The Economics of Welfare

By Arthur C. Pigou

WHEN a man sets out upon any course of inquiry, the object of his search may be either light or fruit—either knowledge for its own sake or knowledge for the sake of good things to which it leads. In various fields of study these two ideals play parts of varying importance. In the appeal made to our interest by nearly all the great modern sciences some stress is laid both upon the light-bearing and upon the fruit-bearing quality, but the proportions of the blend are different in different sciences. At one end of the scale stands the most general science of all, metaphysics, the science of reality. Of the student of that science it is, indeed, true that “he yet may bring some worthy thing for waiting souls to see”; but it must be light alone, it can hardly be fruit that he brings. Most nearly akin to the metaphysician is the student of the ultimate problems of physics. The corpuscular theory of matter is, hitherto, a bearer of light alone. Here, however, the other aspect is present in promise; for speculations about the structure of the atom may lead one day to the discovery of practical means for dissociating matter and for rendering available to human use the overwhelming resources of intra-atomic energy. In the science of biology the fruit-bearing aspect is more prominent. Recent studies upon heredity have, indeed, the highest theoretical interest; but no one can reflect upon that without at the same time reflecting upon the striking practical results to which they have already led in the culture of wheat, and upon the far-reaching, if hesitating, promise that they are beginning to offer for the better culture of mankind. In the sciences whose subject-matter is man as an individual there is the same variation of blending as in the natural sciences proper. In psychology the theoretic interest is dominant—particularly on that side of it which gives data to metaphysics; but psychology is also valued in some measure as a basis for the practical art of education. In human physiology, on the other hand, the theoretic interest, though present, is subordinate, and the science has long been valued mainly as a basis for the art of medicine. Last of all we come to those sciences that deal, not with individual men, but with groups of men; that body of infant sciences which some writers call sociology. Light on the laws that lie behind development in history, even light upon particular facts, has, in the opinion of many, high value for its own sake. But there will, I think, be general agreement that in the sciences of human society, be their appeal as bearers of light never so high, it is the promise of fruit and not of light that chiefly merits our regard. There is a celebrated, if somewhat too strenuous, passage in Macaulay’s Essay on History: “No past event has any intrinsic importance. The knowledge of it is valuable, only as it leads us to form just calculations with regard to the future. A history which does not serve this purpose, though it may be filled with battles, treaties and commotions, is as useless as the series of turnpike tickets collected by Sir Matthew Mite.” That paradox is partly true. If it were not for the hope that a scientific study of men’s social actions may lead, not necessarily directly or immediately, but at some time and in some way, to practical results in social improvement, not a few students of these actions would regard the time devoted to their study as time misspent. That is true of all social sciences, but especially true of economics. For economics “is a study of mankind in the ordinary business of life”; and it is not in the ordinary business of life that mankind is most interesting or inspiring. One who desired knowledge of man apart from the fruits of knowledge would seek it in the history of religious enthusiasm, of martyrdom, or of love; he would not seek it in the market-place. When we elect to watch the play of human motives that are ordinary—that are sometimes mean and dismal and ignoble—our impulse is not the philosopher’s impulse, knowledge for the sake of knowledge, but rather the physiologist’s, knowledge for the healing that knowledge may help to bring. Wonder, Carlyle declared, is the beginning of philosophy. It is not wonder, but rather the social enthusiasm which revolts from the sordidness of mean streets and the joylessness of withered lives, that is the beginning of economic science. Here, if in no other field, Comte’s great phrase holds good: “It is for the heart to suggest our problems; it is for the intellect to solve them…. The only position for which the intellect is primarily adapted is to be the servant of the social sympathies.”… [From the text]

Book Cover

First Pub. Date

1920

Publisher

London: Macmillan and Co.

Pub. Date

1932

Comments

4th edition.

