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Consumption Of Wealth

( Originally Published Early 1900's )

1. The objects of consumption.桟onsumption is the end of all human effort. It is the goal toward which are directed the energies of all producers. When anything is produced for which there is no demand at a price above the cost, the producer has made a mistake and suffers loss.

The first and primary object of consumption is the satisfaction we get out of the maintenance of life and health. In ordinary times many of us give little thought to the importance of food, clothing and shelter; but if an emergency arises which threatens their loss, we suddenly realize their importance and put forth every possible effort to avert the deprivation. Lacking the proper food and environment, we can-not possess the energy necessary for either mental or physical effort and are unable to provide for our future wants.

The second object of consumption is enjoyment or pleasure. The larger our incomes, the greater the amount we are able to devote to consumption of this sort. The poor man indulges in very little of it. He must be satisfied with the simplest forms of pleasure, for the bulk of his income is needed to support his family and maintain the energy necessary for his work.

2. Necessaries of life.桝rticles which are consumed, not in order that the taste or the senses may be pleased, but in order that life and energy may be maintained, are called the necessaries of life. The most important necessaries, of course, are shelter, food and clothing. These satisfy so-called primary wants.

From the economic point of view anything is a necessary of life to an individual if the lack of it in any way impairs his efficiency or productive power. Tobacco is often called a luxury, yet to men who have formed the tobacco habit it seems a real necessity. Indeed the governments of many countries recognize it as such and make it part of the soldiers' and sailors' daily rations. By most Anglo-Saxons wine is regarded as a luxury, but the French people think of it as among the necessaries. To the Germans beer seems as much a necessary of life as bread or meat.

It is evident that we cannot draw a clear line between necessaries and luxuries. We can say in general that clothing is necessary, but there are many different kinds of clothing. If a man wears anything but the simplest and plainest kind of clothing, thinking of personal adornment as well as of the warmth of his body and the preservation of his health, he is indulging in something not strictly necessary. Ex-pensive food, such as terrapin and lobster, while they undoubtedly contain nutriment, cannot be classed under the head of necessaries of life. But the economist does not attempt to make any such fine distinctions. He is satisfied with the general statement that any article is necessary to an individual or to a people if its consumption increases productivity and efficiency.

3. Luxuries.桝 little consideration of the word luxury will show us how futile it is to attempt to draw a clear line between necessaries and unnecessaries. In everyday speech, and even in the writings of many economists, the word luxury is vaguely used and is made to include all articles the consumption of which gives pleasure without contributing in any way to the production of additional wealth. The rich are said to enjoy many luxuries which are beyond the means of the poor. Silks, champagne, diamonds, jewels of all kinds, confectionery, and hundreds of other articles the consumption of which adds greatly to human enjoyment, must all be classed as luxuries if we give the word a broad definition and make it include everything not necessary to the maintenance of human life and energy.

But we find people using the word luxury as if somehow it was related to a man's income. What is a luxury for one man is not always regarded as a luxury for another. We do not get at the fundamental idea embodied in the term unless we think of it in relation to income. Men work, not that they may barely live, but in order that they may get the most out of life; and a man does not do that unless he succeeds in developing and gratifying certain wants.

What the nature of those wants should be in order that any particular man may get the greatest joy out of living is a problem which each man must work out for himself. The economist merely calls attention to the fact that the continued gratification of any particular want gives less satisfaction than could be got out of the satisfaction of a variety of wants.

If the object of living is to get the greatest possible satisfaction out of life, a man must give most careful heed to the expenditure of his income. If he is reckless in its use, he may satisfy certain wants excessively and become the victim of the law of diminishing utility, or he may expend such a large amount of his income in the purchase of articles that give temporary pleasure that he will be compelled later to forego the possession of articles which in the long run would give him greater satisfaction. Evidently from this point of view what is luxury for one man is only a common comfort to another of larger income.

So we may say that a man indulges in a luxury when he satisfies a want at an expense so great that he is later on compelled to forego the satisfaction of more important wants. An automobile, for example, is a luxury to any man if its purchase price compels him to withdraw his son from school to take the place of a hired man.

