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I

Social Science TTert Boofts

Edited by RICHARD T. ELY

OUTLINES OF ECONOMICS

SOCIAL SCIBNCB TEXT BOOKS

OUTLINBS OF ECONOMICS

By Richard T. Ely, Ph.D., LL.D. ReviBed and enlarged by the Author and Thomas 8. Adams, Ph.D., Max O. Lorbkz, Ph.D., Alltti A. YouHO, Ph.D.

HISTORY OF ECONOMIC THOUGHT By Lbwm T. Hanbt.

BUSINESS ORGANIZATION AND COMBINATION By Lbwm T. Havbt.

PROBLEMS OF CHILD WELFARE By Gborob B. Mangold, Ph.D.

OUTLINES OF ECONOMICS

(REVISED EDITION)

BY RICHARD T. ELY, Ph,D., LL.D.

FSOVOBOR OF POLITICAL BCONOICY IN THS UNIYXftSnY OF WISGONSIlf

REVISED AND ENLARGED BT THE AUTHOR

AMD

THOMAS S. ADAMS, Ph.D.

ntOFBSSOK OF FOUnCAL BCONOMY IN THE UNIVXRSITT OF WISCONSIN

MAX O. LORENZ, Ph.D.

ASSISTANT P&OFBSSOR OF POLITICAL BCONOMY IN THS UNIYSKSTTY

OF WISCONSIN ; DEPUTY COMMISSIONER IN THE WISCONSIN

BUREAU OF LABOR AND INDUSTRIAL STATISTICS

ALLYN A. YOUNG, Ph.D.

PROFBS80R OF ECONOMICS IN LELAND STANFORD JUMIOB UNIVERSITY

THE MACMILLAN COMPANY 1914

K^ 3317

Copyright, 1893, By hunt ft EATON.

COPYUCHT, X908,

By the MACMILLAN COMPANY.

Fint published elsewhere. Reprinted May, 1900; July, October, 1901; August, 1903; July, September, 1904: July, 1905; Jsnuavy, August, 1906; July, Z907; April, x9o&i

New edition, leYised aad enluged, September, October, 190I: JanuMy, August, 1909 ; December, 1910; August, 19x1 ; Juae, t9za ; May, X9X3 ; Jamuuy, July, 19x4.

J. •• Ooddiv Oo. ~ Berwlek & Smtm €0^

Norwood, Mass., U.S.A.

PREFACE

Since the first edition of the Outlines of Ecommics was pub- fished fifteen years ago, there has been considerable progress in economic discussion. In this revision an attempt has been made to indude so much of the new thought as seems to have established itsdf. No chapters remain unaltered, most of them have been entirely rewritten, and some new ones have been added. But the {dan of the former edition has been retained. This book differs bom the Elementary Principles of Economics^ published in 1904 by Ely and Wicker, in that it is a more advanced treatise, and in- tended primarily for college and university use; whereas the latter , although used in a number of higher Institutions, is intended pri- marily for high schools.

Four persons have taken part in this revision, but a free inter- change of criddsm has, it is hoped, resulted in a unified product.

Numerous passages, amoundng in the aggregate to many pages, have been printed in smaller type. Such are the passages which, either from their greater difficulty or from their subsidiary char- acter, may best be omitted by a teacher pressed for time. More- over, for classes in which the time limits are too narrow to permit careful study of the whole text, it may be found expedient to omit Book in, on Public Finance; while, on the other hand, some teachers may wish to take this Book up for independent study.

Considerable attention has been given to the questions at the dose of each chapter, and an endeavor has been made to frame these so as to require a mastery of principles to answer them. Po-usal of the text alone will not enable one to answer them all. In some cases it will be necessary to use the references to literature given at the close of chapters. There are also cases in which the correct answer must be a matter open to differences of opinion. It is hoped and believed that the questions will give rise to fruitful dass discussions.

Vi PREFACE

The aim of the authors has been to cover the entire field of eco- nomics, feeling that in this way they best serve the purposes of those students who are going to carry their studies further as well as those whose systematic school study of economics will end with the present treatise.

At certain points in the discussion of distribution, use has been made of the so-called "productivity theory." In order that th^e may be no misapprehension, it may be well to say here, what is repeated in the text, that in our view this theory has little or no ethical significance, and that its principal value b as an expeditious method of approaching the supply and demand theory, with which it is in complete harmony. When properly handle, it has the pedagogical virtue of leading the student directly to a study of the innumerable forces which condition supply and demand. But to regard the productivity theory as an end, is to mistake the problem for its solution; and to pass from this theory lightly to the imme- diate solution of those problems which the theory of distribution is designed to explain, is to o£Fer, in place of scientific explanation, a mass of pretentious platitudes.

