On the Science of Economics and its Relation to Free Exchange and Socialism
by Henry Dunning Mac Leod
ALL persons who are interested in the so-called science of Economics know only too well the melancholy and deplorable state into which it has fallen. It is such a chaos of contradictions that very many persons refuse to believe that there is any such science at all.
The cause of this lamentable confusion is that there are fundamental concepts of it, which are wholly irreconcileable with each other, just as there have been in the earlier and imperfect stages of most other sciences, such as astronomy, optics, and many others.
A science is a body of phenomena all relating to a single fundamental general concept. Thus dynamics is the science which treats of the laws governing the phenomena of force; optics is the science of the laws governing the phenomena of light; and so on. Economics is often said to be the science of wealth. What, then, is wealth? What is that quality of things which constitutes them wealth? Economies can only be the science of the laws which govern the phenomena relating to that quality which constitutes things wealth.
It was long an assured opinion in this country that Adam Smith was the founder and creator of political economy and free trade. A once prominent politician is reported to have said that political economy and free trade sprang perfect and complete from the brain of Adam Smith, as Minerva did from the head of Jupiter. Such ideas, however, show a complete ignorance of the history of Economics, and are now quite abandoned by all persons who have studied the subject.
In fact, it is contrary to nature that it should be so. Great sciences are not created by a book. They invariably arise from small beginnings, just as the mighty Danube flows from a spring in the garden of a German burgher. Men begin to observe certain phenomena connected with some single general fundamental concept. Then others extend it to a larger number of phenomena based on the same concept: and so at last, by the contributions of an increasing number of observers, it grows into a great science, just as the Danube from a tiny spring is swollen into a mighty river by multitudes of tributary streams.
Every one with a scientific instinct can at once perceive that Adam Smith's work is pervaded by a combative air, that every part of it is evidently written at something preceding, and that it was intended to overthrow a prior system.
As a matter of fact, Economics was founded as a science by an illustrious sect of philosophers in France in the middle of the last century, who were the first to perceive and declare that there is a positive and definite science of Economics, based upon demonstrative reasoning, in the same way as the physical sciences.
The science of Economics, like medicine, has arisen out of the calamities and misery of mankind, caused by the violation of true economic principles; and every advance in economic theory has originated in some great pressing practical evil.
The first department of Economics to be reduced to scientific principles was that of money. Charlemagne caused the pound weight of silver to be adopted as the standard of money in all Western Europe; and he divided it into 240 pennies. The mediaeval sovereigns clipped, curtailed and debased their coinages, but declared that the clipped and debased coin should pass at the same value as good coin. Philip le Bel was particularly conspicuous for issuing debased coin, for which he was consigned to the Inferno by Dante. This degradation of the coin produced such intolerable evils and misery to the people that Charles V of France referred the matter to one of his councillors, Nicolas Oresme, who addressed to him a treatise on money, which may be said to stand at the head of modern Economics. In consequence of similar evils in Poland, Sigismund I requested Copernicus to draw up a treatise on the subject. This has recently been discovered and printed in the new edition of his works. These two treatises laid down the true principles of money, which are now accepted by all sound Economists.
For many centuries all governments enacted laws regarding trade without suspecting that there are any fixed principles on the subject. Sometimes they favoured free trade, sometimes protection; sometimes they cockered up one species of industry, sometimes another, according to the whim of the moment. They never seem to have had the faintest idea that the true principle was to leave every industry alone, and allow each one to develop itself according to its natural tendencies.
Every one has heard of the glories of the reign of Louis XIV; but few probably have any idea of the terrible reaction, and the incredible disasters and misery of the end of his reign. These may be learnt from contemporary writers and also from Taine's History of the Ancient Régime. Soon after the death of Louis XIV, John Law was allowed to try in France his scheme of paper money, which had been previously rejected by the Scottish Parliament. The result was that disastrous catastrophe known by the name of the Mississippi Scheme. In 1749 Turgot, then a young man of twenty-two, began to reflect upon these terrible calamities, and endeavoured to discover the error of Law's system. Turgot associated with himself Gourlay, an eminent merchant who was a keen advocate of free trade, Quesnay the king's physician, Le Trosne, Mirabeau père, the Abbé Baudeau, and many others, who formed themselves into a powerful sect under the name of the 'Economists.' These men were the first to perceive and declare that there is a positive and definite science which may be named Economics.
They found France divided into a number of separate and semi-independent provinces,
each of them surrounded with customhouses, which were an intolerable barrier to commercial intercourse; every species of industry was loaded with minute and oppressive regulations; a very large portion of the human race was groaning under the bonds of slavery; in every country persons were relentlessly persecuted for their religious opinions. The Economists held that these commercial, personal and religious oppressions were contrary to the fundamental rights of mankind.
They proclaimed as the indefeasible natural rights of mankind the freedom of person, the freedom of opinion, and the freedom of exchange or of commerce.
Quesnay (who was the real founder of the science) and his followers, reflecting on the intolerable misery they saw around them, struck out the idea that there must be some great natural science, some principles of eternal truth founded on nature itself, with regard to the social relations of mankind, the violation of which was the cause of the hideous misery of their native land. The name Quesnay first gave to it was natural right; and his object was to discover and lay down an abstract science of the natural rights of men in all their social relations. This science comprehended their relations towards the government, towards each other, and towards property. The term politique in French might in a certain way have expressed this science; but the word was so exclusively appropriated to the art of government that they adopted for it the name 'political economy,' or 'economical philosophy'; and hence they were named 'the Economists.' Dupont de Nemours, one of their number, proposed the name of physiocratie, or the government of the nature of things; and hence they were often called the physiocrates; but the word, having been appropriated to certain doctrines of the sect which are now shown to be erroneous, and abandoned by all subsequent Economists of note, has fallen into disuse, and the term political economy, or Economics, which is now more commonly used, has survived.
Now it is evident that this wide and extensive scheme comprehends not only a single science, but a whole multitude of sciences; and we shall henceforth confine ourselves strictly to that part of it which relates to commerce or exchanges.
Quesnay's first publication, Le Droit Naturel, contains a general inquiry into these natural rights; and he afterwards in another work, called Maximes Générales du Gouvernment Économique d'un Royaume Agricole, endeavoured to lay down, in a series of thirty maxims or general principles, the whole basis of the economy of society. The twenty-third of these declares that a nation suffers no loss by trading with foreigners; the twenty-fourth declares the fallacy of the balance of trade; the twenty-fifth says: 'Let entire freedom of commerce be maintained; for the regulation of commerce, both internal and external, the most sure, the most exact, the most profitable to the nation and to the State, consists in entire freedom of competition.' These maxims entirely overthrew the prevailing system of political economy. This was the work of Quesnay and his followers; and, notwithstanding certain errors and shortcomings mentioned below, they are unquestionably entitled to be acknowledged as the founders of political economy and free trade.
We may now give a brief abstract of the doctrine of the Economists, by which they vindicated the principle of liberty and the right of property.
The Creator has placed man upon the earth with the evident intention that the race should prosper; and there are certain physical and moral laws which conduce in the highest degree to ensure its preservation, increase, well-being and improvement. The correlation between these physical and moral laws is so close that if either be misunderstood, through ignorance or passion, the others are also. Physical nature, or matter, bears to mankind very much the relation which the body does to the mind. Hence the perpetual and necessary relation of physical and moral good and evil to each other.
Natural justice is the conformity of human laws and actions to natural order; and this collection of physical and moral laws existed before any positive institutions among men. And while their observance produces the highest degree of prosperity and well-being among men, the non-observance or transgression of them is the cause of the extensive physical evils which afflict mankind.
If such a natural order exists, our intelligence is capable of understanding it; for if not, it would be useless, and the sagacity of the Creator would be at fault. As, therefore, these laws are instituted by the Supreme Being, all men and all states ought to be governed by them. They are immutable and irrefragable, and the best possible laws; they are necessarily the basis of the most perfect government, and the fundamental rule of all positive laws, which are only for the purpose of upholding that natural order which is evidently the most advantageous for the human race.
The evident object of the Creator being the preservation, the increase, the well-being, and the improvement of the race, man necessarily received from his origin not only intelligence, but instincts conformable to that end. Every one feels himself endowed with the triple instincts of well-being, sociability, and justice. He understands that the isolation of the brute is not suitable to his double nature, and that his physical and moral wants urge him to live in the society of his equals in a state of peace, goodwill and concord. He also recognizes that other men, having the same wants as himself, cannot have less rights than himself, and therefore he is bound to respect their right, so that other men may observe a similar obligation towards him.
