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not uncommonly deduced from two propositions : (1) that equal proportional sacrifice should be entailed by taxation, and (2) that the marginal utility of income falls continuously in such a way, as income increases, that taxation of all incomes at the same rate would cause proportional sacrifice of utility to vary inversely as income, other things being equal.

It is first necessary to bridge the gulf which has been left yawning between the experiences of different individuals (see note on page 25), since the kind of taxation referred to above aims, as it is put, at making the sacrifices in utility or satisfaction of different people equal in relation to their incomes of utility or satisfaction. There is no gulf to bridge if we can think of satisfaction as homogeneous and measurable (at least theoretically) as between different people. But I am unable to think of it in this way; and, to be on the safe side, and avoid dogmatising about a psychological question, I never mean by utilities or satisfactions more than conventional symbols representative of the relations between an individual's preferences.3 Consequently, the satisfaction of one person cannot be contrasted with that of another person, according to this view, for obviously no preferential relation can link the two experiences together. However, there is no real difficulty when we come to a political question like taxation, since the gulf is at once bridged by the doctrine, which is essential to much political doctrine, that people who in all external relations seem to be the same must be treated as if they were the same, or, in other words, that the State must not be a respecter of persons. In short, the fiction on which we proceed in taxation (which need not be defended here) is to regard different people in the same or different circumstances as the same people in the same or different circumstances.

Now, given the correctness of the theory in this paper, the second proposition referred to above does not hold with any overwhelming degree of universality at least. On the contrary, it would seem likely that, in many cases, a man's proportional sacrifice of utility would be increased when his income became greater, were his income still taxed at the same rate. Does acceptance of the ideas here expounded, then, involve discarding belief in the progressive principle, and even maintaining, for not

1 Every conceivable kind of diminishing utility of income does not, of course, necessitate progressive taxation if equal proportional sacrifice is to be secured.

? I am taking " satisfaction” to refer to a purely subjective state, and “utility” to refer to what is predicated of the thing producing it.

3 See note on p. 25.
No. 89.--VOL. XXIII


a few circumstances, that the rate of taxation of the higher income ought to be less than that of the smaller one? If it does,

, we are certainly in a predicament, for most political philosophers, I imagine, have a sort of instinctive belief that the progressive principle is somehow right. But happily it does not, as I shall hope to show. With an easy mind we may deny the truth of the second premiss given above to justify progressive taxation (namely, that income must be subject to diminishing utility), because there are grounds for holding that the first premiss (that equal proportional sacrifices of utility should be aimed at) is untrue also. Indeed, the real basis of taxation may be quite other an a principle of distribution of utility-sacrifice.

Let us put the crucial question to ourselves in this way. Should we think it fair to reduce the rate of taxation of large incomes if, by a miracle, income above a certain amount became subject to immensely increasing utility ? An answer in the affirmative is entailed if we believe that taxation should aim at equal proportional sacrifices of utility; but it seems absurd to suggest collecting less money for the State from the rich and more from the poor on the ground that the rich have become really richer. This crude reductio ad absurdum may serve to make the reader doubt whether the principle of equal proportional sacrifice of utility can be sound.

But, if this principle is not sound, what is the basis of progressive taxation? It is, in part at any rate, somewhat as follows, I should suggest : that the wants satisfied by the earlier increments to income are usually of more importance socially than the wants satisfied by later increments to income, whether the satisfaction of the former causes more utility or not. In speaking of the equity of taxation, we are obviously talking ethics, and therefore the wants primarily dealt with must be adjudged not according to the value of their satisfaction in fact (positive value), but according to the value of their satisfaction in a moral scheme of consumption (normative value). The poorer a man is, the more likely is some confiscation of income to cause him deprivation of comforts which add to efficiency (meaning the social value of his life) or even of necessities of efficiency; the richer he is, the more likely is the curtailment of his consumption to be effected at the expense of luxuries which add little or nothing to efficiency, or may even diminish it. So the right basis has a certain reference to faculty. If it is put in terms of sacrifice, it may be said that equal proportional sacrifice is the right thing to aim at, only the sacrifice meant must not be one of utility (positive value) as commonly understood. If this kind of utility comes into the reason for progressive taxation at all, it can only do so, according to the opinions expressed here, in the event of its being arguable that the man who enjoys more utility than his fellows has social obligations much greater than theirs; and, if it figures in this way, the case for progressive taxation, so far as it depends upon utility, would be strengthened rather than weakened by the contentions in this paper as regards the connection between utility and the magnitude of income. What seems to me false doctrine, as regards the basis of progressive taxation, has no doubt been occasioned, in some degree, by a confusion between the urgency and the importance of wants, and by the assumption that, when wants are satisfied according to degrees of urgency, their progressive satisfaction must result in continuously decreasing accessions of utility.1


