The Economics of Welfare

Part IV, Chapter XII

THE EFFECT ON THE NATIONAL DIVIDEND OF THE FACT OF TRANSFERENCE FROM THE RELATIVELY RICH TO THE POOR

§ 1. IN the three preceding chapters we have been concerned with the effect on the national dividend of the expectation of transferences from the rich and of the expectation of transferences to the poor. These things, we have seen, are liable to modify the dividend of any year by reacting both on the contribution of work provided during that year and on the quantity of capital equipment made ready in former years against the needs of that year. The whole story, however, has not yet been told. In the year—any year—that we are considering, the dividend, as determined by these expectations, will be of such and such a size. Thereupon occurs
the fact of transferences from the rich to the poor. This, for the years yet to come, superimposes upon the effects we have been considering so far a new set of effects. For it involves a shifting, additional to any shiftings that are brought about by expectations, in the uses to which the dividend of the year we are considering is put. For the present purpose the accessible uses may be taken to be the provision of goods consumable by the rich, the provision of machines to assist future production, and the provision of goods consumable by the poor. When a transference of resources from the rich to the poor takes place, the third of these three divisions of the dividend is increased at the expense of the other two. Our problem is to determine the effect of this alteration in the distribution among different uses of the dividend of one year upon the magnitude of the dividend of later years.

§ 2. If no transference had occurred, the portion of the dividend due to assume the form of machines would have contributed to enlarge the dividend in later years. The portion devoted to the consumption of the rich, in so far as it served to make them more efficient producing agents, would also have done this to some extent. Among rich persons, however, it is improbable that any practicable reduction of consumption—the effect might, of course, be different if a levy were imposed so large as to bring down incomes from £5000 to £100—would diminish efficiency in an appreciable degree. Hence we may say roughly that that part of the sum transferred to the poor in any year, which, if it had not been transferred, would have been converted into capital, is the only part that would have made a substantial contribution to the dividend of the future. How large that part of the transferred sum is will depend to some extent on the method of taxation that is employed. Under the income-tax method we may suppose that in one year twenty million £ is collected from 200,000 people by a levy of £100 on each; under the death-duty method that an equal sum is collected from 10,000 people by a levy of £2000 on each. Things
could, no doubt, be so arranged that these two plans would come to substantially the same thing. For under the death-duty method each person might furnish about £100 annually to insurance companies, to be handed over by them in payment of the death duties falling due during the year, instead of furnishing it, as under the income-tax method, to the Treasury. In actual life, however, it is not likely that a tax falling due from any estate every twentieth year will be fully provided against in the untaxed years that precede or follow. Consequently it is probable that under the death-duty method a good deal more than £100 will have to be furnished towards the tax from the resources accruing in the actual year of the tax, and a good deal less from those accruing in other years. It is fairly clear, however, that, as the amount withdrawn from the resources of any year grows, people will be less and less willing, owing to the wrench threatened to their habits, to take it out of consumption. Consequently there will be a tendency for a large part of it to come out of such part of the taxpayers’ resources
as would normally have been saved; and, if these resources are not sufficient, for it to be raised by the sale of capital. This last arrangement does not, of course, imply the handing over to the State in taxation of actual capital goods, but it does imply that somebody else, who would otherwise have devoted resources to building plant and machinery, will devote them instead to buying the existing plant and machinery that the taxpayer is forced to sell; with the result that the new savings of the community as a whole are contracted by an amount approximately equivalent to the amount of existing capital that the taxpayer throws on the market. In general, then, the fact that death duties consist of large levies at long intervals in place of small levies at short intervals suggests that the resources transferred through them are likely to be drawn from potential capital more largely than would be the case if equal resources were collected through income tax. This suggestion is confirmed and emphasised by the further fact that, under death duties, the moment chosen for the tax levy is one at which the heir is entering into an entirely new fortune. At this moment he will not have accustomed himself to think of his new property as “belonging to him” in the ordinary sense: he will look upon what comes after death duties have been paid as his “inheritance,” and will not be spurred on to replenish with new special savings the gap that these duties have made in its original amount. This incident also makes
pro tanto for the payment of the duties out of potential capital. The distinction between death duties and income tax in this respect is, however, a secondary matter. Even under death duties, when any given quantity of resources is collected from the rich, it is practically certain that some of it will be taken (perhaps
via insurance premiums) from that part of their income which would, in the ordinary course, have been consumed. This implies that the part which would have become capital will not be reduced by the whole amount of the levy. It follows that any given transference of resources from the rich to the poor is bound, in itself and apart from the reactions discussed in the preceding chapters, to increase the national dividend of the future, provided that the return yielded by investment in the poor, through additions to
their industrial capacity, is not less than the return yielded by investment in material capital—that is to say, roughly, than the normal rate of interest.