These three ideas—the necessity of work, the necessity of society, and the necessity of justice—imply three others—liberty, property and authority—which are the three essential terms of all social order.
How could man understand the necessity of labour or obey the irresistible instinct of self-preservation without perceiving at the same time that the instrument of labour, the physical and intellectual qualities with which he is endowed by nature, belong exclusively to himself, that he is master and the absolute proprietor of his own person, that he is born and should remain free?
But the idea of liberty cannot spring up in the mind without associating with it that of property, in the absence of which the first would only represent an illusory right without an object. The freedom the individual has of acquiring useful things by labour includes necessarily the right of preserving them, of enjoying them, and of disposing of them without reserve, and also of bequeathing them to his family, who prolong his existence indefinitely. Thus liberty conceived in this manner involves and is dependent on the idea of property, which may be conceived in two aspects, as it regards moveable goods, and as it regards the earth, which is the source from which labour ought to draw them.
At first property was principally moveable; but when the cultivation of the earth was necessary for the preservation, increase, and improvement of the race, individual appropriation of the soil became necessary, because no other system is so proper to draw from the earth all the mass of utilities it can produce; and secondly, because collective property would have produced many inconveniences as to the sharing of the fruits, which would not arise from the division of the land, by which the rights of each are fixed in a clear and definite manner. Property in land is, therefore, the necessary and legitimate consequence of the principle of personal and moveable property. Every man has, therefore, centred in him by the laws of Providence certain rights and duties, the right of enjoying himself to the utmost of his capacity, and the duty of respecting similar rights in others. This perfect protection of reciprocal rights and duties conduces to production in the highest degree, as well as to the greatest amount of physical enjoyments. Thus the Economists established freedom and property as the fundamental right of mankind—freedom of person, freedom of opinion, freedom of exchange or commerce; and the violation of these they maintained to be contrary to the laws of Providence, and therefore the cause of all evil to men.
We must now examine what their doctrines were regarding exchanges or commerce.
While they expressly declared that exchanges, or commerce, were one of the departments of economical philosophy, they most unfortunately devised another and alternative name for it, which being misinterpreted by a subsequent very distinguished French writer, has been the cause of all the mischief and confusion of the science in recent times.
They termed the department of economical philosophy relating to exchanges, or commerce, the 'production, distribution and consumption of wealth.' It might not be very apparent to the general reader how in the mind of the Economists these two concepts are identical, and meant exactly the same thing; and we must now explain the interpretation of this latter expression given to it by its authors.
They defined the word wealth to mean the material products of the earth which are brought into commerce and exchanged, and those only. The products of the earth, which were consumed by their owners without an exchange, they termed biens, but not richesse. They steadfastly refused to admit that labour and credit are wealth; because they alleged that this was to allow that wealth can be created out of nothing. They constantly maintained that man can create nothing, and that ex nihilo nihil fit.
By production they meant obtaining the rude produce from the earth and bringing it into commerce.
But this rude produce is scarcely ever fit to be used by men. It has to be fashioned and manufactured in a multitude of ways, to be transported from place to place, and perhaps sold and resold more than once before it is ultimately purchased for use and enjoyment.
All these intermediate operations of manufacture, transport and sale between the original producer and the ultimate purchaser the Economists termed traffic, or distribution.
The final purchaser, who bought the product for his own use and enjoyment, and so took it out of commerce, they termed the acheteur-consommateur; because he consummated, or completed, the operation.
Consommation, in the language of the Economists and of all French writers before them, meant simply purchase, or demand; it involved no idea of destruction.
The consommateur, or consumer, was the person for whose benefit all the preceding operations took place. Production was only for the sake of consumption, or demand; and consumption, or demand, was the measure of reproduction; because products which remain without consumption, or demand, degenerate into superfluities without value.
The complete passage of a product from the original producer to the ultimate consumer, or purchaser, through all its intermediate stages, the Economists termed commerce, or an exchange; and as any man who wished to consume, or purchase any product, must have some product of his own to give in exchange for it, he was also a producer in his turn. Hence, in an exchange, things are produced, and consumed or purchased, on each side. An exchange has only two essential terms—a producer, or seller, and a consumer, or purchaser. These are the only two persons necessary to commerce; and they often exchange directly between themselves, without any intermediate agents.
Hence the 'production, distribution and consumption of wealth,' as defined by the Economists, meant simply the commerce, or the exchange, of the material products of the earth, and of these only.
But distribution was often used as synonymous with consumption. Hence 'production, distribution and consumption,' 'production and distribution,' and 'production and consumption' all meant exactly the same thing—the commerce or exchange of the material products of the earth.
It must be carefully observed that these expressions were one and indivisible; and they must not be separated into their component terms. They all meant simply supply and demand.
The Economists, by restricting the term wealth to the material products of the earth, made materiality and labour the accessories or accidents of wealth; but they did not make them the principle, or essence, of wealth. The essence, or principle, of wealth they held to consist in exchangeability; because they expressly excluded the material products of the earth which were not brought into commerce and exchanged from the term wealth.
Now, considering that the Economists admitted and declared that there is a positive and definite science of exchanges or commerce, how is it possible to restrict it to the commerce or exchanges of material products only? It must evidently and necessarily comprehend all exchanges, or all commerce in its widest extent and in all its various forms.
There is a gigantic commerce in labour; there is a colossal commerce in rights and rights of action, credits, or debts. How is it possible to exclude the commerce in labour and the commerce in rights and rights of action from the general science of exchanges, or commerce?
The basis of the science of Economics is the meaning or definition of the term WEALTH. The Economists admitted that exchangeability is the real essence of wealth; but they clogged it with the limitation that it only applied to material products, and denied it to labour and credit, which equally possess the quality of exchangeability. But this is contrary to the fundamental principles of natural philosophy. Bacon long ago pointed out that when the quality or the concept which is at the basis of a science is once determined, all quantities whatsoever which possess that quality, however diverse in form they may be, must be included among the elements or constituents of the science. This is what Plato calls the one in the many, i.e. the same quality appearing in many different forms. It would be just as rational to restrict the term force to the force of men and animals, and to exclude gravitation from the term force.
Ancient writers for 1,300 years unanimously held that exchangeability pure and simple is the sole essence and principle of wealth; that everything which can be bought and sold, or exchanged, is wealth, whatever its nature or its form may be.
Aristotle defined wealth to be all things whose value can be measured in money. Here we have a fundamental concept, of the widest generality, and fitted to form the basis of a great science. Out of this single sentence of Aristotle the whole Science of Economics is to be evolved, just as the great oak is developed out of a tiny acorn.
In an ancient anonymous dialogue Socrates is made to show that money is only wealth where and when it can be exchanged, or purchase other things; where it cannot be exchanged, or purchase other things, it is not wealth. He shows that anything which can be exchanged for, or purchase other things like money, is wealth, for just the same reason. He says that persons gain their living by giving instruction in the sciences. Therefore, he says, the sciences are wealth— and that those who possess them are wealthier—. This is the first recognition, of which I am aware, that labour is wealth.
Demosthenes showed that personal credit is wealth; because a merchant can purchase goods with his credit equally as with money.
The Roman jurists showed that rights and rights of action, such as credits or debts, are wealth, because they can be bought and sold.
Thus, after 800 years from the time of Aristotle, the Roman jurists completed the science, because they completed the number of its constituent elements. There is nothing which can be bought and sold or exchanged, or whose value can be measured in money, which is not of one of these three forms, or orders of quantities: (1) material products; (2) personal qualities, i.e. labour which can be exchanged for wages, and character which may entitle to credit; and (3) abstract rights.
There is no trace in ancient writers of any such doctrine as that labour and materiality are necessary to wealth and value. Thus they answered, 2,100 years ago, the doctrine of the Economists that labour is necessary to wealth, because they declared that personal qualities and abstract rights are wealth, and they recognized three orders of economic quantities. These can be exchanged against one another in six different ways; and these six different kinds of exchange constitute commerce in its widest extent and in all its forms and varieties.
The relation of these quantities to each other is termed their value; and the laws of natural philosophy show that there can be only one general law of value, or a single general equation of Economics.
We have thus a definite body of phenomena, all based upon a single general concept; separate and distinct from all other phenomena, and circumscribed by a definition, which constitutes a science, and may be designated as pure, or analytical, Economics.
