The Function of Economics
[A speech delivered to the end-of-term gathering at
the London School of Economic Science, July 1952. Copyright reserved.
Reprinted with permission]
Ladies and gentlemen,
Is any study simpler than economics? A child could grasp it. Our
difficulties arise, stream and flow from the superstitions and
prejudices with which we surround it.
The Divine Wisdom which inspires all life and form makes this branch
of learning easy to follow. Were this not true, we could despair of
human progress. A knowledge of economics is essential to good
government; and as men are best governed who govern themselves, a
general knowledge of economics is necessary to good government.
A voter who votes in ignorance forges the chains which bind him. All
who conduct business in ignorance inflict the injustices they suffer
and are confounded by the confusion they cause. If the knowledge
necessary to good government was vouchsafed only to a few, uniquely
gifted to follow it, there would be no end to injustice and confusion.
But this is not so.
The book of economics lies open before us. Its language is simple and
its message clear. We may read it, not in any library, but in our
daily lives and in our essential relations with nature and each other.
Let us look at it together. Lend me your imaginations so that our
sight may be insight and our seeing understanding.
We find ourselves alive in a universe abounding with life. Like us,
rock, plant, fish, animal and bird has each its own nature and carries
the imprint of its kind. We live upon them and with them and depend
upon them for all our nourishment. With their aid we create new worlds
of things, beings, ideas and imagination.
Our strength and quality largely depend upon the correspondence
between the life within us and life without; upon our relations with
the other creatures of nature, including our fellow men.
We can drain the swamp, water the desert, tame the beast and
cultivate the soil. Cities we can build, where grass is lawn, trees
are planted, and streets and buildings almost obliterate the face of
wild nature. Not merely food consumers, but food producers, we are
conscious partners in the miracle of creation. This is our special
Yet our arts do not lessen our dependence upon the life about us. We
make nothing, except it is created from, and formed out of the
universe and its creatures. Cut off from the earth we could not
survive, for our industries would stop, our works crumble, and we
ourselves starve. Like the one- eyed giant of the Greek fables we grow
stronger while our feet are planted firmly on the ground. Wrench us
from this, our source of strength, and all power runs out of us.
This is the first lesson in economics. The human being lives, but
depends for nourishment upon the rest of creation.
This limitation springs from our nature. We are all land animals. We
cannot long remain away from the dry surface of the earth. Here we are
based and from here we work. Access to land and the powers of nature
are essential to each of us, essential to our life, growth and
Every natural limitation upon our activity is a source not of
weakness but of strength. Being dependent on nature, we first marvel
at it and then study it. We learn to till the soil; and the zest for
life, instinct in everything, multiplies and varies our diet. We learn
to tame the beast, and it lives and works for us. Slowly, as we learn
more deeply to understand the life about us, ever greater powers exert
themselves at our instigation, until the electron and the atom lend us
a strength which startles and alarms us.
How puny a man's arm beside these titanic powers; yet our dependence
on nature and her creatures set us to learn about them, and through
this learning to borrow their spirit for the fulfillment of our
Fools and tyrants may abuse these powers but will never win them;
they are gained by men in close correspondence with at least some part
of the life about them; men who are patient, humble and intent upon
So every day throughout the generations we go to nature for the bread
of life, in search of food, materials, knowledge and inspiration. The
more advanced our civilization, the more immediate our dependence. If
coal were not hewn, oil not piped, electricity not generated for only
weeks, our civilization would be thrown into chaos.
This human necessity makes land of the utmost importance to the human
race and to the individual. We need land on which to live; room for a
house and garden, places to work, play, study and meet our fellows.
Our individual needs vary with our nature and calling. A farmer
requires wide acres, a clerk but a place in an office; but the clerk
depends upon the farmer and his acres so that he may work in his
office. We have each our individual and social needs of land.
None of earth's creatures can deny us land -- except our fellow men.
We have only ourselves to fear. This is the second lesson in
All that I have said pertains not only to economics but to religion
and philosophy, for the grounds of economics are the sphere of
religion and philosophy. Hence it springs, and its object is to reveal
knowledge which is good, just and practical, and dispel superstition
which is bad, oppressive and wasteful, so that we may govern ourselves
wisely. We need this knowledge because we need to live and work
together in communities.
Consider our gifts, for all we have is given. The universe itself,
our life and being, our powers and talents, all are bestowed upon us.
