CHAPTER II

ECONOMIC WELFARE AND THE INEQUALITY OF INCOMES

§1. Human welfare is divisible into economic, or material, welfare on the one hand and, on the other hand, various kinds of welfare which are not economic. This division will be sufficiently intelligible without further discussion, though by the nature of things the dividing line is not clear cut.1

The relative importance which should be attached to economic and non-economic welfare, and the probable effects of changes in economic welfare upon welfare as a whole, have been much disputed. But modern opinion, in the civilised countries of the Western world at any rate, seems to hold with increasing strength that economic welfare is of very great importance, both for its own sake and as a means to other sorts of welfare, which may often be of even greater intrinsic importance, and further that an increase in economic welfare is generally likely to cause an increase in human welfare as a whole. Man does not live by bread alone, but without bread he cannot live at all, and without a sufficiency of bread he cannot even hope to live worthily. Moreover, the burden of proof rests upon those who assert that, in any particular case, an increase of economic welfare diminishes welfare in the widest sense. With this view of things I personally have no quarrel, and I shall adopt it in what follows.

§2. Income consists of the means of economic welfare,"

1 Compare Cannan, Wealth, Chapter I. • Compare Part III, Chapter II below.

and great inequality of incomes in any community implies great inequality in the economic welfare attained by different individuals. But this is not all. For it implies also considerable waste of potential economic welfare. Put broadly, and in the language of common sense, the case against large inequalities of income is that the less urgent needs of the rich are satisfied, while the more urgent needs of the poor are left unsatisfied. The rich are more than amply fed, while the poor go hungry. This is merely an application of the economists' law of diminishing marginal utility, which states that, other things being equal, as the quantity of any commodity or, more generally, of purchasing power, increases, its total utility increases, but its marginal utility diminishes. An unequal distribution of a given amount of purchasing power among a given number of people is, therefore, likely to be a wasteful distribution from the point of view of economic welfare, and the more unequal the distribution the greater the waste. Up to a certain point, the more equal the distribution, the further a given amount is likely to go in satisfying economic needs, and hence in increasing economic welfare.

Where, however, is this point? An absolutely equal division of a given income, whether between individuals or between families, will obviously fall a long way short of making the economic welfare derivable from this given income a maximum. The ideal distribution would rather be a distribution according to the capacity of individuals, or families, to make a good use of income. This ideal is very far from realisation in the actual world. To mention two obvious details only, it requires not only that many of the young should be richer, and some of the old poorer, than they now are, but that those who have the power of making money should have also, far more than now, the gift of spending it well. Furthermore, the

capacity to make good use of income can only be developed, in any high degree, by the habitual handling of an income larger than that to which a considerable part of mankind ever attain throughout their lives. It is only through opportunities of spending income as they will that people can learn to spend income well. It is clear, however, without labouring the matter further, that a large reduction in the existing inequality could be made, which would result in bringing us considerably nearer to the ideal.

§3. So far we have been considering the ideal distribution of a given income among a given number of people, and it has appeared that, though absolute equality of incomes is not desirable, yet a large reduction in the inequality found in modern communities would increase economic welfare. This conclusion may obviously need qualification, if such a reduction of inequality causes either a reduction of the total income to be divided, or an increase in the number of people relatively to the total income to be divided among them. The fear that an increase in the incomes of the poorer classes would stimulate the growth of their numbers and lead to "over population" and a consequent reduction of these incomes to their old, or even to a lower, level was much in the minds of the early Victorian economists. But in the civilised countries of the Western world at the present time this fear seems groundless, though among Eastern peoples it may still be otherwise. In the modern communities of the West, however, the evidence available seems to show conclusively that an increase in the economic welfare of any class tends to lower rather than to raise its rate of numerical increase."

The danger that certain methods of reducing inequality

1 See, for example, Mill's argument (Principles, pp. 361-6) on the probable effects of a legal minimum wage.

'Compare Pigou, Wealth and Welfare, pp. 28–31.

might check production is very much more serious, and is the chief objection to many far-reaching projects of economic change. Thus Sidgwick tersely observed, "I object to Socialism, not because it would divide the produce of industry badly, but because it would have so much less to divide." The effects upon production of any change which would reduce inequality must be considered in each particular case upon their merits before we can decide whether or not such a change would increase economic welfare. It may safely be asserted, however, that many changes, which would reduce inequality, would also stimulate production. Further, economic welfare may sometimes be increased by changes which, while reducing inequality, tend to check production, provided that the check is not severe, and still more, provided that it is only temporary. In Marshall's words," a slight and temporary check to the accumulation of material wealth need not necessarily be an evil, even from a purely economic point of view, if, being made quietly and without disturbance, it provided better opportunities for the great mass of the people, increased their efficiency, and developed in them such habits of self-respect as to result in the growth of a much more efficient race of producers in the next generation. For then it might do more in the long run to promote the growth of even material wealth than great additions to our stock of factories and steam-engines."2

§4. The proposition that economic welfare is increased by an increase in production per head is subject to a further qualification, which is often insufficiently recognised. The economic ideal here is evidently not maximum production, but such a relation between product on the one hand and the efforts and sacrifices involved in production on the other, as to yield a maximum of economic 1 Principles of Political Economy, p. 516.

Principles, p. 230.

welfare. As the productive power of a community grows, the importance of reducing the subjective cost of production increases relatively to the importance of increasing the product. Further, the distribution of the total subjective cost in modern communities is, like the distribution of income, exceedingly unequal, and just as economic welfare will be increased, other things being equal, by a reduction in the inequality of incomes, so it will be increased by a reduction in the inequality of subjective cost borne by different individuals. This inequality of subjective cost is specially great in modern communities, owing to the fact that incomes derived from property involve practically no subjective cost when the property has been received by inheritance or gift, and often comparatively little when the property is based upon savings made by the recipient, while, of course, the subjective cost of obtaining incomes from work bears no regular relation to their size, but is often exceedingly heavy for some of the smallest incomes, and is reduced for many of the larger by the intrinsic interest of the work and the comparative independence of the worker. One method of diminishing subjective costs is to increase leisure, provided that work is not more than proportionately speeded up during the shorter working hours. And

This is obvious, but many economists have failed to emphasise it. Historically, economic science has been built up chiefly on what may be called its positive side; stress has been laid on the conditions under which wealth is produced, rather than on the limits within which the production of wealth is worth while. Compare the comments of Mr. Robertson, (Study of Industrial Fluctuation, pp. 208-9), on" the didactic and somewhat priggish attitude of the other classes toward those manual workers, who decide to take part of their share of increased prosperity in the form of increased leisure.

The analogy is tolerably close, though not exact. To the law of diminishing marginal utility of income roughly corresponds the law of increasing marginal "disutility of labour." Compare Jevons, Theory of Political Economy, Chapter V. Mr. J. A. Hobson in his Work and Wealth recognises more clearly than most economists the importance of what I have called subjective cost.