentally, there is no difference between productivity and scarcity. Scarcity
is meaningless except in relation to human desires; so is productivity (cff. the
indefinite supply of power from e.g. wind). This does not mean that you can
create a product by creating scarcity, however[51]. So under competition each
agent gets what it produces. Not that this involves any ethical justification. What
a man can produce depends not only on his capacities, but on his various
opportunities, past and present, including mobility (cff. miners)[52].
An objection has been raised that it is "value", not "product", that counts.
But one does not produce value; the market values what one produces. Further,
one is not paid for the increase, if any, in value of the total output, but for output
times the price per unit. Wages are paid for the value of what the workman
produces. There must be some balancing of the factors of production. One should
notfixone's eyes too narrowly on the way the individual entrepreneur apportions
his expenses. One cannot apply an additive process, andfinda picture of the
whole economy. The older economists thought on the grand scale. Take this
notion of the universality of diminishing returns, of diminishing productivity.
The individual entrepreneur is relatively disadvantaged if he oversupplies himself
with one factor (cff. printing). Following Von Thünen, modern economists,
assuming land and machinery are given, draw decreasing productivity curves
to labour. But what significance does this have? To what extent is this diminishing
productivity a matter of the individualfirm?Would integration give a good social
picture?
LECTURE XXIX
(One can either use a marginal productivity curve, or an integral product curve.
In general the latter is the more useful device.)
Journal of When we pass from the individual entrepreneur to the social situation, the
Economic expenditures appear to be in different classes. If all the factors are given, then
Studies there is no particular difference, it is merely a matter of combination, a problem
17,3/4 only of transfers. There is a communal scale regarding the combination of the
factors, to which each firm has ultimately to come. But owing to the different
ability of managers, some will be able to go further before reaching the margin
— e.g., it may pay a better farmer to use his management intensely, and run
74 a small farm.
Consider the possibility of increasing the factors; s = f(p), say, as with
Malthusianism, for example. Then, if land rents are examined, as the margin
of cultivation goes down rents go up. What you have is an increase in the
proportion of the nation's dividend going to land-owners.
Compare the other factors. When their product increases, the one that
increases least rapidly gets most. This should be related to the discussion that
labour is a cost in the sense that land rent is not[53]. If labour is an overhead
cost, then it is no different from land. But from a long-time standpoint, with
an increasing product, the alternative uses of a person's time become more
important. The value of the product will be diminished if the part of the day
given to non-working does not increase with the product. Apply the diminishing
productivity notion to this fact. This circumstance, more than anything else,
together with the fact that labour may be drawn into industry from other uses,
justifies the view that labour is a cost, in a way that land is not. It may be retorted
that land may be used for pleasure purposes. But then the conception of costs
is not only related to value. We have a right to centre costs, not only as an
abstraction of balancing, as with comparative costs [see Lecture IV], but in human
feelings. The cost conception in economics is relevant, not merely to values,
but to communal programmes and purposes. Going further, one can reduce
capital to labour saving; as good an approach to the real cost problem as any.
Ultimately costs are labour and waiting. Land rent is not a cost. The views
of the older economists are, therefore, attractive.
Fluid productive resources have to be apportioned. What one has is a given
portion of land, and of capital equipment (quasi-rents-share) and you adjust your
fluid resources to these.
It should be noted that wheat importing countries are those where the product
of wheat per acre is high; and exports are from areas of low yield. On the
technical side, European lands are better — because of better rain distribution
— but the main correlation is clear: land is relatively cheap compared to labour
in exporting countries and vice versa amongst importers. In America product
per head is higher merely because there exists a large domestic market affecting
many industries, and a relative scarcity of labour to capital; i.e. labour is relatively
productive.
Comparative costs therefore determine international trade. The relative
supplies of the different factors in the different countries determine the nature
of international trade. Countries rich in land export land, i.e. agricultural products;
countries rich in capital, capital. This is a point developed by Ohlin of Copenhagen
in his, as yet, unpublished book.
LECTURE XXX Allyn Young's
The Ricardian economists were concerned with communal costs. Davenport LSE Lectures,
in his "theories", while acute — and ill tempered — fails to understand them. 1927-29
He confuses himself in accusing them of confusing communal and individual
standpoints. That error is far more the fault of some modern writers. It appears
especially in regard to capital. The view of the whole range of economic theory
which the old writers had, in spite of their crudity, has been lost. Note that
Marshall is really puzzling. You cannot be certain how his cost curves are to
75
be applied to the whole community [see Lectures XIV and XV]. From the
communal standpoint capital is composed of instruments which pass, as stock
in trade, through the hands of successive dealers. Adam Smith, and the older
economists in connection with their wages-fund doctrine, thought of capital as
a stock of consumables for supporting labour. They did make a distinction
between the instruments and this stock, but they thought little of the
instruments. They considered the application of labour to capital while, from
Marshall onwards, there has been the consideration of the application of capital
to labour.
Jevons, in criticising them, partly followed the Ricardians, but he thinks of
capital as being applied to labour until the marginal return to capital equals the
rate of interest. He had in mind the great general fact that roundabout methods
are in general more productive, emphasising the aspect, not strictly correct,
of increasing the lag between the annual product and the consumers'
dividend[54]. He thus approaches Böhm-Bawerk's theory, to whom is the
"instrument" conception best attributable, but finally got a residual claimant
theory somewhat like that of Walker's. Jevons still had the "stock" conception.

Wages
The older economists had a dualistic view — a long-time and a short-time theory.
The former view is Malthusianism, and Young claims to be more of a Malthusian
than most economists. In India, you can see the crude Malthusianism of the
first edition operating[5]. Japan has increased its population from six to forty
millions since the introduction of Western methods. We may speak now of an
"optimum" population. But Mill, in 1848, could say that no material advantage
had been gained by all the improvements in production methods. Today we do
not necessarily agree that an increase in population brings a decrease in wages.
But labour is perhaps the only commodity where increased supply brings with
it an increase in demand. The older theorists were absorbed by the diminishing
returns analysis. Mill should have seen that the "division of labour depends
on the size of the market".
Then there is the wage fund. It has become a term of reproach, along with
"economic man". The earlier economists had hold here of a real truth, and
misused it. Wages are considered as a matter of supply and demand: demand
depending on capital, considered as a stock of goods to be distributed as wages.
Mill really meant by his statement, "demand for commodities is not demand
for labour" that the demand for labour depended upon the employer who paid
Journal of the labourer during production; and the demand for the product depended on
Economic the consumer. He thought in terms that were too inelastic, of a predetermined
Studies fund, and not of something fluid. The wage fund viewed as a flow is a much
17,3/4 more flexible thing than the older economists thought it. But thus it came about
that even humanitarians such as Mill could see only two ways of increasing wages:
(1) Voluntary restriction of the supply of labour.
76 (2) An increase in the wage fund.
The principal critics were Walker, Thornton and Longe. Walker said that there
was not a fund, but a flow. Production is always just ahead of consumption,
and the delicate task is to keep it just ahead. The question resolves itself into
the balance between the product and the dividend.
The wages fund is really a short-period doctrine best explained in terms of
the trade cycle. A drop in real wages may follow a sudden rise in money wages,
if this should take place after a slump when traders' stocks are low.
Their "failure" on the supply side was not to see that the efficacy of
roundabout methods depends on the size of demand.

LECTURES XXXVI-XLV (1927-8)[55]

Industrial Fluctuations
Under this heading we may group analysis of the fluctuations of prices; the
value of money; the mechanism of wage-fixing; and unemployment. The study
is therefore important in itself. Further this study has given rise to a new
approach towards economics. Hitherto, economists have been chiefly interested
in adjustments towards equilibrium, but this problem is one of pathological
economics yet supplementing, and in no way displacing, the classical studies
of economic harmony. The classical social standpoint, strengthened by the
reaction from mercantilism, led to an excessive sophistication of the facts in
so far as it viewed money prices as merely superficial, as in truth manifestations
of the fundamental social mechanism of communal co-operation in the production
of wealth. Heterodox views soon appeared, accusing the orthodox of confusing
acquisitive with productive actions, of stressing the harmony of interests at the
expense of explaining their opposition. Sismondi was one of the first to interest
himself in this "disharmony" (also Lauderdale, Malthus, Daniel Raymond). At
the present time take Eiffertz, "Arbcot und Boden", Landry in his Manuel
d'Economie Politique and Davenport.
Earlier investigations regarded trade cycles merely as manias, forming the
basis for the later "psychological theory" of waves of optimas and pessimas.
Some sort of rhythm is assumed in human temperament. Pareto could see no
other explanation than this, and Pigou now gives great weight to it. Compare
the crude seven-year "turnover" theory in biology.) But why should these waves
coincide, as between different individuals? This periodic movement is explicable
only as the result of contagion due to some external cause and then, admittedly,
mental states may accentuate "real" fluctuations. Amongst suggestions for
these external causes note that of "vital fluctuations", — infra-red wave Allyn Young's
fluctuations [56]. The evidence relies chiefly on a doubtful correlation of time- LSE Lectures,
series, i.e. vital series and economic series. The question then arises: to which 1927-29
economic wave, the preceding or the succeeding, should any one vital wave
be attached?
Then come the overproduction theorists. J.-B. Say pointed out that absolute
overproduction was impossible; supply and demand are the same thing viewed
from different angles. What is commonly called overproduction is merely ill- 77
balanced production. But this involves:
(1) That the supply of money increases correspondingly with production for,
otherwise, prices may fall, leading to decreased profits for producers.
(Objection raised by J.S. Mill.)
(2) A view of the world as a whole. Taking a single country by itself it may
overproduce relative to the world demand for its products, e.g. post-
war Chile.
Ricardo and Senior also employed the "Say" approach.
Then come the socialist overproduction theories; Owen, Rodbertus, Marx,
Proudhon. These, based on the Marxian value theory, saw that since labour
was paid less than the full value of its product, it could not buy its full product.
The surplus product of labour accumulates, only slightly relieved by the
production of luxury goods, until the glut of goods in the market produces a
crisis, and international rivalries. This curiously lives on in some modern theories
not based on Marxian doctrine, but which emphasise that purchasing power
does not keep pace with the output of goods at rising prices, i.e. Hobson's
"over-saving" or overproduction of capital. But men do not "overproduce"
because of their power to do so, but because of mistaken estimates of investors.
Different forms of income do not vary at the same rate, and doubtless it is
true that changes in production are not elastic enough to coincide with changes
in consumers' demands.
Those that seek extraneous causes turn first to agriculture. Now it is true
that crises in countries largely agricultural have been attended with crop failures.
Yet the inelastic demand for agricultural products leaves a larger surplus for
exports in the good years. Further, certain kinds of activities vary directly with
the volume, and not the value of the crop — e.g. milling, transport. The
explanation of periodicity is usually sought outside human institutions, e.g.
Jevons' sunspot theory — a courageous attempt to give a scientific explanation
of industrial fluctuations. He thought that the sunspot cycle corresponded with
the average interval between crises, and also studied weather cycles in India.
The period for the study of crises is something less than a 100 years, and some
of the material for the early part is very inadequate. Jevons' mistake was, when
he found that he had to fit in ten crises to satisfy an eleven-year period of
sunspots, he found crises which anyone considering a shorter period than 99
years, or with different hypotheses, would not have counted as crises. Also,
he paid no attention to the actual interval between crises, but merely took average
interval, which may be purely arbitrary, and no indication of the central tendency.
Journal of Finally, periodicity in agricultural production has not been successfully located.
Economic Moore finds an eight-year period. So far as periods can be found from studies
Studies of price changes, "the" period seems to be nine years.
17,3/4 "Variations of profits" were emphasised by Mitchell, and early Pigou. Given
industrial fluctuations, this explains why they continue. When prices rise, profits
increase more than wages, interest, etc; but, after a point, when surplus stocks
and contracts are exhausted, costs of production rapidly rise, overtake prices,
78 and lead to a crisis. But consumers' incomes must increase as producers' costs
of production, so that one would expect a concomitant increase of prices. To
explain the difference between prices and costs, we have to look at monetary
theory, and credit: there is further disequilibrium between articles produced
and those demanded.

24 April 1928
"Over-investment, Over-saving" Theory
This theory has two general forms:
(1) The standpoint that the production of wealth is such, and that savings of
persons are such, that it is disproportionate — i.e. in excess of the community's
need for capital, and so saving has to be pulled up short once in a while. But
could there be so large an accumulation of wealth that capital equipment would
be so increased that its product could not be sold profitably? The problem
revolves round the question whether the product of capital can always be sold
profitably, and how define "profitably"? We would here expect the rate of interest
to be low, which should react upon peoples' desire to save. When we say people
save willingly, we must bear the rate of interest in mind. So large saving need
not mean over-saving, it is not in itself fatal. It is not because the expected
rewards are low, but because actual rewards are low, expectations are not
realised, we have a crisis. People do not over-save, they miscalculate.

(2) There is something in the mechanism of modern industry which leads men
to miscalculate.

Here there are sub-variant theories:

(i) In a period of prosperity, — large profits — however induced, men's judgement
deserts them; a psychological optimism prevails in a general endeavour to obtain
shares in the increasing level of profits. So a disproportionate amount of saving
is tempted and drawn out. That is [as shown in Figure 36], increase in profits,
δP, calls forth an increase in saving, δS; so that 8S is not proportionate to 8P.
(ii) This rests upon the fact that profits are the largest single source of saving.
With the redistribution of the communal income during times of change more
goes to those who habitually save, and the change in itself offers increased
temptation to saving by this group. The shortage of demand in consumers'
 Allyn Young's
LSE Lectures,
1927-29

79

markets makes it impossible to sell the increased output because (1) consumers'
demands decrease relative to renewing demands; and (2) the increased supply
of capital increases the supply of consumers' goods. But all this assumes the
trade cycle. What starts the movement? The explanation of the trade cycle must
start outside the cycle itself.

(iii) This is a development from various heterodox monetary theorists (cff.

Douglas Martin [sic; perhaps Major Douglas? Ed.]). The money income of
consumers is created largely by the outlays which producers make in the
expenses of production. ("Producers" here is a wide term; "expenses" include
wages, rent, interest, profit.) These consumers' incomes are augmented by
borrowing by producers via the banking process. Lately there has also been
a great increase in the expansion of credit to consumers. So far as purchasers
allow their consumption to go beyond their money incomes (via banks indirectly)
the money income of the community is increased. The amount of money in
circulation depends on the extent to which new money incomes are created
by bank borrowing.
The money put into circulation by the producer will not suffice to pay for
the goods which are being produced at prices profitable to the producer.
(Expenses are but expenses, so that if consumers only pay back the producers'
expenses paid to them, then producers as a whole can never make profits; i.e.
expenses = incomes. Hence one producer profits at the expense of another;
each producer is a parasite on other producers.)
The expansion of industry increases consumers' income for a time faster
than it increases the product of industry. Supply is not increased relative to
demand — an increase in investments, anyhow, causes this. It gives a cumulative
effect which, so long as it continues, leaves industry in a prosperous state.
Then, when a shortage of bank credit, or sudden increase in goods appears,
goods equal purchasing power, and a crisis follows (as shown in Figure 37):
c = consumers' purchasing power
q = supply of goods
After x the crisis occurs.
Journal of
Economic
Studies
17,3/4

80

This is an incident of the process however, not a fundamental cause. In a

stationary state there would be no pure profits, and business profits would remain
constant. Now make the state "static". Then the increased consumers' income
is quite safe so long as the proportion of saving remains constant. A state of
steady progress can be conceived where consumers' income, investment, and
the production of goods all increase at the same rate. So that if there is no
trade cycle to begin with, sub-variant (iii) does not exist in fact.

26 April
(v. Warren Persons, "Classification of Theories of Industrial Fluctuations",
Quarterly Journal of Economics, 1927. Mitchell's book repeats theories which
have no virtue but that of being vaguely connected with industrial fluctuations.)
Unadjusted statistics definitely suggest irregular and diverse types of industrial
fluctuations. We can imagine fluctuations as a result of some regularly recurring
phenomena like tides or the wave motion of light, and the study of wholesale
price fluctuations in England since 1850 shows fairly marked group periodicity.
This is not true of thefirsthalf of the century, however, nor of prices in France
and Germany, nor is it true of statistics of foreign trade, and bank clearings.
In fact those period movements which can be detected do not seem to be
general, or other than fortuituous. Such statistical investigation shows that
perfectly level progression in industry is rare. There are series of more or less
regular variations, small, then suddenly a vastly larger fluctuation — the crisis,
trade cycle. This gives rise to the regular fashionable classification of "trade
cycles", which encompass depression, recovery, prosperity, climax, crisis,
depression, etc. But owing to the difficulty of locating a crisis in every case
it has now been abandoned in favour of "regressions", some of which are so
severe as to be called a crisis. Studies carried out in different countries
frequently do not agree as to the crisis years. There is now reason to go back Allyn Young's
to the older view that crises do occur from time to time, without any attempt LSE Lectures,
to fix them to any cyclical movement. We should consider crises as something 1927-29
different from these "regressions".
Crises can be defined as a sudden collapse of industry; unemployment;
shortage of bank credits; breaking down of contracts; bankruptcies and failures
on a large scale; and generally falling prices and accumulations of goods.
As a result of this definition, a crisis could not exist in an agricultural economy. 81
In the Middle Ages, for example, it could only have occurred in a big money
market. Recent excavations of Sumerian civilisation show a highly complex
monetary organisation, and records give an account of an unmistakable crisis.
The essential feature of a crisis is that people are unable to fulfil their contracts.
Possibly as a result of the inability to sell goods or maladjustment. This is not
an essential feature, however, and there are many possible causes.
Extraneous circumstances such as war, or, in a country depending largely
on agricultural produce, serious crop failures could cause a crisis. Perhaps it
may begin from quite a trivial cause. This is exemplified by the USA 1907 panic.
Here industry was inflated and prosperous, and it was assumed that it would
become more prosperous. Then one bank failed, there being a prejudice against
the management of this bank and other banks would not help. A general lack
of confidence in the banking system was precipitated, heavy bank withdrawals
ensued, loans were called in and crisis occurred.
A man's ability to meet his creditors obviously depends on the ability of his
debtors to meet theirs, so that a crisis may occur on account of the credit
network breaking down at any point. But still, unless the condition of industry
is somewhat strained or, especially, inflated, there is no crisis. It seems possible
that the contract system may break down merely on account of excessive
complications, inherent, and without any extraneous causes; i.e. the supply
of many raw materials, of labour and bank credits are inelastic and, in the short
run, not expansible beyond a certain point. One of these shortages applying
may be sufficient (this is not certain) but above all, to repeat, notice that
extraneous circumstances are not alone sufficient to cause crisis without strain
in the industrial position. "Strain" occurs in the form of:
(1) Various maladjustments.
(2) Various short-run inelasticities and shortages. Commitments may have
been undertaken on the expectation that profits will continue, or even
increase, but profits may be squeezed out through the increased cost
of labour, raw materials or bank credit. These are not in themselves
a large element of strain, unless they run counter to general expectations.
(3) In conditions of rising prices various redistributions of purchasing power
take place. Berridge's work in the USA found that the number employed
multiplied by the average wage fitted in fairly well with the price curve.
That is, that the total purchasing power in the hands of labour increases
at about the same rate as the production of industry. The redistribution
that is important is from those who receive fixed incomes; i.e. there
Journal of are changes in consumers' demand, and changes in the relative
Economic proportions of consumers' spending, and spending for production. This
Studies is particularly important because the greater part of the profits of business
17,3/4 supply the fund for further expansion, and the greater part of saving
out of profits is not necessarily well spent. It does not seek the investment
market but is put back into the, so far, prosperous industry which has
produced it. In other words, there is a tendency for prosperous industries
82 to trade too far upon their prosperity.

1 May
Strain in industry is always necessary, and is possibly a sufficient condition for
crisis. The petering out of bank credits is probably not sufficient to precipitate
a crisis unless industry is operating upon the assumption that prices and profits
are going to continue to increase.
The most important factor of "High Conjuncture" is the "competitive illusion"
(as shown by bull movements on the stock exchange. The ordinary demand
curve must be inverted for speculation: the higher the price the greater the
demand). The business of production is undertaken by entrepreneurs, not one
of whom has a complete view of the situation. Buying, the giving of order, rises
cumulatively and justifies itself for a time, providing no one industry is expanding
out of all proportion to the others. As a result, overproduction of equipment
goods occurs, and (sometimes) the over-accumulation of stock, either in the
market for the means of production, or in the consumers' market. Those
operations which are prompted by expectations that prices will change, as
opposed to those prompted by an apparent opportunity not due to price changes,
seem to be the principal factor. They cause just the effects which one finds
in the trade cycle.
Thus, an industrial fluctuation is something starting a belief in price changes,
then ' 'bull'' commences; then either inherent strain or an external factor brings
about collapse. This question of the cause starting the belief in price changes
demands the closest analysis. Genuine leadership in industry is rare; there is
a flock behind any successful leader, and the thing is overdone. But does not
Schumpeter overemphasise "originality"? It is not so important that someone
should go ahead. This suggests that the natural state of industry is depression
(cff. Veblen). He insists upon something "adventitious" as starting industry
out of depression; further, his "normal" is the lowest extreme. Surely it should
be more near to the statistical average? Then it must be asked, are purely
adventitious circumstances sufficient?
How about the monetary situation? During a depression reserves accumulate
in the banks, so that interest rates fall. Now, do not these falls in interest rates
attract industrial enterprise until industry expands again? (cff. Keynes, Cassel
and Hawtrey.) But actual industrialists (and bankers) deny that variations in
the rate of interest influence the extent of their operations, providing their
competitors pay the same. It is the "market" on which they count. Hawtrey
emphasises the middleman, the wholesaler — and suggests that a small
difference in interest rates should greatly influence him. This does not seem
to be carried out in fact. Yet all this is part of the explanation. A continued Allyn Young's
low interest and discount rate does have one effect — long-time borrowing by LSE Lectures,
companies looking ten or twenty years ahead is more feasible. Their debentures
can be sold at a higher price when rates are low: small variations in the rate 1927-29
greatly affect the total cost of raising capital. So perhaps the British depression
continues as high, rather than low rates are going on? Now when an expansion
of borrowing takes place, it is larger than it would otherwise have been: the 83
"actual" amount depends on the contemporary amount of real saving. Under
present conditions, that leads to an expanded demand for the products of
industry, and so improves its position; i.e. so long as there are reserves of credit
and labour. The small regular movement has merely not gone far enough to
be "bulled".

4 May
Remedies for Industrial Fluctuations
On the one hand are those who seek palliatives and preventatives; on the other,
those who hold that industrial fluctuations are inherent in the existing system,
and hence advocate complete replanning.
(1) Thoroughgoing Industrial Combination
The individual producer has a very limited view of existing conditions and is
so much swayed by current economic activity that he cannot sway the channel
of events himself. Both these evils industrial combination would tend to reduce,
especially if carried to a monopoly extent, i.e. competition qua competition
is abolished. However, an historical survey shows that big combinations are
no better able to foresee events than are an agglomeration of small traders
(as in pre-war Germany). It is also argued that big combinations can stabilise
prices. This is. true as regards such things as steel, where the combination
controls the supply of iron ore and where the price of the raw material is not
a very large element in thefinalprice. But this does not hold true as regards
oil, etc., where the price of the raw material immensely affects the final price
(e.g. contrast the stability of railway rates with variations in shipping). The
argument is altogether unsound. If price stability is due to preventable causes
then obviously prevent instability. But if price instability is due to the inherent
qualities of the economic system, then the best that can be done is to make
the economic system elastic; cff. agricultural products. It is impossible to stabilise
prices "economically". In the world market, general market expenses, transport,
etc., are fairly well fixed. So the variable element in world agricultural prices
is the element due to the farmer, so that, in general, x per cent variation in
market price has meant x +δxper cent in farmers' prices. One may conclude
that, so far as the price system is inherently unstable, the artificial stabilisation
of a section of it leads to greater instability elsewhere. Where one commodity
competes with another, if the price of one is fixed, fluctuation will be thrown
on to the other.
Journal of (2) Timing of Governmental Expenditure so as to go Contrary to General Move
Economic In a period of depression increased government expenditure and, hence, taxation,
Studies would only lower the purchasing power of consumers in general, unless savings
17,3/4 are accumulated and taxes tap these. So one must assume that government
finances its undertakings by borrowing directly from the banks, or by issuing
stocks to be taken up by the public or banks, involving a slight extension of
bank credit. In other words, what is needed is a little inflation. On economic
84 grounds there is no objection except that, in itself, after a crisis it would not
be sufficient without an "inconceivable" amount of government expenditure.
Thus it is a palliative. But there are also political difficulties. Instructions to
the government to spend heavily, and then to throw cold water during the boom,
would lead to great difficulties, e.g. in deciding what industries are in a boom.

(3) Industrial Fluctuations Controllable by Controlling the Supply of Bank Cre

Note: It is not necessary to assume that industrial fluctuations are a function
of variations of bank credit; cff. pre 1844 act. The banking school demanded
elastic currency, otherwise the curtailment of bank credits is necessary and,
hence, crisis occurs. The currency school, on the other hand, suggested you
can never have that degree of industrial expansion to bring about a crisis if you
have an inelastic currency. Note Bagehot's advice, but this is only a palliative[57].
The modern idea is that, if the supply of credit is properly regulated, there
need be no expansion to a crisis extent. The concept takes various forms. The
Central Bank regulates credit so as to keep some index number of prices constant
(Fisher; Keynes's Tract on Monetary Reform).
It is impossible for banks in one country alone, apart from foreign aid, to
regulate prices. Besides, a "fictitious" average steadily maintained is nothing
worth bothering about. In any case a certain elasticity is necessary, otherwise
apart from the statistical average, immense variations may take place elsewhere.
Stability means something far more than the stability of an index number.
What, then, is the real power of the banks? The banks of the Western world
taken together would have an immense power over prices, but not those of
any one country. Some say the Federal Reserve System was the chief controlling
influence of prices in the USA but Burgess (Federal Reserve Banks) contends
that the policy of Europe has been more important[58]. There are differences
too in the way in which the reduction of discount rates causes business
expansion; it is assumed that there is always a negatively inclined curve for
loans. Variations in a discount rate in one market will increase borrowings in
that market, shifted from elsewhere; but otherwise the general increase is
uncertain.

8 May
Business Forecasting
To a certain extent, forecasts of industrial fluctuations would, apart from the
positive factors of change, level out the foreseen fluctuations. Juglar has suggested
an economic meteorological office. A certain Babson has made a good thing out
of selling forecasts based on a line of normal growth. But it is obviously
a posteriori. The concept is an empirical one based on a study of past movements Allyn Young's
and cannot be projected into the future. Babson assumed that fluctuations will LSE Lectures,
be equally dispersed about the line of normal growth. Developing from Babson 1927-29
we get Persons's system, Harvard Econ. Research[59]. (Note book written
by Young in collaboration with Persons, Mathematical Statistics, recently
unauthorised translation into Russian. Preface warns Russian readers to interpret
"profits", "capital", etc., in a "symbolic sense".) This method seeks for
correlations between different series, and three general clauses were 85
distinguished out of some 50 types. They had to do with:
(1) The condition of trade and industry — "the volume of business activity''.
Bank-clearings, after eliminating those that represent speculative rather
than industrial operations (note new banking statistics USA), give the
best single index[60]. In addition, Persons relied mainly on wholesale
prices.
(2) Fluctuations of the money market. Ultimately decided on interest rates.
(3) Speculations on the stock exchange. The number of shares sold, and
the condition of prices on the exchange.
When investigations for time-lag were made, the banking series went pretty
closely, and so did the volume of trade and speculation. But each group of series
had its peculiar movement. Generally, the stock exchange preceded business
activity, then came the money market. (Or start where you will.) The time
correlations were stable pre-war, then spoilt by the war, and now have reasserted
themselves in the last seven years. However, it is a method of forecasting
obviously most uncertain and quite illogical if resting purely on past statistics.
Yet Persons had a "law" or relation. If there were at two points rise in loans
over the last loan price this showed stock exchange prices at their peak[sic].
But the experience of last year discounts this. Yet certain Americans continue
to seek the "philosophers' stone" (cff. Karsten regarding the application of
the method of quadrature).
That "industry requires secrecy" is aridiculousmaxim. If further information
were compelled from industry, as regards stocks, prices, etc., there is no doubt
that further "wholesome" competition would be fostered which would make
better use of a country's resources, and stand in the way of destructive
competition. Thus more economic theory and more information regarding the
state of industry is needed.

