Principles of Economics

Marshall, Alfred
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London: Macmillan and Co., Ltd.
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8th edition

1. Thus Turgot, who for this purpose may be reckoned with the Physiocrats, says (Sur la Formation et Distribution des Richesses, § VI.), "In every sort of occupation it must come to pass, and in fact it does come to pass, that the wages of the artisan are limited to that which is necessary to procure him a subsistence ... He earns no more than his living (Il ne gagne que sa vie)." When however Hume wrote, pointing out that this statement led to the conclusion that a tax on wages must raise wages; and that it was therefore inconsistent with the observed fact that wages are often low where taxes are high, and vice versâ; Turgot replied (March, 1767) to the effect that his iron law was not supposed to be fully operative in short periods, but only in long. See Say's Turgot, English Ed. pp. 53, etc.

2. From these premises the Physiocrats logically deduced the conclusion that the only net produce of the country disposable for the purposes of taxation is the rent of land; that when taxes are placed on capital or labour, they make it shrink till its net price rises to the natural level. The landowners have, they argued, to pay a gross price which exceeds this net price by the taxes together with all the expenses of collecting them in detail, and an equivalent for all the impediments which the tax-gatherer puts in the way of the free course of industry; and therefore the landowners would lose less in the long run if, being the owners of the only true surplus that exists, they would undertake to pay direct whatever taxes the King required; especially if the King would consent "laisser faire, laisser passer," that is, to let every one make whatever he chose, and take his labour and send his goods to whatever market he liked.

3. Wealth of Nations, Bk. I. ch. VIII.

4. Political Economy, IV. 2. There is some doubt as to the extent of the rise of real wages in the fifteenth century. It is only in the last two generations that the real wages of common labour in England have exceeded two pecks.

5. Principles, V.

6. Compare above, IV. III. 8.

7. Some German economists, who are not socialists, and who believe that no such law exists, yet maintain that the doctrines of Ricardo and his followers stand or fall with the truth of this law; while others (e.g. Roscher, Gesch. der Nat. Oek. in Deutschland, p. 1022) protest against the socialist misunderstandings of Ricardo.

8. It may be well to quote his words. "The friends of humanity cannot but wish that in all countries the labouring classes should have a taste for comforts and enjoyments, and that they should be stimulated by all legal means in their exertions to procure them. There cannot be a better security against a super-abundant population. In those countries, where the labouring classes have the fewest wants, and are contented with the cheapest food, the people are exposed to the greatest vicissitudes and miseries. They have no place of refuge from calamity; they cannot seek safety in a lower station; they are already so low, that they can fall no lower. On any deficiency of the chief article of their subsistence, there are few substitutes of which they can avail themselves, and dearth to them is attended with almost all the evils of famine." (Principles, ch. V.) It is noteworthy that McCulloch, who has been charged, not altogether unjustly, with having adopted the extremest tenets of Ricardo, and applied them harshly and rigidly, yet chooses for the heading of the fourth Chapter of his Treatise On Wages:—"Disadvantage of Low Wages, and of having the Labourers habitually fed on the cheapest species of food. Advantage of High Wages."

9. This habit of Ricardo's is discussed in Appendix I. (See also V XIV. 5.) The English classical economists frequently spoke of the minimum of wages as depending on the price of corn. But the term "corn" was used by them as short for agricultural produce in general, somewhat as Petty (Taxes and Contributions, ch. XIV.) speaks of "the Husbandry of Corn, which we will suppose to contain all necessaries of life, as in the Lord's Prayer we suppose the word Bread doth." Of course Ricardo took a less hopeful view of the prospects of the working classes than we do now. Even the agricultural labourer can now feed his family well and have something to spare: while even the artisan would then have required the whole of his wages, at all events after a poor harvest, to buy abundant and good food for his family. Sir W. Ashley insists on the narrowness of Ricardo's hopes as compared with those of our own age; he describes instructively the history of the passage quoted in the last note; and shows that even Lassalle did not attribute absolute rigidity to his brazen law. See Appendix I, 2.

10. Book II. ch. XI. § 2. He had just complained that Ricardo supposed the standard of comfort to be invariable, having apparently overlooked passages such as that quoted in the last note but one. He was however well aware that Ricardo's "minimum rate of wages" depended on the prevalent standard of comfort, and had no connection with the bare necessaries of life.

11. Compare V. V., especially §§ 2, 3.

12. See below, § 10.

13. See above V. IV. 1—4. A little later we shall have to consider in what respects the hire of human labour differs from the hire of a house or a machine: but, for the present, we may neglect this difference, and look at the problem only in its broad outlines. Even so, some technical difficulties will be passed on the way: and those readers, who, in accordance with the suggestion made at the end of V. VII., have omitted the later chapters of that Book, must be asked, if dissatisfied with the general treatment offered here, to turn back and read V. VIII. and IX.

14. See the remarks on labour standardization below, VI. XIII. 8, 9.

An arithmetical illustration is given in the following table. Column (2) represents the number of sheep that might probably be marketed annually, together with a due complement of wool, from a large British sheep run if worked by 8, 9, 10, 11 and 12 shepherds respectively. (In Australasia, where men are scarce, land is abundant, and a sheep of relatively small value, there are often less than ten men, except at shearing time, to each 2,000 sheep; Sir Albert Spicer in Ashley's British Dominions, p. 61.) We are assuming that an increase in the number of shepherds from 8 to 12 does not increase the general expenses of working the farm; and that it takes off the shoulders of the farmer as much trouble in some directions, as it imposes in others: so that there is nothing to be reckoned either way on these accounts. Accordingly the product due to each successive additional man, set out in column (3), is the excess of the corresponding number in column (2) over the preceding number in that same column (2). Column (4) is got by dividing the numbers in column (2) by those in column (1). Column (5) shows the cost for shepherds' labour at the rate of 20 sheep per man. Column (6) shows the surplus remaining for general expenses, including farmer's profit and rent.

number of shepherds
number of sheep
product due to last man
average product per man
wages bill
excess of (2) over (5)
8 580 72½ 160 420
9 615 35 68½ 180 435
10 640 25 64 200 440
11 660 20 60 220 440
12 676 16 56½ 240 436

As we move downwards the figures in (3) constantly diminish; but those in (6) increase, then remain without change, and at last diminish. This indicates that the farmer's interests are equally served by hiring 10 or 11 men; but that they are less well served by hiring 8, or 9, or 12. The eleventh man (supposed to be of normal efficiency) is the marginal man, when the markets for labour and sheep are such that one man can be hired for a year for the price of 20 sheep. If the markets had put that hire at 25 sheep, the numbers in (6) would have been 380, 390, 390, 385 and 376 respectively. Therefore that particular farmer would probably have employed one less shepherd, and sent less sheep to market; and among many sheep farmers there would certainly have been a large proportion who would have done so.

It has been argued at length in regard to similar cases (see V. VIII. 4, 5) that the price which it is just worth while for the farmer to pay for this labour, merely gauges the outcome of multitudinous causes which between them govern the wages of shepherds; as the movements of a safety-valve may gauge the outcome of the multitudinous causes that govern the pressure in a boiler. Theoretically a deduction from this has to be made for the fact that, by throwing twenty extra sheep on the market, the farmer will lower the price of sheep generally, and therefore lose a little on his other sheep. This correction may be of appreciable importance in special cases. But in general discussions such as this, in which we are dealing with a very small addition to the supply thrown by one of many producers on a large market, it becomes very small (mathematically a small quantity of the second order), and may be neglected. (See above, footnote on p. 409.)

Of course the net product of the shepherd in this exceptional case plays no greater part in governing the wages of shepherds, than does that of any of the marginal shepherds on farms where they cannot be profitably employed without considerable extra outlay in other directions; as for land, buildings, implements, labour of management, etc.

Column (4) in the above table is deduced from (1) and (2), just as (3) is. But the table shows how many men the farmer can afford to hire, when they are to be had at wages equivalent to the value of the number of sheep in (3), and therefore goes to the heart of the problem of wages: while (4) has no direct bearing on the problem. When therefore Mr J. A. Hobson, remarking on a similar table of his own (in which however the numbers chosen are inappropriate to the hypothesis which he criticises) says:—"In other words the so-called final or marginal productivity turns out to be nothing other than an average productivity.... The whole notion that there is a marginal productivity ... is entirely fallacious" (The Industrial System, p. 110), he appears to be mistaken.

15. Compare p. 436.

16. Such a method of illustrating the net product of a man's labour is not easily applicable to industries in which a great deal of capital and effort has to be invested in gradually building up a trade connection, and especially if they are such as obey the law of increasing return. This is a practical difficulty of the same order as those discussed in V. XII. and Appendix H See also IV. XII.; V. VII. 1, 2; and XI. The influence of an additional man employed in any considerable business on its general economies might also be considered from a purely abstract point of view; but it is too small to be taken seriously. (See the footnote on p. 409.)

17. The charge made to traders for loans is generally much more than 4 per cent. per annum; but as we shall see in chapter VI. it includes other things besides true net interest. Before the recent great destruction of capital by war, it seemed reasonable to speak of 3 per cent.: but even 4 per cent. may scarcely avail for some years after its close.

18. Compare V. IV.: also Appendix I, 3; where some remarks are made on Jevons' doctrine of interest.

19. This statement follows closely the lines of V. IV. and VIII.

20. Der Isolirte Staat, II. I. p. 123. He argues (ib. p. 124) that therefore "the rate of interest is the element by which the relation of the efficiency of capital to that of human labour is expressed"; and finally, in words, very similar to those, which Jevons, working independently a generation later, adopted for the same purpose, he says (p. 162): "The utility of the last applied little bit of capital defines (bestimmt) the height of the rate of interest." With characteristic breadth of view, von Thünen enunciated a general law of diminishing return for successive doses of capital in any branch of production; and what he said on this subject has even now much interest, though it does not show how to reconcile the fact than an increase in the capital employed in an industry may increase the output more than in proportion, with the fact that a continued influx of capital into an industry must ultimately lower the rate of profits earned in it. His treatment of these and other great economic principles, though primitive in many respects, yet stands on a different footing from his fanciful and unreal assumptions as to the causes that determine the accumulation of capital, and as to the relations in which wages stand to the stock of capital. From these he deduces the quaint result that the natural rate of wages of labour is the geometric mean between the labourer's necessaries, and that share of the product which is due to his labour when aided by capital. By the natural rate he means the highest that can be sustained; if the labourer were to get more than this for a time, the supply of capital would, von Thünen argues, be so checked as to cause him in the long run to lose more than he gained.

