AN INTRODUCTION TO ECONOMICS MACMILLAN \ND CO, I tMt-rn ixj iT> a row w cai cirrr \ >t An* a* vciro i t 1HL MACMM1W COMP\M m:p \ork i ^vo cji CARO dai t vf <\ rPA ckco THV MACMILTAN CO 01 CANADA I -tv ■Of'O TO AN INTRODUCTION TO ECONOMICS FOR INDIAN STUDENTS BY W. H. MORELAND, CSL. O.I.E. of mi. india\ civil service MACMILLAN AND CO, LIMITED ST MARTIN’S STREET, LONDON COPYRIGHT First Edition 1013 Reprinted 1016, 1010, 1020, 1026, 1027, 1028 PRINTED IN GREAT BRITAIN PREFACE The object of this book is to provide a statement of the leading ideas of modem Economic Science in terms that will be easily understood by Indian students. The study of Economics in India is rendered unnecessarily difficult by the fact that in its early stages thero is so httle common ground between the student and his text-books the knowledge of western industrial life which western text- books assumo is not possessed by the student, and the illustrations consequently in many cases only increase the difficulty which they are intended to remove I hope that the study of the science, whioh is of such vital impor- tance to the future of India, will bo facilitated if its leading ideas can bo apprehended in the first place in terms of the Indian field and market-place. The book is designed to serve as an introduction to the larger text-books and the classical writers, and the mam lines of its construction are therefore fixed In one respect, however, I have ventured to depart from tradition It will be seen that while the factors of production are at first treated m the traditional order (Land, Labour and Capital), this order is altered in the section dealing with Distribution. The chief consideration that has led to this change is the importance of laying stress on the fundamental unity of the science, and of showing that a thorough study of the vi PREFACE equilibrium between supply and demand i«* as essentia) to a mastery of the problems of Distribution as of the problems of Value m connection with v Inch it first appears Now it is not easy to present this fundamental unit}' if the traditional order is followed the student comes first to the subject of rent, with all the complications arising from the special features of land, and when ho passes on to wages, his attention is directed to the particular features of that branch of the subject It seems to mo that — at least in the present state of development of Iho Indian markets — the object m viov can host bo attained by beginning with the subject of interest, where the funda- mental urnty is modt easily scon, and passing thence to those subjects where other factors in the problem become of relatively greater importance It may perhaps savour of presumption if one who has no practical experiences in teaching offors suggestions as to the manner m which the Bcicnco should bo taught But, like other employers, I have been forced by experi- ence to realise that to a largo proportion of Indian students of Economics the science is purely abstract, and hears very little relation to tho facts of Indian life I venture, therefore, to suggest that, particularly m tho early stages of the course, stress should ho laid on the concrete interest of the science, and that students should be provided with opportunities for observing economic facts for themselves, whether m the form of pnee-hsts, market-reports, and selected statistics, or of facilities for seemg how production is actually organised in the neigh- bourhood of their college They will thus bo helped to realise that the science anses out of the facts of life, and is not a thing to he first learned and then applied to those facts PREFACE vii I have to thank Mr G. Findlay Shirras of the Indian Educational Service for many valuable suggestions regard- ing tho chapters that deal with Distribution. W. H. MORELAND. CONTENTS BOOK I. INTRODUCTORY CHAPTER I. )/ The Meaning of Economics PACK Tho need of understanding the terms used — Provisional definition of Economics — Tho word Economics — Laws — Science - 3 CHAPTER H. v Ties Meaning of Wealth and Value In its ordinary use Wealth is applied to things that are desirable — but not to all desirable things — The classes of desirable things that are included m the term — In- dividual and National Wealth — Value — Price - - 9 CHAPTER 3H. \j The Meaning of Production and Consumption Mam divisions of the science — The nature of the processes described as production — and as consumption — Gradual consumption — Alternative definition of Economics — The study of wealth is part of the study of man - X CONTENTS CHAPTER IV. Some Assumptions Necessity of limiting the subject by moans of assumptions— The subject is mankind in general and not a particular race — The existence of organised governments assumed — Industrial Freedom assumed — Existence of money assumed — Assumptions m regard to definitions BOOK II PRODUCTION CHAPTER V. The Factors of Production The process of production illustrated — The use of Land, Labour and Capital — Further illustrations from the work of cultivators — of artisans — of factories — of railways CHAPTER VI. Land The meaning of land — Limitation of its quantity — Im- portance of situation — Examples of the rise and decay of townB — The need for means of communication and other natural advantages — The need for enterprise CHAPTER VIE Agricultural Land Situation is important — but also fertility — Standard of cultivation varies with fertility— r Law of Diminishing Returns — Its qualifications CONTENTS XI CHAPTER Vm. Labour Nature of Labour — Need of somo inducement to make men work — Amount of work done depends partly on numbers and partly on efficiency — Factors affecting numbers — Birth-rate and death-rate — Migration — Malthus’ Law of Population - - - - CHAPTER IX. Mobility of Labour Inequality of the supply of labour — Nature of migration — • Conditions affecting mobility — Caste and Iocabty — Habits of mind affecting the country-population — Social and economic pressure — Causes of Increased mobility — Change of occupation -------- s CHAPTER X. Quality, or Efficiency, of Labour Health and strength — Skill — Manual training — Influence of the caste-system on training — Education — Moral quali- ties — Effect of adequate incentive - CHAPTER XI. Intellectual Work Size of population less important than state of development — Conditions ns regards mobility — Effect of caste — Efficiency — Desire for excellence — Tendency to replace manual by intellectual work - PACK 52 61 70 79 CONTENTS xu CHAPTER XII Capital hoi Meanin g of Capital— Illustrations— Saving— Borrowing — Accumulation of wealth— Need of government — Use of wealth as capital ..------88 CHAPTER Xm Organisation op Production The Self- supporting Stage Stages of Production — Description of a self-supporting village — Beginnings of trade — Its effect on the amount of wealth ------- - 9B CHAPTER XIV Organisation of Production The Artisan Stage Conditions of production in this stage — Increasing difficulty of the business side of production ----- 103 CHAPTER XV. Organisation of Production The Factory Stage Example of a factory — Separation of business from labour — Division of labour — Use of machinery — Use of mechanical power — Characteristics of the system — Need for large capital . _ _ _ up CHAPTER XVI Organisation of Capital Need of organisation — Functions of banks — Their limitations — Limited companies — Savings banks and similar in- stitutions -- CONTENTS xui CHAPTER XVH. SPECIALIS 4.TION OF THE FACTORS OF PRODUCTION MO* Specialisation o£ land — Localisation of industries — Specialisa- tion of labour — Specialisation of capital — Increase of fixed capital — Causes of specialisation - 125 Noto on tho relation of costo to specialisation of labour - 131 CHAPTER XVm. Production Concluding Remarks It is probable, but not certain that production will develop in India ns it lias developed elsewhere — India needs increased production, but tho manner of Distribution is also important — Some defects of the factory-system — Possible alternatives -------- - 132 BOOK III. CONSUMPTION- t 1 '"CHAPTER XIX. Wants Wants with which tho Economist is concerned — Their nature — Their intensity — Possibility of complete satisfaction — Increase in number and variety of wants — Differences in tho rate of this increase ------ 139 CHAPTER XX. i / y \ Wants ( continued )• Some Exceptions Wonts which apparently cannot be satisfied — Men whose wonts do not increase — Difficulty of exact definition of economio wants - - - - - ■ - *, 145 CONTENTS sav CHAPTER XXI Necessaries and Luxuries rAox Necessarios for existence? — for cflicicncj— -Con\ontional necessaries— Habit and custom— Their grndunl changes The rato of change — Comforts and luxuries * - 151 CHAPTER xxn. The Demand or an Individual Consumer The way in which a man’s income is spont — Utility of different commodities — A demand schedulo - 169 CHAPTER XXDI Changes in a Consumer’s Demand Change of income — Its offect on the demand schedulo — Relation between Wants and Demand - - • <106 CHAPTER XXIV. Demand or a Community Relation of an individual's demand to that of a community — 4 Demand of various classes in a community — The Law of Demand — Exceptions to the Law — Substitution — General appboabibty of the Law of Demand ’00 CONTENTS xv BOOK IV. DEMAND AND SUPPLY CHAPTER XXV PRELIMINARY CONSIDERATIONS paok Moaning of tlio expression Demand and Supply — The central question is tlio mutual adjustment of Supply and Demand • — Equilibrium in the earlj stages of production — Meaning of tho term Market ------- 179 CHAPTER XXVI. Temporary, or Market, Equilibrium Example of a siraplo market — Effect of increased domand — of increased supply — of diminished supply — Influence of a rise in prices on consumption - - - - - 186 * CHAPTER XXVJI Market Equilibrium , Some Complications Presonco of producers and consumers m tho markot — Import and export — Combinations — Substitution — Holding up stocks — Donlers who both buy and sell — Forecasting tlio future - -- -- -- -- 192 CHAPTER XXVIII. Relations oe Producers and Consumers TO THE ftlARKET Wholesale and retail transactions — Retail prices — Influence of consumers’ demand — Position of producors — The lower limit of price is fixed by tho expenses of production — Summary of market equilibrium - - - - - 201 XVI CONTENTS CHAPTER XXIX. Normal, Equilibrium l*A ft 9 Existence of standards of price — Changes m the standards — Illustration from llio artisan stage of production — Result of a fall m price be] on the expenses of production — Result of a rise in price — Approximation of price to tho expenses of production — Illustration from the factory - stago of production — Summer} — Use of tho words Cost and Expenses 208 CHAPTER XXX. Changes in Expenses of Production The way in which expenses are controlled — Imaginary state where expenses do not change — Illustrations of such a state — Causes of cliango — Tho question of time - - 218 CHAPTER XXXI Conclusions Tho answer to tho central problem — Its necessary comphcn tion — The method of studying such complicated probloms — The need of explicit statement of assumptions — Relation of this discussion to Distribution ----- 227 BOOK F. DISTRIBUTION -•* CHAPTER XXXTT Introductory The nature of Distribution — The various claims for a share of produce — Depreciation — Taxation — Tho position of the producer — Profits — The way in which the subject of Dis- tribution is treated — Distinction between buying and hiring 238 CONTENTS CHAPTER X XXTTT Ivre.nrsT on Capital r*os Origin of Joans on intercut — Waiting for enjoyment of wealth — Bargaining os to the rate — Gradual nso of money-lender*, — Roculnr mnrketa for capital — Demand and Supply in such n market ----- 243 CHAPTER XXXIV. Interest (ccmhinted) Gross and net mt crest — Charge for msuranco ognmst nsk — Charge for management — Not interest and bank rates — Normal rate of interest — Seasonal \nnalions in tlio rate — Changes in the normal rate ------ 252 CHAPTER XXXV. Interest (continued) Interest paid by agriculturists — High charges for insurance and management — Co-operative credit — Interest paid by artisans — Summary ------- 260 CHAPTER XXXVI Rent of Land Early Indian tenures— Tho do\ elopment of landholders and tlio beginnings of a mnrkot — Nature of rent-rates — The Demand for lnnd — Tlio Supply — Results of tho bmitation of supply — Tlio normal lo\cl of rents m Indian conditions 267 CHAPTER xxxra. Rent (continued) Kents in n different social state — Tho margin of cultivation — Tho classical theory of rent — Its application to Indian conditions — Rolation of rents to prices - 274 xvni CONTENTS CHAPTER XXX Vin. Limitation of Rents by Legislation pao* The economic justification of legislation — Nature of fertility of land — Need of Fixity of Tenure and of Fair Rents — Nature of existing legislation — How rents are actually determined .... - 281 CHAPTER XXXIX. General Wages Origin of customary rural wages — Causes tending to produce alteration in the customary rates — Appearance of markets for labour — The imporfections of existing markets - - 288 CHAPTER XL General Wages ( continued ) Prevailing Rates of Wages — Additions to wages — Real and money wages — Working of a labour-market — Limits of the Demand — Variation of Demand with the rate — Appli- cation of the Law of Demand — Relation of efficiency to the rate - -- -- -- -- 292 CHAPTER XLI l v General Wages ( continued ) Supply of labour — Attractions and drawbacks of various forms of work — Net advantages — Impossibility of storing labour — Variations in efficiency — Time required for in- crease of population — Retardation of changes in the rate of wages — Examples of changes — Normal rate of wages— > The standard of comfort - 300 CONTENTS xix CHAPTER XLH. General Wages { continued ,) PAOfc. Changes in normal wages — The present standard of comfort — Effect of a nse in wages, (1) if efficiency is unpaired? (2) if efficiency is increased , (3) if idleness results — General conclusion — Influence of women - - *310 1 CHAPTER XLm i Earnings of Specialised Occupations Nature of the market — The Demand — The Supply — Effect of caste — Need of special training — Net advantages deter- mine the choice made by parents — Tendency to equalise net advantages is imperfect — Unemployment - - 318 CHAPTER XLIV. Earnings of Management The position of the producer — Supply — Nature of training — Difficulty of getting a start — Demand — Conditions required for the development of the market - 327 CHAPTER XLV. Summary. The National Income Summary of the conclusions reached — The National Income — Causes affecting its amount — The effect of character under the regime of Industrial Freedom — Advantages and drawbacks of this rigime — Possible alternatives — Limita- tions of Industrial Freedom ------ 332 INDEX 340 BOOK L INTRODUCTORY. CHAPTER I. THE MEANING OP ECONOMICS When a student takes up a now subject he wants first of all to know what it is about and what is meant by the words which ho has to use In the case of some subjects this is a simple matter ; the meaning of the words used m them is absolutely fixed, and the student begins by learning their definitions by heart Thus, the student of geometry usually begins by learning the definitions of such words as point, or line, or circle ; and when he has once learnt them he knows that all through the course m geometry they have precisely the same meaning, and that there is no risk of his being misled by a word being used sometimes in one sense and sometimes m another There are, however, subjects, and Economics is one, where this method is not applicable, because all writers are not agreed on the me anin gs of the words used , the words are used in ordinary conversation vaguely, and with more meanings than one, and even when a writer defines the sense in which he intends to use a word he sometimes uses it in another sense, and may thereby mislead his readers In studying such sub- jects it is necessary to examine the meanings which each water attaches to the words used, to be constantly on the watch for double meanings, and to use qualifying adjectives when there is any risk of a misunderstanding. 4 AN INTRODUCTION TO ECONOMICS Now the Science of Economics consists of the study of the Laws of the Production, Consumption and Distribution of Wealth , or, speaking populaily, how men or nations got Wealth, and what they do with it Each one of the words printed with a capital lottor m the last sentence needs careful examination Economics, the name of the scienco, is formed from the noun economy, which in current English use has more meanings than one It is derived from the Greek language and originally meant ‘management of the household’) and in popular use it is still closely connected wnththo idea of household expenditure, since we speak of a person spending Ins income with proper economy, or being econo- jrncal m his habits But the scnMo „ s0 „f fte word , e worf Economics has wad* meanm S s > a nd the shorter name — we may praise a map t t0 , do mtix being economical ; economical hut the so^ aV01 ^f '" raste ' tIia t is, for being do with prL."l «h bTal 0£ EMMB,0S ^ » J'f •» principal hegmnmg “T ’ 1 top every time they come to MEANING OF ECONOMICS 6 the word and remind themselves of the sense m which it is used In ordinary talk a Law means a command addressed to the people in general, and telling them to do, or not to do, something ; and Law, or Laws, indicate a body of such commands. In India these laws or commands are either drawn from the Sanskrit or Arabic writings, or are in the form of Acts passed by one of the Legislative Co uncils : much of a Hindu’s conduct is commanded by the Shastras, ■while a Muhammadan is guided largely by the Koran and the Commentaries , and all alike are subject to the Tndmn Penal Code and other Acts passed by the Council - But in science there is no idea of telling people what to do In science a Law is simply a statement that something tejikd y to h appen in certain cond itions, and when we speak of the Laws of Matter or of Motion, or of Economics, or of Political Science, Tie are referring to the conclusions that have been drawn from experience as to what is likely to happen when certain conditions exist Everybody is familiar in a general way with many 1 Laws ’ in this sense of the word . it is common knowledge for instance that water will flow downhill ; and the physical sciences are usually based on these general laws, which are developed and made definite as the result of successive experiments, and of argument as to the moanmg of the experiments, until a large body of conclusions has been drawn as to what will happen m very various conditions Thus we now know 7 , not only that water will flow downhill, but the rate at which it will flow down a slope of any given steepness, the size of an embankment required to prevent it flowing, and many other conclusions, with the aid of which engineers are able to construct drainage-schemes or irrigation-canals, and to supply towns and cities with pure water drawn from' a distant source. These ‘ laws * of the movement of water m 6 AN INTRODUCTION TO ECONOMICS given conditions, which constitute the science of hydraulics, do not tell people what to do or what not to do The engineer learns from them how to achieve his object, and in popular talk he may be said to ‘ oboy ’ them just as a man obeys the Penal Code , but this use of the word obey is figurative, and may mislead In the first case, a man knows what is likely to happen and makes his plans accord- ingly , m the second, he refrains from doing something because it is forbidden by the order of Hie Government, which will punish him if he disobeys Now Economics, like the physical sciences, is based on the every-day experience of the world, and endeavours to state that experience in a set of conclusions which will show what changes m regard to wealth are likely to follow from changes m the conditions under which people live These conclusions are called laws, bnt it must be repeated that they do not form commands, that is, they do not tell people either how they should get wealth, or what they should do with it when they have got it There is one obvious difference between the position of the physicist and that of the economist The former can carry out experiments on a very large scale, that is, he can make the conditions and see what happens, while the economist can very rarely experiment, but must content lnmself with watching the changes that take place in conditions, and their results, and arguing as to the meaning of his observations The student of the movements of water, for instance, can make water flow down any sort of channel he cares to construct, and can measure the velocity of the flow in the conditions ho has produced but the economist is not dealing with water or clay, but with the human bemgs who produce and consume wealth , ho cannot make them alter their ways of working or of MEANING OF EC0N051ICS 7 living at his pleasure, but only observe what happens when the conditions change It is largely owing to this reason that in the science of Economics the conclusions or ‘ laws * are far less definite, and open to many more exceptions than is the cose in sciences where systematic experiments are possible It is very difficult to be sure that we have not overlooked some change in the conditions that has taken place , and even senous students may thus be misled and may attribute a result to a cause which, in fact, has had little or nothing to do with it, just because they have overlooked the true cause or causes The same danger of mistake is, of course, more frequently run by writers in the press, who m many cases have never studied any branch of the subject, and may find themselves called on suddenly to explam changes that excite pubhc interest, such as a rise in prices, or an mcrease in exports Much that is misleading appears in the press on such subjects, and students will be wise not to accept everything they read, but to wait until their study of the laws of Economics enables them to draw conclusions for themselves and to criticise the conclusions drawn by others It will be obvious that in order to understand these laws of which we have been speaking, a student must know a large number of the facts on which the laws are founded Here, as we have said, he is at a disadvantage compared with the student of a science such as physics, who can satisfy him self by experiments m the laboratory that the lavs which he is studying really hold good The student of Economics has no laboratory , and he cannot as a rule ascertain or verify many of the facts for himself He has therefore to take them from books; and a large part of his studies will consist of Economic History and of Statistics {Economic History means the history of the 8 AN INTRODUCTION TO ECONOOTCS production, consumption and distribution of wealth among various nations m the past Statistics mean facts bearing on tho same subjects, stated in figures and arranged so as to show the changes that aro in progress But the study of history and statistics is made vorj much easier by a preliminary know ledge of tho chief conclusions or laws that have already been based on them , and so it is best for students to begin by acquiring such a knowledge, illustrated by facts already familiar to them, and then to study the laws m more detail and in tho light of history and statistics The word Science, which wo have already apphed to the subject of Economics, requires a short c\planation. Originally it meant simply know ledge, but its use is now restricted to a certain kind of knowlcdgo, namely the knowledge of some particular subject stated m the form of laws (in the sense which has been csplauicd) Thus tho knowledge that water runs downhill is not m itself a science but the science of Hydraulics has gradually grow n up as the behaviour of water in various conditions has been ascertained and stated m more or less definite terms In the same way, there was a tune when no science of Economics existed, simply because the facts had not been studied and conclusions had not been drawn tho study is even now by no means complete, hut it has made so much progress that laws or conclusions have been drawn dealing with most of the more important facts, and it can now, therefore, be properly desenbed as a science CHAPTER H. THE MEANING OF WEALTH, AND VALUE We have now to explain the meaning which is attached to the w ord Wealth, tjio subject-matter of ou r science This word, like most of those vThich wo have to use, is commonly employed in orduiary language, and as was said in the last chapter, we have to be careful that whenever we use it wo use it in a definite sense. {When m ordinary talk we speak of a man’s wealth, we probably think first of all of the things which wo know he owns : his land and houses his carnages, horses, elephants and motor cars . his gold, silver and jewels . his money lent to Government or to pnvate persons, or invested in railways or factories, or in coal-mines or other industries If we want to compare the wealth of two men, it is things like these which we take into account : only in order to make the comparison we think of the total money-value of such things, and say that one man’s wealth is so many rupees or so many lakhs, and that another’s is so many rupees or so many lakhs more or less * Now the things -which we have named, and the various other things -which we speak of as wealth, are at first sight very different from each other but if we class them m ordinary talk under the single word wealth, it means that they have all some important quality in common, and to 10 AN INTRODUCTION TO ECONOMICS make sure what wo mean by wealth we havo to find out what tins common quality is What quality is common to land, and elephants, and diamonds, and Government paper, and the olhor things that we speak of as wealth 1 The answer is that they are all things which wo should like to possess for ourselves It is true that in most countnes persons will bo found who do not wish to havo such possessions of their own, and the number of such persons is probably larger m India than m Europo, because of the tendency to adopt an nscetio way of life , the sincere sannyasi or fakir is distinguished from the rest of us mainly by tho fact that ho docs not wont to possess things of the kinds which we have named But even in India sincere ascetics form only a very small pro- portion of the population, and leaving them out of account it is correct to say that ordinary people want to possess tho same lands of things, and that among tho things they want are those which we are discussing ( We may say then that all the things of which wo usually think when we speak of wealth aro desirable, that is to say, they are things which ordinary people would like to havo. But while all tho things wo speak of as wealth are desirable, all desirable things aro not spoken of as wealth Family affection and friendships for instance aro desirable t hing s, but we should never speak of them as pait of a person’s wealth , nor indeed would it be possible for us to do so if as is usual we reckon the various items of wealth at their money-value, for wo cannot assign a money-valuo to such possessions, much as we mav desire them Most of us again desire such things as good health or skill at games, but they are certainly not wealth m tho ordinary sense of the wordi In order then to settle the meaning of the term wealth as ordinarily used, we have to seo what MEANING OF WEALTII AND VALUE 11 kinds of definable Hungs it includes, and -what lands it excludes Desirablo tilings can bo classified m various ways One obvious distinction is between those that are material, that is to say, llioso that \\ o can see and handle, and those that are non-ma tonal and so cannot be recognised by o ur senses of sight and touch j The things which we have enumerated at the beginning of this chapter are all matenal ; and it is correct to say that most material desirable things aro included in the ordinary use of the term wealth Non- material desirable tili ngs aro of two kinds^) One kind, • which may bo called interna^ includes such things a s ' good healthy or ability In business) o r skill in a profession ;> such qualitics moQ'bo employed in order to obtain matenal things, b ut in ordinary talk we do n ot c ount them as wealth though they may bo employed as sources of wealth.^ The second kina of non-material things may~be caU ed'ext emal c they are not qualities ot me poraonTnmself. like skill or, ability, but arise out of his relations with other people __ The commonest examplo of them is what unspoken of variously as * good-will ’ or * practice * A successful shop- keeper who wishes to sell his busmess will charge not only the price of his stock of things for sale, and of his shop (if he owns it) , he charges something more for ‘ good-will * The buyer will pay for this because he knows that he is more likely to succeed m carrying on a shop with a reputa- tion already made, where people are accustomed to deal, than if he opens a new shop and has to persuade people to come and deal there : the ‘ good-will ’ of the shop is in fact a desirable thing, and he is willing to pay something for it This fact explains why in some towns it is quite rare to find a trader or shopkeeper doing busmess under his own name the firm may have changed hands several 12 AN INTRODUCTION TO ECONOMICS times, but the names of the original owners ore retained y{n order that the old reputation of the firm may not be lost. In the same way a successful doctor or dentist can sell lus ‘ practice ’ as it is called m this case , that is, some other doctor or dentist will pay him money in order to succeed him and have a chance of treating the patients who would have come to him We do not perhaps hear much of ‘ good-will ’ or * practice ’ in ordinary talk, but among business or professional men the thing is very real, and its value is taken into account in considering the wealth of a person or a firm l Tn or dinary talk then, we mean by wealth most desirable things that are material, and a few that are non-material and external, such as practice and good-will,^ We say ^ most things that are material, because some classes of 4hese are commonly excluded Thmgs like good roads or a well-drained town, are clearly desirable, but though they are great convemences to an individual we do not, os a matter of fact, regard them as part of his wealth We limit the use of the word to thmgs which a man can soli, or give away , and if wo want to know whether a thing is classed as a man’s wealth or not, the simplest test is to see if he can sell it or transfer it to some one else This then is the ordinary meaning of the word Wealth Writers on Economics have defined its meaning for their own purposes in various ways, and the word does not include exactly the Bame thmgs in all books on the subject • students have therefore to he careful that they understand the meaning adopted in each book which they read But modem English writers as a rule aim at using the word as nearly as possible in its ordinary meaning, and follow- ing this practice we shall use it m the sense explained above. MEANING OF WEALTH AND VALUE 13 For some purposes, economists have to consider the v> ealth of a nation or a community as distinct from the wealth of the individuals of v Inch it is composed. The wealth of a nation includes firstly the total wealth of those indi- viduals, and secondly a variety of thongs which are not counted os individual wealth If we know the amount of the v ealth owned by the individuals, it is merely a matter of arithmetic to ascertain the total ; the difficulty of making the calculation lies in finding out the amount of the wealth of the individuals, and this difficulty is felt very seriously in a large numbor of economio investigations The student however will not feel this difficulty until he has advanced sufficiently far to think of undertaking such investigations for himself, and in the early stages it is enough for him to know that this difficulty exists, and that the accurate calculation of the woalth of any large number of individuals requires a great deal of labour as well as a tramed and acute judgment The second group of things which are included in national woalth are those which are the property of the nation as a whole or of some subdivision of it, and not of its individual members This group includes such tilings as railways and canals owned by the State, pubhc buildings, and the material equipment required for the work of Government, whether it be the store of gold and silver held by the Treasury, or things like mail-carts and pillar-boxes In addition to such material things, some writers include in national wealth various non-material thin gs, such as the organisation of Government. Here too the exact limits of national wealth are not at first of much practical importance to the student : the important pomt is that when he reads anything on the subject he should make quite certain what elements that particular writer includes in the term 14 AN INTRODUCTION TO ECONOMICS Further, a considerable proportion of tho national wealth may be made up of things owned collectively by portions of the nation rather than by tho nation os a whole Thus, if an economist should attempt to calculate tho wealth of India, he would have to reckon, first the wealth of all the individual inhabitants , then the wealth owned by tho Government of India , then tho wealth of each provincial Government , and then the wealth of local bodies such as district or municipal boards, and even of viUago-commumtics in places where these have a recognised legal position and possess wealth of their own The provinces, for instance, own roads and bridges and embankments, as well as buildings for various purposes * municipal boards own streets and drains and lamps, and may own waterworks or tramwayB or other undertakings the district or local board owns roads and bridges, or schools and dispensaries - while even a village panchayai may own wells or tanks or drains. All such things form part of the wealth of the nation In the same way account must be taken of all wealth owned by other pubbe or private bodies , property belongmg to a temple or a mosque, or owned by a charitable committee, or by the governing body of a college, is all part of tho wealth of the nation. Lastly, m reckoning the wealth of either an individual or a community care must be taken to deduct the amount of his or its debts Thus, if a landholder has mortgaged a village, we must not include in his wealth the full value of the village, but must deduct the amount of the mortgage. So if a municipal hoard has borrowed money to construct waterworks, the amount of its debt must bo deducted from the value of the works, and in the same way a nation must allow for the money it has borrowed to construct railways or canals or for other purposes MEANING OF WEALTH AND VALUE 15 Enough has now been said to indicate in general terms the meaning that is attached to the word wealth; but students must be careful not to think that they understand it merely bocauso they have read so far. In this case, as with almost all the w ords wo shall have to explain, it is not enough to learn a definition by heart : we must reahse what it really means, and it is an excellent practice to test our knowledge of it by applying it to things that we see in the course of our daily life. For mstance, a student walking to college m tho morning may ask himself Are tho roadside trees wealth 2 and whose wealth 2 Is the mission-church wealth 1 and whose wealth 2 Is the fountain wealth 2 and whoso wealth * Is tho college hockey-ground wealth ? and whose wealth 2 Discussion of questions such as these in the light of whatever definition of wealth is used in their text books will soon familiarise students with the idea in a way that no study of the books themselves can be expected to do The word Value is closely connected with the idea of wealth, and its meaning must bo indicated at this point This w ord again is in ordinary talk used vaguely , when we speak of something as * valuable ’ or * of great value * we are usually referring to some standard or ideal and prais- ing the thing because it comes near to our ideal In Economics the word makes no such implied reference, but is used m a definite sense which must be clearly under- stood We start with the fact that people constantly exchange portions of wealth for one another, and the Value 1 of a thing 1 Some writers distinguish two senses of tho word, called, * Value in Exchange,’ and ‘Value on Use* In these writers ‘Value m Exchange’ has the meaning assignod in the text to ‘Value,’ while ‘Value in TTse’ means what we shall speak of later on as ‘Utility ’ 16 AN INTRODUCTION TO ECONOMICS means simply the quantity of some other thing for which it is exchanged Thus Value is a relative term, and imphe3 that one t hing is compared to another . if there were only one thin g m the world, the idea of value could not exist because no exchange would bo possible For instance, a cultivator who wants a ser of ghi may obtain it by buying it at a shop, or, ho may got it from a neighbour m exchange for say sixteen sers of wheat If the two agree on this rate of exchange, then, so far as that transactions concerned, the value of one ser of ghi is sixteen sers of wheat, and tbo value of one ser of wheat is one-sixteenth of a sor of gin These are not two facts, but merely different ways of stating the same fact, namely the relation m regard to value that exists at that moment and m that place between wheat and ghi If the cultivator takes the other course that is open to him and buys a ser of ghi at a shop for one rupee, then we may say either that the value of a ser of ghi is one rupee, or that the value of a rupeo is one ser of ghi . the tw o statements mean exactly the same thing. All nations have found it convenient to make use of a single article, or a small number of articles, as money , and the word Price is simply a short w ay of expressing the value of a thing in terms of money . to say * the price of ghi is one ser the rupee,’ is precisely the same as to say * the value of one ser of ghi is one rupee 5 The subject of Money will require much study at a later stage, but for the present w e accept its existence as a fact, and w e use it, as w e have already said, to measure the amount of wealth , we take each item of wealth at its price, that is, at its value expressed in money, and add up these pnees or values so as to got the total value of all the items. CHAPTER HI. THE MEANING OP PRODUCTION AND CONSUMPTION. (VVe have now seen what is meant by the term Wealth, the subject-matter of Economics , it includes most material things, and also a few non-material things, such as ordinary people vs ould like to possess for themselves, and which they can transfer to others} The Laws of the science relating to it are usually studied in three mam groups, which deal with the Production, Consumption and Distribution of wealth. Production means the study of the way in which wealth becomes available for use Consumpti on is lust the opposite of P roduction, a nd means the study of the way in which w ealth is use d up aud ceases to be available A DistrlbuTionaeals with the way in which wealth comes into the possession of particular people or groups of people, v/ It is necessary for students to take up one branch of the subject at a time, but it is most important that in doing so they should not forget the existence of the other branches. When studying Production, for instance, it is necessary to remember that the production of weal th is not a th ing- by itself^ wealth is produced by men in order that they may consume either the wealt h which they pro duce or else other things ior which they exchange it. i So in studying — -gr 18 AN INTRODUCTION TO ECONOMICS Consumption we must not forgot that most of the men who consume are also producers, and that their consumption must depend largely on what they can produce ^ The first thing is to make quite sure what happens wh oa. \ wealth is * produced^ or ‘ consumed" 5 Wo have seen that mosFwealth consists of mater ia l things, but wo must not t.HinW .W. tVin processes 'which yflTirc studjong mvolvo the production or destruction of matter This is an impossibility, as the various physical sciences teach us : we can change the form or the arrangement of matter, but we cannot destroy it, nor can we brrng now matter into existence The meaning in which the terms production _ and consumption are used will become apparent if we examine a few instances w — Take, fo r instance, a tailor making a coat Ho cuts irom a roll o f cloth pieces of the requir e d shape and sews them to gether with, thread hedoes hot make the cloth or the thread, but Tie re-arranges them, and (if ho has done Ins work properly) the purchaser obtains a comfoi table and well-fitting coat, which is for him a useful thing, more useful than the original piece of cloth would be It ma ^ be said that thoug h the tailor makes nothing new t he weaver doesj~, b ut if wo watch a •weaver at work we shall, fige tha t he mer ely takes pieces of thread or yam and re-arranges them so as to produce the cloth j The weaver doe§~hot make new matter any more than the t ailor does, but he arranges thread or yam in such a way that it becomes moTe useful to the tailor ^ ~Iri the same way the spinner* merely takes cotton, or wool, and arranges it in the form of thread or yam m which it becomes useful to the weaver. So far, then, anyone can see for himself that the spinner, the weaver and the tailor do just the same land of work, each of them taking some form of matter and re-arrangmg MEANING OF PRODUCTION 19 it so as to mako it more usoful The earlier stages in the processes of production are of exactly the same nature, but this is not so easily apparent to the student unless he has acquired some knowledge of the sciences of ch emis try and phj’siology, and of their applications to the arts of agriculture , and, m fact, there was a time when the culti- vator was considered to do something different from the artisan But it is now well known that the oultivator can only re-arrange the matter of the soil, put the seed in it and apply fresh matter in the form of water or manure , the plant is not new matter, but is built up from the gases present in the air, and from the water and other matter present in the soil Thus the cotton-fibre from which the spmnor makes yam is not new matter produced by the cultivator, but is built up from the air and water and soil, and the cultivator’s work consists in making these more useful to the spinner, just as the spinner in his turn is making things useful for the weaver. In the same way the wool that grows on a sheep’s back is not new matter, but is formed from the food which the shoep has eaten, and that food is formed from the soil and the an exactly in the same way as the cotton-plants are formed The shepherd who rears the sheep thereby makes the transformation possible from matter m the form of grass and herbs to matter m the form of wool, that is, into something more useful to the spinner. Everyone, then, who is concerned m the production of a coat, or of the materials from which it is made, takes his part in rendering some portion of matter more useful for the purpose In this connection the word ‘ useful ’ means the same thing as ‘ desirable,’ both alike indicating that some want is satisfied , and all the workers to whom we have referred are thus producers of some material desirable 20 AN INTRODUCTION TO ECONOMICS thing, that is, of somo wealth Tho fact is commonly expressed in the phrase that man produces not matter but utilities , the word utility is, of course, closely connected in origin and m meaning with the w ord 1 useful ’ If v,o examine other forms of production, we shall see that in their case also what is produced is not new matter but new utilities Tho maker of sweetmeats uses sugar and milk and ght and other materials so that tho product of his work satisfies a particular want or sot of wants , the potter takes clay and shapes it in the form of plates or vessels , the carpenter uses wood and nails to make a box or a table „ and if students will examine from this point of view the work of all the artisans or factories with which they are familiar they will see that in all cases tho nature of the process is the same existing matter is transformed and re-arranged so that it becomes more adapted to meet some particular want, or, in other words, so as to increase its utility, Stated in this way, the conclusion will probably appear to be obvious , and when it has been thoroughly grasped the student will have no difficulty in seeing that the word Consumption denotes processes of exactly tho opposite kin d . Men do not consume matter, but only utilities ; [fTCfcl ,rT n > -- - 9 iuu u . im i6 amount of matter present in the world is not d imin i s hed by tho act of consumption, but some of i it is re-arranged so that it is no longer capable of satisfying a particular want^-^Thus, when a man eats sweotmeats. his desire for them is satisfied by the process of eatmg ; the matter of which the sweetmeats are composed i s not lost, but (as the study of physiology shows) it is used up in the body and eventually returns to the air, the water , or ^e soil.Jihe sources from which it was originally drawn Or when a man lights a fire to warm himself or cook MEANING OE PRODUCTION 21 food, his want for heat is satisfied by the fire, but at thf same time the matter fo rming the wood is dispersed mtc the air _as smoke or steam, or left m the form of ashes, and is now no longer capable of satisfying a want for heat ) There is one distinction among methods of consumption which is of some practical interest. In the cases we have stated the utility is destroyed in a single operation, by eating the sweetmeats or b urning the wood , but apart from food and fuel, most forms of wealth may be used for a considerable time, and their utility is only gradually consumed. A coat, for instance, may be worn for many months, and continues to satisfy a want the whole time it is worn; but it will not last for ever. The cloth of which it is made gradually becomes thinner until holes begin to appear, and then the coat is worn out, that is, its utility is consumed. A watch should last far longer than a coat, and will satisfy its owner’s want whenever he wants to know the tune , but eventually it will cease to show the time correctly, and then its utility is exhausted A few kinds of wealth last so long that their utility appears to be indestructible ; golden ornaments or diamonds may thus satisfy the wants of many successive generations of owners. It is probable that even such things wear out m the end, but we may say that articles of wealth are of all kinds, from those that are consumed in a single use to those that, when once they have been obtained, continue to satisfy a want for an indefinite period Now a large part of the life of all ordinary men is spent in producing and consuming utilities, that is to say, m producing wealth to satisfy their wants and m consummg wealth in the satisfying of those wants When, therefore, we are studying the production and consumption of wealth, we are at the same time studying a large part of the lives 22 AN INTRODUCTION TO ECONOMICS of men As Marshall says , 1 “ Economics is a studv_of I mankind m the ordinary business of life , if oxammos that part of individual and social action which is most closely connected with the attainment and with the use of tlio material requisites of well-being Thus it is on tko one side a study of wealth, and on tho othor, and more important side, a part of tho studj of man " It follows that tho science may bo defined m more w ays than one The earlier writers defined it in tho way mcntionod m Chapter I > as the study of Wealth , while tho quotation just givon is equally a definition from tho other point of mow. There is no contradiction between theso definitions, because wealth itself is a thing that can only bo defined with reference to man Wealth consists, os wo have seen, of desirable things, that is, of t lungs winch ordinary mon would like to have, and wo cannot think of wealth without first thinking of mon, beeauso wealth is made up of things that men w r ant Tins fact is important m classifying Economics among the sciences Thoso sciences which aro called physical in the broad Bonso are independent of the existence of mankind , to tako our former illustration, if there were no men m tho world the laws of hydraulics would still be true, water would flow downlull, and so on. But the sciences classed as moral (Economics, Ethics, Politics, etc ), assume tho existence of men as wo know them, and study man’B actions from various points of view ; and Economics m particular directs its attention to those actions which, to repeat Marshall’s phrase, aro “most closely connected wuth tho attainment and the use of tho material requisites of well-being,” that is, with tho pro- duction and consumption of wealth 1 Principles of Economics, I, i 1. CHAPTER IV. SOME ASSUMPTIONS This study of wealth, which is also tho study of a large part of human hfo, is not an easy or a simple thing, because life itself is not simple ; wo have to approach it by degrees, and to simplify tho early stages as much as possible In order to do this, wo make certain assumptions, tho effect of •which is to limit tho extent of the subject ; at a later stag*', when wo have mastered tho subject within these limits, wo can go beyond them and extend our knowledge further. In this chapter v o shall explam some assumptions that wo find it convenient to make, and students must remember that these assumptions hold good throughout this work , they must not think that the same assumptions are made by all writers on Economics, but they must bo careful to note the assumptions that each writer makes, so that they may be sure what ho is writing about In the first place, we aro considering ordinary men and women. We aro not limiting our attention to people of any particular race ; wo recognise that one race differs in many respects from another, but we confine our attention mamly to tho points in which they do not differ Different races, for instance, want different kinds of food , some races want meat and others do not ; we are at present concerned not with these differences of detail but with the mam fact 24 AN INTRODUCTION TO ECONOMICS that people of all races want food Different races again have different ways of enjoying or amusing themselves , we are concerned only with the fact that all races want enjoyment or amusement in some form of other When we want to illustrate or explain particular features of human life, we shall as a rule take our illustrations from those races which are familiar to our readers, that is, from the races inhabiting Northern India , this doe3 not mean that we are considering only those races, but that we are using them as illustrations of human life m general In the second place, we assume that the human race is grouped in nations or states with organised governments Tins is the case over much the most important part of the world, and we leave out of account those parts of it where there is no effective government, and where people can steal and cheat without fear of the police or of the law courts Governments are of many different lands, but we are not at present concerned with these differences , their common feature is that the ordinary man is allowed to hold property, that is, to own wealth for himself, and that he can claim the protection of the police and the courts against persons who try to deprive him of his property In the third place, we assume that the people are living in a condition which we shall describe as Industrial [Freedom this means that ordinary persons are free to choose the way m which they shall produce wealth and to decide on the manner m winch they Bhall consume it This freedom is not supposed to be unlimited, because all governments restrict it to a greater or less extent, but the restrictions are exceptional and freedom is the rule Thus, in India, a man is free to make his living by cultivating the land, or by working as a labourer, or by keeping a shop, or in various other ways , he is not bound to work for a definite SOME ASSUMPTIONS 25 wage, but is free to take the highest wage he can get ; nor is he bound to sell or to buy anything for a fixed pnce, but can buy or sell what he likes if he can agree on a pnce with the other party to the transaction. There are restrictions on this freedom m India as else- where. No one, for instance, may distil spirits, or sell opium, or buy fire-arms, or do vanous other things, without special permission from government or again, some professions, such as that of a pleader, can be practised only by those who have undergone a special training. Such restrictions as these have to be borne in mmd when we are considering any of tho special trades, or occupations, or professions, that they affect ; but after counting up all the restrictions that exist, we can see that they make little difference to the economic life of the country taken as a whole, and that it is safe to leave them out of account when wo are dealing with the mam course of business, the production and consumption of food, and clothes, and houses, and the like One restriction of great importance to our subject is found m the laws m force in most parts of India which limit tho freedom of the landholder in ejecting his tenants and in enhancing their rent This restriction will be considered in Book V Apart from interference by government, Industrial Freedom may be limited m practice by the customs and the views of various classes of the people , such limitations can sometimes be neglected, while at other times special allowance must be made for them In India we have to allow in this way for the existence of the system of Caste, which has an important influence on the daily business of a large part of the population In the fourth place, we assume for the purposes of this 26 AN INTRODUCTION TO ECONOMICS work that money does not alter m purchasing power. We take the existence of coins, such as the sovereign and the rupee, as a fact, and we assume that we can measure the value of other things by the number of sovereigns or rupees which they cost, in exactly the same way as we measure weight m maunds and sers, or length in feet and inches. This is the way m which ordinary people do in fact regard money, and the need for stating it as an assumption will not at first be obvious , but later m their course students will find that the assumption is not entirely m accordance with the truth, and that in considering economic movements extending over a long period it is usually necessary to make allowance for changes that have occurred during nat period m the purchasing power of money This necessity makes the argument longer and more complicated than it would be if a rupee were a standard m the same way of J”; "f the option is made merely for the sake n, JZ 7 ’ f ntS Sh ° Uld rememb <* then that the S m ° ney 18 assumed to be changed tinctions Sf P £U5SUme that there are dear dis- two players intn +■„ ' nd ^ 6 °an divide the twenty- * a sohool M, the dmtaofaon is Ltso efeLT ^ ^ obviously good and , * some °f the boys are be bad but be border-bne beWeeu the Wo Casses SOME ASSUMPTIONS 27 He can arrange the names of the boys in order of merit, but the question still arises where m the list he can draw a line and say that all above it are good and all below it are bad A good many of the distinctions that have to be drawn in Economics are of this latter kind , there is no difficulty in putting most things into one class or another, but some of the things are on the border-line between two classes, and their classification is difficult In this first sketch 'we shall as a rule neglect the things that are on the border-hne, though they may be of considerable interest in themselves It is possible, for instance, to discuss at great length questions such as the exact limits of the term Wealth, or of the term Capital, and to point to things that are on the border-hne of any definition which we may adopt * such discussions are of value because they help us to be perfectly sure what our definitions mean, but they can most conveniently be taken at a later stage, and when students are be ginnin g the science it is wisest to concentrate their attention on the mam facts, and not to spend much time m examining the exact limits of the distinctions that have to be drawn BOOK II. PRODUCTION. CHAPTER V. THE FACTORS OF PRODUCTION. Wn have seen in Chapter III that the expression Production of Wealth means the arrangement of portions of matter so os to make them more useful, that is, more fit to aatisfj- some want We have now to examine the conditions under which this process of re-arranging portions of matter is earned out. Let us take a very simple case of an individual who produces a small amount of wealth in a very primitive nay We will suppose that a man earns his living by gathering grass on waste land, and that every day he carries a load of grass to the market and sells it for money, which he spends on his food Such a man is producing wealth, because he is changing the position of some matter, that is of the grass, so that it will meet the wants of people living in the town, who desire to have grass to feed their