Principles of Economics

Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.

Economics is a study of men as they live and move and think in the ordinary business of life. But it concerns itself chiefly with those motives which affect, most powerfully and most steadily, man’s conduct in the business part of his life. Everyone who is worth anything carries his higher nature with him into business; and, there as elsewhere, he is influenced by his personal affections, by his conceptions of duty and his reverence for high ideals. And it is true that the best energies of the ablest inventors and organizers of improved methods and appliances are stimulated by a noble emulation more than by any love of wealth for its own sake. But, for all that, the steadiest motive to ordinary business work is the desire for the pay which is the material reward of work. The pay may be on its way to be spent selfishly or unselfishly, for noble or base ends; and here the variety of human nature comes into play. But the motive is supplied by a definite amount of money: and it is this definite and exact money measurement of the steadiest motives in business life, which has enabled economics far to outrun every other branch of the study of man. Just as the chemist’s fine balance has made chemistry more exact than most other physical sciences; so this economist’s balance, rough and imperfect as it is, has made economics more exact than any other branch of social science. But of course economics cannot be compared with the exact physical sciences: for it deals with the ever changing and subtle forces of human nature.1

It is the business of economics, as of almost every other science, to collect facts, to arrange and interpret them, and to draw inferences from them. “Observation and description, definition and classification are the preparatory activities. But what we desire to reach thereby is a knowledge of the interdependence of economic phenomena... Induction and deduction are both needed for scientific thought as the left and right foot are both needed for walking.”1 The methods required for this twofold work are not peculiar to economics; they are the common property of all sciences. All the devices for the discovery of the relations between cause and effect, which are described in treatises on scientific method, have to be used in their turn by the economist: there is not any one method of investigation which can properly be called the method of economics; but every method must be made serviceable in its proper place, either singly or in combination with others. And as the number of combinations that can be made on the chess-board is so great that probably no two games exactly alike were ever played; so no two games which the student plays with nature to wrest from her her hidden truths, which were worth playing at all, ever made use of quite the same methods in quite the same way.

We have seen that the economist must be greedy of facts; but that facts by themselves teach nothing History tells of sequences and coincidences; but reason alone can interpret and draw lessons from them. The work to be done is so various that much of it must be left to be dealt with by trained common sense, which is the ultimate arbiter in every practical problem. Economic science is but the working of common sense aided by appliances of organized analysis and general reasoning, which facilitate the task of collecting, arranging, and drawing inferences from particular facts. Though its scope is always limited, though its work without the aid of common sense is vain, yet it enables common sense to go further in difficult problems than would otherwise be possible.

We have seen that economics is, on the one side, a Science of Wealth; and, on the other, that part of the Social Science of man’s action in society, which deals with his Efforts to satisfy his Wants, in so far as the efforts and wants are capable of being measured in terms of wealth, or its general representative, i.e. money. We shall be occupied during the greater part of this volume with these wants and efforts; and with the causes by which the prices that measure the wants are brought into equilibrium with those that measure the efforts. For this purpose we shall have to study in Book III wealth in relation to the diversity of man’s wants, which it has to satisfy; and in Book IV wealth in relation to the diversity of man’s efforts by which it is produced.

All wealth consists of desirable things; that is, things which satisfy human wants directly or indirectly: but not all desirable things are reckoned as wealth. The affection of friends, for instance, is an important element of wellbeing, but it is not reckoned as wealth, except by a poetic licence. Let us then begin by classifying desirable things, and then consider which of them should be accounted as elements of wealth.

Man cannot create material things. In the mental and moral world indeed he may produce new ideas; but when he is said to produce material things, he really only produces utilities; or in other words, his efforts and sacrifices result in changing the form or arrangement of matter to adapt it better for the satisfaction of wants. All that he can do in the physical world is either to readjust matter so as to make it more useful, as when he makes a log of wood into a table; or to put it in the way of being made more useful by nature, as when he puts seed where the forces of nature will make it burst out into life.1

In a primitive community each family is nearly self-sufficing, and provides most of its own food and clothing and even household furniture. Only a very small part of the income, or comings in, of the family is in the form of money; when one thinks of their income at all, one reckons in the benefits which they get from their cooking utensils, just as much as those which they get from their plough: one draws no distinction between their capital and the rest of their accumulated stock, to which the cooking utensils and the plough alike belong.1

The older definitions of economics described it as the science which is concerned with the production, the distribution, the exchange, and the consumption of wealth. Later experience has shown that the problems of distribution and exchange are so closely connected, that it is doubtful whether anything is to be gained by the attempt to keep them separate. There is however a good deal of general reasoning with regard to the relation of demand and supply which is required as a basis for the practical problems of value, and which acts as an underlying backbone, giving unity and consistency to the main body of economic reasoning. Its very breadth and generality mark it off from the more concrete problems of distribution and exchange to which it is subservient; and therefore it is put together in Book V on “The General Theory of Demand and Supply” which prepares the way for “Distribution and Exchange, or Value.”