21. As von Thünen was well aware. Ib. p. 127. See also below, VI. II. 9, 10.

Book VI, Chapter II

22. See II. III. 2; IV. I. 2; IV. IX. 1.

23. Recent discussions on the eight hours day have often turned very little on the fatigue of labour; for indeed there is much work in which there is so little exertion, either physical or mental, that what exertion there is counts rather as a relief from ennui than as fatigue. A man is on duty, bound to be ready when wanted, but perhaps not doing an hour's actual work in the day; and yet he will object to very long hours of duty because they deprive his life of variety, of opportunities for domestic and social pleasures, and perhaps of comfortable meals and rest.

If a man is free to cease his work when he likes, he does so when the advantages to be reaped by continuing seem no longer to over-balance the disadvantages. If he has to work with others, the length of his day's work is often fixed for him; and in some trades the number of days' work which he does in the year is practically fixed for him. But there are scarcely any trades, in which the amount of exertion which he puts into his work is rigidly fixed. If he be not able or willing to work up to the minimum standard that prevails where he is, he can generally find employment in another locality where the standard is lower; while the standard in each place is set by the general balancing of the advantages and disadvantages of various intensities of work by the industrial populations settled there. The cases therefore in which a man's individual volition has no part in determining the amount of work he does in a year, are as exceptional as the cases in which a man has to live in a house of a size widely different from that which he prefers, because there is none other available. It is true that a man who would rather work eight hours a day than nine at the same rate of tenpence an hour, but is compelled to work nine hours or none, suffers a loss from the ninth hour: but such cases are rare; and, when they occur, one must take the day as the unit. But the general law of costs is not disturbed by this fact, any more than the general law of utility is disturbed by the fact that a concert or a cup of tea has to be taken as a unit: and that a person who would rather pay five shillings for half a concert than ten for a whole, or twopence for half a cup of tea than fourpence for a whole cup, may incur a loss on the second half. There seems therefore to be no good foundation for the suggestion made by v. Böhm-Bawerk (The Ultimate Standard of Value, § IV. published in the Zeitschrift für Volkswirtschaft, vol. II.) that value must be determined generally by demand, without direct reference to cost, because the effective supply of labour is a fixed quantity: for even if the number of hours of work in the year were rigidly fixed, which it is not, the intensity of work would remain elastic.

24. See ch. XII. Bad harvests, war prices, and convulsions of credit have at various times compelled some workers, men, women and children, to over-work themselves. And cases of ever-increasing exertion in return for a constantly sinking wage, though not as numerous now as is often alleged, have not been very rare in past times. They may be compared with the exertions of a failing firm to secure some return for their outlay by taking contracts at little more than enough to recompense them for their prime, or special and direct cost. And on the other hand almost every age, our own perhaps less than most others, has stories of people who in a sudden burst of prosperity, have contended themselves with the wages to be earned by very little work, and have thus contributed to bring the prosperity to a close. But such matters must be deferred till after a study of commercial fluctuations. In ordinary times the artisan, the professional man or the capitalist undertaker decides, as an individual or as a member of a trade association, what is the lowest price against which he will not strike.

25. On all locomotives there is some brass or copper work designed partly for ornament, and which could be omitted or displaced without any loss to the efficiency of the steam-engine. Its amount does in fact vary with the taste of the officials who select the patterns for the engines of different railways. But it might happen that custom required such expenditure; that the custom would not yield to argument, and that the railway companies could not venture to offend against it. In that case, when dealing with periods during which the custom ruled, we should have to include the cost of that ornamental metal work in the cost of producing a certain amount of locomotive horse-power, on the same level with the cost of the piston itself. And there are many practical problems, especially such as relate to periods of but moderate length, in which conventional and real necessaries may be placed on nearly the same footing.

26. The reiteration in this section has seemed to be unavoidable in consequence of the misunderstandings of the main argument of the present Book by various critics; among whom must be included even the acute Prof. v. Böhm-Bawerk. For in the article recently quoted (see especially Section 5), he seems to hold that a self-contradiction is necessarily involved in the belief that wages correspond both to the net product of labour and also to the cost of rearing and training labour and sustaining its efficiency (or, more shortly, though less appropriately, the cost of production of labour). On the other hand the mutual interactions of the chief economic forces are set forth in an able article by Prof. Carver in the Quarterly Journal of Economics for July 1894; see, also his Distribution of Wealth, ch. IV.

27. See below, VI. VI. 6.

28. See IV. VII., summarized in § 10.

29. The argument of this section is put broadly. For a technical and more thorough treatment the reader is referred to V. X.

30. See V. VIII. 5; and VI. I. 7.

31. See above pp. 517, 8. The net product of a factory is now commonly taken, as it is in the official Census of Production, to be the work which it puts into its material: thus the value of its net product is the excess of the gross value of its output over the value of the material used by it.

32. Differences between the adjustments of demand and supply in the case of commodities and in the case of labour are discussed in the following chapters.

33. We are leaving on one side here the competition for employment between labour in the narrower sense of the term, and the work of the undertaker himself and his assistant managers and foremen. A great part of chs. VII. and VIII. is given to this difficult and important problem.

34. Capital is here reckoned broadly: it is not confined to trade capital. This point is of secondary interest and is relegated to Appendix J, 4.

35. Such a survey is focussed in Notes XIV.—XXI. of the Mathematical Appendix: the last of them is easy of comprehension, and shows the complexity of the problems. Most of the rest are developments of details arising out of Note XIV., the substance of part of which is translated into English in V. IV.

Book VI, Chapter III

36. About fifty years ago correspondence between farmers in the North and the South of England led to an agreement that putting roots into a cart was an excellent measure of physical efficiency: and careful comparison showed that wages bore about the same proportion to the weights which the labourers commonly loaded in a day's work in the two districts. The standards of wages and of efficiency in the South are perhaps now more nearly on a level with those in the North than they were then. But the standard trade union wages are generally higher in the North than in the South: and many men, who go North to reach the higher rate, find that they cannot do what is required, and return.

37. This argument would be subject to corrections in cases in which the trade admitted of the employment of more than one shift of workpeople. It would often be worth an employer's while to pay to each of two shifts as much for an eight hours' day as he now pays to one shift for a ten hours' day. For though each worker would produce less, each machine would produce more on the former than on the latter plan. But to this point we shall return.

38. Ricardo did not overlook the importance of the distinction between variations in the amount of commodities paid to the labourer as wages, and variations in the profitableness of the labourer to his employer. He saw that the real interest of the employer lay not in the amount of wages that he paid to the labourer, but in the ratio which those wages bore to the value of the produce resulting from the labourer's work: and he decided to regard the rate of wages as measured by this ratio: and to say that wages rose when this ratio increased, and that they fell when it diminished. It is to be regretted that he did not invent some new term for this purpose; for his artificial use of a familiar term has seldom been understood by others, and was in some cases even forgotten by himself. (Compare Senior's Political Economy, pp. 142-8.) The variations in the productiveness of labour which he had chiefly in view were those which result from improvements in the arts of production on the one hand, and on the other from the action of the law of diminishing return, when an increase of population required larger crops to be forced from a limited soil. Had he paid careful attention to the increase in the productiveness of labour that results directly from an improvement in the labourer's condition, the position of economic science, and the real wellbeing of the country, would in all probability be now much further advanced than they are. As it is, his treatment of wages seems less instructive than that in Malthus' Political Economy.

39. Wealth of Nations, I. V.

40. The Report of the Poor Law Commissioners on the Employment of Women and Children in Agriculture, 1843, p. 297, contains some interesting specimens of yearly wages paid in Northumberland, in which very little money appeared. Here is one:—10 bushels of wheat, 30 of oats, 10 of barley, 10 of rye, 10 of peas; a cow's keep for a year; 800 yards of potatoes; cottage and garden; coal-shed; £3. 10s. in cash; and 2 bushels of barley in lieu of hens.

41. See II. IV. 7.

42. This class of questions is closely allied to those raised when discussing the definitions of Income and Capital in Book II.; where a caution has already been entered against overlooking elements of income that do not take the form of money. Earnings of many even of the professional and wage-receiving classes are in a considerable measure dependent on their being in command of some material capital.

43. Employers, whose main business is in a healthy condition, are generally too busy to be willing to manage such shops unless there is some strong reason for doing so; and consequently in old countries those who have adopted the Truck system, have more often than not done so with the object of getting back by underhand ways part of the wages which they have nominally paid. They have compelled those who work at home to hire machinery and implements at exorbitant rents; they have compelled all their workpeople to buy adulterated goods at short weights and high prices; and in some cases even to spend a very large part of their wages on goods on which it was easiest to make the highest rate of profits, and especially on spirituous liquors. Mr Lecky, for instance, records an amusing case of employers who could not resist the temptation to buy theatre tickets cheap, and compel their workpeople to buy them at full price (History of the Eighteenth Century, VI. p. 158). The evil is however at its worst when the shop is kept not by the employer, but by the foreman or by persons acting in concert with him; and when he, without openly saying so, gives it to be understood that those, who do not deal largely at the shop, will find it difficult to get his good word. For an employer suffers more or less from anything that injures his workpeople, while the exactions of an unjust foreman are but little held in check by regard for his own ultimate interest.

On the whole evils of this kind are now relatively small. And it must be remembered that in a new country large businesses often spring up in remote places, in which there is no access to even moderately good retail stores or shops; and then it may be necessary that the employers should supply their workpeople with nearly everything they want, either by paying part of their wages in the form of allowances of food, clothing, etc., or by opening stores for them.

44. These considerations are specially important with regard to piece-work; the rates of earnings being in some cases much reduced by short supplies of material to work on, or by other interruptions, avoidable or unavoidable.

45. The evils of irregularity of employment are trenchantly stated in a lecture on that subject given by Prof. Foxwell in 1886.