horses or cows, and who are therefore willing to give some money in exchangd for it : the grass on the waste land will not satisfy this want because there are no people there, and where there are no people there can be no wants , it has to be gathered and brought to a place where people live, and then it becomes wealth because there are wants which it can satisfy In other words, the man whom we are considering is producing a new Utility by bringing the 32 AN INTRODUCTION TO ECONOMICS grass from a place where it is useless to a place where it is useful If he spends on his food the whole of what ho receives for the grass, thon he is consuming day by day as much wealth as he produces, and while thmgs remain as they are he cannot become richer, that is to soy, he cannot accumulate any stock of wealth Let us suppose, however, that he realises that it would be possible for him to bring more grass to market every day if he had a reap-hook to cut it with instead of gathering it by hand He finds that a blacksmith will make him a hook for four annas, and he calculates that if he can save one pice a day he will be able to pay for a hook after sixteen days He decides to do this, and for sixteen days he spends one pice less daily on his food, and buys the hook at the end of this time He now finds that he can cut more grass than he can carry , but that he can carry enough to bung him in twice as much money as before, that is to say, that after buying his food he will have something left over ; he is now producing more wealth than he needs to supply himself with food In the present state of India, most grass-outters would probably be satisfied at this point , they would spend some of their income on clothes, and would take occasional holidays, or would buy tobacco or other luxuries , their income would be larger than before, but it would still be spent m satisfying their immediate wants, and they would not accumulate any store of wealth But a far-seeing man may realise that he has a chance of becoming richer , he may find, for instance, that he could cut enough grass in a day to load a pony, and that the pnee of this load would be sufficient to leave a surplus after feeding both himself and the pony If then he saves up the extra mcome which he is earning with the aid of his hook until he can pay the price FACTORS OF PRODUCTION 33 of a pony, he will then bo the owner of the pony as well as the reap-hook, and ho will make an income substantially larger than is required to satisfy his daily wants From this point it would be open to an enterprising man to advanco steadily in accumulating wealth , he could now take a contract for supplying grass to a stable or dairy , by borrowing money on the strength of his contract he could buy moro pomes and hire men to work for him , and it is conceivable that in process of time he might become a wealthy contractor, engaged m many other productive enterprises. Now let us examine the conditions under w hick such a man is able to produce enough wealth, first to keep himself alive, and then to establish a productive enterprise that gives him an income larger than is required to satisfy his immediate wants In the first place, there is the waste land with grass growing on it. If there were no such land within w alking distance of the market, he could not support himself in the way that has been described , and when his enterprise extends, its growth must be limited by the amount of suitable land within his reach Secondly, there is the work that he does in gathering or cutting grass and bringing it to market Nobody would do this kind of work for pleasure ; he does it because, though it is unpleasant, it is not so unpleasant as going w ithout food At a later stage he may pay othei people to do this work for him , hut the work has to he done by someone if the wealth is to be produced, and people cannot be found to do it unless they expect to receive at least a portion of the wealth that is pioduced. Thirdly, there is a certain amount of existing wealth, which is used in producing more wealth, the existing wealth is in this case first the reap-hook and then the pony c 34 AN INTRODUCTION TO ECONOMICS It is true we have supposed that our example starts without any existing wealth, but a ca«e of this kind is exceedingly rare even in the most backward parts of India , everyw here we find that the grass-cutter has his hook, the potter has his wheel, the carpenter his tools and stock of wood , and, speaking generally, every producer of wealth uses some existing wealth m his busmess of production These three conditions which we have enumerated are usually spoken of as the Factors of Production, and each is designated by a short name, the meaning of which must be clearly understood The first Factor is called Land , the second, Labour , and the third, Capital The meanings attached to these names will be explained m the chapters that follow , but it is well for students at this stage to examine some other productive enterprises with which they are familiar, and seo how these factors enter into each of them In India, and m most other countries, the largest share of the wealth that is produced comes from the cultivation of the soil It is obvious that the cultivator must have Land , if he does not own it he may ave to pay a considerable sum as rent in order to secure its possession It is equally obvious that Labour is required the cultivator spends most of his time in P ou 2 2» manuring, hoeing, irrigating, sowing and harvesting and if the members of his family do not help w ^ “ SMUj to » “ther l»°Pl° ‘o induce ?X£,r\ h ‘ m Agam - he ne eds Capital, that is, mn^w f? 18 v 40 em P 1 °? “ production he ‘ff* implements , he must have put m the 1 f “fr 6 "* 8 ’ he We seed to teed humelf and his “ 3l °° k ° f f00d 40 crops he has sen, am gro^g and ^ FACTORS OF PRODUCTION 35 Or take an artisan who makes, say, brass vessels m bis houso in the bazar. He doos not, like the cultivator, need some acres of land, but still be must have some space to work in, with room for bis furnace and his lathe ; that is to say, he must have some land. He must work, and he may need to pay labourers to work with him . the furnace has to bo managed, the moulds made, and the rough vessels to be turned on the lathe, filed and polished Ho must have capital, too — his lathe and other tools, and the brass which ho melts in the furnace, as well as some money to buy food and to pay wages A large factory requires exactly the same factors of production, though as a rule m much larger quantities A cotton-mill or a jute-mill, for instance, must have land on which to erect buildings It may employ hundreds or even thousands of labourers , and its capital may be worth several lakhs of rupees, represented partly by the buildings, engmes and machines, partly by the stores of fuel and raw material, and partly by the goods in process of manu- facture and the sums paid away m wages A railway may be taken as another illustration of a pro- ductive enterprise It is true that people may occasionally be met who argue that a railway does not add to the amount of wealth, but only moves wealth from place to place , but this argument cannot be applied to wealth in the sense m which we are using the word Wealth consists of things that are useful m satisfying wants, and it is impossible to contend that the ordinary wants of people can be satisfied by things which are not within their reach People living in Calcutta or Lucknow who want fuel cannot be satisfied by wood while it is lying in the forests of the Himalayas, or by coal collected at the mines in Bengal the wood or coal must be brought to the place at which the wants 36 AN INTRODUCTION TO ECONOMICS are felt before those wants can be satisfied A railway is a productive enterprise because it changes the position of matter so as to make it capable of satisfying existing wants, exactly in the same way as our original example w ho gathers grass where it is useless and brings it to a place where people want it and will pay for it Now a railway obviously requires the land on which it is built j it requires the labour of large numbers of workers such as station- masters, clerks, engine-drivers, guards, coolies, and so on and it requires a great deal of capital in the form of rails, m uuLiur engines, carnages, wagons and the like, as well as forms which need not be noticed at this stage These examples will suffice to illustrate the statement t at all forms of production which are of practical impor- tance require the three factors, Land, Labour, and Capital ; ut students will be well-advised to make themselves thoroughly familiar with the idea by examining for them- e es t e case of those producers w'hose work they can ollow, and seeing m each case whether all the three factors anc J Aether there is any other factor that Th? rT 7? th ° Option given in this chapter The re t of this book will be occupied in explaining, Lt, hv Zl'Tl hCS ° th r fMt0re ' and thcr > a® organisation pro" 3 aK maa0 "° rk •W- - the process of CHAPTER VI. LAND. The term Land, as used by economists, means something more than the surface of the ground which we see Besides the surface it includes V (1) The mmerals found below the surface, such as coal, Iron-ore, gold, or petroleum, as well as the underground water, which is by far the most important mineral m the agricultural regions of India ; >S{ 2) the water covering the surface, as m nvers and lakes , ^ (3) the influence on the surface of sunshine, air and ram, which reach it from above | ( Th e distinguishing featu re^ of thejhing s classed as lan d ! is that men cannot inc rea se their quantity. No matter how much a landholder may want coal, he cannot produce i from his land more coal than exists there by nature , no matter how much a cultivator* wants sunshine or rain, he has to be content with what reaches his land by the natural processes ) Some economists prefer therefore to use the term Nature to denote what others describe as Land But the latter term is more generally used, and it is probably the more convenient , the word Nature has many shades of me anin g m ordinary use, while Land gives us a definite idea if we remember that it includes what is below the surface and what reaches the surface from above. LAND 39 a particular area specially suitable for production, there is not, as a rule, room for all the people who want a portion of it, and then it is let or sold to those \\ ho will pay most for the pnvilego and this is the chief explanation of the high cost of land in towns, where land has to be measured by the yard rather than by the acre Production (other than agricultural) is as we have seen largely concentrated in cities or towns, that is, m more or less defined areas where the houses and other buildings stand close together , and a short glance at the history of a few Indian cities and towns will enable students to realise the importance of situation and of facilities for communication. We will glance then at the history of Delhi and Kanauj, Cawnporo and Kalpi, Murshidabad and Calcutta . students will find it interesting to trace in the same way the story of the towns and cities with which they are familiar, using The Imperial Gazetteer of India to supply them with the facts Delhi has been the site of a city since the beginning of history, and we do not know for certain the reasons that first led to the accumulation of people there It is fairly safe, however, to infer that its suitability resulted from its position in regard to the Jumna, which gave an assured water-supply, and also a means of communication by boat — and it must be remembered that, until railways were built, the nver-boats were of the greatest importance both for trade and for travellers The he of the country, too, is such that an armed force can control the crossmg of the river ; and this was always a most important matter so long as the land of India was in the hands of numerous independent longs Thus, as the Mah&Vh&rata tells, Delhi was a capital city in the time of the Pdndavas , and all over the world it is true that the places chosen by kings 40 AN INTRODUCTION TO ECONOMICS as their capitals have become centres of production, because the presence of the king’s court and armies supplies a market which makes the city a suitable place for artisans to settle The city was again a Hindu capital in the twelfth century, and when the Muhammadans conquered its Hindu rulers they too established their capital there ; and successive Muslim dynasties maintained, with short inter- ruptions, their capital in the same locality though they shifted the actual site on more than one occasion Its importance as a capital city declined in the eighteenth century and ceased in the nineteenth but by that tame the establishment of secure peace in the country and the opening of means of com muni cation had made it a large centre of trade, inhabited by enterprising merchants When railways were built, they naturally came to a city of such importance, and the facilities they gave increased the trade further, while some of the inhabitants had the enterprise to establish factories of the modem type, produc- ing cotton cloth, flour and other articles of commerce Thus at the end of the nineteenth century, though there was no longer a court or a large army, the trade and industries of the city were sufficient to support a large population, while its recent selection as the headquarters of the government of the whole of India will most probably result in a further development of its industry and commeice Kanauj had probably as great natural advantages as Delhi, at least in early days when the Ganges flowed close to the city, and nine centuries ago the two cities were of perhaps equal importance but its decline has been so great that some students may not even know where to look for it on the map of India Its decline dates from the Muhammadan conquest of the dynasty which had esta- LAND 41 bhshed its capital tliero . the Muhammadans retamed it as an administrative centre but did not establish a court, while changes m tlio course of tho Ganges deprived the city of its former advantages, and, later, the great trade route established by tho East Indian Railway passed at a distance from it So to-day it is a small town, distin- guished only by the extent of ruined buildings in its vicinity, and by some small handicrafts, especially scent-making, which have survived from the days when it was an im- portant centre of industry Cawnporo has no ancient history, and in tho eighteenth century was a mere village Its importance arose with the increase of boat-traffic on the Ganges, as it was the highest point to which the larger boats could usually ascend, and early in the nineteenth century it was chosen as a cantonment When trade was already established, the railways came, and tho traders w ere quick to take advantage of them and extend their operations , and at the same time some factories were started, and their numbers have smee increased, so that the city has become the chief commercial and industrial centre in Upper India Kalpi, ljing on tho south bank of the Jumna, has a much longer history than Cawnpore. It was an important fortress and administrative centre in Muslim times, and when through trade developed on the Jumna the town became one of the largest ports in India, because much of the cotton and gram produced in Central India was brought to the nver at this point As railways were constructed, the nver lost its importance, and Kalpi sank into insigni- ficance, though the trade has revived slightly since the construction of the railway from Cawnpore to Jhansi Murshidabad first rose into importance in the eighteenth century, when it became the seat of the government of 42 AN INTRODUCTION TO ECONOMICS Bengal, bemg chosen probably because of the facilities for communication by nver Trade developed rapidly, and the city was described in the middle of that century as bemg as ‘ extensive, populous and rich as the city of London ’ By the end of the century its importance was declining the seat of government was transferred to Calcutta , the industries which had been supported by the court diminished greatly, and trade became of httle importance, so that the population is now only about one- tenth of what it was a century ago Calcutta too has a short history Its foundation dates from the days when the oversea trade with Europe was bemg established , it was chosen as the centre of this trade because it lay at the highest point on the nver to which sea-going ships could be brought , it grew with the growth of this trade, and its importance as a trade-centre led to its bemg chosen as the seat of government Large factories came later, and now m industry and commerce alike the city is nvalled only by Bombay in the whole of India The history of these and other cities and towns of Northern India indicates that the first condition for their establish- ment is the possession of some advantages in the way of communications, which m the past meant nearness to a navigable river When population began to coUect at such a place, its selection as the site of a court or centre of administration so enlarged the market for food, clothes and other desirable things as to attract many more inhabi- tants while the departure of the court involved a corre- StS , Cb f e modorn time * railways tend to do was formerI r done by nvers, and the new cities that arc now growing up will usually be lound at suitable pomts on the railways rather than on the nver LAXD 43 brink** In the old dav> when industries wore mainly earned on by artisans working independently, thoir extent variel rapidly v. ith the swo of the market; artisans followed the court, partly because of the market winch it otic red, and partly because of the security which they enjoyed in its neighbourhood , and when tho court left a city, many of the artisans left it too Hero too tho conditions have changed • largo factories with expensive buildings and heavy machinery cannot bo moved about , it is now more difficult to establish industnes in a now centre, but, on the other hand, industries when once esta- blished are not likely to suffer from political changes such as the movement, of a capital They must as a rule be established m places where labourers can bo had, that is, in or near an existing town ; but when thoy are at work the population will stay near them so ns to retain its employment, and will not os in the past go elsewhere The chances are, therefore, that tho modem town with a large part of tho population employed in industries of the modem tj^pe w ill be more stable than if it depended for its existence, os the older towns did, on tho caprice of a long or governor. But it would bo a mistake to think that facilities for communication and other natural advantages will alone ensure the establishment of a town m a particular place Thero are plenty of places on tho Ganges and tho Jumna where no town is known to have existed , and there are plenty of places on the railways which show no signs of growth or development Very much has depended, and still depends, on tho appearance of individuals with the qualities which fit them for the establishment of a new trade or of new industries This subject — the appearance of tho trader and the manufacturer — wall occupy the student’s attention at a later period of his course but it 44 AN INTRODUCTION TO ECONOMICS must be mentioned here as one of the causes that lead to the growth of towns, because it is very largely the existence of trade and industry that makes people want land m a particular position, and thus leads to the keen competition for every small piece of land that is the chief characteristic of town-life as we know it CHAPTER VII. AGRICULTURAL LAND. We have seen in the last chapter that the trader, the artisan and the manufacturer alike cannot be satisfied by any land that may be available , they want it m a situa- tion where, they can carry on then business to the best advantage This is equally true of the agriculturist, but in his case the quahty of the land is also of great importance, whereas the townsman is usually satisfied as regards quahty if he can get good water and keep his land drained Situa- tion then is much the most important pomt m towns, but in the country both situation and quahty are important. One reason why the cultivator is concerned with the situation of his land is that he wants to be near a market where he can sell some of his produce A man who has land close to a large city will grow fruit and vegetables which he can sell for very much more than wheat or maize grown on the same land would bring ; out m the country there is no market for such products, and he will not grow them Hence there is very keen competition for agricul- tural land close to large oities, and people will pay for an acre of it perhaps ten times as much rent as if the land lay at a distance But even m a village at a distance from any town the situation is often a most important question. Some fields can be irrigated from a canal or lake or nver. 46 AN INTRODUCTION TO ECONOMICS and they are naturally more sought after than fields with no supply of water Fields close to the village-houses again are much easier to manure than fields at a distance, and in addition they usually get enriched by the deposit of filth ; they are therefore much more suitable for cultiva- tion than fields at a distance, and consequently people will pay much higher rent for them But to the cultivator situation, though important, is not everything The land must be fit for cultivation or he will not take it at all, and his eagerness for it increases with its natural fertility Much of the surface of India is unfit for cultivation in the hills and mountains large areas either consist of rock or are so steep that crops cannot bo grown on them , and in the plains there is much land that cannot be cultivated either because it consists of excessively stiff clay or because it is loose, shifting sand The landholder knows he can get no one to pay rent for land of this kind For the rest of the land he hopes to find tenants , but even m one locality the amount of rent u Inch tenants will pay vanes greatly according to what is called Fertility A study of Agncultural Science is neces- sary to understand fully the meaning of this word , and tho student must be content to know that the amount of gram that the cultivator can produce depends very largely on tho nature of the soil ho has to work Some soils are deficient m particular substances which plants require for their growth, while others are adequately supplied , some soils again readily supply a plant with all the uatcr it needs, while others have often an insufficient supply , and it is such differences as these that in the a SS re g a l° make one piece of land more, or less, fertile than another If wo watch tho cultivators of a village at then work, AGRICULTURAL LAND 47 we shall find that a sort of standard of work is reco gnis ed by them as appropriate for the different crops grown on land of about the same fertility. By a * standard ’ we do not mean that every cultivator gives just the same amount of work . some will give rather more, and some less , but the general view of the cultivators will indicate clearly the amount of work that is considered profitable m ordinary circumstances Thus, we may find localities where about eight ploughmgs are considered proper for wheat, while two or three will be enough for barley, and perhaps twenty will be required for sugarcane In such a locality a culti- vator will say confidently that for wheat eight ploughmgs will give more produce than four, and will also pay him better If he is asked whether twelve ploughmgs will give more produce than eight, he will probably assent , but he will not assent to the suggestion that twelve ploughmgs would pay him better Now these traditional standards are the result of experience gamed during many generations, and they lead up to one of the most important laws of Agri- cultural Science, which is known as the Lawjof Diminishing R eturns . This law_ belongs primarily to Agricultural Science, but it is not less important in the study of Econo- mics, and students must take some pains to understand exactly what it means, although without a„ knowledge of agriculture they cannot realise the mass, of evidence on* which it is based As wo have seen, cultivators have learned by the experi- ence of many generations that it does not pay to do more than a certain amount of work for any given crop grown on land of a particular quality more work may result in larger produce, but the additional produce will not pay for the additional work In the same way they have learned by experience that there is a limit to profitable irrigation, 48 AN INTRODUCTION TO ECONOMICS to profitable manuring, to profitable weeding, and so on ; more produce can be obtained by carrying these operations further, but there is m every case a point where the addi- tional produce no longer pays for the extra cost This pomt may be made clear by an illustration Suppose that cultivators of a particular piece of land find they get fifteen maunds of wheat from an acre when they have ploughed eight times and irrigated three times A par- ticular cultivator now ploughs sixteen times, and finds chat he gets sixteen maunds of wheat as the result That is to say, eight additional ploughings have secured one additional maund of wheat , does this pay him 5 It does pay him if he can get one ploughing done for less than five sers of wheat, because then the additional eight ploughings have cost less than 5X8, or 40 sers , but if a ploughing costs more than five sers, he will have spent more than he has gamed So if a fourth irrigation yields an extra maund, it will pay hirq if the irrigation costs less than a maund, but not otherwise It is calculations of this sort that he at the base of the standard practices to be found over the country , cultivators have learned that, taking one season with another, it does not pay them to do more than a certain amount of work, because they have come to the pomt where the extra produce would not pay for the extra work It is probably not the case that cultivators all over India carry their work up to this limit in places where there is not much competition for land they probably stop short of the limit and might increase their income by working harder , but in the closely-populated plains of Northern India it is probable that on the whole cultivators do as much work as will pay them, though everywhere there are lazy and careless men who could get a larger income by working harder AGRICULTURAL LAND 49 This same fact, the existence of a limit to the amount of work that can bo done profitably, appears clearly in another way. When a cultivator is in a position to do more work, or to spend more on irrigation and manuring, he does his best to get more land to cultivate, rathor than mcrease his work and his expenditure on the land which he already has If he could go on indefinitely securing a proportionate increase in the produce of his land by giving more work and spending more monoy, then ho would be content with the land ho has, and would not be walling to pay rent for additional fields ; but in fact, he begins to look for additional fields as soon as ho finds that ho has work or expenditure to spare, and he does so because he knows that he has reached tho limit, and that Ins land wall not pay for more than it is getting already , f frhe Law of Diminishing Return is thus stated by3Iar- BhaUT^An increase in the capital and labour applied m "the cultivation of land causes tn general a less than pro- portionate increase in tho amount of produce raise , it happens to coincide with an improvement m the arts of agriculture ” » As this is lie first important Law wtoh wo have to consider, students shoul um ac , point to iv hat was said in Chapter I regar g of a Lair. A Lair is simply a conclusion ^im tom experience, and ire have indicate a ’ 0T increase experience on which this low is foun e evoendi- in produce wero proportionate to the mcrease in expend! tJi, then there would be no limit to expense on any given piece of land ; a man might go on spendmg ; more and more, and each successive item of m^nditam him as well as those that had gone be o is less than proportionate to the expenditure, and thus * Principles of Economics, TV. m 1- D 50 AN INTRODUCTION TO ECONOMICS cultivator sooner or later finds that a limit exists and that further expenditure will not pay him> In the law as above stated, there are two qualifications The first is contained in the words in general These words, or an equivalent phrase, will be found in many of the laws of Economics, and indicate that exceptions must be expected in particular cases , this is m accordance with experience in every-day life where as we know the unexpected sometimes happens The exceptions to the Law are sometimes of great interest and may require study at a later stage, but for the present it is enough that students should realise that while the Law is generally true, it is not necessarily true of every single cultivator or of every smgle field The second qualification has the effect of limiting the application of the law to a period during which the art of agriculture does not change materially This limitation is necessary, because a considerable change in the art may alter the whole relation between expenditure and produce, and either make it advantageous to spend much more, or make it unadvisable to spend so much But when the change has taken place, the Law still holds good the amount of profitable expenditure has changed, but it is stall true that there is a limit beyond which further expendi- ture is unprofitable 1 1 Some knowledge oi the science and practice of agriculture is required m order to appreciate this qualification It is quite possible, for instance, that the introduction of improved tillage-implements m northern India might entirely alter the existing standards of culti\ ation four ploughings with improved implements might give the same produeo os eight ploughings done m the style that prevails at present, and it might then be found profitable to till the land more thoroughly, giving say six ploughings in all The amount of profitable expenditure would then be changed, but there would still bo a limit , it might bo found profitable to plough six times, while eight ploughmgB would not pay for the extra work or cost AGRICULTURAL LAND 61 Subject to these qualifications, the Law is supported by tho expcnonco of cultivators in India, as well as by that of tho English and French farmers from whose practice it was originally doducod. It is tho most important conclusion of Economics regarding agricultural land , we have not occasion to use it at once, but it lies at tho founds tion of tho theory of Rent which will occupy us at a later stage. CHAPTER VHL LABOUR The second Factor of Production is usually spoken of os Labour This tonn includes all the work done by human beings, 1 but excludes the work dono by animals Somotimcs the word is used to denote the work itself, while some- times it is used to denote the labourers who do tho work ; and it is best that students should alu ays bear both meanings of the word in mind, because, w o cannot as a matter of fact separate the worker from the work The work done by human beings is of very different kinds , it is done partly by using the muscles of tho body and partly by usmg the intellect, but it cannot bo distinctly classified on this basis because a great many people use both intellect and muscles, and the work which they do is the result of both On one side we have the ordinary general labourer or coolie, who has very little need to use his intellect, and practically all of whoso work is done y his muscles , on the other hand, we have merchants and^e 6 W ntera1)rth6 y s ^ 0 ThaTOS^ 0t pr ° duct, . vo ° f wea,th * between productive nnri j Ve drawn an elaborate distinction mJtoLo P v^f£ on tb Bn ™ P , r0duCtlV6 labour distinction and its discussion deals mS ^tH? 8 J° the word Wealth ’ line , in accordance ? thuigs thafc are on «mj border- to " ° h,pW 17 • LABOUR 53 and professional men such as pleaders, whoso work is done by the intellect and who practically never use their muscles in production Between theso extremes we have all the people who use muscles and intellect m varying proportions, the cultivators, the artisans, and the skilled labourers, as well as people like copyists whose work is mainly done by the hands It is convement to begin the study of Labour with the men who wont wholly or mamly with their muscles, and we shall take as the simplest case the labourer who works for hire and uses his muscles to do the work that ho is ordered to do The hired labourer is a familiar object both in the town and in the country , and the first question regarding him is, Why does he work * It is because he wants wages to buy food and clothes for himself and his family , that is, his object in working is to obtain some wealth, by consuming which ho will satisfy his wants. It is true t at a man gets a certain amount of pleasure from us ™£ muscles , this is one reason why we play games like hockey or cncket ; and men may be found, though they are pro bably rarer m India than m Europe, who will do for pleasure a certain amount of ordinary coolies work, sue as oS m S m the garden, cutting down trees, or sawing woo even the ordinary cooho feels some pleasure m omg work well and skilfully, just as we take pleasure m a tuned hit m cncket or a good shot at t e goa in or football But the fact remains that the ordinary a does not work for the pleasure of the exertion, ev ® n , he may get some pleasure out of it , he is no oun i ° tor J„™ pleasure on days when he has been unable >to get employment for wages Work is on o u . pleasant to the ordinary man , he will no go ' ° = for nothing, and he has to he penmaded to work by offerrn. 54 AN INTRODUCTION TO ECONOMICS enough wages to induce him to work. The amount of wages that has to be offered is a matter which we shall have to examine at some length when we are discussing Distribution for the present all we can say is that men will not work for nothing, and that if wo want men to work we must offer them some inducement This fact is as true of the cultivator or artisan as of the hired labourer , he will not work without some inducement to do so In his case the inducement is not offered m the shape of a payment for a day’s work, but it is part of tho wealth which he produces The cultivator realises that if he sits idle when he ought to bo ploughing or irrigating, he will have less produco at the next harvest some months hence, and he works to-day in tho hope of securing that distant reward he thus looks further into tho future than the ordinaiy coohe who expects his wages to bo paid at the end of the day, or at latest at tho end of the month , and it is probably true that the ordinary cultivator works harder than the ordinary coohe The artisan again knows that if he sits idle he will have less to sell in the future , and he works because he looks forward to the price to be paid for his wares when they are finished , part of that price will be spent on food and other things to satisfy the wants of himself and his family. So that though the form of the inducement differs m different cases, this fact is true of all classes who use their muscles to produce w ealth they would not do the work merely for pleasure the work is m itself unpleasant, but they do it because it enables them to satisfy some of them wants Inow, if we suppose that the supply of the other Factors of Production remains unchanged, we may infer for the moment that the amount of wealth produced in a given area will vary with the number of labourers, that is, that LABOUR 65 most wealth will be produced where there are most labourers engaged in producmg it This inference must, however, be modified in cases where there are great differences m the quahty of the labour, because a small number of highly skill ed men, all working their hardest, may produce more wealth than a larger number of lazy and unskilful men and thus, in considering labour as a factor of production we have to examine both the question of numbers, and t e question of quahty of the labourers We will take e numbers first, that is, the population of the country, since the largest part of the population hves by manual la our The size of the population at any given time is the result of various influences . these may be considered as affecting (1) the birth-rate, (2) the death-rate, (3) emigration T e birth-rate means the number of children bom annually among a fixed number of people it is obvious that * forty children are bom in a year among a thousand people in one country, and only twenty among a^ t another country, the population of the is increase more rapidly than that of ^ 6 seC °° f «_ causes that influence the birth-rate are y no me known, and their study is not a part of ****** but belongs more properly to the science 0 P u c j^ ay is enough for the student to know that the differences may “Sirs-.— OPPV to the "te ji m one country forty people die in a year out ol la . and m another oily twenty die, it is obvious that the Wtcr will inorease more rapidly in population tha or if (as is quite possible) both are decreasing, the forme will deorease more rapidly than the “ r account the The third influence, migration, takes m fact ot some people leaving the country and other p p 56 AN INTRODUCTION TO ECONOMICS coming to it In India as a Mliole it is of little importance, but it affects some parts of the country, and m some other countries where special conditions exist it may lend to very material changes m the numbers of the population Thus, coantnes like Canada and Australia are at the present time gaining greatly in population by the largo number of immigrants (that is, persons coming to live in the country), while recently some European countries, and notably Ireland, have had then- population reduced by emigration (that is, by people leaving them to live in other countries) While the causes of high or low death-rates and birth- rates he for the most part outside the scope of economic science, the causes of migration usually ho within it, because when people change their country in large numbers, their object usually is to obtain an opportunity of acquiring more wealth Other causes it is true have influenced migration m the past , and students of history will remember that it was a religious cause that first brought the Farsees o Bombay, just as it was a robgious cause that brought toe Huguenots to England But at the present day large numbers of people do not often change then- country tom such causes as these people go to countries like Canada because they can earn higher wages or get possession * 0h r ply of Europe, just BuZ bee 'T e0Utt of ““ 8« to Ceylon and hoZ tT J CM1 8et htgIler ”1™ “"*0 ttan at m“t intent to th m,Sr ‘* t, ° I “4 causes are of very grca/D interest to the economist i ■» . them m the neat chapter taVtoTtST* “ SMd detailed study at a later s'tage 7 t '“ ther po™horST, S the h Zs t re onTl, “T , “ fluent ’ ln S and death-rates, he beyond the scope* toe sTen^ ZZ LABOUR 67 nusts have tried to state the experience of history as to the growth of population in the form of a Lair, or Laws , and one of these attempts, made by the economist Malthus’ has had so much influence on later writers that students should make themselves acquainted with it, though they can hardly appreciate its importance at this early stage Maltkus concluded from his study of history that the increase of population in any country tends to be rapid and contmuous , and that, unless the population is kept down by some special cause, it tends to increase until there is a scarcity of food and of the other necessaries of hfe ; and this conclusion is sometimes stated m the form of a Law, to the effect that Population tends to increase np to the limit of subsistence The full discussion of this Law would involve an extended study of the history of the world, and at the present stage students must be content with understanding what it means In any country, it suggests, the numbers of the people will ordinarily increase. The numbers may be kept down or reduced by special causes large numbers of men may be killed in war or die during a famine, or plague or cholera or some other disease may cause many deaths hut if no such special causes occur to reduce the numbers, a tune must come when the population will be so large as to require all the food and other necessaries that the country can produce , and when this point has been reached a further increase m population will result in an inadequate supply of necessaries It is not very easy to think out the application of a Law kke this for so large a country as India, and its meaning will be more easily grasped if we take the case of an ordinary Indian village and see what is likely to happen there Let ns suppose that a village has sufficient population to culti- 68 AN INTRODUCTION TO ECONOMICS vate the land belonging to it, and that the people belong to castes which do not engage in industries other than agriculture , and let us suppose too that all the produce of the land is consumed in the village Now what will happen if the population increases ? There are now more people to be fed, and the land must therefore be more highly cultivated m order to raise more food than it has hitherto yielded But as we have seen in the last chapter the land yields a Diminishing Return to high cultivation, and the conclusion seems inevitable that a point must be reached when it will not yield sufficient food for the increased population , there will be more food on the whole, but there will not be so much food for each individual As things are at present, epidemics of cholera or plague must be expected from time to time, and these will keep down the population ; but such epidemics are entirely preventable, and everyone must hope that, with the pro- gress of sanitation, they will in time disappear from India as they have disappeared from most of the countries of Europe What happens now m an overcrowded village such as we have described ? Some of the inhabitants leave it to take service elsewhere men of the higher castes go as sepoys or peons, while the low castes go to work in factories, or on railways, or in the coal-mines But if we suppose all the villages and towns of the country to be overcrowded, then the inhabitants of our village will not have this resource because they will not be wanted elsewhere, and they must stay in their village where there is not enough food for them Either then the population will decline as the result of deaths from insufficient food, or the inhabi- tants will limit the population m some way or other, bo that it shall not exceed the number that can be fed History LABOUR 59 tells us that some communities have in fact found ways of limiting the population the old people have been killed or left to dio when they could no longer work, while the practice of killing off some of the young children was not long ago common m various parts of India, and special laws for the prevention of infanticide are still m existence But measures such as these are no longer permitted by civilised governments ; and the only permissible means of limiting the population is the exercise of self-restraint on the part of the adult men and women, so that fewer children shall bo bom. . , , This was the state of things to which Malthas looked forward , 1 a time whan the people should so limit the number of births that the population should not increase up to the limits of subsistence , that is to say, ins a 1 At the time when Malthas wrote, ^ui^fo^hi^to^OTOSco that from what it is now, and it w" to»nB qufmtl . food and other necessaries would bo r P wor ld to the ties by railways and steamships Item onomde of the w^ ^ ^ other. Ho wrote, tlioreforo, on ^ . ^ 03 t' o f the food which at the fmo, that each country must I • coant^ it required for consumption hf hose from other countries, con now get all tho food it needs by p^chose^m ^ ^ ^ {m provided that it produces enough w a pro( jucos much less the food which it buys England, , ^ fc jj 0 goods which it food than it consumes , it P a y° I g r 0 ther fuel to enable it manufactures But if England had no coal « otn for ^ food> to manufacture goods m sufficien q . med as at present , it its 'population could no longer _ oro f 00 d from the land thax would have to dovoto itself to raw g {ood t0 sup p 0 rt itself* is now raised, and if it could no emigration The question is tho population would bo ro J. u °^, b Z od ™f support the population no longer one of raising 6U ^J C1 sufficient wealth to provide of a particular country, but of p country like most of India, by purchase the food that is rcqui produ otion, tho amount of whore agriculture is the chief m t importance , but oven food produced is still a mal ttor of might find it pro- m such coses it is conceivable „ n tton and oilseeds, and buy its fitahle to produce such things sa i e 0 f these food with part of the money obtained ior 60 AN INTRODUCTION TO ECONOMICS a large number of porsons strugghng for a life of poverty and insufficient food, thore should be a smaller number able to obtain sufficient quantities of food and other necessaries and to lead a life of comfort There are many other considerations affecting this question, which will engage the attention of students at a later stage for the present we may lcavo tho subject with the remark that though particular parts of India are certainly overcrowded in this sense, India as a whole is not, and that the problems before Indian statesmen of to-day refer not to limiting the numbers of the people but to facilitating their more even distribution over tho country, and to increasing tho pro- duction of wealth, partly by tho improvement of agriculture and partly by the development of those industries, for which the country offers a wide scope, and which would afford employment and subsistence to what now seems its surplus population. CHAPTER EX MOBILITY OF LABOUR-. As has been indicated in the last chapter, labourers are not evenly distributed over India * there are overcrowded towns and villages, and thoro are villages and towns which could employ a laigor number of productive labourers than they possess. In a general way tho distribution of the population follows tho fertility of the soil, thus the population is dense over most of the fertile plains that he along the Ganges, wlnlo it is very small relatively to the total area in the Himalayas, and also m the hilly tracts of Central India The usual way of stating the density of the population is to calculate tho average number of persons to a square mile , and the census shows that this figure may vary in tho case of Indian districts from less than thirty to close on one thousand persons The density, as w-e have said, tends to vary with the fertility, but this tendenej’ is by no moans always realised, and the differences that exist do not rapidly become equalised. Nor does the surplus population of the over-crowded tracts migrate at once to places where tho establishment of new industries offers bettor chances of employment * such migration as takes place is usually slow’ and partial Thus the factories m cities like Calcutta or Bombay or Cawnpore may want many more labourers than they can get, at times when many labourers in Bihar and the United Provinces can 62 AN INTRODUCTION TO ECONOMICS , * scarcely get enough work to support their families • in some places labourers cannot be got even at high wages, while in others there are labourers to spare It is obvious that in these circumstances the production of wealth is less it would be if the labourers were distributed in accordance with the needs of employers. In former times some of the governments m India, as well as private persons of influence, attempted to deal with this situation by forcmg labourers to go where they were needed , forced labour is still a memory among the country-people, and it might possibly be found m existence m some native states even at the present time But under the British Government of India, the personal freedom of each individual labourer is maintained as far os possible, and though landholders may still be found forcmg unwilling labourers to work in their villages, it is now impossible to move by force any considerable number of men in order to make them work at a distance , employers are left to effect such movements as they may require by the offer of higher wages and other inducements. » Some of the earher European writers on Economics assumed the existence of what may be called complete ( Mobility of Labour , they assumed, that is, that labourers V would go to work wherever the inducements were greatest, j almost as certainly as water will flow downhill until it 'reaches the lowest possible level ^ Such perfect Mobility probably does not exist m any country m the world, and a considerable portion of later works is often devoted to tbe study of the hindrances to mobility that in fact exist These hindrances differ in force from country to country, and from century to century , but their general nature is fairly uniform, and their study may be approached by a glance at the existing position in northern India (i MOBILITY OF LABOUR 63 In the first place we must distinguish between permanent and temporary migration A labourer may either change his Ihbihe permanently and settle in the place where he has found employment, or ho may go away to work for a time only, intending to return to his homo after a longer or shorter interval. Permanent migration is common in many parts of the world, and most of the emigration that takes place to countries like Canada and Australia is of this type ; but it is very rare in India A good example of permanent migration is found in the Bengali families that have come to Upper India and made their homes in Benares, Allahabad and some other cities, and there are numerous other examples, but the number of people who migrate permanently is small relatively to the total popula- tion Temporary migration is much more common : men go out to service, or to work on railways or in mines or factories, usually leaving their families at home, and sending them money for their support, and such men usually return to their homes after a longer or shorter period x C InJCndia at the present time mobility is_ very__largely jl question of caste and lo cal ity. Men of some castes will go from some localities~to work almost auyu here in India, and in their case the degree of temporary mobility is almost as great as is to be found anywhere in the world Thus chamars from Jaunpur and Azamgarh are found working as grooms in almost every town : brahmans and chhattris of Oudh go to the most distant parts of India to work as sepoys and peons ; and there are many other instances of the same kind. On the other hand, the bulk of the cultivating castes and of the field-labourers are very slow to move, and if they are driven to leave their village they go as short a distance as possible,' . Artisans aremnch more mobile than cultivators ; as we have seen in a previous 64 AN INTRODUCTION TO ECONOMICS chapter, many of these classes followed the royal courts m their movements over the country, and numbers of them will still go from one town to another if they think it will pay them to do so Thus, Mobility of Labour exists to some extent in northern India, and the question arises, why is it that when some castes in some localities are exceedingly mobile, the men of most castes are exceedingly difficult to move 7 The full answer to this must be sought for m the history of the country, and much of that history has not yet been written, so that no final conclusions can be drawn, but the informa- tion that is available seems to indicate that the ordinary inhabitant of northern India is by nature slow to move : that the cases of mobikty are exceptional and consequently that employers who wish to mcrease their supply of labour should study these exceptional cases, and try to find out the causes that have led to them, and then try if they can set similar causes at work In studying this question, it must be remembered that most of the population obtains its income by working on the land The cultivator differs from the artisan in one very important pomt he cannot carry his means of pro- duction with him [An artisan with his bundle oftools.and a bttle money can move to even a distant town and start work there with little trouble, but the cultivator’s success depends onbis close and detailed knowledge.of the peculiari- ties of each particular field of his holding, and„when_he goes to another holding he has to leave., behind him all this jdetailed knowledge and set to work_tq_acquire,similar know- ledge regarding his new fields , jwhile if he goes to any great distance he has to learn all about a strange climate an d strange soils, and to grow different crops from those to which he is accustomed It is fine, therefore, of most 65 MOBILITY OF LABOUR countries that the cultivator is slow to move, and it is parti- cularly true of tho Indian cultivator , and since cultivators foirn the most numerous class of tho population, their habits of thought influence tho other classes living m the villages, and tho ordinary villager does not think of leaving lus home,’ and leaves it only vhon ho is either forced to do so, or is by somo Bpecial inducement to go somewhere else, ra^fho pressure tho t forces people to leave their village may no either social- or eco nomio -A man may have to leave his village if ho gels Jumself disliked by the landholder or by his brotherhood'j>hhd particularly if ho has been guilty of some discreditable conduct, In such cases the pressure may bo called social 'l It may work m different ways perhaps the landholder may turn a man out of the village, or perhaps n hen ho has quarrelled with lus brotherhood he ma y find his life so uncomfortable that he decides to go elsew here , and in either case he is likely to go to some town \\ here he hopos to find fnendB Probably this social pressure is not of great importance from 'the economic point of view ; that is to say, it does not send very large numbers of peoplo away from their villages to work in other places , hut it accounts in part for tho number of bad characters who are to be found in large cities like Cawnpore. ' When wo speak of economio pressure, we mean simply that a man finds ho can no longer make a living m lus ^ village^ This cause too is by itself probably of httle im- portance in causing labourers to go where they can be of more use , the men who cannot make a living m their village are usually worse workers than the rest, and would not be of great ubo anywhere, while their ignorance of where to go and their fear of going to a strange place are likely to keep them in their village, doing such casual work as they can find, and looking for help to the chanty of their more 66 AN INTRODUCTION TO ECONOMICS prosperous neighbours (But economic pressure, when com- bined with special inducements to go elsewhere, is of great importance, and this combination of influences does in fact cause many workers to move to places where they can earn more money Thus a young chattri of Oudh. may find that there is not work for him on his father’s land, and that his father’s income is not large enough to support the family * this is economic pressure, and if it stood alone it might not cause him to go elsev here But probably he has relations and fnends in service m Calcutta, or Hyderabad, or Lahore, or some other distant city, who are earning money and sending some of it home to their relatives , so he goes to some distant place where he has fnends, and through their help gets employment, and presently he too is able to send home money to his family Or a weaver may find that he cannot support himself in his village, now that cloth can be bought so cheaply , he knows that some of his brother- hood are norlung m the cotton factones at Bombay or Ahmadabad, and he goes there and gets similar employment with their assistance 1 The general position then is that people are inclined to stay at home among their friends, and disinclined to go among strangers, w hile they are usually ignorant where to go these conditions are not pecuhar to India, and the 1 A striking illustration may bo found m the cose of the Warora coal mine near Nagpur In 1872 when the mine was about to bo made, a man named Bhawam Din Dikshit, who was employed on the railway near the works, offered to bring labourers from his home m Itai Bareli to dig the mine He persuaded a gang of men to come, and when they had dug the mine they found themselves well off, and Btnjcd on as miners to dig the coaL So long os the mine worked, there were always labourers from the same neighbourhood, men coming to a place whero they knew their fnends were doing well , and when the work of mining had become familiar, thoy went to other coal-mines also, and considerable numbers of them may now be found working m the mines of Bengal MOBILITY OF LABOUR 67 obstacles to mobility of labour all the world over may be summarised as disinclination and ignorance, though their extent and importance varies greatly m different countries The amount of temporary migration has increased largely m India during recent } ears, and it will probably contmuo to increase until the supply of labourers is much more closely adapted to (he needs of employers t ban is the case at presont , [One reason for this change is the increase of knowledge people in the villages are becoming famihar with the fact that more money can be earned elsewhere, and they are gradually getting to know the places w here it can be earned , m other words, the obstacle of ignoranco is weakening t A second and most lmpoi feint cause has been the extension of railways, which lias mado it possible for labourers to travel quickly and cheaply to distant places where they can get work A weaver m Oudh, for mstanco, can got to Bombay in two days, and largo numbers of weavers now mnko this journey for tho sake of a few months’ work When there was no railway, the journey might have taken months, and would have cost very much more than it does now'. Tins is only one of the man}' w ays m which railways have added so greatly to the productive power of the country as a wholo So far we have been considering one sort of mobility only, that is o f peop le gomg_to„.workm.anpther. place — but tbo term mobility covers also tho idea of people changing" their occupation. Suppose a man who is employed m making brass vessels finds that brass has become very dear, or that people will not pay fair prices, or that for any other reason he cannot make a living by his occupation. Wliafc is he to do ? One course is, as we have seen, to go to some other town and start making, brass vessels there another is to stay where he is and take up some other occupation. 