Our part is to make our contribution, a little to give in gratitude
for a plenitude of blesings.
The best of life is in giving, and by our giving we live. This giving
is our labour; and whether it is a labour of love or a grudging
tribute is for us to choose. Certainly we shall eat the fruits of our
labour, be they sweetened with devotion or poisoned with envy. Such is
the significance of labour in economics.
So we live upon and by our gifts. Some are general, showered
indiscriminately on mankind - the teeming earth, the sun and rain, all
the glory of the heavens, and the recorded wisdom of generations past.
Others are individual, the special gifts of each and every one.
Those special gifts are not evenly distributed. The strength of one
is the weakness of another. A man is not a woman or a woman a man.
Youth and age are differently endowed. Each of us is most suited to
play his destined part in creation. We were made to be interdependent;
to play our part in reliance on others. Therefore we live in families
The function of a community is to set men free to follow occupations
of their own choice in which they may cultivate their gifts, and grow
in strength, skill, understanding and achievement; to give them the
opportunity to make their contributions and make them worthily.
If every man had to be his own hunter, farmer, cook, builder and
tailor, he would have little energy left to develop his special gifts.
To cultivate himself he must specialise and to specialise he must rely
on others. The hunter frees the farmer to cultivate the soil; the
farmer frees the builder to build; the builder frees the tailor and
they all free the cook.
Judged by these standards, most modern communities are failures.
People cook, who dislike cooking, and our restaurants are monuments of
their indifference. Builders build who dislike building, and the
suburbs of London sprawl hideous across our native land. Everywhere
the cheap and shoddy of this lack-love civilization proclaims our
failure. This is where economics as a special branch learning should
play its part
People live not only by giving but by receiving. Just to receive is
to die of senility - and the last condition is worse than the first. A
proper balance between giving and receiving is essential to human
health. To strike this balance and maintain an equilibrium in the
moving miracle of life, where the factors are unknown and unknowable
and the weights cannot be measured, is the task of government.
Nowadays statisticians seek to measure what cannot be measured and to
weigh what cannot be weighed. They do not aid government -- they
The problem of government is to preserve an equilibrium in society
where the factors are unknowable. Can it be done? It can.
Everything in nature tends to equilibrium. If anything disturbs
nature's balance, forces come into play which seek to restore it.
These forces are not man-made or with in his control, but they will
work for him if he will let them.
Can we fissure an atom? But not secure justice?
The problem of the economist is to understand the balances at work to
restore them. Knowing these disruptive actions, our task is to
When disease attacks our bodies the pain we suffer at first is our
bodies' work in restoring the balance. If the balance is not restored
we are maimed or die. So it is in society. When we by our actions
disturb the balance, forces come into play to restore it which pay no
regard to human life. Our injury is their work. If they fail, society
dies; and the worst and most terrible of these correctives are
revolution and war. This is the greatest lesson economics has to
teach. It establishes our attitude to the problem. Our task is to let
nature's balance preserve our social health: to know what disturbs
this balance and prevent it.
Justice is restraint. Confucius said: "Do not use your eyes,
your ears, your power of speech or faculty of movement without obeying
the inner law of self-control. Act as if you were watching over an
infant". Justice is this law of restraint. It rises from the
nature of man and human society.
The balance between what we give and receive is disturbed when any
one of us takes without giving. Could anything be simpler than that?
All who steal disturb the balance. All who levy tribute from their
fellow men disturb the balance. Let us consider how men are able to do
The impulse of human action is the will to live; and to live man must
eat, sleep, mate and rear children. These are his primary needs, and
if any one is denied, his whole being is filled with a single longing
such as hunger or thirst. He becomes ill, even demented or savage. The
urge to gratify these needs sends him to work. That is why he does
work; to give, to glory in giving. This urge may raise him to the
stature of a god; but it may reduce him to servility and dependence.
Why should a man endure slavery, injustice and deprivation when he
could end it all so easily in death? Because something within him
tells him he and the race must live. This inner knowledge, known by
all creation, drives him on, and is the reason why men endure slavery,
injustice and deprivation.
We all know that justice is better than oppression, freedom than
slavery, and wealth than deprivation. We all know that our greatest
pride is in something well done. We would infinitely prefer to enjoy
this better state. Our difficulty is to see how to enjoy it - and
live. It is the task of the economist to point the way.