46. Workers in the higher grades are generally allowed holidays with pay; but those in the lower grades generally forfeit their pay when they take holidays. The causes of this distinction are obvious; but it naturally raises a feeling of grievance of a kind, to which the inquiries by the Labour Commission gave vent. See e.g. Group B. 24, 431-6.

47. See II. IV. 2.

Book VI, Chapter IV

48. It ought, however, to be remarked that some of the beneficial effects of custom are cumulative. For among the many different things that are included under the wide term "custom" are crystallized forms of high ethical principles, rules of honourable and courteous behaviour, and of the avoidance of troublesome strife about paltry gains; and much of the good influence which these exert on race character is cumulative. Compare I II. 1, 2.

49. This is consistent with the well-known fact that slave labour is not economical, as Adam Smith remarked long ago that "The fund destined for replacing or repairing, if I may say so, the wear-and-tear of the slave is commonly managed by a negligent master or careless overseer. That destined for performing the same office for the free man is managed by the free man himself ... with strict frugality and parsimonious attention."

50. Sir William Petty discussed "The Value of the People" with much ingenuity; and the relation in which the cost of rearing an adult male stands to the cost of rearing a family unit was examined in a thoroughly scientific manner by Cantillon, Essai, Part I. chap. XI., and again by Adam Smith, Wealth of Nations, Book I. ch. VIII.: and in more recent times by Dr Engel, in his brilliant Essay Der Preis der Arbeit, and by Dr Farr and others. Many estimates have been made of the addition to the wealth of a country caused by the arrival of an immigrant whose cost of rearing in his early years was defrayed elsewhere, and who is likely to produce more than he consumes in the country of his adoption. The estimates have been made on many plans, all of them rough, and some apparently faulty in principle: but most of them find the average value of an immigrant to be about £200. It would seem that, if we might neglect provisionally the difference between the sexes, we should calculate the value of the immigrant on the lines of the argument of V. IV. 2. That is, we should "discount" the probable value of all the future services that he would render; add them together, and deduct from them the sum of the "discounted" values of all the wealth and direct services of other persons that he would consume: and it may be noted that in thus calculating each element of production and consumption at its probable value, we have incidentally allowed for the chances of his premature death and sickness, as well as of his failure or success in life. Or again we might estimate his value at the money cost of production which his native country had incurred for him; which would in like manner be found by adding together the "accumulated" values of all the several elements of his past consumption and deducting from them the sum of the "accumulated" values of all the several elements of his past production.

So far we have taken no account of the difference between the sexes. But it is clear that the above plans put the value of the male immigrants too high and that of the female too low: unless allowance is made for the service which women render as mothers, as wives and as sisters, and the male immigrants are charged with having consumed these services, while the female immigrants are credited with having supplied them. (See Mathematical Note XXIV.)

Many writers assume, implicitly at least, that the net production of an average individual and the consumption during the whole of his life are equal; or, in other words, that he would neither add to nor take from the material well-being of a country, in which he stayed all his life. On this assumption the above two plans of estimating his value would be convertible; and then of course we should make our calculations by the latter and easier method. We may, for instance, guess that the total amount spent on bringing up an average child of the lower half of the labouring classes, say two-fifths of the population, is £100; for the next fifth we may put the sum at £175; for the next fifth at £300; for the next tenth at £500, and the remaining tenth at £1200: or an average of £300. But of course some of the population are very young and have had but little spent on them; others have got nearly to their life's end; and therefore, on these assumptions, the average value of an individual is perhaps £200.

51. See above, VI. III.

52. On the subject of this Section compare Book V. II. 3, and Appendix F on Barter. Prof. Brentano was the first to call attention to several of the points discussed in this chapter. See also Howell's Conflicts of Capital and Labour.

Book VI, Chapter V

53. On the subject of this section compare Bk. IV. VI. 8; Mr Charles Booth's Life and Labour in London; and Sir H. Ll. Smith's Modern Changes in the Mobility of Labour.

54. There is some ground for regarding this special return as a quasi-rent. See VI. V. 7 and VIII. 8.

55. Compare above, VI. II. 2. If they have any considerable stock of trade implements, they are to that extent capitalists; and part of their income is quasi-rent on this capital.

56. Comp. V. X. 2.

Book VI, Chapter VI

57. That the supply of capital is held back by the prospectiveness of its uses, men's unreadiness to look forward, while the demand for it comes from its productiveness, in the broadest sense of the term, is indicated in II. IV.

58. See Book III. V. 3, 4; and IV. VII. 8. It is a good corrective of this error to note how small a modification of the conditions of our own world would be required to bring us to another in which the mass of the people would be so anxious to provide for old age and for their families after them, and in which the new openings for the advantageous use of accumulated wealth in any form were so small, that the amount of wealth for the safe custody of which people were willing to pay would exceed that which others desired to borrow; and where in consequence even those who saw their way to make a gain out of the use of capital, would be able to exact a payment for taking charge of it; and interest would be negative all along the line.

59. Compare III. V. and IV. VII.

60. Prof. v. Böhm-Bawerk appears to have underrated the acumen of his predecessors in their writings on capital and interest. What he regards as mere naïve fragments of theories appear rather to be the utterances of men well acquainted with the practical workings of business; and who, partly for some special purpose, and partly through want of system in exposition, gave such disproportionate stress to some elements of the problem as to throw others into the background. Perhaps part of the air of paradox with which he invests his own theory of capital may be the result of a similar disproportionate emphasis, and an unwillingness to recognize that the various elements of the problem mutually govern one another. Attention has already been called to the fact that, though he excludes houses and hotels, and indeed everything that is not strictly speaking an intermediate good, from his definition of capital, yet the demand for the use of goods, that are not intermediate, acts as directly on the rate of interest, as does that for capital as defined by him. Connected with this use of the term capital is a doctrine on which he lays great stress, viz. that "methods of production which take time are more productive" (Positive Capital, Book V. ch. IV. p. 261), or again that "every lengthening of a roundabout process is accompanied by a further increase in the technical result" (Ib. Book II. ch. II. p. 84). There are however innumerable processes which take a long time and are roundabout; but are not productive and therefore are not used; and in fact he seems to have inverted cause and effect. The true doctrine appears to be that, because interest has to be paid for, and can be gained by the use of capital; therefore those long and roundabout methods, which involve much locking up of capital, are avoided unless they are more productive than others. The fact that many roundabout methods are in various degrees productive is one of the causes that affect the rate of interest; and the rate of interest and the extent to which roundabout methods are employed are two of the elements of the central problem of distribution and exchange that mutually determine one another. See Appendix I, 3.

61. From St Chrysostom's Fifth Homily, see above I. II. 8. Compare also Ashley's Economic History, VI. VI.; and Bentham On Usury. The sentiment against usury had its origin in tribal relationships, in many other cases besides that of the Israelites, perhaps in all cases; and, as Cliffe Leslie remarks (Essays, 2nd Edition, p. 244):—It was "inherited from prehistoric times, when the members of each community still regarded themselves as kinsmen; when communism in property existed at least in practice, and no one who had more than he needed could refuse to share his superfluous wealth with a fellow-tribesman in want."

62. They also make a distinction between hiring things which were themselves to be returned, and borrowing things the equivalent of which only had to be returned. This distinction, however, though interesting from an analytical point of view, has very little practical importance.

63. Archdeacon Cunningham has described well the subtleties by which the mediæval church explained away her prohibition of loans at interest, in most of those cases in which the prohibition would have been seriously injurious to the body politic. These subtleties resemble the legal fictions by which the judges have gradually explained away the wording of laws, the natural interpretation of which seemed likely to be mischievous. In both cases some practical evil has been avoided at the expense of fostering habits of confused and insincere thought.

64. This is Marx's phrase. Rodbertus had called it a "Plus."

65. See Appendix I, 2.

66. Mortgages for long periods are sometimes more sought after by lenders than those for short periods, and sometimes less. The former save the trouble of frequent renewal, but they deprive the lender of command over his money for a long time, and thus limit his freedom. First-class stock-exchange securities combine the advantages of very long and very short mortgages. For their holder can hold them as long as he likes, and can convert them into money when he will; though, if at the time credit is shaken and other people want ready money, he will have to sell at a loss. If they could always be realized without a loss, and if there were no broker's commissions to be paid on buying and selling, they would not yield a higher income than money lent "on call" at the lender's choice of time; and that will always be less than the interest on loans for any fixed period, short or long.

67. Again, Dr Jessop (Arcady, p. 214) tells us "there are hosts of small money-lenders in the purlieus of the cattle markets who make advances to speculators with an eye," lending sums, amounting in exceptional cases up to £200, at a gross interest of ten per cent. for the twenty-four hours.

68. See also below, ch. VIII. § 2.

69. Compare Fisher's Appreciation and Interest 1896: and The rate of interest 1907, especially Chapters V, XIV and their respective Appendices.

Book VI, Chapter VII

70. See p. 313.

71. See IV. VIII.

72. With this argument may be compared that of VI. I. 7.

73. Comp. IV. XII. 3.

74. The employer of a large number of workmen has to economize his energies on the same plan that is followed by the leading officers of a modern army. For as Mr Wilkinson says (The Brain of an Army, pp. 42-6):—"Organization implies that every man's work is defined, that he knows exactly what he must answer for, and that his authority is coextensive with his responsibility ... [In the German army] every commander above the rank of captain deals with a body composed of units, with the interior affairs of none of which he meddles, except in the case of failure on the part of the officer directly responsible.... The general commanding an army corps has to deal directly with only a few subordinates.... He inspects and tests the condition of all the various units, but ... he is as far as possible unhampered by the worry of detail. He can make up his mind coolly." Bagehot in characteristic fashion had remarked (Lombard Street, ch. VIII.) that if the head of a large business "is very busy, it is a sign of something wrong"; and had compared (Essay on the Transferability of Capital) the primitive employer with a Hector or Achilles mingling in the fray, and the typical modern employer with "a man at the far end of a telegraph wire—a Count Moltke with his head over some papers—who sees that the proper persons are slain, and who secures the victory."

75. Comp. IV. XI. 4.

76. Lombard Street, Introductory chapter.

77. See IV. XII. 9, 10.

78. IV. XII. 12. When the forms of productions cease to be few and simple, it becomes "no longer true that a man becomes an employer because he is a capitalist. Men command capital because they have the qualifications to profitably employ labour. To these captains of industry ... capital and labour resort for opportunity to perform their several functions." (Walker, Wages Question, ch. XIV.)

