BASIC FOR ECONOMICS by L. W. Lockhart
Part II : EXAMPLES
MARSHALL ON GOLD AND SILVER1
9629. Turning now to the question which has come up about prices being dependent on the amount of money, which observations have you to make ?
-- I am in agreement with the common view that other things being equal, there is an increase in prices parallel to the amount of the metals which are in use as money. In my opinion, the changes in the other things which are taken as equal are very frequently, possibly generally, more important that the changes in the amounts of gold and silver. A question was put by the Commission some time back about the degree in which prices are dependent upon the amount of the metal which was used as a measure of value. I am against making such a division. It is my belief that the shilling and half-crowns in use have the same effect upon prices as they would have if they were legal tender2 ; it is my belief that four half-crowns have the same effect on prices as a half-sovereign has. But, putting that on one side, I am of the opinion that we have not the statistics and that we will not in our time be able to get the statistics which would make it possible for us to get at any connection in the form of statistics between the amount of the high-value metals, or as I would be happier to say, between the amount of money and the average level of prices ; because if there is no change in the amount of money, there may still be charges in the level of average prices caused by other factors.
- The first of these is a change in the amount of things on the market, and about that so doubt we have quite good statistics.
- The second is an increase in the average number of times any one of these things is exchanged in a year, and about that we have no statistics at all ; in fact there has not ever been any attempt to get statistics on the point.
- The third cause is the average number of times in which every unit of money is exchanged in the year ; on that point, as on the second, there are no statistics. The last cause is the relation between the number of purchases of goods made without money, and the number of purchases effected with the help of money ; on that point we have not, to any knowledge, any statistics which may be taken seriously, thought, naturally, a number of persons have given opinions of more or less value. It seems to me that it is not enough to say that average prices are dependent on the amount of money together with the amount of credit. Because, without any change in the amount of money, the average level of prices might be changed, not only by a change in the relation between credit and other ways of effecting purchases,but, in addition, by any other change in organization of business, as for example the growth of the middleman.
9630. In what sense do you make use of the word 'money'3 when talking of prices being dependent on the amount of money ?
-- In my view that theory is not very dependent on the question where the division is made. It is my belief that it is possible to give a true statement of the theory what ever 'money' is taken as covering, if, when you have made your decision, you keep to it all through ; but I, myself, take 'money' as covering everything which is handed from person to person for the purpose of purchasing, without demanding any special or trade knowledge on the part of those who make use of it.
9631. The, on our view, it is not limited to gold or silver, or gold and silver ?
-- No, paper money is covered in addition.
9632. And not only bank notes, but cheques ?
-- No, because with a cheque it is necessary for the person who takes it to have come to some opinion for himself about the person who gives it to him. If a person who is strange to me makes me an offer of a £5 note, I am ready to give him five sovereigns for it, if I am certain the note is not a false one ; but if he makes me the offer of a cheque, I will not give him anything for that, because I have not special knowledge of him.
9633. If, without any change in the amount f credit which persons had at their bankers, the amount of gold and silver in existence in the country became less, what reason would there be for prices being lower or higher ?
-- Because, in my opinion, if a change was made suddenly and in the normal way, it would have an effect straight away on Lombard Street.4
9634. let us say that it takes place in such a way that it does not give a blow to credit or have any effect on it ; that every-one has the belief that it is as safe for them to take cheques to be exchanged at the bank, and as safe for them to put their money in their bankers' care as it was before. Under these conditions, if the amount of money kept in store by the bankers became less, why would this have an effect on prices though not touching credit ?
-- It probably wouldn't have an effect on prices straight away. If by any chance the number of money units in every money-bag, in every storekeeper's drawer, in every office safe became less, that would have a necessary effect on prices ; but even then the effect might not be sudden, though the structure of our business is based on retail exchanges. It seems to me that the number of units of money which a person keeps in his pocket is fixed by the amount of business which he has to do, and by the relation of that part of his payments which are best made in money to all the payments he makes.
. . . (more) . . . p. 52 for 11 pages. . . .
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1 . Official Papers of Alfred Marshall, Evidence before the Royal Commission on the Values of Gold and Silver.
2 . Money which creditors are forced by law to take in payment of their debts.