Thus, if any one had conceived the idea of describing the mechanism of these exchanges, or of commerce, Economics might have been the eldest born of all the sciences; but there was no science in existence in those days to serve as a model for the creation of a science of Economics; and a long and dreary interval had to elapse before the moderns reached the perfection of the ancients, all to redound to the immortal glory of Bacon, who was the first to point out that the physical sciences must first be created to serve as models before it is possible to create the sciences of society.
For many centuries it was held that money alone is wealth; and we must briefly state some of the consequences which flowed from this doctrine, which produced innumerable wars and other calamities.
A strange consequence flowed from the doctrine that only money is wealth. It was held for many centuries that in an exchange what one side gained the other lost. What the persons who maintained this doctrine would have said to an exchange of products it would be difficult to imagine. They quite forgot that when persons bought things with money they obtained a satisfaction for their money. Nevertheless, for centuries, the wisest statesmen and philosophers maintained that in commerce what one side gained the other lost. They held that foreign commerce which did not produce an importation of money was a loss to the nation. Accordingly, in every country, laws were made to encourage the importation of money and to prohibit its export. This doctrine was the cause of innumerable wars. J. B. Say, writing in the first quarter of this century, says that during the last three hundred years fifty had been spent in wars directly arising out of the dogma that money alone is wealth. About the end of the seventeenth century it began to be perceived that it was absurd to maintain that money alone is wealth; and the term was enlarged to include all the material products of the earth which conduce to man's subsistence and enjoyment. But still they held to the doctrine of the balance of trade, which was based on the assumption that, in every transaction of commerce, what one side gained the other lost.
The first merit of the Economists was that they entirely overthrew the doctrine of the balance of trade; and they made a considerable advance in Economics by maintaining that in commerce neither side gains or loses.
The Economists maintained that labour engaged in agriculture is the only form of productive labour; because, they alleged, it is the only one in which the value of the produce exceeds the cost of production. The excess of the value of the produce over that of the cost of production they called the produit net; and they maintained that, as this is the only increase of wealth to a country, all taxation should be levied out of the produit net of the agriculturists, and that all other classes should go free.
They denied that commerce or manufactures can enrich a nation; because, they alleged, in commerce equal values are always exchanged for equal values—and if the values exchanged are always equal, how can there be any profit on either side? They held that the only use of commerce is to vary and multiply the means of enjoyment, but that it does not add to the national wealth; or, if it does, it is only by giving a value to the products of the earth which might otherwise fail in finding a market. They contended also that, as all exchanges are merely equal value for equal value, the same principle also applies to sales, and therefore that the gains, which traders make, are no increase of wealth to the nation.
With such views they held that internal commerce conduces nothing to the wealth of the nation, and foreign commerce very little. They called foreign commerce only a pis aller. One very important truth, however, they perceived. They saw that money is the most unprofitable merchandise of any to import, and that merchants never import money when they can import products. Therefore they called the import of money only the pis aller of a pis aller.
They contended that the labour of artisans in manufactures is sterile or unproductive, because, though this labour adds to the value of the product, yet during the process of the manufacture the labourer consumes his subsistence; and the value added to the product only represents the value of the subsistence destroyed during the labour. Hence there was a transference of the value of the labourers' subsistence into an equivalent value of another kind; but no production of wealth.
They held that all the costs of trafficking come out of the profits of the producers and the consumers, which, though gains to them, are not profit to the nation; and therefore that the State ought not to tax them.
All classes of the community, except the agriculturists, they denominated sterile or unproductive.
These are the doctrines which the Economists maintained, with long and repeated arguments, in defiance of all opposition; but how men of the ability of the Economists could maintain that a country cannot be enriched by commerce or manufactures, with the examples of Tyre, Carthage, Venice, Florence, Holland, England, and hosts of others before them, is incomprehensible. With such patent glaring facts before them, it is surprising that they were not led to suspect the truth of their reasonings. It is one of those aberrations of the human intellect which we can wonder at, but not explain.
These doctrines provoked a reaction: men who were labouring in all sorts of vocations were roused to indignation, by being stigmatized as sterile and unproductive. Men were astounded to hear that a nation cannot be enriched by commerce or manufactures.
Nevertheless, the doctrines of the Economists seemed to be logically unassailable, provided that their fundamental dogma was right. But the consequences they drew from it were so startling, and so contrary to patent undeniable facts, that clear-sighted men began to inquire—Is it true that in commerce neither side gains?
Two writers entered the field against the Economists—Condillac in France, and Adam Smith in England. Both published their works in the same year, 1776. They overthrew the doctrine that in commerce neither side gains, and maintained that in commerce both sides gain—a truth that was seen by anticipation by the great Emperor Frederick II, in the thirteenth century; and by Boisguillebert, the morning star of Economics, in the beginning of the eighteenth century. In this brief sketch we have no space to say much about Condillac, because his explanation is not very satisfactory, and his work never attracted the slightest attention till very recently.
This, then, was the real origin of Adam Smith's work. He was neither the founder and creator of Economics nor of free trade. Economics, as a science, sprang out of the misery and calamities of the French people, and the Economists were the first to perceive and declare that there is a positive and definite science of Economics; and that, consequently, it must be constructed by exactly the same methods by which all other sciences have been created—namely, by settling its fundamental general concepts and definitions; by a strictly accurate statement of facts and phenomena; and by reducing all the phenomena to a single general law. Economics is the science of exchanges, or of commerce; and therefore the details of commerce are the phenomena of Economics. Nor was Adam Smith the founder of free trade. The Economists published their code of doctrine in 1759, in which free exchange was asserted to be one of the fundamental rights of mankind; and there were numerous and powerful advocates of free trade in Italy and Spain fifteen years before Adam Smith published a line. Turgot carried out immense reforms in the direction of free trade in 1774. How did these writers and statesmen learn the doctrines of free trade from Adam Smith, when his work was not published till 1776? The fact is that Adam Smith did not attempt to disprove the theory of protection and prohibition; he assumed free trade as the doctrine approved of by all enlightened minds. Adam Smith has done sufficient services himself to Economics, and his reputation does not require the advances and services done by other persons to be attributed to him.
Adam Smith, then, attacked the doctrine of the Economists, that in commerce neither side gains or loses. By a course of masterly reasoning, far superior to that of Condillac, but too long to be set out here, he demonstrated that in commerce both sides gain; and, therefore, that nations, in multiplying their commercial relations, multiply their profits and multiply wealth. Even if Adam Smith had never done anything else for Economics than this, he would have been entitled to immortal glory. By this single demonstration he brought about a change in public opinion and in international policy which has for ever removed a perennial source of war from the world. Nations learnt that instead of destroying each other, and trying to ruin each other's commerce, it was their interest to promote each other's prosperity and to multiply their commercial relations with each other.
Adam Smith next proceeded to demolish the doctrine that neither commerce nor manufactures enrich a nation. He demonstrated that both commerce and manufactures are productive of wealth, and enrich a nation.
Furthermore, he burst the bonds of the narrow dogmatism of the Economists, that the material products of the earth alone are wealth. For under the title of fixed capital he includes the 'natural and acquired abilities of the people'; and under the title of circulating capital he includes bank notes, bills of exchange, &c., which are mere abstract rights or credit, and types of vast masses of other incorporeal property. Hence he fully recognized the existence of the three orders of economic quantities, as the ancients had done.
But the utility of his work is sadly marred by the total want of clear, distinct and uniform fundamental concepts or definitions. He entitles his work, An Inquiry into the Nature and Causes of the Wealth of Nations; but he nowhere gives a clear and distinct definition of what wealth is. In the Introduction he says that the real wealth of a country is the annual produce of 'land and labour.' But he entirely omits exchangeability, which was the quality which the Economists, in agreement with the ancients, recognized as the essence of wealth. But Smith's definition is ambiguous. It is not clear whether he means the produce of land and the produce of labour, or the produce of 'land and labour' combined. It is probable that he meant the last; and so he has been generally understood. Now, such a definition is manifestly too wide and also too narrow; because there are multitudes of things which are the produce of 'land and labour' which are not exchangeable, and therefore not wealth; and there are multitudes of things which are exchangeable, and therefore have value and are wealth, which are in no way the annual produce of 'land and labour.'
Thus, after proceeding some length, he classes the 'natural and acquired abilities of the people' as fixed capital and as national wealth. How are the 'natural and acquired abilities of the people' the annual produce of 'land and labour'? Further on he classes bank notes, bills of exchange, &c., as circulating capital. How are these, which are mere incorporeal rights, the annual produce of 'land and labour'? It is evident that these ideas are absolutely incongruous. This indefiniteness of view we might have shown at much greater length; but these instances are sufficient to prove that his ideas of wealth in different parts of his work are absolutely inconsistent.
