Principles of Economics
1. On the general question of the influence of physical surroundings on race character, both directly and indirectly, by determining the nature of the dominant occupations, see Knies, Politische Œkonomie, Hegel's Philosophy of History, and Buckle's History of Civilization. Compare also Aristotle's Politics, and Montesquieu's Esprit des Lois.
2. Montesquieu says quaintly (Bk. XIV. ch. II.) that the superiority of strength caused by a cold climate produces among other effects "a greater sense of superiority—that is, less desire of revenge; and a greater opinion of security—that is, more frankness, less suspicion, policy, and cunning." These virtues are eminently helpful to economic progress.
3. This may have to be modified a little, but only a little, if F. Galton should prove to be right in thinking that small numbers of a ruling race in a hot country, as for instance the English in India, will be able to sustain their constitutional vigour unimpaired for many generations by a liberal use of artificial ice, or of the cooling effects of the forcible expansion of compressed air. See his Presidential Address to the Anthropological Institute in 1887.
5. Thus the "moderate level" at which custom fixes the price of a ploughshare will be found when analysed to mean that which gives the smith in the long run about an equal remuneration (account being taken of all his privileges and perquisites) with that of his neighbours who do equally difficult work; or in other words, that which under the régime of free enterprise, of easy communications and effective competition, we should call a normal rate of pay. If a change of circumstances makes the pay of smiths, including all indirect allowances, either less or more than this, there almost always sets in a change in the substance of the custom, often almost unrecognized and generally without any change in form, which will bring it back to this level.
6. The Teutonic Mark system is indeed now known to have been much less general than some historians had supposed. But where it was fully developed one small part, the home mark, was set aside permanently for living on, and each family retained its share in that for ever. The second part or arable mark was divided into three large fields, in each of which each family had generally several scattered acre strips. Two of these were cultivated every year, and one left fallow. The third and largest part was used as grazing land by the whole village in common; as was also the fallow field in the arable mark. In some cases the arable mark was from time to time abandoned to pasture, and land to make a new arable mark was cut out of the common mark, and this involved a redistribution. Thus the treatment of its land by every family affected for good or ill all the members of the village.
9. See above, p. 4. Thus even Plato says:—"Nature has made neither boot-makers nor blacksmiths; such occupations degrade the people engaged in them, miserable mercenaries excluded by their very position from political rights." (Laws, XII.) And Aristotle continues:—"In the state which is best governed the citizens ... must not lead the life of mechanics or tradesmen, for such a life is ignoble and inimical to virtue." (Politics, VII. 9; see also III. 5.) These passages give the key-note of Greek thought with regard to business. But as there were few independent fortunes in ancient Greece, many of her best thinkers were compelled to take some share in business.
10. This fundamental opposition between the Greek and Roman tempers was made clear by Hegel in his Philosophy of History. "Of the Greeks in the first genuine form of their freedom we may assert that they had no conscience; the habit of living for their country without further analysis or reflection was the principle dominant among them ... Subjectivity plunged the Greek world into ruin"; and the harmonious poetry of the Greeks made way for "the prose life of the Romans," which was full of subjectivity, and "a hard dry contemplation of certain voluntary aims." A generous, though discriminating, tribute to the services which Hegel indirectly rendered to Historical Economics is given by Roscher, Gesch. der Nat. Œk. in Deutschland, § 188. Compare also the chapters on Religion in Mommsen's History, which seem to have been much influenced by Hegel; also Kautz, Entwickelung der National-Œkonomie, Bk. I.
11. See above, ch. I. § 2. The misunderstanding is in some measure attributable to the influence of the generally acute and well-balanced Roscher. He took a special delight in pointing out analogies between ancient and modern problems; and though he also pointed out differences, yet the general influence of his writings tended to mislead. (His position is well criticized by Knies, Politische Œkonomie vom geschichtlichen Standpunkte: especially p. 391 of the second edition.)