68 AJST INTRODUCTION TO ECONOMICS Such a change of occupation is possible, and it is some- times forced on people but it is as a rule difficult in all countries, and in India it is rendered exceptionally difficult by the customs of caste The brass-worker may see, for instance, that the leather-workers in his town are A pTp in g exceptionally high wages, but he cannot become a leather-worker This would bB difficult anywhere, because he would not possess the necessary skill in working leather, and (as we shall see later on) most occupations require a period of teaching and training but in India he would not for a moment think of the change as even possible, because the rules of his caste would not allow of it. Thus, many of the occupations which require special skill are closed to all classes of the people except the single caste which follows them, and in this way the caste system, which at present is almost peculiar to India, makes it very difficult to increase the number of workers in the occupations where workers are most wanted If a skilled labourer is forced to give up his own occupation, he can take up only one of the few kinds of occupation which are not confined to a smgle caste, usually either cultivation or what is called general labour, that is coohes’ work We have said above that even when the system of caste does not exist, it is not easy for the worker to change his occupation The course a man takes when he is free to choose is to put his sons into the occupation that seems to offer the best prospects A mason, for instance, may either bring up hiB Bons to be masons like himself, or he may get them trained for other occupations — one a metal- worker, another a shopkeeper, another a schoolmaster, and so on In this way the choice made by parents tends m the long ran to supply workers to the occupations where they are most wanted, because parents choose for their 69 MOBILITY 01 ? LABOUR t. W >« sons those occupations where the wages and other induce- ments are most attractive The adaptation is by no means perfect, because while the boys are being trained the conditions of production may change, and there may be much less need for their work when they have grown up than at the time the choice was made Even m Europe, therefore, workers are not as a rule distributed just as they should be so as to secure the largest production of wealth , at any given time some occupations want more workers, while in others there are too many in the first case some other factors of production are insufficiently employed for want of labour, and in the second some workers are in- sufficiently employed and have to waste part of their time in idleness The want of adaptation between workers and work is probably greater in India than in European countries, because of the special hindrances of the caste- system , not only are workers unable to change their occupation, but they cannot choose occupations for their sons, who are equally bound by their caste We shall see later on that this want of adaptation is of great importance in Distribution , at present we are concerned only with its influence on Production, where it is certainly harmful^ causing an excess of workers m some occupations, while m others the want of workers is the chief limit to the quantity of wealth produced The means of securing closer adapta 4 - tion is therefore one of the large economic problems before the country . we cannot discuss it here, but students will have to pay serious attention to it later on Before leaving the subject, it is well to say that the caste-system is by no means an unmixed evil, even from the point of view of Production We shall see in the next chapter __ that it is of considerable value in seeming the training -of - workers^ and thus maintaining the_quahty~oL.labour CHAPTER X. QUALITY, OR EFFICIENCY, OF LABOUR. So far ve have been considering the quantity of labour, that is the number of ■workers available for productive purposes we have now to consider the other mam factor, the quahty of labour Common experience shows that there are very great differences among workers, so that employers choose one man instead of another, and sometimes one race or caste in preference to others who would be ready to do the same work these differences may be classed as ansmg from (1) health and strength, (2) skill, (3) moral quahties We have seen that manual labour .means. primarily the use of the muscles of the body and it is obvious that men’ who are strong and healthy can do more work, and so aid in the production of more wealth, than those who are weak and sickly The quahty of strength seems to depend partly on race and partly on training in childhood it is difficult to separate these two conditions beoause the races that are strongest are usually those where the children lead a healthy and active life, and we cannot yet say with cer- tainty how much of the strength is due to inheritance and bow much to training But the existence of the difference is well known Panjabi labourers, for instance, can do more work than men from Oudh, and Oudh men can do more QUALITY, OR EFFICIENCY, OF LABOUR 71 than Bengalis But the maintenance of bodily strength requires also a sufficient supply of nourishing food, and a half-starred man can rarely do a full day’s work hence good a nd suffi cient, food is an important condition of Production 1 But a man may be naturally strong and may be suffi- ciently fed, and may yet waste much of his worlang time if he suffers from fever or some other disease that keeps men away from work for prolonged periods.. We have seen that improved sanitary conditions would be a material aid to Production, because they would lover the death-rate and thus leave a larger population at work at any given time but they would be even more valuable in India if they could secure a large reduction in the amount of sickness due to fever We all know in a general way that a piece of work may be very much delayed because many of the labourers have fever, but it is only the employers of many labourers who can realise how great a hindrance this loss of time is to Production Thus, the improvement of sanitation is most important from v our present pomt of view , not only because it will keep more labourers alive, but because it will keep many more labourers m good health and fit for work) The next difference which we have to consider is in skill Skill depends first of all on the muscular movements which constitute manual labour Every student who has played games or done gymnastics knows that a movement of the muscles which at first he finds difficulty in performing 1 Thm point will require further consideration in connection with Consumption and Distribution In the meantime the statement m the text may be illustrated from the experience of famine-relief Labourers who come to relief-works are rarely able to do the full day’s work of an ordinary man, and the task set to them as the condition of their receiving the daily wage has to be carefully graduated so that it shall be reasonable with regard to the physical condition of the workers 72 AN INTRODUCTION TO ECONOMICS becomes gradually easy 'with practice at first ho has to perform it slowly and painfully, and must think of nothing else , but gradually it becomes easier, and he can perform it more quickly and certainly, until at last ho need scarcely think of it at all, but can go through a complicated senes of movements almost automatically An experienced bats- man, for instance, has not to stop and think how he is to move his legs, his arms, Ins vmsts and his shoulders in order to play a particular land of ball he recognises the kmd of ball almost as soon as the bowler delivers it, and he makes the appropnato movements without thinking further , if he had to thmk them out, he would probably be bowled before he had finished thinking The movements made by a labourer at work are exactly the Bame in land as those, made by a youth at play he needs practice in them until he can perform them quickly and accurately without stoppmg to thmk about them, and people watching a skilled workman are apt to thmk that his work is quite easy because he seems to do it so easily. The work of a potter, for instance, looks exceedingly simple he spms his wheel, throws a lump of clay on it, presses the lump for a few seconds with his hands, touches it with a knife, and then, as the wheel comes to rest, takes off the jar or cup which he has made and puts it with others to be baked But if a spectator offered to take the potter’s place, he would soon find himself in difficulties , it takes skill even to spin the wheel at the proper pace, the lump of clay will fly off if it is not thrown exactly in the centre of the wheel, and an u n s ki lful touch will either knock the clay to pieces or pro- duce a shape quite unlike what is intended The same thing is true of all manual labour the muscles concerned must be practised until the required movements become a habit QUALITY, OR EFFICIENCY, OF LABOUR 73 Use cliicf \aluo of the cnstc-system from the pomt of view of Production is that it gives this practice while the [« tur SJrprl:cra are *nll boys The potter’s son has watched ii,c fat ^ er at ^ rorJl from the time he could walk , he looks forward to doing the same work all his kfo, and when he begins to try it his father is beside him, showing him exactly how to make the neccs^n movements The same object, training and practice m the required movements, is, m some other countries, recurcd m part by what is known as the apprenticeship system, under which a boy is placed under ThePordcrs of a workman to learn his occupation , but the ordinary workman cannot be rcbed on to take as much trouble over training an apprentice as the father takes with his children , and probably this kind of skill is ftt least as common in India as anywhere else in the world, just because of tko careful training which the workmen have received from their fathers whilo they were children. This control ovor certain movements of the muscles, acquired by long practice, is the foundation of all manual skill. The higher kinds of skill consist partly m control over a larger number of movements, and partly in the exercise of judgment (also acquired by practice and ex- perience), which enables a man to decide at once what particular movements are most suitable to the material on which ho is working and to the object of his work Thus, the ordinary potter is practised only in the movements required to make a few common objects such as cups and jars, and if ho is given a pattern of some unfamiliar shape he w ill make many mistakes at first, and it will be some time before he can copy the pattern correctly. A more highly skilled potter knows how to make many more objects, and with his wider experience he can copy a new pattern more quickly, and with fewer mistakes An ordinary potter 74 AN INTRODUCTION TO ECONOMICS again knows only the movements required for the clay with which he has always worked , and if he goes away to a place where the clay is rather different it will be some time before he can u ork with it The more highly skilled potter will have a much greater experience of different sorts of clay, and as soon as he recognises any particular day he will know what to do with it So again, he will know much more about colouring matters and how to use them, and can produce cups or jars of the colour he wants, red, or blue, or green, while the common potter can only produce the ordinary red to which he is accustomed Up to a certain point , the caste-system secures this higher skill, because the father teaches his” sons all that he himself knows, and so knowledge once acquired is passed on to the next generation The defect of the system is that it gives little scope for acquiring increased skill the father cannot teach more than he knows, and the son learns only from his father^ Now at the present time there is in India need for higher skill m almost all the work that is done in the country This need is caused by the progress of the people generally m wealth and in knowledge people want a larger variety of things, and they want things which their fathers did not know of , and at the same tune new materials are available, and also new tools The artisan should be able to use these new materials and new tools so as to produce the new things that are wanted but he learns only from his father, and his father knows nothing about these things So the artisan often goes on making what Ins father made, while the people buy things made m other countries, and have less money to spend on what is produced in their own town , it is thus the artisans as a class who suffer for their own ignorance The remedy for this evil has to be sought m some scheme of industrial QUALITY, OR EFFICIENCY, OF LABOUR 75 training, which shall enable the young artisan to work with new nnto-ipls, new tools and new designs as well as ki« Cither work* with the old, and the industrial schools which are now being opened in some cities are attempting to work* out scheme** of the kind so that the next generation of art is an v shall bo at least as able to meet the new needs os the last generation was to meet the old requirements The foregoing illustrations of the meaning of skill have been drawn from the work of artisans, but precisely the same considerations apply in the caso of agriculture Skill, that is to say practice and a certain amount of know- ledge, is required by the man who drives a plough or a cart or who sow*, or reaps, or irrigates, or we , an ^ is acquired in a very high degree by the cultivator s chi dren ns they help their father and learn from him But the art of agriculture has to move with t o tunes, jiu ^ handicrafts must move : new crops have to be & ’ ^ old crons given up , new methods, new too , tap—L required m order to «<™ possible production from the land and cannot teach hie sons about these tbmgs, nhich he docs not know bimself. And so arises e nel ^ cjuldren the of education uhich shall teach ‘ ° ™ ’ ^tcrionng with the new know ledge they require m, m b 0 th training they receive the mam branches of productio , q means skill is at the present "LX^ut of enabling the young to cmpl y b the existmg sacrificing the practical training p institutions of the country. dualities as ; By the term Moral Qualities are of honesty, regulanty, diligence, an > Production' much importance from the pomt of view 76 AN INTRODUCTION TO ECONOMICS A labourer may work hard and steadily without being constantly watched, and he will obviously do much more work in a given time than another who works slowly and lazily, and lays down his tools directly his employer’s baok is turned Some workers again can be trusted with valu- able materials, such as gold or silver, while others must be watched closely all the time, or they will steal some of the materials for their own use The science of Economics cannot indicate all the conditions under which such qualities as diligence and honesty may be expected some of the most important conditions must be looked for m the past history of the people, m the training which they give to their children, and in the views of religion and morals that are current among them but there is one economic tendenoy of great importance that must be considered in this connection It is concerned with the effeot of the reward offered on the quality of the work done. We know that we can usually get a man to do better work if we offer him, in addition to his ordinary wage, a small extra payment depending on the quality of work he does , and the extra value of the work may be worth considerably more to us than the amount of the extra payment This is the simplest case of the tendency we are considering , men will do better work for a higher payment, and an employer can, within certain limits, increase materially the production of wealth by raising the wages which he payB But the limits to this mcrease are of great practical importance , as we know, the muscles get tired when used for long, and the whole body gets tired too , and when a man goes on working with tired muscles and a tired body, the movements which he has to perform are not made with the proper speed and precision, and the work ib badly done, just as a good bowler cannot bowl QUALITY, OR EFFICIENCY, OF LABOUR 77 well when he is tired. The reward offered should, therefore, be sufficient to make men do their best work without over-working themselves . and it is one of the employer s most difficult functions to adjust the reward accurately bo as to meet this condition The tendency which we are considering thus applies to hired labourers only within certain limits its influence is much greater in the case of artisans or cultivators who are their own masters, and receive all the a faona wealth which they produce by working better is found as a matter of experience that these classes, token as a whole, maintain a higher standard of work t an e labourers ; but to ensure this result it is essential that th y should have confidence in being able to keep a have earned The artisan will not work jus ^best if he > knows that his earnings are liable to be carrie o y 10 V. by the officials of an arbitrary government, and, t cultivator will not work his best if he ows extra profits are to be taken from kim y a j e whether as rent or otherwise We thus come aQ(J subjects of the advantages of efficient gove ’ equitable Tenancy laws, questions w ° ^ preS ent all have to consider later m their course , e a most that can be said is that these ins ^ WQrk done by important influence on the quality most of the producers of the country. labour as Economists usually speak of. the ^ Cheney ‘ By this word they to duced by a certain amount of lab Abject 0 f every the cost of the labour expended, an 1 ^ tk e labour employer to secure the maximum e ci ^ other for which he pays . he has to offer suchw^ ^ ^ inducements as will ensure that 78 AN INTRODUCTION TO ECONOMICS best, that they do not w aste their materials, and that they do not spoil the tools and other appliances which ho supplies He has to think too of the conditions under which the work is done, because men cannot do their best work in hadly-bt or badly-ventilated rooms ho has to think of the sanitary conditions of his -workshops, m order to secure the health of his workers and in many cases it is his interest to spend money in training children so that they may become efficient workers later on The management of labour is thus one of the most important functions of the employer All text-books on Economies deal at length with a subject termed Division of Labour Logically it should be con- sidered at this point of the study, but some knowledge of the meaning of Capital is required for a proper under- standing of the subject, and we shall postpone its discussion for the present, and pass on to the higher branches of Labour which we may call intellectual work CHAPTER XL INTELLECTUAL WORK In Chapter VIII we pointed out that the work done by human bemgs is done partly by usmg the muscles and partly by using the intellect. We have described some of the most important conditions affecting the amount and the quality of manual labour, and we have now to see how far those conditions exist also m connection with intellectual work The classes of the people with vhom we are now mainly concerned are government servants, members of the learned professions, merchants, and employers of labour The feature common to the work done by all these classes is that it is done mainly by the intellect, and that t ere is little need in it for usmg the muscles In India at the present time popular opinion would not class all these workers together , the government servant, for instance, is still regarded as something altogether superior to the merchant , but from the economic point of view both fa into the same group, because they do work of the same kind , , , We have seen that since most of the population of the country supports itseif by manual labour the number of labourers depends mainly on the number of the pop^ion. This consideration obviously cannot apply to intellects. 80 AN INTRODUCTION TO ECONOMICS -workers, -who form only a small proportion of tho whole The number of thcso worker? depends mainly on the state of development which o nation has reached a backward nation with little trade has room for a comparatively small number, and tho proportion rises with tho increase of commerce, industry, and learning Apart from this fact wo shall find that, speaking generally, tho same kind of considerations apply to intellectual work and to manual labour As regards mobility, intellectual workers are, in tho presont condition of India more freo to move tlmn manual workers A pleader or merchant can move lus business from one town to anothor at least as easily as an artisan ; and he is rathor more bkoly to do so, bccauso hn> wider knowledge will show him wlioro tho best opportunities for working are to he found But even a pleader or merchant is by no means entirely free Like other men ho would prefer to stay where his familv lives and if ho goes to a distance he sacrifices what wc have spoken of as Ins practice or his good-will, and has to make a fresh start among strangers The employer of labour is, m addition, often hampered by tho fact that ho owns buildings or machinery, which it would be difficult or impossible to move Mobibty from place to place is therefore by no means perfeot among tho classes which wo are considering, whilo change of occupation (tho other kind of mobility) is rendered very difficult by the amount of special training required by most of the professions A pleader, for instance, may become a government servant or a merchant, but unless he takes a long course of study, ho cannot set up as a doctor or an engineer In these occupations special training is so important that the numbers of people engaged in them are determined very largely by the choice made by youtbs or IXTEU/iXT UAL WORK 81 hy thei- p,\r> i*i*>. A vuuth decide* (or hi*t parents decide f^r him) that h** Mil} lx* *v pleader or a doctor, for instance, 'ind if he *x'c&'^U m qualifying for (ho profession w Inch l*o has eleven, h#» then chooses the town where he will «i.*vrt praeitc*. This latter choice is determined partly hy tV r*xvm tint ex»-t-» for more pleaders or doctors in Ibo v triena uw\ i\< of vhseh ho has knowledge, and partly by hi* j*iatienri.if> or connection with persons of influence who can help him at the a tan. ■ hut a ne cessary "factor People cannot produce wealth without it, aiicLthis is even more true of European countries, < which have made greater industrial progress J m fact, as students will discover when they read economic history, the tendency of progress is to increase the amount of Capital required relatively to the number of workers J then does a manjvho wishes to prod uce wealth obtain Capital that he neeus ? He can either save it, or get CAPITAL 91 it from some one else tv ho possesses it These two processes require some consideration The meaning of the term Saying is that a man does not spend all the wealth that comes^uno'lns possession “Hut "juts some of it aside for future 'use,' just as the grass- gatherer of our illustration saved up pice till he could buy a reap-hook. It is this process w Inch leads to an increase in the -wealth of the country, and m ordinary life there is no other way by which the stock of wealth can be increased, since if all tlie inhabitants consumed wealth as quickly as they received it, it is obvious that no stock can be accumulated All the wealth then that is used as Capital must be the result of saving, effected at some tune in the past;' the amount of it is not increased by the other processes we have mentioned, getting wealth from some one eLc who possesses it This second process may be effected in various ways A man may take Capital from someone else by force or by fraud , this method has been popular in India during many epochs, but has not been permitted when a strong government was in existence, and at the present time it is forbidden by the Indian Penal Code, and prevented as far as possible by the police. Or a man may inherit Capital from his father or some other deceased relative This, of course, happens frequently, but it is only by accident that Capital is left to a man at the time he wants it; and a man who wants Capital cannot rely on some nch relative dying at the most convenient time Again, a man may voluntarily give Capital to another. Tins method of getting Capital is by no means unknown in India, but it accounts for only a very small portion of the Capital that changes hands Almost the whole of this passes either by inheritance or by the fourth method — that is by borrowing, where the borrower promises to 92 AN INTRODUCTION TO ECONOMICS return the Capital lent, and in most cases to give something more (in the form of interest or otherwise) m consideration of the loan We cannot trace the history of India hack to the time when the process of saving first began, that is to the time when there was no accumulation of wealth That time must he far beyond the period to' which the earliest Hindu scriptures relate, because oven then there must have been a considerable stock of wealth in existence. Judging by what is known of the lives of the most backward races m the world, it is probable that the practice of saving de- veloped at first very slowly people got gradually into the habit of putting away food when they found they had more than they could eat at the moment, they devised the very simple tools and weapons that many savage tribes are known to have used, and they tamed some animals It seems probable that the accumulation of wealth was started along these three lines, hut wecanhbt "Bay — though we may argue or guess — when they developed, or in what order they came These three ideas, however, a store for future consumption, tools or implements, and tame animals, taken together make up the whole conception of Capital, and when once they were established the conditions existed under which wealth could be accumulated, and in turn could he used for producing more wealth The pro- gress of this accumulation may be read in economic history , for the present purpose it is enough to say that the general tendency is for wealth to accumulate with increasing rapidity The process of accumulation may he checked, and the stock of wealth may even be dimin ished for the tune by wars or by calamities such as famine , but the greatest hmderance to accumulation has usually been found m the absence of a government sufficiently strong CAPITAL 93 to ensure that people shall be able to keep the wealth to which they are entitled It is well to emphasise tins need for a strong and stable government, becauso when it exists people are very apt to accept its existence os natural, and to overlook its advan- tages while they complain of its drawbacks. Men will only employ their wealth to produce more wealth if they have a reasonable prospect of enjoying the wealth when it is produced. If they have not that prospect, they will not risk the wealth they possess, and wall not struggle to accumulate additions to thoir stock When, therefore, complaints are heard of the harshness of government, and of the rapacity of the police, it ib well to remember that in India at the present time, though theft and fraud are not unknown nnd though bribes may be paid, the great majority of tbo people have confidence that they will be able to keep whatever wealth they acquire . and it is just this confidence which is necessary before people will dovote their energies to the production of wealth We have been speaking of the accumulation of a stock of wealth , This is not just the same thing as accumulation of Capitalr because people may accumulate wealth without intending to employ it in production, and wealth becomes Capital only when this intention comes into existence. Tn India, as in other countries, there is a strong inclination on the part of the people to accumulate a stock of wealth, but there is not yet the same inclination as elsewhere to employ the stock of wealth as Capital, and a very large proportion of the wealth of the country is not at present Capital, though it can become Capital if the owners so decide. The mam reason for this fact will be found in the want of security which existed for centuries before the present gover nm ent was established People then wanted M AN INTRODUCTION TO ECONOMICS wealth, as they always want it, but they had the greatest diffi culty in keeping it when they had got it They thus developed the habit of keeping their wealth in forms w hero it could be easily hidden and easily earned away, and gold or silver or precious stones were the forms usually chosen because they most nearly fulfilled these requirements And this habit of hoarding, as it is called, still survives when the need for it has passed away, so that there is a very great aggregate of wealth lying useless in the hands of the people, while there is a very great need for more Capital to increase the productive powers of the land and the people of the country The consequence is that the country is poorer than it should he, because its productive resources are not fully utilised , and students of Economics should realise that, at the present time, one of the greatest practical needs of the country is to secure the employment as Capital of the wealth that is now lying unused, m order both to increase the wealth obtained from the soil and to develop those industries winch can profitablv be carried on. CHAPTER Xm. THE ORGANISATION OF PRODUCTION— -THE SELF-SUPPORTING STAGE We have now to enquire how the factors of production, which have been described, are organised , that is, how they come together, or are brought together, m the pro- portions in v Inch we find them at work The description of the way in which the organisation of production has gradually developed forms one of the most important divisions of economic history A great deal is known on this subject regarding certain countries, but many of the facts regarding India are still obscure, and there is a wide field for research in this direction. The development has certainly been gradual, and changes have for the most part taken place slowly, so that a full description of it would be very long, and cannot be attempted m this book For the present all wo can do is to examine a few stages m the development, and indicate some of the causes that have led to gradual change. For this purpose we will consider three stages, which may be called a) The stage of self-supporting groups b ) The artisan-stage market-production on a small scale c) The factory-stage market production on a large scale 96 AN INTRODUCTION TO ECONOMICS It must not be supposed that those stages follow each other throughout the country in regular order, as April follows March and May follows April So far as we can see, the development has been vory gradual, and its speed has varied very greatly from place to place, so that at any given moment various stages can be seen side by side, and the process of change can even be watched And tins is true of the present day . we can see the most primitive methods of production side by side with tho latest inven- tions, and there is hardly a country m tho world that now offers the same opportunity for a study of the whole subject And the speed of change has varied not only from place to place but from one industry to another Agriculture m particular has progressed very slowly , the country is still largely m the first stage in regard to this occupation, and it is by no means improbable that it may remam so for an indefinite period What is meant by self-supporting — the term by which we have characterised the first stage ? We mean that a group of people themselves produce all the things which they require to satisfy their wants, and that they obtain nothing from people outside the group ' Probably tins condition may be found to exist among sbme of the forest- tnbes even at the present day, but in its pure state it is no longer of practical importance, because nearly all the people in India now satisfy some of their needs by buying some things that have been produced outside the group to which they belong But it is most important to recognise that the whole agricultural system of the country seems to have grown up under these conditions, and that many villages are still very nearly self-supporting as regards the satisfaction of the wants of their inhabitants , and since agriculture is much the largest productive industry in the ORGANISATION OF PRODUCTION 9? country it is worth while to cousidor this stago in some detail If we examine the conditions that exist in the most back- ward parts of the country, and exclude such features as are clearly due to the modern development of trade, we find the people living m villages which are very nearly self- supporting The people are of threo .classes — cultivators who hold the land, labourers who work for the cultivators, and servants or artisans x Thc cultivators till the land and the produce is used in satisfying their wants and those of the labourers, servants, and artisans, all of whom are remunerated for their service by portions of the gram obtained at harvest Let us see how this w orbs out m dotail A man wants for himself food, clothes, shelter, fire, light, cooking vessels, water *, and the cultivator needs also seed, implements, and cattlo For food, there is the gram and pul^o grown in tho ullage, as well as sugar mado from the sugar-cane and oil from some of the various seed crops For clothes, there is the cotton grown on the land, and spun and w oven into cloth m the village For shelter, houses aro built of earth dug in tho village, and roofed w r ith wood from the waste land, and eithor thatch made of straw or tiles mado of earth. Fuel comas from the trees ' growing on tho waste land and from the dung of cattlo light is obtained by burning tho oil pressed from seeds , and the potter makes cooking vessels from the earth of the village Water comes from streams or wells, and there is no doubt that when tho site of a village was first fixed; the presence of water, cither on tho surface or below it,\ was one of the points taken into consideration. Then as to tho cultivator’s needs , his produce supplies seed for tho next crop- the village carpenter makes tho implements \ he needs, and the cattle are bred and reared on the waste \ a 98 AN INTRODUCTION TO ECONOMICS land of the village If rent or revenue has to be paid, it is paid from the gram at harvest-time A village then could live m tbs way m isolation if, as is the case, its inhabitants help each other m difficulties, and look for help m return One man, for instance, may have cotton to spare, and may exchange it for sugar, just as is done even now ; but there is so far no need to offer any of the produce to people outride the village in exchange for things wbch they will bring from a distance There is thus no need for money, and no need for trade, and it is difficult for us to thmk of a country without money or trade yet it is highly probable that the agriculture of the country was originally established without their aid There are, however, two wants which we have not yet mentioned, and which may indicate the need for a slight modification in this statement One of them is salt As is well known salt can be washed out of the ground in many parts of the country , probably some villages met the need m tbs way , but it seems likely that salt is one of the first articles m wbch trade grew up, and that merchants earned it round the villages and exchanged it for gram or other produce, as is still done over a large part of the country The other want is iron for tools Even now agriculture is earned on with the aid of a quantity of iron that seems ndxculously small to European cultivators, but a certain quantity is used everywhere in ploughs, reap-hooks, and other implements, and the use has lasted for a very long time It is quite possible that onginally no iron was used in agnculture, but here too it seems likely that iron was one of the first tbngs in wbch trade developed Now let us consider what were the conditions of produc- *? n ,f +1? cu bvators had Land to cultivate, whether they found it vacant and settled on'it, or whether ORGANISATION OF PRODUCTION 99 they obtained it from a Raja in return for the share in its produce vhich was known as revenue And having once got land, they ordinarily kept it, probably because when the population of the country was small there was enough land for everyone For Labo ur, there were the cultivators and the members of their families, and there were the labourers living in the village ; probably these last never thought of going anywhere else and simply obeyed the cultivator’s orders, and took the share of produce which he gave them for their support For C apit al, there was the stock of q attle , gradually increasing m ordinary times, with enough waste land near the village to support a large number there were the implements-made in the village of materials found there, and paid for by a share m the produce , and the produce yielded the se ed-g rain.that was needed Now in these conditions, with no trade to take away surplus produce or to bnng desirable things from outside, it is probable that the wealth of the community would increase very slowly if it increased at all, and that the existing agents of production would not be fully employed There would be produce to spare in good seasons, and it would be stored for the time and consumed when seasons were unfavourable and the crops poor but there would be no motive for producing much more than was hkely to be required, and it is probable that only enough land would be cultivated to support the population dependent on it , and that, taking good and bad seasons together, all or nearly all the produce would be consumed If the population i should decrease, less land would be cultivated, while if it should mcrease new fields would be ploughed out of the waste land, and possibly more trouble would be taken with the land already cultivated Thus such a community could not be expected to mcrease largely m wealth. 100 AN INTRODUCTION TO ECONOMICS Suppose now that a town comes mto existence m the neigh- bourhood of self-supportmg villages of the type that has been described The townspeople will want to buy from the villagers things like gram and pulse, vegetables, milk and ght, oil-seeds, cotton and sugar , and they will be able to supply the villagers with things brought from a distance — new spices and condiments for their food, brass and copper vessels, better clothes than the villagers can produce, jewellery and ornaments, and so on. This makes a great change in the position of the villager ho finds within his reach desirable things of which he has never heard, and he begins to want a share of them for himself (or, if he himself does not, his wife does) , and m order to get them, he increases the amount of his production, that is to say he works harder himself and makes his cattle and labourers do more work, and so either cultivates a larger area or gives more labour to the land already m his possession The village then will produce more than in the old days, and the villagers will sell their surplus to the town, and spend the money which ^ they so obtain in buying the things which the town \ supplies s The village has then ceased to be a self-supportmg group, because it can no longer satisfy all its wants by its own produce, and it is on the way to the second stage of pro- duction, which we have described as * market-production on a small scale,’ because the cultivators are now pro- ducing partly with a view to selling their produce, 1 Let us see how this change will affect the accumulation of wealth In the first place there is no doubt that the produco of the village will be increased , and, as a rule, a large proportion of the money obtained for the extra produce will be spent on esirable things that will last for a long time, such as brass vessels or silver ornaments This means of course ORGANISATION 0}? PRODUCTION 101 that the stock of wealth is increased In the second place when money is received, the idea of hoarding it, which is part of human nature, is sure to make its appearance, and cultivators will work harder and produce more wealth merely in order to increase their hoards, and m this way too the stock of wealth will accumulate The villagers then will tend to grow richer. At first sight it may seem that this conclusion apphes only to the cultivators, and most probably they would be the first to benefit But if the town wants labourers, as is likely to be the case, it will look for them in the villages, and the wages offered may tempt some of the village- labourers into the town. There would then be fewer men to do the increased work on the land, and the cultivators would have to induce them to work harder by offering them something more than the share of the produce that was sufficient m the old days, and so the labourers would m tune get their remuneration increased. In the same way the workmen and servants would'be' attracted to the town by the higher wages offered there, and it would be necessary to pay them more in order to induce them to stay in the village, so that the increased wealth would be shared by all classes, though by no means in the same proportions Now a change of this sort has been going on slowly m India during the last few centuries For the sake of clear- ness we have supposed that the conditions changed sud- denly ; this probably happened m a few localities where a new capital city was established, but over most of the country the change has been gradual Trade has extended slowly, traders haye_come_ Jo_the_yifiages to buy first one kind . of produce- and— then -another-, and_ mj-the same way. first _one -desirabl e.. thi ng a nd t hen another has been brought within the reach of the villagers The 102 AN INTRODUCTION TO ECONOMICS ch ang e is still in progress some parts of the country have advanced much further than others but the general effect has been to mcrease very greatly the produce of the land, and the wealth of the people w ho share it 1 The change is not complete there are very few localities in India v here agriculture has reached the second stage, and (as has been said above) it is possible that it will never be reached com- pletely 2 For illustrations of this stage « o must turn to the towns 1 This doo3 not mean that oil classes of the people oro bettor off than they were some have gained much moro than others, and some may have lost , but this question concerns primarily the Distribution, and not the Production of Wealth 1 If a village had completely reached the second stage, cultivators would sell all their produce, and would go to shops to buy oven their food , this actually happens in some countries, but no ono who knows how Indian cultivators live will expect to see it m India until the whole hfe of the country changes CHAPTER XIV. ORGANISATION OF PRODUCTION * THE ARTISAN STAGE We have now to examine the second of those stages of production which we have selected for consideration It is distinguished from the first stage by the fact that^ the producer does not attempt to satisfy his wants directly by those desirable things .which he produces h e intends mos t or all of these things to satisfy the wants of other people, and he supplies them to other people in exchange for payment The payment may be made in the form of things which he wants to consume, such as gram, but more usually it is made in money, with which he can buy the things he wants This stage is familiar in every town m India, for it is the position of the great majority of the artisans The weaver, the dyer,_the brass-worker, the shoemaker, — these men cannot satisfy more than a very few of their wants with the actual things which they produce they must sell their produce, and feed and clothe themselves with things bought with the money which their produce brings Let us examine their economic position in regard to the three factors of production *- " First, as regards Land The amount of land which they require is usually very small, much less than even a small cultivator needs , but, as we have seen in Chapter VI , its 104 AN INTRODUCTION TO ECONOMICS situation is a matter of great importance '.The artisan must he in a place where customers will know where to find him , not only, that is to say, must he bo in a town, but often he must be in a particular street or lane where the business in which he is engaged is known to be earned on A shoemaker, for instance, wall pay what for lnm is a large sum as rent to secure a shop in the street w hero people are accustomed to go to buy shoes, and he would not pay so much for a shop of the same size m a gram-dealer’s street Thus, though an artisan needs very little land, it is often not easy for him to get it exactly m the place where he wants it, and his rent may take a considerable portion of his mcome Secondly, as regards Labour The artisan and his family as a rule do most of the manual work, though he may have to hire one or two labourers to help j Ordinarily he uses only a few kinds of material and makes t hin gs of only a few patterns , he thus goes through the same actions over and over agam, and acquires a very high degree of skill m performing them But besides doing the manual labour of production, the artisan has to carry on the business also This means that he has to choose the material to be used, agree on its price, decide what particular t hin gs to make and how many of them, fix their price, and find people who will buy them A man in the self-supporting stage has also to do the busmess, as well as the labour, of his occupation, but the busmess is easier for him than for the artisan produemg for sale, because he has to think almost entire ly o f satisfying his own wants, while the artisan has to satisfy the wants of other people The artisan then must know what other people are likely to want, and this is much more difficult than knowing what he wants himself If he makes a mistake, he finds that he has wasted his labour ORGANISATION 03? PRODUCTION 105 and Ins material in making things which nobody will buy , and if he cannot sell them, he has no money to buy more materials, or to feed himself while he is making other things In the early stages of the progress of a community, this necessary knowledge of business is not beyond the reach of the artisan People then have comparatively few wants, and they do not change rapidly, while on the other hand, with little trade, there is usually not much choice of materials But os we shall see when discussing Consumption, the eco- nomic progress of a nation means an increase in the number and variety of wants, and a larger choice of the means of satisfying them ; it thus becomes more and more difficult for the ordinary artisan to keep pace with these changes, and where he fails to do so, his labour and material is wasted The weaving industry furnishes a good illustration Not very long ago, practically everyone in India, except a few of the richest men, wore cotton clothes made on hand-looms by the artisan-weavers of the locality. Only a few lands of cloth could as a rule be got locally they were well-woven and durable, but coarse, and people dressed very much alike But now, even in the country, people have a much wider choice of clothes They can buy the old type of country-made cloth , or finer cloth woven in the mills of Bombay or Cawnpore : or still finer cloth woven in Europe, from cotton grown m America or Africa . or they can get cloth made of wool or of silk if they are prepared to pay for it People then can satisfy their want for clothing m various ways, hut the country weaver has not the materials, or the tools, or the knowledge, required to produce the lands of cloth that are most wanted, and the demand for what he can produce has consequently fallen off until he some- times finds it hard to sell his cloth at ah 106 AN INTRODUCTION TO ECONOMICS While then the artisan working for himself has the incentive to hard work arising from the fact that his income depends entirely on his skill and industry, his weak point is his inability to keep pace with changes m wants and with the development of new markets , and thus the economic progress of a country may often result in injury to the artisan’s position Then as regards Capital The needs of artisans vary greatly: some need expensive tools others require few tools hut have to spend a great deal on materials while others, whose work takes a long time to complete, need a relatively large sum to live on until their w ork is ready for sale But all are alike in needing Capital for some or all of these purposes They are fortunate when they possess this as the result of their own savings or the savings of earlier generations of their family they are then free to work for their own advantage, and — so long as their business-ability is sufficient for the conditions in which they live — can hope to produce more wealth than they need consume, and thus can save and increase their stock of wealth ' But very often they have not all the Capital that they require, and have to borrow some of it and then the interest which they pay may be so high that what is left of their income after paying it is only enough to keep them alive, and leaves nothing over which they can save Their position thus depends very largely on the rate at which they have to pay interest, a point that will be discussed under Distribution , but m India at present the rate of interest is so high that a large proportion of the wealth produced by artisans is paid to the people who lend them Capital, and consequently the artisans as a class have not much margin for saving They produce wealth, but most of what is left over after pro- viding for their subsistence is taken by the owners of ORGANISATION OF PRODUCTION 107 Capital ; and the high charge for Capital is almost as great a drawback ns is the difficulty of keeping pace with the increasing diversity of wants As w e indicated in the last chapter, the Indian cultivator has to some extent passed bc3*ond the stage of self-support- ing production, because some portion of his produce is grown for sale, but he has not yet reached the second stage in which wo find the artisan, and it is doubtful if he will ever reach it completely But in so far as he produces for the market and not for his own consumption, he has difficulty, just like the artisan, m managing his busmess — that is, in knowing what to produce and how to sell it. The difficulty was not great in the simple case which we first supposed, of the cultivator selling to the inhabitants of a neighbouring towm , but it becomes very serious when trade has so far developed that the produce is taken for sale to distant places, and has to compcto with produce from other parts of the world It is at present impossible for the cultivator to know what lands of wheat or oilseeds, for example, are most w’anted m England or Germany, and though produco of this land is hardly ever likely to be entirely wasted for want of a market, he may lose a great deal of money by produemg kinds which are little wanted instead of lands which are much wanted and wiuch will fetch a lughcr price Again, cultivators may have devoted themselves to producing some particular thmg that has been wanted elsewhere, and then find that the want has ceased to exist or is being satisfied in other ways , they have then to change their methods in a hurry and plan out other W'ays of usmg their land, while they lose tho advantage of the skill which they have acquired in growing that particular crop. This has happened quite recently in two instances in northern India indigo has 108 AN INTRODUCTION TO ECONOMICS almost disappeared from large areas where it was exten- sively grown, because the want which it met is now satisfied by a dye prepared by chemical processes , and many cultivators have had to give up sowing poppy because the Chinese will no longer buy as much ot the opium pro- duced from this plant as they formerly took An d while the cultivator is at a disadvantage m not knowing accurately the wants of people at a distance, he may suffer also because people at a distance have been able to discover the wants of India and are able to meet thorn better than he can This, too, has recently happened in the case of sugar large classes of people in Indian towns and cities find that they can satisfy their wants better with sugar brought from foreign countries than with the land of sugar which the cultivator makes, and so cultivators in some paxts of the country have difficulty in selling their sugar and are produemg less than they did The cultivator also suffers, like the artisan, from the high cost of borrowing Capital when he needs more than he possesses, and his need for Capital has increased since he began to produce for distant markets , more Capital is needed to grow wheat than to grow barley, and much more is needed to grow sugarcane , the produce of the new crops represents more wealth than the old, but when the cost of Capital is high it may take the whole of the extra vealth and leave the cultivator no better off than before W hilc, therefore, the increase m trade has greatly increased the zenith of tho country, a large share of this increased ■wealth has been taken by the people who have Capital to lend Thus tho cultivator, so far as he produces for the market, suffers from tho same drawbacks as are felt by the aitisan ORGANISATION OF PRODUCTION 109 business is increasingly difficult to manage, and Capital is dear , mid the more nearly the cultivator approaches to the second stage of production, the more apparent do the drawbacks become ) CHAPTER XV. ORGANISATION OF PRODUCTION: THE FACTORY STAGE. We now turn to the third of the stages of production which we have chosen for examination , In this stage we find large numbers of _ men working together under the direction of an employer J This, as we have said, is the condition which industrial production has now reached in most of western Europe, where the independent artisan is of com- paratively little importance, and the same condition has in recent years been established m the case of some in- dustries m India, particularly mining and spinning It is rare m the case of agriculture, and at a later stage students will have to study the reasons for this fact , but the production of tea is to a great extent effected on this system A simple case may be taken as a first illustration Sup- pose that a man persuades 100 hand-weavers to set up their looms in a building belonging to him, and to work . for him in return for wages (which may be fixed either by the duration of work or by the quantity of cloth woven on each loom) - The employer buys the yarn and other materials, decides what kind of cloth is to be made, and arranges for its sale , and he keeps for himself the money realised by sale The first effect of this arrangement is ORGANISATION OR PRODUCTION 111 obvious • the business is separated from the manual labour. The weavers have no longer to think and plan, but merely to make the kind of cloth which the employer orders , all the thinking and the planning are done by the employer The next effect also is obvious the weavers have no longer to provide Capital, for the materials they need ate supplied to them, and they live on their wages , the employer has to find the Capital for buying material as well as for paying wages. This arrangement, then, would remove both the mam drawbacks of the life of the artisan, as described in the last chapter; as was there pointed out, the weaver can weave, but he has difficulties both m business and m getting Capital. If there were no other changes in the methods of production, it might