79. Bagehot, Postulates, p. 75.

80. Bagehot (l. c. pp. 94-5) says that the great modern commerce has "certain general principles which are common to all kinds of it, and a person can be of considerable use in more than one kind if he understands these principles and has the proper sort of mind. But the appearance of this common element is in commerce, as in politics, a sign of magnitude, and primitive commerce is all petty. In early tribes there is nothing but the special man—the clothier, the mason, the weapon-maker. Each craft tried to be, and very much was, a mystery except to those who carried it on. The knowledge required for each was possessed by few, kept secret by these few, and nothing else was of use but this monopolised and often inherited acquirement; there was no 'general' business knowledge. The idea of a general art of money making is very modern; almost everything ancient about it is individual and particular."

81. Fortnightly Review, June 1879, reprinted in his Essays.

82. See VI. IV. 3. On the general functions of those who undertake the chief responsibilities of business, see Brentano, Der Unternehmer, 1907.

Book VI, Chapter VIII

83. Wealth of Nations, Book I. ch. X. Senior, Outlines, p. 203, puts the normal rate of profits on a capital of £100,000 at less than 10 per cent., on one of £10,000 or £20,000 at about 15 per cent. , on one of £5,000 or £6,000 at 20 per cent., and "a much larger per-centage" on smaller capitals. Compare also § 4 of the preceding Chapter of the present Book. It should be noted that the nominal rate of profits of a private firm is increased when a manager, who brings no capital with him, is taken into partnership and rewarded by a share of the profits instead of a salary.

84. On risk as an element of cost see V. VII. 4. There would be an advantage in a careful analytical and inductive study of the attractive or repellent force which various kinds of risks exert on persons of various temperaments, and as a consequence on earnings and profits in risky occupations; it might start from Adam Smith's remarks on the subject.

85. There is a great difficulty in ascertaining even approximately the amounts of capital of different kinds invested in different classes of business. But guided mainly by the valuable statistics of American Bureaux, inexact as they avowedly are in this particular matter, we may conclude that the annual output is less than the capital in industries where the plant is very expensive, and the processes through which the raw material has to go are very long, as watch and cotton factories: but that it is more than four times the capital in businesses in which the raw material is expensive and the process of production rapid, e.g. boot factories; as well as in some industries, which make only a slight change in the form of their material, such as sugar-refining, and slaughtering and meat-packing.

Next, analysing the turnover of circulating capital and comparing the cost of raw material to the wages-bill, we find that the former is much less than the latter in watch-factories, where the bulk of the material is small, and in stone, brick and tile works, where it is of a common sort: but in the large majority of industries the cost of material is much greater than the wages-bill; and on the average of all the industries it is three and a half times as great. And in the Slight-change industries it is generally from twenty-five to fifty times as great.

Many of these inequalities disappear if the value of the raw material, coal, etc. used in a business is deducted before reckoning its output. This plan is commonly followed by careful statisticians in estimating the manufacturing output of a country, so as to avoid counting say yarn and cloth twice over; and similar reasons should make us avoid counting both cattle and fodder crops in the agricultural product of a country. This plan is however not quite satisfactory. For logically one ought to deduct the looms which a weaving factory buys as well as its yarn. Again, if the factory itself was reckoned as a product of the building trades, its value should be deducted from the output (over a term of years) of the weaving trade. Similarly with regard to farm buildings. Farm horses ought certainly not to be counted, nor for some purposes any horses used in trade. However the plan of deducting nothing but raw material has its uses, if its inaccuracy is clearly recognized.

86. See above IV. XI. 2-4.

87. See above p. 483.

88. Compare pp. 319, 320.

89. He would however not need to charge a high rate of profits per annum on that part of his capital which he had sunk in the earlier stages of building the ship; for that capital, when once invested, would no longer require any special exercise of his ability and industry, and it would be sufficient for him to reckon his outlay "accumulated" at a high rate of compound interest; but in that case he must count the value of his own labour as part of his early outlay. On the other hand, if there be any trade in which a continuous and nearly uniform expenditure of trouble is called for on all the capital invested, then it would be reasonable in that trade to find the "accumulated" value of the earlier investments by the addition of a "compound" rate of profit (i.e. a rate of profit increasing geometrically as compound interest does). And this plan is frequently adopted in practice for the sake of simplicity even where it is not theoretically quite correct.

90. Strictly speaking it will be a little greater than the sum of these three, because it will include compound interest over a longer period.

91. The fishmongers and greengrocers in working-class quarters especially lay themselves out to do a small business at a high rate of profits; because each individual purchase is so small that the customer would rather buy from a dear shop near at hand than go some way to a cheaper one. The retailer therefore may not be getting a very good living though he charges a penny for what he bought for less than a halfpenny. The same thing was however perhaps sold by the fisherman or the farmer for a farthing or even less: and the direct lost of carriage and insurance against loss will not account for any great part of this last difference. Thus there seems to be some justification for the popular opinion that the middlemen in these trades have special facilities for obtaining abnormally high profits by combination among themselves.

92. The expert evidence that is given in such cases is full of instruction to the economist in many ways, and in particular because of the use of mediæval phrases as to the customs of the trade, with a more or less conscious recognition of the causes which have produced those customs, and to which appeal must be made in support of their continued maintenance. And it almost always comes out finally that if the "customary" rate of profit on the turnover is higher for one class of job than another, the reason is that the former does (or did a little while ago) require a longer locking-up of capital; or a greater use of expensive appliances (especially such as are liable to rapid depreciation, or cannot be kept always employed, and therefore must pay their way on a comparatively small number of jobs); or that it requires more difficult or disagreeable work, or a greater amount of attention on the part of the undertaker; or that it has some special element of risk for which insurance has to be made. And the unreadiness of experts to bring to light these justifications of custom, which are lying almost hidden from themselves in the recesses of their own minds, gives ground for the belief that if we could call to life and cross-examine mediæval business men, we should find much more half-conscious adjustment of the rate of profit to the exigencies of particular cases than has been suggested by historians. Many of them fail sometimes to make it clear whether the customary rate of profits of which they are speaking is a certain rate on the turnover, or such a rate on the turnover as will afford in the long run a certain rate of profits per annum on the capital. Of course the greater uniformity of the methods of business in mediæval times, would enable a tolerably uniform rate of profits on the capital per annum to exist without causing so great variations in the rate on the turnover as are inevitable in modern business. But still it is clear that if one kind of rate of profits were nearly uniform, the other would not be; and the value of much that has been written on mediæval economic history seems to be somewhat impaired by the absence of a distinct recognition of the differences between the two kinds, and between the ultimate sanctions on which customs relating severally to them must depend.

93. A century ago many Englishmen returned from the Indies with large fortunes, and the belief spread that the average rate of profits to be made there was enormous. But, as Sir W. Hunter points out (Annals of Rural Bengal, ch. VI.), the failures were numerous, but only "those who drew prizes in the great lottery returned to tell the tale." And at the very time when this was happening, it used commonly to be said in England that the families of a rich man and his coach-man would probably change places within three generations. It is true that this was partly due to the wild extravagance common among young heirs at that time, and partly to the difficulty of finding secure investments for their capital. The stability of the wealthy classes of England has been promoted almost as much by the spread of sobriety and education as by the growth of methods of investment, which enable the heirs of a rich man to draw a secure and lasting income from his wealth though they do not inherit the business ability by which he acquired it. There are however even now districts in England, in which the majority of manufacturers are workmen or the sons of workmen. And in America, though foolish prodigality is perhaps less common than in England, yet the greater changefulness of conditions, and the greater difficulty of keeping a business abreast of the age, have caused it commonly to be said that a family passes "from shirt sleeves to shirt sleeves" in three generations. Wells says (Recent Economic Changes, p. 351), "There has long been a substantial agreement among those competent to form an opinion, that ninety per cent. of all the men who try to do business on their own account fail of success." And Mr J. H. Walker gives (Quarterly Journal of Economics, Vol. II. p. 448) some detailed statistics with regard to the origin and careers of the manufacturers in the leading industries of Worcester in Massachusetts between 1840 and 1888. More than nine-tenths of them began life as journeymen; and less than ten per cent. of the sons of those who were on the list of manufacturers in 1840, 1850 and 1860, had any property in 1888, or had died leaving any. And as to France, M. Leroy Beaulieu says (Répartition des Richesses, ch. XI.) that out of every hundred new businesses that are started twenty disappear almost at once, fifty or sixty vegetate, neither rising nor falling, and only ten or fifteen are successful.

94. The late General Walker rendered excellent service in explaining the causes that govern wages on the one hand and earnings of management on the other. But he maintained (Political Economy, §311) that profits do not form a part of the price of manufactured products; and he does not limit that doctrine to short periods, for which, as we have seen, the income derived from all skill, whether exceptional or not, whether that of an employer or a workman, may be regarded as a quasi-rent. He uses indeed the word "profits" in an artificial sense; for, having excluded interest altogether from profits, he assumes that the "No-profits employer" earns "on the whole or in the long run the amount which he could have expected to receive as wages if employed by others" (First Lessons, 1889, § 190): that is to say, the "No-profits employer" obtains, in addition to interest on his capital, normal net earnings of management of men of his ability whatever that may be. Thus profits in Walker's sense exclude four-fifths of what are ordinarily classed as profits in England (the proportion would be rather less in America, and rather more on the Continent than in England). So that his doctrine would appear to mean only that that part of the employer's income, which is due to exceptional abilities or good fortune, does not enter into price. But the prizes as well as the blanks of every occupation, whether it be that of an employer or not, take their part in determining the number of persons who seek that occupation and the energy with which they give themselves to their work: and therefore do enter into normal supply price. Walker appears to rest his argument mainly on the important fact, which he has done much to make prominent, that the ablest employers, who in the long run get the highest profits, are as a rule those who pay the highest wages to the workman and sell at the lowest price to the consumer. But it is an equally true and an even more important fact that those workmen who get the highest wages are as a rule those who turn their employers' plant and material to best account (see VI. III. 2), and thus enable him both to get high profits for himself and to charge low prices to the consumer.