Valuable suggestions have been received from Dr. H. C. Taylor and from Dr. W. H. Price, both of the University of Wisconsm.

In conclusion, I wbh to express my high appreciation of the work of my friends and colleagues in the revision of this book.

RICHARD T. ELY.

Madison, Wisconsin^ July, 1908.

PUEPACB

CONTENTS BOOK I. INTRODUCTION

Chaftbr L— The Natuu and Soon of Eoonomigs

Divenity of eoonomic itudy, 3 ; DeBnidon of economici» 4 ; A •odal sdence, 5 ; Studies man in process of development, 6 ; Econo- mic laws, 7 ; Principal divisions of economics, 15.

CHAFm IL— ThB CHAJtACTERISnCS OF THB PUSSNT EOONOMIC

System

Hmnan and physical conditions of economic activity, 16 ; Private enterprise and state activity, 16 ; Division of labor and exchange, 18 ; Mutual dependence, 19 ; Economic classes, 19 ; Private prop- erty, 20 ; Inheritance, 21 ; Contract, 21 ; Vested interests, 22 ; Freedom, 23; Competition and markets, 24; Cofiperation, 26; Monopoly, 26 ; Custom, 27 ; Authority and benevolence, 27.

Craftbr IIL— The Evolution of Eoonomic Society

Basis of the economic stages, 29; Direct appropriation, 30; Primitive man, 31 ; Pastoral stage, 32 ; Agricultural stage, 33 ; Manorial economy in England, 34 ; Handicraft stage, 35 ; Gilds, 35 V^™^^^ system, 36 ; Agricultural changes, 37 ; The mercan- tile system, 37 ; Patents of monopoly, 38 ; Industrial stage, 39 ; Other classifications, 39.

Ckaftkr IV.— The Evolution of Economic Society (^Continued)

England in 1760^ 43 ; Revolt against restrictions, 43 ; Mechani- cal inventions, 44 ; Agricultural changes, 46 ; Effects of industrial revolution, 47 ; The factory system, 47 ; Expansion of markets and mdnstrial specialization, 48 ; Evils of the transition, 48 ; Competi- tioii and iaissn-faire, 49 ; Reaction against the passive policy, 50 ; Quality of goods, 50 ; Protection of labor, 5 1 ; Labor organizations, 53 ; Extension of government enterprise, 54*

vii

Viii CONTENTS

Chapter V. The Economic Development op the United States

Economic stages in American industrial history, 56 ; Sectional- ism, 57 ; Characteristics of the American people, 58 ; Growth of population. 59; Changes in the birth rate, 60; Slavery and the negro problem, 61 ; Inmiigration, 62 ; Natural resources, 66.

Chapter VI. —The Koonomic Development of the United States {Continued^

Mercantilism in America, 70 ; American inditstriei in 1776, 73 ; The Industrial Revolution in America, 72; The development of agriculture, 75 ; Manufactures, 76 ; Transportation, 80 ; The labor movement, 83 ; State regulation of industry, 86.

BOOK II. PRINCIPLES AND PROBLEMS

PART I. INTRODUCTION

Chapter VII. Elementary Concepts

Motives in economic activity, 93 ; Utility, 95 ; Free and econo- mic goods, 95 ; Effort, 96 ; Waiting, 96 ; Services, 96 ; Personal qualities as goods, 97 ; Wealth, 98 ; Wealth and income, 98 ; In- dividual and society, 98 ; Wealth and value, 99 ; Capital and other forms of wealth, 100 ; Capital goods and capital value, 100 ; Social and individual capital, loi ; National wealth and national divi- dend, loi.

PART II. CONSUMPTION

Chapter VIIL Consumfhon Consumption defined, 106; Productive and final consumption, 106 ; Human wants, 107 ; Law of diminishing utility, 107 ; Differ- ent uses for the same commodity, 108 ; Marginal utility, xo8 ; The economic order of consumption, 1 10 ; Future wants, 1 1 1 ; Alleged present consumption of future products, 1 12; Consumption and saving, 113; Luxury, 1x3; Ideal distribution of wealth, 114; Harmful consumption, 116; Statistics of consumption, 117.