pay a business-man to make this change, because his greater knowledge and skill in business would enable him to get material cheaper and to sell cloth dearer, while he would be very unlikely to make anything that could not be sold. On the other hand, it is probable that the amount of cloth produced under this arrangement would be less than when the weavers were working independently, because they would have less incentive to hard work. They need only work hard enough to avoid being fined or dismissed, whereas before they worked their hardest in fear of starvation But this question does not, in fact, arise, because changes in the methods of production would be bound to follow. The first change to be considered is known to economists by the name of Division of Labour. Everyone knows that an artisan-weaver does not spend his whole time sitting at his loom every now and then he has to leave it to prepare a new 1 warp,’ the name given to the threads of yam that are stretched on the loom. Weavers can be 112 AN INTRODUCTION TO ECONOMICS seen at this work in every town the warp is stretched on sticks, usually by tho roadside, and certain substances (known as ‘ sizing ’), are spread on it and brushed in until they have been absorbed in the yam. Much o£ a weaver’s time is spent on this work , but where many men are employed, it is much better for Bomo of them to spend all their time on preparing warps while the rest do not leave their looms Thus the labour of weaving is divided into two parts, the preparation of tho w arps and tho working of tho loom hence tho expression Division of Labour. Similarly the labour of preparing the warp would again be divided, 6ome men being employed only m making tho sizing, and others in putting it on tho yam the work would be so distributed among the weavers that each would make only one kind of cloth, and the most skilful men would make the finest kinds , one or more men would be told off to keep tho stock of yam, to measure the cloth made, to send it to purchasers and so on , and a carpenter would probably be kept to repair tho looms, and make new pieces to replace those that wear out Thus there would no longer be 100 weavers, each domg all the work of an artisan, but there would be several grades of work m the factory, and the workers of all grades would be organised by the employer so os to make as much cloth as possible, and at tho lowest possible cost The numerous advantages m production which are secured by Division of Labour are set out in detail in most of the larger treatises on Economics The most important of them probably are (1) the development of. skill when a man spends his whole time at one land of work , and (2) the possibility of getting from each workman the best work of which he is capable The first of these needs little explanation beyond what has been said in Chapter X. ORGANISATION OR PRODUCTION 113 regarding the acquisition of skill . the fewer motions a man has to execute, the more nearly perfect will he become m their performance As regards the second, some kinds of work are more productive and at the same time more difficult than others A weaver who can produce a pattern in fine cloth can earn more than one who can only weave plain, coarse cloth • when working for himself, he may sometimes have to make coarse cloth because he cannot sell the better quality , but when working in a factory he will spend all bis time doing the best work of which he is capable, and the sale of the produce is the business of the employer One great advantage then of the factory-system is the possibility of introducing, diyrsion-of-labour, which results in increased produce from the same number of workers, and also probably in a better quahty of produce due to the greater skill that the workmen acquire _ The second great advantage is the possibility of using machinery A first glance into a large factory is very confusing . there is steam, and noise, and there are many pieces of metal moving very quickly in complicated ways , but if a student can look closely at any one of the machines, he will find that it is doing exactly the same kind of work as a labourer or artisan though it is probably doing it more quickly and on a larger scale If, for instance, he can examine a faetory-loom, he will see that the shuttle flies backwards and forwards just as it does in a hand-loom, only that it goes more quickly, and that each thread left by the shuttle is pressed into its place before the shuttle returns just as with the hand-loom , the processes are exactly the same, but the parts of the factory-loom are moved not by the muscles of workmen hut by the engine, which is caused to move by steam pro- duced in the boiler The new thing is in fact not the H 114 AN INTRODUCTION TO ECONOMICS loom itself but the way in which its parts are caused to move , and this is true of practically all the machines that can be seen m factories It is possible to make a machine which will perform any regular motion that a man can perform, 1 either moving things back and forward, or moving them up and down, or moving them in a circle , and m all factories the question whether any particular grade of work shall be done by men’s muscles or by machines is simply a question of cost, and mac hin es will be used if they can do the w ork more cheaply than men In the weaving factory which we have taken as an illustration, it is probable that the employer would find that he could do better business if he put up an engine and power-looms m place of the hand-looms with which he started He would then be able to produce a very much greater quantity of cloth with the same number of workmen, because the men would no longer have to spend their mus- cular energy in working the looms, they would be employed in starting and stoppmg them as required, and m seemg that everything was going right This change would mean that the skill which the weavers had acquired is no longer of much use a well-made machine is more skilful m this sense than any man, and it can be trusted to go on making the required motions as long as it is kept m proper order. In place then of the weaver’s skill, the employer wall now want a different kind of skiU, that of the mechanic who knows how to keep machines m order , and he might decide that it is useless to keep skilled weavers, and might employ xnontal C nropLqM Q 6 f T 6n 136 ™ ac * a to perform some of the simpler ^ ’ l 1US machlnos add up figures are now vexy =^T Pl °7 ed m P arts Europe They are as yet httte ™ '“T ClerkS able 40 do “"thmotio can be got for ”" P ™ i *° th0 “ *>“» »« p.,d m ORGANISATION OR PRODUCTION 115 women and children to look after the looms at lower wages, under the supervision of some trained mechanics The introduction of machine-looms would not be the only change Machines would also bo introduced for preparing the warps instead of having this done by hand, and also for various incidental processes ; and the employer might decide to add a spmnmg-mill so as to prepare the yam which he requires There would then be a large factory, producing probably far more cloth than was formerly produced by the weaver-artisans in the neighbourhood, and producing it at less cost, so that people who want cloth could satisfy their wants more cheaply than before. The factory would provide employment for a large number of people , but on the other hand it might deprive most of the artiBan-weavers of the locahty of their means of hvehhood, because there would be no purchasers for what they could produce It must not be supposed that most faotones grow up m the way that has been described for the sake of illustration , the first factories did probably grow up gradually, but now that the nature and methods of a factory are well understood new lactones are planned with complete equipment arid organisation, and in some industries at least this designing of factones forms a separate profession But whether factones are set up complete, or whether they develop gradually from small beginnings, the general features of the factory-system are the same These features may be recapitulated as follows : (1) The business of buying, selling and managing is separated from the actual work of production the business is managed by the employer, and the work is done by the workmen whom he pays. (2) The workmen have nothing to do with the supply of capital, which is part of the employer’s business, and of 116 AN INTRODUCTION TO ECONOMICS course they have nothing to do with tho provision of land , they have to supply labour only (3) The factory is so organised by introducing tho division of labour and the use of machinery as to reduce tho cost of producmg to the lowest possible point ; and this organisa- tion makes the production much greater than would result from the same number of men workmg independently (4) The introduction of tho system, while it increases the amount of tho wealth produced m proportion to the number of persons employed in production, may deprive some classes of the people of tho only skilled work Minch they know how to do Students will easily see that the factory-system requires a much larger amount of capital than the system of small production Buildings, steam-engines and machinery are all very costly, and a large sum is also required for what ib called working-capital, that is, for buying materials and for paying wages and other expenses that must bo met before the produce is sold In fact, the factory-system is not generally possible until a country has made considerable progress in organism g methods of bringing the savings of individuals together in sufficient quantity to be used for large enterprises The development of such methods is the next subject that claims our attention. CHAPTER XVI. ORGANISATION OP CAPITAL. The organisation of capital is a subject of interest tc students of Economics m all countries, but m India at the present time its importance is exceptionally great We have just seen that the ind us trial progress .of the country is dependent on this organisation, and the same thing is" true of“its ’'agriculture , the Indian cultivator needs, more than anything else, facilities for obtaining capital on reasonable terms in order that he may get the best results from the land which he occupies and the labour which he furnishes It is no exaggeration, therefore, to say that the organisation of capital is indispensable^ to the developm enV of 3he V , ealth of the' whol^ country "WeTiave seen that the accumufation-of a.stock of wealth i s, natu ral, in the strict sense of that word , that is to say, ordinary people are likely to save up a stock of wealth when they have the opportunity of doing so, and the opportunity comes when they can satisfy their immediate wants without consuming all the wealth which they produce It is doubt- ful, however, whether the use of accumulated wealth as capital can be called ‘ natural ’ m the early stages of most communities the intention of usmg the stock of wealth to produce more wealth is not generally apparent, and a large portion of the stock is more probably intended for 118 AN INTRODUCTION TO ECONOMICS consumption w lien the need arises Certainly in India^only a small part of the existing stock of w ealtli has been eared in order to be used as capital probably most of it has been saved pnmarly m order to enable the owners to live through a time of fammo or some similar calamity And so long as a man hves in fear of being robbed, it is not hkely that a large part of Ins savings will bo used for production , ho is more hkely, as we have said, to keep them in gold and silver, which can be hidden or earned safely from place to place When a strong government has been established, the motive for such action ceases, but the habit remains , and even now the * natural ' course for a very largo number of the inhabitants of India is to keep their stock of wealth concealed, or as the phrase is to hoard it There is thus in the country a vory large stock of wealth which is not capital, because it is not intended to be used in produemg wealth some of it is well known, as in the case of the hoarded treasures of some Rajas and Nawabs , but tho bulk of it probably consists m the small sums of money w hich ordinary people keep hidden away until they find it necessary to spend them Conditions are different in some other countries, where the practice of hoarding is rare, and where people save up a stock of wealth with the distinct intention of employing it m production and of gettmg an income from its use ^ and since the employment of savings in production is a necessary condition for a largely-mcreased production of wealth, it is important to see how this employment is managed A cultivator or an artisan needs, as we have seen, some capital for his work but he may have a larger stock of wealth than he needs to use as capital , and the same is more generally true of landholders, officials and professional men, while even labourers often have small savings available for employ ORGANISATION OF CAPITAL 119 ment When the owner of capital cannot himself employ it in production, he usually lends it to some one else who promises to pay interest for its use , and this practice is of course common in India in the case of those classes who make a profession of money-lending as well as m other cases. But it is sometimes difficult for a man who wants money to know who will lend it, and it is very often difficult for a man who has a httle money to know who wants to borrow it , 1 the first great step in the organisation of capital is the pro- vision of intermediaries who will take money from those who have it to spare, and will lend it to those who need it These intermediaries are known as Banks ' Banks perform a large variety of functions, winch students will have to study m detail at a later period of then course , but their primary function is to collect capital from the people who possess it, and lend it to the people who want it )(ln order to collect it, a bank announces its willingness 'to receive money on deposit, and promises to pay interest for its use, and to return it at a fixed period after receiving notice that the owner wants it back , and people who trust ths bank, that is who beheve that it intends, and is m a position, to carry out its promises, hand their money over to it) On the other hand people who want to borrow money go to the bank to get it, and the bank will lend it to them if it trusts i them to pay the interest and to return the money when the period of the loan has expired Naturally, people will not do the work of a bank for nothing it aims^to_p_ay as low ( interest as possible.. on_deposits, and to charge .as high ' interest as possible on loans , and the difference between ‘,what it receives and what it pays constitutes its income, 'part of which is used in paying salaries and other expenses of management, while the rest is kept by the owners of the t bank. 120 AN INTRODUCTION TO ECONOMICS Banks arc now familiar institutions m most Indian cities. The early ones were started "by Europeans who were familiar with the system m their own countries, but the system is now being adopted by Indians who have seen its success At present we are concerned only with the aid which banks provide m production , this may bo very great, because they can lend the capital required by employers in order to buy materials and to pay wages and other expenses of production, the loan being repaid when the goods made are sold , j and m fact a large proportion of the rcsouices of banks are employed in this w ay, and the system of factory- production is thus very greatly facilitated.) The ordinary banks cannot, however, provide all the capital that producers require, nor can they collect all tho money that is available for use as capital Their chief limitations are two (1) They cannot safely lend a large proportion of their capital for such purposes as the purchase of buildings or the purchase of machinery (2) They cannot either lend or borrow in small sums (1) We have said above that a bank must be ready to repay money deposited with it when the depositor wants it , if it is not ready to do this, people will not trust it with their money Now suppose a bank has lent all the money it possesses to men who have spent it m building factories and setting up machinery, and then the depositors want t eir money back The bank has no money to pay them , it as only the promises of the men who borrowed the money, and if they cannot borrow it somewhere else, then the bank must tell its depositors it cannot pay them In other words it is bankrupt, and it is most unlikely that onyone would ever trust it with a deposit again This is ORGANISATION OF CAPITAL 121 nn extreme case, but it illustrates one of the fundamental principles of banking, that the bank must always be m ai position to pay what is duo from it, and that most of its , money can bo lent only for short periods and with a reasonable certainty of getting it back at the end of the' period While therefore a bank is ready to lend money to an}’ employer whom it trusts, to be used m the expenses of his business and paid back after a short penod, it will very rarely lend money for purposes such as building a factory or buying machinery. (2) In practice banks find that the expense and risk of dealing in very small sums is so great that no profits result. Some banks, which are anxious to got capital together quickly, may lake deposits of as little as ten rupees, but it takes a long tune for a man with a small income to save as much as this, and, in order to make the savings of the people available as capital, institutions are wanted which will take every rupee as it is saved 4 Similarly a bonk will not lend to ordinary cultivators or to artisan-producers, because it could only trust them with very small sums, and it is not \\ orth its while to lend a rupee or two at a tune. Banks then by no means complete the organisation of capital that a country requires for production One great need is for a system of supplying capital for purposes such as starting and equipping factories the other is for dealing with capital m sums too small for the ordinary bank to handle The first of these needs is met by the establishment of what are known as * joint-stock jpr * limited * companies. 1 1 * Joint-stock ’ means that people join their capital together , stock, it will bo remembered, is the old word for capital The word 4 limited * has o history Undor ordinary law when people join their capital m an undertaking, each of them is liable for all the debts of the undertaking, not merely up to the amount he has contributed but ud to the whole of his possessions It is obvious that people 122 AN INTRODUCTION TO ECONOMICS There are, of course, a few men rich enough to build factories and set up expensive machinery with their own capital, and many small factories (such as cotton-ginning mills) have been started in this way in India But large factories, such as spinning mills or ironworks, require each many lakhs or even some crores of capital, and if they are to be started m considerable numbers it must bo done by the contributions of many people > When a few men decide to start a factory, they usually form themselves into a limited company, and ask other people to * take shares,’ that is, to subscribe fixed sums of ten or fifty or one hundred rupees towards the capital which the company requires. If enough shares are taken, the money received for them is spent in setting up the factory, further capital for working DeCeSSary tom a bank > ™d the profits m i ll M 07 &re dlstnbuted to the shareholders mT i ) amOUnt ° f their 8hares Thus a land- avidST a P f r* ° r u amaglStrate > or anyone with capital ormte miH an tabe . shares ’ m ^nworks, or cotton mills, or jute mills, or coal names, or other productive industries, de^r^ retUm aU mooIne > the amount of which ol ’ t hewf' ! T C6SS ^ ^ 0h th0 nidustry is earned If he wants his money back, he cannot as a rule claim P«2* ^iatSLt 0 raanag°e?St 0 i theS ® t* 1 ™ 3 - w hon an incom- fchem to poverty, and the svstonfnf d ®kta that would reduce remove this drawback. A mm™ ‘rrutedh ability was devised to formalities (one of which is the use n^iT** 1011 . J com P hes with certain has the imvik™ tv™ ? se of .tho word ‘ limited ’ m its title), F aank #.1 1 mm . . •’ has the privilege that ttie habih tv of 'en T? ' ^ the amount of his share if h? f eaoh s harelioIder is limited to o ioo™p. K «?. . «h«e nftv .. ^ , /» w in any lt P >™ r ! an thl3 » he may lose it A man who takes a share m° f P ro P erfc y is m no way hnowB that his liability is limited & lmuted ’ company thus OBGANISATION 03? CAPITAL 123 it from Iho company, but he can sell Ins share ; and on the other hand a man who has money can buy shares m existing companies instead of contnbutmg to new ones The busmess of buying and selling shares is now so large even in India that there are brokers in Calcutta and Bombay and some other cities who make it their principal occupation, and arrange for buying and selling shares m compames, just as other brokers arrange for buying and Belling wheat, or coal, or ]ute Thus a man who has capital to employ, but does not want to engage in production for lnmself, has , now two waj T s of disposing of it he can deposit it with a bank and receive interest, or he can go to a sharebroker and buy shares m some compames, in which case he receives the profits due to those shares by way of income. The variety of compames is very great, and there are often different kinds of shares, while important questions arise m practice as to their constitution and management The whole subject will require much study at a later stage our present purpose is merely to show the function that these compames perform in production , they can collect a large capital m relatively small sums, and thus make it possible for men of enterprise to start a factory with much more capital than they themselves possess But though the shares in a company may represent relatively small sums of money, they are not small enough to attract the savings of the poorer classes. Special . * institutions to, effect this object have been established in many countries under such names as savmgs banks, people’s banks, provident societies and the like, which are designed to receive very small sums, in some cases as httle as an anna at a time Various lands of banks too have been devised to meet the needs of small producers for capital by giving loans in very small sums. In India there is as yet no general 124 AN INTRODUCTION TO ECONOMICS organisation 1 to servo these purposes, and small savings are usually hoarded improductively, "while email producers have to pay very high interest when they borrow from moneylenders , but there is good reason to hope that the need will be largely met by the co-operative societies which in the last ten years have been organised in considerable numbers This movement will engage the student’s attention at a later stage , at present we are concerned chiefly with the fact that the organisation for supplying capital for use in production is m India still very incomplete Considerable progress has been made towards enabling t the well-to-do man to invest his savmg 3 m production, but cultivators and workmen have neither convenient means of mvestmg their savmgs, nor convenient means of obtaining additional capital 1 The nearest approach to such an organisation jb the Post Office Savings Bank , it receives very small sums on deposit, but it does not lond money to the public CHAPTER XVII. SPECIALISATION OF THE FACTORS OF PRODUCTION. We have now described three typical stages in tho gradual development of production that has taken place in tho world ; before leaving this subject it is dcsirablo to direct attention to one general principle which can be found among the ch inges that lead gradually from one stage to the neat Thi= principle can bo spoken of as Specialisation,, and it may be stated as a law in the folio wing terms ~ The tendency is for Land, Labour, and Capital to become more and more demoted to satisfying some particular want, and at the same tuno to become less avaiiablo for satisfying other wants The meaning of this statement will bocomo plain from the paragraphs that follow In the first stago of production which we considered, when a village or group of villages satisfies its own wants by the things which it produces, tho land which is cultivated cannot bo described as devoted to satisfying any particular want , it is used to satisfy most of tho wants of the village, for food, clothing, light and the rest. Progress towards the next stago, in which cultivators produce for a market, is marked by gradual specialisation experience shows the people that tho sod and climate of different parts of the country are more suited to one crop than another , then each crop is grown more widely m the villages where it does 126 AN INTBODUCTION TO ECONOMICS best, and each village tends to givo up those crops that are most difficult to grow successfully For instance, there is much evidence to show that formerly most localities in northern India grew both sugarcane and cotton, the former to supply the inhabitants "with sugar and the latter to furnish material for their clothes But this condition no longer prevails it is now comparatively rare to find a locahty that produces both sugar and cotton in large quantities The two crops do not require ]ust the same climate, sugarcane wanting a moister atmosphere than cotton , and sugarcane is now more largely grown in the relatively damp country near the Himalayas, while cotton is found mainly in the drier country to the south and west Many villages, that is, no longer satisfy the wants of their inhabitants for sugar, because it is cheaper and more convenient for them to buy sugar than to grow sugarcane , and many villages grow no cotton at all because they can buy the clothes they want with the money they get for their sugar or other produce This specialisation of Land is undoubtedly an advantage from the point of view of production, because the land is used for the crop that grows best on it there is, however, the draw- back already mentioned, that the cultivator has to know what is wanted by people at a distance, and may find his business seriously upset by a change in their wants Specialisation of this kind is not confined to the case of particular localities in one country, but apphes to the whole world thus practically all the tea that is drunk m Europe, Africa, America and Austraha comes from three parts of Asia China, Ceylon, and a limited area in Bengal and Assam , while the ]ute grown in a few Bengal districts makes the sacks in which nearly the whole of the world’s trade m gram and oilseeds is carried. SPECIALISATION OP PRODUCTION 127 Another instance of the Specialisation of Land is found m the localisation of particular industries Even m the stage of market-production on a small scale this localisation has begun * particular towns, and particular streets in the same town, get a reputation for some particular product, — leather-work, or brass-ware, or whatever it may be, people go there to buy the things for which the place w known, and artisans go there because they know that they can sell their produce, and that the materials which they need can easily be procured Thus, almost everyone m northern India has heard of the brass-ware of Moradabad, or the silver-work of Lucknow, and these cities supply their wares not only to many parts of India but even to foreign countries When the factory-system establishes itself, the considerations that determine where an industiy shall be earned on are somewhat different, but the result is the same each industry tends to be established m one or more localities, and cities or towns become specially adapted to the needs of a few mdustnes Thus, almost all the jute mills in India are close to Calcutta ; Bombay, Ahmadabad and Cawnpore are> known as the chief centres of cotton-spinning, and so on/ This localisation of mdus- tnes conducted on the factory-system has important results for production, which are discussed in the larger treatises on 1 Economics , at present we are concerned only with the fact of localisation, that is with the specialisation of par- ticular localities for production of a particular kind Next as regards specialisation of Labour This exists to some extent even in villages, where we find artisans such as carpenters or potters, and servants such as washermen but most of the residents in a village are employed in the large variety of operations that are included in the term cultivation , and even the artisans and servants often spend 128 AN INTRODUCTION TO ECONOMICS part of their tune in this less-speciahsed work, since the carpenter and washerman and so on frequently cultivate some land in addition to domg their specialised -work It is not difficult for us to think of a village without these specialised workers cultivators and their families could make their own implements and do all their own work, but we can see that even in the villages that have made least progress this process of specialisation has begun When we come to the second stage, the specialisation is obvious the artisan satisfies very few of his own wants directly, but depends for his livelihood on his success in satisfying a few particular wants of other people \ Thus, the brass-worker can satisfy no want of his own except a want for vessels or other t hin gs made of brass , in order to get food and clothes and satisfy all his other wants he must find other people who will be satisfied with what he has made And m the third, or factory, stage of production, this process of specialisation is as we have seen carried much further the whole business -part of production is done by one set of persons, and the labour by another set , and only a small proportion of the workmen could satisfy any single want of their own The person who merely knows how to manage a machine-loom could not make a piece of cloth by hand any more than the driver of the engine could , he can only carry out one step m the series of processes by which yam is made mto cloth, and his work is useless without that of the other grades of workmen who carry out the remaining steps And in the same way the tendency is for Capital to ~come more ^and more specialised Economists usually divide capital into two kinds, which are described asj fixed’ and circulating ’ circulating capital is consumed in a single use, or, in the words of Mill, “ fulfils the whole of its SPECIALISATION OF PRODUCTION 129 office in the production in which it is engaged, by a single use ” , fixed capital lasts longer and is frequently used, or, to quote Mill again, “ exists in a durable shape, and the return ” to it “ is spread over a period of corresponding duration ” Thus materials, fuel, and money or gram for paying wages are circulating capital, but buildings or machinery are fixed. Now the whole tendency of the change in methods of production is to increase the amount of fixed capital, and to employ more of it in a highly specialised form The cultivator has very httle fixed capital most of it — his cattle — can be used to do almost any land of work, and his fow implements help to produce the means of satisfying almost all his wants. The artisan too uses httle fixed capital, but it is more specialised the tools of the brass- worker for instance are of httle use except for working brass In factories the use of fixed capital is very greatly mcreased parts of it, such as the buildings and the engines, are not absolutely specialised because they could be used (to some extent at least) for production of a different kind to that for which the factory was designed , but most of the machines, as distinguished from the engines, are very highly special- ised indeed, and will serve no purpose except that for which they were made. And the process goes even further, because as the factory-system develops, factories are set up to make machines for use m other factories 2 „ 6 „ n „ 8 „ Si 10 „ 10 „ 6 „ 10 „ CHANGES IN A CONSUMER’S DEMAND 167 The same sort of chango would have to be made m his Demand Schedule for all the commodities which he stall uses, and in this way his reduced income would be distributed so as to secure him as much utility as is possible m his altered circumstances. On the other hand, if his income were largely increased, the changes m his Demand Schedules would be in exactly the opposite direction , he would now be able to satisfy his want completely at a rather higher pnce for each commodity, he would continue consumption at prices where with a lower mcome he would have had to give it up, and between these limits he would be able to buy rather more than before at any particular pnce His Demand Schedules would be raised throughout When a large change of income takes place suddenly, aman usually alters his way of life, and for the time being he has few habits to aid him in settling his expenditure , but he copies the habits of his neighbours, and the new way of life very soon becomes habitual, and then (as before) much of his expenditure is regularly incurred, and he has to think mainly of the point up to which he shall carry his consump- tion of particular commodities His position then is just the same as before, except that the Demand Schedules have been raised or lowered as the case may be, — raised if his mcome has increased, and lowered if it has been diminished Where the change of mcome is gradual, as in the case of a pleader whose practice is improving, or of an official whose pay rises by small periodical increments, the changes m Demand Schedules are also gradual , the consumer’s way of life is not changed suddenly, but the result in the long rim is the same Students will see then that the figures in a man’s Demand Schedule must necessarily change with each change in his mcome, but that the general form of the schedule does not 168 AN INTRODUCTION TO ECONOMICS change , m every case there is an upper limit and a lower limit, and between these limits the quantity demanded mcreases as the price falls and diminishes as the price rises The relation between Wants and Demand will be apparent from what has been said above A man feels a Want, and that is all that can be said about it , his Demand for a commodity to satisfy the Want vanes with the pnce of the commodity in the way that has been explained A coohe probably wants ghi for his everyday food, but bis Demand for it does not interest the sellers of ghi, because he would only buy it at a pnce very much lower than that which prevails If however the price of ghi were to fall bo much that the coohe could buy Borne of it every day, then his Demand would become effective, and it would then interest the dealers On the other hand, as the price of- ghi rises, it may become m excess of the upper limit of the schedules of many consumers, and as they give up its use, their Demand for it ceases to be effective To take an extreme case, if the price were to rise so much that ghi could only be bought for its weight in gold, there would be very few purchasers left m India , the price would be so hi gh that no ordinary person would t hin k of making a purchase, and ghi would be bought only by one or two men m any city, who might be willing to buy small quantities for use on special occasions Ordinary people would continue to want as much ghi as before but they could not possibly demand it at that price CHAPTER XXIV DEMAND OF A COMMUNITY So far we have spoken of the wants and the demand of individual persons The student must know first the nature of these, because communities are made up of individuals, and the demand of a community is made up of the demand of the individuals whom it comprises , but he must also know the nature of the demand of a community, because the science deals with communities rather than individuals If nearly all the members of a community enjoy about the some income and live in the same style, then a Demand Schedule drawn up for an ordinary individual of the com- munity will represent with fair accuracy the demand of the community if the quantities Bhown m it are multiplied by the numbers of tho community For instance, if we know that an ordinary student demands two sers of ghi when tho price is one rupee, and if thoro are 1000 students at the college, all living m the same way and spending about the same amount of money, then the demand of this community of students at this price would be just about 2000 sers It is true that tho community would mclude some students who consume lather less ghi than the ordinary student, but it is also true that there would be others who consume rather more, and the excess of consumption of these will, as a matter of fact, just about make good the deficient con- 170 AN INTRODUCTION TO ECONOMICS sumption of the others, so that the consumption -a ill be just about the same as if all the students consumed exactly the same amount This is equally true of the consumption at other prices, so that in a homogeneous community (that is, one where the incomes of individuals and their ways of life do not differ greatly) tho demand of the community ib directly proportional to its numbers and can be accurately represented by a schedule drawn up for any ordinary individual Where the community is not homogeneous, a little adjust- ment is required in order to prepare a schedule that will show the Demand of the whole To make such a schedule it would ho necessary first to prepare schedules for each of the different classes of which the community is comprised, and then to combme them In an ordinary Indian town for instance, we should have to prepare schedules of demand, first for tho large class of families whoso income is from Bix to eight rupees, then for tho class whoso income is between ten and fifteen rupees, then for the class of from twenty to thirty rupees, and so on , and if we knew approximately the number of families con- tamed m each class we could calculate the total demand at each pnee for the entire population of tho town. The preparation of such schedules would require a considerable knowledge of statistics and also some judg- ment m their use, as students will find when they come to study statistics , but tho important pomt is that such a schedule, though it would be longer, would be of precisely the same type as the schedule for an ordinary individual For any commodity there would he a limit of price so high that no one in the town would think of buying any of it ; if there are very nch men living in the town, tins limit might he very high as we saw in the last chapter, hut it DEMAED OF A C03BIUNITY 171 would exist And in the same w ay there w ould be a limit so low that c\en the poorest classes could satisfy their wants completely, though it would be a very low limit indeed And between these limits there would be the fact already noticed that the demand would increase as the price falls, and would decrease os the pnee rises This in fact is the general Law of Demand, and it is true of very nearly every commodity and very nearly every community , a rise in price diminishes demand, and a fall in price increases demand. This law’ has sometimes been stated in such a way as to lead people to tlunk that the relation between price and demmd is proportional, m the arithmetical sense of the word , that is to say, that if the ' pnee is doubled, the quantity demanded would be reduced to one-half, and so on It is certainly not the case that any general statement can be made os to the proportion in the case of all commodities and all communities , enough is not yet known of the facts of consumption to enable us to make statements as to the proportion m the case of particular commodities, and this is a line of study which ought to yield valuable results to Indian economists, who have the advantage of more extensive statistical information than many countries enjoy, especially in the octroi returns of a large number of towns and cities Further study then may make it possible to deduce laws regarding the proportionate variation of demand and pnee m the case of some classes of commodities, which would be a valuable addition to the science , but at present the Law’ of Demand can only indicate that demand will rise or fall, add cannot indicate by how much it is likely to change in the case of any par- ticular commodity lake other economic laws, the Law of Demand is not entirely without exceptions, but they are rare and of little 172 AN INTKODUCTION TO ECONOMICS practical importance. One exception is found in the case of co mmo dities -which have little or no utility except their rarity. At present people pay very high prices for diamonds because they are very scarce and the ownership of them gives distin ction ; hut if diamonds v ere to be sold at the price of glass it is probable that very few people would buy them at all, so that in this case it is not certain that a very large fall in price would be followed by an increase m demand On the other hand it is possible that if diamonds could be bought by the ser or the maund, some new utility would be found m them, that is to say, they might be found useful in satisfying some want other than the desire for rarity, and m that case the demand might be largely increased There are also possible cases where a nse in price may be followed by increased demand In a famine, for instance, the prices of all food-grains rise very high , many people who in ordinary times eat wheat-flour are then unable to buy it and buy coarser and cheaper grains such as millets or barley instead, and the demand for these may thus increase v hen the prices rise Students will find it instructive to see if they can think of other exceptions to the general law ; they will not he able to discover many, hut the attempt to do so will give them a definite idea of the extent to w hich the Law itself is true m ordinary life. The exception last mentioned leads us to a point which requires a short notice m order to make the account of demand correspond more accurately with actual facts. It is rare to find that a particular want can be satisfied only by a particular commodity , as a rule there are several commodities, any one of which will satisfy the want and the use of one of these rather than the others is partlv a question of price and partly also a matter of habit and custom Thus in the case just given the want of food can DEMAND OF A COMMUNITY 173 be «afispcd h\ the use of barley or millets as well ns by the u of -wheat , and in the same wav various vegetable oiJb can take the place of ghu People m a certain position are accustomed to use wheat and ghi, and they keep to these as Ion" as they can ; but whon prices n^e greatly they may find them selves forced to uso tho cheaper substitutes Mtmv jietvons again are accustomed to drmlc spirits to their want for stimulation ; but when spirits are haul to get and very expensive, some consumers will uso other stimulants instead, possibly opium, or drug3 propared fr<-m hemp or other plants, or on tho other hand tea or coffee The effect of this principle is to modify the figures in a Demand Schedule for any particular commodity, but not to change tho shapo of tho schedule itself. Tho extent of its practical importance varies greatly among different communities In those where tho force of custom is strong, people satisfy their wants os long as possible in the wav to which the}- are accustomed, whilo m others they are much readier to change their ways, and are oven m some cases anxious to try every new way of satisfvmg an old want Thus whenever avo attempt to study tho consumption of any particular commodity, wo have to consider both the other commodities which can take its place, and the rapidity with which customs change m tho com- munities which are being studied This side of the question is often overlooked in actual lifo Students have no doubt heard or read of tho enthusiastic temperance reformers who endeavour to stop tho consumption of spirits in some communities. Some of them are apt to think that their object could be achieved at once if the manufacture and sale of spirits were stopped, and they look to the government to do this But experience in India, as well as m other countries, shows that this course will not prevent 174 AN INTRODUCTION TO ECONOMICS people from ■wanting stimulants , so long as thoy want stimulants, thoy will consume the stimulants they can got, and if they cannot got spirits they will take some of the very dangerous drugs that will satisfy their want The men who wish to effect a change m consumption (whether of spirits or of any other commodity) must attain their object mamly through tho consumers , that is to say, they must persuade the consumers to leave tho particular want unsatisfied, or to satisfy it in ways that are not open to objection Wants such as the want of stimulants are very largely tho result of custom and fashion, and, as we have seen, people can be persuaded to change their customs and fashions, and then the want will be no longer felt or will be felt much less intensely Tho question of temperance reform is one of great importance, but it cannot be discussed fully without a wide knowledge both of Economics and of other sciences that deal with human life , it is mentioned here merely as an illustration of the land of problem that has to be considered m connection with consumption and demand In showing how an individual’s demand for a commodity could be set out m the form of a schedule, we had to confino our attention to such commodities as are bought regularly in small quantities. (It is not possible to make out a schedule of an ordinary individual's demand for commodities which he only buys occasionally and which last for a long time , we cannot, for instance, sot out in this way an individual student’s demand for Bhoes, or tennis bats, or watches, or bicycles j But in the case of a co mm unity, it is possible to make out schedules for such commodities if the co mmuni ty oe large enough (Thus m a college of 1000 students, there are always some students who are t hin king of buying new shoes, or new tennis bats, but doubting whether the utility to be obtained is worth the price If the price falls, some DEMAND OF A COMMUNITY 175 of these will decide to purchase, and the lower the price the moro purchases will be made , while if the price rises, the purchases will bo fewer, as some students will decide to wear their old shoes longer or to do without a tennis bat It is almost impossible to get enough information to enable us to proparo complete Demand Schedules in such cases, but we can see that the schedules must be of the same general shape as those for commodities like ghi, and that the Law of Demand applies equally in their case Again, m a town of 10,000 inhabitants, the number of people who on any given day are thinking of buying bicycles is probably so small that no definite statement could be made as to the number that would be sold at different prices, and the price might rise or fall largely without making much change in the number sold ; but m a city with several lakhs of inhabitants, the number of possible buyers may be so large that every change m price will affect the number sold, just as every chango in pneo affects the sale of ghi The Law of Demand thus holds for all classes of commodities (subject to a few exceptions already dealt with) in every community where actual or possible purchasers of the commodity are to be found in considerable numbers, and the larger the number of purchasers the more closely will the Demand vary with every change m price book iv. demand AND SUPPLY. CHAPTER XXV. PRELIMINARY CONSIDERATIONS We have now discussed the conditions under which wealth is produced and consumed , m the present Book we have to see in what way the production of particular commodities is adjusted so as to provide the amount required for con- sumption. This adjustment is usually spoken of as the Equilibrium of Demand and Supply Demand as we have seen means the quantity of a commodity demanded, and it vanes according to the price at which the commodity can he bought Supply means the quantity of a commodity offered for sale, and as we shall see later on this quantity also vanes with the price. The quantity of a commodity offered for sale must depend m the long run on the quantity produced, and so the terms Supply and Production are closely connected together and refer to the sellers, just as Demand and Consumption are closely connected together and refer to the purchasers Equilibrium means literally even-balancing, and the word can be applied to scales m which thin gs are weighed, when the two sides balance evenly , for our present purpose the word indicates that the Demand and the Supply balance, that is that they are equal Stated in a concrete form, the question for consideration is this . How does it come about that a particular quantity of wheat, or gr/tt, or cotton cloth, or a particular number 180 AN INTRODUCTION TO ECONOMICS of ■watches, or bicycles, or parrs of Bhoes, or any other commodity, is produced and sold at a particular price ? In what way is the quantity or number determined, and how is the price fixed ? The answer to this question is the central part of the science of Economics. Students will notice that there appear to be two questions, and not one there is the question of quantity or number, and there is the question of price One of the chief diffi- culties in Economics arises from the fact that it is not possible to treat these two questions separately, and to say either that Supply and Demand determine Price, or that Price determines Supply and Demand As we shall see more clearly later on, these three things are inter- dependent, and a change in any one of them is likely to lead to changes in the other two a fall m price usually leads to a reduction in the quantity offered and to an increase in the quantity demanded . an increase m the quantity offered usually leads to a fall in price and to an increase in the quantity demanded , an increase in the quantity demanded usually leads to a rise in price and an increase in the quantity supplied We are compelled, therefore, to treat the two questions together , and when we are for the moment looking at a change m one of the three quantities, we must bear in mind that all the three quantities are liable to change, and that any change in. one is both a cause and a consequence of changes in the others So far as the earliest stages of production are concerned, there is little difficulty in answering the question that is now before ns To take the simplest possible case, we may consider men living m a forest who get their food by pick- ing fruit from the trees A man starts out very hungry, that is to say his want for food is intense he goes through the forest picking fruit and eating it as he goes , as he eats. PRELIMINARY CONSIDERATIONS 181 bis want for food gets less intense, and at the same time he begins to get tired with the effort of walking and of reaching or climbing for the fruit If there is plenty of fruit close at hand, he will satisfy his want completely before he gets tired , but if the fruit-trees are far apart and the fruit is difficult to reach, he may get tired of the exertion before he has had a full meal, and ho has to decide to bear either the unpleasantness of further fatigue, or the unpleasantness of the unsatisfied want of food. The want of food grows less as he eats, that is to say the utility to him of more fruit becomes steadily less, and at the same time the unpleasant- ness of fatigue becomes steadily greater Or we may describe the unpleasantness of fatigue as the want of rest, and say that while the utility of food is decreasing the utility of rest is increasing Sooner or later then he will want rest more than food, and will he down and go to sleep In this case the man balances, one against the other, tho utility of food and the utility of rest , when he is very hungry, that is when the utility of food to him is very great, the utility of rest is negligible in comparison , but as time goes on, the two become more nearly balanced, and at last the utihty of rest becomes the greater In the early stages of production then, when men are producing for their own consumption, and think neither of selling nor of buying, they balance the utihty of the com- modities produced against tho efforts and unpleasantness required to produce them With plenty of fertile land and good cattle, a cultivator may produce all that his family wants, without excessive effort on his part , but if his holding is small, or his land is poor, or his cattle are weak, he may decide that it is best to leave some of his wants partially unsatisfied, because the extra effort required to satisfy them completely is not worth his while 182 AN INTRODUCTION TO ECONOMICS It is sometimes convenient to have a single word to denote the efforts and unpleasantness in\ olvcd in the pro- cesses of production those arc, as wo have seen, just the opposite of Utility, and if we speak of them as Dis-utility, then we may say that the cultivator balances the utility of the thin gs produced against the dis-utility of producuig them, and carries his production up to the point where the dis-utility involved becomes as great as the utility The matter becomes more complicated when we pass to the later stages of production, in which men buy most or all of what they consume, and sell most or all of what they produce In this case, as we have seen in the last Book, the purchaser balances the utility of the commodity, not agamst the dis-utihty of producing it, but against the price that he has to pay , and we have now to take up the con- sideration of the seller’s part in the transaction Before, however, we enter on this, we must understand the meaning of the word Market, which we shall have to use frequently m the following chapters In every-day language, the word is used m at least two meanings The most familiar of these in India is probably the meaning which it bears m municipalities , m this sense a market is a building or enclosure where several lands of provisions and other goods are offered for sale under conditions regulated by the municipality This is not the kind of market with which we aTe concerned The other meaning of the word is indicated in such terms as the stock-market, or the wheat- market, or the rice-market, which may be seen m the com- mercial columns of the newspapers, and these markets approach closely to what the economist means by a market We may define a Market for any commodity as a place or region where buyers and sellers of it are in free intercourse with one another. The buyers and sellers may all be in one PRELIMINARY CONSIDERATIONS 183 place, as in the gram-market or the cotton-marlcet of an up-country town ; but this is not a necessary condition, if the postal and telegraphic facilities are such that people can maintain free intercourse while living at a distance Thus, almost the whole of northern India forms one stock and share market, with its centre in Calcutta, and people in Lucknow or Cawnpore or Delhi or Lahore, who want to buy stocks or shares, carry out their transactions m Cal- cutta with the .aid of the post or telegraph In order, however, to study the conditions that prevail in a market, it is best to devote attention in the first place to one where the buyers and sellers meet in one place * such markets are to be found m all Indian towns of any importance, and they deal m commodities such as gram, or cotton, or sugar, which are produced m the locality. There are numerous traders who have their places of busi- ness close together , at any given time some of these want to buy the particular commodity dealt with in the market and others want to sell , and the same trader will some- times be a seller and at other times a buyer of the same thing. Traders, whether they are sellers or buyers, have to think of a large number of factors even m a small market sellers want to know the buyers’ Demand, that is the quantity which will be bought at each price ; buyers want to know the sellers’ Supply, that is the quantity that will be offered for sale at each price , each seller wants to know the position of the other sellers, and each buyer wants to know the position of the other buyers , all alike want to know whether prices are going to be higher or lower in the near future, whether the consumers’ demand is likely to increase or dimmish, and what is the prospect of an increased or reduced supply. Even a small market then is a com- plicated organisation , and w hen the same commodity is 184 AN INTRODUCTION TO ECONOMICS dealt with m various markets, and can be brought from one to the other, the complication may become very great A dealer in wheat in Cawnpore, for instance, must know as much as possible not only of the position m the Cawn- pore market, but also of the other large markets in India ; he must think of Delhi, and Hathras, and Calcutta, and Bombay, and Karachi And, further, he must think about other countries, so that an up-country trader in India sometimes wants to know the attitude of traders m London, and Liverpool, and New York and Chicago We must, therefore, approach the study of a market by degrees, taking first very simple cases, and gradually mtroducmg new considerations until we can form an idea of the working of an actual market There are, however, two points which are common to all markets In the first place, sellers