3 . The word under discussion was in fact 'currency', which is covered in Basic by money.
4 . Lombard Street in London is noted for its banks, which has come to be used as a name for the money market.
CANNAN ON THE GROUPING OF INCOMES1
§1 . Adam Smith's Division of Income into Wages,2 Profit, and Rent.
The grouping of incomes which is of most use for purposes of economic theory is naturally not the same at all times. It has to be changed with the changing times. It has to be changed with the changing conditions of society. That which seemed best in England between 1700 and 1800 would not have been much help in India at that time and is not very much good for English use a the present day. But in view of the connection it has with ideas which still have an important part in forming the thought of the present time, it is necessary to take it into account.
It was a division into three sorts of income -- wages,2 profits, and rent -- which was a very good parallel to the divisions of society at that time and place. In the country the workers were a more or less clearly marked-off group who got wages and nothing more, the landowners another more or less clearly marked-off group getting rent and nothing more, and the farmers another such group making profits and having no other income. In the towns, it is true, the profit-makers, in the form of traders and producers, were frequently owners of land on which stores, offices, and works were put up, but this was looked on as an unimportant fact which did not make them into 'land-owners', because the value of their property in rent would generally be very small in comparison with their profits as ' men with money '. Land in towns was very little taken into account : the ' workers ' in towns were in the same position as in the country, so that the grouping of income into wages, profits, and rent seemed to go very well with the division of the nation into three groups of persons. And what is more, it seemed to give an account of the organization for producing goods which was in existence in England at the time. In the country the produce was the property of the farmer and was looked on by him as what he got back for the money which went in wages and rent, which were then taken as making together almost all his costs. Traders and producers certainly had to get materials and goods. But the money which went in this way might be said in the end to take the place of the payments made in wages and rent by some farmer or producer by whom the materials or goods in question were produced. This division into three groups was first made in economics by Adam Smith, and it seems probable that he got the idea while attempting to get a clear account of price factors. ' Market price ', or the changes of price in the market, were dependent, in his view, on supply and demand, but ' natural price ', or price taken over a long time, was dependent on what payments had to be made for wages, profits, and rent to get the thing in question. By what may possibly be said to be a complete accident, he by degrees made use of this theory of prices for grouping incomes.
While he was working out his theory of prices in Scotland, a little school of economic and political theory-makers were making their way in France. At this time they went by the name of the Economistes, but later, for fear of errors,
they became ' Physiocrats ' because of their belief in the rule of Natural Forces.
The school was produced by a reaction against the theories of Colbert, who had
made an attempt at increasing the well-being of France by supporting industry
and trade. Its chief belief was that farming, or at any rate the earth, was the
starting-point of all economic goods, and its great discovery, respected in the most
surprising way by those in the inner circle, was the Tableau Economique or
Economic Key, in which the Father of the school, Quesnay, made an attempt, by a number
of Z-form lines, to give a picture of the ' distribution ', as it was named, of the
produce of the earth throughout society.
When this system came to his knowledge, and he saw the great weight given
by the physiocrats to the ' distribution '
which it was said to give a picture of,
Adam Smith seems to have come to a decision to make use of his division of
prices into wages, profits, and rent, as a grouping of incomes in addition. He said
that in the same way that the price of anything is made up of one, two, or all three
of the factors wages, profit, and rent, so the price of all the goods forming the complete
produce "is necessarily made up of the dame three pans, its distribution among
the different persons of the country taking the form of the wages of their work,
the profits of their capital goods, or the rent of theft land. Every bit of what is
massed together or produced every year by the efforts of every society, or what
comes to the same thing, the full price of it, is at first in this way in the hands of
some of the different persons forming that society. Wages, profit, and rent are the
three first starting-points of all the nation’s income and of all value in exchange."
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1 . Edwin Cannan : Wealth (3rd edition), Chap. IX : The Classification of Incomes.
2 . Payment for work. See p. 67.