PART III. PRODUCTION

Chapter IX. Production Production defined, 121 ; Thefactorsof production, 122; Saving and capital formation, 123 ; Production and sacrifice, 124 ; Cost of production and expense of production, 125 ; Separation in owner- ship and organization of factors, 126 ; The undertaker, 127 ; Kinds

CONTENTS ix

of division of labor, 127 ; Advantages of division of labor, 128; Effect npoD the worker and the product, 129; Territorial division of labor, 131 ; Prodactive organization of the American people, 132.

Chapter X.— Business Organization

Nature of business units, 136; The corporation charter, 141 ; Corporation capital and securities, 143 ; Overcapitalization, 144 ; Forms of capitalization, 146 ; Corporation management, 147 ; Ad^ vantages and social aspects of corporations, 148; Trusts, 150; Publicity, 153 ; Federal control, 154,

PART IV.— VALUE AND EXCHANGE Cbaftex XI.— Value and Pucb

Meaning and significance of value, 156 ; The market, 158 ; Con- ditkms of competitive valuation, 159; Supply and demand, 160; Nature of demand, 160; Elasticity of demand, 163; Consumer^ surplus, 164 ; Nature of supply, 165 ; The determination of prices 167; Producer's surplus, 169.

Chapter XIL— Value and Price {Continunf)

Normal value, 1 70; Different conditions of supply, 172; Con- stant and variable expenses, 174; Joint expenses of production, 177; Surplus of bargaining, 177; Non-reproducible goods, 178; Monopoly value, 179; Retail prices, 179; Public authority and ▼aloe, 179; Imputed value, 181 ; Valuation of production goods, 182 ; Other theories of value, 183.

Chapter XIII.— Monopoly

The idea of monopoly, 187; Partial monopoly, 191 ; Qassifica- tion and causes, 192 ; Public and private, 193 ; Social and natural, 194 ; Local, national, and international, 196 ; monopoly price, 197 ; Law of monopoly price, 201 ; Qass price, 202 ; Monopoly price, high price, 206; Monopolies and distribution of wealth, 208; Public policy toward monopolies, 209 ; Relation of monopoly to tni2ta,2ii.

Chapter XIV. Money

De6nitions, 214; Metallic money, 216 ; Coinage, 217 ; Seignior* agCt 217; The standard of value, 221 ; Limited coinage, 224; BimetaUism, 225 ; The gold standard, 234 ; Government paper money, 234 ; Colonial and Revolutionary bills of credit, 235 ; The greenbacks, 236 ; Fiat money, 241.

CONTENTS

Chafter XV— Credit and Banking Credit transactions, 243 ; Personal credit, 246 ; Bank credit, 247 ; Bank notes, 250 ; State banks of issue, 250 ; The national banking system, 251; The reserve system, 252; The New York money market, 253 ; Speculation and the New York money market, 255 ; The independent treasury system, 257 ; The movement of money^ 258 ; Elastic currency, 260 ; A central bank, 262 ; State and pri- vate banks, 263.

Chaftbr XVL Other Problems in Money and BANicma Crises, 267 ; Effects of changes in the value of money, 270 ;

Tlie standard of deferred payments, 271 ; Index numbers, 272;

The value of money, 275 ; The production of gold, 280.

Chapter XVII. International Trade Nature and advantages of international trade, 284 ; Law of com- parative costs, 285 ; Restrictions on international trade, 286 ; Bal- ance of trade, 288 ; Foreign exchange, 292 ; Regulation of gold supply, 296.

Chapter XVIII.— Protection and Free Trade The case for protection, 300 ; Arguments of free-traders, 305 ; Conclusions, 311.

PART v.— DISTRIBUTION

Chapter XIX. Distribution as an Economic Problem Distribution controlled by existing institutions, 317; The dis- tributive process, 318; Distribution as valuation, 319; Law of diminishing productivity, 319-326; Marginal productivity, 326* 331 ; Marginal productivity and valuation, 331 ; Social aspects of diminishing productivity, 332.

Chapter XX. The Personal Distribution of Wealth Wealth and income, 335 ; Absolute and relative well beings 335 ; Concentration of wealth and large scale production, 335 ; Methods of measuring concentration of wealth and income, 336 ; Statistics of distribution, 337 ; Causes of poverty and riches, 341 ; The diffu- sion of wealth, 343 ; Modifying wealth acquisition, 345.

Chapter XXI. The Rent of Land The services of land, 349 ; Rent under uniform intensivity of cul- tivation, 351; Rent under actual conditions, 354; The different uses of land, 357 ; The capitalization of rent, 359 ; Rent and social progress, 360 ; The unearned increment, 363 ; Urban lands, 365.