Thus the word luxury is used in two distinct senses. First, to mean any wasteful, foolish, uneconomic indulgence which leads later to the pain of sacrifice; second, to designate certain articles which are popularly regarded as not being necessary for the maintenance of the ordinary comforts and decencies of life.

4. Productive consumption.桭or convenience all forms of consumption which have for their end the creation of more wealth the economists call productive consumption, and the goods consumed as a result of the productive process are regarded as producers' goods. In the strictest sense all consumption is productive of psychic income or satisfaction, but in economics consumption is called productive only in so far as it leads to the increase of utilities in the form of material goods.

Alen are said to spend their incomes unproductively when they consume wealth merely for the sake of pleasure and enjoyment. Gasolene is burned unproductively in a pleasure motor boat or in a joy-ridden automobile, but productively when burned in a commercial truck or in an engine for pumping water.

5. Elasticity of demand,桾here are many articles the demand for which does not increase much even tho the price be greatly lowered. As a rule the cost of these articles is so low that most people are able to possess a supply sufficient to satisfy their needs. Salt and matches are typical commodities of this kind. If the price of salt or of matches should decline 50 per cent, it is not likely that the consumption of either would greatly increase. The demand for such articles is called inelastic, since it does not vary greatly in response to changes in price.

On the other hand, there are many articles the demand for which is very responsive to changes of price. Any decline in the price of silk, for example, almost inevitably leads to an increase in consumption. If silk could be made as cheap as cotton the demand for it would increase greatly, and the demand for cotton goods would probably suffer diminution. The development of the automobile industry proved the existence of an unsatisfied potential demand for automobiles, which became a real economic demand as the prices of automobiles came down. The demand for articles of this kind is said to be elastic.

6. Importance to producers桾o the producer elasticity of demand is a most important matter. If he is manufacturing an article for which the demand is inelastic, such as matches, pen points, lead pencils, he must beware of over-stocking the market, for then he may have to sell his goods at less than their cost of production. A wise producer makes a study of the market for his commodity and is able with considerable accuracy to forecast the amount that it will absorb at a price which he regards as fair. The producer of articles for which the demand is elastic must study his market, but he is in less danger; if he over-estimates the market's absorbing power and produces more than he can sell at the expected profit, a slight decline of price will induce larger consumption.

People ordinarily think of the demand for an article as being fixed and capable of no variation at a given time. They speak of the demand for wheat as being, say, 100 million bushels because that was the amount consumed in the preceding year, and they think of that demand as something which must be somehow satisfied. It does not occur to them that wheat is a foodstuff for which many other foodstuffs will be substituted by many consumers as the price of wheat is advanced. The rise in the price of gasoline which followed the outbreak of the European war was in the first instance the result of an in-crease in the demand for it. But at the same time this rise of price caused a lessened demand for gasoline on the part of many consumers. With gasoline at 25 and 30 cents a gallon there is less joy riding in automobiles than there was when it sold at 15 cents.

7. Monopoly and demand.梂hen a producer possesses a monopoly and is manufacturing an article for which there is no rival or substitute, the study of demand becomes exceedingly important. His costs may amount to only 50 cents, so that he might sell at $1 and realize a handsome profit. Yet he may discover that if he asks $5 for his article his sales will be almost as great as when he asks only $1, the demand being comparatively definite and in-elastic. On the other hand, experience may teach him that the lower price may yield a larger profit, since it may lead to very large sales and such a popularization of his article as to relieve him of great advertising expense.

Many articles the demand for which is inelastic, such as matches, soaps, kerosene oils and nails, are manufactured in most countries by concerns which possess a virtual monopoly thru the power of the vast capital they possess, for it enables them to produce and distribute their goods at lower cost than must be paid by the small producer.