Human wants and desires are countless in number and very various in kind: but they are generally limited and capable of being satisfied. The uncivilized man indeed has not many more than the brute animal; but every step in his progress upwards increases the variety of his needs together with the variety in his methods of satisfying them. He desires not merely larger quantities of the things he has been accustomed to consume, but better qualities of those things; he desires a greater choice of things, and things that will satisfy new wants growing up in him.

When a trader or a manufacturer buys anything to be used in production, or be sold again, his demand is based on his anticipations of the profits which he can derive from it. These profits depend at any time on speculative risks and on other causes, which will need to be considered later on. But in the long rim the price which a trader or manufacturer can afford to pay for a thing depends on the prices which consumers will pay for it, or for the things made by aid of it. The ultimate regulator of all demand is therefore consumers’ demand. And it is with that almost exclusively that we shall be concerned in the present Book.

We have seen that the only universal law as to a person’s desire for a commodity is that it diminishes, other things being equal, with every increase in his supply of that commodity. But this diminution may be slow or rapid. If it is slow the price that he will give for the commodity will not fall much in consequence of a considerable increase in his supply of it; and a small fall in price will cause a comparatively large increase in his purchases. But if it is rapid, a small fall in price will cause only a very small increase in his purchases. In the former case his willingness to purchase the thing stretches itself out a great deal under the action of a small inducement: the elasticity of his wants, we may say, is great. In the latter case the extra inducement given by the fall in price causes hardly any extension of his desire to purchase: the elasticity of his demand is small. If a fall in price from say 16d. to 15d. per lb. of tea would much increase his purchases, then a rise in price from 15d. to 16d. would much diminish them. That is, when the demand is elastic for a fall in price, it is elastic also for a rise.

The primitive housewife finding that she has a limited number of hanks of yarn from the year’s shearing, considers all the domestic wants for clothing and tries to distribute the yarn between them in such a way as to contribute as much as possible to the family wellbeing. She will think she has failed if, when it is done, she has reason to regret that she did not apply more to making, say, socks, and less to vests. That would mean that she had miscalculated the points at which to suspend the making of socks and vests respectively; that she had gone too far in the case of vests, and not far enough in that of socks; and that therefore at the points at which she actually did stop, the utility of yarn turned into socks was greater than that of yarn turned into vests. But if, on the other hand, she hit on the right points to stop at, then she made just so many socks and vests that she got an equal amount of good out of the last bundle of yarn that she applied to socks, and the last she applied to vests. This illustrates a general principle, which may be expressed thus:—

We may now turn to consider how far the price which is actually paid for a thing represents the benefit that arises from its possession. This is a wide subject on which economic science has very little to say, but that little is of some importance.

The agents of production are commonly classed as Land, Labour and Capital. By Land is meant the material and the forces which Nature gives freely for man’s aid, in land and water, in air and light and heat. By Labour is meant the economic work of man, whether with the hand or the head.1 By Capital is meant all stored-up provision for the production of material goods, and for the attainment of those benefits which are commonly reckoned as part of income. It is the main stock of wealth regarded as an agent of production rather than as a direct source of gratification.

The requisites of production are commonly spoken of as land, labour and capital: those material things which owe their usefulness to human labour being classed under capital, and those which owe nothing to it being classed as land. The distinction is obviously a loose one: for bricks are but pieces of earth slightly worked up; and the soil of old settled countries has for the greater part been worked over many times by man, and owes to him its present form. There is however a scientific principle underlying the distinction. While man has no power of creating matter, he creates utilities by putting things into a useful form;1 and the utilities made by him can be increased in supply if there is an increased demand for them: they have a supply price. But there are other utilities over the supply of which he has no control; they are given as a fixed quantity by nature and have therefore no supply price. The term “land” has been extended by economists so as to include the permanent sources of these utilities; 2 whether they are found in land, as the term is commonly used, or in seas and rivers, in sunshine and rain, in winds and waterfalls.

