point is, as already hinted, that it is a continuous stream always flowing, and not a reservoir or store, or in the narrower sense of the word a Fund. The terms National Income and National Dividend are convertible; only the latter is the more convenient when we are looking at the national income in the character of the sum of the new sources of enjoyments that are available for distribution1.

1 We have already noticed that many of the services which a person renders to himself are not in practice counted as part of his income; though if they were performed for him by a valet or hairdresser they would be reckoned among the commodities (or economic goods) on which he spent his means: that is, they would be reckoned as part of his real income. We have noticed also that though the benefits which a man derives from living in his own house are commonly reckoned as part of his real income, and estimated at the net rental value of his house; the same plan is not followed with regard to the benefits which he derives from the use of his furniture and clothes. It is best here to follow the common practice, and not count as part of the national income or dividend anything that is not commonly counted as part of the income of the individual. Thus, unless anything is said to the contrary, the services which a person renders to himself, and those which he renders gratuitously to members of his family or friends, also the benefits which he derives from using his own personal goods, or public property such as toll-free bridges, are not reckoned as parts of the national dividend, but are left to be accounted for separately.

It would be possible, and, for some theoretical purposes, it would be best to include them: but if they are included in the national dividend, the efforts and the material wealth which are their sources must be counted as part of the labour and capital which are agents of production; and the services and the benefits themselves must be counted as earnings of labour or interest on capital as the case may be. It will be recollected that in Book II. Ch. IV., the standard delimitations of Capital and Income were chosen specially with reference to this their most important use.

CHAPTER II.

PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE,

CONTINUED.

§ 1. In the last chapter we confined our attention to the manner in which the national dividend is distributed among the various agents of production, in accordance with the quantity of each several agent, and the services which it renders. We have now to consider the other side of the problem, viz. the reflex influence which the remuneration of each agent exerts on the supply of that agent.

When we inquire what it is that determines the marginal efficiency of a factor of production, whether it be any kind of labour or material capital, we find that the immediate solution requires a knowledge of the available supply of that factor; and that the ultimate solution requires a knowledge also of the causes that determine that supply. The nominal value of everything, whether it be a particular kind of labour or capital or anything else, rests, like the keystone of an arch, balanced in equilibrium between the contending pressures of its two opposing sides; the forces of demand press on the one side, and those of supply on the other'.

The production of everything is carried up to that limit or margin at which there is equilibrium between the forces of demand and supply; that is, the limit at which any further

1 Ricardo and his followers were familiar with the action of the law of substitution, but they laid insufficient stress on the side of demand; and in the reaction too exclusive importance has been assigned to it.

production would bring in less than a remunerative price. The amount of the commodity and its price, the amounts of the several factors or agents of production used in making it, and their pricesall these elements mutually govern one another, and if an external cause should alter any one of them the effect of the disturbance extends to all

The amounts and prices of the several agents of production mutually govern one another.

the others.

Parallel instances from physics.

Just in the same way, when several balls are lying in a bowl, they mutually govern one another's posi tions. And again when a heavy weight is suspended by several elastic strings of different strengths and lengths attached to different points in the ceiling, the equilibrium positions of all the strings and of the weight mutually govern one another: if any one of the strings that is already stretched is shortened, everything else will change its position, and the length and the tension of every other string will be altered also.

§ 2. Let us then call to mind the chief results of the study of the supply of the various agents of production made in Books IV and V. We need not dwell on the fact that the willingness of any one to undergo long and severe exertion is increased generally by an increase in the reward to be got for it1.

It is more important to insist that in the long run the supply of efficient labour is very closely dependent on the rate of earnings and the manner in which they are spent. It is indeed true that a permanent increase of prosperity is quite as

1 Book rv. ch. 1. This assumes other things to be equal. But if he had already earned enough to supply his customary wants, he might refuse to continue work even for a high rate of pay; though, if he had been throughout paid at a low rate and were still in urgent need of money, he might have continued to work for a low rate. Those who earn the lowest rate of wages are often those who are most willing to work long hours: but their work though lowly paid is not always cheap. To this we shall return. But see Principles VI. 11. 2 (Ed. 111.).

of supply of efficient

labour on

earnings.

likely to lower as to raise the birth-rate; though a temporary improvement will give a good many young people Ultimate the opportunity to marry and set up house, for dependence which they have been waiting. But, on the other hand, an increase of wages is almost certain to diminish the death-rate, unless it has been obtained at the price of the neglect by mothers of their duties to their children. And the case is much stronger when we look at the influence of high wages on the physical and mental vigour of the coming generation. For each grade of work there is a certain consumption which is strictly speaking necessary in this sense, that if any of it is curtailed the work cannot be done efficiently: the adults might indeed take good care of themselves at the expense of their children, but that would only defer the decay of efficiency for one generation. Further there are conventional necessaries, which are SO strictly demanded by custom and habit, that in fact people generally would give up much of their necessaries, strictly so called, rather than go without the greater part of these. Thirdly, there are habitual comforts, which some, though not all, would not entirely relinquish even when hardly pressed. Many of these conventional necessaries and customary comforts are the embodiment of material and moral progress. Their extent varies from age to age and place to place; and with its variations there is a corresponding but inverse variation in the extent to which man, himself always the sole end of all production, is also an economical agent of production.

Any increase in consumption that is strictly necessary to efficiency pays its own way and adds to, as much as it draws from, the national dividend. But an increase of consumption, that is not thus necessary, can be afforded only through an increase in man's command over nature: and that can come about through advance in knowledge and the arts of production, through improved organization and access to larger and richer sources of raw material, and lastly through the growth of

capital and the material means of attaining desired ends in any form.

Thus the question how closely the supply of labour responds to the demand for it, is in a great measure resolved into the question how great a part of the present consumption of the people at large consists of necessaries, strictly so called, for the life and efficiency of young and old; how much consists of conventional necessaries which theoretically could be dispensed with, but practically would be preferred by the majority of the people to some of those things that were really necessary for efficiency; and how much is really superfluous regarded as á means towards production, though of course part of it may be of supreme importance regarded as an end in itself.

The earlier French and English economists, as we noted at the beginning of the preceding chapter, classed nearly all consumption under the first head. They did so, partly for

Most expenditure of the working classes

conduces to efficiency,

simplicity, and partly because the working classes were then poor in England and very poor in France; and they inferred that the supply of labour would correspond to changes in the effective demand for it in the same way, though of course not quite as fast as that of machinery would. And an answer not very different from theirs must be given to the question with regard to the less advanced countries even now: for throughout the greater part of the world the working classes can afford but few luxuries and not many conventional necessaries; and any increase in the demand for them made by the other agents of production would result in so great an increase of their numbers as to bring down their earnings quickly to nearly the old level at their mere expenses of rearing. In short, over the greater part of the world wages are governed, very nearly after the so-called iron or brazen law, which ties them close to the cost of rearing and sustaining a rather inefficient class of labourers. As regards the modern western world the answer is materially different; so great has