8. Increase of population and the food supply.- Aggregate demand is that of an entire population. The relation between population and the food supply was discussed in a pamphlet issued in 1798 by a young English clergyman named Thomas Mal-thus. According to the Malthusian doctrine, population tends to increase faster than the food supply, and in support of his position Malthus gave many historical instances which showed that the population tended to increase in a geometric progression, at a rate indicated by the figures, 2𣯚16; while food supply increased in an arithmetical progression, indicated by the series of numbers, 2𣯘8. While today the gloomy presentiments of this doctrine are taken less seriously than formerly, there is nevertheless a truth in it that is worth considering.

The advances in machinery, in the means of production and in the transportation facilities during the nineteenth century; widened the area of cultivation and increased the supply of products. At the same time, checks on population have been at work, which in a surprising way have held back the growth of numbers. A more complete economic organization has laid an increasing number of exactions on the individual, with the seeming result that the diminishing birth rate seems to keep pace with the decline in resources and the growing cost of producing crops.

The population of the United States is now over 100,000,000 and is increasing at the rate of over 1,500,-000 per annum. From the point of view of consumption and the supplying of wants, this means a great and growing demand for foodstuffs, higher land values; smaller exports of food products, and larger imports of materials for manufacturing. Progressing at this rate the growth of population in the United States will necessitate the taking up of the waste places and the introduction of an era of intensive cultivation. Conservation of natural resources also must reach the stage of an economic necessity, and interest in that subject will no longer be deemed a fad as is often the case at present.

9. Malthusian principle exemplified.桾he Malthusian law of population finds most pitiful exemplification among the very poor in all countries. It is well known that the birth rate among the poor is very much higher than among the rich and well-to-do. Also among the poor and ignorant the mortality rate for young children is greater because of insufficient food, poor housing and the lack of cleanliness. Nevertheless in most civilized countries the population is increasing in the lower levels of society more rapidly than in the higher.

Charles W. Eliot, former president of Harvard University, greatly deplores the apparent aversion of Harvard graduates to large families, the records having shown that the family of the average graduate since 1850 contains less than two children.

It may be wise to encourage a higher birth rate among the educated and well-to-do, but any such encouragement extended to the poor is certainly unwise. It is rather the duty of society thru its preachers, teachers and physicians to try to make the ignorant get some conception of the responsibilities of parenthood, so that they will not feel, as many now do, that they are serving both God and their country when they bring a child into the world whether they can support it or not.

10. Standard of living.桾he standard of living, which is different in different classes of society, consists in any particular class of the things customarily enjoyed by the members of that class. Some of the things are regarded as necessaries, some as ordinary comforts, and some as luxuries. The standard of living is said to be rising whenever, there is improvement in the quality of the so-called necessities or any increase in the number of comforts and luxuries which the members of a class ordinarily enjoy and regard as necessary to their contentment.

Members of each social class or group come to have a concept of what is necessary to maintain their proper position in the class. This list, of course, must include shelter, food and clothing. Provision against sickness, and income sufficient to meet the possibilities of unemployment are also a part of the requisite income. And finally there should be pro-vision for some social life, enjoyment of books, and a chance for additional education. To group the different expenditures in two classes will emphasize the point of view that is indicated in this paragraph梖irst, the support things, including food, raiment and housing; and second, the spiritual things, which may be summarized in amusement, education and society.

In the books of the English classical economists the "Iron Law of Wages" was frequently referred to as governing the return of labor. According to this law the wages of unskilled labor constantly tend to-ward the cost of subsistence. Such a meager existence unfortunately constitutes the actual standard of living in many districts.

Above this is the normal standard of living, which emphasizes the healthy growth of the family in mental, moral and physical directions and leads to a higher type of individual, better educated and better endowed physically. An ideal standard would include this and more梒omfortable housing for the family, good food, and opportunities for the development of the esthetic and spiritual sides of man's nature.