want to get the highest possible price, and buyers want the lowest possible price , no trader will sell wheat at three rupees a maund if there is a buyer present who will give three rupees and one anna , and no buyer will give three rupees if there is a trader ready to sell at two rupees and fifteen annas The buyer then wants to know the prices that all sellers are asking, and the seller wants to know the prices that all buyers are offering The second point follows from the first ; at any one moment there can be only one price at which sales actually take place, though that price may change fre- quently even in the course of a single day A seller must know not only what buyers are offering, but what other sellers are asking, because it is no use for him to ask a higher price than others ask , and in the same way a buyer must know what other buyers are offering, because it is no use for him to offer less We have now to see how such a market will settle on a particular pnce CHAPTER XXVI. TEMPORARY OR MARKET EQUILIBRIUM. We must begin this study of equilibrium m a market with a simple case, and we will take a market for wheat lying so far from the railway that wheat does not reach it from a distance, and that export is not practised We will assume also that cultivators do not bring their own wheat to market, but sell it to traders m their village, and that these traders are the sellers in the market , the buyers are the shop- keepers, who will sell it retail to consumers m the town Markets of this type were formerly common in India, and they are still to be found, though the construction of rail- ways has now made most of them largely dependent on import or export We will also suppose that there is no combination between sellers on the one hand or buyers on the other, but that each individual is buying, or selling, independently and for his own interest Let us consider the working of such a market early in December, m a season when the next crop of wheat has been sown on about the usual area and the crop has made a fairly good start, so that there are no unusual circumstances to take into account On the morning of the market-day the traders will come in from the villages with carts or pack- animals carrying the quantity of gram which they think they can sell. They know (and the shopkeepers know too) TEMPORARY OR MARKET EQUILIBRIUM 187 pncc , they do not know of a reason, but they infer that for some reason or other more wheat is wanted for con- sumption, and they raise their pnce by two annas a maund At this price perhaps none of the shopkeepers will buy , then one or two of the traders ask three rupees one anna, and at this price transactions begin to take place, some shopkeepers buying and others still holding aloof m the hope that the price will agam fall. As the day goes on the market gets to know that a large body of troops is shortly coming to the neighbourhood for tra ining , and that this was the reason why some shopkeepers were anxious to buy, because they knew that the demand for wheat for consumption would be mcreased by the presence of the troops The shopkeepers who did not know this, and have so far made no purchases, now become anxious, as they see that a good deal of the stock has been sold, and they begin to offer three rupees one anna , but the traders will see their anxiety to buy, and will agam raise the price for the wheat they have left Some shopkeepers will now reduce their purchases and buy less gram than they in- tended the price will probably fluctuate for a time, some- times rising and sometimes falling, according as the re- maining shopkeepers press forward to buy or hold off for a time, and by the evening the entire stock will have been sold, at prices somewhat higher than those that prevailed on the previous market-day Next, let us watch the market early m January, sup- posing that there has been good ram at the end of Decem- ber, and that the new wheat-crop is promising to give an exceptionally large yield It will be remembered that the traders as a whole have a larger stock than is required for consumption up to harvest-time , and those traders whose stock is large will now begin to get anxious. They have no TEMPORARY OR MARKET EQUILIBRIUM 189 recognise at once that they will have to pay much higher prices, and so will require much less wheat, than usual. Perhaps they will begin by offering three rupees eight annas, Mlule the traders begin by asking four rupees Possibly a little mil at first be sold at one or other of these extreme prices, but there will be the usual bargaining and hesitation, and eventually the market-price will settle at perhaps three rupees tMelvo or three rupees fourteen annas Tins description of the course of a market leaves out many complications that occur even in a small local market in ordinary life ; but it is intended to bring out clearly the central fact of the equilibrium between Demand and Supply, and the complications do not alter this fact, though they may make it harder to see The buyers are guided by what they know about the Demand of the peoplo for whom they are buying * they know by experience that the consumers in the town will buy a certain quantity of wheat at any particular price, and that this quantity falls as the price rises They are buying merely to sell again . if they buy too much, they will not be able to sell it all at the corre- sponding price, and will lose the profit they hoped for on its sale If, on the other hand, they buy too little, they will not have enough to sell at the corresponding price, and will lose profit they might have made on the larger quantity 1 The sellers, on the other hand, are only anxious to sell for the highest possible price, and the higher the price the more they will sell The function of the market, that is of the free intercourse between buyers and sellers, is to 1 It is of course possible that the buyors might see a chance of getting a larger profit by offering a small quantity at a very high price than a larger quantity at a lower price Shopkeepers are occasionally suspected of such action, especially in the early stages of a famine , but the more usual position is that the largest profit is made by the largest possible sales 188 AN INTRODUCTION TO ECONOMICS use for the wheat except to sell it, and they fear that when the new crop is harvested the supply may be so large that prices will fall substantially , so they decide to try and sell as much as possible before this fall m price occurs Those traders then who have a large stock bnng rather more gram than usual to tins market, with the result that the total supply is, say, 2200 maunds But the shopkeepers also have been considering the weather and the prospects of the next crop , they know of no unusual requirements for consumption, now that the troops have left the neigh- bourhood , and when they see signs that the supply is larger than usual and that some holders are anxious to sell, they will at once begin to offer less than the usual price of three rupees Then there will be bargaining and hesitation as before, but unless the traders are prepared to take some of their stock home again they must accept lower prices m order to dispose of what they have brought There is again equilibrium between the amount demanded and the amount offered, but the equilibrium is at a lower price. Let us take one more market-day, and let us suppose that a few days before it a severe frost has occurred at the critical period when the crop is hable to damage Both traders and shopkeepers know that the new wheat crop has been severely injured , it is too early to estimate the yield, but they have reason to think there will not be enough wheat to supply the town with 2000 maunds a week or the whole year Then all the traders will see that they are m a position to ask for higher prices at once , any quantity not sold now will be sold later on, and they do no want to sell much at once, because they cannot yet estimate what the future supply will be So on this day e supp y rought to market is seen to be very small, perhaps only 1200 maunds m all, and the shopkeepers TEMPORARY OR MARKET EQUILIBRIUM 189 recognise ai onco that thcj will have to pay much higher prices, and so will require much loss wheat, than usual. Perhaps (hoy will begin by offering throo rupees eight annas, while the traders begin by asking four rupees. Possibly a little will at first be sold at one or other of these extreme prices, but there will be the usual bargammg and hesitation, and e\ cntually the market-price will settle at perhaps three rupees twelvo or throo rupees fourteen annas This description of the course of a market loaves out many complications that occur even in a small local market m ordinary life ; but it is intended to bnng out clearly the central fact of the equilibrium between Demand and Supply, and the complications do not alter this fact, though they may make it harder to see The buyers aro guided by what they know about the Demand of the people for whom they aro buying they know’ by experience that the consumers in the town will buy a certain quantity of wheat at any particular pnee, and that this quantity falls as the price rises They aro buying merely to sell again : if they buy too much, they will not be ablo to soil it all at the corre- sponding pnee, and will lose the profit they hoped for on its sale If, on the other hand, thoy buy too httlo, they will not ha\ e enough to sell at the corresponding price, and will lose profit they might have made on the larger quantity . 1 The sellers, on the other hand, are only anxious to Bell for the highest possible pnee, and the higher the pnee the more they will sell The function of the market, that is of the free intercourse between buyers and sellers, is to 1 It is of course possiblo that tho buj ora might see & chance of getting a larger profit by offering a small quantity at a very high pneo than a larger quantity at a lower price Shopkeepers are occasionally suspected of such action, especially in tho early stages of a fnmino , but tho more usual position is that the largest profit ia made by tho largest possiblo sales. 190 AN INTRODUCTION TO ECONOMICS find out the price at which the wishes of the two classes will coincide , the individuals in each class have to find out as best they can both the views of the other class and the views of the other individuals of their own class, and the extent to which they are able to do this is an indication of the degree to which any existing market approximates to the perfect market of our definition In the next chapter we shall indicate some of the chief complications which m this first sketch we have left out of account, but before turning to them there is one point worthy of notice in the description that has been given. People are very apt to become angry with those who possess a supply of an important commodity, such as wheat, when they raise the price, as we saw it raised on the occurrence of the frost “ These traders were ready,” it will be said, “ to sell at three rupees , what right have they to raise the pnee to four rupees and make poor people go hungry ? * Now the student of Economics is not interested in tho question of right , he knows that as a fact owners of a commodity will raise the price in such circumstances , he knowB that legally they have a right to do so ; and he leaves the question of moral or religious nght to be dealt with by the teachers and preachers who tell people what they ought to do But the economist can pomt out that the effect of this raising of prices is to secure a provision of food later on for persons who might otherwise starve This fact will become plain if we look back for a moment to the first stage of Production, and see what would happen there on the occurrence of a calamity such as a severe frost The cultivator, who is growing food for his own sup- port, will see at once that, as a result of the injury caused by tho frost, he will not haye enough gram to feed his family until the next harvest , he had calculated that the TEMPORARY OR MARKET EQUILIBRIUM 191 yield of the spring crops would be sufficient for this purpose until about October or November, when the aut umn crops would bo harvested, but he now sees that if he continues to consume gram at the ordinary rate Ins stock will be exhausted in July or August. He must, therefore, as a prudent man reduce his consumption of gram at once , and reduce it so much that his existing stock and the yield of the spring crops taken together will last until the autumn crops arc ripe He and his family must then go through the summer with insufficient meals , but they will, of course, do whatever they can to supplement these meals by gather- ing wild fruits, and by growing vegetables or garden crops that will give additional supplies of food during the period of scarcity. Now this is exactly what happens in the town when the traders of our illustration raise paces If they contmued to sell at pnees which would allow of consumption continuing at the rate of 2000 maunds a week, then the entire stock of wheat would be consumed some time durmg the following summer, and by the winter there would be no wheat left The effect of their raising paces is to make the consumers reduce their consumption at once ; they can no longer get full meals of bread made from wheat, and must live on meals reduced in quantity and supplemented by any other kmd of food they can get, and m this way the stock of wheat is economised (in the ordinary sense of the word), so that there shall be some wheat available throughout the whole of the peaod of scarcity, instead of the whole of it being consumed in the early stages CHAPTER XXVII. MA RKET EQUILIBRIUM SOME COMPLICATIONS We will now notice some of the chief complications that are found m the actual working of a markot In the first place, we may suppose that some cultivators bring their w heat for sale m the market, and that thus the entire supply is not m the hands of traders In markets where cultivators bring a considerable proportion of the total supply, the position of both buyers and sellers is rendered more difficult Cultivators cannot know so much about the conditions either of demand or of Bupply as the traders and shopkeepers, whose mam business it is to acquire this knowledge , they will be influenced mainly by what they have heard as to the price which prevailed last market- day, but they will also be influenced by other considera- tions, especially by their need of money at the time Thus it may happen on any particular day that the supply of wheat is much larger, or much smaller, than usual, because many culti\ators, or very few, cultivators have come m: the general course of the market will not be affected, but traders may find that the price must be lowered, or shop- keepers that they must pay higher prices because of this unexpected condition In any case the cultivator is not likely to get the best possible price he cannot estimate the stocks and the intentions of the people present as MARKET EQUILIBRIUM GOSIPLICATIONS 193 accurately as the regular traders and shopkeepers, and if — as is usually the case — ho is pressed for money, he will probably accept the offer of a shopkeeper and sell at a somewhat lower price than the conditions of the market w ould justify. This sort of thing happens in all markets , some dealers are more expert and have better judgment than others, and are thus often able to get a shghtly higher price if they are sellers, and a shghtly lower price if they are buyers, than other dealers who are less expert , and some dealers may for private reasons be forced to sell or buy at prices w Inch in other cases w ould not satisfy them The consequence is that m actual life it is very rare to find the whole supply in a market sold exactly at the equi- hbnum-piicc foi the conditions prevaihng , some will have been sold rather cheaper, and some wall have been sold rather dearer, accordmg to the needs and capacities of individual dealers, but as a rule the total sum of money realised will be found to agree very closely with what it w ould have been if all sales had taken place exactly at tho equihbrium-pnce Next we may notice the comphcations resulting from the possibility of import and export We may suppose that a railway has been opened to the town which we have been considering, so that import and export becomes possible, and that representatives of merchants from Calcutta or Cawnporo attend the market to buy wheat if they can get it at prices that suit them When they first make their appearance, tho whole market will be disorganised , the traders who have brought wheat to sell will have no idea what these new buyers want, and the shopkeepers will be equally ignorant But they will soon get accustomed to the change they will find that these merchants are just m the same position as the shopkeepers in that the amount N 194 AN INTRODUCTION TO ECONOMICS they will buy depends on the pnce, that is, they will buy more as the pnce falls and less as the pnce rises. There are now more buyers in the market than before, hut the method by which an equilibrium-price is reached remains unchanged The local men have, however, difficulty m forecasting the action of the buyers from a distance : they have learned by experience the local Demand and the local Supply, but the merchants besides taking account of these factors think of the market conditions in Calcutta and Cawnpore and elsewhere , they may buy very largely, and so raise pnces, because they know that prices are higher still in Calcutta, or they may abstain altogether from buying and so send pnces down if they know that pnces m Calcutta are low Thus the local men must extend their knowledge if they are to succeed in their business (the business that is of selling at the highest, and buying at the lowest, possible pnces) ; they must learn as much as they can of the course of pnces m the markets with which their market has become connected, so that they may be m a better position to forecast the action of the merchants who come from those markets This change from mdependent to inter-connected markets has taken place rapidly m northern Tndia during recent years, and markets such as that descnbed in the last chapter are now the exception, where formerly they were perhaps the rule Even m quite small towns, the dealers m wheat, cotton, and other staples maintain close relations with the larger markets , it is by no means unco mm on for up-country merchants to get a telegram every mo rnin g indicating the course of the markets in Calcutta, while at times of special activity telegrams from London or from Chicago may be read m towns of which ordinary people scarcely know the names MARKET EQUILIBRIUM : COMPLICATIONS 195 A third series of complications arises when the buyers, or the sellers, m a market combine together instead of competing with one another We may suppose that in the market desonbed in the last chapter all the dealers come to an agreement as to the amount of wheat to be offered and the price at which it will be sold , they might then be able to maintain the equilibrium at this price, and the individual shopkeepers could merely take the amount offered at that price This comphcation is not uncommon : in some countries the legislatures are actively engaged in endeavouring to prevent such combinations (known as monopolies, rings, trusts, combines, and by other names) from raising prices beyond the point that is considered reasonable ; and economists have m recent years devoted a large amount of study to the theory of combinations and monopolies Students will have to make themselves familiar with this subject at a later stage , for the present it is sufficient for them to know that a combination of buyers or sellers may, at any rate for a tame, make a material difference in the quantity of a commodity sold and in the price which it fetches Next, allowance must be made for the fact, which has already been indicated m the previous Book, that as a rule a want can be met by more commodities than one, and that if a particular commodity rises m price consumers are hkely to use some other commodity m its place Thus merchants who deal mainly m wheat cannot confine their attention to that gram, but must know also the conditions of demand and supply m relation to other grains, such as barley and millets and pulses If some of these are cheap when wheat is dear, consumers will substitute them for wheat, and then the Demand for wheat will fall more than if no substitute for it were possible ; or, on the other 196 AN INTRODUCTION TO ECONOmCS hand, the demand for u heat may bo mcreased by a failure of the nee crops if rice becomes so dear that consumers substitute wheat for it Even in a small market, then, dealers can rarely confine their attention to a single gram, but must know all they can about supply and demand in the case of each of tho grams ordinarily used as food , and, as a matter of fact, the trade in the vanous grams is very often conducted by the same set of dealers Next we come to the important question of holding up stocks We have supposed for the sake of simplicity that dealers bring a certain quantity of wheat to market and take none of it back But in practice, and especially where a dealer has his store near the market, this is not the usual case , the commodity need never be exhibited m the market, or it may be sent back to the store unsold Thus sellers can offer much or httle according as they see the demand to be bnsk or slack, and buyers cannot often judge of the amount that is available for sale merely by the number of carts or sacks actually exposed m the market- place , they must get what information they can on this pomt from other sources and draw inferences from the attitude of the sellers Buyers, on the other hand, can, and often do, hold a stock m excess of what they need for immediate consumption , they can then buy less if prices are high, and draw on their stock until next market-day, or they can buy more if prices are low and add to their stock for the time bemg Thus buyers and sellers ahke cannot judge merely by what they see, but must constantly use their judgment to conjecture what othei people really want Again, we have treated buyers and sellers as necessarily different people, but in a large market the same man 1? often ready to buy or to sell according to the price that he MARKET EQUILIBRIUM : COMPLICATIONS 197 can secure A merchant may be ready to buy wheat at three rupees, and to sell it at three rupees two annas , if the price falls for the moment to three rupees he will buy, because he has come to the conclusion that the pnee will very shortly rise, and that he will be able to secure a profit by selling at three rupees one anna or more On the other hand, he is ready to sell and reduce his stock when the price is three rupees two annas if he has reason to t hink that the price is going to fall In a well-developed market such merchants are almost alw ays to be found , practically their whole business consists in forecasting the equilibrium of the market from the information they can collect as to supply and demand, and talcing advantage of every opportunity of selling above, or buying below', what they think the equilibrium price will be If their forecasts are correct, that is to say, if they have judged accurately the price at w Inch supply and demand will be m equilibrium, they will make a profit on each transaction , if they have made a mistake they will lose money instead of gaming it The effect of the presence of such merchants is, as a rule, to keep the price very near to the true equilibrium price If the price rises, some merchants at once offer to sell, and others cease to make offers to buy , that is to say, the supply of the moment is increased, and the demand of the moment is reduced , the conditions of the moment are changed, and the pnee will be reduced again In such a market then, the price is constantly rismg and falling, but each rise produces a tendency to fall, and each fall produces a tendency to rise, so that the price is never greatly different from that which is justified by the con- ditions of supply and demand The fact that merchants are engaged m forecasting the future leads to further complications, w Inch are commonly 198 AN INTRODUCTION TO ECONOMICS known as dealings m “futures” If uheat is selling at about three rupees to-day and a merchant has reason to think that the price -will bo three rupees four annas next month, he would obviously bo wise to buy as much -wheat as he can now, keep it for a month, and then sell it at the higher pnee And merchants often do tins even when they have not the money to pay for their purchases , they borrow the money in one of the various ways that students will read about when they come to the subject of Credit, or they agree with the seller that ho shall deliver the wheat next month and receive payment then Thus if A and B are two merchants, A in June buys 1000 maunds from B, agreeing that B is to give him the wheat on 16th July, and to receive 3000 rupees when he does so Before that date the price rises to three rupees four annas, and A sells the 1000 maunds to C for 3260 rupees, though at the tune he has no wheat in lus possession, but has only B’s promise to deliver it On 16th July, A receives 3260 rupees from O, pays 3000 rupees to B and tells him to dehver the wheat to G A has never had the wheat m his possession, but he has made a profit of 250 rupees by buying it at a low price and selling it at a higher O in turn may have sold it to D for 3400 rupees, and so on On the other hand, if A thinks the price will fall, he may sell wheat to B without having any wheat in his possession, but hopmg to buy it cheaper before the date comes for delivery, and then the transaction is settled in the same way We may suppose that A has sold 1000 maunds to B for 3000 rupees for delivery on 15th July , before that date he finds himself able to buy 1000 maunds from G for 2800 rupees for the same date, and when the day comes he tells C to give the wheat to B, receives 3000 rupees from B, pays 2800 rupees to G and has 200 rupees profit. On the MARKET EQUILIBRIUM • COMPLICATIONS 199 other hand, A may have made a mistake as to the likelihood of a fall of prices, and may be unable to find anyone willing to sell at less than three rupees In that case when the day comes for delivery to B, he must either break his contract (which may mean rum to a trader), or he must buy the wheat to satisfy B’s claim If he can only get it for 3200 rupees, he must pay that sum, and as he only receives 3000 rupees from B, he has lost 200 rupees where he hoped to make a gain. Transactions of this sort look at first sight like mere gambling, that is to say, people seem to be selling or buying simply oil the chance of some future event, and there is probably a certain amount of gambling in all large markets , but a man who starts to deal m a commodity without knowing the conditions of its supply and demand will very soon become bankrupt, because he will not be able to forecast the conditions and the resulting equihbnum-pnce with the same degree of acouraoy as those merchants who spend their tune in studying the conditions He will take the chance of a rise when the conditions should lead him to expect a fall, and will look for a fall when he should expect a rise, and in either case ho will lose by the trans- action, and the more expert merchants will make profits at his expense, until he either loses all his money or comes to understand the market-conditions for himself A modem v ell-developed market, then, consists largely of a body of merchants, each of whom devotes all his energies to learning all that he can about the conditions affecting the supply and demand of the commodity or commodities m which he deals, and forecasting on the basis of this knowledge what the equilibrium-price is hkely to be both m the immediate future (to-day, or to-morrow, or next week), and at more distant dates. He will buy 200 AN INTRODUCTION TO ECONOMICS when he thinks he can sell again at a profit, and sell when he thinks he can buy more cheaply at one time he may have large stocks on hand, and at others ho may have sold more than he has , but his success m business depends on his abihty to forecast the price at which the supply and demand of the market will be in equilibrium In the nest chapter we shall see how such markets are connected with the actual consumers and the actual producers of the commodities m which they deal. CHAPTER XXVIII. RELATION OP PRODUCERS AND CONSUMERS TO THE MARKET. A modern wholesale market consists, as we have seen, largely of a body of merchants engaged m forecasting the supply and demand for the community m which they deal In some cases both consumers and producers may be found taking part in these dealings, but this occurs only when the quantities which they require or offer are great Thus where the spinning of cotton yam is done m large factories, the spinners would take part in the wholesale market for yam together with the merchants who buy only to sell again, or buy m order to send the yam to places where it will be consumed. But the hand-loom weaver obviously cannot buy the small amount of yam which he needs in a market which may be hundreds of miles from his home, and where a large number of bales is sold in a single trans- action , and m the same way, neither the cultivator nor the eater of wheat can take part in the wholesale wheat market These large wholesale markets are therefore connected with the consumer and the producer by local or subsidiary markets, and by the dealers or shopkeepers whose trade is conducted m small quantities, and is spoken of as retail as distinguished from wholesale. We will examine the position of the consumer and the producer of a commodity such as w'heat, the chief wholesale markets 202 AN INTRODUCTION TO ECONOMICS for which are so closely connected that there is practically a single market for the whole world. The man who wants wheat for the food of his family ordinarily buys it from a shopkeeper, and as a rule, he has not much to say directly towards settling the price The shopkeeper settles the retail pnce, and the consumer buys more or less according os the price is low or high But this does not mean that the consumers as a body have no influence on pnce , as a matter of fact, their demand is one of the most important factors in the market The shopkeepers of any town know more or less accurately the demand of that town, that is, the quantity which it will buy at each pnce, and, as we have seen, they provide for its consumption more wheat when the price is low and less wheat when the pnce is high A shopkeeper knows what his stock of wheat has cost him, and he fixes his retail price so as to give him as much profit as possible But in ordinary circumstances he cannot fix the retail pnce very much above the wholesale pnce, because if he did so he would feel the competition of the other shopkeepers All of them want to sell to money. Tins case has somo interest both m theory and in practice, but its discussion must ho postponed. Where production is controlled by a monopoly the position is materially different, but its discussion must be left for study at a later period of tho student’s course In the next chapter wo have to say something about tho changes in the standard or normal pnco which result from changes m the conditions of production or consumption ; but before wo turn to this a little may bo said on a question of wording, which might otherwise bo a cause of difficulty. Earlier writers were accustomed to use tho term ‘ Cost of Production ’ in the sense which wo have expressed by * Expenses of Production ’ ; and somo of them used the word ‘ natural ’ to express what wo mean by standard or normal Students will thus find somo writers saying that the Natural Prico of a commodity is equal to the cost of its production Tho word Natural has now been generally given up because it has soveral meanings, and tho word Normal is generally used in its placo Tho expression Cost of Production was as a matter of fact used in two senses ; sometimes it meant what wo have called tho Disutility invohod in Production, and sometimes thomonoy that must bo paid to balance this Dis-utility The two senses have been occasionally confused, and it is convenient to avoid the risk of confusion by using the term Expenses of Production to signify tho cost measured in money. CHAPTER XXX. CHANGES IN EXPENSES OF PRODUCTION. We have seen, in the last chapter that the normal price of a commodity is equal to the expenses of its production so long as the conditions of production and consumption remain unchanged We have now to see exactly what this proviso means, and how far it is true m the world in -which we live The proviso does not imply either that all the items of expenses remain exactly the same during the penod under consideration, or that they are the same m all factories producmg the same commodity The managers of a factory have two mam objects m view one is, as we have seen, to sell the produce at the highest possible price, and the other is to keep the expenses of production as low as possible A competent manager is thus constantly on the look-out for any means of reducing the expenses , he com- pares the efficiency of different classes of labourers he plans the various operations so as to require as few labourers as possible, and he sees whether any particular piece of work can be done more cheaply by labourers or by machine At the same time he has to t hin k of buying his materials as cheaply as possible, of reducing the cost of carrying them, of getting the best work out of his staff, of saving office expenses by reducmg the writing and account work, and CHANGES m EXPENSES OP PRODUCTION 219 generally he has to watch every branch of the work so as to see where any saving is possible And managers differ very greatly in competence, so that it is most improbable that many factories will be found to have exactly the same expenses of production in detail. When, therefore, wo speak of the expenses of production of a commodity, we must not think that every maund of it costs exactly the same amount of money to produce in some factories a maund costs rather less, and in other factories it costs rather more, and again the expense may vary from tune to tune, even in the same factory But at any given tune it is possible to recognise a standard of expenses ; we can say, for example, that in a given season the expense of produemg a maund of sugar for a certain market has been nine rupees, even though some factories have produced at eight rupees and others at nine rupees eight annas The former class has made more than the usual profit, and the latter class has made less ; but the average profit of the whole industry has been about the same as if all factories had worked at the same cost It is then the standard expenses in the industry that set the standard of price, and not the expenses of any particular factory. We must recognise clearly that this standard of expenses does, as a matter of fact, change with changes in the con- ditions of production and consumption It is possible to imagine a state of things where the population is stationary . where the people go on consuming the same quantities of the same things ; and where the methods of production do not change Economists sometimes assume for purposes of arg um ent the existence of such a Stationary State, and it is true that, if such a state existed, the standard or normal price of commodities would remain unchanged. 220 AN INTRODUCTION TO ECONOMICS It is not possible to point to any period m the economic history of India where such a Stationary State actually existed, and that history shows that changes tend to increase m rapidity, so that it is very unlikely that the country is on the way to such a state , but we can pick out a few possible cases which will serve as illustrations of what a Stationary State would mean if it over came into existence Take the case of the potter m a self-supporting village, such as we considered m Chapter XHL While the popula- tion of the village remains about the same, and the habits of the people are unchanged, the demand for earthen vessels in the village will vary very little from year to year The potter will go on making about the same number of the same sort of vessels, and receiving the same amount of gram m exchange for them There will be no market and no bargaining as to the price to be paid, because the whole business has become customary , the pottei does not change his methods of work , he gets enough to enable him to live in the way to which he is accustomed, and the price paid for each vessel is the normal price so far as that village is concerned Some of the other village artisans offer similar examples, and further examples may perhaps be found even among the artisans of small and unpro- gressive towns So long as the conditions of demand and supply are unchanged, the normal price of the commodity remains the same, and when it has become customary the price actually paid m each case is equal to the normal price If, now, the self-supporting village comes into relations with a town, and buying and se llin g begin, the potter is likely to be affected In the first place, the town may want earthen vessels as well as the village, and the potter may CHANGES IN EXPENSES OE PRODUCTION 221 not have enough to supply overy one. He would naturally sell u hat he has to Ins old customers in the village , but some of tho townspeople will offer lum a higher price, and he Mill take this from them, unless the villagers also are Milling to pay a higher price And so the increase in the demand breaks up u hat has become the old village custom, and the potter can get a lugher price than that to which he was accustomed On tho other hand, the villagers may take to using brass vessels when they find that they can buy these in the town, and the demand for the potter’s products may fall off in consequence. Or a potter may come and settle m the town, bringing a new kind of wheel and other appliances with which he can make better vessels, and make them in larger quantities than the village potter , he may sell to tho villagers as well as the townspeople, and the village potter may find that he can no longer ask the old price, and may have to reduce it, and either work harder, or live worse, or copy the town potter’s apphances These imaginary illustrations are intended to put in their simplest shape the land of things that happen m the case of ordinary artisan industries, and that happen still more frequently in tho larger industries carried on in the factory stage For it is a matter of experience that pro- cesses and methods of production change, and that tastes and habits of consumers change also It is usual to say that India changes very slowly m such matters, and this is true if the comparison is made with some western coun- tries but tho changes occur all the same, and at the present time the speed at which they occur is certainly increasing And when the changes occur, they affect the expenses of produemg a commodity, and consequently alter its standard or normal price , so that though the normal price may be the same this year as last year, it is 222 AN INTRODUCTION TO ECONOMICS unlike ly to be the same this year as it was ten years ago Students must look to the large treatises on Economics for an analysis of the working of the various causes that may change the price at whioh production and consumption come into equilibrium , here we can only give a few typical examples It is fairly well known that the money- wages of agricultural labourers have been rising m recent years in various parts of India The rise has directly affected the busmess of all cultivators, who have to pay higher wages than before for the same work , but it is felt most seriously in the case of those crops which require most labour The cotton crop is one of these , its cultiva- tion is not specially expensive, but many labourers have to be hired to go over the field from time to time and pick the cotton as it ripens , and consequently the money paid m wages represents a relatively large proportion of the ex- penses of producing the raw cotton The rise m the wages of labourers has therefore increased the expenses of pro- ducing cotton more than the expenses of producing some other crops such as food-grains and consequently large numbers of cultivators, who m the past were doubtful whether to use their land for cotton or for food-grams, are now more inclined to grow food-grains, because they cost less in labour This would mean a reduction m the area under cotton , and m order to get the amount of cotton they require, gmners have to offer a rather higher pnce than they would otherwise have done, m order to make it ■north the cultivators’ while to grow the crop The actual price may vary from day to day or week to week, but the normal price (to which the actual price tends to return) will be higher than it would have been if labourers’ wages had not risen CHANGES IN EXPENSES OE PRODUCTION 223 But this is only the beginning The cotton-gmners work in the localities -where the cotton is grown, and hir e many of their workmen from among the agricultural labourers , and they find that they have to pay higher wages in order to get the labourers they need So the expenses of producing cleaned cotton are raised in two ways m consequence of the rise m wages ; and its normal price must rise if spinners are to get the quantity of cleaned cotton that they need But cotton-spuiners, too, find that they have to pay higher wages than they used, and m the same way the normal price of cotton-yam must rise, so that it may cover the extra expenses of (1) the cultivators, (2) the gmners, and (3) the spinners , and we might carry the illustration further to show that the normal pnce of clothes must rise to cover, not only the extra cost of yam, but also the higher wages paid to weavers, and to dyers and tailors If then there -were no other changes to take mto account, we should be able to trace the effect on the normal pnce of clothes of a nse in the wages of the vanous classes of labourers and workmen employed m their production But it is very seldom, indeed, that the world stands still long enough for us to watch the effect of a single cause like this, and many other changes have been taking place at the same time Thus, the labourers whose wages have risen can now spend more money on clothes, and, since large numbers of them are still insufficiently clothed, this may mean a large increase in the demand for cotton clothes , and as the demand has risen, the equihbnum-pnce must be different from what it was On the other hand, railways have been built and have made it possible to bring cleaned cotton to the spinning-mills from large areas where the cost of carnage w as formerly excessive . this means a large increase in the supply of cleaned cotton, and this 224 AN INTRODUCTION TO ECONOMICS would tend to reduce the price which spinners must pay, and consequently reduce the expenses of producing cotton- yam, a change which will tend to reduce the normal price of cotton-clothes And at the same time, probably better spinning machinery has been mtroduced, the price of coal for fuel has probably changed, and many other alterations m the conditions, both of production and consumption, have probably taken place While, therefore, we recognise that the normal price of cotton clothes is equal to the expenses of producing them, we must also recognise that these expenses are themselves liable to change, and that thus the normal price is not likely to remain fixed for any considerable time Let us take another example from the trade m kerosene- oil The use of this oil in northern India is comparatively recent formerly light was obtained universally, as it still is in many villages, by burning one of the oils produced from seeds grown locally When kerosene oil first came into use, it vas sent up country packed m tms, and the tins placed in boxes, just as the better qualities of oil are still transported This method of packing is expensive, and the cost of carrying the oil so packed by rail is con- siderable , it will bo remembered that production includes the transport of commodities to the place where they are wanted for consumption, and consequently these expenses are mcluded in the expenses of production when the oil is sold up-country At first, therefore, the price was high, and the oil was used by only a few people But it satisfied a want, and its use increased until it became worth the producers’ while to introduce new apphances that would reduce very largely the expenses of transportation All readers must have seen some of the oil-depots which have been set up along the railways during the last few years . CHANGES IN EXPENSES OF PRODUCTION 225 tho oil is pumped into tanks placed on trucks, and these trucks are brought up-country by tram, and the oil pumped from them into tho tanks at the depots Thus, almost all tho expenses of packing are saved, and the expenses of freight are greatly reduced consequently the expenses of producing the oil in tho various towns along the railways have been greatly reduced, and tho oil can be sold much more cheaply than was formerly the case Hero again we have only noticed a single cause operating to change the expenses of production The recent history of tho oil-trade in India has to deal with many other causes, some tending to laise and others to lower the normal price, but they are rather too complicated to go mto hero As we have said above, wo do not intend to attempt an analysis of the causes that may affect the normal prices of commodities The subject is difficult, and it is better that students should first pass on to an elementary study of the subject of Distribution , but a few words may be said here to indicate one of the mam causes of difficulty, namely the element of time If we confine our attention to a particular day or week, we can, in tho case of most commodities, make a fairly close calculation of tho expenses of production, that is of tho normal price, as it existed on that day or m that week But when we look at a longer period, the cal- culation becomes more and more difficult, because changes have taken place gradually during it, and the normal price at its end is not tho same as the normal price at the begin- ning. Few economic causes produce their full effect im- mediately, and some of them may operate gradually over a period of many years , so that when we consider the effects that will result from a particular cause, we have to direct our attention especially to the period of tune that is required for the effects to be produced. Students will not p 226 AN INTRODUCTION TO ECONOMICS feel the resulting difficulty until they attempt to master a full analysis of the problem of equilibrium, such as will be found in the larger test-books , but it is well for them to know that this question of time constitutes one of the chief difficulties that he before them. CHAPTER XXXI CONCLUSIONS At tho beginning of this Book we stated the central problem of the science of Economics in the following terms How does it come about that a particular quantity of any commodity is produced and sold at a particular price 1 In what way is the quantity determined, and how is the price fixed 7 The answer at which we have amved may be set out as follows . (1) In any market where a commodity is bought and sold, the quantity demanded tends to decrease as the price rises, and to increase as the price falls (2) On the other hand, the quantity offered for sale (that is, the supply) tends to mcrease as the pnee nses, and to decrease as the price falls (3) The effect of the bargaining that takes place in the market is to settle the equihbnum-pnce, that is to say the price at which the amount demanded is equal to tho amount supphed. (4) The market-price so settled may vary from day to day, but so long as the conditions of production and consumption are unaltered it tends, in the case of ordinary commodities, to be equal to the expenses of production, because when it diverges from that amount 228 AN INTRODUCTION TO ECONOMICS » causes come into operation to bring the market-price back to it The standard or normal price is thus equal to the expenses of production for the time being (We indicated that this conclusion may not apply in. cases where the production of a commodity is m the hands of a Monopoly, but left that subject for study at a later stage Wo also indicated a possible exception to the rule m the case of some Indian artisans, but the study of that exception also was postponed ) (6) The conditions of production and consumption are, as a matter of fact, constantly changing , these changes result in changes m the expenses of production, and, therefore, the normal price is itself liable to change • The further analysis of changes in normal prices was deferred for later study, but attention was directed to the difficulty caused by the element of time It will be seen that no simple answer can be given to the question "with which we started Life is complicated, and as time goes on its complications tend to mcrease , and a science hke Economics, which deals with a large part of life, cannot be made entirely simple, because at any moment numerous causes are m operation, some working m one direction and some working m another We can, as a rule, observe only the single result that follows from these numerous causes, and, m order to understand that result, we have to trace out the working of the various causes, one by one, and see how far each has contributed to the result Ordinary people are not inclined to take all this trouble, and are apt to be satisfied when they have found a single cause that seems hkely to have contributed to the observed result For instance, we observe that at the present time the prices of food-grams m India arc higher than they used to be, and the ordinary man is inclined to pick out some CONCLUSIONS 229 single cause, which he knows to bo m operation, and attribute the whole result to that cause Thus we may find newspaper-writers confidently attnbutmg the rise in prices to tho w cathcr, or to the construction of railways, or to tho development of the export trade, or to any one of a dozen or more processes which are known to be going on, and which seem at first sight to explain the whole thin g But life is not so simple as all that, and the person who really w ants to understand any economic result has to study all the causes that have in any way contributed to it, or that seem likely to bo connected wnth it m any way, and to determine so far as he can the share that each has taken in produemg the result And smee many processes which look like causes are themselves the result of other causes, he has to study the causes of these causes m the same way a rise in wages may be one of the causes of a rise in pnee, but tho nse in wages is itself the result of other causes (as we shall see in tho next Book), and each of these has to be studied before the final result is fully understood Now, our minds are not able to study a large number of causes at once we know this by experience The econo- mist has to follow the same course as students of other sciences, and study one cause at a time He assumes for the purposes of study that only a single cause is at work, and he studies what the result would be if that cause were to work without interference from other causes , he then studies the othor causes, one by one, in the same way, seeing which causes work in the same direction as the cause first studied, and which causes work m another direc- tion, and so tend to counteract it , and at last he arrives at a conclusion, which may approach more or less nearly to the actual truth, as to the explanation of the result which has been the subject of his study He is then in a position 230 AN INTRODUCTION TO ECONOMICS to forecast, with more or less accuracy, how the result will be affected by changes in the strength of one or other of the causes at work The argument in the present Book may be taken as an example of this method of study We began by ex aminin g what happens in a market with a variety of restrictions that are not often found in actual life, and we saw how m those conditions an equilibnum-pnce would be determined by the operations of the market We then extended the study by seeing what would happen if some of these restric- tions were removed, and so got gradually nearer the truth Then we turned to a new set of causes, the Btudy of which showed us that there is a standard or normal price to which the market-price tends to return and then we turned to still another set of causes showing that this normal price is itself subject to change We are not yet at the conclusion of the investigation we have left for the future, for one thing, the study of the effects of Monopolies, a study of great practical importance, and we have also postponed the detailed examination of the causes that lead to altera- tions in normal prices The answer, then, that we have given to the question under investigation is not yet com- plete, but is only an approximation to the truth When economists are engaged on an investigation of this kind, it is their duty to make quite plam what they are doing Thus, when they are studying a single cause, and assuming that no other causes are at work, they use, or should use, the phrase, ‘ Other things bemg equal,’ or some other words which make plain to a reader, if he is careful, just what is bemg done But some writers and especially some of the earlier writers, such as Ricardo, have not always been careful to do this, and have made certain assumptions which'they have not stated in words. Students CONCLUSIONS 231 have, therefore, to be on tlie look-out for such assumptions . thoy must know just -what tlie -writer 13 assuming for the moment ; and -when they are sufficiently advanced to read some of the classical writers on the subject, they must be prepared to find that the assumptions are not clearly staled, and that they must find out for themselves exactly what is assumed. One assumption is so important in connection with normal prices that it is well to mention it agam, although it has been specified in Chapter IV. ; we are assuming throughout that the purchasmg power of money remains unchanged. So far as fluctuations in market-prices are concerned, this assumption is in accordance with the facts, since changes in purchasmg power do not occur so rapidly as to affect the argument materially. But when we are considering changes in the normal price, we have usually to examine a period of such duration that the purchasmg power of money may have altered materially , and if we overlook such an alteration we may be seriously misled. For the present, it is enough for students to remember that the assumption has been made , when they haVe advanced further in their course they will find that the necessity of making the assumption can be avoided by considering normal values instead of normal prices, and that this course is commonly adopted in the larger works on Economics We have described the subject-matter of this Book as the central problem of the science. The reason for saymg this is found m the fact that the equilibrium between supply and demand, which we have so far studied only m connection with co mm odities, will bo found to exist also m relation to the various factors of production, and to explain how the remuneration of each factor is determined in other words, we shall find that the wages of labourers, the interest paid 232 AN INTRODUCTION TO ECONOMICS for capital, the earnings of employees and business-men, and the rent of land are all very closely connected with the supply and demand for these different factors The next- Book will deal with these questions, winch are grouped together under the name Distribution of Wealth We are not yet, however, m a position to give a complete theory of Distribution Such a theory must depend on a more exhaustive study of the equilibrium of supply and demand than we have attempted, and all that can be done with our present knowledge is to indicate the processes by which the various factors of production have come to resemble commodities m many important aspects, and also the mam features of difference that exist between the two classes A preliminary account of this kind will not enable students to understand fully the causes that determine the rate of wages or rent or interest, but it will enable them to appreciate the objects and the importance of the fuller study of supply and demand that lies before them. BOOK V. DISTRIBUTION. CHATTER XXXII. INTRODUCTORY. Wr have seen that certain Factors have to be employed m order to produce Wealth ; and mo have non to examine the nay m which the wealth when produced is distributed among the people w ho have furnished the different factors Tins section of tlio science is spoken of as Distribution It is possible to imagine cases m which the question of distribution docs not arise, though it is very hard to find such cases m actual existence If we supposo that a man lives by himrelf on land to which no one olso has a claim, and produces without assistance all the wealth which ho consumes, then no one clso could make any claim to share in that wealth on the ground that he has helped to produce it ; the man who produces keeps the whole produce. But such cases are very rare ; in all the stages of production which wo can observe wo find that the necessary factors are provided by moro persons than one, and that the persons who provido the different factors receive a share m the produco to recompense them for tho part which they have taken m production Thus in the self-supporting stage of production tho cultivator, who conducts the business, also supplies most or all of the capital and a large part of tho labour ; but tho land is usually provided by the land -holder, who claims rent for its use, the 236 AN INTRODUCTION TO ECONOMICS labourers and artisans who are employed claim wages m return foT the labour they contribute , and if the cultivator has borrowed capital, the lender claims interest for its use S imilar ly m the artisan-stage, the artisan who conducts the business also provides some of the labour and capital employed , but he has to pay rent if he has hired a house or land, he has to pay wages if he employs labourers, and he has to pay interest on the capital ho has borrowed And m the factory-stage, the owners of the factory have to pay rent, wages, and interest m precisely the same way. The reason why such payments have to be made is simply that people as a rule will not do things for nothing ordinary men who possess land or capital want some remuneration for their use, just as labourers want wages in return for their work , and the questions with which we are now concerned relate to the amount of the remuneration that is paid to the persons who provide the various factors When a commodity has been produced, the pnee received for it has to meet claims on account of (1) Interest. (2) Rent (3) Wages (4) Earnings of Management The problems of Distribution are concerned with the manner in which the amount of these claims is determined , but there are other claims also on the price received, and we must notice briefly (6) Replacing the capital consumed in the production (6) Taxation The necessity of replacing the capital consumed is obvious so far as circulating capital is concerned When a weaver sells a piece of cloth, the pnee has to cover the cost of the yam which he has used in making it the cultivator has INTRODUCTORY 237 to replace the gram -which he has used for seed ; a sugar- factory has to make good what it has paid for materials and fuel, as well as for wages But the consumption of fixed capital has also to bo allow ed for Buildings, ma chin es or tools do not last for ever, but wear out gradually, and a time comes v hen they have to be replaced , if a producer docs not provide for their replacement out of his produce, but distributes all of it under other heads, a time must come when his production is brought to a standstill because his fixed capital is used up In all well-conducted enter- prises, therefore, a suitable share of the produce is set aside periodically to make good the deterioration of the fixed capital; thus when the accounts of a factory are made up for the year or half-year, a sum is set aside under the name of depreciation before the earnings are calculated The need for such a provision is indeed frequently over- looked by producers in a small way of business, and this omission is a common cause of their financial rum If w e take the case of a cultivator who has bought a pair of bullocks for fifty rupees, and who counts on them to do lus work for ten years, it is easy to see that he should set aside five rupees 1 out of his produce each year, so that in 1 Strictly speaking, less than five rupees would suffice if ho could lm cat tho money and got interest on it until it is needed , ho would ha\o to put asido annually such a sum as would amount to fifty rupees at tho end of ton years But where a cultivator has not access to a bank, ns is still generally tho case in India, it ib not easy for him to put small sums out at interest in this way On tho other hand, ho would be wise to put something extra aside by way of Insurance against tho risk that his cattle may die before the ten years havo expired , if they die after six years, ho will only have thirty rupeos available to replace them Most forms of enter- prise provide m one way or another for insurance against certain risks of this kind, and the subject is discussed at length in tho larger treatises on Economics , but we are leaving it out of account for the present in order to simplify as for as possible a problem wluch is in any case complicated 238 AN INTRODUCTION TO ECONOMICS ten years’ time he may have the money to buy another pair , but as a matter of fact cultivators very often fail to provide the money for replacing their capital, and when their cattle die they have either to borrow fresh capital to replace them, or if they cannot do this they have to leave their bolding, which is their means of livelihood Thus the wealth produced has first of all to make good the capital consumed m its production, whether the capital is circulating, that is, consumed m a single operation, or whether it is fixed and wears out gradually The balance left after doing this is the amount available for distribution. The other item, taxation, represents the amount that has to be paid to government or to local authorities such as municipalities This amount is determined directly by legislation and not by economic causes , the economic effects of taxation may be very important, and these are usually considered m a special department of the science, but for our present purpose it is enough to note that part of the wealth produced may have to be paid away in the form of taxes or rates, and is not available for distribution among the factors of production Excluding these two items, the remaining four represent the claims of these factors, interest for capital, rent for land, wages for labour, and earnings for the person who undertakes the business of production As we have seen in a former chapter, Production can be organised in more ways than one, and a theory of Distribution can be worked out for any method of organisation that may come into existence , but wo shall confine our attention to the method which exists in the present day, where a man (or a group of men) undertakes a productive enterprise, and hires the land, the labour, and the capital which is required in addition to any which he may himself contribute We shall call INTRODUCTORY 239 this man (he Producer 1 his position is distinguished by the fact that, whilo he pays for the land, labour and capital hired such sums as may be agreed, he keeps for himself what is left after making these payments, and thus derives no benefit for himself if his enterprise is a failure Under this system of production, the questions that arise relate to Rent, Wages, Interest and Earnings It will bo noticed that the income nhich a producer denves from Ins enterprise usually amounts to something more than the earnings of Ins management ; it mcludes also the remuneration due to each of the factors of production which ho has contributed. When a cultivator, for instance, has paid bis rent and interest and the wages due to his labourers, tho balance of the produce m his hands is not due solelv to his conduct of tho busmess he has laboured on the land, at least as hard as any of tho labourers whom ho has paid, and a share of the income is due to Ins labour , another share is due to his capital which he has employed, and wo may say that the mcomo that is left to him consists partly of wages, partly of interest, and partly of earnings of management And in tho same way a man who owns and manages a factory has a olaim both for the capital invested in the factory and for Ins own work as manager , his income is mado up of these two elements . 