12. Friedländer, Sittengeschichte Roms, p. 225. Mommsen goes so far as to say (History, Book IV. ch. XI.):—"Of trades and manufactures there is nothing to be said, except that the Italian nation in this respect persevered in an inactivity bordering on barbarism.... The only brilliant side of Roman private economics was money dealing and commerce." Many passages in Cairnes' Slave Power read like modern versions of Mommsen's History. Even in the towns the lot of the poor free Roman resembled that of the "mean white" of the Southern Slave States. Latifundia perdidere Italiam; but they were farms like those of the Southern States, not of England. The weakness of free labour at Rome is shown in Liebenam's Geschichte des römischen Vereinswesens.
13. One aspect of this is described by Schmoller in his short but excellent account of the Trading Companies of Antiquity. After showing how trading groups of which all the members belong to one family may thrive even among primitive peoples, he argues (Jahrbuch für Gesetzgebung, XVI. pp. 740-2) that no form of business association of the modern type could flourish long in such conditions as those of ancient Rome unless it had some exceptional privileges or advantages as the Societates Publicanorum had. The reason why we moderns succeed in bringing and keeping many people "under the same hat" to work together, which Antiquity failed in doing, "is to be sought exclusively in the higher level of intellectual and moral strength, and the greater possibility now than then of binding together men's egoistic commercial energies by the bonds of social sympathy." See also Deloume, Les Manieurs d'Argent à Rome; an article on State control of Industry in the fourth century by W. A. Brown in the Political Science Quarterly, Vol. II.; Blanqui's History of Political Economy, chs. V. and VI.; and Ingram's History, ch. II.
14. Hegel (Philosophy of History, Part IV.) goes to the root of the matter when he speaks of their energy, their free spirit, their absolute self-determination (Eigensinn), their heartiness (Gemüth), and adds, "Fidelity is their second watchword, as Freedom is the first."
16. What is true of the great free towns, that were practically autonomous, is true in a less degree of the so-called free boroughs of England. Their constitutions were even more various than the origins of their liberties; but it now seems probable that they were generally more democratic and less oligarchic than was at one time supposed. See especially Gross, The Gild Merchant, ch. VII.
17. But treachery was common in Italian cities, and was not very rare in northern castles. People compassed the death of their acquaintances by assassination and poison: the host was often expected to taste the food and drink which he offered to his guest. As a painter rightly fills his canvas with the noblest faces he can find, and keeps as much in the background as possible what is ignoble, so the popular historian may be justified in exciting the emulation of the young by historical pictures in which the lives of noble men and women stand out in bold relief, while a veil is drawn over much of the surrounding depravity. But when we want to take stock of the world's progress, we must reckon the evil of past times as it really was. To be more than just to our ancestors is to be less than just to the best hopes of our race.
18. We are perhaps apt to lay too much stress on the condemnation by the Church of "usury" and some kinds of trade. There was then very little scope for lending capital to be used in business, and when there was, the prohibition could be evaded by many devices, some of which were indeed sanctioned by the Church itself. Though St Chrysostom said that "he who procures an article to make profit by disposing of it entire and unaltered, is ejected from the temple of God"; yet the Church encouraged merchants to buy and sell goods unaltered at fairs and elsewhere. The authority of Church and State and the prejudices of the people combined to put difficulties in the way of those who bought up large quantities of goods in order to sell them retail at a profit. But though much of the business of these people was legitimate trade, some of it was certainly analogous to the "rings" and "corners" in modern produce markets. Compare the excellent chapter on the Canonist Doctrine in Ashley's History and the notice of it by Hewins in the Economic Review, Vol. IV.
19. Indirectly it aided progress by promoting the Crusades; of which Ingram well says (History, ch. II.) that they "produced a powerful economic effect by transferring in many cases the possessions of the feudal chiefs to the industrial classes, whilst by bringing different nations and races into contact, by enlarging the horizon and widening the conceptions of the populations, as well as by affording a special stimulus to navigation, they tended to give a new activity to international trade."
