Other Definitions of Wealth
( Originally Published Early 1900's )
Production. The act or process of applying labor in such a way as to bring wealth into existence is called production.
As commonly used this word applies only to changes in the raw material of which an article is composed. If we watch the process through which a lump of iron ore is changed into a keg of nails, we shall find the material smelted, hammered, put into a car, conveyed to a city, and passed through a machine. All these operations are included under the term production. It is true that transportation from one place to another is not, in familiar language, called production, but it must be so called in scientific nomenclature, because in order to enjoy an article it must be brought within our reach, and the act of so bringing it belongs to the same class with that of making it.
Exchange. In the most general sense of the term exchange consists in a mutual transfer of the ownership of two properties. A transfers to B his (A's) right of property in some commodity in consideration of B's transfer to him of some other and equivalent right.
The necessity of exchange arises from the circumstance that no one person can produce more than a minute fraction of the wealth which he desires to enjoy. When, as in the savage state, each individual or each family supplies its own wants, there can be no considerable enjoyment of wealth. If each man among us should attempt to make boots, clothing, and hats, to build houses, to paint and plaster them, and to furnish them with everything necessary for comfort, he would miserably fail. But when, as in civilized society, each person devotes himself to the production of a particular kind of wealth, the sum total of wealth produced is incalculably greater than when each person tries to make everything. Now in order that this increased production of each kind of commodity may be enjoyed by others than its immediate producer, there must be a transfer of ownership from the producer to the persons who are to enjoy the commodity. Hence arises a system of mutual exchange in which each receives a supposed equivalent for what he gives.
Exchange is of two kinds, barter and sale.
Barter is the exchange of one commodity for another, in the case when each party receives from the other some commodity which he desires to make use of. For instance, if the owner of a yoke of oxen desires to exchange them for a horse, and finds a person who having a horse desires a yoke of oxen, the exchange of ownership would be barter.
The necessity in barter that each party shall find another between whom and himself there shall be a mutual desire for the exchange of commodities renders it impracticable on any considerable scale in a developed society. Occasionally we hear of a man bartering a horse for a carriage, or a farm for a city residence, but the transaction is too rare to be specially considered in economies.
In all societies advanced beyond the barbarous state exchange is affected by the use of a metal to which the term money is applied. The exchange of a commodity for money is called sale in relation to the one party and purchase in relation to the other. To illustrate the great advantage of sale over barter, let us suppose that the maker of a pair of boots desires to exchange them for a hat. It would be necessary for him to search diligently for some one person who wanted a pair of boots and who had a spare hat to exchange for them. Perhaps he could find no such person. He might find a number of owners of spare hats and a number of seekers of boots, but unless the two desires to part with the hat and to receive a pair of boots were merged in one person his search would be useless. But by the use of money it is only necessary that he should first find some one who desires his boots and then some one else who has a spare hat, and by sale in the one case and purchase in the other the desired exchange is effected. For this reason money is often called the medium of exchange.
Consumption. It is a universal characteristic of wealth that it is gradually used up or consumed in the very act of gratifying the desires of its owners. The gradual wearing out of a coat and its consequent reduction to the state of rags is typical of this process in its ultimate form. The length of time occupied by wealth in the processes of consumption is, however, very different with different kinds of wealth. The words and gestures of the actor are consumed at the moment, and die in the very act of pleasing his audience. The faculties and skill of men die away in old age and entirely disappear at death. Clothing is consumed in a few months or years according to circumstances. In the case of houses a continual process of consumption is going on through the decay and disintegration of material produced by time and the weather. But for many years and even centuries this consumption may be neutralized by new acts of production in the form of repairs to the house. Ships and machinery wear out in the course of a few years. A canal so far as we know may be preserved through indefinite periods with the aid of occasional repairs. Without this it will in the course of time be effaced through the operations of nature. This wearing out of wealth is called consumption.
Productive and Unproductive Consumption. In the case of houses, furniture, clothing, food, and other articles the commodity is gradually consumed in the very act of gratifying the consumer, and eventually disappears as wealth. The house after decaying, the coat after being worn out, and the food after being eaten no longer have the properties of house, clothing, or food. This process of losing useful properties is called unproductive consumption. But in the process of manufacture wealth is continually being consumed for the purpose of reappearing in a new and more useful form. For example, the wool of the sheep disappears as wool when it is woven into cloth. The cloth can no longer be used or sold as cloth after it is made into a coat. We conceive in these cases that the wool and cloth are really consumed to reappear in the improved forms of cloth and a coat respectively. This disappearance to reappear in a new form is called productive consumption.
