Spencer Heath Archive

Item 616

Dictation on tape for Spencer MacCallum on the latter’s suggestion that a start

be made on an article on national income (see Roy Foulke correspondence)

Fall 1955?

This article will be about the rise and successive changes in a national income. When people move into a virgin territory, and enter upon a pioneering mode of life, they are of necessity reduced to such standard of living as they can obtain directly from the soil and similar resources. They will have little or no means of communication one with another, no general markets wherein to pool their various products for redistribution, and no system of money, or credits, wherewith to effect any general distribution of products and/or services among themselves. The family will be the basic unit, and society, in the sense of our economic society, will not then exist.

 In course of time, an economic society will arise. At first, there will be but little and primitive trading, chiefly among families that are in most proximity to one another, and this trading will take the form of barter. As soon as barter is established, or practiced in any consider­able degree, a process of specialization will set in. When a family finds that it can produce with greater facility a certain kind of the necessaries of life, it will tend to pro­duce more than what is necessary for its own subsistence and less of other commodities which may be equally necessary. It will exchange its surplus of one kind of commodity with another family who in a similar way has produced a surplus of another kind of commodity of which this first family has produced less. This will lead to a gradual specialization, so that not only will one family exchange directly with another, but a general market can be established wherein various families pool their respective surplus products and by a system of symbols — money, or credit — will withdraw from the pool a corresponding quantity of that which has been contri­buted thereto. In this way, all the families will have the benefit of specialization and cooperation, and each family will then maintain itself, in part or even chiefly, not from its own immediate production but from the production of others, all of whom have contributed to the pool.

 To carry out a general exchange of this kind, the system of money will be requisite, and the quantum both of contribution to and of distribution out of the general market, or pool, will be measured in numerical terms, whatever may be regarded as the money or credit unit employed for the evalua­tion of those things which are exchanged. This makes it pos­sible for the exchange process to be divided into parts. The first part of the exchange will consist of contributions to the market, and those who contribute to the market will receive a money or credit limit of such numerical amount as the market prescribes. This credit or token, commonly called money, is later and at more convenient times and places reconverted into goods and services out of the market. It stands, therefore, as the numerical expression of the national income. So much of goods and services as are directly produced and consumed — without the intervention of exchange — will not be recorded as any part of the national income; for all such goods and services are not distributed through the market and do not enter into the market economy. The national income refers exclusively to that income which is received through the market or exchanging process, commonly called the economy.

 In the development of a market economy, there will be several stages of its growth. What has just been described could be regarded as stage number one with respect to the distribution of the national income. During this stage, each family or trading unit will have such income as is measured by his contribution to the general market. The head of such family will get the benefit of the productivity of this family as measured in the market units which they receive. There will, therefore, be a fairly regular and equal distribu­tion out of the market corresponding with the distribution into it, with only such differences in family income as would result from inequality of capacity and efficiency of those comprising the unit. There will be a large degree of equality of income, because there will be no cooperation in the form of organized industry, and the national income, although at a low and primitive level, will be fairly equal among the contribut­ing units.

 We could plot this as a curve, in which the distance from the base line upward shall represent the income per family or producing unit, and the distance from left to right mark off the numbers of persons enjoying such income. The greatest income would, of course, be produced by the fewest number, so that our first plotting on the curve would be relatively high. Say, the first hundred families would produce and receive an income which we might call $1,000, A second group of, let us say, 200 families might receive $900. A third of 300 families, $600, and so forth. It is obvious that the curve would descend rather steeply at the beginning and then flatten out, for there would be a vastly greater number of persons receiving a less income than those who were in the “higher brackets,” so called. However, the discrepancy between the income of the first and smallest group and that of the last and largest group could not be extreme. It could not be any more extreme than the difference in the productivity of the most efficient producing groups and that of the general, or least efficient producing groups, and this difference would depend on nothing but the differences in human capacity operating under similar conditions.

 If the pioneers in question are of a race of people who have developed any considerable trading capacity, their mar­kets will grow larger, and the distances covered by transpor­tation and communication will become longer. Specialization will extend then to communications and transportation and various facilities for the extension of trade. All this will give rise to partnerships in commerce and in industry and in such activities as banking and exchange. This will so greatly increase the productivity by reason of greater divi­sion of labor, that the members of the partnerships, whom we will for convenience regard as heads of families, will cause the national income very greatly to rise, this through the greater extension of specialization and the higher efficiency brought about in that way.

 So that if we now plot the curve referred to in the previous paragraph, it will start very high up, much higher on the left hand side, descend more sharply, and that group of persons farthest to the right will also have higher income, but relatively less high, than those on the left. In this situation, the curve suggests an inequity of distribu­tion. But this is not the case. All persons throughout the whole economy are now receiving larger incomes, and that portion of the national income which is consumed, or employed in the current maintenance of the population, will be substantially at the same level for all producing classes — although those who are engaged in the more cooperative forms of partner­ships and general businesses will doubtless have a somewhat higher standard of living. It will not be extremely higher than that of the general average — the reason for this is that these organized businesses are basically the employment of capital /words omitted? check original/, and this capital arises from the fact that those who are engaged in more highly organized business do not consume all that they produce but devote it to the carrying on of their more highly organized activities. It is because of this unconsumed capital — more properly speaking, social-ized portion of their wealth — that the whole economy rises above what it was in the first picture.

 The apparent discrepancy of national income does not mean a corresponding discrepancy in the standard of living, notwithstanding that those who do not employ capital will have a somewhat lower standard of living than those who do. It will still not be very much lower. It will be impossible, in fact, for a partner in a highly productive, specialized business to consume enormously more than a person who has not so engaged in the administration of capital for the benefit of the entire economy. He will live probably only in one house. It may be a larger house. He will eat probably only three meals per day, though they may be larger and better meals. But he will not have a greater standard of living in proportion to his greater income, because the remainder of his income will be invested in his business — and re-invested — in order that his business may grow.

 So we may properly divest our minds of the customary thought that a high income out of the market for a relatively few in the economy represents any injustice to those whose incomes are at a lower level — for in fact it accounts for their incomes being as high as they now are.