95. Compare V. X. 8.

96. When a firm has a speciality of its own, many even of its ordinary workmen would lose a great part of their wages by going away, and at the same time injure the firm seriously. The chief clerk may be taken into partnership, and the whole of the employees may be paid partly by a share in the profits of the concern; but whether this is done or not, their earnings are determined, not so much by competition and the direct action of the law of substitution, as by a bargain between them and their employers, the terms of which are theoretically arbitrary. In practice however they will probably be governed by a desire to "do what is right," that is, to agree on payments that represent the normal earnings of such ability, industry and special training as the employees severally possess, with something added if the fortunes of the firm are good, and something subtracted if they are bad.

Book VI, Chapter IX

97. But compare V. XI. 2 for exceptions to the rule as to situation rent.

98. IV. III. 3. Thus we see that if the value of produce rises from OH' to OH (figs. 12, 13, 14), so that while an amount of produce OH was required to remunerate a dose of capital and labour before the rise, an amount OH' would suffice after the rise, then the producer's surplus will be increased a little in the case of lands of the class represented in fig. 12, with regard to which the tendency to diminishing return acts quickly; much more with regard to the second class of lands (fig. 13), and most of all with regard to the third class (fig. 14).

99. Ib. § 4. Comparing two pieces of land (figs. 16 and 17) with regard to which the tendency to diminishing return acts in a similar way, but of which the first is rich and the second poor, we found that the rise of producer's surplus from AHC to AH'C', caused by a rise in the price of produce in the ratio OH to OH', was much larger in proportion in the second case.

100. England is so small and so thickly peopled, that even milk and vegetables which require to be marketed quickly, and even hay in spite of its bulk, can be sent across the country at no inordinate expense: while for the staple products, corn and live stock, the cultivator can get nearly the same net price in whatever part of England he is. For this reason English economists have ascribed to fertility the first rank among the causes which determine the value of agricultural land; and have treated situation as of secondary importance. They have therefore often regarded the producer's surplus, or rental value, of land as the excess of the produce which it yields, over what is returned to equal capital and labour (applied with equal skill) to land that is so barren as to be on the margin of cultivation; without taking the trouble to state explicitly either that the two pieces of land must be in the same neighbourhood, or that separate allowance must be made for differences in the expense of marketing. But this method of speaking did not come naturally to economists in new countries, where the richest land might lie uncultivated, because it had not good access to markets. To them situation appeared at least equally important with fertility in determining the value of land. In their view land on the margin of cultivation, was land far from markets; and, especially, land far from railways that lead to good markets: and the producer's surplus presented itself to them as the excess value of the produce from well-situated land over that which equal labour, capital (and skill), would get on the worst-situated land; allowance being of course made for differences of fertility, if necessary. In this sense the United States cannot any longer be regarded as a new country: for all the best land is taken up, and nearly all of it has obtained access by cheap railways to good markets.

101. Footnote to his third Chapter.

102. Petty's memorable statement of the law of rent (Taxes and Contributions, IV. 13) is so worded as to apply to all forms of tenure and to all stages of civilization:—"Suppose a man could with his own hands plant a certain scope of Land with Corn, that is, could Digg, or Plough; Harrow, Weed, Reap, Carry home, Thresh, and Winnow, so much as the Husbandry of this Land requires; and had withal Seed wherewith to sow the same. I say, that when this man hath subducted his seed out of the proceed of his Harvest, and also what himself hath both eaten and given to others in exchange for Clothes, and other Natural necessaries; that the Remainder of Corn, is the natural and true Rent of the Land for that year; and the medium of seven years, or rather of so many years as make up the Cycle, within which Dearths and Plenties make their revolution, doth give the ordinary Rent of the Land in Corn."

103. In technical language it is the distinction between the quasi-rents which do not, and the profits which do, directly enter into the normal supply prices of produce for periods of moderate length.

Book VI, Chapter X

104. The sleeping partner may be a village community; but recent investigations, especially those of Mr Seebohm, have given cause for believing that the communities were not often "free" and ultimate owners of the land. For a summary of the controversy as to the part which the village community has played in the history of England the reader is referred to the first chapter of Ashley's Economic History. Mention has already been made of the ways in which primitive forms of divided ownership of the land hindered progress, I. II. 2.

105. The firm may be further enlarged by the introduction of an intermediary who collects payments from a number of cultivators, and after deducting a certain share, hands them over to the head of the firm. He is not a middleman in the sense in which the word is used ordinarily in England; that is, he is not a subcontractor, liable to be dismissed at the end of a definite period for which he has contracted to collect the payments. He is a partner in the firm, having rights in the land as real as those of the head partner, though, it may be, of inferior value. The case may be even more complex than this. There may be many intermediate holders between the actual cultivators and the person who holds direct from the State. The actual cultivators also vary greatly in the character of their interests; some having a right to sit at fixed rents and to be altogether exempt from enhancement, some to sit at rents which are enhanceable only under certain prescribed conditions, some being mere tenants from year to year.

106. Prof. Maitland in the article on Court Rolls in the Dictionary of Political Economy observes that "we shall never know how far the tenure of the mediæval tenant was precarious until these documents have been examined."

107. Thus Mr Pusey's Committee of the House of Commons in 1848 reported, "That different usages have long prevailed in different counties and districts of the country, conferring a claim on an outgoing tenant for various operations of husbandry.... That these local usages are imported into leases or agreements, ... unless the terms of the agreement expressly, or by implication, negative such a presumption. That in certain parts of the country a modern usage has sprung up, which confers a right on the outgoing tenant to be reimbursed certain expenses ... other than those above referred to.... That this usage appears to have grown out of improved and spirited systems of farming, involving a large outlay of capital.... That these [new] usages have gradually grown into general acceptance in certain districts, until they have ultimately become recognized there as the custom of the country." Many of them are now enforced by law. See below, § 10.

108. Thus the value of a service of a certain number of days' work would depend partly on the promptness with which the labourer left his own hayfield when called to that of his landlord, and on the energy he put into his work. His own rights, such as that of cutting wood or turf, were elastic; and so were those of his landlord which bound him to allow flocks of pigeons to devour his crops unmolested, to grind his corn in the lord's mill, and to pay tolls levied on the lord's bridges and in his markets. Next, the fines or presents, or "abwabs" as they are called in India, which the tenant might be called on to pay, were more or less elastic, not only in their amounts but in the occasions on which they were levied. Under the Moguls the tenants in chief had often to pay a vast number of such imposts in addition to their nominally fixed share of the produce: and they passed these on, increased in weight and with additions of their own, to the inferior tenants. The British Government has not levied them itself; but it has not been able, in spite of many efforts, to protect the inferior tenants from them. For instance, in some parts of Orissa, Sir W. W. Hunter found that the tenants had to pay, besides their customary rent, 33 different cesses. They paid whenever one of their children married, they paid for leave to erect embankments, to grow sugar-cane, to attend the festival of Juggernaut, etc. (Orissa, I. 55-9.)

109. In India at the present time we see very various forms of tenure existing side by side, sometimes under the same name and sometimes under different names. There are places in which the raiyats and the superior holders own between them the property in the land subject to definite dues to Government, and where the raiyat is safe not only from being ejected, but also from being compelled by fear of violence to pay over to his superior holder more than that share of the producer's surplus, which custom strictly prescribes. In that case the payment which he makes is, as has already been said, simply the handing over to the other partner in the firm of that share of the receipts of the firm which under the unwritten deed of partnership belongs to him. It is not a rent at all. This form of tenure, however, exists only in those parts of Bengal in which there have been no great recent dislocations of the people, and in which the police are sufficiently active and upright to prevent the superior holders from tyrannizing over the inferior.

In the greater part of India the cultivator holds directly from the Government under a lease the terms of which can be revised at intervals. And the principle on which those leases are arranged, especially in the North-West and North-East, where new land is being settled, is to adjust the annual payments due for it to the probable Surplus Produce of the land, after deducting the cultivator's necessaries and his little luxuries, according to the customary standard of the place, and on the supposition that he cultivates with the energy and skill that are normal in that place. Thus as between man and man in the same place the charge is of the nature of economic rent. But, since unequal charges will be levied in two districts of equal fertility, of which one is cultivated by a vigorous and the other by a feeble population, its method of adjustment as between different districts is rather that of a tax, than a rent. For taxes are supposed to be apportioned to the net income which actually is earned, and rents to that which would be earned by an individual of normal ability: a successful trader will pay on ten times as large an actual income ten times as large a tax as his neighbour who lives in equally advantageous premises and pays equal rents.

The whole history of India records little of that quiet stability which has come over the rural parts of England since war, famine, and plague have ceased to visit us. Extensive movements seem to have been nearly always in progress, partly in consequence of the recurrence of famines (for, as the Statistical Atlas of India shows, there are very few districts which have not been visited at least once by a severe famine during this century); partly of the devastating wars which one set of conquerors after another has inflicted on the patient people; and partly of the rapidity with which the richest land reverts to a thick jungle. The land which has supported the largest population is that which, when deprived of its human inhabitants, most quickly provides shady harbours for wild beasts, for venomous snakes, and for malaria; these prevent the return of the refugees to their old homes, and cause them often to wander far before they settle. When land has been depopulated, those who have the control over it, whether the Government or private persons, offer very favourable terms in order to attract cultivators from elsewhere; this competition for tenants very much influences the relations of cultivators and superior holders for a long distance around them; and therefore, in addition to the changes of customary tenure, which, though impalpable at any time, have been always going on, there have been in almost every place many epochs in which the continuity even of the former custom has been broken and keen competition has reigned supreme.

These disturbing forces of war, famine, and plague were frequent in mediæval England, but their violence was less. And further, the rate of movement of nearly all changes in India has been greater than it would have been if the average period of a generation were as long as in the colder climate of England. Peace and prosperity therefore enable Indian populations to recover from their calamities more quickly; and the traditions which each generation holds of the doings of its fathers and grandfathers run back for a shorter time, so that usages of comparatively recent growth are more easily believed to have the sanction of antiquity. Change can move faster without being recognized as change.