The question may be asked, Since the material of the wool remains through the whole process, and actually exists in the coat, why talk of consumption at all ? We answer this question by viewing the case in other aspects. Consumption does not consist in the annihilation of matter, for if it did there would be no consumption at all. The ultimate molecules of matter do not admit of change or decay. Consumption consists only in a change of the form and relations of the mole-cules. Nearly all the cotton that went into your shirt is still there after the shirt is a pile of rags in the paper-mill. In no case, therefore, is consumption anything but a change in the form of matter. We therefore say, in economics, that any particular kind of material is consumed when its form is so changed that it loses its original properties or qualities. Now, after the wool is made into cloth it has lost the property of being conveniently carded and spun and is no longer available for many purposes to which it could originally have been put. It is therefore consumed. So, also, the cloth after being made into a coat is good for nothing except as a coat; it can no longer be used as blanket or made into a pair of' pantaloons. We therefore say that it is consumed. But because in the act of consumption a more useful form of wealth has been produced we call the consumption productive.
In order that consumption may be productive it is not necessary that the identical wealth consumed should be reproduced in the new form. The consumption of oats and hay by a horse may be productive. The new form of oats and hay will be whatever wealth the horse may be enabled to produce. If lie takes wheat to the mill to be ground, the food he has eaten may be considered as reappearing in the form of flour. The consumption of the iron and brass which enter into the machinery of a cotton-mill results in the formation of cloth, and not in any new form of the metals which went into the machinery.
The distinction between the two kinds of consumption may be condensed as follows : Wealth being necessarily consumed in the process of satisfying the wants of man, we say :
If the owner of wealth is consuming it, or allowing it to be consumed, not for his own immediate satisfaction, but in order that he may sell the result of the consumption to others, then the consumption is productive.
But if he is consuming it for his own satisfaction or that of his family or friends, the consumption is unproductive.
We perceive that the object and result of the operations we have described is that men may enjoy wealth. These various operations may be divided into three classes production, transportation, and exchange. The first consists in mechanical operations upon the sheep, the wool, the yarn, and the cloth, which operations were performed by labor with the aid of capital, and are called tending, shearing, combing, spinning, weaving, cutting, making up, etc. Since each of these operations adds to the value of the product, they are all productive.
The earlier economists were divided over the question whether transportation should also be included in the same class as production. It is, however, obvious that the transportation was just as necessary a condition of the coat being worn as anything else; it should therefore also be considered as production. But exchange has always been considered separate from production. Yet so far as the mere operation is concerned, the process of exchange is just as necessary to our having the coat as any other process was. It involved a certain amount of labor, namely, the labor of building a warehouse to hold the cloth or the coat until we should want it, and the labor of taking care of it during this interval, as well as that. of doing it up in proper shape and receiving the money paid for it. It is convenient to have a separate term for this necessary labor involved in the mere operation of exchange. We shall therefore call it friction of exchange.
The operation of exchange, however, involves something more than the mere performance of labor, namely, the use of money and credit. Money and credit may be considered as forming a certain mechanism by which exchange is effected ; they have therefore been treated under the head of the mechanism of exchange. This mechanism involves other forces than friction. Being one of the essentials to our enjoying the coat, it is an element in the social organism of the same importance with capital and labor.
Value. We can readily understand that under a system of barter the question would continually arise how much of one commodity should be given in exchange for another. If a man with a pair of boots to barter found one person offering him a hat in exchange, a second a coat, and a third a barrel of flour, he would have no ready means of deciding which offer was the best, or whether any of them would be advantageous. But when a commodity is sold, the owner receives a definite amount of money in exchange for it, and the best sale is that for most money. In effecting the sale he has before him a definite object, namely, to get as much money in exchange as he can. The buyer has before him another definite object—to get the commodity as cheaply as he can. Thus, in each case, a certain order of choice is presented, the highest amount of money in the case of the seller, and the largest amount of goods in the case of the buyer, being preferred. From this order of. preference arises the conception of a mathematical. quantity called value.
