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The Scope of Economics.—Economics deals with three major classes of problems: physical, pecuniary, and social. The physical problems have to do with the producing, exchanging, and consuming of tangible commodities; the pecuniary, with the gaining and spending of money incomes; the social, with the making of both tangible commodities and money incomes contribute most to human welfare. The physical and pecuniary aspects of the subject are preliminary to the most vital aspect, the human consequences. The supreme test of material production and of monetary gain must be the human test.
From the physical standpoint, economics may be defined as the science which deals with the wealth-producing and wealth-using activities of man Economics studies the production of concrete goods and the rendering of definite services. It investigates the conditions governing the growing of wheat, the manufacturing of flour, the baking of bread, the mining of coal and iron, the transportation of copper and steel, the construction of bridges and buildings. Likewise, economics studies the consumption of tangible goods, of food, clothing, automobiles, houses. In both production and consumption, economics analyzes man's struggle with nature. Nature contains certain resources. Man attempts to appropriate these resources for his own sustenance and enjoyment. He wrests raw materials from nature, fabricates them, transports them, consumes them. From start to finish he deals with things, goods, products. Economic endeavor aims to make nature contribute the largest possible amount of goods to the satisfaction of human wants.
From the pecuniary standpoint, economics may be defined as the science which deals with the “money-making" and "money-spending” activities of men. These activities move in terms of prices. Economics is a study of human behavior from the standpoint of price. All business is a series of contracts of purchase and sale in which prices are quoted and paid, and money passed from hand to hand. The grower of wheat cares for the physical product only in so far as it will sell for a good price and bring him a money return. The laborer turns out product only because of the money wage which he receives. The manufacturer maintains output because thereby he hopes to make money profits. The consumer obtains commodities only by the spending of money. From beginning to end, the winning and using of dollars is the guiding feature of economic life. Economic endeavor aims to obtain the maximum number of dollars of gain from every transaction. The arts of pecuniary gain direct the arts of physical production.
From the social standpoint, economics may be defined as the science which deals with making material product and pecuniary advantage contribute. most.to humara welfare. Economics cannot restrict itself to a cold and indifferent analysis. Not that economics should be merely sentimentalism; brłt that it should be a truly human science. A strict neutrality: on the ethical import of economic analysis cannot possibly be maintained, for every step in economic analysis carries an ethical implication. If ethical implications are inevitable, everything is to be gained by being frank and outspoken about them. The ethical assumption, in the broadest sense, which permeates economics is that both product and money should be organized to yield the best kind of life to the community. Every economic institution must subject itself to the test of whether it results in a clear social gain.
To condense our threefold conception of the scope of economics, we may say that economics is the science which deals with the wealth-getting and wealth-using, the money-getting and the money-spending, and the welfare-promoting activities of man.
All three of these phases of economics rest upon the mental experiences of men. They have a common basis in the psychological reactions which accompany them. This psychological basis has commonly been expressed as a relationship between two great factors, namely, wants and efforts. Economic wants are the driving incentives to activity They are the objectives which lure men on to sustained productive effort. The satisfaction of wants is the culmination of the economic process. The subjective gratification derived from meeting wants induces men to engage in productive enterprise. In order to satisfy these wants, we find it necessary to labor and toil. Some of this effort is enjoyable for its own sake, much of it is not enjoyable under present conditions. Most of modern work would never be done for its own sake. The bulk of effort would never be undertaken for the joy of the effort itself. There must be some strong ulterior reward to pull men into sustained toil. This ulterior reward is the satisfaction of wants. By labor, men seek to gratify their desires. The economic process is a subjective balance between wants and the means of meeting those wants, between the disagreeableness of toil and the agreeableness of gratifying one's desires, between the pains of labor and effort and the pleasures of consumption. This subjective relation between ulterior reward in the form of want satisfaction, and the effort required to gain ulterior reward, pervades all elements of economics.
Wealth and Economic Goods.-Only a limited fraction of the physical universe can be called economic goods. The essential characteristics of economic goods are scarcity and utility.
Utility is the capacity to satisfy a human want. Before a good becomes economic wealth, some one must have a desire to enjoy it. The utility of a good is its “desirability” or “wantability.” Refuse, barren rock, ice at the north pole, obnoxious weeds, these are not economic goods, because they are not wanted, they satisfy no desire, they have no utility.
But scarcity must be coupled with utility before economic wealth exists. Limitation of supply is essential. The sunshine and the rain, the air and the wind, the water of the ocean and the sand of the desert, all of these may have utility, but the supply under ordinary circumstances is unlimited. There is no scarcity, and where there is no scarcity, there is no economic good.
Such unlimited goods are to be classed as free goods. Both economic goods and free goods have utility, but both do not have scarcity. The scenery of the mountains, the beauty of the sky, the atmosphere all about us, have utility, but until these things have also the quality of scarcity they are not economic goods. They are only free goods.
Wealth, as technically used, is synonymous with economic goods. Wealth may be owned either by private parties or by the government. Government-owned oil lands or forests possess both utility and scarcity. They are just as much wealth as the wells or forests of private owners. The national wealth is the aggregate of the economic goods owned by individuals and by the government.
