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Economics for Helen
A Brief Outline of Real Economy
By Hilaire Belloc
IHS PressCopyright © 2004 IHS Press
All rights reserved.
WHAT IS WEALTH?
The Economic definition of Wealth is subtle and difficult to appreciate, but it is absolutely essential to our study to get it clear at the outset and keep it firmly in mind. It is through some muddle-ment in this original definition of Wealth that nearly all mistakes in Economics are made.
First, we must be clear as to what Wealth is not.
Wealth is never properly defined, for the purposes of economic study, by any one of the answers a person would naturally give offhand. For instance, most people would say that a man's wealth was the money he was worth. But that, of course, is nonsense; for even if there were no money used his possessions would still be there, and if he had a house and cattle and horses the mere fact that money was not being used where he lived would not make him any worse off.
Another and better, but still a wrong, answer is: "Wealth is what a man possesses."
For instance, in the case of this farmer, his house and his stock and his furniture and implements are what we call his "wealth." In ordinary talk that answer will do well enough. But it will not do for the strict science of Economics, for it is not accurate.
For consider a particular case. Part of this man's wealth is, you say, a certain grey horse. But if you look closely at your definition and make it rigidly accurate, you will find that it is not the horse itself which constitutes his wealth, but something attaching to the horse, some quality or circumstance which affects the horse and gives the horse what is called its VALUE. It is this value which is wealth, not the horse. To see how true this is consider how the value changes while the horse remains the same.
On such and such a date any neighbour would have given the owner of the horse from 20 to 25 sacks of wheat for it, or, say, 10 sheep, or 50 loads of cut wood. But suppose there comes a great mortality among horses, so that very few are left. There is an eager desire to get hold of those that survive in order that the work may be done on the farms. Then the neighbours will be willing to give the owner of the horse much more than 20 or 25 sacks of wheat for it. They may offer as much as 50 sacks, or 20 sheep, or 100 loads of wood. Yet the horse is exactly the same horse it was before. The wealth of the master has increased. His horse, as we say, is "worth more." It is this WORTH, that is, this ability to get other wealth in exchange, which constitutes true Economic Wealth.
I have told you that the idea is very difficult to seize, and that you will find the hardest part of the study here, at the beginning. There is no way of making it plainer. One has no choice but to master the idea and make oneself familiar with it, difficult as it is. Wealth does not reside in the objects we possess, but in the economic values attaching to those objects.
We talk of a man's wealth or a nation's wealth, or the wealth of the whole world, and we think at once, of course, of a lot of material things: houses and ships, and pictures and furniture, and food and all the rest of it. But the Economic Wealth which it is our business to study is not identical with those things. Wealth is the sum total of the values attaching to those things.
That is the first and most important point.
Here is the second: Wealth, for the purposes of economic study, is confined to those values attaching to material objects through the action of man, which values can be exchanged for other values.
I will explain what that sentence means.
Here is a mountain country where there are few people and plenty of water everywhere. That water does not form part of the economic wealth of anyone living there. Everyone is the better off for the water, but no one has wealth in it. The water they have is absolutely necessary to life, but no man will give anything for it because any man can get it for himself. It has no value in exchange. But in a town to which water has to be brought at great expense of effort, and where the amount is limited, it acquires a value in exchange, that is, people cannot get it without offering something for it. That is why we say that in a modern town water forms part of economic wealth, while in the country it usually does not.
We must carefully note that Wealth thus defined is NOT the same thing as well-being. The mixing up of these two separate things – well-being and Economic Wealth – has given rise to half the errors in Economic Science. People confuse the word "Wealth" with the idea of well-being. They say: "Surely a man is better off with plenty of water than with little, and therefore conditions under which he can get plenty of water for nothing are conditions under which he has more wealth than when he has to pay for it. He has more wealth when he gets the water free than he has when he has to pay for it."
It is not so. Economic Wealth is a separate thing from well-being. Economic Wealth may well be increasing though the general well-being of the people is going down. It may increase though the general well-being of the people around it is stationary.
The Science of Economics does not deal with true happiness nor even with well-being in material things. It deals with a strictly limited field of what is called "Economic Wealth," and if it goes outside its own boundaries it goes wrong. Making people as happy as possible is much more than Economics can pretend to. Economics cannot even tell you how to make people well-to-do in material things. But it can tell you how exchangeable Wealth is produced and what happens to it; and as it can tell you this, it is a useful servant.