2 1 English writers ha\ o at various times used different names for this man , his position is exactly described by the French word entrepreneur, and some English writers uso the word ‘ undertaker,’ which is its English equivalent "Unfortunately m ordinary English tho word * undertaker ’ lias acquired tho special meaning of a man •alio conducts funorals, and its use in any other sonso is at present somewhat incongruous * At the ponod when the science of Economics was being worked out in Western Europe, it so happened that most of tho existing production was earned on by men who supplied some part at least of tho capital used, and at first a distinction was not clearly drawn 240 AN INTRODUCTION TO ECONOMICS The producer is not the only man whose income may be derived from two or more sources When a landholder lends capital to his tenants, ho charges interest on the loan quite apart from the rent on the land, so that his income is made up partly of rent and partly of interest When he invests capital m improving the land, he also charges the tenants with interest , m this case, however, the charge is usually made m the form of an addition to the rent, and consequently we find tenants paying under the name of rent a sum which represents partly rent in the strict sense and partly interest on capital For some purposes the economist has to distinguish between these fr«o items, because the laws that determine the amount of rent are not the same as those which determine the amount of interest Thus the economist cannot always discuss men’s incomes as a whole , he has to examine the sources from which the income is obtained, and must give separate consideration to tbe part earned by each separate factor of production. And on the other band, he has to be careful to mclude m his examination all that is really earned the remuneration of some people is made in such a way that part of it may easily be overlooked For instance, in some parts of India a groom gets wages of three rupees a month, and a careless person might take this sum as representing his income , but such a man usually gets, in addition to the money, between tbeir earnings and tbe interest on their capital , their ■whole income was described as Profits But as the study of the subject advanced, it was found that no satisfactory theory could be stated regarding the rate of profits, because the two elements (earnings and interest) which compose it are not determined by the same laws It was thus found necessary to distinguish between the two elements, even when both are taken by one man , and where the older writers discuss profits, most modem books contain separate discussions of interest and earnings. INTRODUCTORY 241 free lodging for himself and his family, a certain amount of gram for food, a blanket for the winter, and perhaps some other items. All these must be taken into account in calculating the mcomo that he receives as remuneration for his work, and not merely the money that is paid to him ; and the same is true of all persons who obtain benefits apart from the monoy that is paid directly to them, whether those benefits take the form of a house free of rent, a pension in old age, free medical attendance, or whatever the benefit may be so long as its value can be stated m terms of money In examining then the distribution of wealth, the economist considers the whole of what each man gets for each single factor of production that he provides , where men provide only a smglo factor, he can concern himself directly with their total income, but when they provide more factors than one he must concern himself separately with the parts of their income due to each factor We’ proceed to consider in this way the causes that influence the rates of interest, rent, and wages and other earnings We shall find in this study that the factors of production can be regarded very much m the same way as we regarded commodities in the preceding Book there is equilibrium between the supply and demand m regard to land, laboui and capital just as there is in regaid to commodities, tl e rate of rent, or of interest, or of wages being regarded as the price paid for the services of those factors But at the same time there are special features to be allowed for in the case of each factor, so that neither land nor labour nor capital can be regarded simply as a commodity There is an apparent distinction between commodities and the factors of production that may be noticed before we enter on the discussion which has been indicated above As a matter of fact, at the present day most commodities Q 242 AN INTRODUCTION TO ECONOMICS are obtained by a single payment representing the price, while the payments for the factors of production are as a rule made periodically and depend in amount on the time for which the factor is used , m other words, most commodities arc bought, but most factors of production are hired This apparent distinction is, however, of little or no importance On the one hand the hiring of com- modities is by no means uncommon though it is not so common as buying , we constantly hire conveyances of various sorts, we hire houses to live m, and sometimes we hire things like furniture or cooking vessels for temporary use On the other hand land may be bought for use in production, though as a matter of fact it is more commonly hired , vlnlo slaves could be bought m India not very long ago, and can still be bought m some parts of the world, and employed as labourers in production The distinction between buying and hiring then does not m fact mark a difference between commodities and factors of production, and at the present stage students can safely leave it out of account wo have to consider the way m which the payments made for the factors of production are determined, and it does not matter that these payments are made periodically instead of being made once for all CHAPTER XXXIII, INTEREST ON CAPITAL Wr do not laics', exactly when the practice of paying interest for the use of capital arose m India Wo have seen in Chapter XH. that it cannot hare amen until the process of saving had begun, bccauso the stock of accumu- lated wealth from which capital is drawn depends on saving for its existence It seems probablo that when saving had begun, people at first used their wealth mainly as capital in their own business, and that the practice of lend- ing it to other people on interest camo gradual^ into exist- ence ; wo do not know for certain that this was the case, but w o will assumo that it was, and wo will take on imaginary illustration from a vory early poriod of the process, which will throw' light on tho nature of the transaction which we ■ nro considering. Wc will supposo that a cultivator’s plough-bullocks have died suddenly, and that he has not got any accumulated wealth which he can use to buy now ones. He knows that a neighbour has saved up a considerable stock of gram, and ho asks that neighbour to lend him enough of it to buy tho cattle which ho needs Tho neighbour replies that ho w'ants to spend tho gram for his own satisfaction, say in buildmg a now house for himself : the cultivator urges that ho does not want the now house at once, but could 244 AN INTRODUCTION TO ECONOMICS wait for a year until the loan has been returned The neighbour in answer to this aslcs, Why should, I wait ? The cultivator can reply in one of two ways , he may urge that they are relatives or old friends, and that his need is very great because he cannot hve unless he ploughs Vna land , and if his neighbour listens to these arguments, the loan is given as a mattor of friendship or charity, and the question of interest does not arise But on the other hand, the neighbour may not be inclined to act charitably, and the cultivator may say “ I will make it worth your while to wait, because next year I will give you back more gram than you lend , ” and after bargaining, the loan may be arranged on condition that twenty-five maunds of gram are advanced, and thirty maunds are to be repaid after a yeaT This is a loan of capital at twenty per cent for a year Students may well consider this illustration m some detail, because it bnngs out clearly the fundamental facts of a loan at interest The borrower wants the immediate use of a certain amount of wealth, and m order to satisfy his want he is willing to pay something at a future time : the want is just like those wants which we considered m Book III , and he will give some wealth in order to satisfy it, just as a man gives a rupee to buy a ser of ghi The lender on the other hand is m possession of wealth which he could use to satisfy some of his wants , but he decides that some more wealth received in a year’s tune will enable him to obtain more satisfaction on the whole than if he spends Ins existing stock at once , it is worth his while to wait, because he will be able to satisfy more wants m a year’s time than he could satisfy now , he will secure more satisfaction by waiting than by spending at once We have supposed above that thero is bargaining between INTEREST ON CAPITAL 245 the two parties before the amount to be paid as interest is settled it is obvious that their position m this respect is the same as that of buyers and sellers of a commodity. The borrower naturally wants to pay as little as possible, and there is a limit to the amount which he will pay, just as there is in the case of a purchaser If the borrower should find, for instance, that he would have to pay twice the loan as interest, he might decide that the charge was greater than he could possibly hope to pay, and no loan would be made and even though he calculates that he could manage to pay fifty per cent as interest, he wall not offer to pay so much if there is any chance of the lender being content with less The lender on the other hand wants the highest possible interest there is a limit below which he wall not lend, but he will take more than this limit if he can get it. Even then m such isolated transactions at an early period in the organisation of production, a loan of capital is settled in very much the same way as the sale of a com- modity. At this stage there is of course no regular market, if — as we have assumed — such transactions are at first rare , and in fact a market for capital can scarcely be said to exist even now m many of the villages of India The development that has taken place has, as in other matters, been the growth of customs, differing in detail from village to village It is obvious that a man who has once made a loan and had it repaid with interest will in many cases be i ready to make further loans, and as time goes on his family may develop a regular money-lending busmess , while cultivators who want capital will naturally apply to a man who is known to have lent money before We can thus see how the existing conditions in villages have grown up a large number of the inhabitants want 246 AN INTRODUCTION TO ECONOMICS to borrow money from time to time, and there are a few men (perhaps there is only one in a village) ready to lend money provided they can get a rate of interest which they consider satisfactory The position of these money-lenders is very similar to that of the retail traders, whom we con- sidered in Chapter XXVIII they fix the rate of interest which they charge, just as retailers fix their prices of gram, but the rate is limited by the fact that if it is too high fewer loans will be made, and their income from interest will bo reduced While then such money-lenders have usually customary or standard rates of interest, they modify their charges in accordance with changes in the demand for capital they will lend money below their customary rates rather than keep it unemployed, and they will charge more than usual at times when the demand for money is great There is then no regular market for capital m ordinary villages, just as there is in them no regular market for gram or other produce To find a market for capital we must go to the cities and towns In them we find the conditions which constitute a market on the one side a large number of people anxious to borrow, and to get the capital they require at the lowest possible rate and on the other side a number of people with money to lend, and anxious to get the highest possible rate of interest on it The lenders consist mainly of the banks, which have been described m Chapter XVI a large part of their business consists, as we have seen, m collecting the savings of individuals and lending the sums collected so as to make a profit A bank which is paying interest on the money which it holds obviously cannot make a profit unless it lends that money at a higher interest than it is paying j and consequently every bank wishes to have as much as INTEREST ON CAPITAL 247 ptw-ihle of it* money lent out at the highest rate of itittn-t wh*ch it can get, keeping m its hands only enough to meet the claims of tho<*o depositors who may want their money hack at once The banks, therefore, ns lendtrs arts in a position similar to that, of the sellers m the market of a commodity; they want to lend their money jn«f ns the rollon want to sell their grain , but liter want to get the highest possible rato for their loans, just ns the sellers want to get the highest possiblo prices for their grain , ami they compete with ono another m the attempt to secure what they want. The borrowers mclndo all the persons who want money for any purpose ; these purposes aro very various, but the feature common to all is that iho borrowers want to pay as low a rato of interest ns possiblo. Tlio borrowers aro thus competing among themselves for the monoy that is available, while tlio banks aro competing to lend tho monoy which they possess; and wo thus find all tlio foatures of an organised market, just like tho wliolesalo wheat-market which we described in the previous Book. Following the ordinary use of language, wo have spoken of tho transactions carried out m such a market ns made m money' It is in fact rare for a producer to borrow the actual capital which he needs ; ns a rule, he bonows monoy' with which to provide that capital The oultivator m our opening illustration did not want the wheat he borrowed for uso ns wheat ; ho wanted cattle, and ho borrowed the wheat to give m cxchnngo for them In the same way a man who wants to set up a factory does not borrow tho particular items of capital winch he needs, tho bricks, mortar, timber, machinery and so on , ho borrows money to pay for these We have excluded a discussion of the meaning of money from this introductory course, but 248 AN INTRODUCTION TO ECONOMICS students are already familiar -with the fact that the •word means something more than pieces of coined metal, and that a man who borrows a laldi of rupees no longer needs to have a cart loaded with the silver corns, but can handle the loan in various convenient ways This knowledge is sufficient for our present purpose, and we shall continue in this chapter to speak of the transactions we are con- sidering m terms of money, remembering that it is not the money which borrowers really want but the various things which the money can be used to pay for. One point in this market for money deserves special notice In discussmg the wheat-market, we saw that dealers have to pay constant attention to the conditions of supply and demand m other places, because wheat can be taken from one place to another and will ordinarily be taken for sale to those places where the price is highest But it is much more easy to move money than it is to move wheat or 6ome simihr commodity , students will not realise the truth of this statement fully until they have mastered the subject of Credit, but it is obvious that a lakh of rupees can be sent say from Calcutta to Cawnpore in the form of currency notes very much more cheaply and quickly than wheat to the same value could be transported And even currency notes are comparatively a clumsy method of transferring money from one market to another with the existing organisation of banking and credit, a telegram of a very few wordB is enough to transfer the largest sums from Calcutta to Cawnpore, or Bombay, or Rangoon, or London In this way money can be sent to any part of the world where at the moment it can earn the highest profit, and a banker in Cawnpore or Delhi has to know the con- ditions regarding supply and demand which prevail not merely in the cities of India but m other counties such INTEREST ON CAPITAL 249 as England, and America, and Japan. Thus the market m question is even more highly organised than the market for wheat, but the organisation is of the same kind. Let us examine m a little more detail the conditions of supply and demand m such a market We have seen that in a market for commodities the general law is that the amount demanded falls when the price rises, and rises when the price falls This is equally true as regards money Borrowers want money for a large variety of purposes, but most of it is wanted m order to make a profit by using it in production, and producers will, os a rule, employ more and more money so long as they can get a profit by its use. The individual producer is constantly asking himself the question : Can I employ more capital with advantage or not ? He calculates, for example, that he can increase hiB income by two thousand rupees a year if he employs ten thousand rupees in setting up certain new machines . he knows that in order to provide for depreciation he should set aside one thousand rupees yearly from the additional income, and he has to see if it is worth his while to set up the machines for the sake of the income of one thousand rupees that is left when this provision has been made The answer clearly depends on the rate of interest which he has to pay for the loan * if he can get it at four per cent , he will have six hundred rupees left for himself as earnings, and he will almost certainly make the investment , while if he finds that he would have to pay ten per cent , he sees that there would be nothing left for himself after paying the interest, and he will not, as a rule, think this worth his while. If we suppose that he can get the money for something less than ten per cent , bo that he can hope to earn a small sum, say fifty or a 250 AN INTRODUCTION TO ECONOMICS hundred rupeeB a year, his course of action, is doubtful t some men would think it is just worth their while to buy the machines, and others would, after hesitating, decide against it In the same way, the extent to which money is borrowed for dealers’ transactions depends very largely on the rate of interest A dealer, for mstance, who buys wheat from cultivators at harvest, must as a rule have money to pay the price in cash for each lot of wheat that he buys He may calculate that by buying wheat in the villages and selling it in a distant market, he can make a profit of two rupees per cent in two months after paying all necessary expenses such as the cost of carrying the wheat from the villages to the market is it worth while to borrow money m order to carry out this transaction ? Two rupees per cent for two months is at the rate of twelve per cent for a year , and if the dealer finds that he would have to pay twelve per cent or more for a loan, he obviously will not borrow On the other hand, he would probably borrow a large sum if he could get it for four per cent , while when the rate is about ten per cent , he will be doubtful whether it is worth his while to borrow or not, and different dealers will decide this question in different ways Almost all classes of borrowers then are in the same posi- tion There is an upper limit at which they will not borrow at all, because there would be nothing left for them after paying interest at that rate This limit is not the same for all borrowers , it varies with the nature of the trans- action, but whatever it may be, the general fact remains that uhen the rate is below this limit, the lower it is the readier will men be to borrow Thus m a large market, whatever the rate may be, there will always be men who INTEREST ON CAPITAL 251 are bout-nting whether to borrow or not, and other men in ‘Minting ns to the amount they will borrow ; and even a small change in the rate will a fleet their decision So far then as the demand is concerned, moncj* can bo regarded d-f- a commodity, and the general law of Demand appbes to it Turning now to the question of supply, the money that is ready to be lent at any moment is almost entirely m the lnnds of the banks and of those firms winch do banking business without calling themselves banks At very low rates, some or all of these institutions will not lend money at all , and the higher the rate which can be got, the more re n dy will they be to lend in larger and larger amounts It is easy to see, therefore, that the supply of money in the market wall be increased when the rato rises, just as the amount of wheat offered for sale is increased when the price is raised , in fact, it is easier to increase the supply of money than of wheat for the reason (which has already been mentioned) that money can be moved from place to place more easily and more quickly than wheat Thus on the one hand wo have a number of borrowers anxious to borrow at the cheapest possiblo rate, and on the other hand a number of lenders anxious to get the highest rale they can , and the bargaining that goes on between the individuals determines for the moment the market rate of net interest, at the point where the Demand and the Supply are equal The expression net interest which we bavo just used draws attention to an apparent difference between interest and prices, which will bo explained in the next chapter. CHAPTER XXXIV. INTEREST ( Continued ) Students will remember that when we were describing a market for commodities, we laid stress on the fact that though the pnce may change very rapidly, there is at any moment only one equilibrium-price wheat, for instance, cannot stand at the same moment at sixteen and at fourteen sers A slight knowledge of the market for capital suggests that this is not true in the case of interest some men w ill be borrowing at five per cent , while others have to pay eight or ten or twelve per cent , and it looks as if there were no such thing as a market rate of interest, corresponding to the market pnce of wheat The reason for this apparent difference is to be found in the fact that what is called interest m everyday talk mcludes not only payment for the use of capital, but also payments of other kinds Econo- mists thus find it convenient to draw a distinction betw een gross and net interest Gross interest is what we mean by interest in ordinary talk, the whole amount that a borrow er has to pay, while net interest is that portion of the gross mterest which is paid simply for the use of capital. Gross mterest ordinarily mcludes payments on account of two items in addition to net mterest One of these is uisurance agamst the risk that the borrower will not return the capital when it is due The seller of a commodity has INTEREST 253 not to consider a question of this kind, because his transac- tion is complete when the commodity has been delivered and its pneo has been received , but a loan of capital is a transaction extending over a considerable period of time, and it may happen that during this time the position of the borrower changes so that ho is unable to fulfil his promise to repay. If, for instanco, he has borrowed m order to buy niacluncry, he may find that the machinery he has bought is unsuitable, and yields him no profit ; or if he has borrowed to buv grain or otbor produce, prices may have fallen so much that ho has lost money instead of gaming it by his transactions. There is thus a risk that the borrower may be unable to return the capital ; and the lender guards himself against tills risk by charging in every case some- thing moro than the net interest. If we suppose that a man who has lent Rs. 10,000 in small Bums to a large number of people charges each of them two per cent to cover this risk, then ho hopes to receive Rs 200 m a year in addition to the net interest If he finds at the end of the year that all Ins capital is repaid, ho has gamed Rs 200 ; while if his debtors are unable to pay Rs 500 in all he has lost Rs 300 A moneylender or banker regulates the amount of his charge for insurance against risk according to the view he takes of the risk in the case of each borrower If he knows that a particular borrower is both honest and prosperous, the charge ho makes will be small , if the borrower is not prosperous, the risk that he may be unable to repay becomes much greater, and the extra charge is much higher , while if the borrower is thought to be dis- honest, and likely to refuse to pay when the time comes, no one will lend him money except at a very high charge indeed In ordinary business a man’s credit is said to be 254 AN INTRODUCTION TO ECONOMICS good if people generally expect him to pay his debts, and bad if they think he will be either unwilling or unable to pay , and a man’s credit may bo measured by the amount that ho is charged for loans Again the charge for in- surance will vary greatly according to the nature of the security that the borrower gives. Sometimes a loan may be given on what is called the personal security of the borrower, that is, simply on the borrower’s promise to pay Loans on the personal security of the borrower are naturally given only to men whose credit is good, and even then the charge is usually high because there is the risk that a man may become unable to pay even though he wishes to do so Such a man can get a loan at a substantially lower charge if two or three other men, whose credit is also good, agree to be security for him, that is, to be responsible for the loan if he fails to pay. The charge is less m this case because there is much less nsk that three or four persons wall become unable to pay than that one man will default Or a man may give some tangible security, which the lender can realise in case of default , he may pledge jewels, or mortgage a house or land, and if this security is easily realisable the charge for risk may be very low. But in practically all cases of loans to private persons the sum charged as interest mcludes a charge for insurance against nsk m addition to the net interest The second kind of payment usually included in interest is a charge for the work done by the lender, in fact his earnings of management It may vary according to the trouble that he has to take m each case, for instance, in making sure that a mortgage is legally valid, for storing jewels pledged to him so that they may not be stolen, for finding out how the borrower’s credit stands, and so on Thus to ascertain the net interest, we have to deduct from INTEREST 255 tho charge actually made something on account of msurance against nsk, and something on account of earnings of management An example will make tho relation of not to gross interest more easily understood We will suppose that on a par- ticular day a bank makes loans to different persons at 6, S, 10 and 12 per cont , and wo will also suppose that the hank charges m each case 2 per cent on account of its earnings. Deducting this 2 per cent , we see that the various borrowers are paying 4, 6, 8 and 10 per cent, to cover both net interest and msurance The rate of net interest is the same m the case of all the loans made at the same time, and we may take it at 3J per cent , and by deducting this sum we can see what each borrower is paying as msurance The first borrower is only charged one- half per cent , and we may be sure that his credit is very good, and that he has given very satisfactory seounty. The others are charged respectively 2J, 4 J and 61 per cent by way of insurance The manager of the bank has con- sidered the credit of each of them and the nature of the security which each has offered, and has fixed these charges in the light of liis experience so that, to tho best of his judgment, the bank will not lose money in the long run by some of its debtors failing to pay ; he knows that m the ordinary course of business some debtors will fail to pay, and he calculates that such losses will be just about covered by the charges which he makes It is then the market rate of net interest which is deter- mined by the conditions of supply and demand that prevail at any moment in the market , and the gross interest, which individual borrowers have to pay, is made up of this net interest and of the other items that have been described above. It is not easy for students to know just 256 AN INTRODUCTION TO ECONOMICS what the net rate is at any moment, because the market reports which are published in the newspapers do not distinguish the various items as we have done , but an idea of its fluctuations during short periods can be got by watching the changes m what is known as the Bank Rate. From time to tune each of the three Presidency Banks — (i c the Banks of Bengal, Bombay and Madras) announces the lowest rate at which it will lend money on perfectly good security At one time, when the demand for capital is small compared with the supply, tho bank rate may stand at four per cent or even as low as three per cent , then when the conditions of supply and demand change, the rate may rise rapidly to six or seven per cent , and occa- sionally even higher These changes m the bank rate indicate the changes in the market rate of net interest, the net interest is less than the bank rate, because the latter includes charges for management, and a small charge for risk, but these do not vary greatly m a short period of time, and, consequently, it is safe to conclude that a rise of one per cent m the bank rate indicates a rise of about one per cent m the market rate of net interest In the case of a market for a commodity, we saw that at any given time there is a normal price to which the market price tends to return , and in just tho same way there is a normal rate of net interest When the market rate rises, those persons who have been hesitating whether to borrow or not will decide not to do so, and m this way a rise in the rate will operate to reduce the demand for capital On the other hand, a rise m the rate will make lenders more ready to lend , and so the supply is increased while the demand is reduced A rise in the market rate, therefore, affects the demand and the supply in such a way as to lead to a reduction in the rate , w hile a fall in INTEREST 257 tho rate, by inducing people to borrow and making lending less attractive, tends to make the rate rise again The relation of the market rate to the normal rate is thus precisely the same as that of market to normal prices There is, however, one peculiarity that requires notice, namely, the variation in the rate of interest with the season of the year. A variation of this land occurs m all coun- tries where a large proportion of the circulating capital m use is employed in trade in agricultural produce, and it is especially noticeable in India, where this proportion is at present very high A largo variety of crops ripen m tho samo month cultivators are anxious to soli their produce as soon as possible, and at each haivcst there is a large demand for capital to buy the produce and trans- port it to the places where it will be consumed This demand decreases when most of the produce has been dealt with ; and so tho demand for capital is much higher in some months than in others In Calcutta, for instance, demand is slack and interest is low during the early part of the rams, and tho bank rate at this period is low As soon, however, as tho jute crop ripens, money is wanted to deal with it, and the rate of interest, as a rule, rises rapidly , then more money is wanted for the nee crop m Bengal and Burma, while by the time the cold weather begins the Bombay market demands large sums to deal with the cotton crop. The bank rate (which, as we have seen, indicates the rate of net interest) is therefore generally high or very high during the winter If the winter crops are good, there is a further large demand for capital to deal with wheat and oilseeds ; but as soon as this demand is satisfied the bank rate falls again, and it is usually at a mi nimu m in the rams until the next jute crop causes a fresh rise to begin. Students, therefore, who wish to follow R 258 AN INTRODUCTION TO ECONOMICS the movements m the rate of interest that takes place from month to month, must allow for the fact that the demand for capital vanes very greatly with the season of the year, and also for the fact that it varies from year to year with the yield of the crops , and they will find that those varia- tions account for changes m the bank rate, and are, m fact, put forward to explain such changes in the reports which most of the chief newspapers pubhsh regarding the market m Calcutta or Bombay Lastly, the fact must be emphasised that while at any time there is a normal rate of interest to which the market rate tends to return, this normal rate does not remain fixed for a long period, but changes with the changing conditions of the country We are not yet in a position to consider this subject in detail , students have first to master the movements in normal values, a subject of which the full consideration has been postponed (Chapter XXX.), and then to apply their knowledge to the long-period movements in the rate of interest For the present, all that can be done is to indicate some of the causes which may result m changes in the normal rate, leaving the study of these causes for the future It is easy to see that the demand for capital must in- crease with the progress of the organisation of production We have seen m Book H that this organisation involves the employment of more and more capital, and that it depends on the supply of capital in sufficient quantity If this tendency stood by itself, increased demand must brmg a higher rate of interest, and the development of production must thereby be checked But the tendency does not stand by itself, for while the demand for capital increases, the supply increases at the same time The supply of capital depends, as we have seen, primarily on INTEREST 259 people being able to save — that is, on their getting more wealth than i*« required for immediate consumption The organisation of production increases tho supply of wealth, and consequently makes it possiblo to save a larger amount And while increased saving becomes possiblo, the progress of tho country renders it at tho same time more likely * pcoplo tbmk moro of tho needs of the future, and realise the advantages of saving moro clearly, and they also realise the advantages of employing their savings as capital instead of hoarding them in nnproductno forms. Tims tho prospect for tho future is that both tho demand for capital, and tho supply of it, will increase , and the question whether tho normal rate of interest will riso or fall depends on tho relatn o speed in tho increase of tho supply and tho demand Some economists have looked forward to a time w hen tho supply of capital wall bo so great that it cannot all bo utihsed in production, and it is conceivable that this may como to pass On tho other hand, tho study of economic progress suggests that there may always be room for all tho capital that becomes available, and, in any case, tho need for more capital in India (and m other parts of Asia) is so enormous that tho question whether it will ever bo completely satisfied has no present interest for the student CHAPTER XXXV. INTEREST ( Continued) We must now resume our consideration of the rates of interest that are paid in Indian villages We have seen in Book IV that the retail price of a commodity such as •wheat does, in fact, depend very largely on the -wholesale price as settled in the large markets, and that the con- nection between the two prices is becoming closer with the development of means of communication a similar statement cannot yet be made with regard to the rate charged for loans to cultivators, and one of the greatest needs of the country is the establishment of such a con- nection so that the agricultural industry may have access to the great store of circulating capital which is con- trolled by the markets in the cities of India It is stall, broadly speaking, true that there are no regular markets for the capital required for agriculture Each village, or group of villages, depends for its supply on a few local moneylenders, and probably, m the majority of cases, these moneylenders are independent of the mam banking-system of the country ; each of them owns a certain amount of capital, and lends it at the high est rates he can obtain m the neighbourhood, but they do not t.Vnnk of obtaining additional capital from the banks when the amount which they possess is insufficient The ordinary INTEREST 261 cultivator is accustomed to deal with a particular money- lender, and it is not easy for him to leave that money- lender and go to another . custom, as we have seen, is a strong force in the villages, while a large proportion of the cultivators are, at any given time, m debt to their money- lender, and if one of them should attempt to leave him, he would at once be pressed for the money which he owed, and might be ruined by litigation The net rate of interest, as determined in the city markets, has, in consequence, veiy little direct influence on the amount of gross interest which the cultivator pays , he pays whatever rate is agreed upon with the moneylender with whom he deals And, in bargaining for a loan, he does not meet the money- lender on equal terms , his need for money is urgent, and, as we have seen, he cannot go from one lender to another finding out who will lend at the lowest rate , he has, therefore, very often to agree to whatever rate the moneylender chooses to fix, and the lender fixes the highest rate that a man who urgently needs money will agree to pay. The consequence is that the gross interest charged on capital lent for employment m agriculture is very high indeed in large parts of northern India it ranges from 25 to 50 per cent annually, and these very high rates are a serious cheek on the prosperity of the whole country It is probably true that almost every cultivator in the country could increase his income substantially if he could borrow the capital he needs at even as much as twelve per cent , but the charge of 25 to 50 per cent makes it, in many cases, impossible to make a profit, and consequently the annual production of wealth in the country is very much less than it would be if capital could be borrowed on more reasonable terms This position is not peculiar to India , the same thing 262 AN INTRODUCTION TO ECONOMICS is more or less true in every country where the holdings are so small that cultivators cannot deal directly with the ordmary banks, and whero special arrangements have not been organised for supplying the capital which they need We have said in on earlier chapter that tho ordinary banks cannot deal directly with the cultivator , but let us suppose for a moment that a bank decides to make tho attempt, and opens branches say at tho headquarters of each subdivision of a district The manager of each branch will then have to fix his charges for loans m tho way which has already been described in addition to interest, m tho strict sense of tho word, ho will have to charge something for the cost of management, and he will have to charge enough by way of insurance to secure tho bank against tho risk of loss In order to do thiB, he will have to know the credit of each cultivator who comes for a loan , these men will come from several hundred villages, and tho manager must know the position and the character of each Now, even m a single village it is not easy to find out an indi- vidual's oredit, and such a bank would have to keep up a very large staff to make tho necessary enquiries, and would also have to take many more precautions against loss than suffice m its ordmary business. The charges for loans would therefore be high, because (1) the cost of manage- ment would be very large relatively to the amount of money lent, and (2) the charge for insurance against risk would be much higher than in ordmary banking We have taken this imaginary illustration in order to bring out clearly the fact that dealing with small cultiva- tors is an expensive and nsky business, and that, if the gross charge for capital is to be kept down, some special arrangement^must be organised to avoid the expense and the risk. This is one of the chief aims of the system of INTEREST 263 co-opcratiYo credit w Inch is now being established in many parts of Lidia At a later stage students will have to pay close attention to this system, and, for the present, we will use it only as a further illustration of the nature of the interest that is paid in the villages It is now possible for a group of cultivators in a village to form a co-operativo credit societj', and when the society has been legally constituted it can borrow in a single transaction all the capital that its members require. Thus if fifty cultivators join the socioty, each of whom wants a loan, some wanting twonty rupees, some wanting thirty, and so on, to a total of Rs 1,200, the society can borrow that sum and distribute it among its members A bank or other lender will clearly find it muoh easier and much safer to lend to the society than to lend to its members individually instead of fifty separate transactions it has only to enter into one, and it has only to consider the- credit of the society as a whole, instead of the credit of each separate member The lender can thus charge very much less for management , it costs him no more trouble to lend Rs 1,200 than to lend Rs 20, and m this way the existence of the socioty reduces the gross interest materi- ally by reduemg the charge for management The charge for insurance against nsk can also be reduced It is a standing rule in these societies that each member is hable for all the society’s debts , that is to say, if the society should fail to pay its debts, any single member might be made to pay the whole, if the other members could not contribute Now people will not join m a society under this rule unless each of them trusts all the others, and the fact that a society is formed indicates by itself that all the members can be trusted to pay their debts in all ordinary circumstances, and, consequently, the credit of the society 264 AN INTRODUCTION TO ECONOMICS is good There are also numerous provisions in the system for ensurmg that the societies shall he worthy of trust, and the result is that a loan to a society is attended with very httle risk indeed, and the charge for insurance against risk need not he large The gross interest, thoioforo, charged hy lenders to such a society is very much less than they would charge to the individuals of whom the society is composed , it is less because hoth the charge for management and the charge for insurance against risk are very much reduced We must pass over the other features of the co-operative system, which are designed partly to strengthen the credit of the societies and partly to give them access as easily as possible to the stock of circulating capital which is in the hands of the hanks So far as the system succeeds, its result will he to make the interest charged to agri- culturists depend on the market rate, very much in the same way as the price of wheat paid to the producer depends on the market-price of wheat The individual cultivator wall then, hke the borrower m the city, pay gross interest, consisting of the market-rate of net interest with reasonable additions for cost of management and insurance against risk , and the village-markets for capital wall he connected wath the mam markets of the country While, therefore, we have to recognise that at the present time the rates of interest charged in the villages are not determined in the same way as the prices of commodities, w r e must also recognise that there is a tendency for them to he so determined, and we may fairly expect that as time goes on the position of capital will, in this respect, become more and more similar to that of a commodity, and that the resem- blance which already exists between the rate of interest and the price of a commodity will become closer and closer. INTEREST 2C5 So far, in this chapter, we have dealt with the question of capital m the villages ; hut at the present tune it is tru«» that even m the towns and cities the artisans and other small producers borrow from moneylenders in much the same wav as the cultivators, and that the rates which they pay are practically independent of the market-rate of net interest But in their case too the co-operative system opens out a way of connecting them with the mam market, so that there is a probability that the artisans like the cultivators will, as time goes on, come mto touoh wnth the market, and borrow on the terms rendered possible by the conditions of supply and demand Wo may now summarise our preliminary account of the causes that determine the rate of interest Capital m India is not yet m the same position as a commodity, but it is gradually approaching to that condition. There is already a market for capital in the cities, in wdnch the rate of net interest- is determined by the conditions of supply and demand, very much as the price of a commodity is determined, and the gross interest charged to individual borrowers in these markets is made up of the not interest so determined, together with additions to cover cost of management and insurance against risk The small producers, whether in the cities or m the villages, have not yot access to the mam market for capital, and the rates winch they pay are still more or less independent of the market-rate , but this condition is not likely to be per- manent, and the probability is that as time goes on the market-rate will have a wider and wider influence on the rates charged to all classes of borrowers When, therefore, students have mastered the mam theory of the equilibrium of supply and demand, they can apply its conclusions to the determination of the rate of interest as is done m the 266 AN INTRODUCTION TO ECONOMICS English test-hooks on the subject They have to remember that in India at the present day the rates charged on the capital borrowed by small producers are not, as a rule, determined in accordance with this theory, but still depend mainly on the power of the individual lenders , but, at the same time, this exception is likely to become of less importance as time goes on, and the theory will approxi- mate more and more closely to the facts of Indian in- dustrial conditions. CHAPTER XXXVI. RENT OF LARD. We have now to take up the next factor of production — Land — and see how far the rent 1 paid for it can bo said to be determined hke the price of a commodity by the conditions of supply and demand In this discussion we shall confine our attention to agricultural land rent of land required for othor purposes is determined, to some extent, m the same way as that of land taken for cultivation, and the study of its pecuhar features can be deferred to a later stage In the first place, we must recognise that though markets for agricultural land can now be said to exist in India, they have only recently come into existence, and their organisation is much less perfect than that of the markets for produce such as wheat Before the Muhammadan conquest of northern India, the cultivator usually paid to the Raja, whose land he occupied, a share of the produce of his land at each harvest , but it would be a mistake to regard this payment as being merely rent paid for the right of occupying the land It included rent m this sense, 1 There is no reason why a man should not buy land to cultivate instead of hiring it, and this is in fact sometimes done, though the practice is rare in India The price of land is, however, usually calculated either with regard to the rent which it will bring, or to the revenue which is charged on it, which bears a fixed relation to the rent , the market thus regards the rent as the real thing to be determined 268 AN INTRODUCTION TO ECONOMICS but it also included the cultivator’s share of taxation. The Raja maintained some sort of government, and pro- tected the cultivator (more or less completely) against cheats and robbers, and the payments made by cultivators formed part of the revenue expended on the government of the state As a rule, a family remained in the possession of the same land from generation to generation, and paid the share of the produce as a matter of custom, and the question how the share was determined m those times was not a matter for discussion by economists The Muham- madan rulers for the most part maintained this system of tenure, but changes in the share taken by them were made not infrequently thus at different times we find that culti- vators were required to pay as little as one-tenth, or as much as one-third, or even one-half of their produce Such changes in the rate charged were not determined directly by economic causes , they depended on the will of the Emperor, just as the amount of taxation is now determined by the will of the government , but, hke taxation, these changes sometimes had important economic effects In some cases, for instance, a cultivator might require more than half the annual produce of his land to keep himself, his family and his cattle alive , and when half the produce was taken by the State, such a man would not have enough produce left for his support, and he would probably abandon his land and look for some other means of livelihood This fact was apparently more or less recognised at the time, and it imposed an economic limit on the share of the produce taken