1 To make the argument definite, I have selected for examination the utilitysacrifice theory which seems to me most plausible. But the argument in general holds when any other utility-sacrifice theory is held, since, to deduce the necessity of progressive taxation from any of them, diminishing utility of income must be assumed. (See Edgeworth, ECONOMIC JOURNAL, vol. VII, p. 550 et seq.)



An organised market consists essentially of specialised machinery by which goods are conveyed from one group of persons to another ; properly speaking we should perhaps regard it as constituted by the whole of the organisation by which the goods are moved in their passage from one to the other group. Railway companies, merchants, shopkeepers reduce the cost of conveyance of material goods; banks, issue houses, brokers reduce the cost of conveyance of capital ; in each case the market is essentially an organisation for the transport of goods between persons and its social contribution is to be measured by the economies of transport introduced by the agency of its specialised skill and machinery.

The market for capital consists then of all the machinery lying between those who save capital and those who use it. But the sense in which the term “capital” is used needs some elucidation, for evidently the money market does not deal in durable goods, like houses and machines, to which the term is usually and properly applied.

The act of saving is one of forgoing the enjoyment of goods which may be commanded from society's workshops; it is therefore an act which liberates social resources from the production of these immediately consumable goods, and frees them for other purposes. The product of the act of saving, the commodity of the money market, is therefore a control over that part of social resources which are thus freed, and it is this control over free resources, this "command over capital” (in Dr. Marshall's terms) which is conveyed from one group to another, and which enables the business man into whose hands it passes to adopt roundabout processes, and set up the factories and machines which constitute capital proper.

The machinery constituting the market for capital, in this sense of free capital, consists of the organisation of the banks, the Stock Exchange, trade credit, the brokers, solicitors, trust companies, and a great variety of financial institutions adapted to MAR., 1913] SOCIAL INTEREST IN STOCK EXCHANGE SPECULATION 37

special needs. The essential function of each part is the conveyance of capital between persons, but the characteristics of the one shade imperceptibly into those of the other in adaptation to the varying characters of the groups they serve to connect, and separation must be made on the ground of somewhat fortuitous characteristics rather than by any true “carving at the joints.”

If we separate these parts of the market by reference to the nature of the security in which they deal, we may mark off fairly clearly the organisation of issue houses, brokers, jobbers, &c., dealing in the homogeneous groups of negotiable securitiesstocks and shares; but this organisation is composed of two parts, analytically distinct, which must be separated in order to isolate the market with which this paper is concerned.

The first part consists of issue houses, brokers, underwriters, &c., who are concerned with new issues, and whose function, quite clearly, is to convey free capital from the group who save and own it, the pure capitalist class, to the group who use it, the pure entrepreneur class. By its agency an enormous amount of capital has been carried from one group to the other.

But the presence of this quantity of capital in the hands of entrepreneurs implies the supply of certain services, such as waiting and uncertainty-bearing; that is to say, it implies a burden of disutilities falling upon the capitalist class who have forgone the use of their resources; and the second part of the market, the Stock Exchange, consists of an organisation lying wholly within this group of capitalists, the function of which is to distribute this burden among those who are willing to bear it at the lowest price. Thus the device of splitting up securities into ordinary, preference, and deferred shares, &c., concentrates Uncertainty (i.e., “Risk ”) on certain classes of securities, and allows uncertainty to be borne by those who, at any moment, are willing to do so most cheaply ; while as the circumstances or tastes of the capitalist change from time to time, the organisation enables him to transfer his burden to others who are then more willing to undertake it.

There is thus a continuous process of shifting in accordance with changes in the particular circumstances or outlook of the individual capitalist, and the social service of the organisation by which this distribution is effected between different persons and different times is measured by the reduction in the real costs of supplying the quantity of capital which has been transferred into the hands of the entrepreneur class.

Bringing together these two parts of the market, we see that they are interdependent parts of an organisation whose social

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