11 May
Brief History of Economics
A science is best defined not by its subject matter but by its problems. Economics
is concerned with communal problems of wealth, not problems of household
or business economy. There was no economic science before the second half
of the eighteenth century, for men thought of the natural order of society as
resting upon principles which were non-economic. For Aristotle, the natural
(social) order was inseparable from the structure of the Greek family, and of
Journal of the Greek state. Economic activities were appraised according to whether or
Economic not they fitted in with these institutions. Economic questions always became
Studies ethical, e.g. trade was "natural" where exchange was proposed, but "unnatural"
17,3/4 when devoted to making money profit. Similarly, in the Middle Ages, economic
questions were never discussed on their own merits. The belief in the invariability
of the social structure needed to be broken, as it was as commerce developed.
Individual statesmen investigated particular economic problems but, lacking a
86 view of the economic world as a whole, failed to develop and systematise their
studies. Economics, in fact, only began to develop when men were free to make
contracts.
The mercantilist emphasis was upon the increase of money profits, upon
exports in foreign trade, and upon the view that trade is profitable when
consumers have large money incomes. (Note the confusion with low interest
rates.) [61].
The physiocrats' chief merit is that of realising it to be possible to see the
economic order as a continuous process; as the circulation of goods, not mere
buying and selling. Smith carried this further, and tried to show the structure
of economic society. His discussion of value and distribution is really irrelevant
to the Wealth of Nations. (The labour theory of value was a commonplace in
his day, and he did not state it particularly well.) His chief interest was in
destroying the errors of mercantilism, and considering the general process of
the economy. His general picture of the economic community, as distinct from
the political, is obviously unrivalled work.
With the classical writers, doctrines are far more important. Clearly they
wrote in the shadow of Smith, and the turn they gave to political economy was
determined by the problems England was facing in their time (cff. Bagehot).
Long-time problems, normals, or trends were stressed. Only in two cases did
they really attempt to investigate short-run supply and demand, i.e. the actual
mechanism:
(1) Wages: The cost of production theory of labour supplemented by wages fund,
i.e. the amount of capital available, not consumers' demand. This is true, since
wages are advanced, which creates special problems, but these are now
considered in relation to industrial fluctuations, capital and interest.
(2) Value of Money: Cost of gold production theory supplemented by quantity
theory of money (cff. J.S. Mill).
The chief modern characteristic is the analysis of the mechanism of supply
and demand (cff. Jevons and the Austrians). Value is determined by consumers'
demand, i.e. individual preferences. This does not really contradict earlier work,
but studies another aspect. There are as many "true" accounts of value, etc.,
as there are stable relations in economic life. Which relation is more important
depends on the actual contemporary problems.

21 May
(Gap due to Young's visit to Geneva?)
Ruskin, Carlyle and Morris opposed those classical economists who tended
to identify the interest of the individual with the welfare of society. But theirs Allyn Young's
was rather a code of morals and aesthetics than a science. Morris's cliche LSE Lectures,
objection to "economic welfare" assumed a competitive system, and viewed 1927-29
the results from a social standpoint. Sismondi and his critical school — "making
money and only incidentally making goods" — pointed out defects in the
economic order, inequalities, oppositions, but he went too far. No economist
of the first rank has placed much emphasis on economic harmony.
From another angle, the historical school (i.e. List, etc., not Knies; also see 87
Weber[62]) made history excessively doctrinaire, instead of merely stressing
the inductive side of economic method. Their "historical laws", etc., were
suggestions they got from the Greeks, not from historical research. The
structure of a nation's economic life became an historical category, only
understandable in terms of its past. But while trying to explain economic
development as a result of the inevitable working of historical laws, they at the
same time tried to mould development according to their will. Really this is
inconsistent with their historical determinism, but too much emphasis should
not be laid on this. The historical emphasis on institutions has caused obvious
revisions of the essential "competitive order" seen by the classics. (cff. Y.B.
mark[sic].)
Economics is abstract like any other science, but it has never been wholly
deductive, in spite of its exposition as if from a priori psychological principles.
But, indeed, classical economics rather under-emphasised the extent to which
reason influences human actions (Malthusian population theory). The classics
used two classes of facts:
(1) Those respecting the activities of men which were inferred from a study
of the results of the activities of men rather than immediately perceived.
(2) Observations of the phenomena of economics - interest, prices, etc.
These were drawn on for use in (1) above.
Thus an impression has arisen that the classics deduced (2) from (1), but this
is essentially mistaken (cff. the Ricardian theory of rent.) The second class
of facts is becoming of continually growing importance, and economics will give
them a larger place.
"Theory" is merely that part of economics dealing with less particular and
immediate problems. The essential change now is from the classical long-run
relations between value and cost, including "supply and demand", towards a
study of demand and marginal productivity theory. But because goods can be
produced in different ways, and one factor substituted for another, the problem
of distribution is increased immensely in complexity. The usual generalisation
is that the application of one factor to another involves diminishing return to
the first. The return of the marginal unit of a factor depends, under competitive
conditions, on the extent to which the product depends on the use of the factor.
The significance of this analysis is as a corrective to the notion that rewards
have no connection with product; and it brings clearly into view the relations
between production and distribution, which have to be kept in mind when
analysing the repercussions of any proposed social change.
Journal of The one great advantage of mathematics is that in that way alone is it possible
Economic to detect the interdependence of the factors that determine prices.
Studies
17,3/4 25 May
Regarding ethics and economics, the exact point where you begin to apply values
to the facts depends on your particular philosophy. The utilitarians, with their
"utility", regarded work as a cost (e.g. Pigou, etc.). Their view had the
88 advantage of entailing fairly general agreement in its application; i.e. the greatest
product for any particular amount of work. The "utility" and "demand" curves
we have are entirely commonplace; they really tell us nothing about human
psychology. Economics is concerned with stable relations among economic
phenomena.
Recent theory has paid great attention to interest. Is interest necessary, or
in any sense an earned income? Is there a perceptible relationship between
the amount of payment and the amount of sacrifice? This is a type of question
found nowhere else in economics though, in fact, there is just as real, or unreal,
a question regarding the repayment of capital; (i.e. different because money
and credit is used (cff. interest)). Tariffs, etc. — War experience has shown
that economists are usually right. (Some circ. in prob. [sic circular reasoning?],
i.e. in definition of an economist!) In taking these problems, not only the scope
of economics, but its pattern has changed (e.g. labour problems). (Webbs are
pioneer writers.) Yet earlier economists were concerned with practical problems,
and this is much more significant than to say early economies [sic] were based
on eighteenth century rationalism. They were interested in exploding popular
fallacies, so that they gave the impression that they regarded the economic
mechanism as self-sufficient. They concerned themselves with what the
government could not do. Economists have now come to give more attention
to problems of economic change rather than economic equilibrium. The bearings
of the use of money are being further explored.

29 May
Economic Aspects of Socialism
The Marxian tradition distinguishes "Utopian" from "scientific" socialism[63],
but both are basically idealistic. They are compelled to develop from the existing
order, except that "romantic socialism" is based on the supposed order of later
medieval economic life. The earlier writers of the Owen, Fourier, etc., tradition,
conceived oases of socialism in the desert of capitalism. Those which were
most successful had a "social cement" generally of a religious nature, and these
have generally broken up for non-economic reasons. The highly individual
members of the community tend to withdraw. Summing up, one must say that
these highly picturesque episodes in the history of the nineteenth century were
a failure, but their failure proves nothing either way. Writers of the calibre of
Fourier had really a well-developed psychology, and criticism that their theories
require an "ideal man" is not admissible. Fourier points out that the way men
behave tells very little about their original human nature; institutions mould
them completely, through "social training", etc.
 The "scientific socialists" largely develop the orthodox economics. It was Allyn Young's
an outgrowth of both economic and political changes[64]. The fundamental theory LSE Lectures,
in earlier times was the labour theory of value. (Note: Ricardo was 1927-29
"proportionate", and labour was not the sole element.) It cannot be attributed
to any one economist; it was a commonplace of the time. Marx suggests, though
he scarcely really maintained it, that "labour" was the only common element
in value, and hence the cause of it. Nor did he argue that goods ought to
exchange. . .he was attempting a scientific theory. The real key is in his 89
Hegelianism. The concept of "labour" was the general idea, embodied in
concrete goods, in their "essential essence" (see Value, Price and Profits).
(He contrasts "real values" with "actual values".) He wrote like a medieval
realist. He was not writing in the language of nineteenth century science, and
the last adjective to be applied to him is scientific. He is just as much Utopian
as those he criticises. It is argued that Marx transformed the Hegelian
evolutionary process of history, not guided by "ideas", but by the power of
internal factors. (v. 's recent book on Marx's interpretation of history,
written under Young at Harvard.) Among these factors Marx emphasises:
(1) The institutional factors of economic society (e.g. cartels; differentiation
into social classes, etc.), i.e. the organisation of production.
(2) Techniques of production — concrete goods.
So Marx either begs the question of the materialist guidance of history, or
abandons it, since "institutional factors" must be explained. His doctrine of
the "class struggle" was an invitation to participate in it. His was a suggested
pattern of history, rather than any real interpretation.

1 June
Socialistic states are based on an interpretation of human nature equally as
dogmatic as that of the classical economists. Above we have taken two types
of socialism:
(1) The Romantic, encouraging or envisaging a completely new set of social
institutions, with a hope of the adaptation of human nature to a changed
environment, with self-interest directed into new channels. This places
emphasis on the discipline of communal life.
(2) "Scientific" or revolutionary socialism. Its hope is based on the
continuance of the class struggle, in which the balance of power passes
to wage-earners. An ugly and repellant doctrine.
There remain:
(3) A view of the state as a tool of the capitalist regime; the present power
of the political state is emphasised and the extension of that power is
contemplated. The state will become a tool of the workers; government
control and ownership of industry is sought. State socialism —
administrative socialism.
Journal of (4) This assumes that there will be, in one way or another, a diminishing
Economic of the power of the political state, and an increase of the economic power
Studies of organised industrial groups. These will not only administer industry,
17,3/4 but also to a large extent public affairs. The government is viewed as
a sort of industrial conciliator; as distributor of functions among the
groups, as an arbiter, but itself controlled (e.g. USA trade unions accept
the present political organisation, seeking only their fair share).
90
The problems of socialism are more largely political then economic, for there
are certain aspects of the present system (saving, etc.) which must be maintained
under any system. The real question is, for whom shall power be used? How
should the community, using its communal power, direct the economic
mechanism? These, the chief questions, are political questions.
Anarchism and "socialism" do not differ materially in their concrete proposals.
(cff. Proudhon, Marx; Bakunin, Kropotkin; American industrialists; Mussolini,
"corporation state".) The fourth type of socialism seems to be coming from
a different direction. The anarchist is not so far from the socialist as is generally
supposed. Nor is there so much difference between Marx and Proudhon. Marx
made the most of these differences, probably jealous of Proudhon lest he assume
intellectual leadership of the socialist movement. The emphasis by anarchists
is on opportunities for voluntary assistance, guild socialism with the state
removed, and no compulsion. Some industrialists contend all would be well if
the power of monopoly were removed, and labour organised in company unions
would identify its interests with capital; à peu près Mussolini.
That form of state organisation which can be reached from so many diverse
standpoints may be taken as the most important. Granted that industry may
completely be cartelised, and a unity of interests exists between owners and
workers, then
(1) How will prices be fixed? Monopoly theory does not help since monopoly
theory is regarded as an exception in a competitive regime (i.e. buying
in competition, monopoly only in selling). Then, in fact, in many industrial
fields monopoly could not be established and maintained without
government interference. Prices would be wholly indeterminate, settled
by the relative bargaining strengths of the industrial powers. Of course,
if an external competitive system were permitted a price system might
be maintained; cff. indifference curves. The supplier of the most inelastic
demand would get most. So the only thing seems to be for the state
to fix the prices. How?
(2) On what terms will new capital and new members be permitted into
industry? When does a monopoly cease to be a monopoly? When will
transfers of labour and capital be admitted? This perhaps is the more
serious problem. (Last lecture of the Principles 1927-1928.)*

* It is not clear from this note whether the foregoing is the last lecture or if it is the following
three pages of the original typescript. Probably the latter (Ed.).
Socialists have paid too much attention to interest. Obviously it is possible to Allyn Young's
have a society where money interest does not exist, e.g. Egyptian crown control LSE Lectures,
of the means of production, though this was unique among ancient civilisations. 1927-29
When economics postulates the necessity of interest, it merely points out that
if roundabout production is to take place, some use of present resources for
the future must take place. This might lead one to try taxation, etc. If we define
interest as the difference in value which exists between present and future
benefits then it always exists. Notice that in a community where equality of 91
distribution is made, the relation between the values of present and future goods
changes, since the needs themselves change.
A socialist organisation of society is compatible only with strong governments.
It could not be based on the democratic system of one vote to each individual.
And notice that individualism in philosophy is an outcome of commercial change,
not vice versa. Modern democracy is the result of economic democracy. Young's
objection to socialism centres on this fact of the strong government it involves.
Just as socialists give too much importance to the problem of interest so do
they give too much importance to the question of inefficiency in production.
But there is nothing in human experience to suggest that any ' 'ordered'' society
could be more efficient. In fact the strength of the present system is on its
productive side. Where the values of society centre on the "ability to make
money", which is correlated approximately with production, there is greater
emphasis on production. Under socialism social values would change so that
productive efficiency would become relatively less important. The serious
indictment against the present order is rather in respect of its type and kind
of consumption, the uses to which it puts wealth. Take public expenditures
and compare them with private expenditures. Except regarding war we see
that the former give the individual members of the community a larger measure
of welfare per unit spent than the average welfare obtained per unit privately.
For, in public expenditure, one must justify expenditure in terms of the common
good. "Conspicuous expenditure" is lacking relatively.
Our system of production imposes a pattern of living upon all of us, with its
mass production and pressure of permeation. It is a sophistication to think of
wants as antecedent to production in the modern world. It is true that we can
produce certain things and that the human activities of money making find their
best outlet in certain things and that then these things are produced. But if
you start from the position of producing these things which people really want
you will get a socialism placing very little emphasis on class questions, interest,
etc. It would concentrate on education, on preparing a national scheme of values
in society. It would demand a communal discipline like the Utopian socialists.
It would be a socialism that would seek a greater public expenditure as compared
with private expenditure; it would increase taxation. The absurdity of those
who criticise the existing order on the ground that it is based on an acquisitive
instinct and then propose a social philosophy based explicitly on the same!
Socialism is either organised selfishness, or a different scheme of values.
When we think of the amazingly complex thing that economics is, one realises
that it would be impossible to draft a new economic system disposing of the
Journal of old. The reason we think so easily of changing the present order is that its
Economic present form is new. The changing element in economic systems is human
Studies nature, taking in those particularised ways of behaviour in very large part a
17,3/4 product of life in society. No new scheme of economics is workable which takes
men as they are: it must be essentially elastic or flowing. The only way to change
the economic order for the better is not to change that order itself, but its
essential part — man.
92
SOME NOTES ON DISTRIBUTION
Interest
Modern interest theories have been divided into two classes: psychological and
productivity theories. "Payment for abstinence", or doctrines relating the rate
of interest to the productivity of capital. If any choice is forced, the explanation
we adopt depends on the length of time we take into account. Historically,
productivity theories cannot be fitted in. The comparison of rates of interest
in different times is complicated by differences of legal systems, etc., (e.g. canon
law). But it seems as if the rates were, in Rome 7 per cent; early Italy 5 per
cent; fourteenth century Holland 3 per cent, eighteenth century England 6 per
cent. So rates of interest have changed in nothing like the manner of changes
in the use of capital. In the long run, the pyschological element seems to count.
The rate of interest thus seems to depend on certain relatively constant traits
of human nature. In the short run, supply and demand for capital — productivity
influences — supply the explanation.
Schumpeter claims that "interest as we know it in modern society is derived
from the profits of enterprise''. It is the possibility of getting profits that permits
the payment of interest. Then he points out that to get profit requires not only
original enterprise but also continued enterprise. But the weak point concerns
the displacement of capital. Would capital necessarily remain in industry? [65].
Banks and the Financing of Industry
Some writers, e.g. A.S. Johnson, hold that bank credit could be supplied virtually
without cost so that capital might be costless. But in addition to bank expenses,
there is a cost to the community at large. The cost of saving must fall on some
part of the community. "Imposed lacking" may be the means of a great deal
of the capital formation of a modern society.
Then the analysis of the course of the trade cycle shows another form of saving,
with motives different from individual abstinence or waiting. At the end of the
depression costs begin to lag behind prices (see Figure 38). Then, in upward
movements, prices increase faster than costs. Where unemployment or stocks
of raw materials exist, an increased demand need not raise the costs of such articles.
So in times of active business enterprise gains; labourers may lose. More of the
national dividend goes to profits, less to rent, salaries, wages, interest.
Entrepreneurs are the largest investors — 55 per cent of the capital funds in USA
come from profits. So this increase of profits and redistribution of incomes alters
the amount of saving. More is put back into business. Insofar as the higher prices
fall on the consumer he supplies the capital for this saving; less is consumed.
 Allyn Young's
LSE Lectures,
1927-29

93

The disadvantages of the trade cycle are (a) unemployment, (b) the possibility
of oversaving from the increased profits of the boom period. These are the
prices to be paid for the progress of capital accumulation and advance in the
real wages of labour. Stability in prices would probably check both these unless
some other method could be found; while it has been argued (e.g. Prof. [Paul
H.] Douglas) that labour gains in the long run from the fluctuation by keeping,
during the period of falling prices, part of the advantages gained during the
boom period.
Thus the sources of modem capital include (1) rentiers and other individual
savers, (2) banks, (3) company saving. The latter two are connected with the
trade cycle (banks make elasticity and expansion possible), and introduce
modifying motives on (1). But, in the long run, the permanent factors are the
qualities of impatience and disinclination to wait.

Marginal Productivity Theory[66]

The view that "under competitive conditions each agent of production gets
the share of the final product for which it is specifically responsible" rests on
the "Law of Diminishing Productivity". This law relates to a combination of
factors, there may be any number. Some (e.g. Carver, Taylor) generalise it as
a law of economic variation. In this form it is not merely deductive, but constantly
confirmed by experience. Its parallel exists in the physical world (cff. modern
physical chemistry. Phase rule. Transmission of current (voltage and diameter
of wire)). It is not a statement of "value" in any way.
The division of factors of production into land, capital and labour is largely
conventional. Practically any agent used in production can be elevated to the
position of a separate factor if the need arises.
In Figure 39 all the factors but one are assumed to be fixed. Then, the
"summation curve" shows:
Journal of
Economic
Studies
17,3/4

94

OY = total amount of product.

OX = units of the factor used (others given).
Then Ox units of the factor produces Oy product.
Some have discussed where this curve should have its origin — i.e. 0 or
O'? One cannot generalise. A certain amount of the factor is necessary before
anything can be produced in the case of labour with complicated machinery.
But other times, as in agriculture, there may be a product before the new factor
is applied. Therefore there is no definite point.
A continuous upward slope is impossible. If the curve were permanently
concave downwards it would show a condition in which monopoly is inevitable.
The product of the marginal labourer being always greater than that of the
preceding [labourer], indefinite expansion is possible. Thus the essential point
of the curve is that it becomes convex downwards at some point. This shows
(at the point of inflection on the curve) that the addition of further units of the
factor adds progressively less to the product.
Then some argue "physical factors alone can never tell what the margin is,
only value, what the product sells for gives you the margin". This tends to
confuse value of the marginal product and marginal value of the total product.
So far as the individual entrepreneur is concerned, it is clear that he is interested
not in the value which given factors add to the total product, but in the value
of the additions they make to that product. This differentiates competitive and
monopolist industry, and inelastic demand would mean increased profit is less
valuable than a smaller product, but that does not hinder the individual producer,
i.e. cff. cotton grower, who is interested in what he can get, not the effect of
his growing on the total value of all cotton crops.
1 December 1927 Allyn Young's
In Figure 40 the point where the curve changes from concave to convex to LSE Lectures,
the axis downwards is the point where diminishing productivity sets in. The 1927-29
ordinary definition is when the increment of a factor gives a less than
proportionate return, i.e. ΔP/ΔX< P/X; (P + ΔP)/(X + ΔX)<P/X.
But the objection to this definition is that the point here chosen is partly
dependent on the hypothetical initial stages of the curve. The "marginal"
definition, f"(X) < 0, is necessary for equilibrium discussions. 95
In order to find where your given entrepreneur will stop, it is essential to
find the value of the product. Sooner or later hefindsthe product of an additional
labourer will not sell for enough to cover his wages. If an accurate estimate
is made, the value of the marginal product, that increase in total product
attributable to the marginal employee, will equal the wages of the marginal
employee. The theory therefore assumes free competition; the individual
entrepreneur works as though alterations in his demand for labour will not affect
labour costs, nor will variations in the amount of his products affect its value.
Certain results of the Law of Dimishing Productivity:
(1) It pays to cultivate good land intensively, because labour and capital get
a relatively large product from it.
(2) When land is scarce and labour plentiful, it pays to economise land in
respect to labour. Note Belgium and USA as regards flax growing, cff.
China. Flax grown for seed in the States, where labour relatively dear,
Journal of for linen in Belgium where land scarce. Then the biggest wheat growing
Economic countries have the lowest crops per acre, since land is cheap there, and
Studies wheat requires relatively little labour. Yet land in England, Denmark and
Holland are the best wheat areas. Compare abuse of land in large and
17,3/4 small cities.
(3) "Proportioning of factors" is the best way of expressing theories of
96 international trade. A country where labour is cheap exports labour in
the form of the products of labour; similarly, a country rich in land exports
land products. Others rich in capital export capital products; cff. USA.
Some have quoted the case of USA porters who, giving a lower product, have
a higher wage than English porters. It is important to distinguish between
(average) national wages, and wages of a particular occupation as compared
with wages in the same occupation in another country. The national level of
real wages depends on the marginal productivity of labour or personal services
in general whereas, as regards particular occupations, differences are not due
to "competitive suitability and resources" which affects numbers rather than
wages. This is proved by the fact that the "scale of occupations" tends to be
the same for different countries, especially if we take net advantages and
disadvantages into account.
For general national level the important factor is productivity and efficiency
in respect of the staple exports of international trade. Marginal productivity
of labour in the USA is high, especially in those things entering into international
trade. Just because of this fact, labour gets a high wage in those jobs in which
its marginal product is lower. Because of the relative immobility of labour between
countries, the fact that scales of occupation tend to equalise, "internal"
occupations in the States tend to get relatively higher wages also. In the USA,
however, the best labour tends to go to those occupations where marginal
productivity is high.

Changes in the Supply of Factors

An increased supply of A means an increased total product; and increased wealth
production per unit B,C,D, etc., — i.e. higher marginal product for latter, lower
for A. Labour is more productive where land plus capital equipment is relatively
plentiful. (Larger increment of product in the USA.) If all factors increase
together, a relative increase of product will be for that factor which increases
most slowly; and least increases for that which increases most rapidly.
Where bilateral monopoly conditions exist for labour, the more the product
for which the bargaining unit is responsible the greater its bargaining power,
and the tighter and larger the unit is, the greater the marginal product. This
is complicated however:
(1) Capital productivity will be affected and the economic system requires
the best distribution of resources.
(2) Too high a level of wages may mean unemployment, though not always
at a rate which will be sufficient to remove it.
(Last two paragraphs from Marsh's notes.)
6 December 1927 Allyn Young's
Rent LSE Lectures,
There are two main views: 1927-29
(1) The old doctrine that rent does not enter into price — the Ricardian
view. Because of the pressure of increasing demand, and the increasing
value per unit of product, rents are pushed up. The increasing advantages
which the better lands give, "cause" higher rents. Rent is a result, not 97
a cause of higher prices.
(2) The "opposing" theory stresses that to the individual entrepreneur rent
is as real a cost as any other cost. It deals simply with the entrepreneur's
cost analysis.
(1) takes particular account of long-time tendencies: it attempts to picture the
social as distinct from the individual or competitive aspect (Davenport). After
all, from the social standpoint, rent is not a cost; the payment of rent is a means
whereby land is apportioned between its competing uses. When "rents
increase", ceteris paribus, what changes is the distribution of the national
dividend. Landowners get relatively more, and other factors relatively less.
Rent is (a) a cost, entering into price together with many other factors in
agricultural and industrial products; (b) a price, a distributive (share) category
or part of the pricing process which determines the use of resources. Thus
"rent enters into cost" and "rent does not enter into cost" are both true,
but relate to different aspects or different problems concerned with the data
of costs and prices.
Ricardo was attempting (1) to trace long-run tendencies, (2) take the social
point of view. Rent does not enter into social cost if the latter is viewed as
equal to the using up of resources, and the efforts and sacrifices required by
production.
Then, in many countries of the world, at the present time, agriculture is
suffering from depression, having recovered from the war far more than
commerce or industry and meeting an inelastic demand for its products. Hence
agriculturists have demanded relief so that they can be sure the prices of their
products will cover their costs. But [what] "costs"? (1) The extremely
individualistic character of agriculture means that output depends essentially
on price. (2) What your prices are sets your rents. Rents cannot cause prices;
a land monopoly raising rents would only affect prices in so far as it restricted
the output of agriculture. So the economic case for bounties is weakest in
agriculture. Tariffs would simply mean higher rents from the national point of
view. At the same time, from the national point of view, rents in general do
not affect prices in general.
However, if one's interest is in the relative prices of different agricultural products,
the rent must be included in the costs. (Note: According to Marsh's notes Young
also includes in the "rent as cost" approach (1) consideration of the international
division of labour, (2) "opportunity or displacement costs work so badly as to
displace the production of one commodity for another less valuable".)
Journal of Do the landlords gain at the expense of other members of society? The
Economic Ricardian attitude showed rent as due to the niggardliness of nature. But surely
Studies rent is neither a charge nor a bounty, but purely a distributive problem; cff.
17,3/4 attitude of J.S. Mill and other radicals, especially Henry George. The origin
of the idea of confiscating the unearned increment is not with George, but with
the early English socialists (see Foxwell's introduction to Marx).
98
14 February 1929*
Unearned Income
Viewing the matter sociologically — globalement — it is clear that the rise in
land values due to the general economic development of society is an important
fact. The value of the land in New York City is greater than the value of the
land and buildings west of the Mississippi. So the "unearned increment" is
a real enough thing. The difficulty is in locating it.
(1) Land holding and selling is, on the whole, competitive, so it would be
curious if there were a possibility of making exceptional profits in that trade.
In other words, so long as land is privately owned, the rise in land values is
to the owners just as much an earned income as any other. Fortuitous profits
are on a par with other fortuitous profits obtained in any undertaking. In fact,
in the modern world, the "unearned increment" in shares is more important
(Note: Balfour and Lloyd George in 1909[67]). (The skewness in the distribution
curve is due mainly to (a) inheritance, (b) the fact that in any competitive system
the differences between earning powers are not in the same proportions as
the difference between abilities, (c) and to "increments" in shares, etc.) In
general a man buying land, although there are chance gains and losses, has
to pay a price relatively high to what he would pay for some other factor producing
an immediately equal income. The increment is discounted, and there is
frequently "non-economic" esteem attached to land holding; e.g. it has been
shown that the Astor family's fortune would have been larger, ceteris paribus,
if it had held safe securities, rather than land.
(2) Sometimes, as Marshall[v, xi, 2] emphasises, the rise in land values is
deliberately created, cff. railways, Pullman City. Again, other undertakings would
not be made if the "increment" did not exist (cff. Mr. ? (Washington) Institute
for Economics). Arrangements were made to build large offices. Banks declined
to lend the money required. Mr. ? took the matter over and left it to be
understood that the offices would not be put up. Bought surrounding land from
owners who had that impression. Then, with the certain "profit" from the
rise in the value of the surrounding land, was able to give sufficient security
to borrow the money from the banks. Yet the offices themselves would not
have paid. Was this an "unearned" increment (cff. Lanes Panca's judgement
re the bridge.) Taking the average, the "increment" in land values is probably
as much earned as any other. But there are reasons for upholding the single tax.

* Notes taken in a seminar.

 (1) Private land ownership has had effects on town planning, cff. New York. Allyn Young's
Fashionable (shipping) quarter is steadily being shifted. (Note: also the effects LSE Lectures,
of the "zone system" of transport charges.) 1927-29
(2) Private holding of the increment does not lead to the best distribution,
socially, of the community's resources.

Rent and Interest*

The whole apparent contradiction between the views of Clark, and Wicksteed, 99
who identify rent and interest, and others such as Carver, who claim they are
essentially different, is resolved if one differentiates clearly between the static
and dynamic aspects of any economy. No theory which has received support
for long is ever entirely wrong. "Rival'' theorists are generally both right, except
when denouncing the other. If the static view is taken, and given amounts of
land, capital and labour are assumed to exist, then the return to each factor
can be regarded as a rent. The economic problem then becomes merely that
of organising them, there is no substantial difference between the factors. The
difference only appears in the dynamic view. The existence, or continued
existence, of capital and labour depends upon whether they will pay. Hence
we have "interest" which is needed to call out saving.
But there is no supply-price of landlord. No "saving" is needed to maintain
land; it remains. (Note that it is best to view the use of previously waste land
as the application of capital to land.) Admittedly, from the individual point of
view, one can "invest" in either land or capital. But, socially, investment in
land merely transfers ownership, while capital investment produces capital.
However, once the capital and labour are there along with land, their income
is what they can get; i.e. their share in distribution is according to the value
socially set upon them. When we say "interest" is paid on "capital" it is really
for simplicity in accounting. Interest is properly paid on new additions to capital,
it is the premium on saving. The fact that the rate of interest has never long
fallen below about 2½ per cent suggests that there is a marked "elasticity of
supply" below that point. The reasons for this must be found in the human
makeup. Professor Cassel's "expectation of life" is, so far, one of the best
lines of analysis put forward[68].
Wages we do not consider as rent or interest according to the static or dynamic
view, for two reasons:
(1) The tradition of the supply price of labour. A rise in wages does increase
the supply of labour where different countries, or different industries,
are concerned and mobility exists. Then there is the further Malthusian
doctrine.
(2) Labour is not bought and sold as other factors of production. The income
from labour is peculiar in so far as property rights do not extend to human
beings. Were we dealing with a slave economy, we might well view the
product of slaves less their upkeep as forming a rate of interest which

* Notes in a seminar in 1927.