CONTENTS

Chapter XXII.— The Wages of Labor

Wages as the price of labor, 367 ; Demand for labor, 368 ; Laboi saving machinery, 369 ; Supply of labor, 371 ; Growth of popula- tion, 373 ; Subsistence theory of wages, 376 ; The standard of life and wages, 377; Supply of labor in different occupations, 380; The wage contract, 381 ; Wages and efficiency, 382.

Chapter XXIIL— Labor Problems

Types of labor organizations, 387 ; Jurisdiction disputes, 388 ; Economic justificatioQ of labor organizations, 389 ; Labor organiza* tions and monopoly, 390 ; Methods and policies of labor organiza- tions, 391 ; Educational and fraternal activities, 394 ; The strike, 395 ; Employers* associations, 400 ; Agencies of industrial peace, 401 ; Trade arbitration, 403 ; Voluntary arbitration, 404 ; Com- pulsory arbitration, 404 ; Profit sharing, 406 ; Industrial democracy, 408 ; CoSperation, 409.

Chapter XXIV.— Interest

Definition, 416; Inadequate explanations, 417; Why interest can be paid, 418; The necessity of interest, 419; The investment and replacement of capital, 420-428 ; The expense and value of capital, 428 ; Capital and land, 431 ; Capital and consumption goods, 434 ; The rate of interest, 435 ; Gross and net interest, 437.

Chapter XXV. Profits

The entrepreneur's wage, 440 ; Speculative gains, 441 $ Chance gains, 445 ; Gains of bargaining, 446 ; Non-competitive profits, 446 i The social dividend, 448.

PART VI.— THE RELATION OF THE STATE. TO INDUSTRY

Chapter XXVL— Necessity of State Activity

The state and the meaning of state activity, 458 ; State and gov- ernment, 459 ; Purity and efficiency of the state in relation to eco- nomic activity, 459 ; general statement of the necessity of state activity, 460 ; The state and the fundamental institutions of society, 460 ; Property, private and public, 461 ; trade-marks, copyrights, and patents, 463 ; Public property, 465 ; Inheritance of property, 466 ; Contract, 466 ; Ethical level of competition, 467 ; The con- sumer, 467 ; Monopolies, government ownership, etc., 468 ; The state as the guardian of the permanent interests of society, 468.

xii CONTENTS

Chaftbr XXVII.— Transportation

Scope and significance* 471 ; The railway system of the United States* 472 ; Railway competition, 473 ; Pooling and consolidation* 475 ; The movement of rates* 475 ; The level of rates* 477 ; Rela- tive rates* 478; Distance* 480; Government ownership* 479; Regulation of railways* 481 ; The Interstate Commerce Commia- sion, 483.

Chaftbr XXVIII. Insurance

Nature of insurance, 485 ; Law of probabilities* 486 ; Origin and development* 486; Forms of insurance organization* 489; Life tables* ^490; The reserve* 491; The surplus* 491; Endowments* 492 ; Industrial insurance* 493 ; State insurance* 493 ; State regu- lation* 494.

Chapter XXIX. ■— Economic AcnvmEs of MumaPALinEs

Importance of municipal activity* 496; Character of municipal activities, 498 ; Protection through competition* 501 ; Methods of public regulation* 503 ; Municipal management* 507 ; Municipal home rule* 512.

Chapter XXX.— Sooausm

Socialism defined* 515; Distributive justice* 515; Varieties of socialism, 516 ; Communism* 519 ; Socialism an extension of exist* ing institutions* 519 $ The strength of socialism* 520; The weak* ness of socialism, 521 ; Social reform* 523 ; The socialist movement* 524 ; Anarchism* 525.

Chapter XXXI.— Agricultural Problems

Size of forms* 528 ; Ownership and tenancy* 533I; Farm labor* 536 ; Farm indebtedness and agricultural credit* 538 ; Tenancy vs, encumbered ownership, 540; Marketing of farm products* 543; Speculation* 546 ; Education and organization* 548.

BOOK III.— PUBLIC FINANCE

Chapter XXXII. Public Expenditures

Nature and significance of public finance, 555; Expenditures of public and private economics contrasted, 558; The proper propor- tion between the total income of society and public expenditures* 560; Economy vs, parsimony, 564; Historical development* 566; Development of public expenditures with respect to regularity and irregularity* 570 ; Terms used in public expenditures* 572 ; Cla»i* fication of public expenditures* 573.

