Fundamental Concepts Of Economics
( Originally Published Early 1900's )
1. Utility.—In economics the words utility and value are given an exact definite meaning which must be clearly understood, since in everyday speech they are used in different senses.
Briefly, utility is want-satisfying power. Any-thing which men want is said to possess utility. If only one man desires it, then it possesses utility to him, but not to others. If a thing is intensely desired it is said to possess great utility; the less intense the desire, the less the utility. Potatoes, for example, are greatly desired for food and thus possess great utility. Diamonds are greatly desired because of their beauty and on that account possess utility.
Utility and usefulness are not synonyms. American Beauty roses can scarcely be said to be useful, yet they are greatly desired and therefore possess great utility. No one doubts that the potato is a useful vegetable. Yet a peck of comparatively use-less diamonds could possess greater utility than several million bushels of potatoes, since men are willing to give much more for a single diamond than they are for many bushels of potatoes. The word usefulness implies the attainment of some practical and desired end. A crutch under the arm of a lame man is properly called useful; to him also it possesses utility. The slender canes which young men sometimes carry nobody would call useful, yet to the young man they may possess perhaps as much utility as the crutch does to the lame man.
Sometimes economists use the word utility in a substantive sense. For example, if a thing possesses utility they sometimes speak of it as being a utility, by which they merely mean that it is something desired by man, something capable of gratifying a human want. It is well to note at the outset that the economist sometimes thinks of commodities as being a mass of utilities.
2. Kinds of utility.—For convenience economists classify utilities in relation to time, form and place. Ice, for example, possesses greater value in summer than in winter. Hence we may say that an ice house serves to increase the time utility of ice. Cold storage houses preserve utilities from decay, besides keeping them until they possess greater time utility. Manufacturers in general increase the value of raw materials by increasing their form utility, wood being more valuable in the form of a chair than in the form of a board. Merchants of all classes increase the place utilities of the goods they handle, and hence are the joint producers of their value along with the farmers and manufacturers.
3. Value.—Some objects possessing utility are sup-plied by nature so generously that man has to make no effort ordinarily to get all he wants. Air and water, except in cities; are utilities of this sort. So often in many country districts are apples and berries. Economists are not concerned about things of this kind. They are interested only in those articles which are not freely available for those who want them and for the production of which a certain amount of labor is necessary. Articles of this kind are said to possess value or exchange power because they combine utility and scarcity. Of course, utility is the first pre-requisite of value, for nobody will give anything in exchange for what nobody wants. An article can possess value only on condition that it possesses utility and exists in a quantity insufficient to satisfy the de-sires of those who want it.
Value and income are probably the two most important words in political economy. Men toil in order that they may get things possessing value, for from the possession of such things they derive the psychic income or mental satisfaction which each regards as most desirable.
Popularly the word value is used in many different senses. Men speak of the value of a good name, for example. A business concern values its reputation and good will. A fine singer will think of 'his voice as having great value. If Paderewski thru the negligence of a corporation should lose one of his fingers a court would be called on to pass on its value, yet he could not sell one of his fingers. Most economists use the word in the sense of purchasing power, ex-change power.
4. Economic goods, or wealth.—In. order to escape from the confusion of thought into which the English classical economists fell thru the use of the word "wealth," modern economists employ it sparingly and use in its stead the phrase "economic goods," meaning thereby any commodity or material thing which possesses value. Desirable things that possess no value are called "free goods," because they are supplied by nature gratuitously. The great mass of goods which are bought and sold in the market are economic goods and these are the things in which the economist is especially interested. He wants to know why they differ in value, why they fluctuate in value, what are their costs of production, how they are marketed, and why they are wanted.
As I have said, in the English classical school of political economy all these economic goods were called wealth, that word being defined as including every-thing that has value or exchange power. But the word "wealth" is very broadly used in common speech, and hence the conclusions of the economists with regard to wealth are often misunderstood by the public. For example, Mr. Carnegie is known to be a man of great "wealth," owning as he does a large number of the bonds of the United States Steel Corporation. These bonds give him a claim upon a certain portion of the earnings of the corporation, but they are not wealth in the economic sense. The economist would not call them economic goods. They are merely legal claims on the income produced by certain economic goods owned by the stockholders of the United States Steel Corporation. To be technically correct, these bonds should be called property, not wealth. In the same way a share of Pennsylvania Railroad stock is property, not wealth; it is the holder's legal evidence that he has an ownership interest in the railroad and is entitled to share in the distribution of its earnings.