That is the second difficult point at the very beginning of our study. Economic Wealth consists in EXCHANGEABLE values, and nothing else.
We must be as clear on this second point as we have made ourselves upon the first, or we shall not make any progress in Economics. They are both of them unfamiliar ideas, and one has to go over them many times before one really grasps them. But they are absolutely essential to this science.
Let us sum up this first, elementary, part of our subject, and put it in the shortest terms we can find – what are called "Formulae," which means short and exact definitions, such as can be learnt by heart and retained permanently.
We write down, then, two Formulae:
1. Wealth is made up, not of things, but of economic values attaching to things.
2. Wealth, for the purposes of economic study, means ONLY exchange values: that is, values against which other values will be given in exchange.CHAPTER 2
THE THREE THINGS NECESSARY TO THE PRODUCTION OF WEALTH-LAND, LABOUR AND CAPITAL
You will notice that all about you living beings are occupied in changing the things around them from a condition where they are less to a condition where they are more useful to themselves.
Man is a living being, and he is doing this kind of thing all the time. If he were not he could not live.
He draws air into his lungs, taking it from a condition where it does him no good to a condition where it keeps him alive. He sows seed; he brings food from a distance; he cooks it for his eating. To give himself shelter from the weather he moulds bricks out of clay and puts them together into houses. To get himself warmth he cuts down wood and brings it to his hearth, or he sinks a shaft and gets coal out of the earth, and so on.
Man is perpetually changing the things around him from a condition in which they are less useful to him into a condition where they are more useful to him.
Whenever a man does that he is said to be creating, and adding to, Human Wealth: part of which is Economic Wealth, that is, Wealth suitable for study under the science of Economics.
Wealth, therefore, that thing the nature and growth of which we are about to study, is, so far as man is concerned, the result of this process of changing things to man's use, and it is through looking closely at the nature of this process that we get to understand what is necessary to it, and what impedes it, and how its results are distributed among mankind.
We must next go on to think out how Wealth is so produced. We have already seen what the general statement on this is: Wealth is produced by man's consciously transforming things around him to his own uses; and though not everything so transformed has true Economic Wealth attaching to it (for instance, breathing in air does not produce Economic Wealth), yet all Economic Wealth is produced as part of this general process.
Now when we come to examine the Production of Wealth, we shall find that three great separate forces come into it; and these we shall find to be called conveniently "Land," "Labour" and "Capital."
Let us take a particular case of the production of Economic Wealth and see how it goes forward. Let us take the case of the production of, say, 100 sacks of wheat.
A man finds himself possessed of so much land, and when he sets out to produce the 100 sacks of wheat, the following are the conditions before him.
There are natural forces of which he takes advantage and without which he could not grow wheat. The soil he has to do with has a certain fertility, there is enough rainfall to make the seeds sprout, and so on.
All these natural forces are obviously necessary to him. Though we talk of man "creating" Wealth he does not really create anything. What he does is to use and combine certain natural forces of which he is aware. He has found out that wheat will sprout if it is put into the ground at a particular season, and that he will get his best result by preparing the ground in a particular manner, etc. These natural forces are the foundation of the whole affair.
For the sake of shortness we call all this bundle of natural forces (which are the very first essential to the making of Wealth) Land. This word "Land" is only a conventional term in Economics, meant to include a vast number of things beside the soil: things which are not Land at all; for instance, water power and wind power, the fertility of seed, the force of electricity, and thousands of other natural energies. But we must have some short convenient term for this set of things, and the term "Land" having become the conventional term in Economic Science for all natural forces, it is now the useful and short word always used for them as a whole: the reason being, I suppose, that land, or soil, is the first natural requisite for food – the most important of man's requirements, and the place from which he uses all other natural forces.
We say, then, that for the production of Wealth the first thing you need is the natural forces of the world, or Land.
But we next note that this possession of natural forces, our knowledge of how they will work, and our power of combining them, is not enough to produce Wealth.