The urge to live debases men only when the balance between giving and
receiving is upset. What then upsets it?
Brute force. This we have learnt in Britain to restrain. Men move
about on their lawful occasions without fear of the tyrant's gun.
After force, what next? The deprivation of some essential to life.
And what is more essential than land? Deprive men of land, and you
have deprived them of the most essential thing in life, and they will
slave, tolerate injustice and deprivation. When some own the earth,
and all the others are but strangers and sojourners upon it, then are
the others dependent on the few.
Where land is enclosed, poverty is inevitable. To gain access to the
earth and its powers men must pay tribute. Those who pay most will
receive the land. The more they pay, the less for themselves and, in
the struggle for life, they will be reduced to an animal existence.
The need for food, clothing and shelter for themselves and for their
families will dominate their lives. They will not give what they make;
it will be taken from them. The joy of giving will be overwhelmed by
the fear of losing. What they may retain they will cling to, and who
will upbraid them if they too seek to levy tribute from others?
Meanwhile, the doyens of society, the elegant and cultivated, the
exemplars to all, will live, not by what they contribute to life, but
by what they take from others. They are, of course, the first to
complain when the humbled means of their exaltation imitates them,
when the building labourer seeks a reward without working.
This primary wrong -- this forced dependence of the landless many on
the landed few - - produces a second dpendence.
A human being has the power to make tools to assist him in his
labour. It is not only a power but a necessity to his full development
His tools are an extension of his physical strength which give full
play to his gifts. What use a pianist without a piano? And how many
pianists have been lost for just this reason?
Where men are left so little of the riches they make that they with
difficulty fulfill their primary needs, they cannot hope to acquire
the tools necessary for their work. Thus disabled, robbed of their
man-made arms and eyes, they are forced to borrow and to pay a tribute
to the lender.
Today the palaces of the moneylender out-vaunt the principal
administrative offices of the owners of creation. Lombard Street
outweighs, in massive opulence, the rock of Levers on Thames
This dependence on the moneylender produces yet another. The
moneylender wants security to secure his unearned income. He will not
lend to anyone. His fears breed a new class of men, skilled in a
special art. Theirs is the gift to raise loans and use them for the
benefit of unearned incomes. These men become employers, not because
of their special knowledge of the trade, but because of their
financial skill. They employ others to run their business for them.
Thus grows up a new dependency of employee on employer for the tools
of employment. This completes the enclosure of land, for the new class
of employer ousts the small tenant, who is sent looking for
employment, and in the end our best engineers, scientists, designers
and professors become servants. The direction of work passes out of
the hands of those who do it and even education becomes servant to the
All these dependences on landlord, moneylender and employer, and the
tribute of rent, interest and unearned profit, grow out of the first
and continuing injustice, the enclosure of land. This is the
substratum, the cause of weakness in the many and the power of tribute
in the few. Without it all would have to work for their living. The
law of property in land is the most important economic institution in
any community. If this is wrong, little will be right. It is
Every primitive community knows this and guards its customs
concerning land with jealous care. Only conquest, or the gradual
development of society which outgrows old institutions rendering them
useless, can overwhelm these early institutions. Force is always
needed to break them, as when Henry VIII enrolled his Swiss
mercenaries, and the gentry of the eighteenth century enlisted their
sons in the hated Yeomanry.
Only when absolute private property in land is finally established
does the economic decline of civilization truly begin. This happened
in Britain about 1800. From that date we measure the decline in
craftsmanship and creative skill. Then began the growth of hideous
towns, populated by rootless, depressed thousands, bred in squalor and
ignorance. The way the people have raised themselves from the
degradation of that terrible century proclaims the resilience of the
human spirit and the power for good in every one of us. But the slow
decline in the general standard continues. Not merely the poor, but
all classes are infected. What one of us, old enough to remember, is
not startled by the drop since 1938?
Fortunately, the will to live goes on, and people in all places there
are who are still giving their best. Their are those employers - or
managers, if not employers, for the employer is often a limited
company - those who have the management of concerns, who try not
merely to do their part but instill in others a sense of
responsibility and pride, to waken in those who work for them the
spirit of endeavour. There are those in the schools who humbly plod to
discover the truth, and refuse to be distracted from it by promise of
advantage or threat of penalty. Everywhere throughout society, men
there are who are giving of their best; and, whether they be receivers
of unearned income or not, for what they give we are grateful, for by
their giving are we all enriched.