Welfare.—Again the word wealth is often used as if it were related to, if not synonymous with, welfare. A man of wealth is often spoken of as "well-to-do," yet wealth and welfare are independent of each other. The word welfare implies happiness and contentment. Great wealth may bring neither of these to a man or to a nation. Indeed, it is quite possible that a social census, if one could be taken, would find more misery and discontent among the rich than among those people who are obliged to work every day for their living.
6. The producer.—The economist thinks of the human family as producers and consumers. All are consumers, for otherwise they would perish, and the vast majority of them are also producers, for by their daily labor they must earn their income. Since the problems of production and consumption are entirely different, the economist studies them separately, sometimes to such an extent that the unwary reader gets an idea that in economics certain classes of society are consumers and others are almost exclusively producers. This is of course an erroneous conception. In a civilized country, like the United States or Canada, there are very few people who are not both producers and consumers. The so-called idle rich are numerically almost negligible. So are the other non-producing classes, such as the sick, the defectives, the aged and such criminals as are not given employment.
A producer is a person who creates utility or helps bring it into existence. The earliest producers known in the history of the human race were herders and farmers, and in the popular mind the farmer is still thought of as being the greatest of all producers, for he coaxes from the soil the grains and fruits and vegetables which support human life. He also supplies us with most of the meat we eat. The earth is, of course, the real producer. The farmer by his labor merely manipulates and directs natural forces. Economically he is in no greater degree a producer than the conductor of the freight train who hauls his crop to market, or any one of the wholesalers and retailers who pass it on to consumers.
Let us trace a bushel of wheat from Dakota until it appears in New York City in loaves of bread. The railroad hauls it to Minneapolis, where it possesses greater utility than in Dakota and therefore greater value, because the millers want it. The miller, who is a manufacturer, converts the wheat into flour, thus adding to its utility and value. The railroad hauls it to New York, where it possesses more utility than in Minneapolis, being more in demand. The baker turns it into bread, adding thereby both to its utility and value, for it is now in the form demanded by the so-called ultimate consumers. Some of the loaves may be sold to consumers by grocers who have, like the railroad, merely increased their place utility, for they have saved the consumer the labor of going to the more distant bakery.
7. Intangible utilities.—We have been considering thus far only the producers of tangible goods, that is, economic goods. How about the producers of intangible utility Is there such a thing as an intangible utility, one not embodied in a material commodity? If not, we certainly cannot call lawyers, doctors, teachers, preachers, actors and artists producers unless we can show that their services are somehow helpful in the production of material goods. ` This can easily be done, as the reader will see later in this volume, in the case of bankers, teachers and physicians, and a pretty strong argument could be made in the preachers' favor, but we will not stop now to discuss this phase of the question.
From the economic point of view all these classes of men are producers of utility, for their services give positive satisfaction to the persons from whom they get their income. When you are sick the services of a physician possess greater utility to you than almost any material good. When you are well and have the means and necessary leisure, you may wish to hear Caruso sing or see Sarah Bernhardt on the stage. One artist thru the ear, the other thru the eye as well, appeals to your esthetic sense and gives you greater satisfaction than you could possibly get from a farmer's potatoes and cabbages. To many devout people the services of the clergyman possess greater utility than the services of any other single class of workers; they would gladly turn farmers and produce their own food and clothing rather than see the church disappear.
We may sum up, then, as follows: In an economic sense every man or woman is a producer whose labor tends to the gratification of human wants or to the increase of utilities, whether thru a service which increases the supply of economic goods or thru a service which in itself gives pleasure to the consumer.
8. The consumer.—We consume a utility when we get pleasure or gratification from it. In many cases the consumption Of a utility means the destruction of the commodity in which it is embodied. This is true of all kinds of food and beverages, as is illustrated in the old adage, "We cannot eat our cake and have it too." In the ease of clothing the period of consumption is much longer, depending upon the habits and occupation of the wearer. Many people consume a straw hat in one summer, yet a certain city editor in Chicago was distinguished, among other things, be-cause of his attachment to an old straw hat, which he wore for twenty summers and constantly in the office during the winter months.