If the farmer were to stand still, satisfied with his knowledge of the fertility of the soil, the quality of seed, and all the rest of it, he would have no harvest. He must, as we have said, prepare the land and sow the seed: only so will he get a harvest at the end of his work. These operations of human energy which end in his getting his harvest are called Labour: that is, the application of human energy to natural forces. There are no conditions whatsoever under which Wealth can be produced without natural forces or Land; but there are also no conditions whatsoever under which it can be produced without Labour, that is, the use of human energy. Even if a man were in such a position that he could get his food by picking it off the trees, there would still be the effort required of picking it. We say, therefore, that all Wealth comes from the combination of Land and Labour: that is, of natural forces and human energy.
At first sight it looks as though these two elements, Land and Labour, were all that was needed; and a very great deal of trouble has been caused in the world by people jumping to this conclusion without further examination.
But if we look closely into the matter we shall see that Land and Labour alone are not sufficient to the production of Wealth in any appreciable amount. The moment man begins to produce Wealth in any special fashion and to any appreciable extent, a third element comes in which is as rigorously necessary as the two others; and that third element is called Capital.
Let us see what this word "Capital" means.
Here is your farmer with all the requisite knowledge and the natural forces at his disposal. He has enough good land provided him to produce a harvest of 100 sacks of wheat if he is able and willing to apply his manual labour and intelligence to this land. But he must be kept alive during the many months required for the growth of the wheat. It is no use his beginning operations, therefore, unless he has a stock of food; for if he had not such a stock he would die before the harvest was gathered. Again, he must have seed. He must have enough seed to produce at the end of those months one hundred sacks of wheat. So we see that at the very least, for this particular case of production, the natural forces about him and his own energies would not be of the least use to the production of the harvest unless there were this third thing, a stock of wheat both for sowing and for eating.
But that is not all. He must be sheltered from the weather; he must be clothed and he must have a house, otherwise he would die before the harvest was gathered. Again, though he might grow a very little wheat by putting in what seed he could with his hands into a few suitable places in the soil, he could not get anything like the harvest he was working for unless he had special implements. He must prepare the land with a plough; so he must have a plough; and he must have horses to draw the plough; and those horses must be kept alive while they are working, until the next harvest comes in; so he must have a stock of oats to feed them with.
All this means quite a large accumulation of wealth before he can expect a good harvest: the wealth attaching to clothes, houses, food, ploughs, horses for a year.
In general, we find that man, when he is setting out on a particular piece of production of wealth, is absolutely compelled to add to his energies, and to the natural forces at his disposal, a third element consisting of certain accumulations of wealth made in the past – an accumulation of food, clothing, implements, etc. – without which the process of production could not be undertaken. This accumulation of ALREADY-MADE WEALTH, which is thus absolutely necessary to production, we call "Capital."
It includes all kinds of wealth whatsoever which man uses WITH THE OBJECT OF PRODUCING FURTHER WEALTH, and without which the further wealth could not be produced. It is a reserve without which the process of production is impossible. Later on we shall see how very important this fact is: for every healthy man has energy, and natural forces are open to all, but capital can sometimes be controlled by very few men. If they will not allow their capital to be used, wealth cannot be produced by the rest; therefore those who, by their labour, produce wealth may be driven to very hard conditions by the few owners of capital, whose leave is necessary for any wealth to be produced at all.
But all this we must leave to a later part of our study. For the moment what we have to get clearly into our heads are these three things: (1) natural forces, (2) human energy, and (3) accumulated stores and implements, which are called, generally, for the sake of shortness: "Land," "Labour," and "Capital." In the absence of any one of these three, production of wealth is impossible. All three must be present; and it is only the combination of all three which makes the process of producing economic values possible.
Points About Capital
There are three important things to remember about Capital.
1. The first is that what makes a particular piece of wealth into capital is not the kind of object to which the economic value attaches, but the intention of using it as capital on the part of the person who controls that object; that is, the intention to use it for the production of future wealth. Almost any object can be used as capital, but no object is capital, however suitable it be for that purpose, unless there is the intention present of using it as capital. For instance: One might think that a factory power engine was always capital. The economic values attaching to it, which make an engine worth what it is are nearly always used for the production of future wealth, and so we come to think of the engine as being necessarily capital simply because it is an engine, and the same is true of factory buildings and all other machinery and all tools, such as hammers and saws and so on.
Excerpted from Economics for Helen by Hilaire Belloc. Copyright © 2004 IHS Press. Excerpted by permission of IHS Press.
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