20. For the purposes of statistical comparison the well-to-do yeoman must be ranked with the middle classes of to-day, not with the artisans. For those who were better off than he were very few in number; while the great mass of the people were far below him; and were worse off in almost every respect than they are now.
21. Rogers says that in the thirteenth century the value of arable land was only a third of the capital required to work it; and he believes that so long as the owner of the land was in the habit of cultivating it himself, the eldest son often used various devices for alienating a part of his land to his younger brothers in exchange for some of their capital. Six Centuries of Work and Wages, pp. 51, 2.
23. The Reformation "was the affirmation ... of Individuality.... Individuality is not the sum of life, but it is an essential part of life in every region of our nature and our work, in our work for the part and for the whole. It is true, though it is not the whole truth, that we must live and die alone, alone with God." Westcott's Social Aspects of Christianity, p. 121. Comp. also Hegel's Philosophy of History, Part IV. section iii. ch. 2.
24. The licentiousness of some forms of art created in serious but narrow minds a prejudice against all art; and in revenge socialists now rail at the Reformation as having injured both the social and the artistic instincts of man. But it may be questioned whether the intensity of the feelings which were engendered by the Reformation has not enriched art more than their austerity has injured it. They have developed a literature and a music of their own; and if they have led man to think slightingly of the beauty of the works of his own hands, they have certainly increased his power of appreciating the beauties of nature. It is no accident that landscape painting owes most to lands in which the Reformed religion has prevailed.
26. This term, which has the authority of Adam Smith and is habitually used on the Continent, seems to be the best to indicate those who take the risks and the management of business as their share in the work of organized industry.
27. In the latter half of the eighteenth century, especially, the improvements in agriculture moved very fast. Implements of all kinds were improved, draining was carried out on scientific principles, the breeding of farm animals was revolutionized by Bakewell's genius; turnips, clover, rye-grass, etc. came into general use, and enabled the plan of refreshing land by letting it lie fallow to be superseded by that of "alternating husbandry." These and other changes constantly increased the capital required for the cultivation of land; while the growth of fortunes made in trade increased the number of those who were able and willing to purchase their way into country society by buying large properties. And thus in every way the modern commercial spirit spread in agriculture.
28. The quarter of a century beginning with 1760 saw improvements follow one another in manufacture even more rapidly than in agriculture. During that period the transport of heavy goods was cheapened by Brindley's canals, the production of power by Watt's steam-engine, and that of iron by Cort's processes of puddling and rolling, and by Roebuck's method of smelting it by coal in lieu of the charcoal that had now become scarce; Hargreaves, Crompton, Arkwright, Cartwright and others invented, or at least made economically serviceable, the spinning-jenny, the mule, the carding machine, and the power-loom; Wedgwood gave a great impetus to the pottery trade that was already growing rapidly; and there were important inventions in printing from cylinders, in bleaching by chemical agents, and in other processes. A cotton factory was for the first time driven directly by steam power in 1785, the last year of the period. The beginning of the nineteenth century saw steam-ships and steam printing-presses, and the use of gas for lighting towns. Railway locomotion, telegraphy and photography came a little later. See for further details a brilliant chapter by Professor Clapham in the Cambridge Modern History, Vol. X.
30. The tendency of industries to flee away from places where they were overregulated by the gilds was of old standing, and had shown itself in the thirteenth century, though it was then comparatively feeble. See Gross' Gild Merchant, Vol. I. pp. 43 and 52.
31. In times of peace no one ventures openly to rank money as of high importance in comparison with human lives; but in the crisis of an expensive war money can always be used so as to save them. A general who at a critical time sacrifices lives in order to protect material, the loss of which would cause the loss of many men, is held to have acted rightly, though no one would openly defend a sacrifice of soldiers' lives in order to save a few army stores in time of peace.
32. List worked out with much suggestiveness the notion that a backward nation must learn its lessons not from the contemporary conduct of more forward nations, but from their conduct when they were in the same state in which it is now. But, as Knies well shows (Politische Œkonomie, II. 5), the growth of trade and the improvement of the means of communication are making the developments of different nations tend to synchronize.