§ 3. Now it must be admitted at once that there are certain classes of poor persons whom no transference of resources could render appreciably more efficient. These classes include the great mass of those who are morally, mentally or physically degenerate. The history of Labour Colonies both at home and abroad and the experience of our own special schools for the feeble-minded make it clear that, for this class of person, real cure is practically impossible. “The officials of the colonies, on being asked their opinion as to whether it could be said with truth that any large proportion of the men sent to Merxplas were rehabilitated, morally or socially, by their stay at Merxplas, replied that in very few cases is such reclamation effected”:
*5 and this is the experience of more than one colony elsewhere devoted to the care of the worst class of the non-criminal population. The fact is that, in the economic, as in the physical, sphere, society is faced with a certain number of incurables. For such persons, when they are found, the utmost that can be done is to seclude them permanently from opportunities of parasitism upon others, of spreading their moral contagion, and of breeding offspring of like character to themselves. The residue of hopelessly vicious, mentally defective, and other unfortunates may, indeed, still be cared for humanely by society, when they come into being, and it would be wrong to neglect any method of treatment that might raise the lives of even a few of them to a higher plane. But our main effort must be, by education and, still more, by restricting propagation among the mentally and physically unfit, to cut off at the source this stream of tainted lives. To cure them in any real sense is beyond human power. The same thing is true of those persons who suffer from no inherent defect and have lived in their day the life of good citizens, but whose powers have been worn out by age or ruined by grave accident. Here again, from the standpoint of investment, the soil is
barren. The transference of resources to these persons, in whatever form it is made, may be extremely desirable for other reasons, but it cannot yield any significant return in industrial capacity.

§ 4. Fortunately, however, these classes constitute only a small part of the whole body of poor persons. With the poor regarded generally there is no frozen fixity of quality, but investment is capable of real effect. At a first glance we might, perhaps, expect the marginal return obtainable in this field to be equal to what it is in industry proper. This, however, is not so. In a perfectly adjusted community capital would be invested in the nurture, education and training of different persons, no matter in what class they were born, in such wise that, given the existing state of capital supply, the existing relative demand for services requiring different sorts of ability, and the existing state of industrial technique, the values of the marginal net product yielded by it would be equal everywhere. Thus, as between men with different degrees of the same kind of capacity—duke’s sons and cook’s sons alike—more would be invested in the abler than in the less able; and, as between men of different kinds of capacity, more would (in general) be invested in those whose kind was in keener demand. There is, however, reason to believe that the ordinary play of economic forces tends unduly to contract investment in the persons of the normal poor, with the result that the marginal return to resources invested, not, indeed, in all, but in a great number of the poor and their children is higher than the marginal return to resources invested in machines. The ground for this belief is that poor persons are without sufficient funds to be able themselves to invest adequately in their own and their children’s capacities, while they are also so situated that other persons, who have sufficient funds, are, in great measure, debarred from doing this for them. Under a slave economy, or under a social system so organised that those, in whom alien money was invested, could somehow pledge their capacities as security for loans, the case would be different. But in the actual world there is no easy way in which capitalists can ensure that any considerable part of the return on money invested by them in the capacities of
the poor shall accrue to themselves. If they make a loan, they cannot exact security for repayment; if they invest directly, by providing instruction for their own employés, they have no guarantee—unless, indeed, they are manufacturers of proprietary goods requiring a more or less specialised kind of labour, which is of less value to others than to them—that these employés will not shortly quit their service; and, even when there is such security, the employers must expect that the workers, having become more competent, will endeavour to exact a wage increased proportionately to their efficiency, and so to annex for themselves the interest on the employer’s investment. In fact, investment in the persons of the poor is checked in a way analogous to that in which investment in land tenanted by rich occupiers and owned by poor men may be checked. The owners cannot afford to invest, and the occupiers, living without proper security as regards tenants’ improvements, and receiving, therefore, as private net product, only a portion of the social net product of their investment, are unwilling to invest as much as the interest of the national dividend requires. In view of these considerations there is strong reason to believe that, if a moderate amount of resources were transferred from the relatively rich to the relatively poor, and were invested in poor persons with a single-eyed regard to rendering the poor in general as efficient as possible, the rate of return yielded by these resources in extra product, due to increased capacity, would much exceed the normal rate of interest on capital invested in machinery and plant.
*6 Of course, however, in real life transferences from the rich to the poor are not all made subject to the condition that they shall be employed in the way most productive of efficiency. It is, therefore, necessary to examine separately the effects of certain principal sorts of transference.

