Saving Communities

Bringing prosperity through freedom, equality, local autonomy and respect for the commons.

The Ethics of Democracy

by Louis F. Post

Part 5, Politico-Economic Principles
Chapter 1, Political Economy a Science of Tendencies

TO the billowy sea of economic phenomena there is a mean level, analogous to that of the terrestrial ocean, The mean level of the ocean is what its level would be if there were no tides nor waves. It is the level at which the tides equilibrate, and toward which wave crests fall and wave hollows rise. This common level to which all undulations tend, affords a stable basis for calculation. No one would think of objecting to it because the waves throw up higher crests and hollow out lower depressions. Nor would anyone for that reason discredit generalizations that depend upon it. No one, for instance, would set up the fact that some ocean waves rise higher than the Hudson river, to discredit the conclusion that the Hudson river must empty into the ocean because its mean level is higher than the ocean's. Yet, with reference to political economy, in which the mean level of the ocean has its perfect analogue, just such objections are gravely raised.

Political economy, which is simply the social economy of mankind as distinguished from the personal economy of individual men, is a science of tendencies. So understood, it is an exact science. Just as the mean level of the ocean may be exactly ascertained, though the waves rise and fall in a way to defy calculation, so the mean level of economic undulations may be exactly determined, notwithstanding the number, variety, uncertainty and complexity of individual transactions. But there are students of economic science who ignore this, and reject sound economic generalizations, even such as would appear to the untutored to be axiomatic, for no better reason than that they are contradicted by some transitory economic phenomenon. It is as if the greater height of a particular wave, or the deeper depression between two waves, were cited to show that the mean level of the ocean is a mere assumption which facts disprove.

A familiar example of this species of perversity is the denial by some economists that cost of production determines the value of products. Particular products are instanced, the value of which is conceded or shown to be very much above or below the cost of their production, and also of their reproduction. This seems to invalidate the generalization, but it does nothing of the kind. Such instances, like the waves of the ocean, are only undulations. At the mean level of economic phenomena, the axiomatic truth still holds good, that cost of production determines the value of products. Trade being unobstructed, no kind of production can be carried on long with the value of products either above or below their cost. If their value remained below cost, their production would cease for lack of remuneration; if it staid above cost, competition would set in and draw off purchasers. Whatever the undulations in value may at any time happen to be, the cost of products does in general determine the value of products.

Another example of the disposition to discredit sound general principles in political economy by reference to particular economic undulations, is connected with the incidence of taxes. When levied upon a product of current labor, taxes are found to enhance the price of the product, thus shifting the burden of the taxation from the maker or seller of the taxed product to its last buyer or consumer. The general principle consequently inferred is that taxes on labor products are borne by consumers. But this generalization is often denied because there are instances in conflict with it; as for example, that stamp taxes on proprietary medicines are not always added to the price. Yet that denial is only an instance of disputing the mean level by measuring the altitude of a wave crest. A one-cent stamp tax upon a dollar bottle of medicine might not be added to the price. But this proves nothing except that in that instance the tax is too small to produce its normal effect. A dollar stamp tax upon a dollar bottle of medicine would certainly express itself in the price. So would a tax very much less than a dollar. And if the proprietary medicine happened to be subject to keen competition, even so small a tax as one cent would be shifted to the final buyer.

Any tax upon products, however light it may be, has a tendency to increase their price, just as any pressure upon a wall has a tendency to topple it over. Whether the tendency produces its natural effect must depend in the one case, as in the other, upon such circumstances as its own persistence and the resistance it meets. When a tax is high enough on products to leave the producers no remuneration for their work, the price must go up or production must cease. Men will not produce for nothing. Though some taxes on some products may not for some time be shifted to consumers through higher prices, it is nevertheless absolutely true that at the mean level of economic phenomena, taxes on current production are shifted from producers to consumers, just as in the specific instances of telegraph tolls and express charges, during the war with Spain, the one-cent internal revenue stamp tax was shifted from the corporations to the persons who sent messages and shipped packages.

Still another sound generalization, probably the most important in the whole range of political economy, is often disputed with no better reason that that it is contradicted by some undulation or other upon the restless surface of economic phenomena. It is the simple but exceedingly luminous truth that demand for consumption determines the direction in which labor will be expended in production. If, for illustration, consumers increase the demand for bread and lessen the demand for beef, producers will quickly respond by diverting some of their energies from beef-making to bread-making. Especially impressive illustrations of this great economic truth are observable when some fashionable product, such as hoopskirts once were, goes out of fashion. The expenditure of labor in the direction of producing that article ceases at once. Cessation of demand causes cessation of production. On the other hand, when a new product comes into general use, as the bicycle or the automobile, labor turns in the direction of producing it in quantity and quality to meet the demand of consumers. These instances exemplify in a marked way the principle that demand for consumption determines the direction of labor in production. The same principle operates when the change is not so marked. Any variation in demand for consumption tends to cause a corresponding variation of the direction in which labor is expended in production.