Men have powerful secondary needs, the needs of the artist. No sooner
does a man feel that he can feed, clothe and shelter himself and his
family with reasonable security, than he turns his energy to culture,
to the arts of cultivation and to self-development. He needs to do
this, for it is his special human power and his special human need to
develop this higher cultivation in his work and life.
Those who are fortunate enough to be able to pursue this end may be
grateful, for just as denying men food reduces them to hunger,
illness, and to savagery, so to deny men these powerful secondary
needs is to reduce them in sensibility, balance and morality. The
disorders of this age, the neuroses, the frustrations, are just that.
They are the hunger of the soul.
But nature is kind. Pain dulls sensibility, and those people who are
condemned by poverty not to pursue their special gifts, who find
themselves doing work they do not like and are not fitted for, who
live in poverty, with difficulty raising their families, those people
are often saved the pain of the denial of their real humanity by
becoming unaware of it. They go about almost under an anaesthetic.
How many of us walk about in a kind of twilight sleep, neither waking
nor sleeping, our sensibility dulled? In peace, if it endure for about
half a generation, we grow sensible to cruelty, to sudden death and
disaster; but let a major war be in being for a year, and we eat
horror for breakfast, dinner and tea, and think nothing of it. Our
sensibility is dulled because otherwise we could not endure the pain.
So it is that when men are denied their human development as human
beings, their sensibility is dulled. Do not let anyone blame these
people who are dull, dim, unresponsive. If they were responsive they
would be in revolutionary armies; indeed that is where the
revolutionaries come from, the men who gave not been dulled and who
cannot endure what they suffer. If we deny human beings some essential
elements in life, we create a condition where men give their labour
and what should be theirs is taken from them; at one end of society
the denial of life, and at the other end people living wrongfully.
These last set the standard for the whole community, and foster a
condition where more and more people regard what they obtain from
others as important and what they give as secondary, until this
valuation becomes the ethos of the whole community. When this happens
civilization is doomed.
Such is the importance of Justice; and the function of economics is
to point the way to Justice.
Meanwhile, what of the government? Here again the Divine wisdom which
shapes and forms you and me and our society, has made provision for
government. I need not weary you with it, because you have been
through it all. But from land, the value of which grows as one moves
from the fringes of the community to the centre, springs the natural
fund to sustain government.
There it is, produced year in and year out. What is more, by taking
it, the government would preserve a kind of equality. A farmer on poor
land cannot produce as much as a farmer on food land, and not everyone
can be on good land. A farmer cannot produce as much as a merchant
anyway, and not everyone can be a merchant. And in a sense it is not
the farmer on the good land or the merchant who are producing the
surplus of good things which give value to land, for they could not
produce this abundance without the community. Now let me turn about,
and look at the picture from the other side, from the end of economic
events as they appear to-day.
What I have been saying to you works itself out in every detail of
our economic life, and expresses itself most clearly in prices and
Now, what has happened in these spheres? As we came through the
post-war boom, employment became more plentiful; trade expanded; ;the
number of people at work increased; wives went to work; sons and
daughters went to work; the hours they worked lengthened; and with
each consequent expansion in the family income they grew richer and
stimulated their own industry to answer their own needs.
But, all the time the unearned tribute of rent, interest, taxation
and unearned profit were rising faster and driving wages down. The
people gained in wealth only because they worked more and worked
longer. Their rate per hour or week or month was all the time falling
in real terms. Rising prices more than absorbed increases in money
rates of pay.
Prices are determined by what the producer at the fringe of each
industry must earn to keep in it. The charges he has to meet have to
be met out of the prices his produce fetches. As the charges on his
business rise he just passes then on and as he passes them on, prices
throughout industry rise, and as prices rise, real wages fall.
Recently, a time was reached when the rising tide of prices was
checked. It went on rising but not so fast. At that time, marginal
industries failed because they could not carry the burden of unearned
income. The amount of land under production was reduced. Agriculture,
Forestry, Fishing suffered. Now in this period people were hungry.
There was not enough food, and the contraction of production caused by
these impositions on the margin sent prices of food rising faster than
Other prices followed suit until men could work no longer, there were
no more members of the family to go to work, they were all working as
long as they could.