§ 5. First, consider transferences in the form of industrial training to selected persons among able-bodied adult workers. In this class of persons there are always a number who are
making exceptionally low earnings, because they are illadjusted to the job in which they are engaged, but who are, nevertheless, of good natural ability. Resources transferred to these persons in the form of training are likely to yield a large return. This fact was recognised, not merely in the special arrangements made for demobilised officers and men after the war, but also in the National Insurance Act of 1911. The hundredth clause of that Act provided that, if, after test and inquiry, “the insurance officer considers that the skill or knowledge of a workman (who repeatedly falls out of employment) is defective, but that there is a reasonable prospect of the defect being remedied by technical instruction, the insurance officer may, subject to any directions given by the Board of Trade, pay out of the unemployment fund all or any of the expenses incidental to the provision of the instruction, if he is of opinion that the charge on the unemployment fund in respect of the workman is likely to be diminished by the provision of the instruction.” The class of persons to whom this policy is especially applicable are workpeople not too far advanced in years, whose special skill has been rendered useless by some invention enabling the work they have learnt to do to be performed more economically by unskilled labour in attendance upon an automatic tool. They include, too, those persons whom accident or illness has deprived of some specialised capacity, as well as the victims of permanent changes of fashion. Money spent in teaching these persons a new trade in place of the one they have lost is likely to yield a substantial return. The same thing is true of instruction given to those persons, if in practice they can be distinguished, who, with an aptitude for one sort of occupation, have accidentally, or through perversity, drifted into another. In this category should be included men bred in the country and well fitted for rural life, who have been enticed by the glamour of some city to abandon their proper vocation. It is, however, essential that the men selected for agricultural training should be carefully chosen from among persons with a real turn for agricultural life. Frequently this has not been done.
*7The comparative failure which attended early British experiments in farm colonies may have been due to that fact. The agricultural training centres established by the Ministry of Labour at Brandon and at Clayton in Suffolk in 1925 appear to have had considerable success.
*8 The usefulness of such centres might perhaps be enhanced if they were not confined to the service of persons who have fallen out of employment, but were general training schools of agriculture, open to members of the public, and so endowed with an industrial rather than a remedial atmosphere.
*9

§ 6. Secondly, we may distinguish transferences in the form of medical attendance and treatment to persons suffering from temporary sickness. If these persons are not assisted in time—delayed help may be comparatively useless—they may well suffer a permanent break-down in health. Resources transferred to them in the form of medical care and appropriate food are likely to prevent a large loss of capacity. Of course, in order that good results may be attained, the transferences must be adequate and the medical attendance or supervision must not be abandoned at too early a stage. On this point the Minority Report of Poor Law Commissioners made a serious complaint against the administration of English Poor Law Infirmaries: “No attempt is made to follow into their homes the hundreds of phthisical and other patients discharged every week from the sick wards of the Workhouses and Poor Law Infirmaries, in order to ensure at any rate some sort of observance of the hygienic precautions, without which they, or their near neighbours, must soon be again numbered among the sick.”
*10 Given, however, that the transferences to sick persons are reasonably made, there is good hope that they will lead to a large increase of capacity.