But this almost obtrusive principle is often denied or ignored, because in some industries the producer has had to create a demand for his products. From that fact it is argued that, in those cases at any rate, the direction of production has determined the demand for consumption, and the principle been thus reversed.

Such cases do not rise to the dignity even of exceptions to a general rule. Though the producer does solicit consumers, his production is on the whole only in response to demand, even though he has himself stimulated the demand into activity. It was many years after some bicycle manufacturers began to whip up demands for the "wheel" that a great demand set in; but it is evident that upon the mean level of economic phenomena it is demand for bicycles that turns labor to their production or away from it, 'and not their production that makes consumers demand them, nor a decline in production that causes demand to fall off.

It is similar with the accumulation of goods in stores in advance of the actual demand for them. Though this seems like an instance of production causing demand, it is in fact a splendid instance of demand causing production. The fact that particular goods are produced in advance of particular demand is immaterial. That is only an undulation on the surface of economic phenomena. They are produced in reliance upon a demand which experience has proved to be constant. Particular goods in great quantity and variety are continually produced to Chicago in advance of the particular demands of Chicago consumers. But this is not because production determines demand. It is because Chicago is known to be a center to which consumers come to satisfy their demands. It is demand for goods at Chicago that brings goods there; not their being there that makes the demand. Goods are never produced in great quantity and variety to prairie hamlets in expectation of creating a demand for them there. Since the usual demand at hamlets is for a few goods of meager variety, only a few simple goods are produced to the hamlet. It is the character of the constant demand for consumption that determines the production, on the one hand, of great storehouses of goods to a Chicago, and on the other of small supplies to cross-roads stores.

That demand for consumption determines the direction in which labor will be expended in production is an indisputable truth. Any instance which apparently contradicts it is either no contradiction at all, or is analogous to a rolling wave that rises above or sinks below the mean level of the ocean.

The absorption of the pecuniary benefits of material progress by land values, is yet another mean level principle of political economy to which undulatory economists object When and where land is monopolized, the pecuniary benefits of local progress must add to local land values; and ultimately local land values will altogether measure these benefits as compared with the benefits other localities have to offer. Instances of the truth of this principle are abundant, but no experimental demonstration is really needed. Any celestial visitor who had never heard of political economy, of land, of land values, or of material progress, but whose logical machinery was intact, could reason it out. Given a community in which all the land is monopolized, so that no one can enjoy any of the benefits of living or working there without the consent of some local landowner, obtainable only at a price in competition, and it is inevitable that any advantages which that community has to offer will be charged for by the landowners in higher rents and higher selling prices for land, and that ultimately this charge will come to equal the pecuniary advantages of living or working in that community. This principle is so evidently universal that it must apply not only to a little community but to the whole world. Yet it also is a principle which has been discredited in some minds by some economic undulation or other.

Such economic phenomena as the fall of farm land values in old England and New England are frequently but quite mistakenly referred to as having completely done away with the principle. While it may be true that these values have fallen as compared with what they were a few years ago, it is not true that they have fallen as compared with what they were 300 years ago. We therefore mistake a fluctuation for a tendency, an undulation for the mean level, if we assume that these temporary depressions of value in recent years are in contradiction of the general principle that land values absorb the pecuniary benefits of progress.

Moreover, and this is the more important consideration, though some land values have fallen in some places, other land values have risen in other places. Before the English and New England farm-land values declined, Dakota and Manitoba farm-land values were at zero. These have risen as the others have fallen, and manifestly in greater degree. Likewise, as farm-land values have fallen or remained stationary, town values and mine values have risen enormously. The test of the principle is not whether land values for certain purposes or in certain places have risen or fallen. That test would determine nothing but undulations. The real question is whether land values have risen or fallen on the whole. That is where the mean level lies. In fact land values as a whole have risen wonderfully within the past fifty years. There is but little land now in all the civilized world which is not worth as much as it was half a century ago; and there is much that has multiplied in value a hundred, a thousand, or ten thousand fold.

Even if land values have not yet absorbed all the pecuniary benefits of civilization, their tendency to do so is manifest; and in so far as they fall short of it, the explanation lies plainly in the fact that the monopolization of the earth is not yet complete.

One very remarkable respect in which economists ignore the mean level of political economy, while they concentrate attention upon undulations, remains to be considered. It is, however, more interesting than important; in which respect it differs from the other instances. I refer to their caviling over what is called "unearned increment."

