groups, in the purchasing power of money. We thus seem to return, in substance, to the original conception of money income. But it is important to notice that money income, as commonly conceived, is not equivalent to the money value of real income, as it is here convenient to define the latter. For, on the one hand, there are certain elements of money income, to which no elements of real income correspond; and, on the other hand, there are certain elements of real income, to which no elements of money income correspond.

§2 Let us begin by considering those elements of money income, to which no elements of real income correspond. In the first place, certain elements of " gross money income" are by common consent excluded even from net money income" and it is evident that no elements of real income correspond to them. To any person these represent, roughly speaking, part of the money expenses of securing his money income. They are, of course, specially important in the case of traders, employers of labour and business men generally, and cover such things as cost of material, payments to employees, interest on borrowed capital and expenditure necessary to "maintain capital intact." The distinction between gross and net income is familiar and well established and may be accepted, for our present purpose, in its ordinary form.1

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1 The distinction is not, however, so simple as it may seem at firs sight. For the difficulties inherent in the idea of a depreciation fund designed to maintain capital intact' or to maintain property unimpaired," see Cannan, Wealth, pp. 148-152, and Pigou, Wealth and Welfare, pp. 17-19. As regards income from work, two points may be noticed. In the first place, an analogy may be drawn between payments necessary to maintain the worker's efficiency and payments into a depreciation fund for capital. On the basis of this analogy it may be argued that only that part of a worker's income in excess of what is required to maintain efficiency should be regarded as his net income. This, in substance, is the view taken by Professor Loria, in La Sintesi Economica. But, for our present purpose, such a departure from ordinary usage is not justifiable, since our concern is with the worker's means of economic welfare, to which his net income in the

In the second place, taxes, though usually included in the income of the taxpayers, should, for our present purpose, be excluded. No elements of real income can usefully be said to correspond to those elements of money income, which the recipient is compelled to pay in taxation to public authorities. Unless this principle is accepted, we cannot say, as it is eminently reasonable to say, that, when by a combination of taxation and public expenditure purchasing power is transferred from the rich to the poor, the inequality of incomes is, for the moment at any rate, doubly diminished, first by an increase in the incomes of the poor and second by a decrease in the incomes of the rich. It is sometimes said, in opposition to this principle, that, in return for the payments of individual taxpayers, public authorities provide various services, including the most important service of protecting the taxpayers in the enjoyment of their property and other civil rights. This idea was embedded, for instance, in Joseph Chamberlain's doctrine of ransom, which had a fleeting vogue in the politics of the early eighties, and it can almost be brought under the classifications of modern economic theory, if we suppose that a public

ordinary sense corresponds much more closely than does his net income in the sense indicated above. In the second place, as Professor Cannan points out (Wealth, p. 154), " though we allow for continuing expenses in the present, we seldom think of allowing anything for the original expenses of training the worker for his particular occupation." But this is because "workers are not brought up on commercial principles, like horses, with a view to the profits of owners. They are brought up and trained by their parents, by charities, and by the State, and it is only in rare instances that they are asked to repay any part of the cost." Here, again, for our present purpose, the ordinary usage is the most appropriate.

1 Payments which are voluntary purchases of services rendered by public authorities, e.g., postal services, are not taxes in this sense. For here the services are elements of real income to the purchasers. If, however, the purchase price includes an element of tax, the latter stands on the same footing as other taxes. The principle to be adopted here is clear, though its application will sometimes encounter practical difficulties.

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authority has a monopoly of the supply of certain services and sets up an elaborate system of price discrimination as between different persons and classes. But this parallel breaks down by reason of the fact that public authorities differ from private monopolists in having a legal right to compel acceptance of their wares. In any case the idea is neither very helpful nor very realistic.1 It is better frankly to exclude taxes from the income of taxpayers and to include benefits from public expenditure, in so far as they can be estimated, in the income of the beneficiaries. There are no doubt practical difficulties in the application of the principle that taxes, and especially indirect taxes, are not part of the income of the taxpayer, but these difficulties are small compared with the objections to including taxes in income

In the third place, gifts of money from A to B should, for our present purpose, be excluded from A's income and included in B's. For it is elements of real income to B and not to A, which correspond to these elements of money income. To A such gifts may bring satisfaction due to a sense of affection or generosity or of the discharge of a moral obligation, but it is to B and not to A that they bring purchasing power and hence the means of economic welfare.

