tastes, and, possibly, by the immigration of people of the opposite sort, who might be attracted in consequence of the fall in the prices of necessaries and consequent rise in real wages. Indeed, such a policy might tend to cause an increase in the population even apart from immigration, which in turn suggests that the law of diminishing returns might come into operation. This, however, would act more slowly than the other tendencies set in motion by such taxes, and, in any case, would be likely to be counteracted by new discoveries. Nevertheless, it constitutes an influence which cannot be altogether neglected, and suggests that caution would be necessary in taxing luxuries habitually consumed by the lowest orders of the people.

III

The views of the present writer as to the causes determining the normal rate of interest have been outlined in a former article. If that theory is correct, the proposition that a fall in this rate would be the consequence of the tax here considered would seem to be established but for one circumstance: such a tax might cause a diminution in the aggregate amount of labor expended by the whole community, and hence in the magnitude of the annual product. And here it must be admitted, I think, that no absolutely certain prediction can be made, for we have to deal with nothing less complex than the motives which induce men to exert themselves in the acquisition of wealth. There are, however, some circumstances which may tend to allay our fears in this regard.

We must decide exactly what is meant by labor. All consumption involves some kind of activity on the part

1 Quarterly Journal of Economics, August, 1917.

See Taussig, Inventors and Money Makers, chap. iii.

of the consumer. "All sound, sight, taste, smell, touch, come about through reactions of the nervous system to external stimuli." But surely these reactions are not labor. The consumption of some commodities demands conscious effort; and in some cases, where the benefit looked for is a future one, the effort is disagreeable. It does not, however, seem necessary to classify as labor any of these activities. For present purposes, exertions - - disagreeable or otherwise - which are incidental to the consumption of any commodity or service, whether necessary or luxury, will not be regarded as labor. Since necessaries are supposed to include all objective factors which contribute to the creation of" personal capital " it follows that labor will not include the subjective efforts which a person expends for the same purpose, such as reading text-books or studying under a teacher. But writing text-books, imparting knowledge or skill, and generally rendering services to others, either directly or indirectly, must be classed as labor. Similarly, efforts which a person makes with no other object than the immediate gratification of his desires-playing games for example are not labor. On the other hand if the sole object of the efforts is to gratify the immediate desires of other persons, they must fall into the same category as the exertions of teachers. Yet we must not exclude from our conception the efforts which a man expends, say, in building a house for his own future use. It seems, therefore, that labor might be defined as any exertion which a person puts forth for the purpose of creating a utility

1 Fisher, The Nature of Capital and Income, chap. x, § 2.

For this reason I hesitate to follow Professor Fetter when he seems to regard "taking medicine" as labor; Economic Principles, chap. xvi, § 5.

Cf. Jevons, Theory of Political Economy, p. 168 in edition of 1911. The conception of "opportunity costs" (see Davenport, Economics of Enterprise, chap. vi) appears to make it unnecessary to regard labor as painful.

capable of being consumed by someone else.1 This seems in accordance with a very common conception which regards labor as having to do with the earning or saving of money, or wages.

Of the exertions which men put forth to provide for their own consumption, some are in the social sense productive of utility, and some are merely predatory.2 It seems advisable, however, to simplify the present discussion by assuming that all labor belongs to the former category. It is evident that anything that an individual may gain by an activity which contributes nothing to the national dividend must be offset by a loss on the part of someone else. But, in the words of Professor Taussig, "it is the aim of the legal system under which we live the system of private property

to inhibit predatory doings." 3 Therefore in the above hypothesis we merely assume that the law accomplishes its object.

Now, if leisure be defined as all time not devoted to labor, including time spent in acquiring capacity for labor, it would seem that leisure can be classified, like all other sources of enjoyment or benefit, as either necessary or superfluous.

The introduction of the element of time reminds us that human life is limited, and it is convenient to take account of that circumstance in applying our classification in this instance. It is evident that some leisure is necessary for mere existence. Some of the examples that have been cited by Marx for example would lead one to think this minimum astonishingly small. If, however, only this barest minimum is allowed, no time is left to the worker for education, and the quantity of

1 This and other parts of the present essay are the outcome of some valuable criticisms of which my work has had the benefit.

See Taussig, Principles of Economics, chap. ii.

Loc. cit., § 5.

work which he can accomplish during his lifetime must, owing to his inefficiency, be very much smaller than would be the case if his hours had been shorter. On the other hand, if a person spends more than a certain amount of time in repose, or in the pursuit of pleasure, or even in the attainment of skill and knowledge which he will be unable either directly or indirectly to apply, in this case also the total quantity of labor he will perform will be less than it might have been. Necessary leisure, then, may be defined as that which a man must allow himself if he is to perform during his lifetime the maximum amount of labor of which he is capable. All leisure in excess of this may be classed as superfluous.1

In

Now the annual product is affected by the amount of time devoted to labor, and also by the efficiency of labor. And the circumstances affecting efficiency seem capable of classification under two heads: first, the capacity for labor which a people possesses, and secondly, the intensity with which their labor is applied. But capacity for labor is affected by the amount of necessaries consumed, and among necessaries in this connection must be included a certain amount of leisure. this category must be placed the time required for education or training, and for any given person or group of persons, at least up to a certain point, this must be the more prolonged, the higher is the pitch to which their faculties are to be developed. Also it may be assumed that intense labor is more exhausting than that which is not intense, from which circumstance we may conclude that the more intensely people exert themselves, the more rest they will require in order to

1 The definition of necessary consumption in the first part of this essay had reference only to the capacity for labor. But if the conception be extended to include leisure as above defined, this will exclude from that category any capacity for labor which will not actually result in a corresponding increase in production, since it may be presumed that all capacity for labor takes time to acquire.

prevent their capacity for labor in the future from being impaired. On these combined grounds it may be laid down that the amount of time which must be regarded as necessary leisure varies with the efficiency of labor.

It follows from the above definitions that the amount of time devoted to labor varies inversely as the amount of leisure which people allow themselves. Altho, therefore, part of this leisure is a condition of efficient labor, we may yet say that the annual product tends to vary inversely with the amount of superfluous leisure enjoyed.1

Now, it may be urged, if we make the supposition that, in a general way, the elasticity of the demand of consumers for all superfluities is greater than unity; and if all commodities and services which can be consumed as superfluities are taxed, superfluous leisure alone remaining untaxed, will not this induce people to substitute the latter for the former, and hence to perform less labor? I suppose this must be admitted to be possible. On the other hand if the elasticity of the demand for superfluities in general is less than unity, a rise in the price of luxuries would tend to make people work harder. Here habit, by making demand more insistent, would tell in favor of action.

Again, how far is it true that superfluous leisure would remain untaxed? Luxuries are for the most part enjoyed during periods of leisure, so that by discouraging them the government would be making leisure less attractive, which would so far tend to make labor

more so.

It may be that some people would restrict their consumption of necessaries for the sake of continuing their usual enjoyments, which would injuriously affect their capacity for labor. The opposite effect is also possible,

1 The reasoning in the remainder of this essay is due to suggestions for which I must acknowledge my obligation to Professor Taussig.