Often the line between economic goods and free goods is not hard and fast. For instance, air is said to be a free good, but this is not true under all conditions. A renter who lives in the top story of a city apartment house pays higher rent than the parties living on the ground floor, because the fresh air and the sunshine at the top are superior. In other words, there is a scarcity of fresh air at a particular time and place, and under those conditions, air becomes an economic good. Water is plentiful, but scarcity of water available for home use leads to the installation of the water meter. Water in the home is an economic good in the modern city, but it was not an economic good for the pioneer who dipped as much as he pleased from an inexhaustible spring. Under modern complexities of living, free goods tend more and more to pass into the category of economic goods, because they become scarce with reference to some particular time or place. Scarcity is not a fixed and eternal quality, but a changing quality, reflecting every modification of economic institutions.
In popular thought, money is confused with wealth. A wealthy man is one who is supposed to be worth a great deal of money. Our multimillionaires are measured by the dollar sign. Our ambition appears to be to make as much money as possible. But it must be obvious that money is only a means of command over wealth. People strive with all
their might to gain money, because of what the money will buy. A man would starve to death if surrounded only by bank notes or gold coin. Money is a universal means of purchasing power. With it, one can obtain wealth. But the money itself is not the wealth.
Although money is not identical with wealth, nevertheless economic goods are distinguishable from free goods by the fact that the former can command a money price whereas the latter cannot. Water becomes an economic good just as soon as one can sell it to some buyer and obtain money in exchange. The pecuniary test of economic wealth is the ability of a good to be sold for money. And the amount of the wealth, in the pecuniary sense, will be the amount of money offered for the good. If a ton of brick is worth $15 and a ton of platinum is worth $1,000,000, the latter is vastly the greater amount of pecuniary wealth. From a physical standpoint, it is only a ton of wealth in either case. But in the money economy, the amount of money for which a good will exchange is the measure of the wealth which it represents. The more money the good can command in exchange for itself, the more wealth it represents.
But neither the view of wealth as economic goods nor the view of wealth as a pecuniary sum is an adequate conception of wealth. To make it adequate, we must introduce the social point of view. John Ruskin emphasized the fact that “there is no wealth but life''; and distinguished between “wealth” and “illth.” J. A. Hobson declares, “Every piece of concrete wealth must be valued in terms of the vital costs of its production and the vital uses of its consumption."i From a social standpoint, the student who views our skyscrapers, our hundreds of millions of tons of coal, our hundreds of billions of dollars of national wealth, inquires: Does all this build character, health and happiness? Wealth is not merely tons of pig iron but social well being. Wealth is not the almighty dollar but human welfare. The acid test of wealth is the human test, and unless the output of factories and mines and the accumulation of gold and silver builds healthy and happy laborers and wise and noble consumers there is no wealth worthy of the name. There is no human wealth where dissipation and decay rule, no matter how rapidly the machines grind out their product or how filled the coffers are with money. Materialistic and mercenary gain is vicious unless it brings commensurate social and human gain to all elements of society.
Production, Consumption, Exchange, Distribution. The economic process contains four important links. These are, to use the ordinary terminology, production, consumption, exchange, and distribution.
Production may be viewed either as the making and finishing of physical goods, or as the manipulation of price relations with a view to making a money gain, or as the activity of the human organism in adjusting itself to its physical and social environment. That is to say, it may be analyzed from the physical, pecuniary, or social viewpoint.
1 Work and Wealth, a Human Valuation, p. 10.
Running through these viewpoints is the subjective notion that production is the creation of utilities. That is, production is the effort so to shape and control goods that they may have increased capacity to satisfy human wants. For a comprehensive analysis of production, it is necessary to take account of all these viewpoints. For certain purposes, one viewpoint will be more essential than others. For a study of the physical volume of production, it is necessary to emphasize the making of goods. For a study of business and profit, it is necessary to emphasize the price system and the money economy. For a study of human welfare, it is necessary to emphasize the social consequences of productive effort. For a study of value theory, it is necessary to emphasize the subjective aspect of the creation of utilities. These various viewpoints supplement each other; they do not involve any inherent or intrinsic contradictions. They are closely interrelated. And for a complete understanding of the meaning of production, they must be made an integral part of economic analysis.
Consumption sets the schedules of production. Producers turn out only what consumers desire to use up. Production schedules are set by consumption standards. Everywhere, producers are trying to discover the things which consumers want, and then to provide those things, and no other. Consumption may be viewed as a physical process of using up. tangible commodities. It consists of the destruction through use of loaves of bread, of yards of cloth, of pairs of shoes. Consumption may also be viewed as the spending of money incomes. The pattern of consumption is set by the amount of money one has to spend and how one decides to spend it. But consumption may also be viewed as the process of building human personality and developing community well being. It may lead to vice, poison, and decay, or it may lead to character, health, and progress. Beneath these views of consumption stands the subjective view. Consumption is the enjoyment of the utilities which have been created in production. It is the satisfaction of wants by appropriation of the fruits of labor and effort. All of these views are essential for an adequate conception of the meaning of consumption.
But if production is the beginning of the economic process and consumption is the end, there are nevertheless two intervening or connecting factors. Before production can lead to consumption, goods must, as a general rule, have been exchanged between individuals, and shares in the product must have been assigned. These are the problems of exchange and of distribution.
Exchange deals with the laws governing the ratios at which goods of different kinds may be traded for each other. One man has produced shoes whereas his neighbor has produced cloth. Their problem is to exchange shoes for cloth. Throughout the economic system producers are making goods for others. The factory worker never expects to wear the specific pair of shoes he helps to make, or the self same yard of cloth he helps to weave. The farmer of today sells his wheat and buys flour made from some other farmer's wheat. Each year we have so