Modern analysis may be applied to the contemporary conditions of land tenure in India and other Oriental countries, the evidence as to which we can examine and cross-examine, in such a way as to throw light on the obscure and fragmentary records of mediæval land tenures, which may indeed be examined, but cannot be cross-examined. There is of course great danger in applying modern methods to primitive conditions: it is easier to misapply them than to apply them rightly. But the assertion, which has been sometimes made, that they cannot be usefully applied at all appears to be based on a conception of the aims, methods and results of analysis, which has little in common with that presented in this, and other modern treatises. See A Reply in the Economic Journal, Sept. 1892.

110. The term Metayer applies properly only to cases in which the landlord's share of the produce is one-half; but it is usually applied to all arrangements of this kind whatever the landlord's share be. It must be distinguished from the Stock lease system in which the landlord provided part at least of the stock, but the tenant managed the farm entirely, at his own risk subject to a fixed annual payment to the landlord for land and stock. In mediæval England this system was much used, and the Metayer system appears not to have been unknown. (See Rogers, Six Centuries of Work and Wages, ch. X.)

111. In 1880 74 per cent. of the farms of the United States were cultivated by their owners, 18 per cent., or more than two-thirds of the remainder, were rented for a share of the produce, and only 8 per cent. were held on the English system. The largest proportion of farms that were cultivated by persons other than their owners were in the Southern States. In some cases the landowner—the farmer as he is called there—supplies not only horses and mules, but their feed; and in that case the cultivator—who in France would be called not a Metayer but a Maître Valet—is almost in the position of a hired labourer paid by a share of what he gets; as is for instance a hired fisherman whose pay is the value of a part of the catch. The tenant's share varies from one-third, where the land is rich and the crops such as to require little labour, to four fifths, where there is much labour and the landlord supplies little capital. There is much to be gained from a study of the many various plans on which the share contract is based.

112. The relations between publisher and author on the "half-profits" system resemble in many ways those between landlord and metayer.

113. This can be most clearly seen by aid of diagrams of the same kind as those used in IV. III. A tenant's-share curve would be drawn standing one-half (or one-third or two-thirds) as high above OD as AC does; the area below that curve would represent the tenant's share, that above the landlord's. OH being, as before, the return required to remunerate the tenant for one dose; he will, if left to his own devices, not carry cultivation beyond the point at which the tenant's-share curve cuts HC: and the landlord's will therefore be a less proportion of the returns to a slighter cultivation than under the English plan. Diagrams of this kind may be used to illustrate the way in which Ricardo's analysis of the causes that govern the Producer's Surplus from land, apply to systems of tenure other than the English. A little further change will adapt them to such customs as those found in Persia, where land itself is of small value; and "the harvest is divided into five parts, which are apportioned as follows, one part to each: 1, land; 2, water for irrigation, etc.; 3, seed; 4, labour; 5, bullocks. The landlord generally owns two, so he gets two-fifths of the harvest."

114. This is already done in America, and in many parts of France; and some good judges think that the practice may be extended largely, and infuse new life into what a little while ago was regarded as the decaying system of Metayage. If worked out thoroughly, it will result in the cultivation being carried just about as far and affording the landlord the same income as he would have on the English plan for equally fertile and well-situated land equipped with the same capital, and in a place in which the normal ability and enterprise of candidates for farms is the same.

On the elasticity of Metayage in France see an article by Higgs and Lambelin in the Economic Journal, March 1894; and Leroy-Beaulieu, Répartition des Richesses, ch. IV.

Starting as in the last note, let the Circulating capital supplied by the landlord be represented by the distance OK marked off along OD. Then, if the landlord controls the amount OK freely and in his own interest, and can bargain with his tenant as to the amount of labour he applies, it can be proved geometrically that he will so adjust it as to force the tenant to cultivate the land just as intensively as he would under the English tenure; and his share will then be the same as under it. If he cannot modify the amount OK, but can still control the amount of the tenant's labour, then with certain shapes of the produce curve, the cultivation will be more intensive than it would be on the English plan; but the landlord's share will be somewhat less. This paradoxical result has some scientific interest, but little practical importance.

115. The term "peasant proprietor" is a very vague one: it includes many who by thrifty marriages have collected into one hand the results of several generations of hard work and patient saving; and in France some of these were able to lend freely to the Government after the great war with Germany. But the savings of the ordinary peasant are on a very small scale; and in three cases out of four his land is starved for want of capital: he may have a little money hoarded or invested, but no good grounds have been shown for believing that he often has much.

116. It would seem that England gets more produce per acre of fertile land than even the Netherlands, though there is some doubt about it. The Netherlands have led the way for England in more paths of industrial enterprise than any other country has; and this enterprise has diffused itself from their thickly scattered towns over the whole land. But there is error in the common opinion that they support as dense a population as England does, and yet export on the balance a great deal of agricultural produce. For Belgium imports a great part of her food; and even Holland imports as much food as she exports, though her non-agricultural population is small. In France, farm crops and even potatoes are on the average only about half as heavy as in England proper; and France has only about half the weight of cattle and sheep in proportion to her area. On the other hand, the small cultivators of France excel in poultry and fruit and other light branches of production for which her superb climate is well suited.

117. For long periods the landlord may be regarded as an active partner and the predominant partner in the business: for short periods his place is rather that of the sleeping partner. On the part played by his enterprise compare the Duke of Argyll's Unseen Foundations of Society, especially p. 374.

118. There is still (1907) considerable difference of opinion as to the extent to which the habits of the landlords combined with the existing system of tenure hinder the formation of new small holdings, which might provide an intelligent labourer with an opportunity for starting an independent business of his own, as easily as the artisan can start a retail shop and repairing business in metal or other goods.

119. The difficulty is even greater in small holdings. For the capitalist farmer does at all events measure the prime cost in terms of money. But the cultivator working with his own hands often puts into his land as much work as he feels able to do, without estimating carefully its money value in relation to its product.

Although peasant proprietors resemble the heads of other small businesses in their willingness to work harder than those whom they hire and for less reward; yet they differ from the small masters in manufacture in this, that they often do not hire extra labour even when it would pay them well to do so. If all that they and their family can do for their land is less than enough for it, it is generally under-cultivated: if more, it is often cultivated beyond the remunerative limit. It is a common rule that those who give the time which is free from their main occupation to some other industry, often regard their earnings in this last, however low, as an extra gain; and they sometimes even work below what would be a starvation wage to those who depend on that industry for support. This is especially true when the side-industry is that of cultivating, partly for the pleasure of doing it, a small plot of land with imperfect appliances.

120. See VI. II. 5, and the references given there.

121. Prothero's English Farming, ch. VI. gives some instances of prolonged resistance to changes, and adds that an Act had to be passed in England as late as 1634 "agaynst plowynge by the taile."

122. See IV. III. 5, 6.

123. Horse-power is dearer relatively to both steam-power and hand-power in England than in most other countries. England has taken the lead in the improvement of field steam machinery. The cheapness of horse-power tells generally on the side of moderate sized farms versus very small ones; but the cheapness of steam-power and "motor" power obtained from petrol, etc., tells on the side of very large farms, except in so far as the use of field steam machinery can be hired economically and at convenient times.

124. The experiment of working farms on a very large scale is difficult and expensive, because it requires farm buildings and means of communication specially adapted to it; and it may have to overcome a good deal of resistance from custom and sentiment not altogether of an unhealthy kind. The risk also would be great; for in such cases those who pioneer often fail, though their route when well trodden may be found to be the easiest and best.

Our knowledge on many disputed points would be much increased and valuable guidance gained for the future if some private persons, or joint-stock companies, or co-operative associations, would make a few careful experiments of what have been called "Factory farms." On this plan there would be a central set of buildings (there might be more than one) from which roads and even light tramways extended in all directions. In these buildings the recognized principles of factory management would be applied, machinery would be specialized and economized, waste of material would be avoided, by-products would be utilized, and above all the best skill and managing power would be employed, but only for its proper work.

125. The interpretation of this term varies with local conditions and individual wants. On permanent pasture near a town or an industrial district the advantages of small holdings are perhaps at their maximum, and the disadvantages at their minimum. For small arable holdings the land should not be light, but strong, and the richer the better; and this is especially the case with holdings so small as to make much use of the spade. The small cultivator can often pay his rent most easily where the land is hilly and broken, because there he loses but little from his want of command of machinery.

126. They increase the number of people who are working in the open air with their heads and their hands: they give to the agricultural labourer a stepping-stone upwards, prevent him from being compelled to leave agriculture to find some scope for his ambition, and thus check the great evil of the continued flow of the ablest and bravest farm lads to the towns. They break the monotony of existence, they give a healthy change from indoor life, they offer scope for variety of character and for the play of fancy and imagination in the arrangement of individual life; they afford a counter attraction to the grosser and baser pleasures; they often enable a family to hold together that would otherwise have to separate; under favourable conditions they improve considerably the material condition of the worker; and they diminish the fretting as well as the positive loss caused by the inevitable interruptions of their ordinary work.

The evidence before the Committee on small holdings, 1906 [Cd 3278] discusses very fully the advantages and disadvantages of ownership for small holders; with apparently a balance of opinion against ownership.

In 1904 there were in Great Britain 111,000 holdings between 1 and 5 acres; 232,000 between 5 and 50 acres; 150,000 between 50 and 300; and 18,000 above 300 acres. See Ib. Appendix II.

127. The Ricardian theory of rent ought not to bear the greater part of the blame that has been commonly thrown on it, for those mistakes which English legislators made during the first half of this century in trying to force the English system of land tenure on India and Ireland. The theory concerns itself with the causes that determine the amount of the Producer's surplus from land at any time; and no great harm was done when this surplus was regarded as the landlord's share, in a treatise written for the use of Englishmen in England. It was an error in jurisprudence and not in economics that caused our legislators to offer to the Bengal tax-collector and Irish landlord facilities for taking to themselves the whole property of a cultivating firm, which consisted of tenant and landlord in the case of Ireland, and in the case of Bengal, of the Government and tenants of various grades; for the tax-collector was in most cases not a true member of the firm, but only one of its servants. But wiser and juster notions are prevailing now in the Government of India as well as of Ireland.