Thelaw of or statement of tendency to Diminishing Return may be provisionally worded thus:

The production of wealth is but a means to the sustenance of man; to the satisfaction of his wants; and to the development of his activities, physical, mental, and moral. But man himself is the chief means of the production of that wealth of which he is the ultimate aim:1 and this and the two following chapters will be given to some study of the supply of labour; i.e. of the growth of population in numbers, in strength, in knowledge, and in character.

We have next to consider the conditions on which depend health and strength, physical, mental and moral. They are the basis of industrial efficiency, on which the production of material wealth depends; while conversely the chief importance of material wealth lies in the fact that, when wisely used, it increases the health and strength, physical, mental and moral of the human race.

Having discussed the causes which govern the growth of a numerous and vigorous population, we have next to consider the training that is required to develop its industrial efficiency.

In this chapter it is not necessary to distinguish the points of view in which wealth is regarded as the object of consumption and as an agent of production; we are concerned with the growth of wealth simply, and we have no need to emphasize its uses as capital.

Writers on social science from the time of Plato downwards have delighted to dwell on the increased efficiency which labour derives from organization. But in this, as in other cases, Adam Smith gave a new and larger significance to an old doctrine by the philosophic thoroughness with which he explained it, and the practical knowledge with which he illustrated it. After insisting on the advantages of the division of labour, and pointing out how they render it possible for increased numbers to live in comfort on a limited territory, he argued that the pressure of population on the means of subsistence tends to weed out those races who through want of organization or for any other cause are unable to turn to the best account the advantages of the place in which they live.

The first condition of an efficient organization of industry is that it should keep everyone employed at such work as his abilities and training fit him to do well, and should equip him with the best machinery and other appliances for his work. We shall leave on one side for the present the distribution of work between those who carry out the details of production on the one hand, and those who manage its general arrangement and undertake its risk on the other; and confine ourselves to the division of labour between different classes of operatives, with special reference to the influence of machinery. In the following chapter we shall consider the reciprocal effects of division of labour and localization of industry; in a third chapter we shall inquire how far the advantages of division of labour depend upon the aggregation of large capitals into the hands of single individuals or firms, or, as is commonly said, on production on a large scale; and lastly, we shall examine the growing specialization of the work of business management.

In an early stage of civilization every place had to depend on its own resources for most of the heavy wares which it consumed; unless indeed it happened to have special facilities for water carriage. But wants and customs changed slowly: and this made it easy for producers to meet the wants even of consumers with whom they had little communication; and it enabled comparatively poor people to buy a few expensive goods from a distance, in the security that they would add to the pleasure of festivals and holidays during a lifetime, or perhaps even during two or three life-times. Consequently the lighter and more expensive articles of dress and personal adornment, together with spices and some kinds of metal implements used by all classes, and many other things for the special use of the rich, often came from astonishing distances. Some of these were produced only in a few places, or even only in one place; and they were diffused all over Europe partly by the agency of fairs1 and professional pedlars, and partly by the producers themselves, who would vary their work by travelling on foot for many thousand miles to sell their goods, and see the world. These sturdy travellers took on themselves the risks of their little businesses; they enabled the production of certain classes of goods to be kept on the right track for satisfying the needs of purchasers far away; and they created new wants among consumers, by showing them at fairs or at their own houses new goods from distant lands. An industry concentrated in certain localities is commonly, though perhaps not quite accurately, described as a localized industry.2

The advantages of production on a large scale are best shown in manufacture; under which head we may include all businesses engaged in working up material into forms in which it will be adapted for sale in distant markets. The characteristic of manufacturing industries which makes them offer generally the best illustrations of the advantages of production on a large scale, is their power of choosing freely the locality in which they will do their work. They are thus contrasted on the one hand with agriculture and other extractive industries (mining, quarrying, fishing, etc.), the geographical distribution of which is determined by nature; and on the other hand with industries that make or repair things to suit the special needs of individual consumers, from whom they cannot be far removed, at all events without great loss.1

Hitherto we have been considering the work of management chiefly in regard to the operations of a manufacturing or other business employing a good deal of manual labour. But we now have to consider more carefully the variety of the functions which business men discharge; the manner in which they are distributed among the heads of a large business, and again between different classes of business which co-operate in allied branches of production and marketing. And incidentally we have to inquire how it occurs that, though in manufacturing at least nearly every individual business, so long as it is well managed, tends to become stronger the larger it has grown; and though primâ facie we might therefore expect to see large firms driving their smaller rivals completely out of many branches of industry, yet they do not in fact do so.