34. Meanwhile "Cameralistic" studies were developing the scientific analysis of public business, at first on the financial side alone; but from 1750 onwards increasingly in regard to the material, as distinguished from the human, conditions of the wealth of nations.
35. Cantillon's essay Sur la Nature de Commerce, written in 1755, and covering a wide range, has indeed some claims to be called systematic. It is acute and in some respects ahead of his time; though it now appears that he had been anticipated on several important points by Nicholas Barbon, who wrote sixty years earlier. Kautz was the first to recognize the importance of Cantillon's work; and Jevons declared he was the true founder of Political Economy. For a well-balanced estimate of his place in economics, see an article by Higgs in the Quarterly Journal of Economics, Vol. VI.
36. In the two preceding centuries writers on economic questions had continually appealed to Nature; each disputant claiming that his scheme was more natural than that of others, and the philosophers of the eighteenth century, some of whom exercised a great influence on economics, were wont to find the standard of right in conformity to Nature. In particular Locke anticipated much of the work of the French economists in the general tone of his appeals to Nature, and in some important details of his theory. But Quesnay, and the other French economists who worked with him, were drawn to the pursuit of natural laws of social life by several forces in addition to those which were at work in England.
The luxury of the French court, and the privileges of the upper classes which were ruining France, showed the worst side of an artificial civilization, and made thoughtful men yearn for a return to a more natural state of society. The lawyers, among whom much of the best mental and moral strength of the country was to be found, were full of the Law of Nature which had been developed by the Stoic lawyers of the later Roman Empire, and as the century wore on, the sentimental admiration for the "natural" life of the American Indians, which Rousseau had kindled into flame, began to influence the economists. Before long they were called Physiocrats or adherents of the rule of Nature; this name being derived from the title of Dupont de Nemours' Physiocratie ou Constitution Naturelle du Gouvernement le plus avantageux au Genre Humain published in 1768. It may be mentioned that their enthusiasm for agriculture and for the naturalness and simplicity of rural life was in part derived from their Stoic masters.
37. Even the generous Vauban (writing in 1717) had to apologize for his interest in the wellbeing of the people, arguing that to enrich them was the only way to enrich the king—Pauvres paysans, pauvre Royaume, pauvre Royaume, pauvre Roi. On the other hand Locke, who exercised a great influence over Adam Smith, anticipated the ardent philanthropy of the Physiocrats as he did also some of their peculiar economic opinions. Their favourite phrase Laissez faire, laissez aller, is commonly misapplied now. Laissez faire means that anyone should be allowed to make what things he likes, and as he likes; that all trades should be open to everybody; that Government should not, as the Colbertists insisted, prescribe to manufacturers the fashions of their cloth. Laissez aller (or passer) means that persons and goods should be allowed to travel freely from one place to another, and especially from one district of France to another, without being subject to tolls and taxes and vexatious regulations. It may be noticed that laissez aller was the signal used in the Middle Ages by the Marshals to slip the leash from the combatants at a tournament.
38. Compare the short but weighty statement of Adam Smith's claims to supremacy in Wagner's Grundlegung, Ed. 3, pp. 6, etc.; also Hasbach's Untersuchungen über Adam Smith (in which the notice of the influence of Dutch thought on both English and French is of special interest); and L. L. Price's Adam Smith and his relations to Recent Economics in the Economic Journal, Vol. III. Cunningham, History, § 306, argues forcibly that "his great achievement lay in isolating the conception of national wealth, while previous writers had treated it in conscious subordination to national power"; but perhaps each half of this contrast is drawn with too sharp outlines. Cannan in his Introduction to the Lectures of Adam Smith, shows the importance of Hutcheson's influence on him.