The term may not be felicitous, but it roughly describes increase in land values. Since land values, unlike most other values, tend to increase with advancing civilization, the increase is referred to as an "increment"; and as they are not earned, wherein also they differ from other values, the increment is called "unearned." Hence, "unearned increment." It would be futile now, and is altogether needless, to quarrel with the infelicity of this term. For all practical purposes it is good enough; and it has the advantage of directing attention to the fact that owners of land get a value which they do not earn. The injustice of that is instinctively recognized, and has suggested the propriety of taking the "unearned increment" of land for common use, upon the theory that "unearned" values are rightly common property.

So effective is this suggestion, that special pleaders for land-monopoly are exceedingly cautious about making frontal attacks upon it. Preferring flank movements, they admit that land does take on an "unearned increment of value; but they assert that this is unimportant because other things besides land do the same. And from that they argue that the "unearned increment" of land cannot fairly be made a common fund unless all other "unearned increments" are similarly treated. Supposing that to be impossible or unjust, they snap their fingers triumphantly and shout, "Check!" or maybe, "Check mate!" Here is a charming example of undulatory economics.

One class of illustrations on which these special pleaders dwell, comprises such unique things as rare coins and old books and pictures. But the increasing value of such objects has no more relation to political economy than your grandmother's portrait has to household economy or her wedding slippers to the shoe trade.

Another favorite illustration is the diamond found in the street. The finder does not labor; for, though there is exertion in his stooping to pick up the diamond, it is wholly disproportionate to the value of the stone. This illustration is quite pointless. There is no "increment" of value, none whatever, to a lost diamond which has been found. Its value is no more after the finding than before the losing. Such value as the finder acquires is only that which the loser lost. The finder truly comes into possession of value without earning it; but the loser owns that value, and if he claims it the law will justly restore it to him.

A far better illustration of the same point was furnished some years ago by a newspaper report of a Western lawsuit. On a certain Western farm, according to this report, an aerolite dropped one night and sunk into the ground. A wayfarer who had seen it fall, dug up the aerolite and sold it to a college for $250. His labor was so slight, in comparison with that price, that it may be disregarded for the purposes of this illustration. The wayfarer, therefore, would appear to have been the owner of $250 of "unearned increment" to aerolite. But not so. Before the payment the owner of the farm where the aerolite had fallen put in an appearance, claiming the money; and the courts decided that it belonged to him and not to the wayfarer. They reasoned, quite correctly, that the aerolite became part of the land as soon as it fell. So this $250, instead of being an "unearned increment" to aerolite, was an "unearned increment" to land. It is so with nearly all "unearned increments." At the mean level of economic phenomena they attach to land.

As with the Western aerolite so would it be with diamonds found where nature had left them. If you find a diamond in its natural state on a landowner's premises, the value of the diamond is his and not yours. It is an "unearned increment," not to diamond, but to land. If you found it upon public land, it would be yours; and as to that particular stone, you might seem in that case to have acquired an "unearned increment." But this would be in seeming only. At most it would be an economic undulation. That the value of a diamond so found is essentially an "unearned increment" to land may be seen if we suppose, what would naturally be the case, that it is not a stray stone you have found, but a diamond deposit. Should you have found this on private land, the land would rise in value as knowledge of the discovery spread, until all the "unearned increment" to those diamonds had attached to the land where they lay. The same thing, with a difference only as to beneficiaries, would occur if your "find" were upon public land. You, or some one else, would hasten to acquire private title to the site of the diamond deposit, and through the land monopoly thus created would as landlord appropriate all the "unearned increment," thereby making it an "unearned increment" to land. The history of Kimberley tells that story eloquently.

Analyze the "unearned increments" to other things than land, and almost all of them prove at last to be "unearned increments" to land. All instances to the contrary (such as the finding of a stray diamond without an owner, or the increase in value of relics and rarities), which the most laborious student can discover or the most imaginative controversialist invent, will prove upon investigation to be to the mean level of economic phenomena what rolling waves are to the mean level of the ocean - mere transitory undulations.

Very much of the deferential quarreling among economists might cease were the fact more clearly recognized that economic phenomena have a mean level toward which all undulations tend; if it were better understood, that is, that political economy is a science of tendencies. In a way, this is recognized. But the recognition is quite perfunctory. It is, indeed, only verbal, as a glance through almost any book on the subject will show. Modern text-books in political economy are given over largely to erecting sectional views of economic undulations. And this is not so much for the purpose of coming at the mean level in that needlessly difficult way, as to show that there is no mean level at all, but only a vast confusion of tossing waves and tumbling billows.