Copyright

Part IV, Chapter VIII

DIRECT TRANSFERENCES FROM THE RELATIVELY RICH TO THE RELATIVELY POOR

§ 1. WE now turn to what is in practice by far the most important field of possible disharmony. In a great number of ways, and for a great variety of reasons, poor people in civilised countries are given help, in the main through some State agency, at the expense of their better-to-do fellow-citizens. In Great Britain in 1925 the contribution from central government funds towards social services, chiefly for old-age pensions, education, unemployment insurance, health insurance and housing, amounted to 113 millions, and the contributions from the funds of local authorities, chiefly for education and Poor Law relief, to 79 millions.
*58 Evidently a large part of these 192 millions represent what is, in effect, a transfer of income from relatively rich for the benefit of relatively poor persons.
Prima facie the transference, which this help implies,
must increase, and it can certainly be so arranged that it
shall increase, the real income available for the poor. Hence the question whether any particular form of help to the poor involves disharmony is often equivalent to the question whether its indirect consequence is to increase or to diminish the national dividend. This question, in one or another of its various aspects, will be the theme of the next four chapters. But, before we embark upon it, a brief comment is needed upon two popular arguments, one of which asserts that no transference of resources to the poor is possible, because, in effect, all money taken from the rich is really taken from the poor, while the other asserts that it
is not possible, because the beneficiaries will give back what they have received by agreeing to accept lower wages.

§ 2. The position taken up in the former of these arguments is that any levy of money, whether voluntary or compulsory, from the well-to-do for the benefit of some poor persons necessarily implies the infliction of a substantially equivalent burden upon other poor persons, through the reduction which the rich are compelled to make in their purchases of the services rendered by them. The foundation of this view may be set out as follows. It is obvious that a great part of the expenditure of the rich involves, directly or indirectly, the employment of labour; and it is equally obvious that, if the incomes of the rich are diminished by, say, £20,000,000 of taxation, their expenditure for consumption and for capital investment together must be contracted to a corresponding extent. Some persons, concentrating attention upon these facts, immediately conclude that the workpeople, whose services this expenditure would have called into being if the tax had not been there—and an exactly analogous argument applies to a voluntary contribution—must suffer a loss of income approximating to the twenty million pounds levied in taxation. To argue thus, however, is to ignore the fact that the twenty million pounds collected from the rich is,
ex hypothesi, transferred to the poor, and that the expenditure of it by them is likely to be no less productive of employment than the expenditure of it by the rich would have been. No doubt, if we are contemplating the immediate effect of the addition of twenty millions to the taxation of the rich for the benefit of the poor, it is relevant to observe that the men who lose jobs on the one side will not be the same persons as those who find them on the other; and that, therefore, a certain number of men, who have been trained to special aptitudes, may find their immaterial capital of acquired skill rendered permanently worthless. This loss, however, is the result, not of taxation, but of
change in taxation, and would emerge equally in consequence of a
reduction by twenty millions in imposts levied on the rich for the benefit of the poor. Our problem is not concerned with incidents of this character. The comparison we have to make is between
one permanent system, under which nothing is collected from the rich and handed over to the poor, and another permanent system, under which twenty millions is so collected and handed over. To this comparison the incident we have just been discussing is irrelevant. Speaking broadly and apart from special circumstances, we may say that it makes very little difference to the employment of, and wages paid for, labour, whether twenty millions is annually transferred or not transferred from any one class to any other class. The idea that reactions in this field will render attempts at transference of no effect is, therefore, illusory.