§ 7. Thirdly, attention may be directed to transferences in the form of training and nurture to the normal children of the poor. Here there is immense scope for profitable investment. It is just when their children are young, and, therefore, in many ways afford the most fruitful soil for investment, that poor families find themselves in the greatest straits, and, therefore, least able to provide adequately for them. The proportion of
children who pass their earlier years in great poverty is much larger than the proportion of
families who are in this condition at any one time. Thus, taking a standard of life analogous to Mr. Rowntree’s poverty line, Dr. Bowley found, just before the war, that “more than half the working-class children of Reading, during some part of their first fourteen years, live in households where the standard of life in question is not attained.”
*11 The same point is brought out by Miss Davies’s observation about the village of Cowley, that “from the insignificant one-eighth of the households in primary poverty two-fifths, or nearly half, of all children in the parish are drawn, and that only one-third of all the children are in households above the line of secondary poverty.”
*12 As was observed in Part I. Chapter VIII. § 6, the position in this matter has greatly improved since the war, partly through the rise in the real wages of unskilled labour and partly through the falling-off which has taken place in the average number of children per family. Thus in 1923-24 in Reading the proportion of children under 14 living in houses where the standard specified above could not be reached had fallen (assuming no unemployment) from 1 in 2 to 1 in 7.
*13 Even yet, however, the position is sufficiently deplorable. Reviewing the statistics collected from the five towns (Northampton, Warrington, Reading, Bolton and Stanley), Dr. Bowley concluded in 1924: “More than 1 in 6 (of the children) are in present circumstances below the line (his calculated poverty line) at some period of their young lives; a smaller proportion are below it for many years consecutively.”
³ Properly arranged help for these children may do much towards
building up, in the most plastic period of life, strong bodies and minds trained, at least in general intelligence, and, perhaps, also in some form of technical skill.

Of course, if these transferences are to be fruitful, they must be reasonably conducted. It is useless, for example, to spend money on educating children while leaving them the prey to demoralising home conditions. If they are not properly looked after at home, a part of the transference to them must be utilised in boarding them out with carefully chosen families, or in sending them compulsorily to an institution or industrial school. Thus both the Majority and the Minority of the Poor Law Commissioners agree that children, who are neglected in the homes of parents in receipt of relief, should be forcibly “sent to an institution or industrial school,”
*14 and that, for the children of “ins and outs,” “power should be taken to keep these children in institutions while the parents are detained in a detention colony.”
*15

Again, it is useless, and may be even harmful, to spend money on educating children so ill-nourished that they cannot learn and merely exhaust their nervous system in trying to do so.
*16 Underfed children must be provided with meals as well as with education, and, it need hardly be added, these meals must be regular and not spasmodically offered to different children twice or three times in a week. Probably the meals should be continued during the school holidays, for otherwise much of the benefit will be lost. In like manner, it is useless to spend money on educating children, if, at the same time or immediately afterwards, they are permitted to engage in occupations which inquiry shows to be destructive of whatever benefit education might be expected to yield. There is reason to suppose that many of the forms of unskilled labour at present open to boys not merely fail to train, but positively untrain, their victims. In a report presented to the Royal Commission on the Poor Laws Mr. Jackson well writes: “Mere skill of hand or eye is not everything. It is character and sense of responsibility which requires to be
fostered, and not only morals, but grit, stamina, mental energy, steadiness, toughness of fibre, endurance, must be trained and developed.” But these general qualities can ill withstand the conditions, if these are unalleviated, of many forms of unskilled boy-labour. Mr. Jackson reports the view that “the occupation of van-boys is very calculated to destroy industry,” and adds that “opinion is practically unanimous that street-selling is most demoralising to children. It is not so much a question of a skilled trade not being taught as of work which is deteriorating absorbing the years of the boy’s life when he most needs educative experience in the wider sense.”
*17 It is plain that, if investment in the children of the poor is to be truly fruitful, it must be accompanied by prohibition, or at all events by restriction, of the right of entry into these occupations.