CONTENTS xiii

Chapter XXXin. Public Revenues from Loans and Government Ownership

Classificatioii, 580 ; Temporary revenues and public debts, 582 ; Public domains, 586; Land policy of the United States, 587; Forest lands, 589; Mineral lands, 591 ; Success of our land poUcy, 593; Land nationalization and municipalization, public industries, 595; Public industries, 597.

Chapter XXXIV. Pubuc Revenues: Derivativs Rbvbnubs, Fees, Special Assessments, and Taxes

Definitions, 605; Fees, 606; Special assessments, 608; Taxes, 610; Justice in taxation, 612; Progressive taxation, 616; The shifting of taxes, 619.

CoAiTBR XXXV. ~ Pubuc Revenues: Federal, Static and Local Taxes

Direct and indirect taxes, 625; Customs duties^ 627; Internal revenue duties, 631 ; Taxes on transactions, 633; Inheritance taxes, 637; General property tax, 640; Corporation taxes, 645; Business and license taxes, 648; Poll taxes, 649; Federal control of taxa- tion of interstate commerce, 650; Separation of sources of state and local revenues, 65 1.

BOOK IV. HISTORY OF ECONOMIC THOUGHT

Chafixr XXXVI. ■— History of Economic Thought

The development of economic thought, 657 ; Economic ideas in the ancient world, 658 ; The Middle Ages, 661 ; Modem times, 662 ; Adam Smith, 664 ; The classical school, 665 ; Socialism, 668 ; The sociologists, 669 ; The historical school, 669 ; The eco- nomic optimists, 670; Early American economists, 672; The Austrian school, 673 ; Present condition of economic thought, 674.

Aftendiz A: Statistics of Public Expenditure ..... 677 Appendix B : Subjects for Eisays and Courses of Reading 685 Ihdxz •• 697

BOOK I INTRODUCTION

OUTLINES OF ECONOMICS

CHAPTER I

THE HATURE AND SCOPE OF ECONOMICS

The most striking characteristics of the great field of knowledge the Outlines of which we attempt to sketch m the present volume arc its rich diversity and spacious amplitude. Starting from psychol- ogy in its analysis of the human needs which explain or condition wealth, it traverses the entire field of social activities and institu- tions arising from man's efforts to supply his material needs. It loaches on one side the physical sciences from which it borrows some of its most fundamental principles; occupies joint terri- tory at places with politics, ethics, and law, although their respective jurisdictions are in the mam distinct; and forms at once the most fertile and most thoroughly developed province of the broad science of human society. Within its borders, if we may continue to compare the scientific possibilities of economics with the natural reso\u*ces of an opulent territory, opportunity Ls offered for the exercise of every mental aptitude and every scientific method. The historian's gift is needed to unravel the past and trace the development of the industrial institutions whose present- day problems, in turn, oflfer indefinite scope for the studies of the more practical student with a taste for administration or business management. For the legal mind there are the subtle problems of property, inheritance, labor legislation, and corporation control; for the mathematically inclined, insurance and modem statistics; fw students with practical political interests, the tariff, currency reform, and a score of important problems in which economics and politics are inextricably interwoven; for the philanthropici unemployment, accident insurance, and a number of social prob-

3

4 OUTLINES OF ECONOMICS

lems growing out of the maladjustments of modem industry. Animating the entire subject, blended of course with the love of truth for truth's sake common to all sciences, is the persistent hope that by systematic study we may eventually abolish the ma- terial poverty which deadens and dwarfs the lives of millions of our fellows. Economics is a science, but something more than a science; a science shot through with the infinite variety of human life, calling not only for systematic, ordered thinking, but for human sympathy, imagination, and in an unusual degree for the saving grace of common sense.

To define such a subject adequately in a few sentences is mani- festly impossible. It is frequently said that economics treats of man's efforts to earn a living, and this definition is not inaccurate if by "man" we understand "mankind," and if we fully appre- ciate that the individual's efforts to turn an honest penny's profit receive but little attention in comparison with the conmiunity's efforts to feed, clothe, and shelter itself. Satisfaction of social need, and hot individual profit, is the objective point of the science. So, similarly, economics has been characterized as the philosophy of human industry; and this description is illuminating provided we interpret "industry" broadly enough. Even the old tradi- tional definition, that economics is the science of wealth, is true enough if we clearly understand that there can be no wealth with- out man, and that the science which deals with wealth, so far from being a "gospel of mammon," necessarily begins and ends in the study of man. As we prefer to define it, however, econo- mics is the science which treats 'oj those social phenomena that are due to the weaUhrgeUing and wealth-using activities of man.