128. Compare Tooke and Newmarch, History of Prices, Vol. VI. App. III.

129. Difficulties of this kind are practically solved by compromises which experience has justified, and which are in accordance with the scientific interpretation of the term "normal." If a local tenant showed extraordinary ability, the landlord would be thought grasping who, by threatening to import a stranger, tried to extort a higher rent than the normal local farmer could make the land pay. On the other hand, a farm being once vacant, the landlord would be thought to act reasonably if he imported a stranger who would set a good model to the district, and who shared about equally with the landlord the extra net surplus due to his ability and skill, which, though not strictly speaking exceptional, were yet above the local standard. Compare the action of Settlement Officers in India with regard to equally good land cultivated by energetic and unenergetic races, noticed in the footnote on p. 642.

130. Compare Nicholson, Tenants' Gain not Landlords' Loss, ch. X.

131. The Agricultural Holdings Act of 1883 enforced customs which Mr. Pusey's committee eulogized, but did not propose to enforce. Many improvements are made partly at the expense of the landlord and partly at that of the tenant, the former supplying the materials, and the latter the labour. In other cases it is best that the landlord should be the real undertaker of the improvements, bearing the whole expense and risk, and realizing the whole gain. The Act of 1900 recognized this; and, partly for the sake of simplicity in working, it provided that compensation for some improvements can be claimed only if they have been made with the consent of the landlord. In the case of drainage notice of the tenant's wishes must be served on the landlord; so that he may have the opportunity of himself undertaking the risks and reaping a share of the accruing benefits. In reference to manuring, and some kinds of repairs, etc., the tenant may act without consulting the landlord, merely taking the risk that his outlay will not be regarded by the arbitrator as calling for compensation.

Under the Act of 1900 the arbitrator was to assign such compensation as would "represent fairly the value of the improvement to an incoming tenant," after deduction for any part of that value which might be due to evoking dormant "inherent capabilities of the soil." But this deduction was struck out by the Act of 1906; the interests of the landlord being regarded as sufficiently secured by the provisions requiring his consent in some of those cases, in which such dormant capabilities might be evoked; and by giving him an opportunity of taking the risks himself in the rest.

132. This matter is further discussed in Appendix G.

Book VI, Chapter XI

133. Comp. IV. V. VI. and VII. and XII.; and VI. IV. V. and VII.

134. Compare V. III. 3; and VI. VII. 2.

135. Compare IV. VI. 7; and VI. V. 2.

136. Compare V. II. 3, and VI. IV. 6, and VIII. 7-9.

137. Suppose, for instance, that an increase in the supply of work of the group by one-tenth forced them into work in which their marginal uses were lower, and thus lowered by a thirtieth their wages for any given amount of work; then, if the change came from an increase in their numbers, their average wages would fall by a thirtieth. But if it came from an increase in their efficiency, their wages would rise by about a sixteenth. (More exactly they would be 11/10 × 29/30 = 1 19/300 of what they were before.)

138. As regards the relation between wages and the marginal net product of labour see VI. I. and II. and especially pp. 516-7 and 537-540: the matter is further discussed in VI. XIII. especially p. 706 n. As regards the need to seek a truly representative margin see V. VIII. 4, 5: where it is argued (p. 409 n.) that when that has been reached, the influence of the supply of any group of workers on the wages of others has already been reckoned: and that the influence which any one individual worker exerts on the general economic environment of the industries of a country is infinitesimal, and is not relevant to an estimate of his net product in relation to his wages. In V. XII. and Appendix H something is said of the hindrances to a rapid increase of output even where such an increase would theoretically yield great economies; and of the special care needed in the use of the term "margin" in regard to them.

Book VI, Chapter XII

139. Suppose for instance that an amount of capital, c, co-operating with an amount of labour, l, had raised a product 4p; of which p goes as interest to capital, and the remaining 3p to labour. (The labour is of many grades, including management, but it is all referred to a common standard in a day's unskilled labour of given efficiency: see above IV. III. 8.) Suppose that the quantity of labour has doubled, and that of capital has quadrupled: while the absolute efficiency in production of any given amount of each of the agents has not changed. Then we may expect 4c in co-operation with 2l to produce 2 × 3p + 4p = 10p. Now suppose the rate of interest, i.e. the reward for any quantum of capital (exclusive that is of the work of management etc.) to have fallen to two-thirds of its original amount; so that 4c receives only 8/3p instead of 4p as interest; then there will be left for labour of all kinds 7 1/3p instead of 6p. The amount, that goes to each quantum of capital, will have decreased; and that which goes to each quantum of labour, will have increased. But the aggregate amount that goes to capital will have increased in the ratio of 8:3; while that which goes to labour will have increased in the lower ratio of 22:9.

It is best in such matters to isolate interest, but, of course, we might have spoken of profits instead of interest, and contrasted the share of capitalists (rather than of capital) with that of hired labour.

140. We took account of them when arriving at the conclusion that the tendency to increasing return would on the whole countervail that to diminishing return: and we ought to count them in at their full value when tracing the changes in real wages. Many historians have compared wages at different epochs with exclusive reference to those things which have always been in common consumption. But from the nature of the case, these are just the things to which the law of diminishing return applies, and which tend to become scarce as population increases, and the view thus got is therefore one-sided and misleading in its general effect.

141. The evils of the past were however greater than is commonly supposed. See e.g. the striking evidence of the late Lord Shaftesbury and of Miss Octavia Hill upon the Commission on Housing of 1885. London air is full of smoke; but it is probably less unwholesome than it was before the days of scientific sanitation, even though the population was then relatively small.

142. Primitive appliances will bring water from high ground to a few public fountains: but the omnipresent water supply which both in its coming and its going performs essential services for cleanliness and sanitation, would be impossible without coal-driven steam-pumps and coal-made iron pipes.

143. See Appendix A, especially § 6.

144. Mr W. Sturge (in an instructive paper read before the Institute of Surveyors, Dec. 1872) estimates that the agricultural (money) rent of England doubled between 1795 and 1815, and then fell by a third till 1822; after that time it has been alternately rising and falling; and it is now about 45 or 50 millions as against 50 or 55 millions about the year 1873, when it was at its highest. It was about 30 millions in 1810, 16 millions in 1770, and 6 millions in 1600. (Compare Giffen's Growth of Capital, ch. V., and Porter's Progress of the Nation, Sect. II. ch. I.) But the rental of urban land in England is now much greater than the rent of agricultural land: and in order to estimate the full gain of the landlords from the expansion of population and general progress, we must reckon in the values of the land on which there are now railroads, mines, docks, etc. Taken all together, the money rental of England's soil is more than twice as high, and its real rental is perhaps four times as high, as it was when the corn laws were repealed.

145. Of course there are exceptions. Economic progress may take the form of building new railways that will draw off much of the traffic of some of those already existing, or of increasing the size of ships till they can no longer enter docks the entrance to which is through shallow waters.

146. See IV. VII.

147. See above VI. VI. 7.

148. Comp. IV. VI. 1, 2; and IX. 6. As the trade progresses, improvements in machinery are sure to lighten the strain of accomplishing any given task; and therefore to lower task wages rapidly. But meanwhile the pace of the machinery, and the quantity of it put under the charge of each worker, may be increased so much that the total strain involved in the day's work is greater than before. On this subject employers and employed frequently differ. It is for instance certain that time wages have risen in the textile trades; but the employees aver, in contradiction to the employers, that the strain imposed on them has increased more than in proportion. In this controversy wages have been estimated in money; but when account is taken of the increase in the purchasing power of money, there is no doubt that real efficiency wages have risen; that is, the exertion of a given amount of strength, skill and energy is rewarded by a greater command over commodities than formerly.

149. This may be made clearer by an example. If there are 500 men in grade A earning 12s. a week, 400 in grade B earning 25s. and 100 in grade C earning 40s., the average wages of the 1000 men are 20s. If after a time 300 from grade A have passed on to grade B, and 300 from grade B to grade C, the wages in each grade remaining stationary, then the average wages of the whole thousand men will be about 28s. 6d. And even if the rate of wages in each grade had meanwhile fallen 10 per cent., the average wages of all would still be about 25s. 6d., that is, would have risen more than 25 per cent. Neglect of such facts as these, as Sir R. Giffen has pointed out, is apt to cause great errors.

150. The above brief remarks on the evolution of wages may well be supplemented by Prof. Schmoller's survey in his Volkswirtschaftslehre, III. 7 (Vol. II. pp. 259-316). It is specially notable for its breadth of view, and its careful coordination of the material and psychical elements of progress. See also the latter half of his second Book.

151. It should be noticed however that some of these gains may be traced to those opportunities for the formation of trade combinations engineered by a few able, wealthy and daring men to exploit for their own benefit a great body of manufactures, or the trade and traffic of a large district. That part of this power, which depends on political conditions, and especially on the Protective tariff, may pass away. But the area of America is so large, and its condition so changeful, that the slow and steady-going management of a great joint-stock company on the English plan is at a disadvantage in competition with the vigorous and original scheming, the rapid and resolute force of a small group of wealthy capitalists, who are willing and able to apply their own resources in great undertakings to a much greater extent than is the case in England. The ever-shifting conditions of business life in America enable natural selection to bring to the front the best minds for the purpose from their vast population, almost every one of whom, as he enters on life, resolves to be rich before he dies. The modern developments of business and of business fortunes are of exceptional interest and instruction to Englishmen: but their lessons will be misread unless the essentially different conditions of business life in the old world and the new are constantly borne in mind.

152. An instance, which came under the present writer's observation, may be mentioned here. In Palermo there is a semi-feudal connection between the artisans and their patrons. Each carpenter or tailor has one or more large houses to which he looks for employment; and so long as he behaves himself fairly well, he is practically secure from competition. There are no great waves of depression of trade; the newspapers are never filled with accounts of the sufferings of those out of work, because their condition changes very little from time to time. But a larger percentage of artisans are out of employment at the best of times in Palermo, than in England in the centre of the worst depression of recent years. Something further is said as to inconstancy of employment below, VI. XIII. 10.

Book VI, Chapter XIII

153. See VI. II. 2, 3; also IV. IV. and V.; and VI. IV.

154. See IV. V. 4.

155. The facts are much in question, partly because they vary much from one industry to another; and those who have the most intimate knowledge of them, are apt to be biassed. When piece-work can be brought under collective bargaining by trade unions, the first effect of an improvement in plant is to raise real wages: and the onus of claiming a readjustment of piece rates in order to keep wages in just proportion to those which are being earned by equally difficult and responsible work in other occupations, is thus thrown upon the employers. In such cases, piece-work is generally in favour with employees. And where their organization is good, as in some classes of mining work, they approve it even in regard to work that is not uniform. But in many other cases it arouses their suspicion of unfair advantage. See below, § 8. According to Prof. Schmoller, it is estimated that piece-work increases output by 20 to 100 per cent. according to the race of the workers and the character and technique of the industry, Volkswirtschaftslehre, § 208. An instructive detailed statement of the causes which lead workers generally to oppose payment by results in certain industries, while welcoming it in others, is given by Cole, The payment of wages, ch. II.