Then the rising tide of prices meant to them a falling income. That
began about eighteen months ago. Then the housewife had to pare her
budget. When she did that, trade failed. The first failure was, of
course, in clothes, because there she could save most easily. Now you
see this pathetic spectacle - you see Lancashire hit. The employers
appeal to the Government for help; the Government considers reducing
taxation on cotton goods; it does make some concession - a small one.
The employers themselves look desperately around to see how they can
stimulate trade and they slash their prices. But when they do that,
when they slash their prices, when taxation on cotton is eased, that
does not substantially increase the sale of cotton, it only means the
housewife has more to spend on food, rising fares and housing. And
every relief in the cost of clothes goes there. So the cotton industry
finds that its price slashing policy does not work well. Instead of
increasing turnover (sales do increase of course, but they do not
increase enough) instead of increasing, turnover drops. That is the
situation now in cotton and it is coming on fast in other industries -
wool, furniture, radio sets and the like. They are all going to
Why? Because the earning power of the people has been reduced every
day that prices rose, and it was that reduction in the earning power
of the people that has made them too poor to buy the fruits of their
own industry, and has thrown them out of work.
Now they must look for work working for unearned incomes (which
to-day means armaments and a few luxury trades, because most of the
excess is now taken by the Government). But notice this - they are put
out of work by their own poverty. What is the Government's solution? -
wage restraint! "Keep wages down," they say. "Put
interest rates up." I tell you it is lunacy. Falling earned
incomes and rising unearned incomes was the cause of the trouble. When
the financial crash comes, remember that. In this country we are
victims of our own idea that the profit of industry depends on how
much is taken out by people who are putting nothing into it, and the
only way to make industry profitable is to ensure that those who are
putting their life's work into it take as little out as possible. Such
is our attitude; it is taught in the schools of economics, preached by
the Government, whether labour or conservative. How ugly it is, how
sterile. What a sad reflection on our economy.
Here we are, impelled to live by some power we do not understand. To
live we must give, and once you start giving - once you start working
and expending your talent - it grows upon you until it becomes your
chief occupation in life, like the mother with her children. She does
not count what she receives; nor does the man once he has found his
calling. The more important his calling becomes to him, the less
important the reward he receives becomes. That is natural, and that
way of life is only being defeated because our society has so far
disturbed the balance that there is as much taken out by people who
contribute nothing as there is by all the people who work. Those are
the facts when taxation is included in the calculation.
The Government's taxes and the unearned incomes paid in Britain equal
the whole of the earned incomes in Britain.
Now see where it has led us to. Watch the corrective forces of nature
at work. Unearned incomes have gone too high, our economy is out of
balance. How are they to be reduced? Simply by smashing industry. Let
industry stop and then there is no unearned income, and that is what
happens every depression. The balance is restored by depression or
war, one or the other, or revolution.
That balance will be restored, make no mistake about it, but the
restoration is very painful. It hurts, and if by any chance it failed
and did not restore the balance, then our little civilization would be
gone. Not, I suppose, that that is important.
Surely we can add our little line to the poem of creation. Surely we
can bring justice into our economic dealings, restore nature's
balance; for economics is simple. There is nothing difficult about it
once you have seen it, once you have overcome the difficulty of
removing preconceived ideas, prejudice and superstition. It is so
simple; so wonderfully balanced that you know that all men could
understand it. It has that simplicity, which all truth has. It has
that strange quality. But it is profound, it lies beneath the surface
and is not at once self-evident.
I have tried tonight to put before you a broader concept of what the
principles of economics really are. Justice consists in permitting the
natural balance of society to maintain itself. We cannot maintain it
but we can restrain ourselves from upsetting it. The best government
lies less in what we do than in what we do not do.
You may have observed that government can only act by restraint, it
has no other power, and it has no other power because restraint is its
function. The best of all government is self-government; and that is
what Confucius meant when he said, "Never use your eyes, your
ears, your tongue, your faculty for movement without obeying the inner
law of self-restraint. Act as though you were watching over an infant."
He meant what he said literally. To put it in other famous words - "Do
unto others as you would they should do unto you." Economics
teaches the same lesson.
Would you go and seize another man's land and turn him off? Would you
willfully reduce a man into poverty, and see his children uneducated
and ill-clad? You would not do any of these things knowing you were
doing them; but we are doing them and we must cease doing them. That
would be justice.