Journal of called forth a greater or less number of slaves. At any time, we could
Economic regard the price obtainable for the use of slaves as a quasi-rent, (e.g.
Studies in the Southern States of the USA where slaves were imported or bred
17,3/4 according to the value set upon them).
There is no general rate of quasi-rents, any more than there is a general rate
of profits. On the one hand, the quasi-rent of a factor of production may be
100 sufficient to cover the costs necessary to elicit its replacement, [pay?] "interest"
and to show "profits". (Note: the controversy between some at Cambridge
re nature of quasi rents.) Or, on the other hand, its quasi-rent may be almost
nothing.
Summing up, we can see that the producers' net money incomes — that which
is left after essential expenditures — may be used in two ways: (a) spent on
immediate consumption; (b) invested, in order to add to the supply of productive
factors. The rate of interest acts like a gate or "regulator" influencing the
proportion of these two uses. But rent cannot control the process of land
accumulation; there is no such process.
Some writers have suggested that "rent" should be employed to support
further workers working below the "natural" margin. (Landry, Webb, Sankey
Coal Commission). But notice (1) effects on the price of the product; (2) it
assumes there is a reservoir of unemployed; (3) that the transference of all
the resources concerned is the best socially (scarcely true in fact).

Profits
(These notes cover the lectures which have primarily a bearing on profits.
the intervening lectures, monopoly, railways, etc., see above.)

10 February 1928
Forms of Business Organisation[69]
The emphasis has been upon legal history, but we should turn to economic
history. Too much stress has been placed upon the relation between the modern
business company and the old formal corporation. The relation seems to be
due to "companies" being assimilated by already existing half-applicable laws.
Adam Smith, influenced by the experience of his day with the East India
Company and others, did not regard them as suited to business and commercial
enterprise — being unwieldy, lacking in adaptability and efficiency, and suited
to routine work. (cff. sphere of state in views of modern extreme individualists.)
J.S. Mill also thought the balance of advantage lay with smaller units, and the
independent entrepreneur in business. However, companies grew until they
became the dominant form of business organisation in the nineteenth century.
The two factors, historically, in this growth are:
(1) The transferability of shares in an enterprise.
(2) The institution of limited liability.
These advantages were derived from the legal rights of corporations. Yet the
history of corporations shows that the law was not specifically concerned
with these as principles. (Note: Some German companies need not have Allyn Young's
transferable shares.) Ancient corporations were mainly concerned to emphasise LSE Lectures,
their legal personality. Derived from Roman universitas, a "person" was any 1927-29
subject liable to rights and duties; and since there existed a group of duties
it was a "person". They were distinguished by special privilege resulting from
a grant or King's charter. But early chartered companies (guilds, monasteries,
corporate towns, etc.) have little relation to modern companies.
Shares seem to be traceable to Grecian civilisation and, conceivably, to older 101
Mediterranean civilisations. Their primary connection is with "tax-gatherers'
associations'' which existed in the Middle Ages before the trading companies.
Then Italy from the fourteenth century supplies examples of limited liability.
The principle, obviously a necessary commercial system, originated from private
contracts between the active and the financing partners in business, being
gradually recognised by law from the time of the Italian communes. The union
of these two gives us the joint-stock company. Notice that the East India
Company, in its first stages, had neither limited liability nor transferable shares.
The joint stock was the actual merchandise, as was the case with most of the
early trading companies. All companies needed a charter until company law
was established.
The principle of limited liability has two great merits:
(1) It is consistent with a wiser and more economical use of capital than
would otherwise be possible.
(2) It makes it possible for men with moderate resources to participate in
active business enterprise, and to minimise their risks by a proper placing
of funds between different undertakings (cff. investment by labourers
(a) with their employers, (b) with an investment trust).
Contrast with unlimited liability where, if investments were distributed, risks
to the individual investor would be very high. Then shares encourage mobility
of capital, provided their market is large enough. Various classes of shares appeal
to different people. They have democratised investment, encouraging saving.
Further, as the proportion of borrowed capital increases, it means that each
business is forced to stand on its merits. Each must submit to the criticism
of underwriters, syndicates, banks and investors. There is less unwise or lax
management (cff. richer shareholders in non-limited liability companies).
Some have argued that "the company permits and facilitates large aggregations
of capital". But this is post hoc propter hoc. These facilities are not due to the
company qua company form, but due to its advantages such as limited liability.
(cff. development of company finance. Austrian and German commercial banks.)
Actually, many enterprises would prefer to retain old forms other than the
company.
What difference then, does the company form of organisation make to the
rubrics of classical theory? Who is the entrepreneur in the joint-stock company?
The "capitalist" is divided among all the creditors and shareholders of various
grades from the debenture holders downward. But the ownership and the
management of capital resources is largely separated. It is difficult to test for
Journal of the entrepreneur by the risk assumption or by a share in the profits. All
Economic connected with the company have pinned part of their fortunes, by contracts
Studies of various kinds, to the enterprise, and many share in the profits. The usual
17,3/4 answer to the question, "who is the entrepreneur?", is "the owners of the
common shares", it being doubtful if the preference or debenture holders are
equally exposed to risk. But how about the company promoters? Are risk-taking,
planning and responsibility, qualities of entrepreneurship? And how allocate these
102 qualities? One may say
(1) Shareholders with votes may be regarded as the ultimate entrepreneurs,
since they have to make some decisions, and to elect directors.
(2) In other cases: "management" groups. The president, the more active
directors, some large stockholders, and legal and financial advisers.
(3) "One-man corporations" are possible in practice because one man may
hold the majority of shares in a number of concerns. Here the theoretical
division of responsibility and function is a legal fiction. He has increased
power coupled with freedom from risk of capital and detailed
superintendence.
(4) The company promoter. The group most responsible for the direction
resources take, and for pioneering. They leave leadership of administration
to others as soon as the venture is started.
Companies have been regarded, legally, upon the analogy of a political
community, with its conflicting rights of the majority and minority. In this view
citizens are the same as shareholders, parliament is represented by the board,
elected by shareholders, which functions through officials — i.e. the
administration — which ensures orderly procedure, etc. (Note: Early companies
were political bodies in fact, exercising sovereignty in the name of the King.)
But this assumes that every investor is well-informed as to the current affairs
of the company, has adequate control, and uses it wisely. Actually,
(1) Choice of citizenship in these little industrial republics is limited only
by your means (so the above analogy is incomplete). The investor has
interests in a number of companies, and judges from prospectuses, and
imitation or advice of others.
(2) Interference is rare, and often ill-advised. You cannot interest yourself
actively in all undertakings but only in their dividends, which may not
be good either for the company or the community (an example of this
is Dodge cars where debentures were sold for more than their capital
cost (Whibley); i.e the investors were concerned with dividends rather
than reserves and the long-run prosperity of the firm).
(3) The investors are inadequately protected from a concentration of individual
power in a few hands without corresponding responsibilities.
The greatest need for reform is in this direction. Some have suggested a return
to "one shareholder, one vote". But probably it is best:
 (1) To recognise the shareholder as an investor or rather as an entrepreneur. Allyn Young's
In practice, he plays a passive role with only incidental risk. LSE Lectures,
(2) Enforce directors with power to be reckoned as trustees or quasi-public 1927-29
officials, responsible to those who entrust them with the administration
of their interests. This would need legal enforcement, as it would not
be undertaken voluntarily.
The problem is one of the evils due to the survival of the eighteenth century 103
conception of economic organisation rather than to large units. Reform might
retard experiment and general progress, but it would secure more stability and
a greatly improved distribution of wealth.

25 February 1928
Risk
The opinion that sufficient knowledge would eliminate risk involves, at least,
a dogmatic regarding the nature of things. Cournot speaks of chance as a "real
thing", but the economic view takes risk as a function of ignorance not of
"chance"; it involves no metaphysical theories as to the nature of "chance".

Insurance and Gambling

Insurance is sometimes said to be founded on probability, actually, not on pure
theory, but on the reliability of averages obtained inductively and the setting
of chances against one another; or having a sufficient aggregate to enable the
calculation of a secure premium. Others say it is a government wager, or a
wager between persons and a company. But the distinction is, properly, that
in gambling the risk is created by the gambler, net social loss is involved,
(diminishing utility analysis) and betting does not determine the outcome of
the event. It is purely artificial risk creation and risk bearing. Whereas insurance
is like gambling only in one way — that it does not affect the outcome of the
event (except indirectly through the production of safety devices, etc.) On the
other hand, no risk is created by insurance. The risk is merely transferred from
dependants to the insurance company. There is a net social gain rather than
loss; it substitutes a spreading of small costs over all insurers which, in the
aggregate, is less than the heavy loss otherwise borne by a few.

Speculation
There are two forms of speculation:
(1) Purely gambling — e.g. "involuntary options". Bucket-shop brokering:
money is taken on contract to buy shares, but no shares are bought.
It sets the interest of the broker against that of his customer and
represents a pure gamble. It may also bring about deliberate social harm,
the spreading of false information, bad advice, etc.
(2) Genuine speculation. With this organised speculation are the problems
of the economist mainly concerned.
Journal of Produce markets and the stock exchange deal with commodities and shares
Economic which, by their nature, vary with demand, conditions of production, etc. Whoever
Studies holds the produce, from the grower to the final consumer, is assuming a risk
of change in value due to an inevitably unpredictable situation. The professional
17,3/4 or specialised speculator is therefore here justified, on the grounds that he
has greater experience and knowledge of these things than most people, and
is less likely to make losses as a result, taking profits as his reward and income
104 which enable him to continue in the business. No creation of risk normally follows
from this. Speculation merely determines who shall assume it. This is taken
advantage of by manufacturers and those who wish to "hedge" in the course
of production. English cotton producers hedge by buying cotton and selling yarn
for the future at the same time. American cotton producers prefer to work
without hedging, though probably enabled to do so because less expensive
materials move more closely with prices of yarn. Hedging of this kind is practised
by American millers however. So genuine speculation, therefore:
(1) Affects the outcome of the event.
(2) Leads to probable gains in social welfare.
(3) Does not involve the creation of risk, but rather the assumption of natural
risk (e.g. annual crops, holding of supplies over the year; this is a
necessary risk socially, and is borne by speculators in hope of monetary
gain).
One must distinguish between investment (the outlay of money for a promised
or probable income) and speculation (the outlay of money with the purpose
of profiting by changes in the market value of the purchased thing). That is,
investment is based on gain by holding; speculation on selling. Of course, in
ordinary transactions there is a confusion between the two elements.
Speculation and Price Fluctuations
We will adopt the usual, arbitrary, distinctions made in the analysis of industrial
fluctuations.
(1) Long-time trends. These are not, to any appreciable extent, influenced
by speculation, except for minor secondary effects which tend to eliminate
themselves. These long-run prices depend upon ultimate supply and
demand.
(2) Cyclical fluctuations — i.e. periods of a few years. Probably speculation
operates to accentuate the magnitude of these fluctuations. Rising prices
have a cumulative effect, since market operations increase merely on
account of price rises (e.g. Courtaulds). Profits made on the margins
enable purchases to be increased. Yet it is a questionable assumption
that the fluctuations are greater than if there was no organised speculation.
In produce speculation, however, holders do not look so far forward and
commodities are turned over more rapidly. Capital values are the main
incentive, and this may apply to land — higher capital value after good
crop years.
 (3) Seasonalfluctuations.These are especially marked for agricultural crops, Allyn Young's
and standardised commodities. Here, speculation is most effective in LSE Lectures,
evening out prices and supplies. Otherwise, immediately after harvest, 1927-29
prices would be very low and rise steadily throughout the year. Prior
to professional speculators, a good deal of government intervention was
needed. Statistical investigations show that speculators rather overdo
their work. They must, or ought to get, interest, etc., on money sunk,
but it appears they often do not, and farmers gain. The optimum amount 105
of speculation means (i) a better use of (physical) products, since at too
low a price too much would be consumed for less important uses (yet,
e.g. USA agriculturalists have argued the need for credits to enable them
to carry on their own holding and wheat marketing, claiming that
speculators made too great a profit); (if) a better distribution of
consumption in time.

28 February 1928
Day-to-day Fluctuations
It is difficult to generalise as to whether day-to-day fluctuations are less because
of the existence of speculation. Probably speculation does accentuate fluctuations
of a short-time nature — the process of elimination of seasonal fluctuations
may accentuate daily fluctuations in that transactions exploiting rumours and
"tips" tend to be prolonged. But, of course, there exists in the market the
restraining influence of ultimate demand.
In general, speculation comes midway between insurance and gambling, forcing
act [sic] by a speculator involves both some creation and some elimination of
risk, little scope for pooling by aggregates. It is true that professional speculation
is distinct from true gambling in that the transactions are real, and affect prices.
Only dishonest gambling affects prices, or the outcome of the event concerned.
(Above paragraph from Marsh's notes.)
The Stock Exchange
Marketing of new securities is a minor function of the stock exchange in modern
times. It is generally argued that the stock exchange creates a market where
capital allocates itself into the most profitable channels. But, since the securities
dealt with represent property already existing, how are you investing, as opposed
to transferring your capital into that industry? Now really to define the supply
of capital you must consider the supply and demand for holding capital rights
existing as well as the continuous process of production. A buyer on the stock
exchange increases "willingness to hold securities" by £x which, somewhere
in the system, is released. The mere fact that the securities dealt with are
equities to existing property does not invalidate the statement that the stock
exchange is a mobilising centre (i.e. the stock exchange is "concerned with
the mobilisation of the supply and demand for the holding of capital'' is a better
description of its functions than "concerned with the equating of demand and
supply[of] capital" since capital [is] antecedent to[the] securities representing
it which are dealt with in the exchange).
Journal of The stock exchange supplies an open market where prices are determined.
Economic With the growing democratisation of holdings in company and public funds, it
Studies is essential that the ordinary investor should know that the price at which he
17,3/4 deals is determined by experts. In contrast, cff. the use of inside information
(e.g. Union Pacific Railway 1907). But knowledge that exists is diffused, and
brought to bear on the market situation. The "evils" of the stock exchange
are those of our present system of company finance and organisation.
106 On the stock exchange, as elsewhere, the essential difference between
gambling and speculation is that the latter affects the outcome of the event.
The influences are:
(1) In the long run, prices are more certain, and the range of prices narrowed.
(2) Cyclical fluctuations are exaggerated.
(3) Very short fluctuations are due to (i) ignorance, and temporary
maladjustments (these are reduced by speculation); (ii) speculation itself.
How to strike the balance?[70].
It should be noted that it is difficult to realise profits from artificially manipulated
operations in capital values. One may push prices up, but attempts to sell cause
a drop in prices. Profits on the stock exchange are probably of the same character
as in other business spheres. Large fortunes occur, but others small. Recent
analysis of the books of a number of continuous speculators on the pre-war
New York Exchange showed no profits for any of them. It is probable that the
most shrewd and far-sighted speculators were not continuous operators. The
net position is, probably, that there is no gain in general, or at least the gainers
are fewer than the losers.

Business Profits
Business profits contain both speculative and non-speculative elements. The
shortest expository device is that of the stationary state. In a stationary society,
where population, human tastes and inventions are constant, pure profits would
be non-existent. Ordinary business profits, the supply price of capital and
managerial ability, would remain as a mere matter of supply price. But, under
conditions other than these, there must be a point in the businessman's
calculations where only judgments of probability and the taking of chances is
possible.
Thus, in the actual world, profits arise because society is subject to change
and competition does not work perfectly. There is no complete adjustment as
in the static routine. Thus there is room for persons (1) more able or willing
to see and pursue the most advantageous course, in the sphere of production
or consumption, and (2) willing to initiate change, which will afterwards be
followed by others.
Hence the main sources of profits are:
(1) Incomplete price adjustments at any given time. Where maladjustments,
and differences of opinion, knowledge or price exist, scope for profits
from simultaneous buying and selling, or middleman operations are
 present. In such maladjusted markets profits can be made without risk Allyn Young's
(cff. offers for Young's house in Harvard). For example, brokering or LSE Lectures,
arbitrage, where knowledge is not diffused, or where there is a lack of 1927-29
good connections. This is not generally the most important aspect of
profits, however. Such profits tend to be reduced by a competitive
scramble, and markets tend to adjust themselves. Competition so
operates as to bring down per capita profits.
107
(2) Differences in time as to values, situations, etc. Really speculative profits
come out of time differences, as opposed to arbitrage, or space
differences. "Pure" examples are those of speculation for a fall or rise
in many goods, or in securities. Risk in these cases is of two kinds: (a)
mistaken analysis, (b) concerted buying and selling may cause the
operation to be overdone (cff. (1) above — usually more important than
in (1)).
The work of businessmen and of others performing the entrepreneur function
necessarily involves some elements of both types (1) and (2). Broadly, their
function is to interpret the demand of the consumer, transmit it to the demand
for productive agents, and sell the product from the latter.
The profit-maker takes on the function because he believes he can make
a greater income here than elsewhere (allowing for motives of initiative and
independence). He has to estimate the costs of materials and services relative
to the future; and how differences between them and the prices of the products
will remunerate him for his activities. Elements (1) and (2) are in:
(i) Buying productive agents, etc., advantages from incompletely adjusted
situation, which are usually temporary, but continually recurring.
(ii) Buying and selling is not simultaneous, the sales are usually a lengthy
period afterwards. Marked in the case of manufacturing for stock.
In general, therefore, the risk element is present because at some point there
is a dependence on future estimates made by individuals. In a dynamic society,
there must always be some unforeseeability or occurrences of pure chance —
crops, inventions, etc. For the entrepreneur, the risk is that the gap between
costs and prices may not be what he thought, or in some cases that competition
may work too smoothly; i.e. profits can never be regarded as permanent, even
where great "goodwill" exists.
Risks may be eliminated to the degree that insurance is possible (or at least
the risks transferred) where the entrepreneur so desires. The cost of the
elimination of the risk is then the chance of the profit that might have occurred
had the operation been uninsured. Thus, distinctions between "risk" and
"uncertainty" must not be insisted upon too severely, since:
(1) ' 'Successful risk taking'' may relate to profits from risk not uninsurable
but uninsured.
(2) "Probable expectation" is not relevant only to insurance, but is the basis
of the entrepreneur's activity.
Journal of The "probability" is greater or less according to the amount of knowledge
Economic we have as to events. The more knowledge we have as to events the more
Studies insurable the event, and the greater "certainty" we have of our own judgement.
17,3/4 The entrepreneur has to consider:
(1) Present expenses of production.
(2) Present consumers' demands.
108 (3) Probable future changes in costs and demands.
(4) Probable action of his competitors. Kind of productions, increase or
decrease of output.
(5) Probable activity in industry in general.
(6) World situation, if a large industrial concern — crops, war and peace,
inventions, situation of trade.
What is important from the social point of view is that the knowledge needed
for large-scale operations tends to be not mere knowledge from immediate
experience, but knowledge requiring a general view of the whole economy. What
is needed is not rule of thumb, demanding little continuous judgement, but
planning with all the knowledge that theory, statistics, economics, the state,
etc., can aid in giving. Profits thus are "the reward of enterprise" where this
means taking advantage of maladjustments, taking chances, and acting on
reasoned probabilities where some elements are relatively certain and of others
there is only scant or entirely subjective knowledge.
Pure or Net Profits
Ordinary profits, or the difference between prices and contractual expenses
of production, are not net profits, nor are "business profits" which include
interest and possible rents. The relevant conceptions are:
(1) Normal, minimum, or necessary profits — the sum necessary for the
profit maker to continue in business.
(2) Net or pure profits. The final residue which is the difference between
gross and normal or total income, on the one hand, and, on the other,
all-expenses including normal profits.
For any period, net profits are to be distinguished from "wages of management"
— really the supply price of managerial ability proper — and normal rate of
interest or supply price of capital. Remainder, if any, is "pure profits" as defined
above. It must be there so long as some final decisions and responsibility
(therefore risk) remain undelegated. The type of industrial organisation
determines who has the opportunities of getting them.
Normal profits can only be estimated or imputed. The wages (rent and interest)
an entrepreneur would receive if he sold his personal (and material) services
instead of using them himself. Yet imputation meets with difficulties in the
individual case since the same person prefers independence, even with small
income, and others dislike responsibility even at a larger income. There must
also be variations for different industries.
Average Rate of Profits — Social Cost Allyn Young's
Since profits cannot by nature be homogeneous, there can be no normal rate LSE Lectures,
for all activities and industries. Any such rate must be a statistical average. 1927-29
Statistical estimates are not yet certain, but point to a distribution curve in the
negative direction for realised profits. Doubt as to whether the curve is not
shown in the negative direction for some years, and in positive direction for
other years. [Here Kaldor left a blank space for a (missing) diagram. Ed].
Whatever the normal rate, we have to explain it by facts of the industrial 109
system, and human psychology. One needs to distinguish the subjective and
the actual prospects. The actual facts show a small number of great fortunes
and great losses and a great number of small and "marginal" incomes, and
many losses. Often much more money is lost than gained (cff. gold mining).
But, subjectively, the majority may anticipate great incomes, according to the
optimism of individuals and the branch of activity.
Although, in the short run, profits are determined by prices, and are not
a Cost of production, yet in the long run they should be a cost to society. But
because of their special nature as prizes in a competition, there need not be
"prizes" for all. Socially, it is more important that they should be obtainable
than obtained. If the normal rate is negative it means that, in the aggregate,
profits do not exert a claim on the social dividend, and the entrepreneur function
is performed for nothing. The position may be explained along the lines:
(1) Men are too optimistic. There may be a tendency for men to pay more
for "long shots" than they are worth, and to believe their ability and
foresight to be greater than others'. This would mean a negative rate;
moderate estimates — zero; timidity positive — need for bribes.
(2) The desire to be independent is so important that entrepreneurs receive
and are content to receive less than "minimum" profits.
(3) Profits only possible in a rapidly progressive society. Statistics show
positive balance during periods of boom, though negative skewness in
depression. If the general trend is relatively upward, however, we may
assume ' 'booms'' are of greater weight and pure profits are continuous
in the long run.
(Monopoly profit may be at the expense of society, or only the surplus which
a competitive organisation would have contended for.)

The Derating Bill (Effects on Profits)

Comments by Young in a Seminar, 29 November 1928.
The aggregate burden of taxes remaining the same, the loss from derating may
be taken to fall on the income tax. This must be considered in answering the
question, "What will be the effect of removing rates upon cost of production,
prices and the demand for labour?". We will eliminate difficulties arising from
the elasticity of demand for products (e.g. coal). Then, from the entrepreneur's
point of view, the removal of rates will mean that:
Journal of (1) in respect of property already in use, it will not appear as a stimulus,
Economic except psychologically. His annual surplus over costs will be a little larger;
Studies (2) if the situation is one in which the entrepreneur has in mind improvements
17,3/4 which have been delayed for the lack of capital he may now, with his
extra money, make those expansions.
But the present difficulty in England is not lack of capital. Taking all things
110 together, income tax payers lose as much as capitalists and entrepreneurs gain,
yet since entrepreneurs are the greatest savers, some extra saving will occur.
But this is both unimportant and questionable, certainly not sufficient to offset
the annoyance to people generally.