Yet again, as with the sick, so too with the children, the care expended on them must be adequately prolonged. “It is not sufficient to send a child of fourteen to a situation which may prove unsuitable, and leave it there to look after itself.”
*18 In short, stupidly organised investments in children’s capacities—like other stupidly organised investments—will yield little return; but well organised investments, and, more especially, investments adjusted in amount to the natural abilities of the various children affected, hold out large promise. Nor is this promise exhausted when account has been taken of the effect produced on
average children. Among the great number of working-class families there are sure to be born from time to time children of exceptional power. Investment in the education of children generally should be credited with the effect it produces in
these children. This point and the implications of it are put with great force by Marshall in the following passage: “There is no extravagance more prejudicial to the growth of national wealth than the wasteful negligence which allows genius that happens to be born of lowly parentage to expend itself in lowly work. No change would conduce so much to a rapid increase of national wealth as an improvement in our schools, and especially those of the
middle grade, provided it be combined with an extensive system of scholarships, which will enable the clever son of a working man to rise gradually from school to school till he has the best theoretical and practical education which the age can give.”
*19

§ 8. Up to this point we have been considering transferences made in selected forms and to selected groups among the poor; and we have seen that for such transferences there are “openings,” in which the return probably obtainable is very much superior to that offered by investment in machines. It follows that the fact of these transferences, when they are managed by competent persons, is practically certain to benefit the national dividend. The effect of transferences made in a general way, in the form of command over purchasing power, cannot be determined so easily. The main difficulty is that many poor persons are unable, through lack of knowledge, to invest resources in themselves or their children in the best way. Thus, in a recent report of the Board of Education, we read: “A large proportion of the badly nourished children suffer from unsuitable food rather than from lack of food. It is probably no exaggeration to say that the improvement, which could be effected in the physique of elementary school children in the poorer parts of our large towns, if their parents could be taught or persuaded to spend the same amount of money as they now spend on their children’s food in a more enlightened and suitable manner, is greater than any improvement which could be effected by feeding them intermittently at the cost of the rates.”
*20 In like manner, Mrs. Bosanquet notes that some two-ninths, out of Rowntree’s three-ninths, of poverty is “secondary” poverty. She writes: “The weight of the problem rests with the ignorance and carelessness of parents who do not lack the means to do better; and this view is further enforced by the
large amount of evidence that most of the malnutrition is due to misdirected feeding rather than underfeeding.”
*21 To charge the whole body of the poorer classes with ignorance and lack of capacity for management would, indeed, be to utter a gross libel. A sharp distinction must be drawn between poor families whose income, though small, is fairly regular, and poor families where the fathers are in casual and intermittent employment. Families of the latter class, disorganised in their mental habit no less than in their homes, never knowing from day to day or week to week what their income will be,
cannot arrange their expenditure well. But families of the former class are in a position, if they choose, to build up a fairly definite standard of life. Among them there are many whose spending is even now arranged with extraordinary competence and wisdom; and, if they were better off, so that the wife was less burdened with work and worry, it may be supposed that their present high standard would be still further raised. Still, though, as against some members of the poorer classes, the charge of incapable management is ridiculous, as against many members it is undoubtedly true. Nor from the nature of things could it be otherwise. The art of spending money, not merely among the poor, but among all classes, is very much less developed than the art of making it. The investments which people make in industry are usually made with the help of specialists, who are in competition with one another and among whom bad judgment ultimately means elimination; but the investments which people make in their own capacities are conducted by themselves—that is to say, by persons who are not specialists, acting in circumstances where the selective influence of competition is excluded. This distinction can be brought out by an illustration drawn from within the business sphere itself. Those entrepreneurs who produce goods for the market are subject, in general, to keen competition among themselves. The result is that the stupid and ignorant tend to be extruded, and those only continue to act as entrepreneurs, who approach fairly closely to the average level of intelligence among their class. In occupations where
commodities are produced, not for sale in the market, but for domestic consumption, and where, therefore, the competitive struggle is relaxed, the standard of competence tends, other things being equal, to be lowered. This point is well illustrated by the history of the English textile industries. Wool and linen, at the time of the industrial revolution, were associated with the ordinary routine of peasant life, but the treatment of cotton was not so associated. “Everywhere a professional employment, not a by-product, those who followed it did so for gain.”
*22 The result was that improvements developed and spread much more rapidly in cotton manufacture than in the other textiles. It is plain that the conditions under which the art of spending money is conducted are on a par with those prevailing in domestic, and not with those prevailing in professional, employments. It follows that the main stimulus making for competence and the power of wise choice between different ways of using resources is lacking. Thus, Professor Mitchell writes: “The limitations of the family life effectually debar us from making full use of our domestic brains. The trained intelligence and the conquering capacity of the highly efficient housewife cannot be applied to the congenial task of setting to rights the disordered households of her inefficient neighbours. These neighbours, and even the husbands of these neighbours, are prone to regard critical commentaries upon their slack methods, however pertinent and constructive in character, as meddlesome interferences. And the woman with a consuming passion for good management cannot compel her less progressive sisters to adopt her system against their wills, as an enterprising advertiser may whip his reluctant rivals into line. For the masterful housewife cannot win away the husbands of slack managers, as the masterful merchant can win away the customers of the less able. What ability in spending money is developed among scattered individuals we dam up within the walls of the single household.”
*23 The inevitable consequence is that among all classes, and among the poor along with the others,
there is a very great amount of ignorance concerning the comparative (marginal) advantages of different ways of spending money. Consequently it is idle to expect that resources transferred to poor persons in the form of general purchasing power will be employed by them exclusively in the openings that are likely to yield the largest return of capacity. When the mistakes made are very grave, the national dividend may gain less from the improvements wrought in the capacity of the poor than it loses by the withdrawal from ordinary investment of that part of the transferred resources, which, if they had not been transferred, would have been devoted to that use.
*24 There is a danger that resources transferred to poor persons, in the form of command over purchasing power, will, from the point of view of the national dividend, be wasted. The Royal Commissioners on the Poor Laws complain, for example, that out-relief, as administered in many parts of Great Britain, serves merely “to perpetuate social and moral conditions of the worst type.”
*25 Many Boards of Guardians take no measures to ascertain what recipients do with the relief granted to them.
*26 “With significant exceptions, Boards of Guardians give these doles and allowances without requiring in return for them even the most elementary conditions…. We have seen homes thus maintained out of the public funds in a state of indescribable filth and neglect, the abodes of habitual intemperance and disorderly living.”
*27