39. For instance, he had not quite got rid of the confusion prevalent in his time between the laws of economic science and the ethical precept of conformity to nature. "Natural" with him sometimes means that which the existing forces actually produce or tend to produce, sometimes that which his own human nature makes him wish that they should produce. In the same way, he sometimes regards it as the province of the economist to expound a science, and at others to set forth a part of the art of government. But loose as his language often is, we find on closer study that he himself knows pretty well what he is about. When he is seeking for causal laws, that is, for laws of nature in the modern use of the term, he uses scientific methods; and when he utters practical precepts he generally knows that he is only expressing his own views of what ought to be, even when he seems to claim the authority of nature for them.
40. The popular use of this term in Germany implies not only that Adam Smith thought that the free play of individual interests would do more for the public weal than Government interference could, but further that it almost always acted in the ideally best way. But the leading German economists are well aware that he steadily insisted on the frequent opposition that there is between private interests and the public good: and the old use of the term Smithianismus is becoming discredited. See for instance a long list of such conflicts quoted from the Wealth of Nations by Knies, Politische Œkonomie, ch. III. § 3. See also Feilbogen, Smith und Turgot, and Zeyss, Smith und der Eigennutz.
41. The relations of Value to Cost of Production had been indicated by the Physiocrats and by many earlier writers, among whom may be mentioned Harris, Cantillon, Locke, Barbon, Petty; and even Hobbes who hinted, though vaguely, that plenty depends on labour and abstinence applied by man to working up and accumulating the gifts of nature by land and by sea—proventus terrœ et aquœ, labor et parsimonia.
42. Adam Smith saw clearly that while economic science must be based on a study of facts, the facts are so complex, that they generally can teach nothing directly; they must be interpreted by careful reasoning and analysis. And as Hume said, the Wealth of Nations "is so much illustrated with curious facts that it must take the public attention." This is exactly what Adam Smith did: he did not very often prove a conclusion by detailed induction. The data of his proofs were chiefly facts that were within everyone's knowledge, facts physical, mental and moral. But he illustrated his proofs by curious and instructive facts; he thus gave them life and force, and made his readers feel that they were dealing with problems of the real world, and not with abstraction; and his book, though not well arranged, is a model of method. The supremacy of Adam Smith and of Ricardo, each in his own way, is well set forth by Prof. Nicholson in The Cambridge Modern History, Vol. X. ch. XXIV.
43. Another way in which he influenced the young economists around him was through his passionate desire for security. He was indeed an ardent reformer. He was an enemy of all artificial distinctions between different classes of men; he declared with emphasis that any one man's happiness was as important as any other's, and that the aim of all action should be to increase the sum total of happiness; he admitted that other things being equal this sum total would be the greater, the more equally wealth was distributed. Nevertheless so full was his mind of the terror of the French revolution, and so great were the evils which he attributed to the smallest attack on security that, daring analyst as he was, he felt himself and he fostered in his disciples an almost superstitious reverence for the existing institutions of private property.
44. He is often spoken of as a representative Englishman: but this is just what he was not. His strong constructive originality is the mark of the highest genius in all nations. But his aversion to inductions and his delight in abstract reasonings are due, not to his English education, but, as Bagehot points out, to his Semitic origin. Nearly every branch of the Semitic race has had some special genius for dealing with abstractions, and several of them have had a bias towards the abstract calculations connected with the trade of money dealing, and its modern developments; and Ricardo's power of threading his way without slip through intricate paths to new and unexpected results has never been surpassed. But it is difficult even for an Englishman to follow his track; and his foreign critics have, as a rule, failed to detect the real drift and purpose of his work. For he never explains himself: he never shows what his purpose is in working first on one hypothesis and then on another, nor how by properly combining the results of his different hypothesis it is possible to cover a great variety of practical questions. He wrote originally not for publication, but to clear away the doubts of himself, and perhaps a few friends, on points of special difficulty. They, like himself, were men of affairs with a vast knowledge of the facts of life: and this is one cause of his preferring broad principles, consonant with general experience, to particular inductions from select groups of facts. But his knowledge was one-sided: he understood the merchant, but not the working man. His sympathies however were with the working man; and he supported his friend Hume in the defence of the right of the working men to combine for mutual aid in the same way as their employers were able to do. Compare Appendix I below.