Notes and References

Notes in square brackets[ ] are by the editor.Therest are from Kaldor's own manuscript. On occasio
the editor and publisher have slightly altered the punctuation, wording and layout of Kaldor's
typescript in order to improve the flow of the text when the notes were too stilted, ungrammatical
or cluttered. But this has been done sparingly. No attempt has been made to impose a particular
interpretation where genuine ambiguity exists, except via explicit editorial notes.
1. See Lujo Brentano[1844-1931, German economist], Origins of Capitalism: cf. Charles Cooley
(1864-1929, American sociologist): cf. "Old ideas come down perpendicularly: new ideas
come in sideways".
2. See Gustav Schmoller or Edgar Furniss.
3. E.g. Cantillon (1740), Essai sur le Commerce.
4. Cf. Young's Presidential Address to Section F of the British Association for the Advancement
of Science, 1928.
5. This is the theory of the second edition of Malthus, T. (1803), Essay on Population, which
refers to cautionary checks as opposed to merely physical checks (referred to in the first
edition) as in China.
6. Schumpeter (1928), ["The Instability of Capitalism", p. 366 n.], Economic Journal.
7. [Kaldor placed a question mark in the margin of his manuscript here. Note, however, that
while the wage rate may fall, the wages bill may rise absolutely and as a share of total
product. Alternatively, with diminishing returns, Mill noted that "the cost of the labourer's
subsistence is therefore increased; and unless the labourer submits to a deterioration
in his condition, profits must fall". Mill, J.S., Principles of Political Economy, Book IV,
ch. IV, para. 4.]
8. Mill, J.S., ibid, Book. IV, ch. IV, "Tendency of Profits to a Minimum".
9. [Hand-written initials, M.A., were added to the typescript. This section may have been
Maurice Allen's own addition. It may be noted that in the fifth edition of R.T. Ely et. al.
(1930) Outlines in Economics, the first 13 chapters of which had been revised by Young,
there is a discussion of the law of diminishing returns in terms of the "law of the proportion
of factors'' in which (ch. 7, p. 121) it is shown that the efficient point is where the marginal,
or "variable", cost equals the average cost, and "the most economical combination is
one in which all the factors are in a stage of diminishing returns".]
10. [Similar ideas on the nature of the trade cycle and price trends are found in "The Trend
of Prices", American Economic Review, March 1923; reprinted in Allyn Young (1927),
Economic Problems New and Old, Houghton Mifflin, Boston.]
11. See Morris, W. (1888), Dream of John Ball.
Allyn Young's
12. See Lenin, Imperialism: The Last Stage of Capitalism. LSE Lectures,
13. [Young makes a similar point in his well known review, "Jevons's 'Theory of Political 1927-29
Economy' ", American Economic Review, September 1912; reprinted in his Economic
Problems, 1927.]
14. [This cryptic paragraph can be understood by reading Young's "Limitations of the Value
Concept", Quarterly Journal of Economics, 1913, reprinted in Economic Problems New
and Old, 1927, especially pp. 198-204. Here Young criticises the view that value is
111
antecedent to price. He explains that this approach may be traced to Adam Smith's interest
in discovering a "real measure of value" (such as in the labour theory), independent of
money prices with their continual fluctuations. Young's criticism is based on the observation
that "exchange values emerge only from the actual process of exchange (and there emerge
as prices)". He concedes that value is a more general concept than price, but price is
a more precise and realistic concept. If we do not know the price of a commodity we
do not know its exchange value. Furthermore, a general equilibrium set of relative exchange
values, or prices, cannot be reached by pure barter. Money is an essential ingredient
in the actual operation of markets, and therefore money prices are a necessary and integral
part of the analysis of Walrasian equilibrium.
Further light is shed on this in Young's articles on "Value" and "Price" in the
Encyclopaedia Britannica. See also the final paragraph of his "Economics" article (ibid.)
where he writes: "The older economists, for example, in their efforts to dig beneath
that surface view of economic life which had so deceived the mercantilists, held that money
was merely a convenient instrument or tool. From their point of view, which remains a
significant point of view, they were right. They also held that money prices were "exchange
values" expressed in terms of money, making value the basic and price the derived
conception, and thus inverting their real relation"(see also Lecture X).]
15. [This sentence is misleading. Contrast Young's Encylopaedia Britannica article on "Wealth'',
where he writes that the "money value of what we may call consumers' real income. . .will
not, in general, be the same as the money value of the annual product'', and it is the
money value of the annual product which "lends itself better to statistical measurement
than consumers' real income does".]
16. [It is clear from his article on "Wealth", ibid., that Young was here referring to the wealth
of the people of a particular country or region (as distinguished from wealth within that
country or region).]
17. [Reprinted in Economic Problems New and Old, 1927.]
18. Wicksteed (1888), The Alphabet of Economic Science; (1894), Co-ordination of the Laws
of Distribution; (1910), Common Sense of Political Economy.
19. See Young, A., "The Measurement of Changes of the General Price Level", Economic
Problems.
20. [Compare Young's article on "Value" in the Encylopaedia Britannica: "So far as there
is, in fact, any systematic relation between quantities of labour and the values of products,
it is a result of the circumstance that labour is apportioned to different tasks only in such
proportion and degree as its different products are valuable".]
21. [Sraffa, P. (1926), "The Laws of Returns under Competitive Conditions", The Economic
Journal, Vol. 36.]
22. [In Figure 5 the ff' is convex, unlike the straight-line ff' schedule in Figure 4. Figure 5
may be compared with the very similar diagram in the Appendix to Young's "Increasing
Returns and Economic Progress"(1928).]
35. [Robbins, L. (1928), "The Representative Firm", Economic Journal, September.] Allyn Young's
36. [Leifmann, R.L. (1915),' 'Monopoly and Competition as the Basis of a Government Trust LSE Lectures,
Policy", Quarterly Journal of Economics.) 1927-29
37. [The McNary-Haugen Bill was enacted in June 1929, and established the Federal Farm
Board, with a view to controlling agricultural production.]
38. [These distinctions, and other issues dealt with later, are discussed in detail in "The
Sherman Act and the New Anti-Trust Legislation", Journal of Political Economy, 1915;
reprinted in Economic Problems New and Old, 1927, pp. 152-97. See especially pp. 166-8.]
113
39. See Young, A. (1927), "New Anti-trust Legislation", ch. IX, Economic Problems.
40. See League of Nations (1927), Memorandum on Cartels, International Economic
Conference, Geneva, May; and Watkins, M. (1927), Industrial Combinations and Public
Policy, Boston.
41. See Bowley (1928), "Bilateral Monopoly", Economic Journal, December.
42. [Probably refers to the Colwyn Committee on National Debt and Taxation (1927). See
Snavely, T.R. (1928), "The Colwyn Committee and the Incidence of Income Tax",
Quarterly Journal of Economics, Vol. 42, pp. 641-68.]
43. Note that the introduction of a constant marginal utility commodity, i.e. money, involves
the assumption that there is just a temporary isolation "bilateral monopoly"; otherwise
marginal utility of one of the commodities could hardly be assumed to remain constant.
[Kaldor's hand-written note.]
44. [These points, which involve criticism of the concept of the "law of indifference'' as applied
to a community, are discussed more fully in Young's review, "Jevons's Theory of Political
Economy", American Economic Review, 1912; reprinted in Economic Problems, 1927. See
especially, pp. 222-7.]
45. cff. Hicks's paper on the indeterminateness of wages. [Handwritten note.]
46. [For further discussion of this and other issues dealt with here, see the chapter on
"Transport Economics" in R.T. Ely, el al., Outlines of Economics.]
47. [Hadley, A.T. (1903), Railway Transportation, Its History and Its Laws, Putnam, New York.]
48. [See Marshall's Principles, Book I, Ch. IX.]
49. League of Nations (1927), Memorandum on Cartels, International Economic Conference,
Geneva, May.
50. [Kaldor has a question mark in the margin here. Probably the point is similar to that made
by Young in his article on "Wages" in the Encyclopaedia Britannica: if the "fund" of
goods available is inadequate to meet the increased demands arising from increased wages
then prices may rise and real wages will rise less than money wages. See also Lecture VIII.]
51. Contrast Ely, Outlines of Economics, second edition, as regards Gibraltar. [This is also
referred to in Knight, F.H. (1921), Risk Uncertainty and Profit, Houghton Mifflin, Boston,
p. 189.]
52. [The reference probably is meant to suggest that in the absence of adequate mobility miners
will continue to be paid relatively poorly despite the disagreeable nature of their work
relative to that of accountants or solicitors, for example.]
53. [See Young's remarks in his article on "Value" in the section on Theories of Value, from
Encyclopaedia Britannica, reprinted on pp. 157-8.]
54. [For further discussion, see Young's "Jevons's Theory of Political Economy", in Economic
Problems, 1927, especially pp. 227-9.]
Journal of 55. [Note: There is no explicit reference in Kaldor's typescript to Lectures XXXI-XXXV, probably
because lecture XXX was the last that Young gave to the 1928-29 class before his death.
Economic The next (numbered) page (p. 95) of the typescript deals with "Industrial Fluctuations"
Studies (Lectures XXXVI-XLV), dated 1927-28, which probably means that these notes came
17,3/4 originally from Maurice Allen. Thereafter there is no further reference to numbered lectures,
but some of them are given dates. These are not always ordered chronologically; rather,
by theme. The section entitled "Some Notes on Distribution" (pp. 127-42), which includes
sections on "Interest", "Marginal Productivity Theory" and "Rent", would appear to
114 cover material that may have comprised Lectures XXXI-XXXV.]
56. Hexter, W.B. (1925), Social Consequences of Business Cycles, which has a preface by Young;
also Thomas, Social Aspects of the Business Cycle,
57. [See Bagehot, W. (1915), Lombard Street, 14th edition, London, especially ch. XII, "Principles
Regulating Reserves", and ch. XIII, "Conclusions", where he refers to his proposals on
bank reserve requirements as "humble palliatives"(p. 315).]
58. [Young reviewed Burgess, W.R. (1928), "The Reserve Banks and the Money Market",
Economica, June, pp. 229-31; see also ' 'The Structure and Policies of the Federal Reserve
System", in The Annalist, 1927; reprinted in Economic Problems, 1927, pp. 77-94.]
59. [Persons, W.M. (1919), Indices of General Business Conditions, Harvard University
Committee on Economic Research, Cambridge.]
60. [See Young, A. (1928), An Analysis of Banking Statistics for the United States, Harvard
University Press, Cambridge.]
61. Then count Locke [1632-1704 ]a regards money; Sir Dudley North [1641-91, Discourses on
Trade, 1691], concerning commerce; and Cantillon [1680-1734].
62. Weber, M., "Roscher und Knies", Gesamnelte Aufsatze zur Wissenschaftslehre.
63. See Sombart (1863-1941); and Skelton, O.D. (1911), Socialism: A Critical Analysis.
64. See Menger, "Right to the Whole Product of Labour", and Foxwell's introduction.
65. [This cryptic paragraph may be clarified by reference to the "Notes in a Seminar 1927 on
Rent and Interest" on pp. 99-100, in which Young distinguishes the static and dynamic aspects
of the economy. In the static view, rents are paid on all factors, since resources are fixed.
But in the dynamic view payments are no longer "rents" if resources are elastic (true
of capital and labour, but not land). Payment of interest is then required both to ensure
the continued existence of capital, and for an expansion of the stock.]
66. Marshall, Principles, mathematical appendix; Flux, A.W. (1904), Economic Principles;
Wicksteed, The Commonsense of Political Economy; Carver, T.N. (1904), Distribution of
Wealth; Clark, (1904), The Distribution of Wealth; Ely, R.T., Outlines of Economics, section
on Distribution; Landry, A. (1904), L'Interêt du Capital; and Edgeworth (1925), "Papers".
67. [The manuscript reads '091 [sic] which is obscure. The reference is probably to Lloyd George's
1909 Budget in which he attempted to introduce a land tax (blocked by the House of Lords).]
68. [Cassel, G. (1903), Nature and Necessity of Interest.]
69. See Prof. Scott, "Joint Stock Companies"; and Prof. Unwin. [References to W.R. Scott
and G. Unwin on this subject can be found in Knight, M.M., Barnes, H.E. and Flugel,
F. (1928), Economic History of Europe, Houghton Mifflin, Boston, which Allyn Young edited.
The book is notable for its focus on the historic role of expanding markets in calling forth
technical innovations and new, more specialised forms of organisation in industry and
commerce.]
70. See Usher, A.P. (1913), History of the Grain Trade with France.
Contributions by Allyn Young to Excerpts from
Encyclopaedia
the Encyclopaedia Britannica, Britannica

1929
115
ECONOMICS
Because economics has to do with the wealth-getting and wealth-using activities
of men, it is often defined as "the science of wealth". This is not a wholly
satisfactory definition, for the special characteristics of economics are determined
not so much by its subject matter as by the particular interests which have
prompted the enquiries of economists and the particular questions which they
have tried to answer. We define economics better, therefore, when we say that
it is a science which is concerned with the communal problems of economic
life. The ordering of the economic affairs of the household and the planning
and management of business undertakings come alike under its purview, but
its interests and problems are not the interests and problems of either household
economy or business enterprise. How men acquire wealth and how they use
it are matters of fundamental importance for economics, but its principal concern
is with the intricate interrelations of various wealth-getting and wealth-using
activities and with the ways in which these activities affect the welfare of the
community. The attention which economics gives to the general or social aspects
of the interplay of economic activities is born of its central interest in the wisdom
or unwisdom of measures which governments take or which conceivably they
might take with a view to regulating, controlling or participating in them or to
directing them into one channel rather than another. The older name, "political
economy", still gives a right impression of the kinds of problems with which
economics is mostly concerned.
Like every science, economics proceeds upon the assumption that there is
some sort of order in the phenomena with which it deals. Just as and because
the economic activities of men are not altogether aimless or directed wholly
by chance, so the economic life of the community, viewed as a whole, is not
sheer confusion, but has a discernible ordered pattern, showing itself in
dependable "laws" or "tendencies" which are discoverable by means of careful
observation and analysis. That there is some measure of regularity and
predictability in economic phenomena is a commonsense assumption, one upon
which men act in the daily conduct of their affairs. But there was only a very
small field for economic science so long as the economic order, in its larger
features, merely reflected the social or political order — so long, that is, as
men's different economic activities and their economic relations were determined
largely by their political status, by the position in the general institutional structure
of society into which they were severally born or which they might be able
to attain. Under such circumstances economic problems appeared in the guise
of juristic and ethical problems. Economic activities were rated good or bad,
not so much by their ultimate effects upon the economic welfare of the
Journal of community as by their consistency with some supposedly rational or "natural"
Economic view of the general structure of society. Thus Aristotle's conclusion that trading
Studies for gain, as contrasted with trading to exchange goods, is "unnatural" was
17,3/4 merely a corollary of his views of the nature and the functions of the family
and the state. In the Middle Ages economic matters were discussed by some
of the patristic writers and later by the schoolmen, but both groups were
concerned almost wholly with the ethics of trade and of money-lending, and
116 their criteria were drawn either from authority or from their own systematic
philosophies.

The New Economic Order and Its Problems

What made the development of a science of economics possible was that
transformation of the economic structure of society which, better than anything
else, marks off the modern period from the mediaeval. This transformation
is referred to, with emphasis upon one or another of its aspects, as the rise
of modern capitalism, or of the competitive system, or of the system of free
business enterprise. The dominating factor in it was the growth of trade,
especially the growth of inter-town and inter-regional trade. With the growth
of trade and the widening of markets the advantages of the division of labour
and of local and regional industrial specialization became more and more
pronounced. With the increasing ramifications of the market men were brought
into a new nexus of relations, more intricate and more impersonal than the
mediaeval system of prescriptive rights and duties, and giving the individual
man more freedom of choice and action than that system had given him. Men
became more dependent upon one another, not in any direct personal way, but
in the sense that with the expansion of markets and the progress of the division
of labour the welfare of each became intricately related to the activities of an
increasing number of others. They came to realise that they had common
economic interests and oppositions of economic interest as well. What were
these interests and how best could the interests of the community or of a
particular group or class within the community, be furthered? Such questions
created problems of public policy for the new national states which the
transformation of economic life had helped to bring into being, and out of the
discussion of such problems the new science of political economy was born.
There was need of such a science, because the mechanism of economic life
had become so intricate that the deeper-reaching as contrasted with the surface
effects of particular economic policies were difficult to discern. The task of
economics was that of finding whatever dependable ordered relations might
lie beneath the baffling complexity of the surface of economic life, so that public
policies might be based upon knowledge and understanding.
Long before there was anything deserving the name of economic science,
however, there was much writing, mostly controversial, as there has been ever
since, about such matters as the monetary, fiscal and commercial policies of
governments. Among the participants in these early controversies were some
of the ablest men of their time — philosophers, public administrators and
successful men of affairs. At one point or another the best of them probed deeply
into the mysteries of the world's economic mechanism and reached conclusions Excerpts from
which the economists of a later day have reaffirmed. For the most part, however, Encyclopaedia
the early writers were too heavily handicapped by the lack of a scientific organon. Britannica
They had no consistent general view of economic processes taken as a whole,
so that their views of particular issues were likely to be partial and short-sighted.
Take for example the writings which had the purpose of expounding or defining
the principles of that general system of governmental economic statecraft known
as "mercantilism", which flourished from the sixteenth century down to the 117
nineteenth and which was exemplified in the restrictive policies of such statesmen
and rulers as Colbert, Burleigh, Cromwell and Frederick the Great. Whether
mercantilistic measures met the immediate needs of the times, whether they
helped or hindered the task of nation-building, are disputed questions; but there
can be no doubt respecting the weakness of the grounds upon which the case
for such measures was commonly supposed to rest. It is not quite true that,
as their critics have often said, the mercantilists held that money alone is wealth;
but as a group they concerned themselves largely with the ways in which a
country might secure and maintain a favourable balance of trade so as to conserve
and increase its stock of money. They identified the economic interests of the
nation with the interests of its merchants and they looked mostly at the
immediate rather than the enduring interests of the mercantile classes
themselves. The things which they thought conducive to national welfare were
those they thought would stimulate trade and increase profits: plentiful supplies
of money, low interest rates and low wages. Some of them appear to have thought
of the nation as though it were itself a great trading firm, profiting from the
excess of its foreign sales over its foreign purchases. Mercantilism, as the reader
may have observed, is even now not wholly dead, but its errors were exposed
long ago.

The Beginnings of Economic Science

Sharply contrasted with the mercantilists' naive confusion of economic welfare
and money profits were the conceptions employed by a small but influential
group or philosophical sect, which flourished in France in the second half of
the eighteenth century. They called themselves les Économistes, but the world
now calls them the Physiocrats. Compared with the tracts of the mercantilists,
who used the language of the world of trade, their writings seem abstract and
doctrinaire. Their principal tenets were erroneous, and the modern economist
finds less that has permanent value in their work as a whole than in that of
some of their predecessors (e.g. Richard Cantillon, whose Essai sur le commerce
was written between 1730 and 1734). But though they saw the processes of
economic life imperfectly, they saw them as a whole. Not the buying and selling
of the marketplace, but the continuing flow of goods through various channels
from producer to consumer, was what they fixed their attention upon. The
welfare of the community, in their view, was measured, not by the profits of
trade, but by the excess of the community's annual product over its cost. In
commerce and manufactures, they thought, there is no net product or surplus,
for those activities add no more to the aggregate product than is required to
Journal of support the people who are engaged in them. But in agriculture more is produced
Economic than is required to support the cultivators, and the surplus, which goes to the
Studies landowners as rent, is the only true net product which the community reaps
17,3/4 from its efforts. Upon this disposable surplus the burden of all public
expenditures, through the shifting of taxes from one producer to another, must
inevitably fall. The Physiocrats were mistaken, for there were inconsistencies
in their ways of measuring product and costs; they are important in the history
118 of thought, not because they gave the right answers, but because they asked
important questions — questions which in themselves were a challenge to the
naive assumptions of mercantilism; and they had a considerable influence upon
thoughtful men of their own day and of the period immediately following. Turgot,
renowned for his courageous but abortive economic and fiscal reforms, fell just
short of discipleship. His work, Reflexions sur la formation et la distribution
des richesses (1766), is an exceedingly able treatise.
In 1776 Adam Smith published An Inquiry into the Nature and the Causes
of the Wealth ofNations, a work in which wisdom, learning and power of analysis
were joined as they are in few books. Sharing the physiocratic prejudices ("in
agriculture nature works with man" — as though she did not work with him
in his every pursuit!) and holding that the interests of business men, as a class,
are more often opposed to the interests of the community than the interests
of landowners are, Adam Smith nevertheless gave the world a new interpretation
of the advantages of trade, a new '-'philosophy of commerce". But he saw in
commerce a means to welfare, not an end, and his book was, in effect, a
formidable tract directed against mercantilism. Money, from the communal point
of view, he held to be merely an instrument, a "wheel of trade". The real source
of a country's wealth, he said is its "annual labour", and its wealth could be
increased only by making its labour more effective and by husbanding and
accumulating the products of labour. The division of labour, i.e. the specialization
of tasks, is the principal factor in its effectiveness, and the degree in which
the division of labour is practicable depends upon the extent of the market.
These were Adam Smith's fundamental principles. He elaborated them with
extraordinary skill, always discussing concrete problems, showing unusual powers
of fresh observation in his selection and use of illustrative material, and passing
large sections of economic history and the whole range of the contemporary
commercial and fiscal problems of Great Britain under survey. Although the
book is the most powerful brief ever formulated for unimpeded trade, neither
hampered nor coddled by governments, its greatest importance is not to be
found in that circumstance, but in the general picture, at once simple and
comprehensive, which it gives of the economic life of a nation. The apparent
chaos of competition, the welter of buying and selling, are resolved or transmuted
into an orderly system of economic co-operation by means of which the
community's wants are supplied and its wealth increased. This general picture
has been in the minds of economists ever since, whatever their opinions with
respect to the efficiency of the competitive system. Despite some sweeping
phrases which invite a different interpretation, Smith's real concern was for
the establishing and maintaining of competitive conditions rather than for a
vigorous observance by governments of a hands-off policy in respect of economic Excerpts from
matters. He was discussing a special set of problems. He was opposed to Encyclopaedia
monopoly, to exclusive combinations, and special privileges of all kinds, quite Britannica
as much as to the type of legislation which aims at fostering a country's
prosperity by restricting its trade. Often styled the "apostle of self-interest",
he took no pains to conceal his dislike for some of the forms in which self-
interest manifests itself in trade and industry. What his attitude would have been
under the later conditions of the nineteenth and twentieth centuries towards 119
the factory acts, social insurance, and measures intended to help onward equality
of competitive opportunities, we cannot tell. But there is very little in these
newer types of legislation which runs counter to his principal contentions or
is inconsistent with his general economic philosophy.

The Older Political Economy

Adam Smith's work had a profound influence, not in Britain alone, but in almost
every part of the Western world. It was probably partly responsible for some
radical changes in the commercial policies of governments, although one cannot
be certain about this, for the current of the times was moving in a direction
favourable to Smith's contentions. Its effect upon scientific thought and upon
the character and quality of public discussions of economic questions.was
unmistakable. Men like J.B. Say in France and K.H. Rau in Germany based
their own work very largely on Smith's and helped to diffuse his influence. Say,
however, was more than a mere popularizer. He had some clear-cut views of
his own, and developed Smith's work in directions other than it took in the
hands of Smith's British successors. In the United States, Say's work came
to be about as widely read as Smith's.
The particular trend which the development of economics took in Great Britain
was determined very largely by the character of the economic problems which
confronted the nation, partly by reason of swiftly progressive changes in its
own industrial structure and partly in consequence of the Napoleonic wars. The
rapid growth of population, the extension of agricultural cultivation and the rise
of land rents, the expansion of industrial activities, the depreciation of the
currency, the variations of prices, of interest rates and of profits, and, after
the wars, the depression in both agriculture and industry, were phenomena
at once conspicuous and important. Some of these developments commanded
the attention of Parliamentary committees; all of them attracted the interest
of thoughtful men. With Adam Smith's impressive picture of the mechanism
of organized economic life in their minds, it was natural that men should think
of such phenomena as interrelated and as susceptible of being explained in some
consistent and comparatively simple way. At any rate, out of the discussions
of the period, out of the pamphlets and the controversial tracts, there emerged
a coherent system of political economy, owing much, of course, to Adam Smith,
but putting stress on matters to which he had given little or no attention, and
emending his views at a number of important points. This newer political
economy was more formal and systematic than Adam Smith's, and was concerned
more largely with abstract general relations, but it dealt with real problems
Journal of and dealt with them in what was intended to be a practical way. There is an
Economic appearance of paradox, but only an appearance, in the circumstance that the
Studies particular type of economics which grew out of attempts to deal intelligently
17,3/4 with the problems of a period of economic storm and stress should be one
which gave particular attention to "normal tendencies" and to the* conditions
of economic equilibrium rather than to the causes of economic maladjustments.
A parallel may be found in the way in which the study of pathology has contributed
120 to men's knowledge of normal physiology.
For convenience the period of which we are now speaking may be taken as
having definitely begun when David Ricardo's Principles of Political Economy
and Taxation was published (1817) and as having culminated with the publication
of John Stuart Mill's Principles of Political Economy (1848). One who compares
the economic tracts and the systematic treatises of that period with the Wealth
of Nations, will be impressed with the increased importance given to a group
of problems which have remained ever since among the principal concerns of
economics, problems now commonly grouped under the head of "the theory
of value and distribution". The theory of value, of course, has to do with the
explanation of why goods exchange at particular ratios, why some goods are
expensive and other goods are cheap. The theory of distribution is really an
extension of the theory of value so as to explain the magnitude of the shares
of the total national product which are secured by those who contribute either
their own services or the use of their property to the communal task of
production. With the problem of personal distribution, the problem, that is,
of why some men are rich and some are poor, economic theory, of the type
which we are now discussing, has not directly concerned itself. Its problem
has been that of the distribution of the product among the so-called factors
of production. These factors and their respective shares were classified as labour
and its wages, capital and its profits, and land and its rent. Later on the conception
of a fourth share, the profits of enterprise, or of the successful direction of
production, was taken over from the French economists, the earnings properly
imputable to capital, as distinct from enterprise and direction, being put down
as interest. But British economists, more than those of other countries, still
continue to speak, in realistic fashion, of "the profits of capital", and there
is no general agreement among economists anywhere that enterprise should
be treated as a separate factor in production, even though the profits of enterprise
be conceded to be a separate distributive share. The three-fold, or four-fold,
classification of factors is in some respects arbitrary. Some economists use a
two-fold classification, treating land as a particular form of capital, while others
hold that a really adequate classification would take account of many different
kinds of capital and of various grades or qualities of labour. The truth is that
the three-fold classification is adequate in the analysis of some problems (the
simple contrast between labour and capital, taken as including land; is all that
is needed to bring certain important problems into clear relief), and inadequate
in the analysis of others. It has been suggested that the three-fold classification
was in its origins merely a reflection of the actual political and social structure
of the society of the day. Be that as it may, the classification still corresponds Excerpts from
very closely to the way in which some of the most important of communal Encyclopaedia
economic problems present themselves. Britannica
An element in the theory of value which, for a long time, was stressed to
the comparative neglect of almost everything else was the tendency for the
exchange values or relative prices of goods produced and sold under competitive
conditions to be equal or at any rate proportionate to the respective costs of
producing them, as a result of the continuous shifting of productive resources 121
from less profitable to more profitable channels. By costs were meant not the
money outlays of employers but "real" or communal sacrifices. At first these
real costs were conceived to be measured by or proportionate to the amounts
of labour required to produce different goods, but later the "abstinence" or
waiting involved in accumulating capital by using resources so as to get a larger
future product instead of using them in providing for immediate wants was held
to be a distinct and separate cost. This innovation was first suggested by N.W.
Senior in 1836. At this point, it may be observed, the economic theory of the
"scientific" socialists, including the predecessors as well as the followers of
Karl Marx, branches off from that of the more orthodox economists, for the
socialists refused to adopt the innovation.
The distribution of the product was held also to be determined in considerable
part by costs. Thus the doctrine that in the long run the standard of living of
the labouring people determined their wages was in effect a cost-of-production
theory of the value or price of labour. This doctrine rested upon the theory
of population generally associated with the name of T.R. Malthus, and particularly
with the revised form which Malthus gave his theory in the second edition (1803)
of his famous Essay on Population. In its revised form the theory was to the
effect, not that population would normally increase faster than the means of
subsistence could be increased, but that it would normally increase at least
as fast as the means of subsistence would permit. For "means of subsistence''
read "standard of living", understanding by that term the general scale or
standard which labourers think must be maintained if a family is to be supported,
and the essential basis of the standard-of-living theory of wages is obvious.
If wages fall below that level, it was thought, the rate of growth of the population
will fall off, the supply of labour will be relatively smaller, and wages will rise.
If wages rise above that same fixed point, the increase of the population will
be quickened (except so far as a better standard of living may become effective)
and wages will fall.
The rent of land, however, was held not to be governed or determined by
the principles of cost. This was because (1) the supply of land is fixed, so that
a rise of rents does not tend to counteract itself by stimulating supply, and
because (2) the prices of agricultural products cover the costs of cultivation
on lands which, prices and wages being what they are, are barely worth using,
and hence yield no rent. Rent, from the communal point of view, was held to
be neither determined by cost nor itself a determining element in the prices
of commodities, but to be a surplus arising from the circumstance that the value
of the produce of the better lands is more than enough to pay the cost of
Journal of cultivating them. Closely connected with the doctrine of rent — although in
Economic point of historical fact preceding it instead of deriving from it — was the law
Studies of diminishing returns. With the growth of population and the extension of
17,3/4 cultivation, the theory ran, resort must be had to poorer lands, or lands already
in use must be cultivated more intensively, or more probably both things must
occur. In any case the increase of product would not be proportionate to the
increase of the amount of labour required. In manufactures, it was thought,
122 increasing returns were normally operative, because a larger population, with
a larger demand for goods, affords larger opportunities for the economies of
the division of labour, and for the inventions and the applications of the fruits
of scientific progress to industry which the division of labour facilitates.
Agriculture, too, benefits by technical progress, but here the possibility of
improvements in methods were thought to be somewhat smaller and to be more
than counterbalanced by the increasingly disadvantageous proportioning of labour
and land which comes as an inevitable result of the growth of population. Some
of the older economists, including both Ricardo and Mill, went so far as to hold,
in what is perhaps the most vulnerable part of their analysis, that with the
increase of the amounts of labour required to produce the labourer's own
subsistence, coupled with advance of land rents, the profits of capital must
decline. This would dampen men's desire to accumulate capital, and finally the
growth of population and of wealth would come' to an end. In the law of
diminishing returns, taken as a statement of a tendency there was nothing
fallacious. Taken as a prophecy, however, it was, or has been thus far, mistaken.
The possibilities of improvements in agricultural techniques were under-
estimated, and the rapid extension of the cultivation of new lands of good quality,
brought nearer to the world's industrial centres by cheap transport, was
unforeseen.
It was recognised, of course, that at any given time the prices of goods and
of productive services might be considerably out of line with the norms
established by long-run tendencies. But these deviations were held to be self-
correcting and for the most part the older economists were content to attribute
them to ' 'variations of supply and demand''. In some instances, however, they
pushed their analysis of the factors which control the temporary state of the
market a little further. Thus, for the time being, the supply of labour is
determined by the present numbers of the working population. The demand
for labour was held to be determined, not by the demand of final consumers
for the products of labour, but (since most labour has to be paid for and the
labourers supported before their products are ready for the market) by the
amount of capital that can be devoted to the making of "advances" to labour.
This was the famous wages-fund doctrine. It was found to be so misleading,
however, that it has been pretty generally abandoned, the elements of truth
which it contained being taken account of in other ways. Again, the equally
famous doctrine (which has withstood criticism better) that the value or
purchasing power of money at any given time depends, other things being equal,
upon its quantity as compared with the volume of production and trade, may
be regarded as a supply-and-demand theory of money. It was supplemented
by the doctrine that the "normal" value of money, i.e. its value in the long
run, is determined, when gold or silver is the monetary standard, by the marginal Excerpts from
costs of mining; that is, by the costs of producing that portion of the supply Encyclopaedia
which would not be produced if the metal were a little less valuable. Similarly, Britannica
and quite naturally, short-lived fluctuations of the rate of interest were ascribed
to temporary changes in the supply of and demand for loanable funds.
It would be an error, however, to think of these earlier economists as altogether
preoccupied with theories of value and distribution, and it would also be an
error to fail to recognise that their interest in those theories was born of their 123
interest in practical problems. In general, moreover, they were not such
uncompromising opponents of any sort of interference by the government in
industry as some of their critics and some of the lesser writers who pretended
to expound their views might lead one to think. Their attitude towards legislation
intended to improve the condition of the working classes was sometimes sceptical
but rarely hostile.
The Critics
Before reviewing the later progress of economics it will be helpful to look at
the principal types of criticism which have been directed against the older political
economy and which are still maintained as against some of the newer
developments of economics. In the first place, romanticists like Adam Müller
and John Ruskin and their followers disliked the new modern economic
mechanism, into the workings of which the economists were trying to probe,
and they also disliked the economists' conception of communal welfare, which,
one might say, involves no challenge of the particular conception of individual
economic welfare which prevails in a competitive society, but merely substitutes
the point of view of the community for that of the individual. They preferred
an ordered society with economic subordinated to religious, moral or aesthetic
values — such as some of them thought was implied, even if not fully realized,
in the social structure of the later Middle Ages. Work, some of them insist,
is not merely a means to an end, particularly when the end is what is commonly
called wealth, for good work is worth doing for its own sake and for its effect
upon the character of the worker. What the romanticists offer is a moral or
aesthetic creed, not a science. They do not impugn the fitness of economics
to serve as an instrument of attack upon its own problems, but they belittle
its problems.
Another group of writers, for whom there is no better general descriptive
name than "the critical school", come much closer to meeting the economists
of the orthodox line upon their own grounds. One of the earliest and easily
the most influential of them was Sismonde de Sismondi (Nouveaux principes
d'économie politique, published in 1817, and other works). Other able writers,
often without any conscious discipleship, have taken a position much like
Sismondi's. These critics urge that insufficient attention is given to the defects
of the existing economic mechanism, even if it be viewed merely as a means
of providing for the material needs of the community. They suggest that the
economists, in their contemplation of such things as "long-run" or "normal"
tendencies, the advantages of the division of labour, and the seeming perfections
Journal of of the automatic processes by means of which the things men do in the pursuit
Economic of their own economic interests become knit together into a vast scheme of
Studies communal economic co-operation, forget how often the mechanism breaks down
17,3/4 and the "normal" progress of the community's economic life is interrupted
by a crisis; how unemployment, partly chronic and partly epidemic, is a persisting
disease of the present economic order; how unequally the aggregate product
is distributed among the members of the community; and how many of the
124 things which men do in pursuit of their own economic advantage are, in point
of fact, inimical to the economic interests of the community. As some
contemporary critics put the matter, men today are interested first of all in making
money, and only incidentally in making goods. To look at the activities of a
competitive, acquisitive, society as though such activities constituted, in their
entirety, a communal process of wealth production, requires, it is urged, rather
more rationalizing and sophisticating of the facts than the orthodox economists
and their followers realized. Such criticisms undoubtedly go too far. They give
an incorrect impression of the place of the more abstract parts of the older
economics in the general view of the community's economic activities which
one finds in the works of the economists. No economist of the first rank has
ever been a devotee of the "economic harmonies". The critical school,
nevertheless, has had a wholesome influence upon the progress of the science.
This school, it may be observed, occupies a position midway between that of
the economists of the more orthodox line and that of the socialists who denounce
the parts of economics that are inconsistent with their tenets as being merely
an apologetic for and a product of the existing economic order.
Another angle of attack was adopted by the "historical school" — using that
term broadly so as to include critics who might easily be put into several different
groups. This school has had and still has adherents in all countries, but it has
been especially influential in Germany. The most important of the early
exponents of its views were Friedrich List (Nationales System der politischen
Oekonomie, 1841) and Wilhelm Roscher (Grundlagen der Nationaloekonomie
1854, and other works). The structure of a nation's economic life, said these
critics, is a "historical category", something peculiar to a given nation at a given
time, a product of its past, and to be understood, therefore, only by the study
of that past. The wisdom of particular economic policies is relative to place
and time, and the general or supposedly universal "laws" of abstract economics
need to be supplemented by or even subordinated to an analysis of the concrete
facts of each nation's economic growth. If they had gone no further these critics
would have found many to agree with them. But the founders of the school
(Karl Knies, whose work, Die politische Oekonomie vom Standpunkte der
geschichtlichen Methode, appeared in 1853, is a notable exception) made of what
they called the historical method something peculiarly arbitrary and doctrinaire.
Instead of looking to history for the particular antecedents of those concrete
differences of economic structure in which they professed to be interested,
they proposed to derive from history universal and binding laws, akin to the
laws of the physical sciences. In naming certain stages of economic development
through which they thought every nation must pass they were really elaborating
suggestions which they got, not from historical research, but from the Greeks. Excerpts from
Like some of their followers, they regarded the forms which economic life has Encyclopaedia
taken in the past as inevitable products of historical forces, while at the same Britannica
time they contended for a rather heavy-handed control of economic activities
by the state. The French and British economists had looked upon the way in
which the economic life of the community is organized as being shaped and
determined by the interplay of the activities and interests of individual men,
and they had treated the state as though it were an instrument of men's 125
purposes, a utilitarian device. The spokesman of the historical school, on the
other hand, strongly influenced by Hegel, ascribed a prior and independent
value to the state, and looked upon the economic activities of individuals as
though moving in grooves determined by the general structure of society and
expressing at the same time the controlling purposes of the state. Despite the
extremes to which they pushed their contentions, the historical economists
gave a needed emphasis to what may be called the institutional as contrasted
with the free or contractual aspects of economic activities. Their work, and
that of their successors, has made economists more mindful of the way in which
institutions are the masters as well as the servants of men, and less ready to
assume that the particular economic order with which their analysis is mostly
concerned is inevitably permanent or final. The historical economists also gave
a needed impetus to the study of economic history — a most valuable
complement to the study of economic theory. With the growth of careful and
painstaking historical research the old dogmatism of the historical economists
has pretty generally given way to a realization of the variety and complexity
of the fabric of economic history, and the new schools of historical economics
under the leadership of such scholars as Gustav Schmoller in Germany and
George Unwin in Great Britain (to name only men who are no longer living)
are, as they should be, schools of historical research.