At the beginning of the Book we saw how the extra return of raw produce which nature affords to an increased application of capital and labour, other things being equal, tends in the long run to diminish. In the remainder of the Book and especially in the last four chapters we have looked at the other side of the shield, and seen how man’s power of productive work increases with the volume of the work that he does. Considering first the causes that govern the supply of labour, we saw how every increase in the physical, mental and moral vigour of a people makes them more likely, other things being equal, to rear to adult age a large number of vigorous children. Turning next to the growth of wealth, we observed how every increase of wealth tends in many ways to make a greater increase more easy than before. And lastly we saw how every increase of wealth and every increase in the numbers and intelligence of the people increased the facilities for a highly developed industrial organization, which in its turn adds much to the collective efficiency of capital and labour.

A business firm grows and attains great strength, and afterwards perhaps stagnates and decays; and at the turning point there is a balancing or equilibrium of the forces of life and decay: the latter part of Book IV has been chiefly occupied with such balancing of forces in the life and decay of a people, or of a method of industry or trading. And as we reach to the higher stages of our work, we shall need ever more and more to think of economic forces as resembling those which make a young man grow in strength, till he reaches his prime; after which he gradually becomes stiff and inactive, till at last he sinks to make room for other and more vigorous life. But to prepare the way for this advanced study we want first to look at a simpler balancing of forces which corresponds rather to the mechanical equilibrium of a stone hanging by an elastic string, or of a number of balls resting against one another in a basin.

The simplest case of balance or equilibrium between desire and effort is found when a person satisfies one of his wants by his own direct work. When a boy picks blackberries for his own eating, the action of picking is probably itself pleasurable for a while; and for some time longer the pleasure of eating is more than enough to repay the trouble of picking. But after he has eaten a good deal, the desire for more diminishes; while the task of picking begins to cause weariness, which may indeed be a feeling of monotony rather than of fatigue. Equilibrium is reached when at last his eagerness to play and his disinclination for the work of picking counterbalance the desire for eating. The satisfaction which he can get from picking fruit has arrived at its maximum: for up to that time every fresh picking has added more to his pleasure than it has taken away; and after that time any further picking would take away from his pleasure more than it would add.1

We have next to inquire what causes govern supply prices, that is prices which dealers are willing to accept for different amounts. In the last chapter we looked at the affairs of only a single day; and supposed the stocks offered for sale to be already in existence. But of course these stocks are dependent on the amount of wheat sown in the preceding year; and that, in its turn, was largely influenced by the farmers’ guesses as to the price which they would get for it in this year. This is the point at which we have to work in the present chapter.

The first difficulty to be cleared up in our study of normal values, is the nature of the motives which govern the investment of resources for a distant return. It will be well to begin by watching the action of a person who neither buys what he wants nor sells what he makes, but works on his own behalf; and who therefore balances the efforts and sacrifices which he makes on the one hand against the pleasures which he expects to derive from their fruit on the other, without the intervention of any money payments at all.

The variations in the scope of the term Normal, according as the periods of time under discussion are long or short, were indicated in Chapter iii. We are now ready to study them more closely.

Bread satisfies man’s wants directly: and the demand for it is said to be direct. But a flour mill and an oven satisfy wants only indirectly, by helping to make bread, etc., and the demand for them is said to be indirect. More generally:—

We may now return to the consideration of prime and supplementary costs, with special reference to the proper distribution of the latter between the joint products of a business.

This Chapter and the three following are given to a study of the marginal costs of products in relation to the values of those products on the one hand, and on the other hand to the values of the land, machinery, and other appliances used in making them. The study relates to normal conditions and long period results. This fact must ever be borne in mind. The market value of anything may be much above or much below the normal cost of production: and the marginal costs of a particular producer at any time may stand in no close relation to marginal costs under normal conditions.1

The incidents of the tenure of land are so complex: and so many practical issues connected with them have raised controversies on side issues of the problem of value, that it will be well to supplement our previous illustration from land. We may take another from an imaginary commodity so chosen that sharp outlines can be assigned to each stage of the problem, without inviting the objection that such sharp outlines are not found in the actual relations between landlord and tenant.

We now pass from general considerations to those relating to land; and we begin with those specially applicable to agricultural land in an old country.

The last three chapters examined the relation in which cost of production stands to the income derived from the ownership of the “original powers” of land and other free gifts of nature, and also to that which is directly due to the investment of private capital. There is a third class, holding an intermediate position between these two, which consists of those incomes, or rather those parts of incomes which are the indirect result of the general progress of society, rather than the direct result of the investment of capital and labour by individuals for the sake of gain. This class has to be studied now, with special reference to the value of urban sites.