Furthermore, after inculcating for several hundred pages that value and wealth require the combination of 'land and labour,' he admits that if a thing is not exchangeable it is not wealth. He says that if a guinea could not be exchanged for other things it would not be wealth any more than a bill upon a bankrupt. Thus, after all, he recognizes that exchange-ability is the real essence of wealth. By this single sentence he upsets the whole theory which he had been so elaborately building up.
Keen observers have long ago seen that the first half of Adam Smith's work is entirely inconsistent with the latter half; because in the first half labour is considered as the essence of value and wealth, and in the second half exchangeability, i.e. demand, is admitted to be the real essence of value and wealth.
Ricardo adopted the first half of Adam Smith's doctrine, and founds all his ideas of value upon labour. Whately adopted the latter half, and adopts exchangeability pure and simple, and says that Adam Smith's title only denotes the subject-matter of his work; but that Economics is the science of exchanges, or of commerce.
Adam Smith's first two books are upon production and distribution; but he explains that that means commerce, and he says that his purpose is to examine the causes of the price of things; in other words, the theory of value; and McCulloch says in a note that it might be called the science of values.
An acute writer pointed out long ago that the great defect of Adam Smith is the total want of unity of doctrine, and the want of uniformity of principle. He never had the least idea that the phenomena of value must be reduced to a single general law; but he catches at any theory which seems to explain the cases which for the moment he is considering. The consequence is that his theories are utterly inconsistent with each other; and of course, as they are a series of contradictions, they must sometimes be right. Moreover, though his work abounds with shrewd observations, it is entirely wanting in the very first requisite of every work of science, a clear and accurate definition of its subject-matter. Consequently, though Adam Smith did great and solid services in overthrowing the prejudices and errors of his own day, his work is in no way fitted as an exposition of the actual science at the present day; in fact, most of the great and complex problems, which are of pressing importance at the present day, had not arisen when he died.
Now, from the foundation of Economics as a science up to the time of Whately, who was Professor at Oxford in 1830, there was in this country a perfect uniformity of opinion as to the general nature of the science. The Economists expressly declared that it is the science of exchanges, or of commerce, or the theory of value: and so it was understood to be by the writers in France who did not enrol themselves in the sect of the Economists; by Condillac, Adam Smith, Ricardo, McCulloch, Whately, and all persons who were interested in it. And, however imperfect it might have been, or however many defects it may have had, these were all capable of being rectified. If this concept had been steadily adhered to, and the same labour had been bestowed upon it, to rectify and develop it, by the same methods by which all other sciences have been created, it might long ago have been erected into a positive and definite science, like any of the physical sciences.
But, most unfortunately, the science was thrown into utter confusion, and its progress retarded for a long time, by a distinguished French writer, J. B. Say, about the beginning of this century. He adopted the second and alternative definition of the science which the Economists most unguardedly and unadvisedly suggested. Moreover, he completely changed the meaning of its fundamental terms; by which he ruined Economics as a science, and has been the cause of all the subsequent confusion and of the deplorable state in which it is at present. From this state of chaos it has only begun to recover in recent times. Those who have examined the matter closely are beginning to see that the system of J. B. Say is absolutely unworkable as a practical science, and that in order to construct Economics as a positive science it is indispensable to revert to the original concept of it as the science of exchanges or of commerce.
While the Economists declared that the expression 'production, distribution and consumption' of wealth is one and indivisible, and meant nothing but exchange, or commerce, J. B. Say broke it up into its constituent terms and completely changed their meaning. While the Economists defined production to mean bringing the rude produce of the earth into commerce, Say defined it to mean bestowing value on a product. While the Economists defined distribution to mean the intermediate operations between production and consumption, and those only, Say treats of distribution in such a nebulous way that it is difficult to make out distinctly what be means by it. The Economists and Adam Smith used the word consumption (consommation) to mean purchase pure and simple, or demand; Say defined it to mean the destruction of value, and says that all consumption is a destruction of value. The absurdity of this is patent. When a person purchases (i.e. consumes, in the language of the Economists and Adam Smith) a diamond ring, a piece of plate, a picture, a statue, or a book—does he thereby destroy them? The fact is that consumption, which Say defined to mean destruction, is no part of Economics at all. For Economics is limited to the phenomena of exchange.
The Economists steadfastly refused to admit that labour and credit are wealth. But on the first page of his work Say classes titres de créance, bank notes, bills of exchange, the funds, &c., as wealth; and further on includes many other kinds of incorporeal property under the title of wealth. These are all abstract rights. Say also, like Adam Smith, includes all the industrial faculties of the people under the definition of wealth and capital.
Now, how can we speak of the 'production, distribution and consumption' of bank notes, bills of exchange, the funds, shares in commercial companies, copyrights, patents, and the other forms of incorporeal property?
How can we speak of the 'production, distribution and consumption' of labour of different kinds, of knowledge, and other intellectual qualities, and of personal credit?
Whereas we speak of the supply and demand, and the value of all these things; and they are all the subjects of exchange or commerce. The whole operations of mercantile credit—the colossal system of banking—and the foreign exchanges—are all sales, or exchanges, and integral departments of commerce: but how can their mechanism and phenomena be explained under the expression the 'production, distribution and consumption of wealth'?
This separation of the component terms of the expression 'production, distribution and consumption,' and their treatment in separate chapters, utterly destroys the character of Economics as a science, and utterly breaks the back of the theory of value, which is the very essence of Economics.
Say's books abound in valuable observations, but his system of Economics is absolutely unworkable for any practical purposes. Say totally forgot to observe that the expression 'production, distribution and consumption of wealth' was rigorously restricted by the Economists to the exchanges, or commerce, of material products only, and, even as applied to them, was a very awkward concept; and that labour and credit were entirely excluded from it. But when labour and credit are admitted to be wealth by Adam Smith and Say, and introduced into Economics by them, the expression becomes mere unintelligible jargon.
J. S. Mill was the friend and pupil of J. B. Say, and modelled his ideas very much on those of Say. Nevertheless, he has considerable divergences from him. He saw that consumption, in the sense of destruction, is no part of Economics; and he divides his work into production, distribution and exchange. But production and distribution, in the language of the Economists and Adam Smith, was exchange—so that Mill's work is really simply exchange and exchange.
But as the basis of the whole science is the word wealth we have to see what meaning Mill gives to it.
In his preliminary remarks he says that it is no part of the design of his treatise to aim at metaphysical nicety of definition where the ideas suggested by a term are already as determinate as practical purposes require, and that every one has a notion sufficiently correct for common purposes of what is meant by wealth. It somewhat surprises us to hear this. For many centuries nations have been quite unable to agree as to what wealth is; and many bloody wars have been waged because of quarrels which rose directly out of a mistaken conception of its meaning; vast quantities of mischievous legislation have been enacted as the result of erroneous theories as to its nature and origin; and at the present moment the widest differences of opinion prevail among Economists as to what should be included under the term.
One of Mill's definitions is as follows: 'Everything forms part of wealth which has power of purchasing.' This exactly agrees with the definition adopted 1,300 years ago by the ancients, and includes everything which can be bought and sold, or exchanged, whatever its nature or form may be; and evidently comprehends all the three orders of economic quantities.
Now, let us see how far Mill is consistent with himself. After giving this wide and general definition he shortly afterwards attempts a second, and identifies the 'production of wealth, the extraction of the instruments of human subsistence and enjoyment from the materials of the globe.' Mill admits that industrial qualities are wealth. Now, how are industrial qualities extracted from the materials of the globe? Mill admits that personal credit is wealth. How is a merchant's or banker's credit extracted from the materials of the globe? Mill admits that a credit given by a solvent banker or merchant is of the same value as gold, and therefore wealth. How is a credit—a mere abstract right of action—extracted from the materials of the globe? Elsewhere Mill speaks of wealth as being the product of land, labour and capital; but how are personal qualities and abstract rights the product of land, labour and capital? We might point out several other self-contradictions of Mill on the nature of wealth; but that would be too wearisome for our readers. Mill says that every one has a sufficiently correct knowledge of the meaning of wealth; and now it is seen that he has no consistent ideas on the subject himself.