by the government it was recognised that the share taken should not be so large as to cause culti- vators to give up their land , but subject to this limit the cultivator’s payments were regulated by the decision of the State, and not by economic causes RENT 03T LAND 269 It is on tho whole correct to say that during these periods landholders did not exist in northern India, if we mean by tho word landholder a person who has a right of property in a certain area of land, which he is free either to cultivate for himself or to let out to cultivators The landholders came into existence 1 mainly during the period of anarchy which covered the greater part of the eighteenth century, and then the development of markets for land became possible, because the supply of land was now in the hands of men whoso incomo depends on the amount of rent which they can get for its occupation We will look at the working of these markets and see how the level of rents in them is determined In this case we have to apeak of the level of rents, and cannot speak of a single rate There ib, in fact, no general rate of rent in the sense in which we have spoken of a general rate of net interest. One rupee of capital is worth just as much as any other rupee ; but, as we have seen m Book II., one acre of land may aid in producing much more, or much less, wealth than another acre, and the amount of rent charged on eaoh acre depends on its productive power This fact is familiar to everyone who knows the rents of a village it would probably be impossible to find a village of any size where the rent of every separate field works out at the same rate per acre Thus, in northern India one usually finds the fields which have the best situation and are most fertile renting at from about eight to fifteen rupees the acre, and the rest of the land paying lower rates according to its quality, until we come to the 1 This great social and economic change receives perhaps less attention than its importance merits m most text-books of Indian history A sketch of its development lias been attempted by the present writer m The Revenue Administration of the United Provinces 270 AN INTRODUCTION TO ECONOMICS poorest outlying fields, which may rent for a rupee an acre or less, and which are very commonly let free of rent or cultivated by the owner himself When, therefore, we speak of a rise or fall in rents, we cannot refer to a single market- rate of rent, but have to remember that the rent vanes ith the quality and position of the land. ; a rise in rents means that all, or nearly all, of the various rates have increased, and a fall means that they have decreased The demand for land in the markets which we are considering comes from the people who want to use it for the growth of crops The largest part of the popula- tion of northern India expects to make its livelihood by cultivation, and each family wants to occupy enough land to make this possible The classes who live by cultivation are by temperament exceedingly conservative, and most of them will go on cultivating so long as they can make a living at all, rather than change to some other occupation , and, on the other hand, labourers who wish to improve their position endeavour to get land in their village to cultivate rather than go to work in the towns At the same time, the people are not naturally inclined to take land at a distance from their home ; they want it in the locality where they live, and they will pay a very high rent in that locality, though equally good land could be got elsewhere at a much lower rent The consequence of these tendencies of the people is that there is not a large and well-developed market for land , there is rather a large number of small local markets, and the level of rents may at any time vary considerably from market to market The demand for land m any Iocabty will clearly increase as the population of the locality increases , for, as we have seen in Book II , the production from a given area of land cannot be increased to an indefinite RENT OP LAND 271 extent but sooner or later the Lav of Diminishing Returns <.omc» into operation regarding it, and a point is reached "here the crjienditure of more labour and more capital on land already cult in nted becomes unprofitable In the greater part of northern India the rural population is noNN so dense that there is a keen demand , landholders have no difficult}* m finding a cultnator for any land that fall* \ncant, "lnle many cultivators have less land than tho\ vant, and man} labourers are anxious to get land m order to start cultivation for themselves The demand is of the kind with v. hich nvo arc already familiar , the higher the rent that is asked for land of a particular quaht} ,tho le the last chapter w o skotchcd the grow th of tho market for agricultural land in northern India, and showed that in the conditions which pre\aii at present an oxccss of demand over supply must, in tho absenco of restrictive legislation, lead to tho rise of rents up to the level wlicro tho cultivators can only make a baro living, and wlicro tho landholders can take all tho wealth which the cultivators pioduce, excopt tho amount that is required to kcop thorn alivo and at work But at other times, and in other places, different conditions may prevail, and wo will now examine the same question in a very different sot of conditions. Wo will take an economic situation of tho land that was considered by tho English economists w'ho first worked out the theory of rent, and wo will assume that tho land is cultivated by intelligent men, w ho can get tho capital and the labour they require on oidmary commercial terms, and who are ready to move from ono part of tho country to another, or even to give up cultivation and take to some other occupation, if it promises to pay them bettor To simplify tho case, we will assume that these cultivators do not themselves w’ork with their hands, but devote their energies entirely to managing tho business of their cultiva- tion , and that they keep detailed accounts of the income RENT 275 and expenditure of each field, so that they know at; any time how much each field is earning for them The land which we are considering varies greatly in fertility, but some of it is so poor that cultivators pay no rent for it, while for the rest they pay rent that varies according to its fertility We have now to see how rents will be determined in the conditions which we have described. It is usual to speak of land which is cultivated but bears no rent as bemg ‘ on the margin of cultivation ’ , that is to say, its cultivation is only just worth while, and a very small change in the conditions will induce the cultivator to give it up A cultivator in the position which we have assumed will continue to cultivate such land so long as its produce suffices to (1) replace the capital expended on it , (2) pay interest on the capital, and wages of the labour employed on it , and (3) leave for himself a sum which he considers reasonable remuneration for the work that he has done, that is his earnings of management If the land does not produce enough to cover these items, he will cease to culti- vate it. Thus, if the prices of the produce should fall, the land on the margin of cultivation would no longer be cultivated This would mean that the supply of produce in the market will be decreased, and if the demand for produce is unchanged the decrease m the supply must lead to a rise in price, which will make it worth while to bring the marginal land again into cultivation On the other hand, if the prices of produce should rise, the margin of cultivation would extend , that is to say, culti- vators would find it worth while to take up stall worse land, because the higher prices would just make its cultivation r em unerative In that case the increase in the supply of produce would tend to lower prices. Thus, m the con- 276 AN INTRODUCTION TO ECONOMICS ditions which we have assumed to oxist, the margin of cultivation docs not consist permanently of land of a par- t’cular degree of productiveness , cultivation will extend to poorer soils whon prices rise, while the poorer soils lull he left uncultivated when prices fall , and whatever the prices may bo, at any time there will bo some land under cultivation which only just pays its expenses, and loaves nothing over which can bo claimed as rent Of course the markot-prico for all produco of any par- ticular land is the same, no matter on what quality of land it is grown , purchasers are not interested in the quality of the land, but only in tho produco Consequently all tho land which is more productive than that on the margin of cultivation will yield a surplus after repaying tho expenses of production, and the amount of the surplus will vary with its productiveness This surplus will, m the conditions which wo' have assumed, bo the rent payable to the landholder, because ho is m a position to claim it, and none of the other people who take part in the production can do so The labourer and tho capitalist are already, as wo have supposed, receiving tho current rates of wages and interest , they cannot ask for further remuneration, or if they do the cultivator can refuse it, because ho can get labour and capital at tho current rates The cultivator himself is also being remunerated for his work at the current rates , he would, of course, like to keep a part at least of the surplus for himself, but there are numciou? cultivators competing for a limited quality of land, and his competitors will offer the whole surplus as rent, so he must do the same. If the quantity of productive land were un- limited, then the surplus would be divided between the landholder and the cultivator by the process of barg&mmg, but since the quantity of land is not sufficient to satisfy the RENT 277 demand for it, the landholder is in a position to claim the whole of the surplus. This, then, is the classical theory of rent, stated m the simplest terms Whatever the prices of produce may be, some of the land under cultivation will only just remunerate the labour, capital, and business management employed on it this ‘ marginal ’ land will pay no rent, while all the more productive land will pay as rent the entire surplus of its production that is left after remunerating the labour, capital and management employed on it It is convenient to describe this surplus as the Economio Rent, to dis- tinguish it from the rents actually paid by particular cultivators On this theory the Normal Economic Rent will be determined by the normal prices of produce If prices rise, it will pay to cultivate land which is less productive than that previously on the margin of cultivation, and this new and inferior land will then set the standard, and all land that yields more than it will pay rent • in other words, a rise of prices will cause cultivation to extend beyond its former margin, and rents will rise all round If, on the other hand, prices fall, the marginal land will go out of cultivation, because its cultivation will no longer pay, the > margin of cultivation will contract, and rents will show a general fall Let us see what relation this Economic Rent bears to the rents that would be paid by Indian cultivators, if they were not restricted by legislation In the first place, there is no doubt that the c margin of cultivation ’ can be recognised m Indian conditions, smce in village after village we can find land which it only just pays to cultivate, and which does not, in fact, pay rent 1 ‘■This point may bo insisted on, because it has been overlooked by some Indian writers on Economics Much of the land which 278 AN INTRODUCTION TO ECONOMICS Above this marginal land we find land of all grades of productiveness, and the rent varies generally with the productiveness of each field. The Indian cultivator, however, is in a very different position from the men on whom the classical theory is based he does much of the labour and finds most of the capital besides domg the work of management, and he does not separate in his own mmd the remuneration due to each of these factors of production He does not ask, that is, if his land is giving him a fair return for his capital, fair wages for his labour, and fair earnings of management , he does not even ask if it is giving enough to replace the fixed capital that is, being gradually used up He cannot, therefore, calculate whether or not each separate field in his cultivation pays him, on the hues of the calculation assumed m the classical theory to be possible he pays cash or gram for certain items of the cost of cultivation (the cost of the labour which he hires, the price of seed which he buys, and so on), and he calculates — or rather he learns by experience — whether the rest of the produce of his holding is sufficient to afford him a living and to pay the rent Instead, there- fore, of asking whether the land pays the expenses of cultivating it and leaves a surplus for rent, we must ask Does it support the cultivator and leave a surplus 2 If now we bear m mmd the fact stated m the last chapter, that m most parts of northern India competition for land is keen, that cultivators have great difficulty m taking to some other occupation, and that their whole habit of mmd is opposed to a change of this land, we must conclude that, is cultivated by the landholders under the name of LhudLasht comes under this head , they cannot persuade any cultivator to pay them rent for it, but thoy cultivate it themselves because it just pays for the work done and tho capital expended, though it provides no surplus that could be paid as rent RENT 279 in the absence of restrictin' legislation, their rents arc not hkily to la' U' s than the Economic Rent, and ma\ \ery 'H‘l* c f c'^1 it hi a coiMd"rable nmount Competition for kit'd is m» hum that people ml! ho quick to offer higher rent for run hml from w Inch a cultivator is making an c v option r 1 income, amt they will offer at least as much rent as will bring down the income to what other land is inkling, that n to «iv, the landholder will bo able to take at ha* ! the whole surplus as calculated m the classical theory Rut cultiiatore will pn\ more than this lather thin Is wo their hnd ; they will reduco their expenses by working hauler them c elies and employing less hired labour; they will do without some of the comforts of life which they lin-ie hitherto enjojed; and they will fail to proud#- for (ho replacement of the capital winch is gradu- ally being med up. Ihcy will offer then a ront which docs not Ionic* them sufficient return for their cnpital, their labour and their management ; they may, m fact, keep for thcnwlves only tho barest. ncce«aancs of hfo, and pay tho rest of their produce to tho landholder as rent Of course the landholder is not bound to take tho highest ront that cuUnators would offer under tho pressure of competition , and manj Indian landholders do not, m fact, tako so much. Rut landlords could take this amount if thoy wished to do so, and the ordinary man takes as much as ho can get We see then that tho theory of rent, which has been worked out bj Western economists, applies, broadly speak- ing, to India Where thero is competition for a limited supply of land, the landholder can m any caso tako the whole Economic Rent if ho chooses to do so, but tho ignoranco and the poverty of tho cultivators may enable him to tako even more than this In tho next chapter wo shall explain why it is that government has introduced legislation to prevent 2S0 AN INTRODUCTION TO ECONOMICS the landholder from taking so much, or, in other "words, has decided that rents shall be determined otherwise than by the existing conditions of demand and supply for land Before, however, we leave the theory of rent, a few words may be said on the relation that exists between the rent ot land and the prices of agricultural produce It is not unusual to find people arguing in conversation or m the newspapers that an increase in the level of rents leads to a rise in the price of food-grains, or, in other words, that prices depend on rents , speaking generally, this is exactly the reverse of the truth, and m fact rents depend on prices This conclusion follows clearly from what has been said above, regarding the way in which the position of the margin of cultivation is determined by the prices obtainable for produce The price just repays the cost of cultivating the ‘ marginal ’ land, and thus sets the standard by which the Economic Rent is determined , if prices rise, poorer land is taken into cultivation, and if they fall, the worst land is left uncultivated, so that in either case the standard by which rent is determined is changed , that is to say, rent depends on prices This truth is commonly stated m the form of a law that * Rent does not enter into the expenses of production * The expenses of production, which at any time set the standard of price, consist of the cost of cultivating the ‘ marginal ’ land, which pays no rent ; and their amount cannot depend on the amount of rent which is charged on the more pioductive land CHAPTER XXXVIII LIMITATION OP RENTS BY LEGISLATION. We have seen in the last chapter that the economic causes at work in northern India, if they were allowed to work without interference, would result in a very large share of the produce of the soil being paid to landholders as rent, while the cultivators would keep little or nothing beyond the barest necessaries of life We have also indicated that the working of these causes is interfered with by legislation, which limits the amount of rent that a landholder can claim, and aims at leaving to the cultivator part of the produce which would otherwise go to the landholder. This legislation is exceptional * the Indian government makes no attempt to fix prices, or wages , 1 or the rate of interest, but leaves them to be determined by the action of economic causes, and , its exceptional interference in the case of rents requires justification A full discussion of this question would extend fax beyond the scope of the present work The action of government is directed to secure many objects, the discussion of which forms part of the science of Politics ; the economic prosperity of the 1 Students will find later in their course that the governments of some countries are taking notion to regulate the standard rates of wages m certain cases somewhat m the same way as the Indian government regulates rent, but this question has not yet arisen in India 282 AN INTBODUCTION TO ECONOMICS country is one of these objects, and a most important one, but it is not the only object , and a government may sometimes have to choose between promoting economic prosperity and securing some other aim We must pass over, therefore, many of the arguments which justify tenancy-legislation, and confine ourselves to those which have a direct economic bearing From this point of view the great argument in favour of such legislation is that the unrestricted nse in rents must operate m the long run to reduce the mcome of the whole community. In order to understand this argument, we must pay some further attention to the idea of the Fertility of the soil, which we discussed briefly m Chapter VII It would be a great mistake to regard the soil as a sort of storehouse from which food and other agricultural produce can be ex- tracted , it is much nearer the truth to regard it m the same hght as we regard a horse or a bullock We know that m order to get from a horse or a bullock the best work of which it is capable we must feed and tend it carefully ; we can get an extra amount of work from it for a short time by over-working it, but when it is treated in this way it very soon deteriorates, and can do less work than before These statements are, broadly speaking, true of the soil. The fertility — that is tne productiveness — of any ordinary field can be seriously injured m a very short time by improper methods of cultivation, which may secure a small gam in the present, but at the cost of a much greater loss in future mcome On the other hand, careful and skilful cultivation may gradually produce a permanent improvement m the fertility of land Thus the amount of produce obtained from the land, which forms much the greatest proportion of the mcome of the country, depends on the way m which the land is cultivated by the persons LIMITATION OF RENTS BY LEGISLATION 283 who occupy it If those persons are trying merely to get the largest possible immediate income, the production will tend m time to dimmish , while m order to secure that the production shall increase, it is necessary that each culti- vator shall have a personal interest in maintaining and improving the productiveness of the land in his possession Now if there were no tenancy-legislation, a cultivator would have no such personal interest Whatever happened he could only hope just to make a living if he effected an improvement in the productiveness of his land, he would have to give up the whole of the extra produce as rent, while if the productiveness declined he would be able to get his rent reduced. And he could not be expected to work for an improvement m the future, because he would have no certainty that the land would remain in his posses- sion ; it might at any time be given to someone else who offered a higher rent than he was ready to pay. In these conditions then the wisest course for the cultivator would be to think only of the present, and get the largest crop he could without regard to the future productiveness of the soil In order to induce him to regard the future, he must be given a reasonable prospect of keeping possession of the land long enough to secure the increased produce, and he must have the hope of keeping a share at least of the increased produce for himself. This conclusion has been drawn, not merely from the theory of rent, but from the study of actual facts m countries where the economic position resembles that of India , and m all such countries it is recognised that m order to maintain and increase the income which the country, as a whole, obtains from land the cultivators must be given a certain degree of Fixity of Tenure Fixity of Tenure is the name given to the condition which has just 284 AN INTRODUCTION TO ECONOMICS been indicated, when the cultivator has a reasonable prospect of retaining his land for a sufficient penod to make it worth his while to manage it so as to improve its productiveness And in the same way it has been recog- nised that the cultivator must not be made to pay more than a Fair Rent This last expression is, of course, vague ; the most definite meaning that can be given to it is to regard a Fair Rent as a rent which leaves to the cultivator a sufficient share of any mcrease m produce he may secure to furnish him with an adequate motive for improving the condition of his land Thus the object of Government is to secure for the cultivator, firstly, Fixity of Tenure, and, secondly, Fair Rents. Am examination of the various Rent Laws or Tenancy Laws m force in the different provinces of northern India will show that, while the particular provisions vary from province to province, these two elements, Fixity of Tenure and Fair Rent, are to be found m all of them the protec- tion given vanes in completeness, and does not always extend to all cultivators, but m each case the object of the law is to give the bulk of the cultivators more or less fixity of tenure, and to limit the amount of rent which the landholder can claim from them Thus m different provinces we find * hereditary,’ or * occupancy,’ or * settled,’ or * statutory ’ cultivators , some of these are entitled to hold their land for ever, provided they pay the rent and do not injure the land, while others are entitled to hold it for a minimum number of years And we find different methods of limiting the amount of rent , m Oudh, for in- stance, the enhancement is limited to a fixed proportion (one anna in the rupee), while in Agra the occupancy cultivator can have his rent settled by a court of law. But the general principle is the same , landholders are LIMITATION OF RENTS BY LEGISLATION 285 prevented from ejecting cultivators except on good grounds, and the amount of rent which they can claim is limi ted The study of Indian land-tenures is too large to be dealt with fully at this early stage of a student’s course , but what has been said above is sufficient to indicate that landholder are not permitted to claim as rent the full share of the produce which they could claim in the absence of restrictive legislation It is thus not easy to state in a few words the way in which the amount of rent is determined in India at the present day. Now that markets for agricultural land have come into existence, the conditions of supply and demand are such as to enable rents to be raised not merely to what wo have spoken of as the Economic Rent, but to the point where the cultivator is left only the bare necessaries of life But government interferes to prevent this condition, and so far as its interference fa effective, the result fa to leave the cultivators something more than bare necessaries in the present, and (what is more im- portant) the hope that they can improve their income by improving the productiveness of their land. The cultiva- tors then have an incentive to make the best use of their land in the interest of the country as a whole ; and the discussions that arise from time to time as to the sufficiency of the tenancy law of a province are concerned funda- mentally with the question whether or not this incentive is adequate. CHAPTER XXXIX, GENERAL WAGES. In the foregoing chapters we have indicated the extent to which markets for Capital and for Land have come into existence in India, and the nature of the processes by which rates of interest and of rent are determined in them We have now to consider Labour from the same pomt of view. We shall begin with the case of general labour, and refer later to the special conditions which affect the remuneration of those occupations which require specialised skill. If we ask a cultivator living in an ordinary village remote from a town how the wages he pays to labourers are settled, there is very little doubt that he would reply that it is entirely a matter of custom , that the field- labourers have always received two sers of gram (or what- ever the local rate may be) for each day on which they worked, and that the carpenter and other artisans and servants also get the remuneration that is customary His answer would have been perfectly true not very long ago, and is nearly true even now, because away from towns the rates of wages are in fact largely customary, and the customs regarding their amount do not change rapidly. But as students of the subject we must go rather further, because we know that customs are not everlasting, and that GENERAL WAGES 287 they do, in fact, change ; we want to look back to the tune before the custom was established, and so to find out what were the causes of the rates which have become customary ‘ Looking back * means studying the economio history of the past. This stage in the economic history of India is still very imperfectly known, but there is good reason to think that the system of paying wages to labourers must have arisen from a condition of slavery It is probable that the ancestors of the men of low castes, who now form the bulk of the village labourers, were at one time m the position of slaves of the cultivators , that is to say, they were not free to leave the village or to offer their work to the employer who would pay the highest wages, but they were bound to do their master’s work, and the share of the produce which they received was determined by their master’s will In these conditions there would obviously be no ' market ’ for labour . 1 The chief economic consideration that would affect the cultivator would be the need of keeping his slaves ahve and at work , it would upset his business, and possibly rum him, if the slaves either died or got desperate and ran away into the jungles at a time w r hen lus land was urgently in need of their work To avoid such risks, he would have to give them enough gram and other produce to keep them at work , the least he must give would be what we have described as the necessaries for existence, smee if he gave less than this they would starve , and he would probably, m practice, give a little more than this so as to keep them contented At this period the slaves would have very few wants 1 A market for labour may exist where slavery prevails if the Blavos are bought and sold like cattle , but there is no reason to suppose that in India the village-labourers were bought and sold, and transferred from place to place, as a regular practice 288 AN INTRODUCTION TO ECONOMICS beyond a sufficiency of food, and while each village had little communication with its neighbours, there would be httle chance of many new wants arising When, therefore, the cultivators had once learned by experience how much produce must be given to keep their slaves ahvo and content, things might continue without change for vory many years , on the one hand, the same payments would be made year after year, and they would become a matter of custom , on the other hand, the slaves would go on satisfying the same wants in the same way, and their lives would ako be regulated almost entirely by custom The customs would continue in force until changes from out- side began to affect the life of the village , their origin w ould be forgotten, and the people — whether cultivators or labourers — would simply say that things had always been so As we have said above, the economic history of India is not sufficiently known to justify a definite general statement that the labourers were really slaves, and that wages began in this way This is, however, the most probable con- clusion from what is known , and perhaps the strongest evidence of it is to be found m the fact that even now the condition of the labourers in the more backward tracts of the country is very like that of slaves They cannot, of course, now be forced by law to work for their masters, but as a matter of fact many of them do not think of doing anything else, but take the customary wages, and hve in the customary way , they are only gradually commg to realise that they are free to go 'and work for whoever will pay them best It is probable then that m most villages the customary rates of general wages were based originally on the amount of commodities required to keep slaves ahve and reasonably GENERAL WAGES 289 content m the way of life to which they were accustomed There was then no labour-market m the villages, and even now there are many villages where the influence of the market is very little felt ; in the case of labour, as in that of capital, we have to look to the cities and towns for the development of the market A town is essentially a collec- tion of a largo number of people engaged mainly in produc- ing wealth, and labourers are needed to take part in the production If now we consider the case of a town coming into existence in what was previously an ordinary village, we see that, as production develops, the producers will want more labourers, and they must at first look to the neighbouring villages for their supply But the labourers in the villages are accustomed to their old life, and some inducement must be offered to them to change it , the obvious inducement is to offer somewhat higher wages than those that are customary m the villages Thus the growth of a town implies the beginnings of a market for Labour There are now different employers, some in the town and some in the villages, anxious to induce men to work for them, and offering -wages as an inducement , the amount of wages is no longer fixed entirely by custom, but it is beginning to depend on the conditions of supply and demand The demand consists of the employers, who want men to work , and the supply consists of the labourers in the neighbourhood At first such markets would be very small and local, but the gradual development on the one band of means of communication, and on the other hand of knowledge and intelligence among the labouring classes, would in time produce the larger though stall imperfect market for labour which exists to-day, and the main features of which have been outlined in Chapter IX This market is, as we have T 290 AN INTRODUCTION TO ECONOMICS seen, stall very imperfect In a thoroughly-organised market, -we should find the labourers all over India con- stantly informed of the demand for work and of the n ages offered in all parts of the country, and ready to start off for any distant place nhere thero might bo a prospect of earning higher wages ; as a matter of fact, only a small proportion of the labourers think of moving at all, and most of that small proportion think of going only to some particular place whore they happen to know the condi- tions We must not, therefore, expeot to find that the rate of wages is determined so closely by the general conditions of supply and demand as it Mould be m a thoroughly organised market* Me find rather that the markets for labour resemble the markets for agricultural land In both cases thero are largo numbers of local markets, within which the conditions of supply and demand have a large influence in determining the rate, and these markets are more or less connected M'lth each other, so that each of them is influenced to some extent by the con- ditions prevailing in its neighbourhood , but the connection between the markets is by no means so close as that Minch we found to exist in the markets for a commodity such as wheat The essential difference between Labour and a commodity such as wheat will be apparent when we say that Labour may be regarded as a commodity with a null of its ( own A sack of n heat has no choice m its disposal, but is sent for consumption wherever its ouuier decides ; but a umt of Labour is embodied m a living man, who cannot be sent about the country in the same way, but who decides for himself where he will go and what work he will do The market for Labour is thus affected very largely by the tastes and views of the labourer,^ and in discussing the question of wages it is always necessary to GENERAL WAGES 291 remember that -no are no longer dealing with inanimate things, but with human beings whose nature is like our own We shall return to this essential difference in the follow mg chapters. CHAPTER XL GENERAL WAGES ( Continued ). We have now to consider the working of tho markets for labour, -which, as we have seen m the last ohapter, have gradually come into existence in India , we have to examine the nature of the demand for labour, and also of the supply, and to see in what way equilibrium is secured In the first place, however, it is necessary to settle the meaning which we attach to the phrase Rate of Wages We know that m an ordinary Indian town there is at any time a prevailing rate of wages for general labour; that is to say, if we engage an ordinary coolie for ordinary work, we expect to pay him the prevailing rate of two annas, or three annas, or whatever it may be at the tamo In the same way there are prevailing rates in villages, which may differ considerably from village to village an ordinary labourer expects to receive for his day’s u ork a fixed amount of money, or of gram, according to the rate that is established m that particular village in which he works The existence of a prevailing rate does not mean that every labourer is paid precisely at that rate We expect to pay a man more than the prevailing rate if he does an exceptional amount of work, or does it excep- tionally well, or works for longer hours than usual , and, on the other hand, a man who is too weak to do a full day’s GENERAL WAGES 293 'work, or -who works badly and carelessly, finds that he cannot got employed at the usual rate, and has to work for lower w ages But these cases are exceptional . m any town or village thero is a standard of work and efficiency recognised by tlio people, and the prevailing rate of wages is paid to those labourers (the great majority) who work in accordance with that standard. At an earlier period m the history of India, it is prob- able that the remuneration of labourers was given in the form of commodities which would satisfy their wants directly, and would not need to be exchanged for other commodities ; , tho labourers received the food and cloth- ing and fuel which they required, and were sheltered at their employer’s expense This system has changed gradually first, labourers were paid mainly m gram, and though they consumed most of this as food, they had to exchange part of it for clothing or other commodities , and then they were paid mainly m money, with which they could buy tho food and other commodities that they need But traces of the old system survive, and make it necessary that, when we are considering the remuneration of a particular class of labourers, we should be careful to count up all that they really receive, and not limit our attention to tho money that is paid. Thus, field-labourers m some parts of the country commonly receive some dried pulse ( chabena ) or some tobacco every day m addition to the ordinary rate of gram or cash wages, and these items must not be overlooked m calculating the remuneration which they receive Again, as we saw m Chapter XXXII , the money paid to a groom in some parts of India is only a part of the remuneration which he receives , he still receives a quantity of commodities for consumption in addition to his pay Such customs make it m some cases 294 AN INTRODUCTION TO ECONOMICS difficult to state the total remuneration received by labourers of particular classes As soon as wages begin to bo paid m money, a distinction arises between money wages and ical wages, winch must be carefully borne m mind. The expression money wages means simply the remuneration of the labourer stated m terms of money , by real u ages w o mean the quantity of commodities for consumption that tho remuneration provides The labourer works in order to obtain com- modities for consumption, and the important question for him is the quantity of these commodities which he can got, and not the number of coins which come into his possession If we find that the rate of wages in a particular town has nsen from two annas to three annas a day, it is obvious that the rise m money wages has been at tho rate of fifty per cent , but if we want to find out what the rise in real wages has been, we must consider the prices of the various commodities which the labourers consume, and see what quantities of these they can purchase If prices have not changed materially during the period which we are considering, then the rise in real wages will be about the same as that of money wages , the labourer can buy half as much again when he has three annas to spend as when he had only two If, on the other hand, prices of the commodities which he consumes have risen by fifty per cent , he is no better off than before , he has more money to spend, but it will purchase only the same quantity of commodities, and thus the amount of his real wages has not changed Agam, if we find that the rate of wages in a village has remained for a long time at two annas a day, we must not conclude that the rate of real wages has not altered in that time , we may find that the labourer has to pay more than before for gram and salt and clothes GENERAL WAGES 295 and other commodities, so that his real w ages have fallen * w hile his money wages are unchanged. It is by no means easy to find out accurately the changes that have taken place in real w ages A detailed study of the labourer's consumption has to be made so that we may know what commodities to take mto account, and in what quantities ; and though this is not difficult in the case of a remote village w’here the labourer has few wants and his habits change slowly, the difficulty becomes serious as the number of wants increase, and as the means of satisfy- ing them multiply The difficulty has to he faced when we wish to study the economic progress of the people, because their condition depends on the amount of real wages, and not on money wages ; but for the present we will put it aside by assuming that the prices of commodities do not alter materially, and that a rise or fall m money wages means a corresponding increase or decrease in the quantity of commodities that a labourer can obtain We can then speak of a rise or fall m the rate of wages, and for con- venience we can speak of the change in terms of money ; but wo must remember throughout that the important thing to the labourer is not the amount of money he receives, but the quantity of commodities which he can obtain We will now look at the working of a market for Labour, such as exists in an ordinary town in northern India, and see how the prevailing rate of wages is determined The Demand for labour comes from all the employers in the town who want coolies to work for them , there are probably several classes of employers — one or two factories, the goods-station of the railw ay, merchants w ho have goods to transport, contractors who are erectmg buildings or repairing roads, residents who want coohes to pull punkahs, or cut grass, or work in their gardens, and the like , and 296 AN INTRODUCTION TO ECONOMICS the demands of all these classes taken together make up the total demand m the market This demand is not 3 a fixed quantity, but varies with the rate of wages very much in the same way as the demand for a commodity varies with the price, that is, the general Law of Demand apphes to labour as well as to commodities This idea will probably be unfamiliar to students who have no practical experience of employing labourers, and we muBt examme it in a httle detail When we considered the demand for a commodity, we found that for each consumer there is an upper limit of price, and that when the price reaches this limit he ceases to consume that commodity In the case of labour, this upper limit is determined by the amount of wealth which the labour produces This is easy to see m simple cases a man will not pay a coohe two annas to cut grass if the grass is not worth two annas to him he will pay less than the grass is worth to him if he can get the coohe to work for less, but he will not pay more The same fact is true, though it is not so easily seen, m cases of organised pro- duction : where coohes are working with capital provided by the producer, it is not easy at first sight to say how much of the wealth produced is due to the coohes 5 work, and how much to the capital , but it is a most important part of the producer’s business to ascertam this, and to make sure that every coohe whom he employs is at least worth his wages No employer then will pay more for a coohe than he t hi nks the coohe is worth Thus there is an upper hmit to the Demand Schedule for labour. There is also a lower limit, because the demand of each employer can be completely satisfied Even if coohes were willing to work for as httle as one pice daily, the number that could find employment m the town would not be GENERAL WAGES 297 unlimited, though it would bo largely increased, and there is thus a Ion er limit to the Demand Schedule, correspond- ing to the point m the case of a commodity u here every- one can satisfy his nant completely Between these two limits the number of coolies demanded vanes with the prevailing rate of wages, increasing when the rate falls and decreasing when it rises, precisely m the same way as the demand for a commodity vanes with the price Even in ordinary household affairs, a man has to consider the rate of it ages nhen deciding how many coolies he can employ to cut grass or work m his garden, and if he finds that the rate has risen he has sometimes to reduce the number employed, and leave undone work that would have been done if wages were lower. In the same way cultivators have constantly to consider whether or not to lure a few labourers for a day or two, and a difference of even a couple of pice m the rate of wages may decide whether the labourers shall be employed or not Con- tractors, again, who employ large numbers of coolies, have to pay the closest attention to the rate of wages if the rate falls they employ more coolies, and get their work done quickly, while if it rises they reduce the number of coolies, and spread the work over a longer period. Where production is organised on a large scale, and much capital is employed, the rate of wages is not less important Some of the most difficult problems that a producer has to decide arise from the possibility of substituting machinery for manual labour ; he has to compare the interest and depreciation that must be charged on the machines with the wages that would have to be paid if the work were done by hand Where wages are low, he will employ large numbers of coobes in such work as moving materials and finished goods from place to place by hand , when wages 298 AN INTRODUCTION TO ECONOMICS nse, he may find it advisable to set up new machinery, and thereby reduce the number of coohes All classes of employers then are inclined to reduce the number of coohes when the rate of wages rises , and in a town of any size it is reasonably certain that, whatever the rate of wages may be, there are some employers who are in doubt as to the exact number of coohes they can profit- ably employ Even a very small change in the rate will cause these hesitating employers to decide m one way or the other , a shght rise will reduce the demand, and a shght fall will increase it The demand for labour m the market of an ordinary town can thus be represented by a schedule similar to the Demand Schedule for a commodity, and following the general Law of Demand, that a rise in wages will reduce the demand and a fall m wages will increase it Before leaving the consideration of the Demand for labour, attention should be directed to the fact, which is of very great practical importance, that the upper limit of the Demand Schedule depends on the Efficiency of the labourers in the market The nature of efficiency has been discussed in Chapter X , where we have seen that the amount of wealth produced by labour vanes greatly in accordance with the quality of the labour employed , the upper limit of wages depends on the value of the work done, and consequently, on the efficiency of the labourers employed This fact is well known to employers contractors, for instance, know that they can pay higher wages for earth- work to labourers from Oudh than to labourers from Central India, because the former do more, and better, work than the latter , and where large buildings are under construction it is sometimes worth while to bring Sikh carpenters from the Punjab, or Chinese carpenters from GENERAL WAGES 299 Calcutta, the SiUis and Chinese got much higher wages than ordinary Indian carpenters, but they are worth their wages, because they are more efficient and do better work Labourers can never go on earning more than their work is « orth to employers, but an increase of efficiency, which increases the north of their work, can also lead to a rise m the rate of w ages CHAPTER XLI. GENERAL WAGES ( Continued ) When we turn to consider the Supply of labour in the market, we have a more complex problem before us than that of the supply of a commodity The supply of labour on a particular day consists of the labourers who are present, and able and willing to work Their object in working is, as we have seen, to obtain commodities for consumption , an increase m wages means (on the assump- tion which we have made that prices do not change materi- ally) an offer of a larger quantity of commodities, and this tends to increase the supply of labour by inducing people to work who are hesitating whether the remuneration offered is sufficient So far then the position is similar to that of a commodity, where a nse in price results in an increase of the supply offered for sale , but the working of this tendency is complicated m various ways owing to the facts, on which we have already laid stress, that the labourer has a will of his own, and that his life is largely a matter of custom and habit In the first place, we must remember that the labourer cannot be separated from his work 1 The destination of a commodity such as a sack of wheat ''makes no difference to the seller, who is satisfied when he has parted with it and received its price , it makes a very great difference to GENERAL WAGES 301 the labourer •where he has to go, and under what condi- tions he has to do his work, and the offer of higher wages may be insufficient inducement for men whose habits of life are not easily changed Thus it is a matter of common knowledge that wages may be considerably higher in an Indian town than in villages a few miles distant , this difference could not continue to exist if labour were just hkft a commodity, because the labourers would leave the villages, reducmg the supply there and go to increase the supply in the town Some labourers do, in fact, go to the towns, but by no means so many as the employers in the towns would like ; the reason is that the conditions under which they have to live and work in a town are less attrac- tive to them than those which prevail in the villages. A village-labourer usually has a house of his own with some open ground near it, where he and his family can live in the way to which they are accustomed ; if he goes to a town, he has to rent a house or a room in a crowded lane, with probably no place where he can sleep in comfort on hot nights, and with many other discomforts, and his whole way of life has to be changed Then the conditions of his work in a factory are unpleasant ; he cannot always rest when he is tired, or stop work to smoke or drink water as he usually could m his village : and he may have to work under harsh overseers, and alongside of strangers of other castes, instead of passing his time in the society of his friends and relatives Considerations of this sort affect very strongly the view of the village-labourers in northern India, and a large proportion of them prefer two annas a day in their village to three, or even four, annas in the city This point — the effect on the supply of labour of the attractions and drawbacks of particular forms of employ- ment — is by no means peculiar to India, but has been 302 AN INTRODUCTION TO ECONOMICS noticed by writers on Economics in most countries The views of different races may differ considerably as to what constitutes an attraction, and as to the senousness of particular drawbacks thus, while Indian employers com- plain that even higher wages will not draw labourers to the cities, in some countries the complaint is that all the best men go to the towns, and that the towns are over- crowded, while there are not enough labourers to do the work of the country but the fact remains that to the men of any particular race some forms of employment are more attractive than others, and they will work for lower wages at those which they prefer in other ways The supply of labour in a particular market, or for work of a particular kind, is thus not merely a question of the wages that can be earned the labourer thinks of the amount of wages, but he also thinks of all the other advantages and drawbacks incidental to the employment, and he chooses that which, taking everything into consideration, he considers the best Economists speak of Net Advantages when they are comparing one form of employment with another the idea underlying this expression is that a labourer can reckon up on one side all the advantages (including the wages) of a particular kind of work, and on the other side all its drawbacks, and then deduct the drawbacks from the advantages , when he has done this, he can compare the net advantages of one form of employ- ment with another, and he will choose that form of which the net advantages are the greatest Such a calculation cannot be made exactly, because it is not possible to compare directly with each other such things as differences in climate, the conditions of work, the social life, and so on , but the idea makes it easy for us to see what the labourer more or less unconsciously tries to do. He wants GENERAL WAGES 303 to choose the pleasantest hfe for himself a^d Ins family, and he compares the conditions of different ways of living as well a3 he can. A difference in the amount of wages will mfluenco his decision, and he may choose a form of employ- ment with many drawbacks because he thinks the extra wages obtainable in it will more than counterbalance these , but what he looks at is the conditions of the employment as a whole, and not merely the w ages obtainable \A second cause that may affect the Supply is the impos- sibility of storing labour. A merchant can in nearly all cases store his stock of commodities if he thinks the prices are too low, they will be as fit for consumption some months hence as they are to-day. But if a labourer does no work on any day, that day is lost , he cannot offer two days* work on the next day In selling his labour he is thus in the position of a merchant whose stock of goods must be sold on the day that it is offered, or it becomes worthless — as worth- less as a stock of fish that has lam on a market-stall during a night in May It may be worth the while of a body of labourers to refuse to w ork for wages which they think are too low, in the hope that employers will offer more , action of this kind, which is called ' striking,’ is very common in many countries, and is by no means unknown in some industries in India , but in order to strike effectively, labourers must have the means to feed themselves and their families dunng the period of idleness, and where labourers have no resources, but spend their wages as they earn them day by day, refusal to work means starvation The ordinary labourer then is rarely m a position to withhold the offer of his labour for more than a day or two, while many employers can, as a rule, wait longer than that, and iconsequently the labourer’s position in bargaining for wages is weaker than that of the employer, and labourers 304 AN INTRODUCTION TO ECONOMICS have often to work for less wages than they could get if they were in a position to withdraw their labour from the market, that is, to reduce the Supply, for a period long enough to induce employers to offer higher w ages Students will find later on that in western countries this question has become of great practical importance, and they will have to devote much attention to the way in which workmen combine to form what are called Trade Unions, one of the mam objects of which is to enable workmen to bargam with employers on more nearly equal terms, by providing them with the means of living during a strike , and there is httle doubt that the question will become important throughout India also if the system of factory-production extends as it appears likely to do But for the present the ordinary labourer has neither the intelligence to know when it would be wise to withhold his labour, nor the resources required to enable him to do so , and, con- sequently, he has often to work for less than the wages which the state of the market would otherwise enable him to claim Next, we must consider the effect on the supply of labour of what we have called efficiency. One maund of wheat is just as useful a commodity as any other maund of the same kind , it will give the same number of satisfjnng meals But one labourer is not just as useful as any other labourer ; his usefulness to his employer depends on the amount and quality of the work which he performs An increase in efficiency, such that three men can do the work that previously required four men, would produce the same effect on the supply of labour as an increase of one-third m the number of labourers This consideration is im- portant when we are considering changes in the supply of labour during a long period of time, but it does not affect GENERAL WAGES 305 the equilibrium in the market in a short period, because sudden changes in efficiency do not occur , a large change can result only from careful training and the development of the moral qualities, and these processes come about slowly and not suddenly Another important consideration is the length of time ’ requrrod to increase the supply of labour through the growth of population When the market-pnee of a com- modity rises, producers set to work to mcrease the supply , the time required for this process varies greatly, from the few days or weeks that a factory requires to produce increased supplies of commodities like yam, to the period of some months required to sow and reap a larger area of wheat , but in any case it is much shorter than the pcnod required for children to be bom and grow to the age at w'hich they can work as labourers Thus the supply of labour cannot be affected rapidly by the growth of popula- tion On the other hand, it may be affected in a very short period by the decrease of population resulting from plague or some other epidemic As a rule, however, rapid changes in the number of labourers m a market result from migration rather than from changes m the birth- rate or death-rate The subject of migration has been discussed in Chapter IX , and we have seen that the process is becoming more and more important in India, though the obstacles are still very great , there