45. As regards wages there were even some logical errors in the conclusions they deduced from their own premisses. These errors when traced back to their origin are little more than careless modes of expression. But they were seized upon eagerly by those who cared little for the scientific study of economics, and cared only to quote its doctrines for the purpose of keeping the working classes in their place; and perhaps no other great school of thinkers has ever suffered so much from the way in which its "parasites" (to use a term that is commonly applied to them in Germany), professing to simplify economic doctrines, really enunciated them without the conditions required to make them true. Miss Martineau gave some colour to these statements by her vehement writings against the Factory Acts: and Senior also wrote on the same side. But Miss Martineau was not an economist in the proper sense of the word: she confessed that she never read more than one chapter of an economic book at a time before writing a story to illustrate economic principles, for fear the pressure on her mind should be too great: and before her death she expressed a just doubt whether the principles of economics (as understood by her) had any validity. Senior wrote against the Acts when he had only just begun to study economics: a few years later he formally recanted his opinions. It has sometimes been said that McCulloch was an opponent of the Acts; but in fact he heartily supported them. Tooke was the chief of the sub-Commissioners, whose report on the employment of women and children in the mines roused public opinion to decisive action against it.
46. A partial exception must be made for Malthus, whose studies of population were suggested by Godwin's essay. But he did not properly belong to the Ricardian school and he was not a man of business. Half a century later Bastiat, a lucid writer but not a profound thinker, maintained the extravagant doctrine that the natural organization of society under the influence of competition is the best not only that can be practically effected, but even that can be theoretically conceived.
47. James Mill had educated his son in the straitest tenets of Bentham and Ricardo, and had implanted in his mind a zeal for clearness and definiteness. And in 1830 John Mill wrote an essay on economic method in which he proposed to give increased sharpness of outline to the abstractions of the science. He faced Ricardo's tacit assumption that no motive of action except the desire for wealth need be much considered by the economist; he held that it was dangerous so long as it was not distinctly stated, but no longer; and he half promised a treatise which should be deliberately and openly based on it. But he did not redeem the promise. A change had come over his tone of thought and of feeling before he published in 1848 his great economic work. He called it Principles of Political Economy, with some of their Applications to Social Philosophy [it is significant that he did not say to other branches of Social Philosophy; comp. Ingram's History, p. 154], and he made in it no attempt to mark off by a rigid line those reasonings which assume that man's sole motive is the pursuit of wealth from those which do not. The change in his attitude was a part of the great changes that were going on in the world around him, though he was not fully aware of their influence on himself.
48. It has already been observed that List overlooked the tendency of modern inter-communication to make the development of different nations synchronize. His patriotic fervour perverted in many ways his scientific judgment: but Germans listened eagerly to his argument that every country had to go through the same stages of development that England had gone through, and that she had protected her manufacturers when she was in transition from the agricultural to the manufacturing stage. He had a genuine desire for truth; his method was in harmony with the comparative method of inquiry which is being pursued with vigour by all classes of students in Germany, but especially by her historians and lawyers; and the direct and indirect influence of his thought has been very great. His Outlines of a New System of Political Economy appeared in Philadelphia in 1827, and his Das nationale System der Politischen Œkonomie in 1840. It is a disputed point whether Carey owed much to List; see Miss Hirst's Life of List, ch. IV. As to the general relations between their doctrines, see Knies, Pol. Œk., 2nd edition, pp. 440, etc.
49. The excellence of this work may perhaps partly be attributed to the union of legal and economic studies in the avenues to many careers in Germany as in other countries of the Continent. A splendid instance is to be found in Wagner's contributions to economics.
50. In such matters, the English, the Germans, the Austrians, and indeed every nation claim for themselves more than others are willing to allow them. This is partly because each nation has its own intellectual virtues, and misses them in the writings of foreigners; while it does not quite understand the complaints which others make as to its shortcomings. But the chief reason is that, since a new idea is generally of gradual growth, and is often worked out by more than one nation at the same time, each of those nations is likely to claim it; and thus each is apt to under-estimate the originality of the others.