A period of consumption is popularly known as the "life" of the commodity. In New York City, for instance, the life of a house is commonly estimated at twenty years, it being assumed that its utility in its existing form will disappear at the end of that period and that a new house will be wanted on the site. The life of a steel rail depends upon the amount of traffic hauled over it. The life of a book depends upon the care given it and the charm of its content. We consume an oil painting when we get pleasure from contemplating it. The life of the canvas depends upon the care given it. Marbles and bronzes, humanly speaking, last forever. They may be daily consumed but never destroyed.
9. Exchange.—No exposition is necessary to make the reader understand the necessity for the exchange of economic goods. Nothing in business is more obvious than the fact that few people produce the goods which they consume. At the present time nearly every man is a specialist. In the production of some articles the labor of thousands of men is employed; each receives his compensation in the form of money and then buys the articles which he desires to consume. Thus exchange has become the most conspicuous feature of our modern civilization. Nearly all producers expect to market their product.
10. Barter.—It is fair to assume that in prehistoric times, as is the case today in some savage tribes, there was little division of labor, each family being able to produce enough to satisfy its own needs. The first exchange was doubtless in the form of barter, a fortunate fisherman being perhaps glad to give up part of his catch in return for berries and goat's milk. This exchange of goods for goods is known as barter and is obviously awkward and inconvenient.
11. Money.—Not until money appeared was it possible for men to specialize in their labor and to begin the development of an exchange civilization, each man devoting himself to the task which gave him the greatest pleasure or in which he was most proficient. Money is the medium which made this advance possible. It is a thing wanted not for itself but because with it one can buy what one wants. In a sense it may be called a third commodity, standing between the thing we have and wish to sell and the thing we wish to get in exchange.
Money may be defined as an economic good which is universally desired in any community and which is universally acceptable as a means of payment for goods or services.
12. Credit.—As modern business is conducted in most civilized countries, actual money is very little used. Men are satisfied to accept in lieu of it a mere promise to pay money. This promise is known as credit and it is founded on the rock of confidence.
If business men of the United States should lose confidence in one another, or in the government, or in the courts of law, the great credit system by which gigantic totals of wealth are daily exchanged would collapse, business would be at a standstill and great distress would ensue, the rich suffering as well as the poor. Just how money and credit do their work we shall discuss in later chapters.
13. Price.—The universal use of money and credit in modern business gives great importance to the word price. Popularly this word is confused with value. Yet they have different meanings. The price of a thing is the amount of money it exchanges for or that is asked for it. The price of wheat shows the value of a bushel of wheat with respect to money. It gives us no idea of the value of wheat unless we know the prices of many other articles and thus can make comparison.
14. Distribution of income.-The subject matter to be touched on in this section is usually called "distribution of wealth," but that phrase is misleading, for the problem before us relates, not to the distribution of all of the country's wealth, but solely to the distribution or sharing of the new wealth daily created.
Into a nation's markets there is constantly pouring a stream of new commodities and out of the proceeds of their sale various people who have aided in their production must get their compensation, the laborer his wage, the landlord his rent, the capitalist his interest, the business man or entrepreneur his profit. Roughly speaking the total of new wealth produced in the country in any year, sometimes called the national income, is divided among those four classes of society.
What determines the amount that each class shall get?
Does the landlord arbitrarily fix the rent which his tenants shall pay? Or is the amount determined by forces which the landlord cannot control?
Is the rate of wages fixed by the will of employers or by the insistent demands of trade unions or by forces beyond the immediate control of both employer and employe?
Why does the rate of interest on borrowed money fluctuate? Is it a product of unseen forces too powerful to be overcome by conventions and agreements?
Why do profits vary, some business men amassing fortunes while others go into bankruptcy?
Important questions of this sort are all related to the distribution of income and are treated in the chapters on Wages, Interest, Rent and Profits.
Show how the terms utility and usefulness differ. How do economists classify utilities?
Give some examples of the popular use of the term value. How does the economist understand the term?
Distinguish between free goods and economic goods.
How would you define a producer? Indicate some various classes of producers and the kind of goods they create.
Discuss what is meant by the consumption of a utility.
What is meant by the distribution of income and what classes share in it?