Economics treats of Man. The supreme importance of man in the study of wealth has not always been appreciated by those who have expounded the science. Too often they have considered man simply as a producer of wealth, the one "by whom" the necessaries, conveniences, and luxuries of life are created, whereas the infinitely greater truth is that man is the one "for whom" they are all produced. Of course no one denies this truth, but one might almost as well deny it as to leave it out of account. The result of such neglect is that men devise with great skill

THE NATURE AND SCOPE OF ECONOMICS 5

rules by which man may be made the best possible manufactur- ii^ machine. It sometimes quite escapes the notice of these persons that in making man the best possible manufacturing machine they may make him a very poor sort of a man; that in teaching him to supply his wants very bountifully they may pre- vent his developing and correcting those same wants. They for- get that there are two kinds of poverty one a lack of goods for the higher wants, the other a lack of wants for the higher goods. To become rich in goods while losing at the same time the power to profit by them is imfortunately one of the commonest retro- gressions in human experience. We do not mean that the whole problem of human development is the subject of economics, but simply that manhood, rounded human development, is the goal of all social sciences, and none must consider their subject so Darrowly as to exclude that object.

Another common mistake has been to regard as of chief im- portance the economic activities of one particular class, especially the employer. Other men were treated simply as "a factor m production." An English writer speaks of dear labor as one of the chief obstacles to England's economic prosperity. Could anythmg be more utterly an oversight of general human well- being? Dear labor shouki be the very goal of England's eco- nomic effort, for that means abundant supply of the wants of the great mass of her people ; and the fact that labor is dear, so far torn being an obstacle to prosperity, is the very proof and sub- stance of that prosperity. A glance at history indicates that men have made these mistakes not only in theory but in practice. Industries have been developed to majestic proportions while man was sinking into deeper degradation; wealth has grown at the expense of that human weal in whose service it won its name.

Economics treats of Man in Society. This is one of those truisms which only history can make real to us. As we pass from the savage and cannibal, up through all the stages of development, we find an ever-increasing interdependence among men. Man is least dependent when he wants least, cares least, has least, knows kast, and is least. With every betterment of condition and char-

6 OUTLINES OF ECONOMICS

acter he is more dependent than before, more dependent and yet more free. The beginnings of barter are a confession of mutual need; the coining of money is a declaration of dependence to all men. We look with pride upon a century of progress, but that progress has consisted in little else than a growth of dependence, an ever-increasing departure from that rude kind of literal self- help in which each one does everything for himself. Our fathers drew water, each for himself, in "the moss-covered bucket," while our mothers dipped candles for the evening's light. If one was negligent, the rest did not suffer. To-day a network of pipes radi- ate from a common center to enter a thousand households. An engineer makes a blunder at the station, and thousands are in darkness or drought. Progress is a passage from independence to dependence, from distrust to confidence, from hostility to amity, from helplessness to helpfulness, while the great law of social solidarity gains ever-increasing importance. Our science, then, is interested primarily in man in his relations to others, and not in man by himself. Moreover, as a science which studies the pres- ent in order that it may predict and prepare for the future, and discovering that interdependence is the law of progress, it must not hesitate to shape its principles with reference to a solidarity which shall grow more rather than less, stronger rather than weaker.

Economics treats of Man aa in Pirocess of Development. Few truths are more easily admitted or more persistently ignored than that of change in human life and condition. History makes it real. Man now wanders about by force of necessity and age-long habit, now starves rather than be moved from his home. Land is now free to all, now parceled out with well-nigh absolute right of individual possession. The seemingly eternal features of the social structure are gone in a few generations. Nothing so invali- dates theories, laws, general principles, institutions, and enter- prises as this great law of change of which we seldom take full account. Take, for instance, bequests. Nothing is commoner than for a man to leave a legacy under specified and detailed regulations, binding for all time. One leaves money to endow a religious service in a language which in a few generations no one

THE NATURE AND SCOPE OP ECONOMICS J

understands; another founds a coDege to teach certain doctrines which in a century no one believes; and so on indefinitely. These and a thousand other laborious efiForts of statesman, warrior, or philosopher quite lose their worth for the future because their authors assumed that the future would be like their present Even the wages system and the division between capital and labor which seem rooted in the constitution of society are scarcely two centu- ries old as a general system. One must never forget in the study of economics that the phenomena with which it deals are per- vaded by the spirit of life, moving forward or backward, pro- gressing or decaying, under those influences which control the rise and fall of social institutions. The science is biological rather than mechanical.