We may now continue the study begun in chapters iii. and v.; and examine some difficulties connected with the relations of demand and supply as regards commodities the production of which tends to increasing return.

In earlier chapters of this Book, and especially in chapter xii., we have considered gradual changes in the adjustment of demand and supply. But any great and lasting change in fashion; any substantive new invention; any diminution of population by war or pestilence; or the development or dwindling away of a source of supply of the commodity in question, or of a raw material used in it, or of another commodity which is a rival and possible substitute for it:—such a change as any of these may cause the prices set against any given annual (or daily) consumption and production of the commodity to cease to be its normal demand and supply prices for that volume of consumption and production; or, in other words, they may render it necessary to make out a new demand schedule or a new supply schedule, or both of them. We proceed to study the problems thus suggested.

It has never been supposed that the monopolist in seeking his own advantage is naturally guided in that course which is most conducive to the well-being of society regarded as a whole, he himself being reckoned as of no more importance than any other member of it. The doctrine of Maximum Satisfaction has never been applied to the demand for and supply of monopolized commodities. But there is much to be learnt from a study of the relations in which the interests of the monopolist stand to those of the rest of society, and of the general conditions under which it might be possible to make arrangements more beneficial to society as a whole than those which he would adopt if he consulted only his own interests: and with this end in view we are now to seek for a scheme for comparing the relative quantities of the benefits which may accrue to the public and to the monopolist from the adoption of different courses of action by him.

The present chapter contains no new matter: it is a mere summary of the results of Book V. The second half of it may be of service to anyone who has omitted the later chapters: for it may indicate, though it cannot explain, their general drift.

The keynote of this Book is in the fact that free human beings are not brought up to their work on the same principles as a machine, a horse, or a slave. If they were, there would be very little difference between the distribution and the exchange side of value; for every agent of production would reap a return adequate to cover its own expenses of production with wear-and-tear, etc.; at all events after allowance had been made for casual failures to adjust supply to demand. But as it is, our growing power over nature makes her yield an ever larger surplus above necessaries; and this is not absorbed by an unlimited increase of the population. There remain therefore the questions:—What are the general causes which govern the distribution of this surplus among the people? What part is played by conventional necessaries, i.e. the Standard of Comfort? What by the influence which methods of consumption and of living generally exert on efficiency; by wants and activities, i.e. by the Standard of Life? What by the many-sided action of the principle of substitution, and by the struggle for survival between hand-workers and brain-workers of different classes and grades? What by the power which the use of capital gives to those in whose hands it is? What share of the general flow is turned to remunerate those who work (including here the undertaking of ventures) and “wait,” as contrasted with those who work and consume at once the fruits of their endeavours? An attempt is made to give a broad answer to those and some similar questions.

As was indicated at the beginning of last chapter, we are now to supplement the study of the influence of demand on distribution, by a study of the reflex influence of remuneration on the supply of different agents of production. We have to combine the two in a preliminary general view of the parts played by cost of production and by utility or desirability in governing the distribution of the national dividend between different kinds of labour and the owners of capital and land.

When discussing the general theory of equilibrium of demand and supply in the last Book, and the main outlines of the central problem of distribution and exchange in the first two chapters of this Book, we left on one side, as far as might be, all considerations turning on the special qualities and incidents of the agents of production. We did not inquire in detail how far the general theories of the relations between the value of an appliance for production and that of the product, which it helps to make, are applicable to the incomes earned by natural abilities, or by skill and knowledge acquired long ago, whether in the ranks of the employers, the employed, or the professional classes. We avoided difficulties connected with the analysis of Profits, paying no attention to the many different scopes which the usage of the market-place assigns to this term, and even the more elementary term Interest; and we took no account of the influence of varieties of tenure on the form of demand for land. These and some other deficiencies will be made good by more detailed analysis in the following three groups of chapters on demand and supply in relation to labour, to capital and business power, and to land, respectively.

The action of demand and supply with regard to labour was discussed in the last chapter with reference to the difficulties of ascertaining the real as opposed to the nominal price of labour. But some peculiarities in this action remain to be studied, which are of a more vital character. For they affect not merely the form, but also the substance of the action of the forces of demand and supply; and to some extent they limit and hamper the free action of those forces. We shall find that the influence of many of them is not at all to be measured by their first and most obvious effects: and that those effects which are cumulative are generally far more important in the long run than those which are not, however prominent the latter may appear.

