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 XI

BOUNTIES ON THINGS PURCHASED BY THE POOR

§ 1. SO far we have been considering transferences of a direct kind. There remain transferences through bounties or devices substantially equivalent to bounties. These take three principal forms: first, bounties, provided out of taxes, on the whole consumption of particular commodities which are predominantly purchased by poor persons; secondly, bounties, similarly provided, but confined to that part of the whole consumption which is actually enjoyed by defined categories of poor persons; thirdly, authoritative interference with prices, so contrived that the richer purchasers of particular commodities have to bear part of the cost of what is sold to poorer purchasers. The first of these methods is illustrated by the special subsidies which were paid on bread and potatoes during the Great War to enable prices to be kept down to what was considered a reasonable level. The second and third methods are only practicable in connection with commodities and services which are non-transferable in the sense explained in Part II. Chapter XVII. The second is illustrated by the Irish Labourers Acts, under which, not all house-building in the districts affected, but only house-building for labourers was subsidised, and by the more general provisions which were adopted to meet the post-war house shortage. The third method is illustrated by special arrangements often made in connection with the services supplied by monopolistic “public utilities.” Whether these services are actually produced by private concerns or by the public authorities themselves, public authorities can, if they choose, compel sales to selected poor persons to be made at a
loss, and can arrange for this loss to be made good through charges to other persons higher than would otherwise have been permitted. This plan is adopted under a number of Tramway Acts, where provision is made for a convenient service of workmen’s cars at specially low fares. Thus “a recent report of the Highway Committee of the London County Council estimates that the loss involved by running the workmen’s car service is £65,932 per annum.”
*1 The same policy is illustrated in another connection by the (pre-war) practice of the municipality of Wiesbaden, where gas supplied by means of prepayment meters—a more expensive method of supply—was charged for at the same rate as gas supplied by ordinary meters to all persons the annual rent of whose house was less than 400 marks.
*2 It should be noted that this method is not necessarily confined to commodities and services produced under conditions of monopoly. Provided that the goods are, or can be made, non-transferable, it is open to public authorities to fix a charge at which anybody undertaking a named business or profession must sell whatever quantity of service is demanded by persons in a given category. The result will be to limit the number of persons entering that business or profession, till the expectation of earnings therefrom—derived jointly from sales to the poor and to other persons, for whose purchases the charges are fixed by the normal play of demand and supply—becomes about equal to that ruling in other businesses or professions of a similar difficulty and disagreeableness and involving an equally expensive training. This, of course, implies that the low charges made to the favoured category of persons are associated with charges to other categories higher than would have prevailed if the low charges had not been enforced.

§ 2. To all these methods it has been objected that they necessarily benefit unequally different poor persons whose circumstances are substantially similar. Professor Knoop writes, for example: “It is difficult to see why artisans, mechanics, and day labourers, who travel in the early morning,
should receive privileges which men and women serving in shops, clerks, and others, who are no better off financially, do not enjoy.”
*3 It may be replied that, if a thing is good in itself, the partial realisation of it cannot rightly be condemned on the ground that complete realisation is impracticable. We are not, however, concerned with the validity either of this objection or of the different and more forcible objection, from the side of fairness, which can be urged specially against the third method, namely, that it throws the cost of helping the poor upon particular persons, instead of upon the taxpayers generally.
*4 For the present purpose it is enough to know that all three of the methods distinguished above have, as a matter of fact, been adopted over a fairly wide field.

§ 3. The first of the three necessarily, and, if the categories are so chosen that people cannot practically be drawn by the bounty into a benefited category, the other two also involve “neutral transferences” in the sense explained in § 3 of the last chapter, and not differential transferences. Hence the expectation of them operates on the productive activity of the poor only through their effect on the marginal desiredness which money has to them. But they differ from the kind of neutral transferences so far examined in one respect. They will check to a small extent the contribution of work made by the poor, if they are granted upon things for which the demand of the poor has an elasticity less than unity; but they will increase this contribution to a small extent, if they are granted on things for which this demand has an elasticity greater than unity. For in the former event the marginal desiredness of money to the poor will be lowered, since more is left over for other things; and in the latter event it will be raised. As a matter of fact, bounties are most likely to be given on things of urgent need and, therefore, of inelastic demand. The check to output resulting from the consequent relaxation of effort on the part of potential recipients means
some, though probably a very small, diminution of the national dividend.

§ 4. So far it would seem that there is little to choose between help to the poor by bounties and by direct neutral transferences. If the amount of the bounty-fed commodity which each recipient is to consume is fixed authoritatively, as under the British system of free and compulsory elementary education, this is in fact so. It is so, too, if the amount is not fixed authoritatively, but is, for other reasons, not liable to change in consequence of the bounty. Thus poor people are accustomed to buy some things through a common purchase fund, so organised that the payment a member has to make does not vary with the amount of his individual purchases. Sick clubs are arranged on this plan. There will be no inducement to a member of a sick club to increase the amount of the doctor’s services that he calls for in a year merely because the fixed amount, that he has been accustomed to pay for membership of the club, is taken over and paid by the State. These conditions, however, are exceptional. In general, when a bounty, or the equivalent of a bounty, is given on any commodity, the purchasers, having regard to the bounty, will buy more of the commodity than they would have done had they received an equivalent subsidy in the form of a direct money grant. In this way resources are diverted out of the natural channels of production, and there is a presumption—which may, of course, as was explained in Part II. Chapter XI., be rebutted by special knowledge—that this diversion will inflict an extra injury on the national dividend, over and above that set out in the preceding paragraph. If the bounty is large enough, it may happen that the output of the bounty-fed commodity will be expanded so far that to the poor themselves the supply price, not merely in terms of money, but in terms of satisfaction, exceeds the demand price, or, in other words, that the economic satisfaction they get from the last increment consumed is less than the economic dissatisfaction involved in producing it. In general the expectation of a transference to the poor through bounties on particular commodities is likely to damage the national dividend rather more than the expectation of a direct neutral transference of equal magnitude. In spite of this, however, the bounty method may still sometimes be better than the other, not only because there may be special
economic or non-economic reasons for encouraging the consumption of the particular thing on which the bounty is given, as compared with other things, but also because the element of “charity” is less obvious and, therefore, less damaging to the
morale of the beneficiaries, when it is concealed in a bounty than when it is displayed in a direct dole.

Knoop,
Principles of Municipal Trading, p. 266.

Ibid. p. 213.