11. Stimulus of the standard.梂ithin bounds, the standard of living that is hoped for has a marked effect upon the ambitions, tending to stimulate the worker to greater efforts to supply his wants. The trade-union has been able to insist upon a minimum standard of living as secured thru a given wage. In so far as the higher standards of living have been realized the family life of the nation has been much benefited, but where the standard of living cannot be realized, tho it may still be insisted upon, the family life may be rendered increasingly unstable. To found and maintain a home with rising standards of living requires a larger income than is attainable by any considerable part of the population. Consequently there are increasing domestic difficulties and a lower standard of family life.

The standard of living is an important economic factor, and from the psychological point of view has much to do with keeping up the struggle for the economic means to supply wants. In America the, pressure of the standard has reduced the size of families among the native-born, and increased the competition in occupations in which wages are low as - compared with the standard of living. The more unskilled trades and occupations have been taken by the foreign-born; and the native-born have been driven into the higher grade occupations, where wages and the standard of living are higher.

12. Determining the standard.桺utting the mat-ter broadly, there are three ways in which some approximation of standards of living may be reached; the first of these is thru the process of intelligent guessing: the second, by getting an authoritative statement of the cost of what is needed to maintain an average family; and the third is thru the information gained by the study of family budgets.

The various government statistical bureaus in the United States and Europe have worked out an estimate of the commodities required for the support of a family and then figured their cost. This method has been followed by such careful investigators as Professor R. C. Chapin,' Mrs. Louis B. Moore,' and her associate, Miss Elizabeth Lennox, who have given the public the benefit of their researches in the collection of family budgets.

As early as 1857, Ernst Engel, the head of the Prussian Statistical Bureau, advanced the theory that the study of family budgets should yield a number of interesting results that would be helpful in ascertaining economic conditions. The conclusion is that the fair living wage for a workingman's family in New York City should be at least $728, or a steady income of $14 per week. Since 1914 the cost of living has advanced, so that the wage now required is probably above $1,000.

13. Philanthropy.桬xpenditure for philanthropy tends to reduce the immediate amount of capital available for industry; but if it has the effect of raising standards of living and bettering the condition of the workman, the ultimate gain may be many times that of the present cost. The problem involved requires genuine statesmanship; the immediate cost must be measured against the possibility of a better race that can maintain a higher standard of living.

At one of the meetings of the American Academy of Political and Social Science, according to the American Year Book for 1913 (p. 46), the art of giving was discussed as an exact science. The reader of the paper declared that in 1912 gifts totaling nearly $267,000,000 were reported by the press, and that for the twelve years preceding, the annual total of notable gifts had exceeded $100,000,000. This statement tells something of the extent to which consumption for social purposes may be carried voluntarily.

The incorporation of the Carnegie funds and the application to Congress for a charter for the Rockefeller Corporation, raised the question of the influence of these private philanthropies upon public interests. It has been alleged that their influence might be detrimental to political welfare, but in reality the question of the withdrawal of the income of these endowments from productive enterprise and the weakening of capital accumulation may be more vital.

Like taxation for social purposes, private philanthropy may materially diminish the productive capacity of the nation. The effect upon the community can be observed only after a prolonged period; the immediate effects are difficult to see. As a people we are now entering upon a period of public and private, philanthropy that is bound to have a wide influence upon national growth.

14. Cost of government.桝 large amount of the world's new wealth is consumed in the support of the governments of nations and their various subdivisions. This is sometimes referred to as public consumption; and the various methods of raising and distributing the necessary funds form the subject-matter of public finance.

Much of the consumption of wealth by governments may properly be called productive. Courts of law are necessary for the maintenance of justice; police-men and firemen for the protection of life and property; public school teachers in order that education may be open and free to all; boards of health that the inroads of disease may be checked; and congresses, legislatures and parliaments in order that expenditures may be made for the common welfare of all citizens.

For example, the United States Government in the first decade of the twentieth century expended $242,000,000 for the improvement of rivers and harbors, and this expenditure if wisely planned and executed was productive in the economic sense. Unhappily much wealth is consumed by governments wastefully and therefore unproductively. It is a notorious fact that government employes work with less energy and diligence than the employes of a private concern, that producers selling to a government exact exorbitant profits whenever possible, and that public officials are less wary in entering into contracts for the government than they would be if doing business for themselves. For this state of affairs no remedy can be found except in education. As people realize more fully the services which a good government can render and how closely it is related to their own personal welfare, they will insist upon placing in office only men of integrity, zeal and intelligence.