§ 9. The practical inference from this discussion is that transferences to the poor, made in the form of command over purchasing power, have a much better chance of benefiting the national dividend of the future if they are associated with some degree of oversight over the persons to whom the transferences are made. This oversight, and whatever control it may be necessary to couple with it, must, of course, be very carefully guarded. It
should be based on a full recognition of the fact that people are not machines, and that their industrial—not to speak of their human—capacity is a function of their moral, as well as of their material, surroundings. If the arrangements are such that persons hitherto respectable are compelled, for any considerable time, to associate with vagabonds and ne’er-do-weels, their industrial character is endangered. If, on the other hand, the gift of material aid is accompanied by the interest, sympathy and counsel of friends, willingness to work and save may be largely and permanently encouraged. Out of a full experience Canon Barnett wrote: “Many have been the schemes of reform I have known, but, out of eleven years’ experience, I would say that none touches the root of the evil
which does not bring helper and helped into friendly relations.”*28 A system of administration, in which, as in the Elberfeld and Bergen plans—copied in essentials by the voluntary Guilds of Help now growing up in many English towns
*29—the elements of personal care are largely utilised, is thus likely to prove, even from a purely monetary point of view, a better investment than one dependent on mechanical rules. This consideration emphasises the great importance of associating voluntary effort with the official machinery of State aid to the poor.