" PART III CHAPTER I ABSOLUTE AND Relative Shares. §1. In considering changes, and the cause of changes, in the shares of the total income of any community, which are received by various economic categories or by various persons, the distinction between absolute and relative shares is fundamental. This distinction between portions" and "proportions" is, of course, very obvious. No one, it might be supposed, would be likely to confuse an actual sum, whether of money or goods, with a mere fraction or percentage. But, in fact, economic thought, both ancient and modern, abounds with confusions on this point. A smaller relative share of a larger absolute sum may, or may not, be a smaller absolute sum. A quarter of £100 is greater than a third of £60, but less than a third of £90. Thus those who dispute whether or not "the rich are growing richer and the poor poorer" are often at cross purposes. For this assertion is sometimes intended to mean that the absolute share of the rich is increasing, and the absolute share of the poor diminishing, two independent propositions; sometimes that the relative share of the rich is increasing, and the relative share of the poor diminishing, a single proposition, if all members of the community are classified as either rich or poor; 1 Compare Edgeworth, Quarterly Journal of Economics, 1904, p. 161. • Compare, e.g., Part II., Chapter VI., § 7. above. sometimes that the inequality of personal incomes is increasing, which inequality may be defined and measured in a number of alternative ways. This variety of meanings is sometimes even further extended by taking account of changes in the number of the rich or of the poor, and by comparing the share, whether absolute or relative, not of each class as a whole, but of an average member of each class. But these prolific ambiguities often pass undetected in popular discussion. §2. Propositions concerning relative shares can often most easily, and sometimes can only, be obtained as deductions from other propositions concerning absolute shares. It is an arithmetical truism, but one which is often overlooked, that, if we know the size of a number of absolute shares, we can easily calculate the corresponding relative shares or percentages, whereas, if we only know the percentages, we have no means of calculating the absolute shares. Arguments from percentages alone are always, therefore, to be received with caution. In a certain Battalion, which served in the South African War, fifty per cent. of the teetotalers were taken ill before reaching the front, and the remaining fifty per cent. were invalided home, unwounded, after a few days' fighting. But these facts do not go far to prove that alcohol makes soldiers strong, for the teetotalers in that Battalion were only two in number. Only a little less misleading are many other arguments based upon percentage changes in the value of the foreign trade of different countries, or in the total incomes of different groups or classes. An increase from two million pounds to four million pounds is an increase of a hundred per cent., while an increase from two thousand million pounds to three thousand million pounds is an increase 1 Compare my forthcoming study on the Measurement of the Inequality of Incomes. of only fifty per cent., but for most practical purposes the latter increase will be more significant than the former. But, provided that elementary confusions of mind are avoided, the causes determining the relative shares of various classes and persons in the total income of the community offer an interesting, though difficult and hitherto somewhat neglected, field of enquiry.1 1 It is sometimes suggested that it is only absolute, and not relative, shares of total incomes, which are relevant to the economic welfare of individuals or social classes. For it is our own incomes that we spend, and not those of others, whatever the proportion between the one and the other may be. But to this suggestion three replies may be made. (1) Though absolute shares are the chief determinant of actual economic welfare, relative shares are one of the determinants of the potential economic welfare, which might be realised under a different scheme of distribution. Compare Part I., Chapter II. above. (2) Human psychology is such that the satisfaction, and hence the economic welfare, derived from an income depends, not only on the absolute size of this income, but also on its relative size as compared with other incomes. Compare Pigou, Wealth and Welfare, pp. 23-24. and Macgregor, Evolution of Industry, PP. 13-14. The ill-concealed chagrin, with which, while the general level of prices has been rising, certain members of the middle classes have seen their real incomes diminishing, not only absolutely, but relatively to those of many manual workers, is a further illustration. It is the relative, rather than the absolute, decline, which seems in many cases to cause the greater bitterness of spirit. (3) Relative shares are often, whether rightly or wrongly, made the subject of ethical judgments. Compare, for example, a correspondence in the Economist, Oct.-Nov., 1911, in the course of which it is argued by one writer that labour is entitled, on grounds of equity, to half the national dividend. CHAPTER II THE MEANING OF INCOME. §1. As a preliminary to further discussion, it is necessary to consider shortly what precise meaning shall be attached to the word "income," which stands for the central idea of all that follows. The most appropriate definition of income will vary, according to the purpose for which the conception of income is to be used. But, assuming that none of the rival definitions involve either confusion of thought or too violent a breach with common usage, the choice between them turns, not upon principle or logic, but upon appropriateness and practical convenience. In the subsequent argument, the main purpose of the conception of income is to facilitate comparisons between the economic welfare of different persons, or, more precisely, between the means of economic welfare available to different persons. Only persons have incomes, and for my present purpose only real persons, in the sense of human beings, and not "juridical persons," such as institutions or public authorities. For only real persons can attain to economic welfare.1 1 Such statements as that of Mr. Ramsay Macdonald (Socialism and Government, I., p. 34) that "the State requires an income and this is earned just as much as a personal income is earned," is an illegitimate personification of the State, which can only lead to confusion of thought. As regards institutions, Professor Cannan (Wealth, p. 156) says "the net yield of any non-commercial institution's endowments clearly comes under the ordinary conception of income. 1. If a hospital or school, for example, possesses land or Consols, the income is perfectly genuine income. It may be spent on nursing the sick or on teaching the young, but it will not be regarded as part of the income of those persons, so there is no double reckoning in counting it as income of the institution." In my opinion, it should The crudest and most popular conception of income is that it consists of money," not necessarily coins, but either coin or some kind of written or printed order which enables "people" to receive coin if they want it." But it is necessary to draw aside the veil, which the habitual use of money throws over most economic processes, and to consider not merely money but money's worth, not merely money income but real income, in the shape of those things which are bought with money income. For the purpose of my subsequent argument a person's real income during a given period should be so defined, as to correspond as closely as possible with the means of economic welfare which become available to him during this period. Any person's real income contains many heterogeneous elements, various sorts of food amd clothes, house room of varying quantity and quality, various personal services and so forth. In order, therefore, to compare the size of two or more real incomes, it is necessary to express all these elements in terms of some one common measure. The most obvious common measure is money value, which can in practice be used with approximate accuracy, corrections being made for variations, as between different times, places, and social " be "regarded as part of the income of those persons," for it is they, and not the imaginary personality of the institution, whose means of economic welfare are increased by nursing or teaching. Similarly a public authority's income from property," such as the British Government's income from Suez Canal Shares, should strictly be regarded, it seems to me, not as the income of the public authority, but as the income of those persons to whom the public authority pays it over, whether or not such persons perform any services in return for the payments they receive. Again, a public authority's "income ' from taxation, as will be argued later in this chapter, is only income transferred from taxpayers to beneficiaries of public expenditure, the public authority being merely a piece of machinery by means of which the transfer is effected. Professor Cannan, in Chapter VIII. of his Wealth, appears to be considering the question, who has the control of the income. I, on the other hand, am considering, who gets economic welfare from the enjoyment of the income. 1 Cannan, Wealth. p. 140. |