52. Mill, On Comte, p. 82. Comte's attack on Mill illustrates the general rule that in discussions on method and scope, a man is nearly sure to be right when affirming the usefulness of his own procedure, and wrong when denying that of others. The present movement towards Sociology in America, England and other countries recognizes the need for the intensive study of economics and other branches of social science. But perhaps the use of the term Sociology is premature. For it seems to claim that a unification of social sciences is already in sight: and though some excellent intensive studies have been published under the name of Sociology, it is doubtful whether those efforts at unification which have been made so far have achieved any great success beyond that of preparing the way and erecting danger posts at its pitfalls for the guidance of later generations, whose resources will be less inadequate for the giant task than our own.
53. Mill exaggerated the extent to which this can be done; and he was thereby led to make excessive claims for the deductive methods in economics. See the last of his Essays; Book VI. of his Logic, and especially its ninth chapter; also pp. 157-161 of his Autobiography. His practice, like that of many other writers on economic method of all shades of opinion, was less extreme than his profession.
Hermann said (Staatswirthschaftliche Untersuchungen, chs. III. and V.) that capital consists of goods "which are a lasting source of satisfaction that has exchange value." Walras (Éléments d'Économie Politique, p. 197) defines capital as "every kind of social wealth which is not consumed at all, or is consumed but slowly; every utility limited in quantity, that survives the first use which is made of it; in one word, which can be used more than once; a house, a piece of furniture."
Knies defined capital as the existing stock of goods "which is ready to be applied to the satisfaction of demand in the future." And Prof. Nicholson says:—"The line of thought suggested by Adam Smith and developed by Knies is found to lead to this result: Capital is wealth set aside for the satisfaction—directly or indirectly—of future needs." But the whole phrase, and especially the words "set aside," seem to lack definiteness, and to evade rather than overcome the difficulties of the problem.
60. The following are among the chief definitions of capital by Adam Smith's English followers:—Ricardo said:—"Capital is that part of the wealth of a country which is employed in production and consists of food, clothing, tools, raw materials, machinery, etc. necessary to give effect to labour." Malthus said:—"Capital is that portion of the stock of a country which is kept or employed with a view to profit in the production and distribution of wealth." Senior said:—"Capital is an article of wealth, the result of human exertion, employed in the production or distribution of wealth." John Stuart Mill said:—"What capital does for production, is to afford the shelter, protection, tools and materials which the work requires, and to feed and otherwise maintain the labourers during the process. Whatever things are destined for this use are capital." We shall have to return to this conception of capital in connection with the so-called Wages Fund doctrine; see Appendix J.
As Held remarked, the practical problems which were prominent early in the last century suggested some such conception of capital as this. People were anxious to insist that the welfare of the working classes depended on a provision of the means of employment and sustenance made beforehand: and to emphasize the dangers of attempting to make employment for them artificially under the extravagance of the Protective system and the old Poor-law. Held's point of view has been developed with great acumen in Cannan's suggestive and interesting Production and Distribution, 1776-1848: though some of the utterances of the earlier economists seem capable of other and more reasonable interpretations than those which he assigns to them.