The Methods of Economics

Not only its critics but also some of its expounders have held that economics
(i.e. analytical economics, allied in its methods and its aim, even if not in all
of its findings, to the older political economy) is essentially abstract and deductive,
proceeding from the premise that men's activities are prompted mostly by self-
interest, and that it posits an "economic man", whose behaviour under given
circumstances is completely rational or predictable. Economics is indeed abstract,
as any science must be, but it has never been in any real sense deductive or
a priori, and the "economic man" will be found upon scrutiny to be a fairly
complex sort of person, whose behaviour is taken to be strictly self-regarding
only in respect of certain aspects of the relationships into which he enters as
buyer or seller, borrower or lender. In fact it might be urged plausibly that the
older political economy, of which the Malthusian theory of population was an
integral part, erred by underestimating the part which the rational prevision
and weighing of economic consequences plays in human conduct. When we
say that economics is abstract, we mean merely that economists do not pretend
to take account of all of the factors which, in their entirety, might be supposed
Journal of to account completely for every happening and every outcome in economic life.
Economic Their principal interest is in uncovering factors and relationships which are so
Studies general and important that the community cannot afford to remain in ignorance
17,3/4 of them.
Economics makes use of two general classes of data: (1) observed facts
respecting the behaviour of men in their various economic activities and
relationships, including all classes of activities that have economic consequences;
126 (2) such economic phenomena or events as movements of population, production,
trade, incomes, prices, wages, profits, interest rates, etc. The most trustworthy
evidence respecting the characteristics of human behaviour is often supplied
by its results, and so the second class of data has often been drawn upon for
knowledge respecting the first class. In the actual processes of constructive
thought men doubtless pass forward and backward from one sort of knowledge
to the other. The earlier economists, however, presented their findings in such
a manner as to show that the known phenomena of the second class could be
explained by (i.e. were consistent with) the known facts of the first class —
the known characteristics of human behaviour. This circumstance undoubtedly
accounts for the mistaken impression that they "deduced" their findings,
including the second class of facts, from the first. What they really did, of course,
was to examine such experience as was at hand and seemed relevant to their
problems, with a view to discerning the systematic relationships which ran
through it and to explaining the more puzzling or apparently more complicated
happenings in terms of their relationships to what was familiar or more easily
understood.
The growing accumulations of precise numerical information covering a wide
variety of economic facts, coupled with the advance of statistical technique,
bids fair to accomplish a notable change in the character and content of
economics. More and more it is found that records of measurable economic
phenomena, carefully interpreted, may be used to provide a basis for more
reliable and in some respects more sensitive accounts of the economic activities
of the community than can possibly be derived from even the most careful
observation of how individual men conduct their affairs. The economic science
of the immediate future, it is safe to say, will give a relatively larger place to
the study of the movements of averages and aggregates. It should not be
supposed, however, that this means that economics will be or can be altogether
statistical — a new kind of "political arithmetic". Every average or aggregate
is in some measure unique, the resultant of the play of a particular combination
of circumstances, such as may never be encountered again. In order that we
may know just how dependable and how significant the variations of these
statistical magnitudes are, we need to analyse them so that we can explain them.
That is, we need to weave them into the general texture of our knowledge,
so as to relate them to other things which we know. In short, although economics
is beginning to utilize new materials effectively, and although some of these
new materials call for the use of a new technique, it cannot change its general
logical method, for outside the field of the experimental sciences there is no
other method of getting useful and reliable knowledge.
The Progress of Economic Theory Excerpts from
"Economic theory" is the rather misleading name now commonly given to Encyclopaedia
the more general and abstract parts of economics. These more general parts Britannica
are no less practical than what is sometimes called ' 'applied economics'', but
the problems with which they have to do are less immediate and particular.
The general problems of value and distribution, referred to above, have continued
to hold a place among the central concerns of economic theory, but there has
been a notable change in the general character of the analyses. The older 127
economists, as we have seen, had a special interest in the long-run relations
between value and costs and, save in a few notable instances, were content
to dispose of the other factors governing the variations of prices and values
by invoking the formula of supply and demand. One of the tasks which a newer
generation of economists set for themselves was the careful examination of
the mechanism of supply and demand, with special emphasis on what had been
the relatively neglected factor of demand. One of the most important steps
in the new analysis was taken independently but almost simultaneously (towards
the end of the third quarter of the nineteenth century) by W.S. Jevons (England),
Carl Menger (Austria) and Leon Walras (France and Switzerland), although it
came to be known later that they had been anticipated by some earlier but
forgotten writers. Adam Smith, in a famous passage, had contrasted "value
in use" (high for water and relatively low for diamonds) with "value in exchange"
(high for diamonds and low for water). The new analysis found a definite relation
between value in use (or "utility") and exchange value. The point was that
neither use value nor exchange value is an attribute of things conceived generally
or abstractly, but only of specific units or increments. Water, for example, has
a variety of different uses, and its exchange value at a particular time and place
is directly related to the importance of its marginal uses, i.e. the uses which
would have to be foregone if the supply of water were just a little smaller. Under
conditions of scarcity the value of water might be exceedingly high, but only
because its marginal uses were exceedingly important. In this way many an
ingenious theory of value was built up by the economists whom we have named
and their followers in Europe and America. Some of these writers also took
another and more doubtful step. Having explained values by relating them to
the choices and preferences of consumers, they pictured the economic behaviour
of men, including the choices which they make as consumers, as governed by
the aim of maximizing pleasure and avoiding pain, so that the fullest possible
satisfaction of consumers' wants was held to yield "maximum happiness". This,
it is now pretty generally agreed, is dubious psychology.
Starting with this new way of explaining the values of the goods and services
which consumers buy and use, a new type of explanation of the distribution
of the aggregate product among the various productive factors was developed.
The central point in this new analysis was the thesis that the value of productive
agents, including labour, capital and land, is derived from or, we might say, reflects
the value which consumers attach to the final products of such agents. The
problem of distribution, viewed from this particular angle, is the problem of
discovering the general relations between the values of the final products of
Journal of trade and industry and the values of the productive agents. If the demand of
Economic consumers for finished products could be construed to be a demand for definite
Studies quantities of land, labour and instruments, combined in fixed proportions, the
17,3/4 problem would be relatively simple. But because, in fact, goods can be produced
in different ways, and because, within limits, one factor can be substituted for
another (as a given amount of agricultural produce can be grown by using more
labour and less land or more land and less labour, or as simple and direct or
128 highly roundabout methods, requiring small or large amounts of capital, may
be used in industry) the problem is really exceedingly complex.
One general principle which has been found to help towards clarifying the
problem is nothing more than an extension or generalization of a principle which
the older economists had taken account of in their doctrine, previously noted,
that the expansion of agricultural production is attended by diminishing returns.
It came to be seen that if it is true that the amount of product dependent upon
the efforts of any one labourer or any one day's labour becomes smaller when
the amount of labour "applied" to or combined with a given amount of land
is increased, it must also be true that the amount of product dependent upon
the use of any one particular acre of land becomes smaller when the available
supply of land of equal quality and accessibility is increased more rapidly than
the supply of labour. Similarly, the larger the supply of capital as compared
with the supply of labour and land, the smaller is the amount by which the
product would be decreased if any one unit of capital were not available. How
much of the aggregate product will have to be assigned to any one labourer
or to the owner of a certain productive instrument or a certain piece of land
will be determined, if competition is free and frictionless, by the extent to which
the product really depends upon the work of that particular labourer or the
use of that particular productive agent. The individual labourer, for example,
counts for more, and indeed produces more, when there is a plentiful supply
of productive agents other than labour. He produces less — for less depends
upon his own efforts — when labour is relatively plentiful and other productive
agents relatively scarce. What he earns will depend, of course, upon the value
of what he produces, and his real wages — what he is able to buy — will depend
as well upon the values of other products. But — assuming again that competition
is unimpeded and frictionless — labour, like capital and land, will move or be
moved away from employments where the value of its product is relatively small,
and will move or be moved into employments where the value of its product
is relatively large. There is thus a tendency — effective in a measure, though
never working itself out completely — towards an equality of the values of the
products attributable in different employments to labourers of comparable
efficiency and to other productive agents of comparable kinds. The significant
outcome of this newer analysis is not the doctrine that everyone who contributes
to the communal product tends to get as his allotted share an amount equal
to "what he produces". It must be remembered that differences in respect
of training and of opportunity still affect men's productive capacities; that
institutions, such as inheritance, help to determine how the products imputed
to capital and land shall be distributed; that the swift process of industrial change
often robs men of the advantages of acquired skill; that impediments of one Excerpts from
kind or another often prevent men from transferring their labour to employments Encyclopaedia
in which its product would have a higher value; that capital once fixed or invested Britannica
in permanent forms is generally irretrievably committed to the fortunes of a
particular type of enterprise, whatever those fortunes may prove to be. No,
the doctrine that "rewards tend to be proportionate to products", taken by
itself, has no particular significance, except as a corrective to the even more
misleading notion that rewards are in no manner related to or dependent upon 129
productivity. The real significance of this new way of sketching the outlines
of the problem of distribution is that it brings clearly into view the general form,
at least, of some very important relations between production and distribution
and between one distributive share and another. Relations such as these have
to be kept in mind when analysing the probable repercussions of almost any
projected scheme for economic betterment.
Any short summary is bound to make economic theories appear thinner and
more remote from the concrete facts of economic life than they are. The
structure of abstract general relations which constitutes the framework of modem
economic theory has been built up, not like pure geometry, by a wholly
intellectual process, but by a patient and persistent scrutiny of the complicated
facts of economic life. In what is generally called "mathematical economics",
however, one finds a comparatively high degree of abstraction. The one great
advantage of the use of mathematics in economics is that in that way alone
is it possible to depict the variety, the complexity and most of all the
interdependence of the factors which determine prices, costs, supply, demand
and distributive shares. Elaborate mathematical formulations of the conditions
of "general economic equilibrium" have been devised, notably by Léon Walras
(Elements d'économie politique pure, 1874, and later editions) and Vilfredo Pareto
(Manuel d'économie politique, 1909, and other works). The principal value of
these elaborate and highly abstract systems is that they put the enquirer on
his guard against over-simplifying his problems, as for example, by forgetting
that a change of almost any economic variable has its indirect as well as its
direct effects. Other writers, notably Alfred Marshall (Principles of Economics,
1890, and later editions) have shown that it is possible to put a proper emphasis
upon the interdependence of economic phenomena while yet examining more
closely and realistically the operations of the different parts of the economic
mechanism, and while taking account of factors which make for change as well
as of factors which make for stability.
Among the economic phenomena to which a largely increased amount of
attention has been given are interest and profits. In connection with interest,
two different though related types of questions present themselves. First, is
interest a necessary or in any sense an "earned" income? For what sort of
productive service or sacrifice is it a payment? Is there any perceptible relation
between the amount of the payment and the amount of service or sacrifice?
Second, what factors govern the fluctuations of interest rates, and what
determines their general level or their movements, upward or downward through
longer periods of time? The first of these two types of problems was brought
Journal of into prominence by the attacks of the socialists upon the private receipt of income
Economic from capital. Profits, as the term is used in the world of affairs, are generally
Studies a mixed form of income, containing elements of interest and sometimes of wages
(as for superintendence or managerial direction) along with a special element
17,3/4 (which may be positive or negative) of what the economist calls "pure profits".
The distinguishing characteristic of profits is that they are not paid in accordance
with any contract or agreement, but are contingent upon the success of particular
130 undertakings. Pure profits are what is left after allowance is made for the interest
and wages which would have to be paid for capital and management upon a
contractual instead of a contingent basis. Pure profits, therefore, are determined
by all of the factors which make for the success of an undertaking, such as
foresight, fortune, quickness to see opportunities for gain and to take advantage
of them. In a completely stationary and unchanging economic order, it is pretty
generally agreed, the advantages of different employments of capital and of
managerial ability would be so completely equalized by competition that there
could be no pure profits.

The Problems of Modern Economics

The more general and abstract parts of economics cannot be taken to be
completely true and adequate accounts of the mechanism of modern economic
life. They are at best serviceable approximations to partial, though important,
aspects of truth. There are other true generalizations which might be made.
Some of these are obvious but unimportant; others, doubtless, are important,
but require further scrutiny of the facts or a more penetrating insight to bring
them to light. But even in their present imperfect and incomplete state the
generalizations which the economist has at his hand constitute an organon of
proved effectiveness, an instrument by means of which some of the results
of economic changes, whether planned or not planned, may often be predicted
with a fair degree of certainty. The practical problems of communal economic
life are many and various. At any given time they appear to fall into a number
of fairly well defined groups or classes, but as new problems challenge attention
and new interests emerge, new groups appear and some of the old problems
fall into new relations. Each group or class of problems has its special literature,
and each engages the attention of a corps of specialists.
Among the classical problems of economics are such subjects as the
mechanism of money and credit and its proper management, the incidence and
the effects of various kinds of taxation, the nature of international trade and
the economic consequences of protective tariffs and other devices for controlling
it. In none of these fields is the ground completely explored or all of the issues
definitely settled. But in eachfieldimportantfindingshave been reached which
appear to have permanent value. The outcome of the various fiscal and monetary
measures to which governments resorted during the World War, and the results
of the various restrictions imposed at that time upon trade and industry were
in general just about what competent economists predicted they would be. Post-
war experience, too, in respect of such problems as reparations and monetary
stabilization, were such as to give new confirmation of some long-established
economic principles.
 The general form which economics took at first was determined very largely Excerpts from
by its preoccupation with certain special types of problems, notably problems Encyclopaedia
of national commercial policy. But as new types of economic problems have Britannica
forced themselves upon the attention of the community, economics has had
to deal with them, and in the process not only its scope, but its general pattern
has inevitably been altered. The way in which a new group of "labour problems"
has emerged from the labour movement of the nineteenth century is a case
in point. Up to the last quarter of that century there was very little careful 131
analysis of those problems, apart from discussions of the general theory of
wages. Now, however, there is hardly a field of economic enquiry which is more
thoroughly cultivated. The trades union movement and its significance, the
possible gains of collective bargaining, the length of the working day, factory
legislation, profit-sharing, the organization of control within the factory and its
administration, labour turnover, the minimum wage, the prevention and
settlement of industrial disputes, compulsory arbitration, the causes and possible
cures of unemployment and social insurance in its various forms are subjects
which suggest the increasing range of this new field of economic interest. It
is important to observe that the attention now given to these subjects marks
a change of interest rather than a change of attitude. The earlier economists,
interested as they were in the exploding of popular fallacies with respect to
the ways in which the prosperity of the community can best be secured and
(with that end largely in view) in showing how the economic activities of
individuals are so interrelated that they constitute, in their entirety, a great
communal economic mechanism, often give the impression — an impression
which careful study of the writings of the ablest of them will dispel — that they
regarded that mechanism as self-sufficient, needing neither interference nor
any sort of direction on the part of the community. They concerned themselves
more with what governments could not do than with what they could wisely
attempt. Modern economics strikes a different note. Its tone is less negative;
it is more insistent in its search for and scrutiny of possible ways of altering
the organization of the community's economic life for the better. Almost every
gain has its cost, and accordingly almost every such problem resolves itself
into a question of a balance of advantage. The advantages and disadvantages
are hardly ever purely economic, and no purely "scientific" analysis, therefore,
can completely dispose of such questions. The economist, however, may be
able to gauge the general character of the probable effects of a specific change
upon the production of wealth or its distribution, so that the wisdom of proposed
changes can be discussed upon the basis of some knowledge of their probable
consequences.
Questions associated with monopoly — its roots, its various types, its effects,
its possible advantages in some circumstances, the ways in which it may be
controlled — are matters with which economics have long been concerned.
Economists have learned, for one thing, to distinguish between the types of
monopolies which are inevitable, and have to be recognized and treated as such,
and the types of monopolies which might be prevented or suppressed, in so
far as the maintenance of competitive conditions in fields where competition
is feasible is held to be a sound public policy. Changing methods of business
Journal of organization and particularly the rise of the limited liability company have created
Economic new problems for economics. On the one hand there is a new opportunity for
Studies large numbers of people, not merely to put their savings out at interest, but
to participate in the profits (and losses) of large undertakings. On the other
17,3/4 hand, along with this larger diffusion of industrial ownership, there are new
opportunities for the concentration of industrial control. This situation gives
rise to new communal problems, and these, in turn, create new fields for
132 economic enquiries. The general theory of economic equilibrium, which includes
an analysis of how exchange values and distributive shares "tend" to be
determined under the operation of the forces which make for a general balancing
of supply and demand, retains its importance in economics. But in recent years
economists have come to give increased attention to the factors which make
for economic change and to the persistence of maladjustments in the mechanism
of production and trade. The recurring phenomena known as industrial
fluctuations or business cycles, with their attendant costs and wastes, are
receiving a very much larger amount of study than was formerly given to them.
The most striking and possibly the most important characteristic of the newer
work in economics, as contrasted with the older, is its greater realism. Not
that it manages to do without abstract conceptions, but that it takes its
conceptions, so far as it can, from the world of affairs. The older economists,
for example, in their efforts to dig beneath that surface view of economic life
which had deceived the mercantilists, held that money was merely a convenient
instrument or tool. From their point of view, which remains a significant point
of view, they were right. They also held that money prices were "exchange
values" expressed in terms of money, making value the basic and price the
derived conception, and thus inverting their real relation. This procedure, again,
was not without reason, and in some special types of economic analysis it
remains convenient to assume that trade is conducted by barter, without the
use of money. In general, however, modern economists find it better to deal
with money prices rather than "exchange values". They have observed that
modern processes of price-making and distribution depend upon the use of
money and credit, not only in the sense that processes so complex would be
unthinkable otherwise, but also in the further sense that the use of money
and credit has certain special and discernible effects upon the outcome. Reliable
records of economic activities — or at any rate of their results — are now brought
together and published by governments or made public by business organizations
on a scale, in respect of both volume and variety, which would have excited
the envy of the older economists. A much wider range of economic experience
is now available for study and analysis. In dealing with this new material —
virtually a by-product of the activities which it records — economics again has
to accommodate itself to a more realistic view. It has to deal with economic
events in the forms in which they really occur, and it has to search for the
systematic relations which run through these masses of real events. But although
the interests of economics have become more varied and concrete, and although
its conceptions have become better adapted to the handling of the facts of
economic life in the form in which those facts present themselves, economics
remain a communal or political science. Particularfindingsor tenets have been
discarded, and new ones have been set up in their stead. But the general picture Excerpts from
of a scheme of communal economic life, sufficiently ordered to make an analysis Encyclopaedia
of it possible, and imperfect enough to give point and purpose to such an analysis Britannica
in spite of changes of view-point and method, remains.
Bibliography
A.E. Monroe (Ed.), Early Economic Thought (1924), a compilation of well chosen selections
from economic literature prior to Adam Smith; Paul Gemähling (ed.), Les grandes économistes 133
(1925), with excellent bibliographies, covers the subsequent period also. For the history of the
earlier period the best single reference is A. Oncken, Geschichte der Nationalökonomie (3rd
ed., 1922); for the later period the Histoire des doctrineséconomiquesby Charles Gide and Charles
Rist (5th ed., 1926) is similarly useful. An English translation, History of Economic Doctrines
(1915) of an earlier edition of the last-named work is available. Recent developments are treated
in detail in Theo. Surányi-Unger, Die Entwicklung der theoretischen Volksuirtschaftslehre in ersten
Viertel des 20 Jahrhundert (1927); a more accurate though less complete survey will be found
in Die Wirtschaftstheorie de Gegenwart (4 vols., 1927-29), ed. by Hans Mayer and others. See
also for special branches, Edwin Cannan, A History of the Theories ofProduction and Distribution
in English Political Economy from 1776 to 1848 (3rd ed., 1917); Jan St. Lewinski, The Founders
of Political Economy (1922); James Bonar, Philosophy and Political Economy (3rd ed., 1922);
Walter Bagehot, Economic Studies (1879); S.P. Altmann and others, Die Entwicklung der deutschen
Volkswirtslehre im neunzehnten Jahrhundert (2 vols., 1908); G.H. Bousquet, Essai sur l'évolution
de la pensée économique (1927); and the following standard treatises: J.K. Ingram, A History of
Political Economy (new ed., 1919); L.H. Haney, History of Economic Thought (1911); A. Dubois,
Précis de I'histoire des doctrines économiques (1903); Hector Denis, Histoire des systèmes
économiques et socialistes (2 vols., 1904,1907); René Gonnard, Histoire des doctrines économiques
(3 vols., 1921-27); J. Rambaud, Histoire des doctrineséconomiques(2 vols'., 1907-08); J. Schumpeter,
Epochen der Dogmengeschichte (in Grundriss der Socialökonomik,1913). Articles on various special
topics, with bibliographies, will be found in the Handwörterbuch der Staatswissenschaften (4th
ed., 3 vols., 1923-8) and in the Dictionary of Political Economy, edited by Sir R.H.I. Palgrave
(revised ed., edited by Henry Higgs, 3 vols., 1926).

LAND
In economics, land is commonly treated as a separate factor or agent in
production, differing from capital in that no increase of the price paid for its
use will evoke an increased supply. What land furnishes is, first, room for
productive operations or other activities, and second, locations, as, e.g. with
respect to markets. The value of urban land is mostly a matter of room and
location. In the third place, different tracts of land have different special qualities
or characteristics which permanently affect their productivity. Among these
characteristics are such things as climate, configuration, tillability, other general
qualities of the soil or subsoil, situation (as in a valley or on the north or the
south side of a hill), feasibility of drainage or irrigation, etc. Finally, different
pieces of land have other special attributes, set apart from those which have
already been mentioned by the circumstance that they are perishable, i.e. that
they are used up in the processes of production. Mineral deposits and native
forest are examples of this last class. So too are those elements of the soil
which are exhausted by crop-growing and which have to be replenished if the
fertility of the land is to be maintained.
The value of any piece of land depends upon the serviceability and the scarcity
of all of the particular attributes which it possesses. Economists, however,
sometimes find it useful to make use of an abstract conception of land, in which
Journal of only its permanent qualities are taken into account. Ricardo's statement that
Economic land rent is paid because of the "original and indestructible" powers of the
Studies soil has been challenged by a long series of critics, who point to the perfectly
17,3/4 obvious facts that some of the valuable qualities of land have been imparted
to it, as e.g. by fertilization or drainage, and that not all of its valuable qualities
are indestructible. The critics miss the point, which is that it is important for
some purposes to take separate account, not only of the element in the value
134 of land which may be imputed to the capital which has been incorporated with
the land in the form of improvements, but also of an element which reflects
the gains which may be secured by appropriating and depleting some of the
valuable attributes or constituents of the land. The rent of mines, for example,
is in the nature of a royalty rather than a true rent, and the possibility of "mining
the soil" is often an important element in the value of lands which have been
newly opened for settlement.
Land, in the economic sense, need not be terra firma. Land under water
(e.g. oyster beds) and even tracts or bodies of water, as where valuable fishing
rights are involved, may figure as land. It is often convenient, in fact, to regard
land as synonymous with all that nature supplies, external to man, which is
valuable, durable and appropriable, thus including, for example, waterfalls and
other sources of water-power. Valuable rights to particular uses of land, such
as the right of a privately-owned tramway to use a city street, may also be
included, for the economic nature of land does not depend upon how it is owned
or controlled. Only in respect of especially favoured spots or strips of land,
which have unique uses or supply unique products, does land ownership or
an exclusive right to a particular use of a piece of land constitute a monopoly.
An important city street, the only practicable pass through a range of mountains,
the only important deposit of a rare mineral, are examples. The circumstance
that a particular piece of land is of high quality does not give its owner a monopoly
if its uses and its products do not differ in kind from the uses and products
of other pieces of land, even if these other pieces of land are of inferior quality.

RENT: IN ECONOMICS
In economics, rent is the name given to the income which the owner of a
productive instrument gets by using it himself or by exacting a payment from
another user. Much of the importance of the general theory of rent in economics
comes from its application to the special case of income derived from land
ownership. In the case of the incomes yielded by the ownership of reproducible
instruments of production the principle of rent is subordinate, in the long run,
to the principles which govern the rate of interest on capital, for the supply
of such instruments will be maintained and increased if, but only if, the
prospective return is sufficient to induce the investment of capital. At any given
time, however, the income-yielding power of reproducible instruments of
production is determined, not by what they cost, but by the value of their
productive uses. That is, it is governed by the laws of rent. The specific
hypothesis upon which the significance of the principle of rent depends is that
the supply of the productive instruments which yield rent may be assumed to Excerpts from
be given or fixed, so that the question remains only of how they may best be used. Encyclopaedia
Rent is generally held to have two distinguishing characteristics: first, it is Britannica
a differential or graded return; second it is a surplus above costs. That it is
a differential return depends upon the circumstance that productive instruments
are described or measured in units (e.g. acres) which are not themselves units
of productive efficiency. It is obvious that if one acre of agricultural land is better
(more fertile or nearer to the market) than another it will command a larger 135
rent. It is also obvious that the rent which any given piece of land commands
may be taken to be a measure of its differential superiority over land which
just falls short of being good enough to be worth using. That rent may be
regarded as a surplus over costs is a consequence of the circumstance that
the supply of rent-yielding instruments is taken as given. Even if they were
produced or improved (as land is improved) at a cost in the past, their past
costs have no relevance to the practical question of how and for what purposes
the instruments shall be used. The only costs which need to be taken into
account are the costs of using them.