The next peculiarity in the action of demand and supply with regard to labour, which we have to consider, is closely connected with some of those we have already discussed. It consists in the length of time that is required to prepare and train labour for its work, and in the slowness of the returns which result from this training.

The relations between demand and supply cannot be studied by themselves in the case of capital any more than they could in the case of labour. All the elements of the great central problem of distribution and exchange mutually govern one another: and the first two chapters of this Book, and more especially the parts that relate directly to capital, may be taken as an introduction to this and the next two chapters. But before entering on the detailed analysis with which they will be mainly occupied, something may be said as to the position which the modern study of capital and interest holds in relation to earlier work.

In the concluding chapters of Book IV we made some study of the various forms of business management, and the faculties required for them; and we saw how the supply of business power in command of capital may be regarded as consisting of three elements, the supply of capital, the supply of the business power to manage it, and the supply of the organization by which the two are brought together and made effective for production. In the last chapter we were concerned mainly with interest, the earnings of the first of these elements. In the earlier part of this chapter we shall be occupied with the earnings of the second and third taken together, which we have called gross earnings of management; and after-wards we shall pass to the relation in which this stands to the earnings of the second taken by itself which we have called net earnings of management.1 We have to inquire more closely into the nature of the services which are rendered to society by those who undertake and manage business enterprises, and the rewards of their work; and we shall find that the causes by which these are governed are less arbitrary, and present closer analogies to those which govern other kinds of earnings, than is commonly supposed.

The causes that govern Earnings of Management have not been studied with any great care till within the last fifty years. The earlier economists did not do much good work in this direction because they did not adequately distinguish the component elements of profits, but searched for a simple general law governing the average rate of profits—a law which, from the nature of the case, cannot exist.

It has been argued in Book V. that the rent of land is no unique fact, but simply the chief species of a large genus of economic phenomena; and that the theory of the rent of land is no isolated economic doctrine, but merely one of the chief applications of a particular corollary from the general theory of demand and supply; that there is a continuous gradation from the true rent of those free gifts which have been appropriated by man, through the income derived from permanent improvements of the soil, to those yielded by farm and factory buildings, steam-engines and less durable goods. In this and the following chapter we are to make a special study of the net income of land. That study has two parts. One part relates to the total quantity of the net income, or producer’s surplus from land: the other to the way in which this income is distributed between those who have an interest in the land. The first is general, whatever be the form of land tenure. We will begin with it, and suppose that the cultivation of the land is undertaken by its owner.

In early times, and in some backward countries even in our own age, all rights to property depend on general understandings rather than on precise laws and documents. In so far as these understandings can be reduced to definite terms and expressed in the language of modern business, they are generally to the following effect:—The ownership of land is vested, not in an individual, but in a firm of which one member or group of members is the sleeping partner, while another member or group of members (it may be a whole family) is the working partner.1

The argument of the preceding ten chapters may now be summarized. It falls far short of a complete solution of the problem before us: for that involves questions relating to foreign trade, to fluctuations of credit and employment, and to the influences of associated and collective action in its many forms. But yet it extends to the broad action of the most fundamental and permanent influences which govern distribution and exchange. In the summary at the end of Book V we traced a continuous thread running through and connecting the applications of the general theory of equilibrium of demand and supply to different periods of time; from those so short that cost of production could exercise no direct influence on value, to those so long that the supply of the appliances of production could be fairly well adjusted to the indirect demand for them, which is derived from the direct demand for the commodities which they produce. In the present Book we have been concerned with another thread of continuity, which lies transversely to the thread connecting different periods of time. It connects the various agents and appliances for production, material and human; and establishes a fundamental unity between them, in spite of their important differences of outward feature.

The field of employment which any place offers for labour and capital depends, firstly, on its natural resources; secondly, on the power of turning them to good account, derived from its progress of knowledge and of social and industrial organization; and thirdly, on the access that it has to markets in which it can sell those things of which it has a superfluity. The importance of this last condition is often underrated; but it stands out prominently when we look at the history of new countries.

Let us begin by pursuing a little further the line of thought on which we started in Book III, when considering wants in relation to activities. We there saw reasons for thinking that the true keynote of economic progress is the development of new activities rather than of new wants; and we may now make some study of a question that is of special urgency in our own generation; viz.—what is the connection between changes in the manner of living and the rate of earnings; how far is either to be regarded as the cause of the other, and how far as the effect?