The Laws with which Economics Deals. The evolutionary character and complexity of economic phenomena, which account for much of the charm of the subject, endow it also with unusual difficulties. Conclusions true for one generation are invalid in the next Terms and definitions appropriate to one stage of in- dustry are misleading in a succeeding st£^. Generalizations valid for one nation and government are inapplicable to another. Even those laws or uniformities which the science prizes as the finest product of its research are but statements of probabilities dec- hiations of what is most likely to occur for the mass of men in ^be long run under certain specified circumstances.

In no department of knowledge, consequently, is there greater need of temperate statement and of that humility d mind which is the surest safe- guard against bigotry and dogmatism. No system of economics is appli- caUe unchanged to all times and all places: the premises of the aigiunents dumge ; the ingredients of nearly every problem present themselves in differ- ent proportions; and the conditions of almost every question vary from country to country and from generation to generation. The student must not expect rules of thumb by which he can decide offhand the economic problems of the particular city or country district in which he is for the moment inter- ealBd. No general treatise on economics can authoritatively decide the piactical problems of particular times and places; although the economist, before all other students, is forced to deal with practical problems. What such a treatise can do is to point out mistakes of logic common in the current discussions of economic questions, call attention to obscure factors some- times of great importance which the practical man is likely to overlook,

8 OUTLINES OF ECONOMICS

give solutions of typical problems which are likely to arise, and thus afford a training which will assist the student in solving practical problems for himself. The peculiar and distinctive office of the economic scientist, however, is to emphasize the less tangible truths, the remoter consequences, the deeper and consequenUy less obvious forces of economic society. The impulses of the moment, the immediate demands of the hour, the present "fact" that stares us in the face (and sometimes blinds us), are not likely to lack vigorous champions; and to preserve the balance there is need of a craft of thinkers far enough removed from the battie to preserve the wider outlook, mindful of the lessons of the past, jealous for the rights of the future, insistent upon the less obvious truths. This is why economics so frequentiy appears to the practical man strained and academic. This impression arises from a difference of emphasis which in the main is as salutary as it is inevitable. The academic quality of the economist's work arises sometimes from igno- rance, sometimes from pedantry, but more frequently from his courageous insistence upon the importance of the less tangible truths and the distant consequences of present action.

Is not economics, then, a science based upon natural law ? The question is largely a verbal one. What do we mean by natural law? In the narrowest sense natural laws are the habits of na- ture which know absolutely no variation. Such are gravitation and chemical affinity; and the sciences based upon such laws astronomy, physics, and chemistry were the first to develop, and have attained a maximum degree of exactitude. The term " science " is sometimes used in a way to imply only sciences of this character. These sciences are more properly known as exact sciences, and they are characterized by the fact that the relations with which they deal can usually be expressed quanti- tatively.

When we come in contact with life, however, and especially with its higher forms, the exactness witB which an astronomer predicts an eclipse or a chemist anticipates a reaction becomes impossible. Not that life is without laws; very far from it. There is, in the first place, the basis of physical nature, with its perfect regularity, upon which all life rests and to which it must conform. Then, too, there are laws governing life directly and pertaining to it. These form the subject of the group of sciences known as biology. We must remember, however, that all we can say of natural laws is that they are habits^ not compulsory necessUies of

THE NATURE AND SCOPE OF ECONOMICS 9

nature, and the laws of life seem to differ from those of inanimate nature in that they are not quite invariable habits. Variability seems to be inherent in life, increasing as life rises in the scale of development. It is often assumed, to be sure, that these laws are as invariable as any other, and that this seeming variability is only a greater complexity which we do not yet imderstand. How- ever that may be, the result is the same for the present. The sci- ences of life are not exact in the sense we have defined. We must further note that in so far as a science deals with facts which seem to be governed by no invariable law, or whose law has not been discovered, it must content itself with a description of this part of its subject Thus we have the term " descriptive science.'* We might better speak of the descriptive part of a science, for all sciences are able in part to reduce their facts to law.

What has been said of the sciences dealing with life applies to an even greater extent to those sciences which deal with man. It is perfectly true, of course, that within certain limits man is gov- erned by absolutely invariable laws. He is as much bound by gravitation as anything else, and if he falls over a precipice, we can predict the results as certainly as though a stone fell over. But, without entering the bog of discussion as to the nature of human freedom, we may safely assume, for practical purposes, that man is also, within certain limits, a law unto himself. No- where do we find an element of variability so great and so seem- ingly ultimate as here. We must remember, therefore, that the sciences which deal with man deal with a being who is modified by his environment, but who has (he power of modifying that envi- ronment by his own conscious effort.