Rent's Relation to Product

Why, then, should rent be paid? The reason is that rent-yielding productive
instruments, including rent-yielding land, exist in limited quantities, in the sense
that if any one unit of them were withdrawn from use the aggregate product
would be smaller. The rent of a given piece of land or of a given farm tends
to be approximately equal to the value of the amount of product which is
dependent upon using it. This amount can be determined by comparing the
product which the given piece of land or farm will yield under proper cultivation
with the product which could be got by employing the same amount of capital
and labour on the best land which is not good enough to yield a rent (i.e. at
the "extensive margin of cultivation") or by employing it in cultivating rent-
yielding lands' more intensively (i.e. at the "intensive margin of cultivation").
When the supply of a particular class of rent-yielding productive agents cannot
be increased as rapidly as the demand for the products which they yield
increases, they will command higher rents. Furthermore, unless there are
compensating improvements in productive technique, production can be
increased under such circumstances only by using instruments which had
previously been below the level of profitable use or by making more intensive
use of the latter instruments, i.e. by increasing the labour and other types of
instruments used in conjunction with them. Whichever method is followed,
increasing costs are encountered. This circumstance is the basis of the doctrine
that with a fixed supply of land an increased agricultural product can be had
only at the expense of a more than proportionate outlay of labour and capital
— a doctrine to which the name, "law of diminishing returns", has been given.
When economists refer to some other form of income or gain, not derived
from the ownership of land or of other productive instruments, as rent, they
generally mean either that it may be looked upon as differential return or that
it may be conceived to be a surplus above costs. Thus, "rent of ability" is
Journal of a name sometimes given to the differential element in personal earnings.
Economic "Entrepreneur's rent" denotes the profits of an ably-managed and successful
Studies enterprise, conceived of as a differential above the return secured by a marginal
17,3/4 undertaking which is barely able to meet its costs. "Consumer's rent" is the
difference between the amount which the consumer pays and the value which
he attaches to what he buys, as measured by the maximum amount which he
would have been willing to pay if required. Similarly, "producer's rent" is the
136 difference between what the state of the market enables the producer to get for
his goods and the amount which would have sufficed to induce him to produce them.

LABOUR
In economics, as in ordinary discourse, the word labour is used as a name for
the general body of wage-earners. It is in this sense, for example, that one
speaks of "organized labour". In a more special and technical sense, however,
labour means, in economics, any valuable service rendered by a human agent
in the production of wealth, other than the accumulating and providing of capital
or the assuming of the risks which are inseparable from the responsible planning
and direction of business undertakings. It includes the services of manual
labourers, but it covers many other kinds of services as well. It is not synonymous
with toil or exertion, and it has only a remote relation to "work done" in the
physical or physiological senses. The application of the physical energies of men
to the work of production is, of course, an element in labour, but skill and self-
direction, within a larger or smaller sphere, are also elements. A characteristic
of all labour is that it uses time, in the specific sense that it consumes some
part of the short days and years of human life. Another common characteristic
is that, unlike play, it is not generally a sufficient end in itself, but is performed
for the sake of its product or, in modern economic life, for the sake of a claim
to a share of the aggregate product of the community's industry. Even the
labourer who finds his chief pleasure in his work commonly tries to sell services
or products for the best price he can get.
If labour could be measured adequately in simple homogeneous units of time,
such as labour-hours, the problems of economics would be simplified. But
labourers differ and tasks differ also, as, for example, in respect of the amount
and character of training and the degree of skill, intelligence, capacity to direct
one's own work or the work of others, and the other special aptitudes which
they require. They differ, furthermore, in respect of their irksomeness, the
prospects which they offer for permanent employment and advancement, the
social status generally associated with them, and in respect of other
characteristics which make one task more attractive than another. Quite apart,
therefore, from the circumstance that the mobility of labour is imperfect, that
it cannot be transferred easily and quickly to the employments in which its
products have the highest value, there is the further circumstance that the wages
of different kinds of labour cannot be taken to be payments for larger or smaller
"quantities of labour". The price per unit of time which a particular kind of
labour commands in the market depends not only upon the technical efficiency
of the labourer but upon the demand for the particular services which he is Excerpts from
able to furnish, upon their relative scarcity, and upon the supply of other Encyclopaedia
productive agents. The attempts of the older economists and of some of the Britannica
Socialists to find a simple and direct relation between the value of a product
and the quantity of labour which it embodies were fruitless.
Different uses of the available supply of labour, however, whatever its
composition, can be compared with reference to the quantity and the value
of the products which they yield, and such comparisons are being made 137
continuously in the ordinary course of the planning and management of
competitive business undertakings. By means of economic analysis, moreover,
it is often possible to know whether a proposed change in the organization of
the community's labour or of the uses to which it is put (as, for example, by
encouraging certain types of industries at the expense of others) would be more
likely to increase or to decrease the annual production of wealth. For the
individual worker, as well as for the community as a whole, the practicable way
of measuring the "labour costs" of production is by reference to the other
possible products which might have been secured by means of the same labour,
or to possible alternative uses of the time given to labour. Thus the fact that
in most countries both the number of hours per day and the part of the average
worker's life which are given to labour are less than they were 100 years ago,
means, not that labour has become intrinsically more arduous or more painful,
but that it has become more costly, in the sense that, with the increase of
the general level of incomes, the alternative uses of the worker's time have
become relatively more valuable.

WAGES
In a broad sense, wages may be said to include all forms of income which men
are able to get in return for the expenditure of their own time and energies.
In this broad sense the fees paid to professional men and the royalties received
by authors and inventors are wages. Employers, so far as their profits depend
upon the personal supervision which they give to their affairs, and capitalists,
so far as they have to give time and thought to the management of their
investments, are, in this broad sense, wage earners. In a more special sense,
wages, as defined by Francis A. Walker, are "the reward of those who are
employed in production with a view to the profit of their employers and are
paid at stipulated rates".
To say that wages may be regarded as the price of labour, and that, like other
prices, wages are determined by supply and demand, is not particularly helpful.
The growth of a country's population generally means an increase of its supply
of labour. It does not follow, however, that labour will be cheaper in the sense
that average real wages (what the labourer can buy with his money wages) will
be smaller. Where there are serious obstacles to industrial development, and
where agriculture is of dominating importance, as in Russia, India, or China,
it may, indeed, be true that the average per capita production of wealth, and
hence, presumably, average real wages as well, would be larger if the population
Journal of were smaller. A notable rise of wages followed upon the depletion of the
Economic population of England by the Black Death in the middle of the fourteenth century.
Studies But where a higher stage of industrial development has been reached, it may
17,3/4 well be that the economies of large-scale production and of the division of labour
are so far dependent upon the size of the domestic market that if there were
any considerable reduction of population the production of wealth per capita
would be smaller. It cannot be assumed, therefore, that an increase of the
138 aggregate supply of labour will normally have the effect of reducing wages. Nor
can it be assumed that a general reduction of real wages would lead to the
increased employment of labour (except temporarily, or when wages had been
disproportionately high) in the way that a reduction of the price of a particular
commodity will generally lead to larger sales. Little or nothing is to be gained
by looking to the general formula of supply and demand for an explanation of
the determination of wages.

The Wages-Fund Doctrine

Some of the ablest British political economists of the nineteenth century thought,
however, that in one particular way the general level of wages might be looked
upon as the outcome of the play of forces of supply and demand. Emphasis
was put upon the circumstance that in modern industry wages are advances,
in the sense that they are paid before, and often long before, the final product
to which the labourer contributes in direct or indirect ways, passes into the
hands of the consumer. Wages are paid out of capital, and the demand for labour
depends upon the amount of capital which is or can be devoted to that purpose.
The amount of capital which is, or can be, so used was dubbed the wages fund,
and was held to be pre-determined, in the sense that it depended upon how
much and what had been produced in the past. The present demand of
consumers for commodities, it was insisted, is not a demand for labour, but
merely a demand for the products of past labour. The wages-fund doctrine was
not altogether untrue, but it involved misplaced emphasis, so that it led to untrue
or misleading inferences. What is, at most, an important aspect of the way in
which goods are produced and apportioned, was made to serve as a fundamental
determinant of wages. The doctrine implies a static conception of what, as its
proponents recognized in other connections, is essentially a dynamic problem.
Wages are paid not out of a fixed fund, but out of a continuing flow of wealth.
Changes in the aggregate volume of that flow — changes, that is, in the magnitude
of the total product of industry — have a more important bearing in the long
run upon the amount which labour receives than can be attributed to variations
in the relative demand for present labour and for finished goods. Through the
modern mechanism of credit, moreover, the future value of part of the product
of present labour is discounted, and the proceeds are used in paying present
wages. A sudden increase in the total amount of money paid to labourers, such
as comes sometimes after a period of industrial depression, may have the effect
at first, however, of increasing the labourers' own purchases of finished products
more rapidly than the supply can be replenished, so that prices will rise, and
the increase in the amount of real wages received will not be proprortionate
to the increased amount of money wages paid. An adherent of the wages-fund
doctrine might maintain, and not without point, that this temporary effect shows Excerpts from
how an increase of real wages is dependent upon an increase of the "fund" Encyclopaedia
(the supply of goods of the kinds for which money wages are expended) from Britannica
which real wages are drawn.
Wages and the Standard of Living
Another theorem respecting wages, closely allied historically to the wages-fund
doctrine, was that wages must conform very closely, in the long run, to the 139
amount needed to enable the labouring population to maintain its customary
standard of living. An early and more rigid form of this theorem had made a
bare minimum of subsistence the norm to which wages were held to be
constrained to approximate. In thisrigidform the doctrine was taken over by
some of the Socialists, named the "Iron Law of Wages", and made much of
as showing the hopeless position of the labouring classes under the existing
economic regime. In developing the doctrine, however, the Socialists rested
it upon the power which they imputed to the owners of capital, to assign to
labour no larger share of the aggregate product of industry than they conceived
to be in their own interest. The grounds upon which the economists supposed
their standard-of-living theory to rest were quite different, and, if they were
valid, would have retained both their validity and their significance under a
socialistic or any other regime. These grounds were, first, the Malthusian theory
of population, serving as a basis for the affirmation that the labouring population
would increase as fast as the increase of the means of maintaining its customary
standard of living would permit; and second, the assumption that the level of
wages must vary inversely with the supply of labour, falling off with an increase
in the number of labourers, and rising with a decrease. Granting the premises
the conclusions followed logically. Deviations from the normal level would be
self-correcting, for an advance beyond that level would enable labourers to marry
earlier and to rear larger families, so that the supply of labour would be increased
and wages would be forced down again, while a fall below the supposed normal
level would have the opposite series of effects. This doctrine naturally led to
the pessimistic conclusion that there could be no permanent improvement of
the economic status of the labouring classes except as the result of their own
voluntary restriction of the growth of their numbers. On all this, it is enough
to say that during the last century and a half there has been a notable increase
in the level of real wages, a corresponding advance of the standard of living
of wage earners. That if the rate of population growth had been slower, a yet
higher general level of wages would have been attained is no more than a doubtful
conjecture.

Wages and the Product of Labour

In modern economic analysis increased emphasis is put upon the necessarily
close relation between the wages which a labourer can command and the value
of what he produces, and more attention has accordingly been given to the
factors which are responsible for changes in the amount and value of the product
of labour. At first sight it might seem to be impossible to disentangle the product
of labour from the product attributable to capital, land and management. The
Journal of whole product is dependent upon labour, in the sense that there would be no
Economic product if no work were done, but is dependent in the same way upon the use
Studies of land and other natural resources, and much of it is equally dependent upon
17,3/4 the use of capital. If there are n labourers, of equal efficiency, however, the
annual product dependent upon the efforts of any one labourer will not be an
nth part of the aggregate product of industry, but something considerably less
than that amount. It is for the specific increments of product which depend upon
140 their individual co-operation in the work of production that labourers are paid.
The magnitude of the specific individual product attributable to a particular
labourer will depend in some part upon his own skill and energy, but it will
depend also upon how well he is supplied with tools and other appliances, upon
the richness of the natural resources to which he has access, and upon the
efficiency with which industry is organized and managed. If, while the supply
of labour remains unchanged, the supply of productive capital is increased, if
new natural resources are brought into use, if improvements are effected in
either the technical processes or the general organization of industry, the
increment of product dependent upon the work of any one labourer will become
larger. If, on the other hand, the supply of labour is increased while the supply
of other productive agents remains constant, and if no improvements are made
in productive methods, the increase of the aggregate product will not be
proportionate to the increase of the expenditure of labour, and the increment
of product attributable to an individual labourer will shrink. (The "law of
diminishing returns", i.e. the theorem that unless the available supply of land
can be increased, as by the cheapening of transport, or substantial improvements
in methods of cultivation can be effected, the supply of agricultural produce
can be increased only at the expense of a more than proportionately increased
outlay of labour, is merely a particular application of this general principle). The
wages of labour, then, may be said to depend upon the magnitude of the
aggregate per capita product of industry, and upon the relative scarcity of labour
as compared with the available supply of other scarce and valuable productive
agents. As has already been emphasized, an increase in the supply of labour
is not inconsistent with an increase of the general level of real wages. Even
in the absence of the discovery of new productive methods or of new supplies
of productive resources, an increased supply of labour might lend itself to a
better organization of production and to the accumulation of larger supplies of
capital, so that the specific product of labour would be increased.

Differences in Wages
These differences are of two kinds; first, differences in the wages of workmen
of a given level of efficiency in different localities and in different occupations;
second, differences in wages which reflect difference in skill and efficiency.
Although competitive forces exert a constant pressure in the direction of
equalizing the value of the different specific products which are attributable
to labourers of equal efficiency (in the sense that, with like training and
experience, one could do the work of another and do it equally well), these
forces never completely achieve their ends, for they have to contend not only
with economic inertia but with various disturbing forces. The factors which
make for the persistence of local and regional variations of wages are plain to Excerpts from
see. Habit, ignorance of better opportunities elsewhere, the initial costs of Encyclopaedia
movement, local ties, political barriers, are some of them. The differences,
often very large, in the general wage levels of different countries, reflect similar Britannica
differences in the productivity of labour, and are associated with differences
in supplies of natural resources, and in the ways in which production is organized.
The international movement of capital probably counts for more than the
migration of labour as an equalizing factor. Differences in the wages paid in 141
different occupations, and in different industries where a common local or national
supply of labour can be drawn upon, are attributable mostly to the circumstance
that variations in the rates of growth of different industries, and in the demand
for different kinds of work, cannot be met promptly by equal variations in the
apportioning of the labour supply. Adam Smith observed, in a famous passage,
that there are certain "normal differences" in wages, depending upon the
agreeableness of the employment, the difficulty and expense of learning the
trade, the constancy or inconstancy of employment, the degree of trust and
responsibility entailed, and the chance of success and advancement. Such
differences are both real and important, but it is to be observed that the workers
who are least able to pick and choose are often forced to accept a combination
of disadvantages, so that the most disagreeable and irregular employments are
often those which afford the smallest opportunity for advancement, and are
at the same time the poorest paid. How far the general level of wages can be
advanced by the efforts of trades unions or by legislation is a debatable question,
but it is certain that the control of the labour market, whether by trades unions
or by the Government must have definite effects upon differences in wages.
Trade union activities have the effect of increasing the difference between the
wages paid in the well-organized and the unorganized trades. There is some
evidence, on the other hand, that public control of wages in Australia has had
the effect of diminishing the difference between the wages paid in skilled and
in unskilled employments.
That there is a general relation between the ability, native and acquired, of
individual workers and the wages which they can command is obvious. Allowing
for disturbing factors, such as have been noted, higher wages are associated
with higher degrees of ability. This does not mean, however, that wages are
at all closely proportionate to ability. The evidence is far from being adequate,
but such facts as are known indicate that differences in wages are more than
proportionate to native differences in capacities, physical and mental. Proceeding
from the lower wage levels to the higher, earning power appears to increase
more rapidly than capacity, as measured by some non-economic standard of
attainment. A variety of causes, probably, rather than any single cause, are
responsible. Wages are paid for efficiency, not for capacity. Efficiency is a matter
of education and training as well as of native capacity, and education and training
are partly matters of opportunity. The higher wages paid to the more efficient
workers are in some measure a return to investments in "personal capital",
whether by means of education, in the ordinary sense, or by means of a period
of service in some employment in which wages are small but from which paths lead
Journal of upward, in preference to some better-paid employment with no larger future
Economic ahead of it. Every factor which deflects men from the paths which lead to the
Studies better paid employments, or which impedes their entry into such employments,
17,3/4 helps to swell the numbers of the "hewers of wood and drawers of water"
who compete for the poorer places, and thus operates to increase the difference
between high wages and low. Moreover, in modern economic life the individual
worker is a sharer in a co-operative effort. The results which he achieves cannot
142 be measured separately, on a fixed scale of reference, as the results of a test
of his physical or mental capacity might be measured. The product of industry
is not got by merely adding the results of one man's work to the results of
the work of others. The productivity of the individual worker is in some measure
multiplied into, not merely added to, the productivity of the complex of productive
agents with which he works. One man's efficiency directly affects the results
which others get. More is gained by equipping a good workman with good tools
or a good farmer with good land than by assigning good tools or good land to
a poorer workman or a poorer farmer. The man best equipped to manage a
large industrial undertaking may really earn twice as large a salary, measured
by the results he gets, as a man only slightly inferior in capacity. A good foreman,
by getting a maximum product from the workers under his charge, will not only
increase the earnings of his men, but will earn a larger wage for himself. In
short, it is probable that in many employments, though possibly not in all, the
differences between the increments of product which are dependent upon the
labour of a superior workman and of an inferior one are disproportionate to
such differences in their skill or ability as would be revealed by a test which
would deal with them as isolated individuals. It is these larger differences, of
course, which are reflected in differences in the wages which they can command.

CAPITAL
In economics, capital may be defined as produced wealth used productively
for gain. It is thus distinguished from land and other natural resources, which
are not "produced", and from consumers' goods, which are not used
productively for gain. The economist's conception of capital is unlike the
conceptions which govern the practice of accountants. The reason is that many
things which are properly counted as part of the capital of a person or a firm
make no part of the aggregate capital of society. A house occupied by a tenant
is part of its owner's capital, but it is not for that reason any more a part of
the productive apparatus of the community than it would be if it were owned
by its occupant. A may include what B owes him in an inventory of his capital,
but in the aggregate view A's claim and B's liability cancel. Patents, copyrights,
the franchises of public service companies, and other exclusive privileges, or
the goodwill of a business undertaking, its established claim upon the preferences
of buyers, have similar status. Such things are sometimes called "acquisitive
capital", to distinguish them from the things which constitute the true capital
of the community.
There is a sense in which a community's whole stock of accumulated wealth,
including durable goods in the possession of consumers, may be said to be its
capital. A consumer who buys durable goods — a house, a piano, a piece of Excerpts from
furniture — from which he expects to get a long series of uses, is thereby Encyclopaedia
providing for the future, and so far as a community is supplied with such goods Britannica
its future wants are in that measure provided for. Whether such accumulations
should be called capital is a question of convenience, not of principle. The
distinction between goods which provide for future wants and the goods and
services which merely provide for the present is doubtless important, but the
distinction between using goods in production for the market, i.e. in production 143
for gain, and using them as part of one's own equipment for living is also
important, and most economists have preferred to emphasise this last distinction
by drawing a line between capital and consumers' goods. The line cannot be
drawn with perfect precision, however. It is impracticable to make a sharp
distinction either between the capital which a farmer uses in producing food
for the market and the equipment which he uses in producing food for his own
household, or between the latter and the equipment which a housewife uses
in preparing food for the table. But these are small matters and do not affect
the practical utility of the conception of a special category of produced wealth
which is used productively for gain.
There is also a sense in which personal qualities, as well as goods, may be
said to be capital. Expenditure for education or for any training which makes
a man a more efficient producer may properly be regarded as an "investment
of capital". The personal earnings which are attributable to acquired qualities
of skill and efficiency might easily be treated as interest or profits upon "personal
capital". Economists have found it more convenient, however, to adhere in this
particular to the practice of the business world, and to treat such earnings as
elements in wages. Similarly, while it is important to take account of the motives
which lead men to employ capital in improving land (e.g. in fertilizing or draining
it), no useful purpose is served by attempting always to distinguish between
the return attributable to the capital which has been incorporated in land and
the rent of the land itself.

The Varieties of Capital

Historically, the distinction between commercial capital and industrial capital
is of prime importance, for capital was employed on a large scale in trade and
transport long before any considerable use was found for it in industry. What
date should be assigned to the beginnings of "modern capitalism" or of
"capitalistic institutions" depends upon what is meant. Most of the history
of industrial capitalism falls within the last 200 years, while many of the
characteristic institutions of commercial capitalism can be traced back to the
towns of the later middle ages, or even to the ancient civilizations of the eastern
Mediterranean. The distinction between commercial and industrial capital
remains important for an understanding of the part which capital plays in modem
economic life, but it is better to draw the line, not between the capital used
by traders and the capital used by manufacturers, but between stocks (raw
materials, auxiliary materials, goods in process, finished goods) and instruments
(machines, tools, railways, factory buildings, etc.). Much the same distinction is
Journal of conveyed by the terms circulating capital andfixedcapital. The characteristic
Economic which gives circulating capital the quality of capital, however, is not that it
Studies "circulates'' (whether in the way in which raw materials reappear in the finished
product or in the way in which goods pass from manufacturer to merchant and
17,3/4 from merchant to consumer) but that the processes of production and distribution
require that large stocks of it shall be maintained.
Next in importance to the distinction between instruments and stocks is the
144 distinction between specialized capital and unspecialized capital. A railway track
or a complicated machine is serviceable only within the narrow range of uses
for which it was constructed. Its value depends upon the demand for the special
services which it is capable of rendering. Raw materials that enter into different
sorts of finished products, tools and machines of standard types, are examples
of less highly specialized capital. The difference is one of degree. Most capital
is partly specialized, in the sense that it has only a certain range of uses and
that it is better adapted to some uses than to others. Money, because it can
be used in acquiring goods and services of whatever sort, is sometimes held
to be a wholly free and unspecialized form of capital. But is money capital?
It is true that stocks of ready money as well as stocks of goods are required
for the operations of industry and trade, and that these stocks are not maintained
without expense. But it is also true of some of the most important forms of
money (including the notes of banks and of governments and bank deposits
subject to cheque) that the holder's capital is offset by the issuer's debit or
liability. Furthermore, the supply of money may be increased without there
being any attendant increase of the real wealth of the community or even of
the aggregate serviceability of its stocks of money. In short, money may properly
be counted as capital if it is recognised clearly that it constitutes a separate
category, with special characteristics of its own.

The Earnings of Capital

That capital contributes nothing to the production of wealth beyond the labour
which it embodies, that it merely enables its owners to appropriate an unearned
share of the total product, is a tenet held by disciples of Karl Marx and by other
critics of the existing economic order. This tenet appears to rest upon a
misconception of the services which both labour and capital render. Neither
labour nor capital is inherently productive. Just as land will grow thistles as
well as figs, so labour and capital alike may be wasted in making things which
no one wants and which therefore have no value. Labour and capital are without
value except as their products are valuable. In one sense, therefore, labour
and capital may be said to derive their value from the value of their products.
Taken by itself, however, this is a misleading statement. No product will have
value if it can be reproduced without diverting any part of the supply of scarce
and valuable productive agents (labour, capital, and natural resources) from other
possible uses. When we say that capital is productive we imply not only that
capital can be used so as to increase the supply of valuable goods but also that
the supply of capital itself is in some degree limited or inelastic.
Nature furnishes free productive agents which, merely because no economy
need be practised in our use of them, are not productive in an economic as
distinguished from a purely physical sense. Thus in the economic sense the Excerpts from
wind is not productive but windmills are. We harness natural forces so as to Encyclopaedia
use them in production, but we attribute the product wholly to the harness. Britannica
This is inevitable, for the harness is the only factor in the situation which we
can add or take away or which we can vary as we please, so that the product
depends upon it. Capital would not be deemed productive if its supply were
not limited, nor would it be deemed scarce if it were not productive. Whether
the earnings of capital are attributable to its productivity or to its scarcity is 145
therefore a meaningless question. That a larger (physical) product can be got
by using capital does not explain why a specific part of the product has to be
attributed to capital and assigned to it as its earnings. The economic productivity
of capital, its scarcity, and its earning power are merely different aspects of
the way in which the amount of the product depends upon the supply of capital.
For an understanding of this relation of dependency between product and capital
it is necessary to take account both of the productive uses of capital and of
the circumstances which limit its supply.

The Uses of Capital

Consider first the uses of instruments — tools, machines, prime movers, and
auxiliary apparatus. Inert and passive in themselves, from the point of view
of economics, instruments are goods which are produced and used in the
producing of other goods for the reason that such procedure is economical.
A conspicuous characteristic of the procedure is that it is indirect or roundabout.
There is nothing inherently economical in roundabout methods, but the most
economical methods often happen to be roundabout. The degree of
roundaboutness which is most economical generally depends upon the amount
of a particular kind of work which is to be done. And also the making and use
of instruments involves an extension of the principle of the division of labour,
and the division of labour, as Adam Smith observed, depends upon the extent
of the market. The use of capital on a large scale in industry came later than
its use in commerce, for the reason that not until there were markets which
were able to absorb large outputs of standard types of goods was it profitable
to make any extensive use of roundabout methods of production. Once
established, however, industrial capitalism showed that it had within itself the
seeds of its own growth. Cheaper goods, improved means of transport, and
the increased advantages of specialization led to larger markets, so that the
economies of industrial capitalism grew in a cumulative way. The increasing
division of labour, by breaking up complex industrial processes into simpler
parts, not only invited a larger use of instruments, but also prompted the invention
of new types of instruments. Along with these changes and holding with respect
to them the dual relation of cause and effect, the exploitation of the world's
stores of mechanical energy extended enormously the effective range of the
use of instruments. Improvements in industry and in transport made the world
capable of sustaining a larger population, while the growth of population, in
turn, by creating larger markets, made it profitable for industry to use methods
of a higher degree of roundaboutness.
Journal of The uses of stocks are various. (1) Stocks are held in order to give time for
Economic spontaneous or induced changes of a desirable kind to occur. The maturing
Studies of wine or tobacco, the fructifying of the seed in the soil, the drying and seasoning
17,3/4 of the wood used in cabinet work, are examples of a very large number of
processes which either cannot be hastened or cannot advantageously be
hastened beyond a certain point. (2) Stocks have to be held in order that the
products of agriculture and of other seasonal industries may be spread throughout
146 the year in accordance with the requirements of consumers. (3) The technical
requirements of production make it necessary that stocks of "goods in process"
be held. (4) At various points in the linked chains of agencies through which
goods pass on their way from the producer of raw materials to the ultimate
buyer of the finished product stocks are accumulated. This helps to safeguard
buyers, at whatever point in the chain, against the inconvenience and losses
of delays, and it makes for economy in transport and handling. Furthermore,
even if production and trade were always managed with complete efficiency
and if producers and traders always had complete knowledge of the market,
it would be impracticable and uneconomical to keep all of the various processes
of production and distribution moving together so as to maintain a smooth and
even flow of goods from the first producers to the final buyers. Stocks are like
the reservoirs in which the waters from variable and intermittent streams are
impounded so as to guard against both floods and drought.

The Supply of Capital

The use of capital saves time, in the sense that a larger product can be had
with a given amount of labour. But it increases the average interval of time
which elapses before the products of a given day's labour reach their final form
and pass into the hands of consumers. Present work, however far away its final
fruition in a finished product may be, has to be paid for in the present, and
so do the present uses of land and capital — unless, indeed, the owners of
land and capital can be induced to defer their claims. These present payments
are advanced in anticipation of the payments which consumers will make later
for finished products. This is the central fact of the capitalistic system of
production.
Interest is the premium which is paid for advances. The money incomes which
employers, labourers, capitalists, and landowners receive are used in part to
pay for immediate personal services and for the finished goods that have been
produced in the past, and in part to pay (as advances) for the present expenses
of forwarding the production of goods for future markets. In those future markets,
it is expected, the goods will sell for enough to cover the advances, with interest
added. If the returns finally secured prove on the whole to be inadequate, or
even promise to be inadequate, the demand for advances will fall off and the
rate of interest will decline. But if industry is prosperous, if the prospect is
that in general some net profit will be left after the cost of advances has been
met, the demand for advances will increase and the rate of interest will rise,
so that a smaller part of the current stream of money incomes will be expended
for finished goods and personal services and a larger part will be used in producing
instruments and in increasing stocks. There is thus an effective tendency towards Excerpts from
an unstable sort of equilibrium, in which the most important variable factors
(human nature being taken as constant) are, first, the economies of capitalistic Encyclopaedia
methods of production, and second, the rate of interest. In the long run, however, Britannica
what part of the product is imputed or attributed to capital rather than to labour
or to natural resources will be determined by the rate of interest. How much
larger the total product is than it would be if no capital were used is mostly
a matter of technology. How much of the product is, in the economic sense, 147
attributed to capital as its product, is largely a matter of the price which has
to be paid for advances.
The operations of banks have an important effect upon the way in which
advances are made. Banks are more than mere intermediaries between lenders
(depositors) and borrowers. So far as their own obligations (notes and deposits)
will serve as money, and within the limits set by the necessity of maintaining
their own solvency, they can make advances to industry and trade without their
being any prior saving. In fact, because consumers' incomes will be increased
as the funds advanced by the banks are paid out to cover the expenses of
producing goods, the demand (in terms of money offered) for goods and services
will be larger than before. If stocks cannot be increased as rapidly as the demand
for finished goods increases, prices willrise,and a disguised form of involuntary
saving will thus be imposed upon all consumers whose incomes have not
increased proportionately. Futhermore, if manufacturers and traders gain by
reason of theriseof prices (their expenses not having increased proportionately),
they are fairly sure to reinvest some of their profits. The real burden of the
saving which makes these new advances possible falls more heavily upon the
persons who lose (in purchasing power) because of the rise of prices than upon
the manufacturers and traders who gain. But profits, of course, do not depend
upon price fluctuations alone. A high general level of profits, brought about as
the result of whatever causes, will increase both the demand for and the supply
of advances. In consequence there may be an unduly rapid increase of
instruments and stocks — a circumstance which probably plays a part in the
recurring industrial fluctuations which have come to be known as trade cycles.
Business profits are probably the largest single source of investment funds.
Estimates made by A.L. Bowley, Sir Josiah Stamp and W.I. King indicate that
in Great Britain and the United States fully half of the current supply of advances
comes from that source.