The fact is that Say and Mill have brought the science to a complete impasse. The expression 'production, distribution and consumption of wealth' was expressly restricted to the commerce, or exchanges, of material products only; and when we introduce personal qualities and abstract rights into the science, as Adam Smith, Say and Mill have rightly done, it throws the whole subject into irremediable confusion. There is no possibility of erecting the 'production, distribution and consumption of wealth' into any sort of scientific system; if we are to attain that end we must revert to the concept of Economics as the science of exchanges, or of commerce, as the most advanced Economists are now doing: and then we have a body of phenomena as capable of being erected into an exact and definite science as astronomy, optics, or any other.
We shall now see the bearings of the doctrines of the Economists and Adam Smith on free trade.
The Economists established it as one of the fundamental rights of mankind that they should be allowed to exchange their products and services freely with one another. Now, it is evident that when men agree to exchange their products and services, the arrangement of the price, or value, of the reciprocal products and services exchanged should be left entirely to the mutual agreement of the parties, the buyer and the seller. Who can tell so well as they what is the real value of the product or service to them? Now, when the price of the product or service is agreed upon and settled between the sole parties who are interested in it, suppose that some artificial force is suddenly directed against one of them, beyond what arises from their natural position, to oblige him to yield up more of his property to the other than he would do if the arrangement were left perfectly free—such a force suddenly put at the disposal of either party, whatever its nature be, whether moral or material, would clearly be unjust in its very nature, and would be nothing more than a license enabling one party to rob the other.
It may be asserted in the broadest possible terms that it is the natural right of every man to employ his industry and the talents which Providence has given him in the manner which he considers to be most for his own advantage, so long as it is not to the injury of his neighbour. He has the natural right to exchange the products of his industry with those of any other person who will agree to such exchange, to buy from whom he will, and to sell to whom he can. A law which seeks to check the course of this free exchange is inherently wrong, and, because inherently wrong, inherently mischievous. And, though it may be permitted to take something from him for the necessities of the State, which is the guardian of the interests of all, a law which deprives one class of the community of a part of their property in order to bestow it upon another class is an intolerable violation of natural justice. If a person forcibly takes away a part of his property from another person without any equivalent it is simply robbery. In the same way if a man wishes to sell any article and can by any means force the buyer to pay a higher price for it than he otherwise would, it is simply despoiling him of part of his property, and appropriating it to himself.
Let us put this in a familiar way. Suppose that Richard Stubble lives in the country and grows corn, and that his friend John Smith carries on his business in town. Having some corn to sell, Richard proposes to have a transaction with his friend John. The free marketable value of the corn is 40s. per quarter. But suppose that Richard has about a hundred times more influence over the legislature than John has, and he gets them to pass a law by which he can compel John to pay him 50s. for what he could buy elsewhere for 40s. In that case he deprives John of 10s., representing so much of his industry, for which he gives him no equivalent, and takes it to himself. In the mediaeval ages great lords and barons used to keep armed retainers whom they employed to plunder any unfortunate travellers who came within their power. In the nineteenth century the governing classes passed laws by which they forced traders to surrender to them a considerable portion of their property against their will. Where is the moral difference between the two cases? When one man forcibly and unjustly deprives another man of his property, the precise method he may adopt for his purpose does not materially affect the moral aspect of the thing.
It is no argument to say that till comparatively recent times the protective system was established in this country, that it is still in force in foreign countries, and that it was supported and adopted by men of unblemished character and integrity. It is absolutely necessary that we should not suffer our estimation of the moral character of men to influence our view as to the soundness of their opinions. There never prevailed a pernicious error in the world which was not supported by the authority of men of eminent personal virtue. It is, unfortunately, through the very excellence of the men who adopted them, that most of the erroneous principles which have done so much mischief in the world derived their fatal influence. The real question is, not whether the men who hold certain opinions are estimable, but whether the opinions themselves are right or wrong. The fact is that questions are examined with greater care and more searching criticism nowadays than ever they were before; and by this more comprehensive investigation new considerations and relations are discovered. Arguments drawn from equity, sometimes well founded, sometimes the reverse, are every day obtaining greater influence in legislation; and many of the most beneficial reforms of the present day have been to abolish and set aside the partial and unjust laws which encumbered the statute-book. It is not so very long ago that public opinion in this country tolerated the slave trade, and men of eminent piety saw no harm in stealing men from their homes and transporting them to foreign countries to labour for the benefit of their masters. But public opinion became convinced of its abomination, and not only put it down but declared it to be a great crime. What was considered to be legitimate traffic at the beginning of the century is now declared by law to be piracy, and Englishmen who engage in it are liable to be dealt with as pirates. Little more than one hundred years ago, if a gale came on, it used to be the custom to pitch the negroes overboard like cattle, and this was related in a court of law without eliciting the slightest comment. Now, at bottom there is not much difference in the idea involved in protection and the slave trade. They both seek to effect the same object by somewhat different methods. They are both for the purpose of enabling one set of men to appropriate to themselves the fruits of their neighbours' industry—the one by the coarse method of force, the other by the somewhat more refined method of fraudulent taxation.
Lord Macaulay remarks that the two greatest and most salutary social revolutions which have taken place in England were those which, in the thirteenth century, put an end to the tyranny of nation over nation; and which, a few generations later, put an end to the property of man in man. To these we may venture to add a third, not less great and not less salutary than the other two—that great revolution in the ideas of the age which, in the nineteenth century, abolished for ever the property of one set of men in the industry of another.
The protective system is, therefore, nothing more than a method by which producers endeavour to force consumers to pay a higher price than they otherwise would do for their commodities. Now, let us consider a different case.
Suppose that the legislature, being entirely composed of consumers, should pass a law forbidding the farmers to sell their produce above a certain price, or to export it to foreign countries, where they might find a better market for it: or suppose that laws were made to prevent workmen demanding above a certain rate of wages: or compelling producers to bring their products to market and accept a price for them much below what they would fetch if there were no such law. This would be a case on the part of consumers precisely analogous to what protection is on the part of producers.
This form of injustice did formerly prevail to a certain extent in this country; but it never acquired a distinctive name in our language as it did in France. During the height of the horrors of the French Revolution in 1793, when the insecurity of property had scared away almost all sorts of produce from the market, the French Convention passed the severest laws to limit the price of commodities, forbidding persons to sell their produce above a certain fixed price, whence they were called the laws of the maximum. As might have been foreseen, these laws only aggravated the evil; and their disastrous effects are set forth with great minuteness in the third, fourth, fifth, and sixth volumes of Alison's History of Europe (seventh edition); though the author overlooks the fact that the very same objections apply against the system of protection, of which he is so strong an advocate.
Each of these systems, then, is erroneous, but in opposite directions; that of protection, by which the producer obliges the consumer to buy from him his produce at a price above its natural value; that of the maximum, by which the consumer obliges the producer to sell to him his produce at a price below its natural market value. Now, every law which interferes with the natural course of trade, which attempts to regulate the wages of labour, or the price of commodities, which attempts to meddle with the free exchange of industry or products between man and man, must necessarily fall under one of these forms of error. Every such law sins against natural justice, more or less, in one direction or the other, either as it assumes the form of protection or the maximum; and it is just as clear as the sun at noonday, that the only true, just and proper course is to establish and maintain absolute freedom of exchange.
The fact is, that both of these erroneous systems—protection and the maximum—are forms of socialism; they are both especially designed for the very purpose of interfering with the natural value of commodities. Consequently, whichever of the parties is enabled to compel the other to part with his property at a different rate than what he would, if unconstrained, is able to appropriate to himself a portion of the other's property. And this is the very essence of socialism. Protection is the socialism of producers; the maximum is the socialism of consumers. And nothing is more natural to find than that where the one doctrine is popular with one party the other doctrine is popular with the other party. Of this we may see examples in foreign countries where protection is the creed of the State, and socialism is the alarmingly increasing creed of the people.
Now, the idea which was at the root of all this legislation was that cost of production should regulate value, and that those who had produced articles had the right to have remunerative prices secured to them by law. This idea was a very natural one to occur to producers; and when we think of the condition of Parliament when this species of legislation was in fashion it is not surprising that it prevailed. In the last century, it is true, there were at various times laws enacted for disturbing the natural course of commerce; but the corn laws, which lasted, with various alterations, until Sir Robert Peel abolished them, were made in 1815. Now, what was the state of Parliament at that time? One branch was entirely composed, as it still is, of agriculturists; the other principally of agriculturists, and the nominees of agriculturists, as well as great manufacturers, great merchants, great shipowners, and great producers of all sorts. It was entirely a Parliament of sellers, a vast close and corrupt combination. The great body of the people, i.e. the consumers, had very little influence in the House of Commons. The sellers had a complete monopoly of law-making; and their legislation is exactly what might have been expected. All the producers in turn were permitted to plunder the public for their own benefit. It was nothing more than a gigantic conspiracy of all the sellers against all the buyers. These laws were a striking proof that no single interest can be entrusted to frame laws for the whole community in a spirit of justice; but, to insure that, all interests must have a voice.