Let us consider verV carefully what this means. It does not mean simply that man modifies his environment because he has been modified by it and so reacts upon it, just as things do when they come in contact. If we accept this view, we shall come to Herbert Spencer's theory of natural selection. The forces at work accomplish their own results, according to this theory, whether man will or will not, simply by natural action and reaction. This implies that man is modified by his environment, and that he in turn modifies that environment without conscious effort. This

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theory is based on an assumption that man has no power of iniH- aHng an influence, and consistently concludes that social develop- ment, like geological development, must be left to work itself out Mr. Spencer, however, goes farther, and stoutly maintains that man, by conscious effort, especially by collective or state effort, not only does not help this development, but actually hinders it. In this the whole theory is abandoned, for it is plain that if man by conscious effort can hinder a process, he can help that process in the same way, if he only has enough wisdom and sense. These it is the purpose of sdence to give him.

In opposition to the theory of natiual selection, or unconscious development, has been urged the theory of artificial selection, or conscious development. Ages of natural selection made of the potato a lean, watery, unpalatable tuber; a few years of artificial selection made it a valuable food product and a table delicacy. Compare the development of domestic animals in the last few years, under man's conscious guidance, with their slow and meager development in a state of nature. Man has precisely this power of consciously modifying the natural and artificial elements of his environment, and this power continually enlarges.

So, when we ask if economics deals with natural laws, we really ask whether this being, whose activity in a certain line we are studying, is governed by such laws. It we mean by this to ask whether his action is characterized by absolutely invariable hab- its, like the forces of physics, we must plainly answer, no. If man had no power of initiative, or, on the other hand, were so perfectly radonal as to always do the wisest thing, there would be a regularity in his action which might perhaps form the basis of a complicated, but exact, science. As it ii, all social sciences are approximate and partiy descriptive. There is much in man's ac- tion which is exceedingly (though not perfectiy) regular, and hence we have general, though apparently not invariable, laws. There is a part of his action, however, that seems as yet to be capricious, and we can only roake note of it till we have more knowledge.

The laws of economics are not comparable to the laws of inani- mate nature in invariability, but they are of very general applica- bility, and are wholly in line with the action and intent of nature,

THE NATURE AND SCOPE OF ECONOMICS II

and are, in this sense, "natural." But the laws of economics are not natural laws in the sense in which the word is often used; namely, laws external to man and not at all the product of man. The laws of economics have been designated as social laws to distinguish them from those of physical science. Social laws de* scribe tendencies, or regularities, which appear especially in the consideration of large masses of facts. Human mortality serves as an illustration. When and how a certain man, as A, will die, is proverbially uncertain; but when we speak of himdreds of thou- sands of lives, we can predict with such an approximation of accu* racy that a vast business-like life insurance can be built upon the regularity of the action of death.

The foregoing discussion enables us to answer in a word the much-mooted question, "Is economics a science ?'' It is not an exact or mathematical science, though certain portions of the sub- ject may possibly become so. It is an approximate and partially descriptive science, like all sciences dealing with man, or even with life. The inexactness of the social sciences is due to the very thing which gives them their supreme value, the nature of man and the greatness of their subject.

The Relation of Economics to other Sciences. We have al- ready referred briefly to the relations between economics and some of the other sciences, but the topic is one which requires fuller treatment In one sense, economics may be said to be dependent upon practically every other science, since the discoveries in every field of knowledge almost inevitably react upon the industrial life of man. Modem chemistry, to take a single example, has revo- lutionized some industries, wholly created others, and, through the agency of the piu*e food laws, may claim most of the credit for entirely suppressing others. From psychology economics takes the axiomatic principles upon which the laws of value rest; from ph3rsical science the law of diminishing returns which plays such an important part in the theory of distribution; and from mathe- matics the methods by which to ascertain how insurance may be safely supplied against accidents, death, and loss by fire. But it is to the sister sciences dealing primarily with man that eco- nomics is most vitally related.

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Man has been busy from the first in several lines of effort. He has talked, worshiped, fought, studied, and each of these lines of effort has developed its own faculties and institutions. For convenience we may arrange these in eight groups, as follows: language, art, education, religion, family life, society life, politi- cal life, economic life. Each of these is the subject of a science more or less developed. The group of society life that is, the life of polite society, calls, parties, balls, and the like has been studied but little, and we know few of its governing principles.* Language, on the other hand, is a science which has attained to very complete development. The rest lie scattered between these extremes.

A peculiar feature