156. The history of British industries offers the most various, the most clearly defined, and the most generally instructive experiments as to the influence of variations in the hours of labour on output: but international studies on the subject seem to be specially German. See for instance Bernard, Höhere Arbeitsintensität bei Kurzeren Arbeitszeit, 1909.

157. On the whole of this subject see Prof. Chapman's address at the British Association, 1909, published in the Economic Journal, vol. XIX.

Double shifts are used more on the Continent than in England. But they have not a fair trial there, for the hours of labour are so long that double shifts involve work nearly all the night through; and night work is never so good as day work, partly because those who work at night do not rest perfectly during the day. No doubt certain practical objections can be urged against the plan; for instance, a machine is not so well cared for when two men share the responsibility of keeping it in order, as when one man has the whole management of it; and there is sometimes a difficulty about fixing responsibility for imperfections in the work done; but these difficulties can be in a great measure overcome by putting the machine and the work in charge of two partners. Again, there would be a little difficulty in readjusting the office arrangements to suit a day of sixteen hours. But employers and their foremen do not regard these difficulties as insuperable; and experience shows that workmen soon overcome the repugnance which they feel at first to double shifts. One set might end its work at noon, and the other begin then; or what would perhaps be better, one shift might work, say, from 5 a.m. to 10 a.m. and from 1.30 p.m. to 4.30 p.m., the second set working from 10.15 a.m. to 1.15 p.m. and from 4.45 p.m. to 9.45 p.m.; the two sets might change places at the end of each week or month. A general adoption of double shifts will be necessary if the extension of the marvellous powers of expensive machinery into every branch of manual work is to exercise the full influence of which it is capable in reducing the hours of labour much below eight.

158. See above, V. VI. 2.

159. To take an illustration, let us suppose that shoemakers and hatters are in the same grade, working equal hours, and receiving equal wages, before and after a general reduction in the hours of labour. Then both before and after the change, the hatter could buy, with a month's wages, as many shoes as were the net product of the shoemaker's work for a month (see VI. II. 7). If the shoemaker worked less hours than before, and in consequence did less work, the net product of his labour for a month would have diminished, unless either by a system of working double shifts the employer and his capital had earned profits on two sets of workers, or his profits could be cut down by the full amount of the diminution in output. The last supposition is inconsistent with what we know of the causes which govern the supply of capital and business power. And therefore the hatter's wages would go less far than before in buying shoes; and so all round for other trades.

160. For instance, when we look at the history of the introduction of the eight hours' day in Australia we find great fluctuations in the prosperity of the mines and the supply of gold, in the prosperity of the sheep farms and the price of wool, in the borrowing from old countries capital with which to employ Australian labour to build railways, etc., in immigration, and in commercial credit. And all these have been such powerful causes of change in the condition of the Australian working man as to completely overlay and hide from view the effects of a reduction of the hours of labour from 10 gross (8¾ net after deducting meal times) to 8 net. Money wages in Australia are much lower than they were before the hours were shortened; and, though it may be true that the purchasing power of money has increased, so that real wages have not fallen, yet there seems no doubt that the real wages of labour in Australia are not nearly as much above those in England as they were before the reduction in the hours of labour: and it has not been proved that they are not lower than they would have been if that change had not taken place. The commercial troubles through which Australia passed shortly after the change were no doubt mainly caused by a series of droughts supervening on a reckless inflation of credit. But a contributory cause appears to have been an over-sanguine estimate of the economic efficiency of short hours of labour, which led to a premature reduction of hours in industries not well adapted for it.

161. A short provisional description of trade unions is affixed to Vol. I. of my Elements of Economics, which is, in other respects, an abridgment of the present volume. And the account of their aims and methods given in the Final Report of the Labour Commission, 1893, has the unique authority derived from the cooperation of employers and trade union leaders of exceptional ability and experience.

162. Compare above, VI. III. 7 and V. 2.

163. The wholesome influences on social wellbeing, which are exercised by trade union leaders in many directions, are apt to be marred by a misunderstanding on this matter. They commonly give as their authority the very weighty and able treatise on Industrial Democracy by Mr and Mrs Webb, where the misunderstanding is suggested. Thus they say, p. 710, "It is now theoretically demonstrated, as we saw in our chapter on 'The Verdict of the Economists,' that under 'perfect competition,' and complete mobility between one occupation and another, the common level of wages tends to be no more than 'the net produce due to the labour of the marginal labourer' who is on the verge of not being employed at all!" And, p. 787 f. n., they refer to this marginal labourer as an industrial invalid or pauper, saying:—"If the wages of every class of labour under perfect competition tend to be no more than the net produce due to the additional labour of the marginal labourer of that class, who is on the verge of not being employed at all, the abstraction of the paupers, not necessarily from productive labour for themselves, but from the competitive labour market, by raising the capacity of the marginal wage labourer, would seem to increase the wages of the entire labouring class."

164. It is really an understatement to say that competition tends to make the employer willing to pay twice as high wages to A as to B under these conditions. For an efficient worker who will make the same factory space and plant and supervision serve for twice as much production as an inefficient worker, is worth more than twice as much wages to the employer: he may really be worth three times as much. (See above, VI. III. 2.) Of course the employer may be afraid to offer to the more efficient worker wages proportionate to his true net product, lest inefficient workers, supported by their unions, should over-estimate his rate of profits, and claim a rise in wages. But in this case the cause which makes the employer pay attention to the net product of the less efficient worker, when considering how much it is worth his while to offer to the more efficient, is not free competition, but that resistance to free competition which is offered by the misapplication of the common rule. Some modern schemes for "gain sharing" aim at raising the wages of efficient workers nearly in proportion to their true net product; that is, more than in proportion to the "piece-work" rate: but trade unions do not always favour such schemes.

165. A useful history of the opposition to machinery is given in Industrial Democracy, Part II. chapter VIII. It is combined with the advice not generally to resist the introduction of machinery, but not to accept lower wages for working on the old methods in order to meet its competition. This is good advice for young men. But it cannot always be followed by men who have reached their prime: and if the administrative power of Governments should increase faster than the new tasks which they appropriate from private enterprise, they may do excellent service by grappling with those social discords that arise, when the skill of middle-aged and elderly men is rendered almost valueless by improved methods.

166. It may be noted that the great Amalgamated Society of Engineers, to which reference has just been made, led the way to concerted action between kindred branches of industry that softens the hard outlines of delimitation.

167. The quotation from Mill and the two paragraphs which follow it are reproduced from The Economics of Industry, III. I. 4, published by my wife and myself in 1879. They indicate the attitude which most of those, who follow in the traditions of the classical economists, hold as to the relations between consumption and production. It is true that in times of depression the disorganization of consumption is a contributory cause to the continuance of the disorganization of credit and of production. But a remedy is not to be got by a study of consumption, as has been alleged by some hasty writers. No doubt there is good work to be done by a study of the influence of arbitrary changes in fashion on employment. But the main study needed is that of the organization of production and of credit. And, though economists have not yet succeeded in bringing that study to a successful issue, the cause of their failure lies in the profound obscurity and ever-changing form of the problem; it does not lie in any indifference on their part to its supreme importance. Economics from beginning to end is a study of the mutual adjustments of consumption and production: when the one is under discussion, the other is never out of mind.

168. Some years ago the annual income of some 49,000,000 people in the United Kingdom appeared to amount to more than £2,000,000,000. Many leading artisans were earning about £200 a year; and there were a vast number of artisan households in which each of four or five members were earning an income ranging from 18s. to 40s. a week. The expenditure of these households was on as large, if not a larger scale, than would be possible if the total income were divided out equally, so as to yield about £40 annually a head. PS, 1920. No recent statistics are accessible on the matter. But it seems certain that the incomes of the working classes generally are increasing at least as fast as those of other classes. Several of the suggestions made in the present chapter are further developed in an article on "The social possibilities of economic chivalry" in the Economic Journal for March 1907.

169. A beginning might be made with a broader, more educative and more generous administration of public aid to the helpless. The difficulty of discrimination would need to be faced: and in facing it local and central authorities would obtain much of the information needed for guiding, and in extreme cases for controlling, those who are weak and especially those whose weakness is a source of grave danger to the coming generation. Elderly people might be helped with a chief regard to economy and to their personal inclinations. But the case of those, who are responsible for young children, would call for a greater expenditure of public funds, and a more strict subordination of personal freedom to public necessity. The most urgent among the first steps towards causing the Residuum to cease from the land, is to insist on regular school attendance in decent clothing, and with bodies clean and fairly well fed. In case of failure the parents should be warned and advised: as a last resource the homes might be closed or regulated with some limitation of the freedom of the parents. The expense would be great: but there is no other so urgent need for bold expenditure. It would remove the great canker that infects the whole body of the nation: and when the work was done the resources that had been absorbed by it would be free for some more pleasant but less pressing social duty.

170. This last consideration seems to have been pushed on one side largely under the influence of a faulty analysis of the nature of "parasitic" work and of its influence on wages. The family is, in the main, a single unit as regards geographical migration: and therefore the wages of men are relatively high, and those of women and children low where heavy iron or other industries preponderate, while in some other districts less than half the money income of the family is earned by the father, and men's wages are relatively low. This natural adjustment is socially beneficial; and rigid national rules as to minimum wages for men and for women, which ignore or oppose it, are to be deprecated.

171. See above, III. VI. 6; and Note VIII. in the Mathematical Appendix. Compare also Professor Carver on "Machinery and the Laborers" in the Quarterly Journal of Economics, 1908.

172. It is urged below, Appendix G, 8, 9, that the health of the working classes, and especially of their children, has a first claim on rates levied on that special value of urban land which is caused by the concentration of population.

173. See VI. V. 1, 2.

End of Notes to Book VI.

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