These considerations are, we think, sufficient to place the doctrine of free exchange on an impregnable moral basis: and we have now to consider the effect of Adam Smith's demonstration that in commerce both sides gain. This, of all the services he has done to Economics, may be considered his chief achievement, one which alone, from its stupendous effects on national policy, would entitle him to immortal glory.
The essence of Adam Smith's doctrine is that the wider and more extensive commercial intercourse is among nations, the more prosperous and wealthy they all become. Every one, in seeking his own advantage benefits others as well, because if a man wants to acquire any object, he must have to offer in exchange for it something which other people want. Different countries have different advantages for producing commodities for the enjoyment and satisfaction of mankind. It is the interest of the whole world that all commodities should be produced in those places where they can be obtained best and cheapest, and exported to those places where they can only be produced of inferior quality and at a greater cost. Thus the whole world will obtain the greatest amount of enjoyments and satisfactions at the least labour and cost. Thus absolute freedom of commerce and exchange throughout the whole world is the true nature of things. But when hostile tariffs are interposed they act at once as a barrier, and diminish the commercial intercourse of nations to their mutual loss and impoverishment. Protective tariffs are expressly made for the purpose of forcing commerce out of its natural course and development, and that alone is sufficient to condemn them. This is so obvious that we need not dwell on it further.
It is, however, necessary to correct an assertion which is by no means uncommon. It is well known that Cobden in his wonderful campaigns many times declared that if England would lead the way other nations would quickly adopt free trade. At that time there seemed every prospect that this hope would be realized. The success of free trade legislation in England gave an immense stimulus to free trade doctrines in France, the birthplace and cradle of Economics and free trade. In 1846 and 1847 numerous Economists, among whom Michel Chevalier and Frederic Bastiat were the most conspicuous leaders, got up an association and agitation in France on the model of the Anti-Corn Law League in England, and excited immense enthusiasm. The movement had the best prospect of success, when the French Revolution of 1848 broke out and quickly spread all over Europe. That of course extinguished all hopes of free trade. When thrones were rocking to their foundations, and crowns were tumbling in the dust, statesmen could give no attention to Economics. Inter arma Economics silet. And instead of Economics the wildest socialism got the upper hand. The socialists knew instinctively that true Economics was their deadly enemy, so they abolished all the chairs of Economics in France. Under the fatal advice of Louis Blanc they established the Ateliers Nationaux (of which I have given an account in my Dictionary of Political Economy), where every workman was to be provided with work out of the resources of the State. But though the State could pay workmen to produce articles, it could not provide purchasers to buy them: so that, to prevent bankruptcy, the Ateliers Nationaux had to be suppressed at the cost of the most terrible civil war ever waged in any city.
Napoleon III, with the advice and assistance of Rouher, Chevalier, Cobden and Mallet, negotiated a commercial treaty with England in 1860 which considerably relaxed the protective system then established. But this treaty was carried by the autocratic power of the Emperor, and was utterly distasteful to the great mass of the French people, who were now mainly protectionist and socialist, which are one and the same thing. And alas! France, which in the last century was the beacon to spread the light of free trade throughout the world, is now enveloped in the deepest darkness of protection and socialism: nor does there seem any immediate prospect of her emerging from it.
Now, a considerable number of persons, seeing that other nations not only have not followed the example of England, but on the contrary have retrogressed, and are now even more protectionist than they were in 1847, and that, up to this time, Cobden's hopes have been falsified, have maintained that what Cobden regarded only as a hopeful prospect, was in his view the necessary corollary of England's adoption of free trade: and that as other nations have plunged deeper and deeper into protection and socialism, England should do so likewise. They clamour against what they are pleased to designate as one-sided free trade. And under the specious names of reciprocity and fair trade, they are calling for England to retaliate by enacting protective tariffs against those nations which have enacted protective tariffs against her, and so to do unto them as they do unto her. If this were carried out, England would have to revert to the darkest days of protection.
It has been frequently said that if Cobden were alive now, and saw the falsification of his hopes, he would advocate reciprocity and fair trade, as they are pleased to term it. But those who say so never studied Cobden's doctrines. Constantly and uniformly he inculcated that England ought to adopt free trade whether other nations did so or not, and even if all the world were against her, as is pretty much the case at present.
Having a perfect recollection of the great free trade discussions, I have no hesitation in saying that Cobden would have done nothing of the sort which the reciprocitarians and fair traders would attribute to him. His constant maxim was that the true way to fight hostile tariffs is by free trade.
No doubt all these hostile tariffs are extremely exasperating: they inflict incalculable injury, not only upon the wealth and prosperity of England, but upon the nations which enact them, and on the rest of the world. But if, as some hot-headed and inconsiderate persons urge, England were to resort to reciprocity and retaliation, she would merely double the mischief. If the present hostile tariffs destroy an incalculable amount of commercial intercourse, a resort to reciprocity and retaliation would destroy it infinitely more. As Sir Louis Mallet pithily said, 'If one tariff is bad, two are worse.' If foreign nations smite us on one cheek by their hostile tariffs, if we followed the advice of the reciprocitarians and retaliated, we should simply smite ourselves very hard on the other cheek.
Retaliation is not to be thought of. England may justly fume and fret, but she must keep her temper and possess her soul in patience. There is no remedy but time and patience. When protectionist policy once gets the upper hand the natural tendency of its advocates is to strain it till it cracks. When protectionists do not reap the benefits they expect from protection, their constant cry is for more protection. We see this in Russia, Germany, France, Italy, and most conspicuously in the United States. In this last-named country there are evident signs that the people see that they have bent the bow too far, and the present Government is strenuously bent on relaxing it to a considerable extent; but how far it will succeed time only can show. But, whatever other nations may do, England must endure to the end and steadily keep the light of free trade burning amid despondency, gloom and darkness, in the hope that time, experience and reflection will bring other nations to a better frame of mind. One example alone is sufficient to prove the wisdom of this policy. Even in former times, when all nations were protectionist, there were always a certain number of free cities, and their wealth and prosperity, while all nations were weighed down with protection, completely establish the truth of Cobden's doctrine. If so be, England must continue to the end as the free port and market of the world.
Thus we see how true Economics throws a clear and steady light on the path of national policy.
We have now to consider the influence of economic speculation, true or false, on that new form of protection which, under the name of socialism, has in these last few years become so increasingly prevalent, and which is assuming more alarming and portentous influence every day.
Adam Smith, as we have shown even in this brief and cursory sketch, did immense services to Economics; but, alas! he also did infinite mischief by his self-contradictions and confusion on the nature and causes of value.
Aristotle said—'Value is the relation which anything bears to other things.'
The Economists were perfectly clear and consistent in their doctrine of value. Le Trosne says—'Products acquire, then, in the social state which arises from the community of men among each other, a new quality. This new quality is value, which makes products become wealth.
'Value consists in the ratio of exchange which takes place between such and such a product, between such a quantity of one product and such a quantity of another product.' And in this the Economists were unanimous. Now, it is evident that if value is a ratio, there can be no such thing as intrinsic value; and also that a standard of value is impossible by the very nature of things. Value, like distance, necessarily requires two objects or quantities.
Aristotle also showed that the cause of all value is demand—. The word , which is one of the most usual words in Greek for wealth, comes from , to want or demand: and the ancients showed a thing is —wealth—only where and when it is —wanted and demanded: and that where and when it is not —wanted and demanded—it is not —wealth. In the ancient dialogue we have referred to above, Socrates shows that money is wealth only in those places where it will purchase other things, and he instanced several examples of local moneys which were valuable and were wealth in certain places, but which had no value and were not wealth in others, where they had no power of purchasing. All the Economists of France and Italy showed that value proceeds entirely from the wants and desires of men. The Economists were quite unanimous that all value proceeds from consommation, or demand; and that where things are not consommés—demanded—they are no better than so much rubbish. Now, as all commerce or exchange proceeds from the mutual wants and desires of men, it is quite evident that value requires the concurrence of two minds, and that it proceeds from reciprocal demand.