§2 . Or Income from Work, Capital, and Land
The three terms, wages, profit, and rent, seem to have been used in normal talk and
writing in Adam Smith's time very much as they are at present. Wages were the
payments made to persons for their work when there was an agreement on the rate
of payment before the work was started, and when the work went on more or less
under the control of the person for whom it was done; rent was the regular payment made
to the ' land-owner ' by a
person using the land and anything joined to and let with the land, such as field-
divisions and drains and houses ; profit was the amount which was still there when
costs had been taken from receipts. Roughly, no doubt, it might be said that
workers were supported by their wages, landowners by their rents, and farmers,
traders, and works-owners by their profits. But certainly, at all times, some receipts
have been covered by the three words as normally used which are not part of
income, and some receipts have not been covered by them which are part of income.
The agreements under which the greater number of rent payments are made do
not give the landowner "a clear rent every year of the full amount of the
payment in question" : generally some part of his rent has to go in keeping the
property in a rent-giving condition, so that the income got from the property is
something very much less than the rent. In the same way it is frequently necessary
for the wage-getter to give out money in connection with the work he does, as when
he is responsible for his instruments. On the other hand, income is not completely
covered by the three words taken together
because there are a number of other receipts all of which, or part of which, go
to make up the income of those who get them. There are, for example, ' salaries '
given to workers of a higher order than those who are said to get wages, ' fees '
which are given to others who are less under the control of someone for whom
they are working than wage-getters and persons who have ' salaries ', and there are
in addition ' royalties '3 and other payments which are made to owners of
rights and property.
In the statement by Adam Smith, given earlier, he does not take into account any
of these facts : he says quite clearly that the three divisions taken together make up
the complete income, and the suggestion is that they make up nothing but income.
What he was in fact doing, without being quite conscious of it himself, was to make
work, capital goods, and land together equal to every cause of income and taking
wages for his purposes as income got from work, profits as income got from capital
goods, and rent as income got from land.
The fact comes out a little later on that ' common language ' is sometimes not
in agreement with his sense of the words : a man farming land of which he is the
owner will say that all the money he makes is ' profit ' without putting
anything on one side for rent; a renting farmer, acting as overseer of the work on
the farm, and even helping with it himself, will take anything which comes to him
after payment has been made for working-costs and keeping up the capital goods as
' profit ', giving nothing to himself as wages for his work ; a worker running a
one-man business, who makes things for the public in place of working for another,
will in the same way say that he has only ' profits ' and give himself nothing for
wages : and last, a working gardener, with a garden of which he is the owner, is
commonly said ' to get the ' earning 4
(not, let it be noted, the ' wages ') ' of his
work ', nothing being taken off and given
to him as the profit of his capital goods or the rent of his land. But these
observations did not put any doubts into his mind about the value of his uses of the
words. He simply takes the view that ' common language ' is wrong, and that it
' gets mixed ' about the different sorts of income. " When", he says, "those three
different sorts of income come to different persons it is not hard to see which is
which, but when they come to the same person, they sometimes get grouped together,
at least in common language."
What seems a little strange about this account is the fact that no example is
given in which 'those three different sorts of income come to different persons".
In fact, it is very hard to give one. The great group of renting farmers, as Adam
Smith says himself, in the statement given here, get ' wages ' in his sense of income
from work, in addition to profits or income from capital goods, and in a later part
of his book he says that the greater part of the income of a retail storekeeper
may quite well be ' true wages '. He seems to take the view that wholesale
traders and producers get very little as "the wages of a special sort of work, the
work of overseeing and direction", but, all the same, he seems to have been of the
opinion that about half the receipts which came to them they made by doing something,
to which he gives no name, because the common statement that the rate of
interest is only half of a good profit has his approval. This statement makes one put
a question as to why the income got from being the owner of capital goods is joined
with the income got from the owner's effort by talking of it all as ' profits of
capital goods ' or of capital. Why not say quite simply that the wholesale trader and
the works-owner, like the retail trader and the farmer, get by their work everything
which comes to them in addition to the normal interest on their capital ?
- - - - - -
3 . Payments made by a mining company to the owners of land, for the right to take from it
substances of value.
4. Payment (for work).
§3 . Division of Profit into ' Interest ' or
Income got from Capital, and ' Fruits of Direction ' or Income got from the Work of running a Business.
