This section is from the "Elementary Principles of Economics" book, by Richard T. Ely and George Ray Wicker. Also available from Amazon: Elementary Principles Of Economics: Together With A Short Sketch Of Economic History
Two important questions regarding economy in consumption remain to be studied. The first question is, briefly, How can one's whole expenditure or consumption be so distributed between the present and the future that the greatest amount of satisfaction will result ? The second question assumes that the first has been answered, and asks how the consumption of the present may be so ordered that it will result in the greatest total of satisfactions ? Though both questions really have to do with expenditure, still we commonly think of the first as the problem of saving, as distinguished from the problem of spending, which is represented in the second question.
First of all it should be noted that the proportion between present and future expenditure conforms to the general rule which has already been laid down as the law of the "economic order of consumption." We seek always in our expenditure to secure the greatest surplus of utility over cost; hence we discontinue present expenditure when we feel that we can secure a greater surplus of utility by applying any remainder of our purchasing power to future purchases. Of course, with many people the demands of the present are so urgent and their means so limited that there is little opportunity for any such balancing of present and future surpluses. But whenever there is any saving at all, it proceeds according to the mental comparison just explained.
Hoarding. But how are goods saved ? Manifestly, we may save goods in such a way that neither we ourselves nor others can enjoy them in the present. Thus it is claimed that the peasants of France are so distrustful of banks that they lay by or hoard their savings in secret places about their homes. Such saving, though it is not the best, is better than harmful or luxurious consumption in the present; for if the goods, for instance, money, be stored away in such a manner that they will not suffer harm, they may in the end minister to real and commendable wants.
Investment. But in modern times, with security of property guaranteed by a strong government, and with easy opportunities for devoting savings to productive uses which will return a regular income, most provident people prefer saving by investment to saving by hoarding. Moreover, as industry becomes more complicated and requires more and more skill for successful management, a greater number of people prefer to intrust their savings to the hands of others rather than to invest them directly. The process is even carried one step farther in the majority of cases. Instead of lending their savings directly to those who manage productive enterprises, men deposit their savings, in the form of money or credit instruments, in banks, and the banks in turn take it upon themselves to decide in what enterprises such savings may be most safely and profitably invested.
The difference between hoarding and saving by investment is, briefly, that in the one case the goods may ultimately be used productively and economically, while in the other case the goods saved are saved by being used thus productively.
The fact that money represents goods in general is likely to cause us to overlook the real nature of saving. From the individual standpoint, saving means the postponement of consumption. When a man saves five dollars out of his week's income, he is postponing to a future time the exercise of his right to receive goods to that amount from his fellow-beings. He may do this either by hoarding the money or by lending it to some one else. But such acts do not necessarily result in saving from the social standpoint. Social saving means greater enjoyment in the future on the part of the community as a whole. If A lends to B money with which to buy a suit of clothes, A individually has saved, but there has been no social saving, for there will not be more goods to enjoy in the future on account of this act. But if, instead of asking other men to make a suit of clothes for him, B had told them to construct a machine, there would also have been social saving, since the machine would make it possible to produce more goods in the future. Modern societies save chiefly by bettering their facilities for producing goods; the amount of food, clothing, etc., that the people of the United States store up for future use is comparatively small.
We often hear men talking as if the man who spends money freely were a public benefactor, while the man who is not thus lavish is to be regarded with reproach. But it is plain from the foregoing that the former is using up goods and services now, while the latter may through his investments be improving the productive equipment of society. The one is telling men to serve him in his home, in his stables, and aboard his yacht; the other is setting them to work building factories he is saving socially. It is true, this may be carried too far. Just as the farmer may have too many ploughs and wagons, so we as a nation may have built too many railroads and cotton factories for present needs.
Having considered the first of the two questions which were raised at the beginning of this chapter, we have next to consider the other, the question of how to order one's present consumption that the greatest good may result.
First of all, for economy in spending, two things are essential, which we may call (A) the economy of right choice and (B) the economy of right use. The economy of right choice depends upon a correct knowledge of those present uses to which commodities may be most advantageously applied, while the economy of right use depends upon a knowledge of the most efficient means of applying the goods to those uses.
(A) The Economy of Right Choice. 1. Luxury. There is a lack of economy in consumption, due to a failure to exercise right choice, when men apply their means to the purchase of luxuries. Expenditure for luxuries, or luxurious consumption, is not economical consumption, because it does not adapt resources to their most advantageous uses. The subject of luxury is a difficult one to discuss, since a definition of the thing itself is by no means easy. Many things are to-day easily obtainable by the poorest which two centuries ago could be enjoyed only by the most wealthy and powerful. Such things are never thought of as luxuries in modern days, but if their possession in the olden time required the exploitation of the poor and did not render their possessors able and willing to confer great social service in return, we must hold that they were then luxuries. To the illiterate man, a library is a luxury; to the scientist, it may be a necessity for complete efficiency. These illustrations may serve to show the difficulty of reaching any simple and clear definition of luxury, and the equally great difficulty of establishing any universal principles by which we may always judge such expenditure. Yet it is possible to lay down a definition which implies a principle of social economy in expenditure, and which suggests an ethical precept: Luxury consists in any consumption of commodities and services which is seriously out of proportion to the social service that they render possible, but which is not of necessity directly injurious to the consumer. As we have suggested, the principle here indicated should be used with caution. If the possession of great talents calls for large expenditure to render those talents more efficient, then small consumption would be wasteful, and large consumption would not be luxurious.
But, it may be asked, has not a man the right to do as he will with his own ? And the answer must be, Yes, in a very full measure, if you judge right solely by the statute law. No court had appointed Cain to the guardianship of Abel. But the statute law follows only slowly and haltingly after the growing sense of right and duty as it develops in the race. The laws of to-day grant extreme rights of property and use, because it has been found that on the whole men have worked harder, produced more, and on the whole been happier when they were given such almost unfettered rights of disposing of their product. Now, however, men are becoming more socially inclined. More and more, rich men and talented men are coming to regard their riches and their talents as trusts which have been committed to them, rather than as possessions which they may squander without a thought for their fellows. When this feeling of responsibility, of stewardship, becomes sufficiently developed, our law may safely be changed to recognize the change in the race idea, and to compel the unsocial to feign the virtue if they have it not. Indeed, save in exceptional instances, there may be no need for a change in the law, since public opinion would be sufficiently powerful to accomplish the purpose of checking lavish display.
Caution. But we must revert to our caution. Too great penuriousness is an evil only less serious than prodigality. We must not forget that a rational expansion in the number and variety of human wants is necessary to human progress.
2. Harmful Consumption. In speaking of luxurious consumption, we have said that it does not necessarily involve immediate and direct harm to the consumer himself. When such harm does result, it is more usual to speak of the consumption as harmful rather than as luxurious. It goes without saying that harmful consumption calls for the censure of the economist no less than for that of the ethical teacher, since it is in the highest degree wasteful whether regarded from the standpoint of the individual or of society. When a nation devotes a large amount of its labor and capital to the production of commodities which, in their consumption, cause more misery than happiness, and weaken the nation's future resources of energy and intelligence, there is a departure from economical consumption so serious as to call for the severest condemnation. If society would forego such injurious consumption, bread would be cheaper, higher wants would find satisfaction, and man would be working away from the beast's low level of sensual gratification.