Non-Productive Uses and Forms of Capital

No simple and consistent view of the nature and uses of capital can be altogether
true to the complicated facts of economic life. The conception of capital as a
productive agent is justified because it emphasises what are, in fact, the most
important uses of capital. Advances are made mostly so that capital may be
used in furthering the production of goods. In some importantfieldsof business
enterprise, however, large amounts of money are invested, not in producing
goods which consumers already want, but in inducing them to buy certain
particular things. The purpose of a considerable part of what are commonly
Journal of called selling expenses is not to supply goods to satisfy an existing demand,
Economic but to shift demand from other channels. Such expenditures are not always
Studies wholly unproductive. Scrupulously truthful advertising may be of real service
17,3/4 to the consumer, perplexed by the wide range of alternative choices and without
firsthand knowledge of the qualities of competing goods. Advertising,
furthermore, by helping to create larger markets for particular types of goods
which can be produced much more economically if produced on a large scale,
148 may itself be a factor in the economising of the productive resources of the
community. But these are incidental and by no means necessary results of what
are primarily competitive or acquisitive uses of capital. Advertising may lead
sometimes to the education of the consumer, but it may also lead to the
exploitation of weakness and ignorance. While it may sometimes open the way
to real economies in production, it may at other times involve a pure waste
of resources which might otherwise have been used productively. Its importance
has been fully recognised in all forms of productive business.
One other qualification of what has been said about the nature of capital
remains to be noted. A nation's capital may be taken to be either (1) the capital
within the nation's boundaries, irrespective of its ownership, or (2) the capital
owned within the nation, irrespective of its situation. In the second sense a
nation's capital includes the net excess of its external or foreign assets (property
and credits) over its external liabilities (domestic property owned abroad plus
foreign debts). In two respects this view is inconsistent with the definition of
capital "as produced wealth used productively for gain". In the first place, credits
are included, which, in an international stock-taking, would cancel against debts.
In the second place, foreign holdings of land, of mineral rights, of concessions,
and of other valuable privileges, as well as of instruments and stocks, are
included. There is nothing unreasonable in this. Investments in landed property
or in mineral rights outside of a nation's own boundaries make part of its national
savings and affect the amount of its annual national income. In short, in
determining the amount of a nation's capital, it is necessary, for some purposes,
to abandon at the national frontiers the communal conception of capital, and
to adopt a private or acquisitive conception, such as is employed in accountancy.
Similarly, while the phrase, "the export of capital", might conceivably be taken
to refer to the movement of instruments and stocks from one country to another,
it is more generally taken to denote the increase of the net foreign investments
of the people of a given country.

Bibliography
E. von Böhm Bawerk, in Kapital und Kapitalzins (4th ed., 1921) provides an acute critical analysis
of the principal theories of capital and interest. An English translation of an earlier edition of
this important work is available in two separate volumes, Capital and Interest (1890) and Positive
Theory of Capital (1891). Standard modern treatments will be found in A. Marshall, Principles
ofEconomics, 8th ed. (1920); G. Cassel, The Nature and Necessity of Interest (1903) and Theory
of Social Economy (trans. J. McCabe, 1923); R.T. Ely and others, Outlines of Economics, 4th
ed. (1920); F.W. Taussig, Principles of Economics, 3rd ed. (1921); A. Landry, L'intérêt du capital
(1904); J.B. Clark, The Distribution of Wealth (1899), distinguishes between capital, viewed as
a "fund", and the specific capital goods, including land, in which at any given time the fund
is embodied. Irving Fisher, Nature of Capital and Income and The Rate of Interest (1906) identifies Excerpts from
capital with wealth, measured in terms of its money value. J. Schumpeter, Theorie der
wirtschaftlichen Entwicklung (1912), emphasizes the parts which progress and enterprise play
Encyclopaedia
in making capital productive. H.J. Davenport, The Economics of Enterprise (1913), holds that Britannica
in a competitive society capital must be defined as an instrument of acquisition rather than of
production. The most influential statement of the view that income from capital is unearned
and is based on exploitation is Karl Marx's Capital. For older views of the nature and services
of capital see especially Adam Smith, The Wealth ofNations (1776), Book II, and J.S. Mill, Principles
of Political Economy (1848), Book I. Some of the differences in the views of modern economists, 149
it may be observed, are more apparent than real, and come from differences in definitions, in
emphasis, or in the particular problems which the different writers have attacked.

Supply and Demand

Economics or political economy, is sometimes defined as the science of supply
and demand. Although this is an inadequate definition it cannot be said to be
altogether misleading. A very important part of Economics, and the part which
probably has the best title to the name of science, has to do with the operations
of supply and demand and with the way in which variations of supply and demand
are related to the movements of prices and to changes in the production and
distribution of wealth. The "law of supply and demand" was not invented or
discovered by the economists, however, nor do they lean very heavily upon
it as a general explanatory formula. Long before there was any systematic analysis
of economic processes men had observed that prices vary with supply and
demand, and from the earliest days, traders have had to take account of that
circumstance. The economist's task has been to scrutinise those characteristics
of human behaviour and of the physical environment which determine the various
forms or patterns in which supply and demand appear and to enquire into the
complicated interactions of the demand for and the supply of different
commodities and services.
Elementary Principles
Consider the familiar theorem that the price of a commodity must be such as
to make supply and demand equal. If supply is taken to mean the amount sold
and demand the amount bought the theorem is mere tautology, for supply and
demand become different names for the amount transferred from sellers to
buyers at any price whatever. But if it be understood that demand means the
amount which buyers would be willing to take at a specified price, that supply
means similarly the amount which sellers would be willing to part with at a
specified price, and that demand and supply vary in some systematic and
continuous way and in opposite directions as the price is raised or lowered,
the theorem has meaning and significance, for there will be one price, and only
one price, at which supply and demand will be equal.
In another elementary theorem, namely that an increase of demand for a
commodity will raise its price, that an increase of supply will lower it, and that
a decrease of supply or of demand will have an opposite effect, other meanings
are attached to changes of supply and demand. Here an increase of demand
or supply means an increase of the amounts which will be taken at given prices,
Journal of not an increase which is dependent upon a reduction of price. The general state
Economic of supply and demand, in the sense specified in the preceding paragraph, can
Studies be represented by lists or "schedules" of "supply prices" and "demand prices".
17,3/4 In this other sense, however, supply and demand are regarded as independent
variables, and a change of supply or demand means an alteration of the schedule
of supply prices or demand prices, such as might come on the one hand from
a change of consumer's preferences or an enlarging of the market or, on the
150 other hand, from a change of costs of production.
It is proper to assume that at any given time the immediate general condition
of supply might be represented by a schedule in which the progressively higher
prices which are required to evoke a progressively larger supply are set forth.
But if the commodity is one which can be produced more economically if
produced in large quantities, the ultimate effect of an increase of demand, in
the sense of an increase of the amounts which will be taken at specified prices,
will ordinarily be to reduce the price per unit at which these larger amounts
will be supplied. In a schedule of supply prices constructed on the assumption
that sufficient time is allowed to permit the necessary economies to be effected,
larger supply will be associated with lower prices. When the long-period schedule
of supply prices is of this type, the commodity is said to be produced under
conditions of decreasing costs or of increasing returns. When, on the other
hand, because of the scarcity of some necessary productive factor, increased
supply cannot be had, even in the long run, except at a higher price, the condition
is described as one of increasing costs or of diminishing returns. The factors
which give rise to increasing returns should not be confused with the
circumstance that in many industries certain outlays (e.g. for plant and
equipment) have to be incurred in advance or with the further circumstance
that in a growing industry such outlays are ordinarily considerably larger than
the volume of output immediately in prospect would require. Under such
circumstances the additional or "prime" costs incurred by reason of an increase
of output may be relatively small. Furthermore, with a progressive increase
of output there will be a progressive diminution of costs per unit of output,
because the general, supplementary, or "overhead" costs will be spread over
a large number of units. But although when the market is sluggish or when
competition is especially keen, prices may be cut to a point where they barely
suffice to cover the additional or "prime" costs, this condition, which cannot
be lasting, should not be confused with a true condition of increasing returns,
for this last condition is to be found only when a gradual increase of output
is attended, in the long run, with genuine economies.

Interactions of Supply and Demand

The results obtained by taking account only of the supply of and demand for
a particular commodity in relation to its price are no more than a first
approximation to the truth. In isolating, for reasons of practical convenience,
the factors which determine the price of any one commodity, taken by itself,
economists are accustomed to assume that the value of money, to both buyers
and sellers, is constant. This means that no account is taken of the way in which
changes in the amount of money which consumers expend for the one commodity
will affect their ability to buy other commodities, or the way in which an increase Excerpts from
of the production of the one commodity will affect the ability of producers to Encyclopaedia
supply other commodities. There are many instances of joint or complementary Britannica
demand, as for fruit and sugar or for automobiles and petrol, and of joint supply,
as of mutton and wool, of coal-gas and coke, of cotton and cottonseed. The
general rule is, however, that consumers' outlays for any one commodity can
be increased only by reducing the amounts which they expend for other
commodities, and that more of any one commodity can be produced only by 151
displacing other possible uses of productive resources. This general rule is not
inconsistent with the fact that, making abstraction of the use of money as a
medium of exchange, the supply of any one commodity is an expression of the
demand of its producers for other commodities and services.
There is a sense in which supply and demand, seen in the aggregate, are
merely different aspects of a single situation. It is for this reason that some
of the older economists held that general overproduction is impossible — a
thèorem which, though not really erroneous, has proved to be misleading. The
effective demand of the producers of one commodity for other products depends
not only upon how much they produce, but also upon the relative demand of
other producers for that particular commodity as compared with other products.
Only so far as the demand for a particular commodity is elastic is it true in
any significant sense that an increase of its supply is an effective increase of
demand for other commodities. There may be and often are maladjustments
of supply and demand. Furthermore, production in general may at one time
outrun and at another time fail to keep pace with the expansion of money
incomes. In either event there will be general fluctuations of prices, attended,
as experience shows, by changes in the relative levels of the prices of different
classes of goods and services.
The general form of the relations of supply, demand and price which obtain
when all products are taken into account can be depicted mathematically in
systems of equations, and thus the general character of the whole interdependent
structure of prices can be laid bare. But empirical (statistical) studies of the
relations between the fluctuations of the production of various staple commodities
and fluctuations of their prices have shown that the first approximation previously
referred to is generally a useful and often a surprisingly accurate approximation.
It is necessary, of course, to allow for the effects of contemporaneous changes
of the general purchasing power of money, and it is sometimes necessary to
allow also for the effects of other important disturbing circumstances. But it
is not necessary to take account of complications of a secondary order of
importance in order to obtain ' 'empirical laws of demand'' for such commodities
as wheat, cotton, sugar, beef and potatoes which appear to be fairly reliable,
at least over periods of some years.
Inelastic Supply
The rule that supply and demand may be regarded as functions of or dependent
upon price must be so interpreted, of course, as to allow for the circumstance
that the supply of something is fixed and is in no way responsive to an increase
Journal of of price. As the production of other goods increases the prices of these non-
Economic reproducible forms of wealth must inevitably increase, unless the demand for
Studies them falls off. If these non-reproducible things are necessary instruments in
17,3/4 the production of other goods, as land is, then other goods will be produced
under conditions of diminishing returns, unless this disadvantage can be offset
by improvements in productive processes or by cheaper supplies of other
necessary productive instruments. For some purposes it is convenient to assume
152 that the aggregate supply of reproducible goods, or of reproducible productive
goods, is fixed for the time being. The problems of supply and demand then
have to do merely with the apportioning, by exchange, of an existing stock of
goods, or with the assigning of productive instruments to the most important
of their various possible uses. Thus the increase of the supply of labour in a
given industry or a given locality may be taken to depend largely upon a possible
transfer of workers from other industries or other localities. Whether labour
in the aggregate may be said to have a supply price (i.e. to be responsive in
the long run to an increase of wages) is a question to which the Malthusian
theory of population gave a more nearly unqualified affirmative answer than
would be supported by the present opinion of scholars.

PRICE
What prices are and what price, as a general conception, means would seem
to be obvious enough. Yet economists, dealing with the relations of prices to
different forms of economic activity and with their own interrelations find that
they must take pains if they are to keep their conceptions of price clearly defined
and consistent. Thus one may speak of the whole amount of money paid for
a quantum of goods as their price, or — if the goods are of a homogeneous
or standardized kind, sold by measure, weight, or tale — the amount of money
given for each unit of the goods may be regarded as the price. Alternatively,
price may be defined, not as a quantity of money but as a ratio between a quantity
of money and a quantity of goods. This is generally the more useful conception,
but the prices of unique goods, such as works of art, cannot be said to be ratios
of quantities. The price ratio is usually stated as so many monetary units
(shillings, pounds, dollars) per unit of commodity (ton, yard, bushel). In some
markets, however, the ratio is expressed inversely, as so many ounces or yards
per shilling, pound, or dollar. This would be a negligible difference if it were
not that, as the makers of index numbers have found, where prices or percentage
changes in prices are averaged or otherwise combined, precautions must be
taken if the results are not to be affected by the particular form in which the
price ratios are expressed.
A distinction may also be made between the conceptions of price as a ratio
of quantities and as a ratio of values. If ten units of money are required to
purchase one unit of a commodity, it may be inferred that a unit of the commodity
is ten times as valuable as a unit of money and that the price ratio merely gives
expression to that fact. That price is "value expressed in terms of money"
is a standard definition. This should not be taken to mean that the values of
goods are determined independently of or prior to the determination of their Excerpts from
prices, or that the values of goods and of money are determined separately. Encyclopaedia
The factors which determine the values both of goods and of money operate Britannica
through the processes of exchange, and the values which are thus determined
appear in the guise of money prices. It is probable, indeed, that the abstract
notion of exchange value is nothing more than a generalization of the simpler
idea of price. When we say that price is a ratio of values or that price is value
expressed in terms of money, we logically imply, not that value is antecedent 153
to price, but either that in respect of each particular transaction the limits within
which the ratio of exchange can vary are established by the general state of
the market, or that in analysing the factors which determine the price of any
one commodity, the value or general purchasing power of money may often,
without too large an error, be assumed to be constant. The conception of the
value of money, in turn, rests upon nothing more tangible than a broad view
of all the various prices of different goods and services, but it is nevertheless
a useful conception.

The Problems of Price

The economic theory of price has two principal divisions. One division has to
do with the inter-relations of the prices of different goods and services, and
with the way in which changes in production, consumption, and trade operate
directly upon some prices and indirectly upon others. This division of price
theory includes that important part of economics sometimes called the theory
of value and distribution (or sometimes simply the theory of price-making) and
also parts of other fields, such as the theory of international trade. It is concerned
both with the tendencies which continually make for a coherent and consistent
system of prices and with the subversive forces which make continuously for
change. The other division of the theory of prices has to do with the causes
of general movements of prices to a higher or lower level — movement which
may continue gradually through a long period of years, but which may be broken
by shorter movements, convulsive or cyclical in nature. The study of the long-
continued general trends of price, and, in considerable measure, of their shorter
movements as well, is commonly made a part of the general theory of money.
The reason is not that general changes of prices are always attributable to the
action of monetary factors alone, but that they are reflected in and in fact are
changes of the value of money. They can be studied most conveniently and
effectively by enquiring into the changing relations between the supply of money
and credit and the volume of production and trade. In recent years especial
attention has been given to what might be called the distortions of the whole
interrelated structure of prices which accompany changes in their general level.
The movements of certain classes of prices, for example, generally lag behind
the movements of other classes of prices in a more or less systematic way.
Commodity prices are not the only prices with which economists are
concerned. Securities such as bonds or debentures, stocks or shares and bills
or notes, have their prices. Railway rates are prices. Foreign exchange rates
express the price of current funds in one market in terms of current funds in
Journal of another market. Wages, of course, may be regarded as the price of labour, rent
Economic as the price of the use of land or of other durable goods, and interest as the
Studies price of advances of money. Profits, however, are not prices, for they are not
17,3/4 proportioned in any definite way to the amounts of goods or services supplied,
but are contingent upon the success of particular undertakings. Nor are taxes
prices, for the governmental services for which taxes pay are diffused, and
not apportioned to different taxpayers in accordance with their respective
154 contributions. Not even the fees which are paid to Government offices for
licences or for particular services are in all respects like prices, for the amount
of the fee is usually proportioned very loosely, if at all, either to the value of
the service to the recipient or to its cost to the Government. But the charges
which Governments make for supplying such things as water, gas, electricity
and transport may be governed more or less completely, according to the
circumstances of the particular case, by the principles in accordance with which
prices are determined.

Equilibrium Price
This is a price at which supply and demand are equal. A distinction has to be
made between a temporary equilibrium, such as would express a balancing of
the immediate factors which are operative in the market at any given time, and
such an equilibrium as would be reached eventually if the particular factors now
known to be at work could have their full effects. Equilibrium, then, is always
relative to time. All economic equilibria are unstable, but it is convenient in
analysis to take separate account of the factors which, if they were neither
impeded nor deflected, might finally lead to a stable equilibrium. Market price
is the price which will be found in a given market at a given time. It may be
regarded as the limiting form of short-time or temporary equilibrium price.
Normal price is a price just high enough to cover the expenses of production,
including whatever profits are necessary to induce men to undertake the risks
of productive enterprise. Because some firms produce at smaller expense than
others, because the expense per unit of production often varies, directly or
inversely, with the volume of output, and because of the difference, at any given
time, between the average expense incurred per unit of product in a given
establishment and the expense of producing an additional unit, the conception
of normal price is attended with serious, though not altogether insuperable
difficulties.

Competitive Price
This is the price which results from the activities of many buyers and sellers,
each of whom can affect the outcome only by buying or selling larger or smaller
quantities according as the price is at one point or another. Monopoly price
is a price fixed with a view to his or their own advantage by a single (exclusive)
seller or buyer, or by a combination of sellers or buyers acting as a unit. Class
price (or differential or discriminatory price) is possible only when a monopolist
seller is able to deal separately with different classes of buyers or to manage
in some other way to sell his goods in what are virtually separate markets.
A speculative price is a present price which is influenced by estimates of what Excerpts from
the price of the same commodity or security will be in the future. A contract Encyclopaedia
price, or what is sometimes called in speculative markets a "future" is the Britannica
present price for an exchange which is to be completed by delivery or by taking
delivery in the future. Mint price is the price of gold in terms of money at a
Government's mint or at a bank which acts as agent for the mint. Gold price
is the rather misleading name sometimes given to the result obtained by dividing
a price which is quoted in terms of some depreciated paper currency by the 155
price, in terms of the same currency, either of gold or of funds payable in some
other country where a gold monetary standard is at the time effective.

Demand Price
This is the price at which some specified quantity of a given commodity will
find purchasers. A schedule of demand prices or demand schedule, exhibits
the general relation between the price of a commodity and the amount of it
which will be purchased. Supply price, similarly, is the price at which a specified
quantity of a given commodity will be offered in the market. The form of the
supply schedule depends upon the conditions under which the particular
commodity is produced and also upon the period of time which is taken into
account. Thus a sudden general increase in demand (in the sense of a general
upward movement of a schedule of demand prices) would have the effect of
increasing the price at which a specified quantum of a given commodity would
be offered for sale. But if the commodity is produced under conditions of
increasing returns (i.e. if the output can be increased without a proportionate
increase of costs), an increase of demand, continued over a period of years,
will have an opposite effect upon its supply price. Indeed, the gradual lowering
of the supply prices of commodities produced under conditions of increasing
returns need not wait upon a general increase of demand. It is necessary only
that demand should be elastic, i.e. that the demand price of successively larger
quantities should not fall off too rapidly. It follows that when an adequate period
of time is taken into account, a schedule of supply prices may show that larger
quantities will be supplied at lower instead of higher prices. A corresponding
schedule of supply prices for a commodity produced under conditions of
diminishing returns (i.e. with increased output procurable only at a more than
proportionate increase of costs) would, of course, like a schedule of short-period
or "instantaneous" supply prices, show higher prices associated with larger
quantums of supply.

VALUE
In economics, use is made of three closely related conceptions of value: exchange
value, subjective value and imputed price.
Exchange Value, or value in exchange.
This denotes the relative importance which the community, as a whole,
manifesting its preferences through the process of the market, attaches to a
Journal of particular good (commodity or service) in comparison with other goods. It is
Economic often defined in the older treatises on political economy as "power in exchange''.
Studies The exchange value of a particular "good" is measured or expressed by the
quantity of other goods for which a unit of that good can be exchanged, or,
17,3/4 preferably, as a ratio of exchange. Any one good, of course, really has many
different specific exchange values, corresponding to the various ratios at which
it can be exchanged for different commodities and services. The notion of the
156 general exchange value of a good rests upon an inclusive view of all its different
specific exchange values. The money price of a good is conceived of as one
of its specific exchange values or, in other connections, as its general exchange
value expressed in terms of money, which thus serves as a "common
denominator of values". Because the direct barter of goods for goods is
uncommon, the exchange values of different goods have to be inferred from
their money prices. Indeed, the conception of exchange value is derived from
the conception of price by making abstraction of the use of money as an
instrument of purchase and sale. This abstraction has been found useful in
economics because, first, some aspects of important economic problems are
seen more clearly when values are looked upon as though they were determined
by the direct comparison of goods with goods without the intervention of money,
and second, because it is often desirable to eliminate the effects which changes
in the value of money have upon the money prices of different goods. With
the development of statistical technique, however, it has been found possible
to take separate account of general changes of prices and of relative changes
in the prices which are paid for particular goods. For this and other reasons
the conception of exchange value has lost some of the importance which it once
had in economics. Economic analysis now commonly deals, more directly and
realistically, with money prices.

Subjective Value
This denotes the relative importance which an individual consumer attaches
to a particular good, in comparison with other goods. It relates always to specific
quantities or specific increments or decrements of goods. Even an indivisible
good, an automobile for example, is a compound of various qualities, such as
size, power, comfort and appearance, and buyers have a certain range of choice
within which these qualities may be had in larger or smaller measure and
combined in different proportions. So far as a consumer chooses rationally rather
than impulsively he apportions his outlays so that he would gain nothing by
buying more of one thing and less of another. Thus he brings his monthly or
annual outlays for different purposes to or towards a common boundary or margin
(his "margin of consumption") where the importance which he attaches to
what he gets for the final or marginal pound or dollar which he spends, say
for food, is equal to the importance of what he gets for the marginal pound
or dollar spent for clothing or other object.

Imputed Price
This is an estimate of the amount of money for which a given article or a given
quantum of goods could be sold or bought. When we say that the value of
a work of art, a house, or a stock of goods is so many pounds or dollars, we Excerpts from
are using the word value in the sense of imputed price. The "valuation" or Encyclopaedia
appraisal of goods for purposes of taxation or of formal transfer is an imputation Britannica
of price. A nation's wealth can be expressed in terms of its money value only
by imputing prices to the various items of which it is composed. Value, in this
sense, is not the price which could be got at a forced sale or the price which
would have to be paid by buyers in order to induce holders to part with their
goods en bloc. It is, instead, an estimate of the price which could be obtained 157
in due course, with no sudden accelerating of either supply or demand.
Statements to the effect that the price of a commodity is above or below its
value generally mean only that because of a temporary excess of supply or
demand or because buyers or sellers lack knowledge of facts which, if known,
would affect their offers, the present price is out of line with the probable future
price.
Theories of Value
That the exchange value of a good is determined by the amount of labour required
to produce it was at one time a fairly common belief. Adopted and restated
by Adam Smith and his successors, this doctrine was later taken over by Karl
Marx and other socialists and put into a form in which labour is held to be the
sole source or cause of value. In its best form, as set forth by Ricardo, the
labour theory of value was to the effect that, allowing for temporary fluctuations
of supply and demand, the exchange values of different commodities tend to
be proportional to the respective quantities of labour required to produce them.
The rent of land was held to be without influence on the value of its produce,
for the reason that the value had to be high enough to cover the labour costs
incurred under the most unfavourable conditions of cultivation, where no rent
is or can be paid. Capital was regarded as stored up labour, and interest or
necessary profit on capital was disregarded on the arbitrary assumption that
its amount would be roughly proportionate to the total amount of labour employed
in producing a commodity.
Apart from the circumstance that other costs than labour are not adequately
brought into the reckoning, the labour theory of value encounters two difficulties.
First, different kinds of work call for different kinds and degrees of ability and
training, and differ in respect of attractiveness. Different kinds of labour can
be fused into a "quantity" of labour only by grading them or weighting them
in accordance with the different values which their respective products command
in the market, and this procedure leads to circular reasoning. Second, so far
as there is, in fact, any systematic relation between quantities of labour and
the values of products, it is a result of the circumstance that labour is apportioned
to different tasks only in such proportion and degree as its different products
are valuable. Similar difficulties are encountered in any attempts to find a simple
relation between values and "real costs".
Dissatisfied with explanations of values in terms of costs, some economists,
taking note of the circumstance that values must necessarily be related to the
choices and preferences of consumers, sought to find the determinant of value
Journal of in marginal utility (i.e. the utility or importance to the buyer of the least important
Economic or "marginal" part of his current consumption of any commodity). Subjective
Studies values are proportionate to marginal utilities and exchange values must be
17,3/4 proportionate to subjective values. If they were not, the consumer would alter
his budget by buying more of one thing and less of another. Each* consumer
thus adjusts his purchases so as to bring his own valuations into line with the
values which obtain in the market, but the values which obtain in the market
158 are the resultants of the aggregate demand of consumers for different products.
This aggregate demand determines what and how much shall be produced and
what the values of different uses of labour and of other productive agents shall
be. Such, in brief outline, is the marginal utility theory of value. It illuminates
some aspects of the problem, but it is quite as one-sided and incomplete as
a cost-of-production theory of value is. That consumers' preferences determine
what shall be produced and what costs of production shall be incurred is no
more true than that the relative costs of producing different things determine
how far consumers can follow their preferences.

Displacement Costs
The costs which are most directly and systematically related to values are
displacement costs. Labour displaces other uses of time, saving displaces present
consumption, any one use of labour or capital or natural resources displaces
other uses, and in general, the production of one good displaces the production
of other goods. The production of some goods can be increased with a
progressively smaller sacrifice of other possible products. Other goods can be
had in larger quantities only by sacrificing progressively larger amounts of
alternative products. As the amounts of a given good which have to be sacrificed
in order that other goods may be acquired change, consumers will alter their
budgets, but how far they will go will depend upon the relative importance to
them of the uses of the increments of goods which they acquire and of the
increments which they sacrifice. Out of the play of forces such as these, and
especially out of the relation between the preferences of consumers on the
one hand and the technical conditions which determine the displacement costs
of production on the other hand, there emerges a tendency — never fully
effective because of continuous changes in the structure of demand and in the
conditions of supply — towards the establishing of a system of exchange values
which would bring production and consumption fully into equilibrium.