are, how- ever, grounds for concluding that as time goes on the adjustment of the supply of labour will be affected more and more rapidly by means of migration, though the adjustment is never likely to be so rapid as is seen in the case of a commodity. We have not yet given a complete account of the special features that exist in regard to the supply of labour, and 306 AN INTRODUCTION TO ECONOMICS the subject will require the attention of students at a later stage , but enough has perhaps been said to make it plam that the working of the labour-markets is by no means so rapid as that of the markets for commodities. The demand for labour decreases as the rate of wages nses, and there is a tendency for the supply to increase in the same circumstances, so that the tendency to produce equilibrium exists — that is to say, the market-rate of wages tends to settle at the rate where the supply is equal to the demand , but the supply is, as we have seen, affected by various other causes, and so does not vary directly with the wages offered, and, consequently, the adjustment is imperfect The result is that in an ordinary Indian market the rate, when once settled, is slow to change employers get accustomed to paying a certain sum, and labourers get accustomed to woik for that sum, and the rate is not affected at once by small changes in the demand or in the supply, so much so that a slight knowledge of the market m times when such changes are not large may lead to the hasty conclusion that demand and supply do not affect the rates at all This conclusion would, however, be wrong, as is seen when the changes are large We know, as a matter of fact, that a widespread epidemic of fever will raise wages for the time bemg, because the supply of labourers able to work is largely reduced , the men are stall present within the hunts of the market, but they are not able to work, bo their work is not on offer m the market A severe outbreak of cholera or plague may equally reduce the supply of labour, because many labourers run away , but the demand usually falls at the same tune because many employers run away too, and, consequently, the effect on the rate of wages cannot be foretold with the same degree GENERAL WAGES 307 of certainty. The effect of a very bad harvest is usually to lower wages in towns, becauso employers who depend largely on the harvests for their incomes have little money to spend, and the high prices of food leave them less than usual to spend in other Mays ; and Mhile the demand for labour falls, tho supply nses becauso labourers who cannot find work in tho villages come to look for work m the town A large pubhc work again, such os the making of a railway or canal, always tends to raise Mages in the neighbourhood, becauso it requires a very large number of coolies, or, in other words, increases tho demand for labour These examples are sufficient to show that, as a matter of fact, the market rate of wages is affected in the same way as tho market price of commodities by changes m supp y an demand, provided that these changes are of considerable amount relatively to the size of the market We find too that w hen temporary ^ uc ^ ua ^° ns come into operation to bring wages back to th ® of the place and time, just as market-prices of commodiries tend to return to the normal level When wag^ the demand for labour falls off and the supply tends to m crease, Mkile nhen wages fall the demand uses «*«*■ supply is reduced, so that in either case the rate tends to rctom to the normal after each fluctuation In the case of commodities, wo found that 6 ’ of P p rodu ction, tune depends on what m*o call t xp becauso producers roll not go on produemg *“ this amount, while if they receive more the m the „iU be increased untd the price is ease of labour, the normal rate of ^ femiIjr the amoiuit that mil maintam , jf -wa.es iall in the nay of Mo to nhieb the largely below this pomt for any gt 308 AN INTRODUCTION TO ECONOMICS supply of labour may be reduced by labourers deciding not to -work, and perhaps leaving the market and going to work elsewhere , while 1 f wages remain much abovo this point, labourers who were hesitating will dccido to work, and perhaps men will como to tho market from elsewhere, and so tho supply will bo increased Changes such as these will not, however, tako placo rapidly in the conditions which exist in India , and it is always possible that, in* stead of such an adjustment, tho labourers may change their customary way of lifo, that is that the normal rate of wages may change The w-ay of life to which labourers of any grade are accustomed is usually spoken of as their Standard of Comfort It is easy to recognise tho Standard of Comfort prevailing at any time and placo, and also to see that it vanes from time to tuno and from placo to place We know by expcnence that most of tho labourers in a par- ticular town, or in tho villages of a district, live in houses of the same kind , that they wear the same sort of clothes , and that they eat about the same amount of food of tho same land But if we compare the labourers of Benares with those of Delhi, or the labourers in a Bihar distnot with those of a district in the Panjab, we see at once that the latter have a distinctly higher standard of comfort ; they eat a larger quantity of more nourishing food, they wear better clothes, and they have usually more money to spend on small luxunes or amusements This Standard of Comfort, then, is a thing that really exists, and that w'e can recognise If bad times come, when there is little work to be had and labourers are not able to earn as much as usual, they cannot, of course, maintain their standard of comfort , they must eat less, and have to put up with inferior food, and they must wear less clothing, and make GENERAL WAGES 309 their old clothes last longer , but when the conditions of employment improve, they return as soon as possible to their former way of living But, as we have indicated above, the Standard of Com- fort may change, just as changes must be expected in the expenses of production of a commodity The habits and customs of the people change slowly, but they do change, and the rate at which they change m India is increasing A rise in swages may last long enough -for the labourers to get accustomed to a better way of living, for instance, to consuming wheat instead of the coarser grains , and when their Standard of Comfort has thus been altered they are not likely to give up wheat as long as they can get it On the other hand, a fall in wages may last long enough for the labourers to get accustomed to a reduced amount of food, and then their Standard of Comfort will have been altered for the worse In the next chapter we shall consider further this question of changes m the Standard of Comfort and m the normal rate of wages. CHAPTER XLH GENERAL WAGES ( Continued ) We must now consider the subject of changes in tho norma! rate of -wages Tho normal rato m a market is determined at any tune, as no have seen, by the conditions of supply and demand in such a way that tho labourers as a whole can just maintain their existing standard of comfort , but this standard of comfort is itself liable to change, and in India changes are hkely to occur more rapidly in the future than has hitherto been tho case We have seen m Chapter XXXIX that the rates of wages in villages remote from towns might remain unchanged for a long time, because tho customs of the people, which mako up the standard of comfort, might then be very slow to change , what we have described in that chapter as the customary rate — the amount required to keep the labourers ahve and content — is in fact the normal rate in those conditions, and just enables the standard of comfort to be maintained But our study of Consumption has shown us that the customs of Indian hfe are changing more rapidly than was formerly the case, and those changes must affect the normal rate of w'ages A more complete study of the conditions of normal equilibrium in a market is required before any thing hke a complete account of the theory of changes in normal wages can be given , but the practical importance of the GENERAL WAGES 311 subject is so great that we must attempt to indicate by examples the nature of the changes that may occur, and their ultimate effect on the economic condition of the f country. „ , In most parts of northern India at the present time, we see that the ordinary labourers have what we must admit to be a very low standard of comfort they get enough food for existence, but they wou e efficient labourers if they could get more nourishing food, while their supply of clothing, and their house-accom- modation are generally insufficient for the proper mam- tenance of health They can spend little or training their children for work, and they cannot as rule, save up money to support themselves m sickness or 4en they are too old to labour The* wagas , arelow and the* efficiency as workmen * also low Wha wdl £ the result on such labourers of a eons.derable nse m the wages which they earn 7 nbaerved Writers who base their conclusions on questl0 n in Europe and America say that the depends on the way Iead s° to increased and they distinguish expenditur reduce it efficiency of labour from that winch laving m India, we have to colder anottoc^c w ^ has not hitherto presented i e m ean less time because we find that higher wages may mem less , v w e -rwiH take these cases one y spent in work, we win ^ wages rise. In the first place we may suppos. that thar the labourers hve and wor m e j, mptlon increased earnings on m the se will, of mtomoatmg drugs Co ^ th(J efficiency of the '“ kOT ' ond ' 312 AN EsTR ODUCTION TO ECONOMICS ■wtat is more important, the moral qualities which (as we have seen in Chapter X.) affect efficiency so largely -will be gradually destroyed. The rise in wages will then he lost * employers wilt find that the work of the deteriorated labourers is worth less to them than, formerly, and will offer less for it. Bat it is most unlikely that men who have formed the habit of using such drugs will give them up when their income is reduced ; they are much more likely to go on using drugs and reduce their expenditure in other ways This means that their standard of comfort, which is also the standard of their wages, will fall; this means further loss of efficiency, and this in turn means a farther loss of wages ; and so things will go from bad to worse. But this is not alL As the standard of comfort falls, the labourers’ children will suffer more and more from insufficient food and clothing ; when the time comes for them to work, they will be weaker, and therefore less efficient, than their fathers were at the same age ; and if (as is very likely) they Ieam from their fathers the habit of using drugs, the progressive deterioration will go on throughout the second generation, and the final result will be a degraded and inefficient population, naming barely enough to keep themselves ahve. So far we have assumed that the population wiH not change materially in numbers If it increases, the progressive fall in wages will go on more rapidly, because there will be a larger number of inefficient labourers looking for work. If it decreases, the mil in wages will be retarded because there will be fewer of them ; but wages must continue to fall so long as effici- ency continues to decrease. This is an extreme illustration : we have chosen it so a= to show as clearly as possible the result of a loss of efficiency among labourers The cause of the loss of GENERAL WAGES efficiency is for our present purpose immaterial ; the pi is that when efficiency is reduced by any cause, the rec tion is likely to be progressive loss of efficiency me loss of wages, and loss of wages means further loss efficiency, and the process of deterioration can be stop only by a change m the habits (whatever they may that cause the inefficiency Now let us contrast with this the case of a labourer i spends Ins increased earnings in such a way as to mere his efficiency. At first the extra money will go to impr the food and clothing of the labourer and his family , i better food and clothing will make him a more offici labourer, and enable lnm to secure a further mcrease Ins mcome Then he will be able to live m a better hoi to spend something on training his children, and perhi save up some money to support him m old age We n safely beheve that as his wages rise, he will — so long as spends them wisely — become a better man m every wi The children of such a man will start life with much grea advantages than their father enjoyed , better fed and bet clothed, they will be stronger and healthier, and they v be trained for work of a higher class than their father wc while the moral qualities that make for efficiency will ha had the best chance of developmg ;m a home govern by a man of this type In this case we have exactly t opposite result to that which we have just consider© the improvement m position is likely to be progress ! 1 because each mcrease m earnings is so spent as to sees greater efficiency, and each mcrease in efficiency is like to secure a further rise m wages In this case too we must allow for possible changes the n umb ers of the population If the numbers fall, t' process of improvement will be accelerated, because the 314 AN INTRODUCTION TO ECONOMICS will be fewer labourers looldng for work, while if the numbers nse it will bo retarded. But we must remember that if (as we suppose) the labourers generally are improving their position and increasing both in thrift and in productive power, the children of some of them are likely to nse to the higher grades of labour, and will no longer compete for the employment which wo have described as general labour And we must also allow for the fact that labourers of this type are not likely to bring up a larger number of children than they can hope to provide with a favourable start m life , the population will in this case bo limited by the prudence of its adult members, and the conditions to which Malthus looked forward {vide Chapter .VIII ) will be to some extent realised in practice In the case then which we are considering, the increase in the number of labourers is not likely to be so great as to prevent the progressive improvement resulting from a progressive increase in efficiency ^Looking, then, at the labouring classes of northern ..✓India as we see them to-day, we might say that a nse in their wages, if it lasts long enough to give time for a change m their habits, may have one of tw r o results. If the in- creased income is so spent as to secure greater efficiency on the part of the labourers, then a progressive improve- ment is hkely to follow in their position, and there is no reason why, m the course of a few generations, the bulk of them should not enjoy all the requirements of a reason- able life If the mcreased income is wasted, and its expen- diture leads to a loss of efficiency, then a progressive deterioration must be expected until the labourers are living on the barest necessaries of life But we have still to take account of a third possibility In the previous Book we had to recognise the possibility GENERAL WAGES 315 that, w the artisan-stage of production, the supply of a commodity would decrease as its price rose, because the artisans would do less work. In the same way it is possible that the supply of labour will fall off as wages rise This possibility has not usually received serious considera- tion in most countries, but it has to be reckoned with m India : it is a common complaint of employers that when they pay higher wages their men work on fewer days in the week, and there is undoubtedly a certain amount of truth in the complaint Habits and customs, as we have seen, change slowly in India ; and it may well be the case that labourers will not increase their expenditure, but will be content to go on earihng the same income as before , and if they can earn it by four days’ work instead of six, they will only work for four days and spend the other days in idleness Let us suppose that labourers generally adopt this attitude, and let us also suppose that their total number does not vary greatly, and that their efficiency is not affected by the fact that they spend a much larger portion of their time in idleness 1 The immediate result is that the supply of labour is reduced by one-third of its whole amount , and if it were not for the facts which are embodied in the Law of Demand, wages might rise to an infinitely greater figure, because each nse in wages would reduce the supply, and each reduction m the supply would result in a further rise m wages. But, as we know, em- ployers wall not pay more than the labour is worth to them ; if they find that raising wages diminishes the supply of 1 Their efficiency might bo reduced if the habit of -working steadily while at work should be weakened by the change , they would then do loss work than before even on their working days It might on the other hand he increased if (which is not likely) working every day puts an excessive strain on their muscles or on their nervous system, for then they would do better work after each day of rest. 316 AN INTRODUCTION TO ECONOMICS labour, they will not go on raising wages, but they will organise then production so as to employ as httle labour as possible, and they will refrain from extending then production or from undertaking new industries because of the difficulty of getting sufficient labour at wages which they can afford to pay Thus the final result may be that the condition of the labourers is unchanged , they mamtam then standard of comfort, and neither advance nor deterio- rate But the production of wealth m the country may be seriously affected by the inadequacy of the supply of labour, so that the choice of leisure (or idleness) on the part of the labourers will prevent not only then own progress but the economic progress of the country as a whole - We have now indicated three ways m which the position of the labouring classes may be affected by a nse m the rate of wages. Human nature being what it is, it is not likely that all the labourers of any country will behave in the same way Some will become more efficient, some will become less efficient, and some will not change , so that the three tendencies will be all at work at the same time There will always be some labourers increasing m efficiency and bringing up their children to be better labourers than themselves , there will be others decreasing in efficiency and bringing up children who will be worse workers than their fathers , and there will be others agam whose efficiency does not change and whose children will be neither better nor worse And the same individuals will not always remain in the same class Men who have failed to make a living as cultivators or as artisans will become ordinary labourers, while ordinary labourers may become cultivators, or acquire sufficient skill to rise to a higher grade of employment. The final result for the GENERAL WAGES 317 country will depend, in the long run, on the balance of these various forces the position of the labouring classes will gradually improve if their efficiency on the whole increases, and it will deteriorate if their efficiency on the whole declines In no case can they continue for long to get more wages than their work is w orth, and the amount of their wages must depend very largely on their efficiency, that is, on the quantity and the quality of the work they do * In a first approach to the study of Economics it is pos- sible only to take a very general view of the action of the various causes that are at work, and students will find that this question of the causes affecting the rate of wages is even more complicated than the foregoing account would suggest But before leaving the subject a few words must still be said regarding the influence that is exerted by the character of the labourers’ wives In most households the wife takes a very large part in regulating the way m which the income is spent, and it rests very largely with her to determine whether the expenditure makes for increased efficiency or the reverse. And her influence over the children is probably of even greater importance in the long run, because their moral character depends on their mother’s training more than on any other single cause The future of the working classes depends therefore very largely on the character of their wives and mothers , and if for a moment we look beyond the limits of our science, and consider what steps can be taken to give the working classes the best chance of improving their position, we must recognise that the result must be sought by influencing not so much the adult labourers themselves as the women who have so large a share in controlling the expenditure of their wages, and in training the next genera- tion of woikers CHAPTER XLm. EARNINGS OF SPECIALISED OCCUPATIONS We turn now to consider the earnings of all those classes who receive wages, of pay , or salaries, or fees, or whatever the ftn.minga may be called, in return for doing work that requires a greater of less degree of speciahsed skill, as distinguished from the work that can be done by a general labourer. These classes are numerous , there are engino- dnvers and mechanics of various grades, workmen carrying out particular processes m factories, clerks, and officials of all ranks, doctors and pleaders, engineers and archi- tects, and so on The amount of specialised skill required may vary greatly from class to class, but in all cases a longer or shorter period of training is required to fit a youth for the particular occupation which he is gomg to follow In all these cases the principles hold good that the earnings are determined by the conditions of Demand and Supply, that at any time the earnings of each class tend to be equal to some normal rate, and that the normal rate of earnings of each class alters With the progress made in the develop- ment of the country There are, however, several points of importance which may have a marked effect on the Demand, or on the Supply, of men of a particular class, and may consequently affect the earnings of that class The market for employees of any particular class differs EARNINGS OF SPECIALISED OCCUPATIONS 319 in some respects from that for general labour. As we have seen in Chapter XI. there is often a greater degree of mobility among these classes than is the case with general labour, so that in this sense the market is more extensive . employers look for men with particular qualifications not merely in their own town but all over India, or even outside its limits, and a large factory in northern India may be found to employ men from many different places — perhaps a few Europeans at the head of its different branches, Parsi mechanics, Bengah clerks, and so on But in another sense the market is more limited, because the number of men wanted in any class, and also the number available in that class, is very much smaller than the number of general labourers The market is thus more restricted, and bargaining is not so easily done as in the case of ordinary commodities, or even of general labourers ; but, at the same time, the employers of many of these classes make it their business to study very carefully the rates of earnings and the state of supply and demand, and they know very well the rate at which they can expect to get a man of any particular qualifications And, in the same way, the employees, especially in the higher grades, study closely the same facts, so that m practice the rates are settled almost entirely on a consideration of the number wanted and the number available m the particular class The number wanted, or the Demand, depends partly on the natural resources of the country and partly on the state of development which production has reached The natural resources are important, because they decide the type of industry that is carried on . thus there can be no demand for coal-miners in countries where coal does not exist But the state of development is also of great im- portance : there will be no demand for engme-dnveis in 320 AN INTRODUCTION TO ECONOMICS a country where production has not got beyond the artisan- stage, and where all work is done by hand , and the demand will increase as producers extend the use of machinery. Thus as a country progresses, the demand for men pos- sessed of special skill is likely to mcrease, and the demand for general labourers is hkely to become relatively less important The Supply in each class is limited in particular by two causes One of these is the influence of caste A particular kind of work which, under existing social con- ditions, can be done only by the men of a Bingle caste, may at any time, through changes in the orgamsation of production, become very important, and a large demand may arise for workmen who are able to do it. But the supply is strictly limited by the number of men in the caste, and if this is small relatively to the demand, the conditions are Buch that the men may earn very high wages, and continue to earn them for a considerable time The establishment of a large leather industry, for instance, means a greatly increased demand for workmen of the caste or castes that will handle different lands of skins, and if such men are scarce, they may earn very high wages ; but in tune it is probable that men of other castes, or of other religions, will become w illing to do the work, and then the increased supply of workmen will tend to bnng wages down from their abnormal level The second pomt is the need of special training before men can make a living m one of these occupations The amount of such training, of course, differs very greatly in different occupations The son of an ordinary labourer can learn how to manage a simple oil-engine in the course of a very few months, while it takes years to tram a mechanic of one of the higher grades, or a professional man such as EARNINGS OF SPECIALISED OCCUPATIONS 321 a pleader or an engineer. In some cases adults can enter one of these occupations, but, as a rule, the mam source of supply consists of those for whom the occupation or the profession has been chosen ■while they are quite young The supply at any given time is not, therefore, determined merely by facts in existence at that tune, but is very largely the result of the decisions made by a large number of parents many years before Students probably know from personal experience how much care and thought parents in the official and professional classes devote to choosmg occupations for their sons , and as production becomes more highly organised the same question begins to trouble skilled workmen of all classes. In making the decision, parents look at many points besides the income that may be expected to be earned , in fact, they do their best to compare what we have spoken of as the Net Advan- tages of each of the occupations that appear to be within their reach. Students are probably familiar with the comparisons drawn at such times between different branches of the pubhc service ; the rate of pay is, of course, im- portant, but the conditions of service m regard to pension and similar matters are also closely scrutinised , the chances of rising to the highest grade, and securing one of the prizes of the service, are taken into account , and the social position is by no means neglected And when the organisation of production has developed, precisely similar questions have to be settled by engine-drivers, or mechanics, or foremen m factories, or other skilled v orkmen , they have a choice of various occupations for their sons, and they compare the net advantages of each (and not merely the pay), and choose that of which the net advantages appear to them to be greatest The result of this process should be to equalise the net x 322 AN INTRODUCTION TO ECONOMICS advantages of occupations m tho same grade, because if parents choose that occupation which offers tho greatest net advantages, tho supply in that occupation will bo increased, and its earnings will consequently fall, while occupations which offer tho smallest net advantages will be chosen by few parents, tho supply in them will fall off, and the earnings must consequently rise This tendency does in fact exist, and its results are important , but tho equalisation of net advantages is very rarely completely realised The chief reason for this fact is that parents are quite unable to forecast tho demand for men m different occupations during tho thirty years or so that their children must bo expected to work Changes m production may at any time cause a largo sudden demand for employees of a particular class, and may make tho skill of employees of other classes practically useless, and tlicso things cannot be foreseen Parents, especially Indian parents, look very much to the present position, and do not make sufficient allowance for possible changes , and hence wo find that; tho competition for old-established professions or occupations is exceedingly keen, and tho rato of earnings in them is lowered, while it is sometimes very hard to find men qualified to work in occupations or professions of moro recent establishment, and tho earnings in these are rela- tively high While, therefore, tho tendency to equahso net advantages exists, tho time required to adjust tho supply, and the difficulty of foreseeing the future, make exact equalisation almost impossible ; and at any moment some professions and occupations are overcrowded and their earnings depressed, while the supply in others is inadequate and the earnings abnormally high A few examples will make it easier for students to under- stand what has been said on this point First, let us look EARNINGS OF SPECIALISED OCCUPATIONS 323 ftfc tho caso of clerks ablo to copy English •writing. When the English administration was established m India, the proportion of tho population that could read and wnte was much smaller than it is now, and naturally scarcely anyone know English, because tho language m official use had hitherto been mainly Persian. When then a demand aroso for English copyosts, very few could at first bo found, and those who existed wore able to earn large salaries But parents very soon recognised that in the new condi- tions a knowledge of English would be an important qualification for an official career ; and as more and more boys were taught English, the supply of men able to copy English increased rapidly, and the salary offered for such work fell, until now a man who can merely copy earns no more than many domestio servants. In the same way when typewriters were first introduced there were few clerks who knew how to use them, and people who wanted their work typewritten paid considerably more for this than if it had been copied by hand Typewriting, however, is an occupation m which the supply can be increased very quickly, because a copyist can learn the art in a month or so, and consequently the deficiency in supply was rapidly made good, and now typists cannot earn much more than copyists ; if they want to increase them income they have to acquire the much more difficult art of writing shorthand. Again, wo may take the case of drivers of motor-cars It is only a few years since motor-cars were introduced into India, and naturally there were no trained drivers in the country, because parents could not have foreseen some years before that the occupation was going to come into existence, nor if they had foreseen it could they have found anyone in India qualified to tram their sons. The 324 AN INTRODUCTION TO ECONOMICS first owners of motor-cars had therefore to engage European drivers on very high salaries But it does not take very long to tram a mechanic to he a competent driver, and very soon Indian mechanics began to be trained because they saw they could earn much more as drivers than as mechanics, though they could not get such large salaries as the European drivers At first they had difficulty in getting the necessary training, but in a short time training classes were established m various parts of India, and now the supply of drivers is about keeping pace with the demand, that is to say, drivers earn incomes that make the net advantages of their employment roughly equal to those of other employments which the same class of men could undertake Again, let us consider the profession of the pleader or advocate This profession cannot be said to have existed before the establishment of regular courts of law, which was carried out gradually by the British administration , but the establishment of the courts was quickly followed by a demand for advocates trained in the law, and able to present their clients’ cases m the most favourable hght Suoh training is not easy to organise, and m the early days the leaders of the profession were mostly Englis hmen, who had benefited by the system of training existing m their own country These leaders made very large incomes, and enjoyed many other advantages m the way of influence and social position , the attractions of the new profession soon became apparent, and while, on the one hand, means of training were provided m the country, on the other hand, large numbers of parents took advantage of these means, and had their children educated for the profession At the present day the supply of pleaders is at least equal to the demand The ablest men can still earn very large EARNINGS OR SPECIALISED OCCUPATIONS 325 incomes, but; many pleidets earn very halo , and if it vero possible to work out the average mcomo of all the pleaders m a city' v hero they are numerous, the average Mould probably' be lover than Iho averago earnings of other professions of the same rank The chfforenco is accounted for in part bv tko of her advantages of Iho profession, but faking alt tho advantages (including tho mcomo) info account, if is still probablo that pleaders aro on the averago wor-e off than men of other professions: that is to say’, the present supply is excessive, and tho excess is due to tho fact that for many years parents have over- estimated the advantages of tho pleader’s position Thcso examples Mill help students to understand that the adjustment of Iho supply in thcso occupations and pro- fessions ic by no means perfect : causes aro at work tend mg to adjust the supply' m such a way that tho various occupa- tions or professions In tho same grade offer equal net* advantages, but these causes, from their very nature, work very slowly, and changes in industrial organisation (which may occur with relative rapidity) may entucly upset tho adjustment. It follows that any particular occupation or profession may for a considciablo period remain over-supplied, or under-supplied, and that its earnings may bo less or moro than tho amount that would result if tho supply could bo adjusted more rapidly. Another consequence of the slowness of adjustment is tho risk of men being unable to cam a living in the occupa- tion or profession which they havo chosen This occurs when the demand falls off in an occupation which is already' fully suppbed with w’orkers , the fall m demand may be duo to changes m tho organisation of production, to new discoveries that make tho old ways obsolete, or merely to some change m consumption, but the effect m any case 326 AN INTRODUCTION TO ECONOMICS is that men who are skilled in some particular occupation are no longer able to find employment in it : they must either learn a new occupation or work as general labourers. A simple example may be found in the present position of the water-carrier (bhtshh) caste in the cities of northern India. Large numbers of these men were formerly employed m watering the streets and gardens, and in the domestic work of M uhamm adans and Christians, hut when a regular water-supply was introduced, the water-earner’s occupa- tion was much reduced, because most of the domestio work is provided for by house-connections, and the streets are watered from carts A large proportion of the water- carriers was thus thrown out of work The men were unable to make a living by the only occupation in which they had special skill, and many of them have taken to general labour, because it is the only means of livelihood within their reach This condition is spoken of as un- employment, and the risk that it may occur has to be allowed for in every specialised occupation ; as the speciali- sation of occupations increases, unemployment must also bo expected to increase in importance, but m the present industrial condition of India it is not a very widespread ovil, and its 6tudy may for the present be deferred CHAPTER XLIV EARNINGS OF MANAGEMENT We now come to the last of the claimants for a share m the wealth that is produced , this is the Producer him- self, the man who organises and manages production We have already seen that, as a matter of fact, the producer usually contributes some other factor of production m addition to his organised work the cultivator and artisan supply both capital and labour, while m the factoxy-stage of production the employer usually provides a portion at least of the capital ; and we have to be careful to dis- tinguish the earnings of management from the share due to these other factors H, however, we allow for the separation of these items, We see that the producer pays out of his produce the shares of land, capital, and labour, which are determined on the lines indicated in the preceding chapters of this Book, and keeps what is left for himself His object is two-fold , he wants to produce at the least possible expense, and he wants to sell at the highest possible pnee if he succeeds in these objects, he has an adequate share left for himself after paying the expenses, while if he fails, he has nothing left, or has even lost part of the capital employed But no ordinary man vail undertake a productive enter prise unless he expects to make an income from it, and all 328 AN INTRODUCTION TO ECONOMICS ordinary men will give up such an enterprise if they find that in fact they are not making an incomo, or aro making a sm all er mcome than they could secure in other occupa- tions, and wo must therefore regard organisation or management as an occupation to be compared with other occupations which a man can undertake If wo ask why a man chooses to start his son in lif6 as a producer rather than as a pleader or an enguiecr, we must answer that he regards the net advantages of the one occupation as greater than those of the other , ho hopes that his son will be bettor off as a producer than as a pleader, that is to say, that his whole position (and not merely his mcome) will be better in the former case than in the latter Wo thus see that the supply of producers must be determined on the conditions which we have already seen to be applicable in the case of other occupations requiring specialised skill Let us look a little closer at a fow of the conditions which affect this occupation The training required has to be obtained in somewhat different ways from those which will equip a man for a profession It is truo that much that is of value can be learnt at a University or at a Technical Institute In the latter a youth can learn the sciences that underhe the methods of production, and their application to those methods , if, for instance, he wants to undertake the production of sugar, he will have to study the chemistry and physics of the subject, and learn how the machinery of a sugar-factory is designed to allow the necessary chemical and physical changes to take place, and to prevent the occurrence of undesirable changes , and in most branches of production he will find that he needs some knowledge at least of mechanics, as veil as of the chemistry of the materials used This, however, is only one branch of his training * ho has also to learn the EARNINGS OP MANAGEMENT 329 commercial side of his business, how to buy cheap, and how to sell dear : and he has to acquire the very difficult art of managing the labourers and workmen employed so as to get the best work at the lowest cost He needs, that is to say, not merely a knowledge of chemistry and mechanics, but also a knowledge of human nature as it is found among merchants, workmen and labourers , such knowledge can bo acquired only by experience, but the best foundation for it is laid m the course of a good general education, such as the schools and universities aim at supplying. To these qualifications must be added the practical experience of production a student of law requires to spend a good deal of tune in the courts, seeing how legal busmess is actually conducted, before he is m a position to conduct such business himself a medical student has to spend a long time m a hospital seeing cases treated and operations performed before he is qualified to start practice for himself , and in just the same way a man who wishes to undertake the management of a factory must get practical experience of how a factory is managed The training for t his occupation is consequently lengthy , and it is often very difficult to arrange for the practical experience that is required, while, in addition, the youth may have to be provided with a considerable amount of capital to enable him to start a factory, or (what is usually more practicable) to buy a share in an existing concern, and learn his work by working with partners of greater experience. Again, the social position of a producer in India is still inferior as compared with that of a landholder or a professional man there are signs of a gradual c an Q e in this respect, but even now comparatively few parents among the educated classes think of this occupation or their sons, and most of them confine their attention to 330 AN INTRODUCTION TO ECONOMICS government service or to such professions as the law or education It follows that the races inhabiting northern India do not as yet furnish a large supply of men com- petent to organise production on a largo scale, and most of the producers are drawn either from tho families already engaged in similar work, or from mon of other races, such as Europeans or Parsis, m whose eyes tho disadvantages which have been enumerated count for less It is obvious then that the earnings must for the present bo high m order to attract an adequate supply of men in tho condi- tions which have been described It is possible to recognise tho demand for men of this land in a country where production on a large scale has developed extensively, and in such cases we can see that the general Law of Demand applies But the develop- ment of industry in northern India has not yet reached a stage where we can recognise tho existence of an omploy- ment-market for such men , tho numbers demanded, and the numbers available, in any industry are still too small for that. Students must therefore become famihar with the conditions that prevail m countries more advanced m industrial development before they can realise the way in which the earnings of management are determined when large numbers of competent men are looking for a chance of employment, and large numbers of men possessing capital are looking for some one to employ it for them We may, however, consider what conditions will have to be fulfilled before such an employment-market can be established in India One comparatively simple step is the provision of facilities for technical training We speak of this as comparatively simple because it can be done by government or by the work of a few enlightened individuals, and indeed con- EARNINGS OP MANAGEMENT 331 sidorablo progress has been mado in this direction in the last fow years Thero are of courso great difficulties in the organisation of such institutions, but these difficulties are small compared with the other conditions that have to be realised One of these is a change in the attitude of the educated classes of Indian society * they must recognise that tho greatest ovil affecting India is the small amount of wealth produced, compared with the number of people "who have to bo supported , that increased production requires organisation more than anything else , and that the occupation of the producer is not less respectable, and not less desirable, than the occupations which at present command a social preference A second condition is a change m the attitude of the people as regards the employ- ment of wealth os capital ; the wealth that is lying idle has to be brought into use, and savings have to be employed os they accrue A third condition is a gradual development in tho efficiency of labour , tho workers in all grades hove to learn how to make the best use of the money which they cam, and to recognise the need for increased technical skill and for more careful training of their children Some slight progress has already been made towards the realisation of these changes in tho attitude of the people , and as the changes progress, tho number of producers is likely to increase, the capital that they require for their work will become available, and then the factors of production existing in the country will be more effectively used, an the supply of wealth yielded by them will be increased CHAPTER XLV SUMMARY THE NATIONAL INCOME We have now examined the way m which the remunera- tion of the various factors of production is determined Our examination has been by no means complete, for the subject is very complex, and our present aim is merely to obtam a general view of the mam lines of the theory of Distribution, leaving many points to be elaborated further during subsequent study. Wo have, however, arrived at the following conclusions In the case of interest we have seen that, so far as markets for capital have developed, tho market rate of net interest is determined by the conditions of demand and supply m very much the same way as the market pnce of a commodity, and that at any tune there is a normal rate of not interest, corresponding to the normal pnce to which the market price of a commodity tends to return This normal rate, however, is not permanently fixed, but changes with the changing conditions of the country in a manner that will require much further study The gross interest paid by a borrower is made up of net interest at the market rate, together with charges for management and for insurance against nsk , the amount of these charges vanes m indi- vidual cases, so that the rate of net interest cann ot be ascertained so easily as the pnce of a commodity, but its SUMMARY. THE NATIONAL INCOME 333 importance is not diminished by the difficulty of ascertaining it Ono of tlic greatest needs of Lidia at the present time is the further development of the market so that pro- ducers of all classes may bo ablo to obtain the capital they requiro on rcasonablo terms , and as this development proceeds, the theory of interest worked out by economists will become moio and more closely applicable to the facts of ordinary Indian life In the case of rent also u o have seen that the conditions of supply and demand determine the rate paid, but that the rate varies with the fertility of the land In all countries a stage must bo oxpcctcd to anivo when the demand for fertile land exceeds the supply , and when this stage has been reached, it becomes possible for tho landholder to claim as rent the entiro produce of the soil after deducting tho necessary expenses of its cultivation In conditions such as pro vail m most of northern India, the effect of enforcing this claim may bo to leave the cultivator without adequate incentive to maintain the fertility of his land , and in these conditions tho State commonly intervenes in the interest of the national income, and limits the amount of tho landholder’s claim so as to ensure that the cultivator shall have the incentive which is required Turning next to wages and earnings, we have traced the influence of tho demand and supply of workers in the various grades We have seen that tho demand for labour resembles generally the demand for commodities, but that the supp y is affected by various considerations arising mainly from the facts that the worker cannot be separated from his wor and that he is a human being with tastes and preju ces o his own The market rate of wages is consequently not affected so easily as the market price of a commo ty y small changes in the supply and demand , but t e visi 334 AN INTRODUCTION TO ECONOMICS effects of larger changes show that the market rate does in fact depend on these forces The standard of wages at any given fam e is set by the standard of comfort of the wage- earners, and in no case can a body of workers continue to receive more than their work is worth. Further study of the changes in the standard rate of wages must consequently be directed mainly towards the causes that affect the efficiency of labour, and to the relation that exists between the labourer’s way of living and the quality of hiB work Lastly we have seen that the conditions affecting the work of the producer are similar to those affecting salaried employments requiring particular forms of skill , but that production m India has not yet been organised to the point where a theory of the earnings of management can be based on the facts of Indian life These conclusions carry us some way in our study But in an examination conducted in this way it is easy to over- look the mutual influences of changes in the remuneration of different factors , we do not realise sufficiently how changes in the wages of some classes may affect the wages of others, or how changes m rent or interest may affect the whole commumty, and not merely the classes w T ho pay or the classes who receive Before leaving the subject, there- fore, let us try and view the problem of distribution in its broadest possible aspect We may regard the whole nation as a single co mmuni ty engaged m produomg wealth , and we may regard the whole of the wealth produced as the National Income, by the consumption of which the nation lives All the working members of the nation, from the labourer working in the field to the owner of a large factory, assist in producing this income , all of them are supported out of it, but they do not consume it all Some of the income has to be applied SUMMARY. THE NATIONAL INCOME 335 in replacing the capital used up in its production , whole in all nations a portion of it is employed in the support of tho unproductive classes of the population The first and obvious interest of tho nation as a whole is that the National Incomo should be as largo as possible To secure this object, each of tho factors of production must be used in tho most effective manner possible tho land must be so cultivated as to yield the largest produce consistent with the mainten- ance of its fertility , the men who work, whether with then hands or with their brams, must bo efficient m the widest sense of the word; and the accumulated wealth must be so used as to give the greatest possible assistance to the workers The nation as a whole is interested m seeing that these conditions are fulfilled, and it sets aside a share of the national income in order that the government (w represents it) may deal with those questions which require tho common action of the people. The other qnes h ® 8 ' leaves to bo dealt with according to the judgment of m- viduals , but as we have seen each individual .does not d all these questions consciously for himse , u is goi many of lam by the custom which view of at leant a portion of the nation the individual may bo detamned m one of Seaways , by law, by custom, or by to own Judgment instance, the govamment is charged with seeing m dividual enjoys Ins own property, and secure tins by puiushmg thieves and cheats, and by com •This shore may be provided ■? flvTp 1 "’ “* instance, when tho government v be provided by of every rupee that a man re °“? . production to be managed sotting osido some porticular fa government manages very by tho government thus, “? ; ! fch ’ W atof-suppIy furnished by the largo areas of forests, and also the waiw w ^ larger nvers 336 AN INTRODUCTION TO ECONOMICS polling them to restore to its owner any property which they have wrongfully taken , the manner in which the individual enjoys his property is on the other hand determined very largely by custom , while he uses his own judgment in acquiring property, or m parting with it We have assumed throughout our study that a govern- ment exists which secures to each individual his freedom to use Ins own judgment, and the enjoyment of his share of the national wealth On this assumption, we find that the extent of the National Income depends in the long run mainly on the character of the individuals who make up the nation for this charactei determines not only the nature of their decisions, in cases where they use their judgment, but also the nature of the customs to which they conform If a nation is to enjoy a large and increasing National Income, the individuals who compose it must be hard-working, intelligent and thrifty Hard work (whether the work is done by the hand or by the bram) is as we have seen the first condition of efficiency in production Intelligence is necessary to secure the proper organisation of production, and its adaptation to changing circumstances Thrift implies a clear realisation of the needs of the future and a steady effort to provide for them , the w ord thus covers the proper regulation of consumption so as to secure efficiency, the avoidance of w aste, the accumulation of a store of wealth to be employed as capital, and the training of each new generation to be more efficient than its parents The Distribution of this National Income may be earned out in more ways than one We have examined it on the assumption of Industrial Freedom (Chapter IV ) and we have found reason to conclude (though we have not examined all the reasons) that where Industrial Freedom prevails the share of each individual and of each class tends SUMMARY. THE NATIONAL INCOME 337 to vary with efficiency, tho most efficient men and the most efficient class getting the largest, shnro But the individual and the class are dependent on the rest of the nation, because the amount of their ^lmrc depends on the amount of the National Imomo; and tho inefficient a ho dimmish this, diminish not only their own share but the shares of all other classes. When labour is inefficient there is less income to divide, and it is not onlv the mcfncicnt labourers a ho suffer but aho the efficient men whoso work and a hose capital Mould yield them a larger share if labour played its part In the same \\n} tho inefficient organisation of production mean? not onh a smaller income for the inefficient pioducers but also a reduced National Income, and consequently a reduction m the shares of capital and labour Tho mam economic n, Fertility of tl «• se 1, 4i , jfixitv o f ‘enure. £S » Item* mc’udxl m U“— Landholder*, ‘ *' fvs**in n Irdift* ’ Law of D *nin*n Ee‘*i*r * 47, 4i, 271 Locat on a a o'*. - Mnrgmof cul , -'"i* o", Kent (f«e that titl") 113 , 342 INDEX Land — ( cont ) Specialisation of, 125 Standard of work, 47 Tenure system in India, 267 Law, \ nnous definitions of, 4, 49 Localisation of Industries, 127 Machinery, use of, 113 Management, oarnmgs of, posi tion of producer, status, training of, etc , 327, 334 Market Definition of, 182 Equilibrium, 185-208 Holding up stock, 196 Organisation and working of, 183 Relation of producers and con- sumers to, 201 (Seo also names of Special Subjects as “ Land,” “ La- bour,” “ Capital, ’ otc ) Monej , purchasing power of, 26, 231 Money-lendors, 216, 260 Mursludabad, history of, 41 National Income, factors pro- ducing, distribution of, otc , 334 Pleader or Ad\ocato profession, status and earnings of, 324 Population Causes influencing, 65 Molthus' Law, 52, 314 Surplus, provision of subsist- ence for, 68 Producor Income, sources deriv od from, 239 Position of, 239, 327, 334 Production Artisan since, 103 Definition of, 17 Production — ( coni ) Expenses of, changes m, 214, 217, 218, 307 Faotors, and specialisation of, 31, 126 Factory stage, 110, 132 Organisation, self-supporting stago, 95 Profits, nature of, 239 (note 2) Purchasing power of money, 26, 231 Rent Agricultural land, method of determining, 267, 269, 285 Classical theory of, 277 Economic rent, 277 Fair rent, definition of, 284 Limitation of, by legislation, 281, 333, 338 Normal level, 271 Relation to prices, 280 Savings Investment of, amongst poorer dosses, 123 Process of accumulating, 91,92 Scienco, definition of, 8 Self-supporting systom, 96 Specialised Occupations Caste system, effect of, 320 Demand and Supply, causes affecting, otc ,318 Earnings of, 318 Mobility, 319 Special training for, 320. Spcciabsation of Labour, 127, 131 Stock, holding up, 106 Stnke systom, 303 Taxation, Allowance for, 238, Utilities Production and consumption of, 20 INDEX 343 Utility , . Definition of, in relation to Economics, 160 Value, definition of, 15 Wages ' Agricultural Labourers, in- crease in rate, 222 Customarj rural rates, 203,310 Efficiency of Labour, effect on rate, 298 Prevailing and normal rate, 292, 310 Real and Money wages, dis- tinction between, 294 Rise m, in India, 222, 223, 311 Specialised labour, earnings Variations in rate, 298, 301, 333 Wants . Exceptions as to mcrease of, Increase m number and variety, 141 Nature of, etc , 139 Necessaries and Luxuries, 161 Relation between demand and wants, 163 Satisfaction of, 141, *40 Wealth Definition of, a . 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