Our great philosopher Locke was, unfortunately, the originator of all the confusion which has done so much to blight the progress of English Economics. Locke maintained that all differences of value arise from differences of labour. Locke's abstruse works are very little known, and if this fatal dogma had lain perdu in them there would have been very little harm done.
But, unfortunately, this idea was taken up in the early part of his work by Adam Smith, though quite discarded in the latter part of it, and his fifth chapter has been the ruin of English Economics.
Of this chapter that distinguished Economist and statesman Francis Horner says—'We have been under the necessity of suspending our progress in the perusal of the Wealth of Nations on account of the insurmountable difficulties, obscurity and embarrassment in which the reasonings of the fifth chapter are involved.... the discovery that I did not understand Smith speedily led me to doubt whether Smith understood himself.'
We shall now lay before our readers the cause of all this confusion.
In this unfortunate chapter Smith begins by saying that the value of any commodity is equal to the quantity of labour which it entitles him to purchase. Hence if we denote labour by l, we have
A = l, 2l, 3l, 4l...
He then says that this is the same thing as saying that it is equal to the produce of labour which it enables him to purchase. On denoting produce by p, we have
A = p, 2p, 3p, 4p...
Then he says that the value of anything is more frequently estimated in money than either in labour or commodities. On denoting money by m, we have
A = m, 2m, 3m, 4m...
Now, although it has been pointed out that these modes of estimating the value of a quantity are by no means identical, we observe that in this passage Smith defines the value of a thing to be something external to itself. Hence the value of A must vary directly as l, p or m. The more of l, p or m that A can purchase, the greater is the value of A: the less of l, p or m that A can purchase, the less is the value of A. It is also perfectly clear that if any change takes place in the relation between A and these quantities, the value of A has changed.
Hence Smith admits that value, like distance, requires two objects. If any change takes place in the position of these two objects, the distance between them has changed, no matter in which the change has taken place. So if any change takes place in the relation of two quantities, their value has changed, no matter in which the change takes place. Hence it is clear that there can be no such thing as invariable value. Nothing whatever can have invariable value unless its exchangeable relation with everything else is fixed. Hence we can at once see that, by the very nature of things, there can be no such thing as an invariable standard of value by which to measure the value of other things, because by the very nature of things, the very condition of anything being invariable in value is that nothing else shall vary in value, and that there shall be no variations to measure.
Nevertheless a very large body of Economists have set out upon this wild-goose chase, this search for an invariable standard of value, which it is utterly contrary to the nature of things should exist at all. Directly after the passage we have referred to, Smith commences the search for that single thing which is the invariable standard of value. He says that gold and silver will not do because they vary in their value; sometimes they can purchase more and sometimes less of labour and commodities. Then he says—
'But as a measure of quantity, such as the natural foot, fathom or handful, which is always varying its own quantity, can never be an accurate measure of the quantity of other things, so a commodity which is itself continually varying in its own value can never be an accurate measure of the value of other commodities. Equal quantities of labour at all times and places may be said to be of equal value to the labourer. In his ordinary state of health, strength and spirits, in the ordinary degree of his skill and dexterity he must always lay down the same portion of his ease, his liberty, and his happiness. The price which he pays must always be the same whatever the quantity of goods which he receives in return for it. Of these, indeed, it may sometimes purchase a greater, and sometimes a smaller quantity, but it is their value which varies, not that of the labour which purchases them. At all times and places that is dear which it is difficult to come at, or which it costs much labour to acquire, and that cheap which is to be had easily, or with very little labour. Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.
'But though equal quantities of labour are always of equal value to the labourer, yet to the person who employs him they appear sometimes to be greater and sometimes of smaller value....
'Labour, therefore, it appears evidently is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the value of different commodities at all times and places.'
The utter confusion of ideas in these passages is manifest. A foot, or a fathom, is an absolute quantity, and of course may increase or decrease by itself: but value, by Smith's own definition, is a ratio, which requires two quantities: and therefore we might just as well say that because a foot which is constantly varying its own length cannot be an accurate measure of the length of other things, therefore a quantity which is always varying its own ratio cannot be an accurate measure of the ratio of other things. This is utter confusion of idea. We may measure a tree with a yard, because they are each of them single quantities; but it is impossible that a single quantity can be the measure of a ratio. It is manifestly impossible to say that
a : b : : x.
It is manifestly absurd to say that 4 is to 5 as 8, without saying as 8 is to—what? just as it is absurd to say that a horse gallops at the rate of twenty miles, without saying in what time.
But Smith says that 'equal quantities of labour are always of equal value.' What? If a man is paid five shillings for a certain amount of labour, is his labour of the same value to him as if he were paid £1,000? This certainly is a very comfortable doctrine for the employer, because, if he pays his workmen one shilling a week, according to Smith their labour is of just as much value to them as if he paid them twenty shillings a week. We doubt whether the workmen would acquiesce in this view.
Smith himself says that gold and silver vary in their value because they sometimes can purchase more and sometimes less of other things. But when labour sometimes earns more wages and sometimes less wages, does it not also vary in its value? How, then, can its value be invariable? How is its value to be determined on principles different from those which govern the value of gold and silver?
The fact is that Smith's dogma that labour is an invariable standard of value is a pure mare's nest. Neither labour nor any other single quantity can be a standard of value; and to suppose that it could, is only to betray utter ignorance of the mathematics of ratios.
The term value has been so confused by Economists that it will aid much in showing the confusion of Smith's ideas to translate them into mechanical language, substituting the word distance, which has not been so befogged in popular language, for value, thus—
'As a measure of quantity, such as a foot, which is always varying its own length, can never be an accurate measure of the length of other things, so an object which is always varying its own distance can never be an accurate measure of the distance of other objects. But the sun is always at the same distance. And though the earth is sometimes nearer to the sun and sometimes further off from it, the sun is always at the same distance. And though the earth is at different distances from the sun, the sun is always at the same distance from the earth: it is the distance of the earth which has varied, and not that of the sun: and the sun alone never varying its own distance is the ultimate and real standard by which the distances of all things can at all times and places be estimated and compared.'
Such is a fair translation into mechanical language of Smith's ideas on value, merely substituting distance for value. Smith practically contends that if a railway station is fixed, and a train approaches, or recedes from it, the distance of the train from the station varies; but that the station is always at the same distance from the train! Can we wonder at the language of Horner? The cause of the confusion is obvious. Smith begins by holding the value of a product to be the quantity of other things it will purchase: and then he suddenly changes his concept of value to the quantity of labour embodied in obtaining the product itself: and he has not the slightest idea that these are utterly inconsistent ideas.
Exactly the same confusion runs through the whole of Ricardo. His conception of value is vitiated by the same utter want of unity.
Ricardo's work is avowedly a treatise on value. Now, Bacon and common sense show that before a person begins to theorize on a subject he must first make an exhaustive collection of the facts relating to it, even the most minute; because a single fact which is irreconcileable with a theory is fatal to it. Ricardo excludes immaterial and incorporeal quantities from his investigations, which Adam Smith in conformity with the unanimous agreement of ancient writers included: he confines his inquiry solely to material things: and of these he excludes all but those which are the product of human labour. Now, material commodities which are the product of human labour, are one subdivision, and that by no means the largest, of material commodities, which are wealth by unanimous consent. Ricardo then attempts to found a general theory on a single subdivision of one class of commodities which have value: by this method he omits about eighty per cent. of the facts of the case. The veriest tyro can perceive that such a method of philosophizing is absolutely inadmissible.
He also falls into exactly the same confusion on value that Adam Smith does. He begins by saying—'The value of a commodity, or the quantity of any other commodity for which it will exchange.' Also—'The exchangeable value of these commodities, or the rule which determines how much of one shall be given in exchange for another': and several other passages to the same effect.
But he very soon slides into the same pitfall as Smith does; and he calls the 'quantity of labour bestowed on a commodity under many circumstances an invariable standard indicating correctly the variations of other things.'
He then maintains that, 'if a commodity could always be produced by an invariable quantity of labour, its value would be invariable, and it would be eminently well calculated to measure the varying value of all other things'; and in a subsequent part of his work he says: 'The labour of a million of men in manufactures will always produce the same value. That commodity is alone invariable which at all times requires the same quantity of toil and trouble to produce it.' Now, Ricardo's doctrine is that when manufactures have been produced they are of exactly the same value, whether they sell for a large sum of money or cannot be sold at all. We doubt whether the manufacturers of Manchester would acquiesce in this doctrine.
