Chapter VII. The Control of Provision for the Future

CIIAPTER VII THE CONTROL OF PROVISION FOR THE FUTURE § I. Why and how Provision for the Future is made. IN the preceding chapter, in order to prevent the main argument being obscured by detail, I have ignored the fact that demand may be either for commodities and services which are wanted at once for immediate ends or for things which are wanted because they will improve people's position in the future. We have seen that our supposititious Isolated Man would have to be constantly deciding between action which gives immediate results and action which improves his position in the more distant future, and that his decision would be governed by rough estimates of the urgency of present as compared with future wants and of the technical advantages to be obtained in the long run by adopt ing methods which require effort to be put forth long before fruition instead of H hand-to-mouth" methods. We have seen, too, that Society has also by some means or other to make the same decision.

Now Society as a whole certainly has neither mind nor machin\;ry for making and carrying out such a decision on a straightforward estimate of the 122 IMPROVEMENT 123 comparative urgency of present and future wants and the comparative technical advantage of the different methods of production. The decision is made for it by individuals and by public and pri vate institutions, including the territorial states and their subdivisions, in consequence of impulses derived from various motives. We see that while the bulk of the effort of Society is devoted to serving immediate ends, and to preventing the per sonal and the outward equipment of mankind from deteriorating, a considerable amount of effort is devoted to the improvement of this personal and outward equipment. We find that each generation teaches the next not only as much as it was taught itself but something more, so that each generation becomes better equipped with knowledge; we find that each generation leaves the material surround ings of mankind not only as good as it found them, but somewhat better, so that each generation is better equipped with tools and has easier access to raw material. We have to ask ourselves" Why ? "

A certain considerable amount of the effort de, voted to the increase of knowledge is due to a desire for the credit and renown gained by remark able discovery, to the wish to benefit mankind or that part of it which belongs to a particular race or country, and to the natural itch to discover things which affects every healthy-minded person from his earliest childhood. A portion of the effort devoted to the improvement of material surround ings is due to the desire of individuals that they or their families shall enjoy the advantage of those 124 PROVISION FOR THE FUTURE very improvements in the future. I have, for example, constantly to decide whether to go on with books and papers in confusion or to devote time at once to putting them in order so as to save time in the future and the long run. Many things will affect my mind in making the decision. A change in the extent of my knowledge may do so : I may become acquainted with the invention of the card catalogue, and that may make it more worth while to catalogue the items: the weather may be very good, which will make it less worth while to give up leisure time at the present. So, too, every one who does his own gardening is constantly having to decide whether some little pennanent improve ment is worth while' or not. Wherever large num bers of people live to a considerable extent upon the produce of their own and their family's exertions in agriculture, these direct decisions amount in all to something of considerable importance. Where a state exacts compulsory labour from its subjects, as was the custom with regard to road-making even in Europe till quite recent times, it rests with the State to decide how much of this labour shall be devoted to immediate and how much to distant ends: the State can direct permanent improve ments to be made or abstain from doing so.

But at present in our part of the world these cases are exceptional. As a rule when we see people producing things for storage, or building additional houses and factories, or improving land, or doing anything else which we believe likely to improve the position of mankind in the future rather than to SAVING 125 " satisfy its immediate wants, we do not think they are actuated by fear of the State, nor by the expecta tion that they or their families will themselves use the things they are producing, nor by philanthropy or patriotism. We know that they do this parti cular work simply because it pays them to do it. Demand govems the distribution of effort between the production of goods for the present and goods for the future just as it govems the distribution of effort between different kinds of goods for the present. If demand varies in one direction, a larger proportion of the whole effort of Society will be devoted to present goods and vice versa. What is true of labour is also true of the devotion of pro perty to different kinds of purposes. If demand varies in favour of present goods, there will be more parks and fewer brickfields, more yachts and excur sion steamers and fewer tramp steamers carrying iron ore and other materials for future constructions.

At anyone time there is a particular distribution of resources between nearer and more distant· ends which is governed by demand, and what we want to know is what will cause the demand to be varied so as to vary this distribution. The principal immediate cause is variation in the proportions between what we colloquially call I( saving" and II spending." § 2. Savings made chiefly in order to secure Future Income. The tenn saving is ordinarily applied exclusively to money. We speak of II saving money" and 126 PROVISION FOR THE FUTURE It saving £IOO a year." The money thus spoken of as II saved" might have been spent on current satis factions and enjoyments, but has instead been reserved, with the effect of improving the outlook of the saver for the future. A person may have saved simply with the view of postponing the spend ing till some future period, when a given sum of money will, as he reckons, give him, or possibly his widow or children, something more worth having than what he can buy for himself or his wife and children at the present moment. Saving of this kind takes place in primitive conditions when a man puts away coin in a stocking or in a hole in his thatch in order that he may bring it out again to spend when he is old or sick and consequently unable to work; under more modern conditions it appears when people deposit money in savings banks or pay life insurance premiums not because the savings banks pay a small interest or because interest accumulates on the insurance premiums, but simply because they think it well to make provision for times when they or their families will be more benefited by the expen diture of the money than they would be if the money were spent at once in addition to what is actually being spen t upon them. I t is thus true that a certain amount of saving takes place which is not caused by the existence of interest, and some economists have pronounced that a little saving might still take place even if the rate of interest sank to zer9.

