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
Why Production should be studied Next. We have made human wants, consumption, and demand the first subjects of our study of economic theory because it is from these that all other economic phenomena take their rise. We have seen why men exert themselves in the work of production. The next logical step is to inquire how men go about the work of production. We have studied the cause and the laws of demand. We have next to make a similar inquiry regarding supply. Our present study therefore is of the general subject of production," says John Stuart Mill, " of putting things into fit places for being acted upon by their own internal forces, and by those residing in other natural objects, is all that man does or can do with matter."
All Production essentially the Same. It has seemed to some, even among economists of an earlier time, that the farmer is more truly a producer than the manufacturer, and the manufacturer than the merchant; but careful thought discloses the fallacy of such a view. All industrial classes alike produce one or more of the four sorts of utility which we have described, and they do so by changing the relations of things in time or space. The farmer changes the position of grains of corn by dropping them into the earth. Then he removes weeds and throws earth about the rising stalks. Thus man's acts in changing the relations and position of things, aided by nature's materials and forces, result in more corn for human consumption. The manufacturer in the same way changes the position of pieces of matter, and, aided by natural forces within and without the object of production, he causes matter to assume a form which fits it, or better fits it, for human needs. So, too, the merchant changes the places of things from where they are less useful to where they are more useful, or holds them in one place until a change of external circumstances gives them a greater time utility. He is producing utilities as truly as is the farmer or the manufacturer. Of course it is possible that the utilities actually produced by merchants could be produced with a smaller expenditure of economic force than they are at present, and that saving could be effected by a better organization of the work of production. Again, it may be that the merchant may now and then secure a larger return for the production of a given quantity of social utility than does the farmer. But all this affords no justification for the popular impression that his work is really less productive in its nature than is that of any other industrial class. The only difference is in the kind of utility that the different classes are engaged in producing. Finally, it must be remembered that in the same way the physician, the teacher, and all others who are engaged in rendering personal services, are creating utilities, and are therefore producers.
Production, then, we may define as the creation of utilities by the application of man's mental and physical powers to the physical universe, which furnishes materials and forces. This application of man's powers we call labor.
We have already defined goods and economic goods. It remains for us here to call attention to the fact that those quantities of utility which result from labor are economic goods, but that not all economic goods are to the same extent the result of labor. One may pick up a diamond or a nugget of gold upon which one has stumbled: in such a case it can hardly be said that the economic good is the result of labor at all. But even in such rare cases it must be remembered that while the one diamond or the one nugget may have required no labor in getting, yet the whole stock of such goods is the result of toil and suffering and privation for which the value of our diamonds and gold, it is frequently said, does not represent anything like a proper recompense.
There is one clearly marked case of value creation which is not wealth production. The land on which New York and Chicago stand could have been purchased only a few centuries ago for a very small sum of money. The great value which that land now has is to a considerable degree the result of human labor, but much of it is due to the great increase in population, which of itself represents no idea of labor. Such value is a product of social aggregation, not of individual effort. The question of the expediency of allowing individuals to appropriate these individually unearned increments of value will be discussed later. Here it concerns us only to notice that such unearned increments exist; in other words, that there is such a thing in the world as value creation which is not at the same time wealth production.
Individual and Social Wealth. This distinction between the individual and the social standpoint runs all the way through economics, and it is particularly important in the case of the conception of wealth or economic goods. What is wealth to the individual may not be wealth to society, and, on the other hand, what is wealth to society may not be within the ownership of an individual. Thus a mortgage is wealth to the individual who holds it, but it is not a part of social wealth, since if the claim for which it stands is extinguished, society is neither richer nor poorer. The case is the same with bonds issued by a city, a state, or a nation.
Productive Elements often Overlooked. There are many important facts regarding production which are often overlooked. Thus we are likely to forget that even to-day a large part of production is household production, and is not designed for the market place at all. The labor of at least half the women of the country is expended in producing material good things for the use of producers.
Again, we are likely to overlook the fact that in the country, where over one-half of the population of the United States lives and works, there is annually produced a vast amount of goods which are destined not for the market but for home consumption. Vegetables, small fruits, cultivated and wild,butter, eggs, meat, fish caught in public waters, and game are some of the things that occur most readily to the mind.
Considerations of this character show the great need of caution in attempting to compare the annual production of one country with that of another, or to compare the annual production of the same country at different periods. Household production is becoming relatively less important, while the production of things for the market, the value of which is readily measured in money, is constantly gaining in importance. Hence, apparent annual production the production of things which have a market price set upon them is increasing more rapidly than is the real annual production. The result is a tendency to overestimate our progress and even to count as progress what may not be progress at all. Thus, should boarding-house and hotel life displace private housekeeping, annual production might appear to increase as a result of the change, though the real wealth and income of the country would evidently be affected in no such degree.
Still further care must be exercised in studying census estimates of wealth. These estimates are ordinarily made in terms of money. Now if commodities are very abundant, their price, other things being equal, will be low, though the real wealth of the country is great. If, for instance, the quantity of cotton cloth produced doubles between two census periods, while the price falls one-half, the total value of the product will appear in the census estimates as equal in the two cases, though it is evident that society in the second period has twice the amount of this valuable commodity.