§ 3. The latter of the two arguments distinguished above asserts that, if any group of poor persons are accorded any form of subsidy, they will, in consequence, be willing to work for less than the worth of their services to their employer, and so will, in effect, transfer back the subsidy they have received to members of the richer classes. This view rests partly upon
a priori reasoning and partly upon what is called experience. It needs, therefore, a twofold discussion. The
a priori reasoning starts from the fact that a Poor Law subsidy
enables a person to accept lower wages than it would be possible for him to accept otherwise without starvation, or, at all events, serious discomfort; and it proceeds to assert that, if a person is
enabled to work for less, he will be
willing to work for less. Now, no doubt, in certain special circumstances, when a workman, in receipt of a subsidy insufficient to enable him to live up to his accustomed standard of life, is confronted by an employer occupying towards him the position of a monopolist, this inference may be valid. In general, however, where competition exists among employers, it is quite invalid. A person who, by saving in the past, has become possessed of a competence, is
enabled to work for less than one who has not. A millionaire is
enabled to work for less even than a relieved pauper. So far from this ability making it probable that he will strike a worse bargain in the higgling of the market, it is likely, in general, to have the opposite effect. It is not the fact that the wife of a man in good work is likely to accept abnormally low wages. On the contrary, the woman who, for this or any other reason, can afford
to “stand out,” is, in general, among those who resist such wages most strenuously.
*59 Let us turn, then, to the reasoning from what is called experience. This starts from two admitted facts. The first fact is that old and infirm persons in receipt of a Poor Law subsidy very frequently earn from private employers considerably less than the ordinary wage per hour current for the class of work on which they are engaged. The second fact—given in evidence before the Poor Law Commission of 1832—is that the refusal of guardians to grant relief in aid of wages “soon had the effect of making the farmer pay his labourers fairly.” From these facts the inference is drawn that, where a Poor Law subsidy exists, workpeople accept a wage lower than the worth of their work to their employers. This inference, however, is illegitimate. There is an alternative and more probable explanation. As regards old and infirm persons, may it not be that the low wage per hour is due to the circumstance that the work they can do in an hour is poor in quality or little in quantity? As regards the old Poor Law, may it not be that the unreformed system of relief, so long as it prevailed, caused people to work slackly and badly, that, when it was abolished, they worked harder, and that this was the cause of the alteration in their wages? The view that the true analysis of experience is to be found along these lines, and not in the suggestion that relieved persons work for less than they are worth to their employers, is made likely by general considerations. It has been further confirmed by recent investigations, which tend to show that, where two people differ solely in the fact that one does, and the other does not, receive a Poor Law subsidy, their wages are in fact the same. Thus investigators appointed by the Poor Law Commission of 1909, as a result of their inquiry into the effects of out-relief on wages, write: “We found no evidence that women wage-earners, to whose families out-relief is given, cut rates. Such wage-earners are invariably found working at the same rates of pay as the much larger number of women not in receipt of relief, who entirely swamp them…. We could find no evidence that
the daughters of paupers accepted lower rates than others, or earned less than others, because of their indirect relation to pauperism.”
*60 This argument, therefore, like that set out in § 2, breaks down. The direct transference of resources from the relatively rich to the relatively poor, by way of philanthropic or State action, whatever its ultimate consequences may prove to be, is at least not impossible. Of course, this conclusion does not deny that
additional work by assisted, or any other, workers slightly lowers the general
rate of wages.
*61 But that proposition is quite different from the proposition that assistance to persons who are working anyhow has this effect.

§ 4. In view of this result we may proceed undisturbed to our main problem—that of determining the effect of various sorts of transference upon the size of the national dividend. Some sorts, it would seem, are likely to increase that dividend and others to diminish it. We have, therefore, to investigate the conditions upon which the occurrence of the one or the other of these opposing consequences depends. These conditions can be examined most effectively by means of an analysis in which the distinction between the effect of the fact, and the effect of the expectation, of transference is made fundamental. Of course, when we have to do with a levy, which is made once and for all to meet some exceptional need, and the regular continuance of which is not anticipated, effects operating through expectation do not have to be considered. In ordinary times, however, the fact of a tax levy imposed one year carries with it the expectation that it will be continued in future years, so that both fact and expectation are relevant. I shall consider first the expectation of transferences
from the rich; secondly, the expectation of transferences
to the poor; and thirdly, the fact of transferences.

58.

Cf. Carr-Saunders and Jones,
Social Structure in England and Wales, p. 158.

59.

For an illustration of this among home-working tailoresses cf. Vesselitsky,
The Home Worker, p. 17.

60.

Report of the Royal Commission on the Poor Laws, Appendix, vol. xxxvi. pp. vi-vii.

61.

Cf.
ante, Chapter III. § 10. Dr. Hourwick, in his book
Immigration and Labour, seems to miss this point; for, having shown that immigrants into the United States do not earn less wages for equally efficient work than native Americans, he treats this conclusion as implying that they do not
affect the wages of native Americans.

Part IV, Chapter IX