It is a general rule, applicable not only to economics, but to all the mathematical sciences, that the definition of an object or of a magnitude of any kind does not include a description of how it shall be measured. As a general rule the quantity itself and the system; of measuring it are to be defined separately. Now what is termed the theory of value includes not only these two definitions, but at least a third subject. We thus have,
First, the definition of value as a simple quality or object, without respect to how it shall be measured. That is, we must know what value is.
Secondly, we have to describe or define how value shall be measured.
Thirdly, we have to study all the causes on which value depends.
The last does not belong to the present stage of the subject, and the first can be better considered at a future stage. We have therefore only to deal with the second by considering how value is measured in practice.
Value as a Mathematical Quantity. In economics price is considered, as the measure of value. The price of a commodity is the number of units of money which the commodity can be exchanged for in the public market. The monetary unit is a dollar in America, a pound in England, a franc in France, a mark in Germany, etc.
We are careful to say, not that price is value, but that price is the measure of value. It is the measure of value just as length is the measure of a line, weight the measure of iron in the market, and volume the measure, of things which sell by the bushel. We have now to consider the method of measure-ment.
I. In mathematics quantity of any kind is measured by taking a certain standard portion of the quantity as a unit and determining to how many of these units the quantity measured is equivalent. For instance, the length of a board may be expressed by taking a standard unit called the foot, and stating how many feet will make a length equal to the board.
II. When we measure a quantity we leave out of consideration all the qualities of the thing measured except those which pertain to the special quality which is measured. For example, in estimating length the measuring unit may be made of iron, boxwood, brass, or any other material. The thing measured may be wood, iron, rope, or any other substance ; may be of any color and have any weight. But all such qualities as color, weight, etc., are left out of consideration in the estimate of Iength. So with weight. Our unit of weight, which may be a. pound or a kilogram, may be of any material whatever ; and the thing weighed may be of any length, any color, or any substance. But in stating the weight we make abstraction of all qualities except weight.
So with value. In stating the value of a commodity we have no reference to its color, magnitude, or weight, but only to the degree in which it possesses the attribute of commanding money in the public market. Just as we have a certain measure called a foot which we take as the unit of length, or a certain weight called a pound as a unit of weight, so we have a piece of gold which we call a dollar, the value of which we take as the unit of value. Again, as we measure length by applying a foot-rule, and weight by balancing two things in the scales, so we measure any commodity in terms of the unit of value by ascertaining how many units of value it will ex-change for in the public market.
Relativity of Value. It follows from this that, like all other expressions of quantity, values are not absolute, but relative to some unit of value. If we are asked for the value of a loaf of bread, we can answer only by saying that it is equal to a certain number of cents. The value of one cent is then the term of comparison or the unit of measure. If we express the value of a house in dollars, the dollar is the term of comparison or unit of value.
Absolute Value. It does not follow from this that there is no such thing as absolute value, but only that we have no way of stating what the absolute value of anything is. Here again our conceptions will be assisted by an analogy with sensible objects. We have here a piece of rope. It has a certain length. I may inform you what that length is by telling you that it is 2 yards, 6 feet, or 180 centimetres. Then the yard, the foot, or the centimetre is the term of comparison. Yet when I think about the rope, I conceive its length as remaining the same no matter which term of comparison we use. So with value. The value of a barrel of flour to a certain person under given conditions is the same, though we may call it one pound, five dollars, twenty marks, or twenty-five francs.
Effect of Changing the Unit of Measure. This principle has an important application. The number which expresses value, that is, the price, depends upon the unit of comparison, and in fact varies inversely as that unit varies. For example : A barrel of flour is worth four times as many marks as dollars, because the mark is only worth one fourth as much as the dollar. Now if all the foot-measures of the country were liable to change, either by an act of Congress or by a natural shrinkage or expansion over which men had no control, it is evident that the expression for all lengths would vary inversely as the measures. If the yard-stick were reduced to one half, a piece of cloth, unchanged in absolute length, would measure twice as many yards. So, in the case of value, we are compelled to admit that our measuring unit, the dollar, is subject to changes like changes of length in a yard-stick. The prices of commodities will then change in the inverse ratio. But we are not therefore to look upon their absolute values as being altered by this cause, though their value relatively to the dollar is altered. The consideration of these changes belongs to a later part of the subject; what we have at present to do is to fix in the mind the measure of value as a mathematical quantity, namely :
The value of a commodity is expressed by the number of monetary units it will exchange for in the public market.