15. War.桰n times of peace most governments maintain armies and navies; and many of them expend considerable sums in the payment of pensions to old soldiers. All expenditures of this sort are economically unproductive. If all thought of war could disappear from the minds of men, the wealth of the world would increase much more rapidly; and a much larger population be supported.

War causes an actual diminution of a country's wealth in two ways. First, it takes men out of productive employments and puts them into battle; second, those men while continuing to be great consumers of foodstuffs and clothing become also consumers of vast quantities of munitions, which have been produced at great cost by the men, women and children who stay at home. A war which calls to the front even no more than one-tenth of the men of fighting age and ability necessarily causes an economic or industrial upheaval. If a million men take up arms many mil-lion others must change their occupations, stop producing the useful objects of commerce, and work in the manufacture of ammunition and war supplies. Thus a war not only brings about a physical destruction of vast amounts of wealth, such as bombs, air-planes and battleships, but also causes a lessened production of the articles ordinarily produced for the satisfaction of human wants. If a crazy king had the confidence of his subjects and should order that one-fourth of all the produce of their labor be taken to sea and sunk in the ocean in order that the gods be propitiated, he would do his people less economic injury than would be wrought if he plunged them into war.

16. Economic effects of war hidden.桾he real effects of war upon industry, upon consumption and upon the economic welfare of a people are veiled during its progress. The government raises immense sums of money by means of taxation and bond issues and enters into the various markets as a gigantic buyer of the products of labor. New factories are built and the demand for workers is insatiable, labor and capital being diverted from many industries. The prices of foodstuffs and of most of the necessaries and comforts of life also advance because of the war demand, because of the scarcity of productive labor and because of the great expansion of credit incident to the war loans. During the progress of a war business changes its character, but is active; many individuals make fortunes; and all classes of labor demand higher wages. The country seems to be more prosperous than ever, and unthinking people do not see that it is actually growing poorer every day. If a million men of gigantic stature should capture the United States and compel its people to feed, clothe and house them comfortably, every one of us would realize the cost, yet the economic effect would be much like that of war.

Not until after a war is ended and all extraordinary expenditures by the government have ceased, do the people of a country begin to pay its economic costs. Only a small part of this cost is represented by the interest which must be paid on the capital borrowed and destroyed during the war. When people return to the industries of peace it is soon discovered that the old markets have lost their buying power and that the amount of capital available for production is less than had been supposed. Then comes a period of depression which is like that of convalescence after a fever, the nation as a whole being industrially feeble and incapable of new enterprise. If a country can get thru such a period without a financial panic or a commercial crisis and without great distress among large numbers of unemployed, the people may consider themselves fortunate and should be grateful rot only to God but also to their entrepreneurs, their captains of industry and finance, who during the period must have most wisely regulated their production if not their consumption of wealth.

17. The destructive power of nature.桭rom time to time a vast amount of wealth is destroyed by storm, fire and flood. A tornado on the Great Lakes and along the east coast of the Atlantic not long ago drove hundreds of vessels ashore, drowned many persons and destroyed valuable cargoes. In 1913, a storm on the Japanese coast, accompanied by a volcanic eruption, killed thousands of people and destroyed the property of many more. The report of the engineering division of the War Department states that the annual loss from floods in the United States averages $50,000,000. In the Ohio flood in 1913, the loss to railroads, cities and private individuals amounted to hundreds of millions.

Losses by fire add to the appalling aggregate of wealth destruction. In recent years the fire losses in the United States are estimated at about $200,000,000 a year; and despite the efforts of the insurance companies and other agencies to limit the size and frequency of fires, the absolute amount of waste has declined but slightly. The newness of some parts of the country, the absence of regulations for building in many places and the failure to provide first-class protection against fires, give the United States a per capita fire loss which is from five to six times as large as that of any of the leading European countries.