WEALTH
In economics wealth may mean either a stock or fund existing at a given time
or a flow of valuable goods and services during a period of time. In dealing
with the production, exchange, distribution and consumption of wealth,
economics is concerned very largely with the origins of the community's annual
income and with the disposition which is made of it. This annualflowof income,
or national dividend, may be conceived of as comprising all of the valuable
commodities which pass into the hands of theirfinalconsumers during the year,
together with the valuable personal services (e.g. the services of the Excerpts from
Government, of physicians, of actors, of household servants) rendered during Encyclopaedia
the year, apart from those which come to the consumer embodied, as we might Britannica
say, in the products of industry and trade. Alternatively, the community's annual
flow of wealth may be identified with its annual product, which comprises the
personal services directly rendered to consumers, as aforesaid, together with
the results of all that is accomplished during the year in forwarding products
towards their final form and destination, and in augmenting the community's 159
productive equipment. The two conceptions overlap, for both include the
products of work which is performed and comes to its final fruition within the
year. But one conception includes, in addition, theripenedfruits of work done
in the past, while the other includes fruits of present work which will reach
their maturity only in future years. The money value of what we may call
consumers' real income (the first of the two conceptions) will not, in general,
be the same as the money value of the annual product. In a prosperous
community, where saving is growing relatively to consumption, the money value
of the annual product will be the larger of the two. It is always approximately
equal to the aggregate amount of the net money incomes received during the
year. It lends itself better to statistical measurement than consumers' real income
does, and it is the better index of the community's economic welfare.
Viewed as a stock or fund, wealth is an aggregate of scarce and valuable
objects. Some of these valuable objects are given by nature, others are the
products of man's industry and thrift, but all of them, irrespective of their origins
or their cost, are valued prospectively, looking towards the future, with reference
to their importance as aids to production or to their more direct beneficial uses.
Wealth can be described by means of a stock-taking or inventory, but it can
be summed or measured as a whole only in terms of its money value. Wealth
is always something owned, whether the ownership be private or public. Its
value is the sum of the values of existing property rights. Securities, such as
stocks, shares and bills, are among the objects of property, but if these are
to be counted as wealth, account must be taken of the circumstance that they
are offset by an equal amount of "negative wealth" — the liabilities of their
issuers. In arriving at the wealth of the people of a given country or region
(as distinguished from the wealth within that country or region), the net balance
of external assets and external liabilities must be included.
It is obvious that the degree of a country's economic well-being depends
upon the character and extent of its unappropriable resources — sunshine,
rainfall, rivers, harbours — as well as upon the appropriate objects of wealth
within its borders. Is not a navigable river, therefore, as much an item in a
nation's wealth as a railway or a canal? Yes, in the sense that a nation's wealth
is larger because of an abundance of these natural advantages. No, if is meant
that no evaluation of a nation's wealth is complete if separate account is not
taken of such things.

UTILITY
In economics the utility of a good is not conceived to be its usefulness, as judged
by any objective standard, but its importance to a consumer. Capacity to excite
Journal of 23. [The issues dealt with here are based on Young's "The Measurement of Changes in the
General Price Level", Quarterly Journal of Economics, August 1921, reprinted in Economic
Economic Problems New and Old, 1927.]
Studies 24. See Mill, J.S., "The Behaviour of Prices".
17,3/4 25. [Young, A. (1925), "Marshall on Consumers' Surplus in International Trade", Quarterly
Journal of Economics, Vol. 39, pp. 144-50 and 489-90. Young states (p. 149): "I might
be willing to pay $30 a ton for enough coal to heat one room for the winter, and $20 a
ton for enough coal to heat two rooms. It does not follow that I should be willing to buy
112 enough coal at $30 to heat one room and enough at $20 to heat a second room." See
also Ely, R.T. et al. (1930), Outline of Economics, pp. 179-80.]
26. Marshall, A., Principles, Book 3, Ch. VI, seq.
27. [Hobson, J.A. (1900), Economics of Distribution, London.]
28. [In ' 'Marshall on Consumers' Surplus in International Trade'', ibid., p. 149, Young states:
". . .by no stretch of the imagination can the importance of a dollar to a consumer be
deemed constant over the wholefieldof his expenditures. The different surpluses attributed
to the consumer in his purchases of different commodities blot out one another. Consumers'
surplus, as Marshall measures it, is not additive. Its sum, for any one consumer, comes
precisely to zero.
' 'Nevertheless, it would be absurd to deny that consumers gain when commodities are
to be had with less exertion or at a smaller sacrifice of other goods. But the nature and
conditions of such gains must be sought in the analysis of costs, not in demand schedules.
Even then the net benefits conferred by such economies cannot be measured, although
it is possible to compare them and to rank them as greater or less."]
29. Principles, Appendix H, 8th edition. ["Limitations of the Use of Statistical Assumptions
in Regard to Increasing Returns." Figure 14 is drawn directly from Marshall's Appendix
H, eighth edition, where there is extensive discussion of the "representative firm", internal
and external economies, and increasing returns, to which Young is alluding in these lectures.]
30. [Sic Kaldor's marginal handwritten note. The puzzle is resolved by reference to Marshall's
own discussion of this diagram, in which he states: "For convenience the owners of
differential advantages may be arranged in descending order from left to right; and thus
SS' becomes a curve sloping upwards to the right." This must mean that the greatest
advantages are at the left, as Kaldor has suggested here.]
31. [This cryptic paragraph perhaps warrants a clarificatory note. Young appears to be saying
that when price is high it is because costs (of the marginal producers) are high, so supply
(and demand) is low. When price is low it is because costs are low, so supply (and demand)
is high. Thus the supply curve (along with the demand curve) is downward sloping. It
is only the particular expenses curve (a very short-run construct) that is upward sloping.
(Later Young explains that supply is greater when demand is greater because of the
"increasing returns" that are associated with a larger market size, which affords greater
scope for internal and external economies, and for specialisation in all its manifestations.
Microeconomic analysis then merges with macroeconomics and the theory of economic
progress.) Marshall himself (Appendix H) says of the upward sloping curve in Figure 14,
that it is not a true supply curve; but modem textbooks usually conceive it thus, and
ignore Marshall's many reservations.]
32. [The word ' 'moot" has been changed to "most important'' in a hand-written amendment
to the manuscript.]
33. [These ideas were examined in greater detail in Young, A. (1929), "Big Business: How
the Economic System Grows and Evolves Like a Living Organism", reprinted on pp. 161-70.]
34. [The reference is obscure, but see Young's article, published anonymously, based on such
an approach, "Economic Changes since the War: Their Meaning and their Lessons",
in The Book of Popular Science, Vol. 15, Grolier Society, New York, 1929, ch. 37, pp.
5239-48.]
Journal of desire rather than to yield benefits or bestow happiness is the measure of a
Economic good's utility, in this technical sense, and only as the conduct of life is completely
Studies rational and guided by adequate foresight are the two capacities the same.
17,3/4 The law or principle of diminishing utility, which serves in economics as a
logical foundation for the laws of demand, is merely a general statement
respecting an obvious aspect of the way in which men apportion their time and
their means. Summarized, it is that progressively diminishing importance is
160 attached by a consumer to successive additional increments of a good.
Diminishing utility has two aspects: absolute and relative. One suit of clothes
is more important than a second, and a second is more important than a third.
It is more important that in a cold climate one should have coal enough to keep
one room warm during the winter than that a second, or a third or a fourth
room should be heated. It cannot be said, however, that all luxuries and
particularly such as minister to the "desire for distinction", have different uses
which can be ranked in an order of diminishing importance.
Marginal utility is the utility of the last increment (not necessarily last in
point of time) which the consumer thinks worth acquiring.

Reprinted with permission from Encyclopaedia Britannica, 14th edition, © 1929 by Encyclopaedia
Britannica, Inc.
 Big Business: How the Big
Business
Economic System Grows and
Evolves Like a Living
Organism 161
What Will Become of the Small Retailer?
Allyn Young
The vast and intricate system of economic organization, by means of which the
varied needs of modern life are met, is mostly a product of a continuous process
of evolution. In only very small part is it a result of conscious collective planning
or devising. It grows and changes unceasingly as men, in their work as producers
and money-makers, try to find new and more economical ways of providing
consumers with goods which they are willing to buy. Every innovation, whether
in the technique of production or in the organization of business, affects in some
degree the conditions which govern the activities of other producers. The
economic system grows and evolves, like a living organism, by means of
successive adjustments and adaptations. But change breeds change, and every
new adjustment paves the way for another.
So complex is the world's economic organization and so inconspicuous, at
first, are some of the changes which finally lead to veritable economic revolutions,
that it is dangerous to generalise about the nature and probable outcome of
the economic tendencies which are at work in the contemporary world. One
tendency, in particular, has again and again been made the basis of generalizations
which thus far have proved to be unsound. That is the observable tendency
towards an increase of the size of the average business undertaking. Because
of that tendency many men have been led to prophesy the final doom of the
competitive system and the complete extinction of the small business
undertaking.
Thus Karl Marx, who formulated the creed of modem revolutionary socialism,
held that the small property owner was fated to disappear, and that wealth and
the control of industry would become concentrated in the hands of a relatively
small number of people. But during the last 50 years the general course of
events has been so far out of line with Marx's forecast that, among the socialists,
only his most loyal disciples now insist upon its truth. There have been a host
of minor prophets, too, ready when any new industrial amalgamation is
announced, or when any large industrial undertaking achieves a striking success
and grows rapidly larger, to proclaim the approaching end of competition as
a factor in trade and industry, and the coming dominance of monopoly. The

Published anonymously as Chapter 38 of The Book of Popular Science, Vol. 15, New York, 1929.
Journal of railway, such prophets once held, was to supplant all other agencies of transport.
Economic Yet the railway itself now has to face the powerful competition of motor transport.
Studies Immediately before and after the beginning of the present century, a very large
17,3/4 number of industrial combinations or "trusts" were formed (a recent writer
lists 90 combinations, large and small, which were formed in the United States
between 1898 and 1904). There was no lack of prophesying that a new industrial
order was being ushered in. Only a relatively small number of these
162 combinations, however, proved to be successful. Some of them, in fact, were
formed merely in order that their securities might be sold at inflated prices
to investors who overestimated the profits that would result from combination.

Does the New Order Hurt the Old?

When department stores were new there were many who foretold the ruin of
the small shopkeeper and his disappearance from the field of retail trades. In
recent years the growing activities of mail-order houses and of systems of chain
stores have given rise to similar forebodings. Are the new prophets of economic
revolution any more likely to be right than the old?
No one dominating principle shapes the course of economic evolution. It is,
as we have seen, always a matter of successive adjustments to a situation which
is forever new because it is forever changing. The advantages of unified or large-
scale industrial management are not absolute. There are disadvantages as well
as advantages. Which are preponderant in a particular industry cannot be
determined upon the basis of abstract considerations alone. Everything depends
upon the characteristics of the particular industry, upon the nature of its products,
and the size of its markets. Let the reader ponder the reasons which account
for the circumstance that agriculture, the world over, remains a small-scale
industry together with the reasons which explain why the manufacture of steel,
the world over, is mostly in the hands of gigantic corporations. It will not do
to evade the issue by holding that agriculture, as contrasted with steel-making,
is inefficiently organized. In the first place, there is no real evidence to that
effect. In the second place, no farmer, not even the most efficient farmer, could
continue very long to enlarge the scope of his operations, by acquiring and
operating one adjoining farm after another, without losing money. After all, the
real test of efficiency as a producer is the capacity to bid enough for land, labour
and other productive agents to keep them out of other employments and then
to use them profitably. This is an unfair test only when a particular producer
enjoys special privileges, not available to his would-be competitors, or when
he is strong enough to be able to afford to suppress competition, whenever
it begins to show itself, by attacking it ruthlessly and at whatever cost.

Enlarging the Market

There is one elementary distinction which ought never to be neglected, for
its neglect always leads to confusion. That is the distinction between the
economies which may be gained when the market for a particular product is
enlarged, so that it can be produced in larger quantities, and the economies
which a particular firm secures when it increases the scale of its operations.
The history of the securing of the first of these two kinds of economies makes Big
a very important part of the history of modern industry. To appreciate the nature Business
and significance of these economies, one must fix one's eyes, not upon the
activities of a particular firm, but upon the operations of an entire industry,
or, better yet, upon the operations of the whole group of related industries
which contribute to the making of a single product. Producers of raw materials,
of fuel, of auxiliary supplies, of machines, together with railways and other
transport agencies are all in the picture. Consider, for example, the printing 163
industry. The average printing establishment is not, even today, a very large
affair. Back of it, however, and, as one might say, reaching the final consumer
only through and by means of it, are the type-founders, the makers of linotypes
and monotypes, of printing presses and of other specialized machines, of inks,
of wood pulp, and of paper, together with the industries which, in turn, supply
equipment and materials to those which are immediately auxiliary to that of
printing.
Thus the books, the magazines, the newspapers, and the multitude of printed
forms which appear to be so important a part of the paraphernalia of modern
life are seen to be the products, not necessarily of large printing establishments,
but of an intricately organized system of industries, operating, as an aggregate,
on an exceedingly large scale. Sometimes the various stages of a series of
industrial operations are brought together into what is called an "integrated"
industry. The United States Steel Corporation and the Ford Motor Works, are
as good examples as can be found anywhere of integrated undertakings. In no
case, however, can the integration of successive industrial processes be
altogether complete. Nor are the conditions common which make any large
degree of integration economical or feasible.

Economies of the Big Plant

Turning now to the large undertaking or large establishment (as distinguished
from the large industry or large group of related industries) let us try to discover
whether any general explanations can tell us why, in some fields of industry
and trade, the average successful undertaking is very large, while in other fields
the small enterprise continues to hold its own. We shall arbitrarily exclude from
consideration such undertakings as railways and local "public utilities" (water,
gas, and electric light plants, street railways, telephone service, etc.). In this
particular field of enterprise, almost any undertaking requires a considerable
initial investment of capital, and, furthermore, the special conditions under which
such undertakings operate make monopoly (either controlled or owned by the
public) more economical than competition. Outside of this special field, then,
what industrial and trading activities lend themselves best to large-scale and
what to small-scale management? As we have already seen, the general
conditions which business enterprise has to meet change so continuously and
so rapidly that any single generalization, and especially any definite forecast,
is likely to be wrong. There is one observation, however, which appears to
be supported by all of the experience which we have had up till now with such
matters. Unified management and large-scale undertakings succeed best when
Journal of the product itself can be standardized (so that one unit is like any other unit)
Economic and when the processes of production, however complex, can be reduced to
Studies an ordered succession of routine operation.
17,3/4
Industries of a Different Class
Some of the products of agriculture are fairly well standardized — so well so,
indeed, that they are commonly sold by weight or measure. But the conditions
164 under which farms have to be managed do not lend themselves to routine, in
the sense in which routine pervades the operations of many manufacturing
industries. The farmer has to know the qualities of his land and the various
peculiarities of his different fields. He has to contend with the vicissitudes of
the weather. He has to meet one small emergency after another, and, so far
as may be, he has to keep his plans flexible and adaptable. In farming,
management (responsible directing and deciding) has to concern itself with a
multitude of small details. It cannot successfully spread itself over a very large
field. This is one reason (the circumstance that agriculture still remains in some
degree a family industry may be another) why the average farm is not a very
large undertaking. How different the controlling conditions are in the manufacture
of steel billets and beams and rails will be obvious to anyone. Look again at
the printing industry. Its products are almost infinitely various. That is one of
the reasons why the industry of printing is not in the hands of a relatively small
number of establishments of great size. Book printing, newspaper printing, and
commercial printing are different trades, requiring (in part) different sorts of
equipment, and each calling for a considerable amount of managerial supervision
of details. The markets for many kinds of printing, futhermore, are local. It
might be quite as uneconomical for a resident of a small town to have all of
his printing done in a great manufacturing centre as to send there for all of
his small purchases or for his plumber or his barber. But even the "one-man"
shop of the small printer who combines the functions of craftsman and retail
dealer is one of the channels through which the operations of the great industries
which are auxiliary to the printing trade serve to meet the wants of the buyers
of printing.
An industry may approach the status of a "handicraft", as we have seen,
either because of the insistent demand of buyers for special and particular
characteristics in the things which they purchase or because of the variability
and instability of the conditions with which producers have to contend. At one
end of the scale is art in all of its varied forms. The artist has to manipulate
stubborn and refractory materials into new forms, which will convey meaning
and a sense of beauty to the observer. He has to acquire a "technique", which
means that he has to achieve a difficult mastery over his own faculties. His
task is as far removed as one can imagine from the processes which are utilised
most economically in "mass-production", and which therefore lend themselves
best to large-scale organization and management. The artist is first of all a
craftsman. And the farmer, it may be observed, is, and has to be, rather more
like a craftsman than like a manager of a "standardized" industry. Modern large-
scale industry — where it can — tends to eliminate the craftsman, and to
substitute the engineer, the machine, and the machine operator. A penetrating Big
observation by Werner Sombart, a great German economist, has been Business
summarised by Professor Wesley Mitchell in the following words:
Modern technique seeks emancipation from the hobbles of living nature. So far as possible,
it chooses inorganic materials in place of organic — metals replace wood, coal-tar dyes replace
vegetable dyes, mineral lubricants replace animal oils, and so on. Similarly with prime movers:
man power and animal power are replaced by steam, electricity and the internal combustion
engine. Working processes undergo a like transformation. For the ordinary processes of nature, 165
modern technique substitutes artfully arranged chemical or mechanical processes, designed
to convert standardized materials into standardized products through a continuous series of
operations on a quantity basis.

The Field of Standardization

Standardization has to contend, however, with the infinite variety of human needs
and with the human passion for novelty and for change. Its largest field is found
somewhere between the variety and instability of the natural environment, on
the one hand, and the varied requirements and caprices of human nature itself,
on the other hand. It is no accident, therefore, that with certain notable
exceptions its greatest triumphs have been in the "heavy" industries, which
supply "semi-finished" products. Out of these products a multitude of specialized
industries fashion the bewildering varieties of goods, which are sold in the world's
markets. There is an appearance of paradox in the circumstance that never
before in the world's history has so large and varied an assortment of goods
been within reach of the average man as in these days of "standardization"!
Some of the industries which take over the standardized semi-finished products
and convert them into a diversity of finished products are themselves very large
industries, composed of large establishments, while others are small. As a
general rule, however, and as we should expect, the typical establishment which
has a specialized product (i.e. a product fitted or adjusted to the particular needs
of a particular body of consumers) is not as large as the typical establishment
producing semi-finished or "intermediate" goods.

Determining Factors of Size

Distance, and the modern methods of transport and communication by means
of which distance is overcome, are among the most potent of the circumstances
which determine the optimum size of an individual undertaking within a given
industry. If raw materials are both widely dispersed and bulky, so that transport
costs are large, a number of small plants, distributed so as to draw upon different
local sources of supply, may be more economical than a few large plants. If
thefinishedproduct is bulky, perishable, or for some other reason difficult to
transport, the advantages of small plants, near to different markets, may be
great enough to offset whatever technical economies might be secured by the
concentration of manufacturing operations in a very few large plants, necessarily
remote from some, at least, of the principal markets. The cheapening and
improving of transport and communication during the last hundred years has
had the effect, in many industries, of enlarging the area from which raw materials
can be obtained economically; as well as the area within which the products
Journal of of a particular establishment can be sold profitably. These changes have operated
Economic to make the average establishment, in such industries, larger than otherwise
Studies it would have been.
17,3/4
Shifting Retail Trade Centres
The organization of retail trade, also, is influenced by distance and by
166 improvements in transport and communications, for retail trade has to adapt
itself to "market areas", and these, in turn, are larger or smaller according
as distance is a smaller or larger obstacle. Almost every retail establishment
occupies a site which gives it some sort of advantage, however small that
advantage may be. Just what particular sort of site gives the maximum advantage
depends upon the character of the goods which are offered for sale and the
nature of the market which is sought for them. A shopkeeper may be satisfied,
according to his capital and his ambitions, with the casual patronage of passers-by,
or with some part of the patronage of a neighbourhood. He may try to secure
for himself a share of the trade of an established "shopping district", and he
may even hope to attract "pilgrims from afar". In rapidly growing communities,
however, and especially in American communities, retail markets are never stable
for very long. A shopping district becomes congested, so that some enterprizing
firm decides that it can do better by establishing itself elsewhere. Other firms
may follow its example, and a new shopping district may soon be created. The
old district may survive, or it may be given over to a wholly different class or
group of business activities. Much economic waste, it may be observed, often
accompanies this process of restless change. American cities have only recently
come to realise, what most European cities learned long ago, that a city's growth
must be planned, that it must not be left to the haphazard forces of shopkeepers'
competition and real estate speculation. A city is like a living organism, but
unlike a healthy unitary organism, it does not have within itself those magical
properties which preserve a due balance of the parts and organs and which
prevent the development of abnormalities and excrescences.
Let us return, however, to our own proper problems. The fears, once
prevalent, that great department stores would secure a monopoly of all retail
trade have pretty completely disappeared. In the first place, anything like an
effective monopoly of retail trade is impossible for there is no way in which
competition in that field can be effectively suppressed. Even though certain
great department stores have been amalgamated, so that they are units or links
in ' 'chains'' of stores, competition on the part of department stores themselves
remains keen and effective. In the second place, the department store has not
displaced the smaller establishment. Not merely do these survive, but with
the growth of our towns and cities, their numbers continue to increase. Most
of them are comprised in one or the other of two distinct classes: first, the
specialized shop, offering a limited and distinctive type of goods; second, the
neighbourhood store (observe that the "neighbourhood" may be either a
business or a residential district), conveniently accessible to a fair number of
possible customers.
The Department Store Big
Some of the advantages of the department store are obvious. Shopping under Business
one roof is convenient. A single credit account will cover a considerable part
of a buyer's needs. The department store can be and usually is arranged like
a great bazaar, with a visible display of very large samples of the goods offered
for sale, so that the buyer who enters the store for a particular purpose may
find his interest attracted to other goods. From time to time certain "lines"
may be offered at bargain prices, so as to achieve the purpose of attracting 167
customers into the store. These advantages suffice, up to a certain point, but
beyond that point they fail so that room is left for that persistent competition
of which we have already spoken. The "overhead" expenses (rent, light, heat,
etc.) of a department store are likely to be quite as large, in relation to the
gross volume of sales, as those of a smaller establishment. Every effort has
to be made to keep the "rate of turnover" (i.e. the ratio of sales to the average
amount of goods held in stock) as high as possible. One great and profitable
American department store, in accordance with a definite policy, accepts a net
loss (which, of course, it tries to minimize) on that part of its business which
is housed, in its imposing building, on and above the street level, getting its
profits out of enormous sales of cheaper goods in its ' 'bargain basement''. The
losses of its other departments thus constitute, in a curiously literal sense,
part of the "overhead" expenses of its profitable activities. The mere size of
a department store does not always enable it to buy its goods more cheaply
than similar goods can be bought by an alert manager of a smaller and more
highly specialized establishment, for the latter's annual sales of a particular
class of goods may be quite as large as those of the department store. In short,
the department store has advantages, but it also has its limitations. It has an
important, useful, and often profitable place in the general field of retail
merchandising, but it can occupy only a certain special part of that broad field.

The Chain Store Development

Chain stores, which have had a spectacular development in recent years, present
some striking contrasts with department stores. In respect of the sheer
magnitude of their operations some of the great systems of chain stores equal
and even surpass the largest department stores. But whereas the department
store brings together different activities and an amazing range of commodities
under one roof, the chain of stores is often content to handle only one particular
class of goods, and in place of one great central bazaar to which all customers
must come, it maintains a large number of relatively small outlets, located in
each instance in accordance with a careful calculation of advantages. A recent
federal census of Distribution, revealed the surprising fact that 28.7 per cent
of the total volume of sales in the eleven cities covered by the census had fallen
into the hands of the chain stores. Their sales for a year, in those eleven cities,
amounted in the aggregate to more than $1,200,000,000. For the United States
as a whole, according to figures gathered by the Chain Store Research Bureau,
the value of the goods sold by chain stores in a recent year was over
$5,000,000,000. In 1928 nearly 4,000 "chains", large and small, were operating,
there being as many as 860, some local and some operating on a nationwide
Journal of scale, in the grocery trade alone. Among the other enterprises which are being
Economic operated successfully as "chains" are boot and shoe stores, clothing stores,
Studies restaurants, bakeries, drug stores, and those extraordinarily interesting and
17,3/4 successful establishments which resemble miniature department stores, but
where nothing can be bought except at smallfixedprices, such as 5 or 10 cents,
or 10 or 25 cents, or within a somewhat larger range, but not exceeding a dollar.
Any large economic development of this kind has back of it, of course, the
168 vision and initiative of individual men. But it should not be forgotten that changing
conditions create the opportunities of which enterprising men take advantage.
The chain store system is no "belated" discovery. It is not as though men
had suddenly devised a way of securing economies which before had always
eluded them, so that an economic waste of long standing could finally be
eliminated. No, the chain store is merely another example of adaptation and
adjustment to a new situation. Fifty years ago chain store systems would probably
have been unprofitable, except in a few narrowly circumscribed fields.

The Telephone in Retail Shopping

Barely a generation ago the general introduction of the telephone brought with
it a notable change in the conditions to which retail trade had to adapt itself.
Some of the advantages of location which small retailers possessed were lost,
for the telephone helped to overcome some of the disadvantages of distance.
Particularly was this true of what is sometimes called the "better-class trade"
in staple kinds of groceries and provisions. An established reputation for reliable
goods and for prompt service came to count far more, with certain classes
of consumers, than a certainty that the prices asked were as low as the market
afforded. The consumer in fact was willing to pay a certain price for relief from
the inconvenience of personal shopping. Many grocery stores, although affording
facilities for the personal inspection of goods, came to be largely warehouses
from which goods were delivered, upon order, to the customer's home. The
system of making sales upon credit, already well established, extended still
further as a result of the introduction of the telephone. These changes did not
and could not greatly affect the buying habits of the poorer classes in the
community, and as time went on some of the advantages which people with
moderate incomes had secured from them began to be whittled away.

Increase in Selling Costs

Modern capital-using methods of manufacturing goods greatly increase the
productivity of the labour employed in industry. For that very reason they are
responsible for a corresponding increase of the cost of employing labour in other
pursuits. With the steady increase of the productivity of labour in industry the
cost of personal services has increased, and will continue to increase. An
increasing pressure, therefore, is put upon retailers, as upon those engaged
in otherfieldsof enterprise, to economize, so far as they can, in their use of
labour, particularly when the labour is not directly aided by "labour-saving"
machinery. As compared with the costs of manufacturing goods, the costs of
handling, displaying, selling and delivering have become relatively greater.
Influence of the Automobile Big
These costs fall upon the consumer, and the consumer of moderate means Business
has reached a point where he is willing to adjust himself to a system by means
of which these costs are reduced, even at the expense of some personal
inconvenience to himself. The well-nigh universal use of the automobile, affording
a quick andflexiblemeans of transport, has been another very important element
in the new situation to which both dealers and consumers have had to adjust
themselves. 169
The problems which the different retail trades have to meet are not, however,
all alike. One of the earliest of the great chains was established to sell cigars
and tobacco. Taking account of the circumstance that many men buy their cigars
or cigarettes in small quantities, and at whatever place is most convenient, careful
studies were made of the average number of people passing certain possible
sites for retail stores (certain corners, for example) per hour or day. Other
considerations were, of course, taken into account, but when once the managers
of the chain were convinced that a particular location was the right one, hardly
any rent, no matter how high, was regarded as too much to pay. The location
of those vendors of curiously assorted goods, the chain drug stores, are
determined on much the same bases. Different considerations, however, often
govern the choosing of locations for chain grocery stores. The margin of "a
profit on the turnover" is generally fairly low, and, to make a profit, overhead
costs have to be kept low, too.

Choice of Location
Nearness to the homes of possible customers counts far more than proximity
to important business districts or a large number of passers-by. Nowhere,
however, does the influence of the new situation created by the general use
of the automobile (which has enormously increased the possible range of "cash
and carry'' trade) show itself more plainly than in the selection of the locations
of the great new retail stores which have been opened in a number of American
cities by firms which formerly confined their activities to the mail-order trade.
The locations selected have generally been away from the crowded business
and shopping districts, where access by automobile is difficult and where parking
space is not to be had. This new development is a particularly interesting example
of adaptation to new conditions. It may be the beginning of a considerable
overturning of the principles which have hitherto shaped the growth of American
cities and the organization of American retail markets.
The economies achieved by the chain stores do not stop with their elimination
(generally, though not universally) of the expense of delivering goods and of
losses from bad debts. The accounts of chain grocery stores have been compared
by the Harvard Bureau of Business Research with the accounts of ordinary
retail grocers. The chain stores, it was found, were able to buy more cheaply.
On much of their trade the wholesaler is virtually eliminated. They have their
own brands, and some of them manufacture or prepare a considerable part of
the products which they sell. Their operating costs, also, are kept at a relatively
lowfigure.By keeping reserve supplies in central warehouses, and by confining
Journal of themselves mostly to trade in a selected but limited line of staples, their different
Economic outlets are able to get along with relatively small stocks, so the ' 'rate of turnover''
Studies (a fundamental factor in the economy of retail trading) is relatively high.
17,3/4 It must not be supposed, however, that there is any magic formula for business
success, whether in large industries or small, in chain stores or in the ordinary
single-unit establishment. Some large industries have failed and not all systems
of chain stores have succeeded financially. Intelligence, imagination, persistence
170 and courage are needed in these fields, as elsewhere. One of the real advantages
of large-scale units in industry and commerce, is that they make it possible
for intelligence and managerial ability of an exceptional order to be spread, as
we might say, over a larger field of activities. But how far it is economical to
go on enlarging the scale of the business unit, even when the best of brains
are behind it, depends, as we have tried to show, upon, first, the characteristics
of the particular industry or field of enterprise, and, second, the character of
the general economic situation into which every business undertaking must
somehow be made to fit.