But it must be borne in mind that such saving is only intended to be temporary: the savers intend what they save to be spent again, and that at no SAVING TO GET INTEREST 127 very remote date, and if their intention is not frus trated by accident, all that they save will be spent within a very moderate ,period of years, eighty or so at the outside, and usually much less. Conse quently .no very considerable accumulation could take place if there were no other motive for saving than the desire to H provide for a rainy day" by collecting a store of money which should be spent on the occurrence of the It rainy day." The most powerful motive for saving is supplied at present by the interest, profit, or rent which can be obtained by it. People who are primarily in duced to save by the desire to provide for a rainy day are encouraged to persist in their resolve and induced to increase their savings by the fact that they can get interest so long as the capital remains intact, and others are induced to save in the first place because they see that it would be pleasing to receive interest, profit, or rent while retaining the power of spending the savings if they choose at any moment to give up the interest, profit, or rent.

H Interest" is obtained when the H money saved" is lent out on condition of the borrower paying periodically a sum called the H interest," and usually calculated as a percentage on the amount lent, which percentage is spoken of as H the rate of interest," and in modem times is usually cal ~u1ated per annum rather than per month or per week. H Profit" is spoken of when the money saved is expended on the purchase of commodities and 128 PROVISION FOR THE FUTURE services which are subsequently sold for more than their cost, and thus bring in a profit or gain: this gain, too, is usually calculated as a percentage, but confusion sometimes occurs in consequence of the facts that the amount expended may be regarded as a whole or in parts and that the gain may come in at more or less frequent intervals. For example, it might be said that a secondhand bookseller was making a profit of 60 per cent. when the speaker was thinking simply of the difference between the price at which he bought books and that at which he sold them, and onlY.20 per cent. when the speaker was thinking of the whole amount the bookseller had put into the business and the return upon that amount per annum.

H Rent II is obtained when the money saved is devoted to the purchase of land which is let for periodical payments agreed on between lender and borrower, or, as it is commonly expressed, between landlord and tenant or owner and lessee; and it is also in common language said to be obtained when the money saved is spent in constructing or buying a house or some other fixed object which is let for similar periodical payments. It is not, however, the practice to speak of rent in percentages. Instead of saying the land or the house yields 5 per cent., we say it yields, say, £100 a year. If we want to relate the yield to the money expended, we say it was bought at twenty years' purchase, meaning that the price was equal to twenty times the rent. But this phrase is perhaps becoming old-fashioned, and it is quite possible to say that the land or house SAVING TO GET INTEREST 129 yields 5 per cent. on the price paid for it. In any case, it is a question of phraseology, which does not affect. the fact that people who acquire property which yields a " rent II are actuated by the same motives as those who use the money they have saved to procure interest or profit. Hence economists have found it convenient to use the tenn " interest "

~o cover the whole of the periodical H returns U to savings. The higher the rate of interest, the greater is the inducement to. save and, other things being equal, the greater is the amount saved. This has been questioned on the ground that there are some people who are determined to save an amount which will bring in a certain income, and if the rate of interest is low, these people will save more than if it is high. The existence of such people may be doubted,. and even if a few such exist, they cannot make much difference. If strong cases of difference in the rate of interest be taken, it will be obvious that their determination, however obstinate, will be of no avail. A man earning £500 a year who determines to save enough to get a permanent income of the same amount when he retires at the end of thirty years from now, may do it by living on £350 a year if he can get 5 per cent., free of tax, on his accumulations. But if he could only get 2!

per cent., he would have to live on £45 a year, which would certainly break his determination. Taking all potential savers together, there can be no reason able doubt that the higher the rate of interest, othe" things being eqWJl, the greater the savings.

130 PROVISION FOR THE FUTURE § 3. Circumstances Other than the rate of Interest which a.ffect the amouni of Saving. But of course other things are not equal, so that the amount of saving does not depend only on the rate of interest. In the first place, changes rnay take place which will render the potential savers more desirous or less desirous of providing for the future as compared with the present, although their means of doing so and their knowledge of methods remain the same. There is little reason to suppose that H provi dence" is always present in the same degree in the minds of paten tial savers. Writers and preachers are in the habit of assuming that people usually underestimate future goods as compared with pres ent. There is little ground for the assumption: it is chiefly made by the well-to-do, who do not know what it is to be really pinched in the present. But the fact that the assumption is made, and that people are exhorted to be more" provident," while nobody thinks of retorting that a change is impossible, shows that it is generally believed that a change in this respect can take place, and here no doubt the general belief is correct.