18. Consumption and progress.桭rom a purely materialistic point of view a nation can be said to be making progress when the labor of its people produces greater wealth, whether because of new inventions and machinery, or because better conditions of living have improved their health and increased their energy, or because they have been better trained and organized. Progress of this sort would mean an increasing demand among all the people for the necessaries and comforts of life and doubtless an increase in the variety of goods which they consumed.

Economics is sometimes called a materialistic science because the economist seems to be interested only in progress of this sort. In reality, however, the economist is no more materialistic than the psychologist or sociologist. He sees clearly that any cause which tends to lower the cost of producing the necessaries and comforts of life will tend to increase the welfare of people now on the earth and to make possible a still larger population in the future. He also sees more clearly than others the evil economic effects of unwise consumption, of excessive indulgence in any form of pleasure, of alcohol and other drug habits梩hese weaken character, injure the health and lessen a people's productive power.

19. What is progress?桾rue economic progress is identical with the advancement of civilization and is not measurable in material good. The difference between the civilized man and the savage is found, first, in the greater number of goods which the former can produce and enjoy, and second, in his control of sources of enjoyment which makes no appeal whatever to the savage. In other words, the civilized man gets more delight out of his physical senses than does the savage, and also out of what might be called the higher senses, the esthetic, the intellectual and the spiritual, which in the savage are almost dormant. Hence churches, universities, art galleries, public parks, statues of heroes, beautified homes, are all landmarks of economic progress or civilization. They express the existence of wants higher than those of the senses and mean that men are getting vastly more out of life than mere physical comfort and pleasure.

Any change in the condition of a people which tends to increase their happiness may be regarded as a step forward in civilization. For example, if a nation improves its educational system or enacts wiser laws regulating the conditions under which labor may be employed, or adopts a policy which makes war less probable, it is moving forward and upward. The economist in his vision looks forward to an ideal civilization. In it labor will be so admirably adjusted to ability that all men will love their work: the consumption of wealth and all the enjoyments of life will be so rationally balanced that disease, poverty and misery will disappear from the earth. This economic millennium unhappily seems just now to lie far in the future.

20. Impediments to progress.桭olly and extravagance mark the consumption of many people. Much of their income is squandered upon pleasures and luxuries that are hurtful to their health and to their morals. The economist may grieve over these facts as a man, but as an economist it is his business to study the facts and conditions as they exist. It is his task first to know what is, and why, not what ought to be. He may also be a social reformer and endeavor to make people improve their method of consumption, but that is not his task as an economist.

The entomologist must know the anatomy of the wasp and not waste his scientific time worrying about its dangerous end, nor can the zoologist stop to consider methods of breeding fangless rattlesnakes.

There are plenty of human wasps and snakes, and the economist is interested in knowing their number, their methods of attack and the conditions which breed them; for they are destroyers and not producers. As we shall see later, the production of wealth at the present time is the result of an involuntary cooperation among millions of workers and mutual confidence is absolutely essential to the highest rate of production. Dishonesty, misrepresentation, deception of any kind, like sand in the cogs of a machine, lessen the efficiency of the industrial organism, thus lessening the production of wealth and the sum total of human welfare.

It is the economist's duty to call attention to economic evils and,perils as they are discovered and to make clear the causes and conditions responsible for their existence. The consumption of tobacco and alcoholic beverages gives pleasure to many people, but the economist knows that such consumption tends to raise the price of a loaf of bread because of the land and labor which are diverted from the production of wheat; and it is his duty to make this truth clear..


What is consumption and what are its purposes?

What do you understand by productive consumption?

Explain the difference between an elastic demand and an in-elastic demand, and their bearing on the welfare of producers under competition and under monopoly.

What is the Malthusian doctrine and how does it apply today? What is the standard of living? Why is it important? How is it determined?

How is a country's wealth diminished in time of war? Why does a country seem to be more prosperous in war time than at other times?

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