For almost a hundred years after Adam Smith, economists were kept from taking
this step by theories of wages which made necessary the belief that wages in the
normal sense (payments by agreement for work done under the control of the person
for whom the work was done) were fixed by factors quite different from those by
which other payments for work are fixed, where there is no agreement
with the worker. Though on paper ' wages ' was said to be equal to income
got from work, they were unable to get out of their minds the normal sense of wages,
and the theories they made about wages were no use in connection with payments
for the work of a person working by himself. But when these theories became
dead, there was a change of attack, and far from getting mixed between the
income which the owner of capital gets from his efforts and that which he gets
from his property by talking simply of ' profits of capital ', economists, almost
with one voice, came to give the name of ' interest ' to income got from capital,
looking upon the rest of the amount made by the owner as the reward for work,
though so far they have not come to an agreement about what name to give it.
The Americans generally say ' profits ' simply, but English writers have not been
quite ready to get away so completely from the economic language of the past,
and have sometimes let this division of income go without a name, and sometimes
given it the name of ' Earnings of Managing '. This last is not a good name
because the money made by persons working for themselves, and the incomes
of persons who do the work of managing but get wages or ' salaries ' for it are not kept separate.
§4 . Income from Land and from other Property grouped together, and division made of Complete Income into Income from Property and Income from Work.
By this division of Adam Smith’s profits of capital goods’ into two
parts, one for the operations of the ' undertaker of the work ', as he was in
Smith’s time, who does something, and one (named ' interest ') for the owner of
the property, who does nothing, a clear line was fixed between income from work
and income from property. But a decision had still to be made about the value
of the old division between rent, or income got from land, and ' interest ',
or income got from other property. Adam Smith does not ever seem to have
been conscious of the need for care in making a division between land and
capital goods or ' stock ', as they were named by him. To him land was land
and ' stock ' was property of value other than land : land gave a rent, and the part
of ' stock ' looked on by him as ' capital gave a profit, and it did not seem to him
that anyone would have or make any trouble about that. But even he makes
the statement that part of ' the rent of land ' (and possibly in certain very special
conditions all of it) may be made up of a ' normal profit or interest ' on capital put
into giving the land greater value. If we are in agreement that rent may be caused
by putting capital into land in this way, we have to go on and say that ' land ' may
be increased in value by the work men do on it, and the sharp division between land,
produced naturally, and capital, the stored produce of past work, is no longer possible.
Ricardo made some sort of attempt to get the theory straight when he said, early in
his Principles, that he would give the name rent only to the payment made for the
powers of the land before anything was done to it, but in a very short time he
gave up this idea and made a division between additions to value which were
only for a time and those which were not, grouping the income from these last as
rent of land and the income from "buildings and other increases in value made only
for a limited time" as ' profits of capital ', or interest, as later writers would say.
This second system of Ricardo's was the one used till the eighteen-nineties. Then it was seen that the division he made was one between things which were different
in degree but not in quality : additions to value are not of two sorts, one ' for ever '
and the other ' for a time ', but are better looked at as all more or less for ever or all
more or less for a time. Marshall made this fact clearer by the invention of the
term ' quasi-rent ' for the income got from being the owner of man-made producing
apparatus, though he does not make use of it in place of the term ' interest ' which is
generally used for the income got from capital when looked on as part of a system
distribution. From that time on it has been possible for the economist to give
attention to the division between all the money made by work on the one side, and
all the income got from property, as rent, ' quasi-rent ’, interest, or in any other form,
on the other side. This I will do in Part X,
Some readers may possibly come forward with the argument that the division
of all income into income from work and income from property does not take into
account the fact that income is sometimes got from qualities which a person has
without work. Two persons joined together from birth and the smallest Man
on Earth, he will say, got their incomes not because they did any work, but
because there were certain strange facts about them which made the public ready
to give money to have a look at them. It is to be doubted, however, if there are any
qualities of this sort out of which it is possible to make money without doing a
certain amount of work. Even the Fat Woman who is taken from place to place
with the roundabouts, who might seem to make no effort at all, has to give up her
time, and no doubt gets quite tired from being talked about and looked at. It
seems unnecessary to make such very small points. If it seems better to anyone
to say "income from work and qualities of person" in place of "income from
work" there is nothing against it. The change might become important if there
was any suggestion that workers get income because it is good to do work, but
there is no such suggestion in the present book.
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