§3. We may now consider those elements of real income to which no elements of money income correspond. In the first place, we have payments in kind under contracts of service, such as the board and lodging of domestic servants, or the rent-free dwellings sometimes supplied by employers for their workers. But such payments in kind are of continually diminishing importance relatively to payments in money. Money is the predominant medium of exchange. In the second place, we have certain elements of real income, which are

1 Compare Nitti, Scienza delle Finanze, pp. 46–7.

obtained otherwise than by exchange. Four groups of these may be distinguished, (1) goods which men produce for themselves, services which they render to themselves and the benefits which they derive from the direct use of their own property, (2) goods and services, which they receive gratuitously from other persons or private institutions, and the benefits which they derive from the direct use of the property of such persons or institutions, (3) goods and services which they receive gratuitously from public authorities, and the benefits which they derive from the direct use of public property, (4) such free and unappropriated goods as they make use of.

Thus, under (1) we have, for example, that part of the produce of a farm, which the farmer himself consumes, the services which a doctor, by reason of his knowledge, can render to himself when he is ill, the benefits which a man derives from living in a house which is his own property, and from the use of his own clothes, furniture, books and other personal property.

Under (2) we have the services rendered without payment to one member of a family by another, notably to their husbands and children by the domestic work of women, the provision of food, clothing, etc., for young children by their parents, and all gifts in kind, including the benefits of hospitality. If we are considering the income of a family and not of the separate individuals composing it, most of the items in group (2) will be transferred to group (1).

Under (3) we have free education and any other goods or services gratuitously provided out of public expenditure, including all benefits derived from the use of public property, such as parks, highways, museums, etc.

Under (4) we have, for example, the benefits of air, sunlight and a good climate, and in certain cases free access to rivers and the sea, in which no property rights have been established by individuals or public authorities.

All the items included in these four classes form part of the means of economic welfare available to individuals, and are, therefore, for our present purpose, elements of their real income, though no elements of money income correspond to them. In ordinary usage, most of them are not counted as income, partly through lack of reflection, partly owing to practical difficulties in the way of estimating or valuing them, partly owing to their supposed small comparative importance and partly on the ground that they are common elements in all the incomes with which we are concerned.1 It is reasonable to take account of them wherever possible, but it is pedantic to argue as though they were, under modern conditions, of the same importance as other elements more commonly regarded as income and more easily valued.2

§4. It is not usual to include inheritances in income, but there is a strong case for doing so, after deducting any taxation that may be payable in respect of their receipt. For a net inheritance is clearly an addition to the inheritor's means of economic welfare in the year in which it is received. Further, if, as has been argued above, gifts from the living are income to the recipient, there seems no good reason why inheritances, which are gifts from the dead, should not likewise be income. It has been

1 But this last is not a good ground for ignoring them, if we are interested in the inequality of incomes. For equal additions to a number of unequal incomes reduce inequality Compare my forthcoming study on the Measurement of the Inequality of Incomes.

2 Marshall (Principles, p. 72) observes that no services which a person "performs for himself are commonly reckoned as adding to his nominal income. But though it is best generally to neglect them when they are trivial, account should for consistency be taken of them, when they are of a kind which people commonly pay for having done for them," but " there is some inconsistency in omitting " from current conceptions of income "the heavy domestic work which is done by women and other members of the household, where no servants are kept (Ibid, p. 79). Again, 'from the social point of view income is regarded as including all the benefits which mankind derive at any time from their efforts in the present and in the past, to turn nature's resources to the best account." (Ibid, p. 76).