He then says: 'I cannot agree with M. Say in estimating the value of a commodity by the abundance of other commodities for which it will exchange.' Thus Ricardo, in this last sentence, not only disagrees with the whole world, but he flatly contradicts himself.
Ricardo, then, having excluded all commodities from his inquiry which are not the produce of human labour, roundly declares that labour is the foundation of all value.
Ricardo gives an instance, which is indeed the logical consequence of his doctrine, which will enable plain persons to judge of the value of his system. As he contends that labour is the sole cause of value, he alleges that as fine weather, the warmth of the sun, and copious showers, are the free gift of nature, they add nothing to the value of the crops. If this be so, it is obvious that bad weather, storms of rain and wind, can in no way damage their value. If Ricardo's dogma be true, the value of the crop reaped cannot be greater than the value of the seed sown; because with the ploughing of the land, the sowing of the seed, and manuring the ground, human labour ceases, all the rest is the agency of nature. Surely the naked statement of Ricardo's doctrine is sufficient to show that his whole system is fallacious.
McCulloch is the bondslave of Ricardo; he also asserts that labour is the sole cause of value. Carey, the American Economist, says: 'Labour is the sole cause of value,' and he adds, it is so in nine hundred and ninety-nine cases out of a thousand; and if there be one case in a thousand where there is value without labour it is just the exception which proves the rule. Carey had queer notions of natural philosophy, for it is an axiom of natural philosophy that if there be a single case which is irreconcileable with a theory it is fatal to it.
Now the superlative importance of this doctrine is that it is the foundation of socialism and all its consequences. Socialists avowedly base their doctrines on Adam Smith and Ricardo, and just as the astounding consequences which the Economists drew from their doctrine, that in an exchange neither side gains or loses, caused Condillac and Smith to inquire into its truth; so the portentous consequences which the socialists draw from the Smith-Ricardo doctrine, that labour is the cause of all value, demand the strictest inquiry into its truth, because it has become a very prevalent dogma among working men, and a good many others besides, that working men are the creators of all value and of all wealth.
In the brief space at our command it would be impossible to give a full examination of the dogma commensurate with its superlative importance and its consequences. We can only touch upon a few leading points; but if any of our readers care to examine it more minutely, we may refer them to our Theory of Credit, in which it is investigated exhaustively.
Let us now test the dogma that working men are the creators of all value and of all wealth.
We may premise that by the term wealth, in accordance with the argument contained in an earlier portion of this paper, we mean anything whatever whose value can be measured in money; anything which can be bought and sold; anything which has purchasing power.
Now let us take a few examples of wealth:
(1) The simple space of ground upon which a great city stands has enormous value and is wealth. Did working men create the ground upon which a city stands and give it value?
(2) Herds of cattle, sheep, pigs, fowls, and other animals fit for food have value and are wealth. Did working men create all these kinds of animals and give them value?
(3) Timber trees standing on the ground, which no human being ever touched, often have very great value, and are bought and sold. Did working men create these timber trees and give them value?
(4) A whale was stranded on the shore of the Frith of Forth. As it lay on the beach it was sold for £70. Did working men create the whale and give it value?
(5) An aerolite fell in Sweden. The curator of the national museum bought it for £84. Did working men create the aerolite and give it value?
(6) Mr. Buckland says that at the Zoological Gardens the dejecta of the snakes sold for nine shillings the pound. Did working men create the excreta of the snakes and give them value?
(7) The manager of a great commercial company, such as a bank or a railway, often earns by his business capacity an income of several thousand pounds a year. His business qualities, therefore, have great value, and are wealth to him. Did working men create his business qualities and give them value?
(8) To professional men, advocates, physicians, surgeons, engineers, and many others, their capacity often brings them an income of many thousands of pounds a year. Their capacity has therefore great value and is wealth to them. Did working men create their professional ability and give it value?
(9) Mill says justly that everything is wealth which has purchasing power. Merchants and traders purchase commodities almost exclusively with their credit, i.e. by giving a promise to pay at a future time; and these promises to pay have value, because they will be paid at maturity. Merchants and traders make a profit by trading with their credit: their credit has great value to them and is wealth. Did working men create the credit of our merchants and traders and give it value?
(10) The express purpose of a bank is to create credit, i.e. to issue promises to pay several times the amount of cash they hold in reserve. The floating rights of action issued by all the banks in Great Britain, and at present in circulation, are about £1,000,000,000. These thousand millions of circulating credits have all the effects of an equal amount of gold. They have value and are wealth. Did working men create the credit of our great banks and give it value?
We must now say something about credit, because the dogma that labour is the cause of all value has made the subject absolutely unintelligible.
We shall first explain what credit is.
When one person has the legal right to compel another person to pay or do something for him he is termed a creditor; the person who is legally bound to pay or do that something is termed a debtor; and the right of action which the creditor has against the debtor is termed indifferently a credit or a debt. It is to be carefully observed that this credit or debt is not the right to any specific material chattel; the creditor has no right to any part of his debtor's property; that is absolutely intact; it is simply the right against the person of the debtor to compel him to part with some part of his property in exchange for this right of action, credit or debt, at a fixed time. It is, therefore, a pure abstract right. But the creditor can sell his right of action to any one else for money; and it may be bought and sold any number of times like any material chattel. And because the right of action may be bought and sold, the Roman jurists termed it pecunia, res, bona, merx; the Greek jurists, ; and English jurists, goods, chattels, vendible commodities, merchandise, incorporeal property, incorporeal wealth. So Mill acknowledges that the promise to pay of a solvent merchant or banker is of the value of gold, which is very clear, because the gold is the value of the promise.
Thus the whole mass of circulating credits or debts is a mass of exchangeable property just like any other, such as gold, silver, corn, manufactured goods, or any other. These credits, debts or rights of action have value for exactly the same reason that any other commodities have value, because at the proper time they will be exchanged for money or its equivalent. The whole commerce of the country is now carried on by them, except only to an infinitesimal degree, and the aggregate of money and all these credits under various forms constitute the circulating medium, or currency of the country, or the measure of prices.
The whole system of credit is based upon this principle—that every future profit, from whatever source arising has a present value, and that this present value may be bought and sold like money or any other chattel.
Few persons have any idea of the enormous magnitude of this species of property in this country. In a return laid before Parliament by an eminent city firm it was shown that out of £2,000,000 of payments and receipts by the firm only £40,986 were made in gold, silver and copper; all the rest in different forms of credit; and some bankers found that in banking only four per thousand, or 0025 per cent., were paid in coin; all the rest in credit. Thus if we say that ninety-nine per cent. of the transactions of this country are carried on by credit, and only one per cent. by coin, our statement will be well within the mark, and we may obtain a very rough approximate estimate of the actual amount of this circulating credit, because the best estimates of the actual coin in the country place it at about £110,000,000; now if we multiply this by ninety-nine we shall find the result to be £10,890,000,000, as the proximate actual quantity of credit in all its different forms in this country. Thus it is seen of what supreme importance it is to comprehend the great principles and mechanism of credit, if we would understand the commerce of the country, and the theory of prices. Now, in no sense can it be said that working men created these ten thousand millions of credit and gave it value.
Thus we see that the whole basis of socialism, founded on the Ricardian doctrine of value and incorporated as the leading idea of Karl Marx's Capital, is utterly overthrown.
Labour, like everything else, has value in so far as it is exchangeable. Attempts to raise the price of labour by artificial restrictions on its sale are destructive of the mechanism of exchange, from which alone value is derived. The theory of Economics here developed contains a complete vindication of the equity and beneficence of the principle of free exchange as applied to all forms of wealth, to Labour, to Credit, and to material commodities.
English Economics can never emerge from its present deplorable state until we utterly discard the doctrine that labour is the basis of value, and dismiss from our mind the concept of Economics as the 'production, distribution and consumption of wealth,' by which it is impossible to create it a science. When we shift the basis of value to exchange-ability, and revert to the original concept of Economics as the science of commerce, or exchanges, scientific order succeeds to chaos, everything becomes clear and simple, and we have a definite, positive, and intelligible science. Economics is the theory of value, which, next to civil government, is the most important thing in human affairs. It may be summed up in words which M. Michel Chevalier did me the honour to say contained the best definition of the science which has yet been proposed—'Economics is the science which treats of the laws which govern the relations of exchangeable quantities.'
HENRY DUNNING MAC LEOD.