62. See II. IV. 1, 5. The connection of the productiveness of capital with the demand for it, and of its prospectiveness with the supply of it has long been latent in men's minds; though it has been much overlaid by other considerations, many of which appear now to be based on misconceptions. Some writers have laid more stress on the supply side and others on the demand side: but the difference between them has often been little more than a difference of emphasis. Those who have laid stress on the productivity of capital, have not been ignorant of man's unwillingness to save and sacrifice the present for the future. And on the other hand, those who have given their thought mainly to the nature and extent of the sacrifice involved in this postponement, have regarded as obvious such facts as that a store of the implements of production gives mankind a largely increased power of satisfying their wants. In short there is no reason to believe that the accounts which Prof. Böhm-Bawerk has given of the "naive productivity theories," the "use theories" etc. of capital and interest would have been accepted by the older writers themselves as well-balanced and complete presentations of their several positions. Nor does he seem to have succeeded in finding a definition that is clear and consistent. He says that "Social capital is a group of products destined to serve towards further production; or briefly a group of Intermediate products." He formally excludes (Book I. ch. VI.) "dwelling houses and other kinds of buildings such as serve immediately for any purpose of enjoyment or education or culture." To be consistent, he must exclude hotels, tramways, passenger ships and trains, etc.; and perhaps even plant for supplying the electric light for private dwellings; but that would seem to deprive the notion of capital of all practical interest. There seems no good ground for excluding the public theatre while including the tramcar, which would not justify the inclusion of mills engaged in making home-spun and the exclusion of those engaged in making lace. In answer to this objection he urges, with perfect reason, that every economic classification must allow for the existence of border lines between any two classes, to contain things which belong in part to each of the two. But the objections submitted to his definition are that its border lines are too broad relatively to the area which they inclose; that it conflicts violently with the uses of the market-place; and that yet it does not embody, as the French definition does, a perfectly consistent and coherent abstract idea.
68. See above, V. XI. 3 and 8. The builder generally looks to sell his lease before much of it has run out. But the price which he expects to get is the (discounted) excess of the rental value of the property over the ground rent for the remaining years: and therefore the substance of his calculations is nearly the same as it would be if he intended to keep the property in his own hands.
69. This assumes that the land is assessed to the tax at the same amount, whatever the use to which it is put. The case of an extra tax for a special use can be treated as in V. X. 6. If agricultural land were exempt from the tax, then the tenant of a house or factory in the country would escape that part of the site tax which is assessed on the excess of the value of the land for building uses over its value for agriculture. This might slightly increase concentration in towns, and thus take a little from the burden on site owners in them: but it would not materially affect the values of sites in the centre of towns. See also below § 6.
70. For instance suppose an area of a million square feet to be covered with rows of parallel buildings 40 feet high and 40 feet deep; a bylaw, that the sky must subtend half a right angle at the ground looking straight back as well as front, will cause the distance between each row and the next to be 40 feet: and the aggregate volume of building will be 40 feet multiplied into half the total area, i.e. 20,000,000 cubic feet. Now suppose the height of the buildings to be trebled. Under the same bylaw, the distances between the rows must be 120 feet: and, on the supposition that it is not convenient to increase the depth of the houses beyond 40 feet the aggregate volume of building will be 120 feet multiplied into a quarter of the total area, that is, 30,000,000 cubic feet. Thus the total accommodation will be increased by only one half; instead of being trebled, as would have been the case if the old distances of 40 feet between the rows had been maintained.
74. In old times the windows of a house were taken as representative of the house, and were taxed heavily: but the tax did not strike, and was not intended to strike, persons as owners and users of windows only; it was intended to strike them, and did strike them, as owners and users of houses. And, just as the window is a more or less good representative of the house; so the house is a representative, perhaps a better representative, of a certain scale and style of household expenditure in general; and when houses are taxed, the tax is, and is intended to be, a tax upon the ownership and use of the means of living in certain general conditions of comfort and social position. If part of the tax assessed on houses were removed, and the deficit made up by taxes assessed on furniture and indoor servants, the true incidence of the taxes would be nearly the same as now.
75. The recent Commission on Local Taxation was much occupied with the difficulty of assessing site values; and with the even greater difficulty of making ad interim arrangements by which an equitable share (whether more or less) of the rates, which were designed in the long run to be paid by the ultimate landowners, might be transferred from the occupiers to lessees. (See especially pp. 153-176 of the Final Report.) The difficulty of assessment, though undoubtedly very great, is of a kind to be diminished rapidly by experience: the first thousand such assessments might probably give more trouble, and yet be less accurately made than the next twenty thousand.
78. Besides positions of stable equilibrium, there are theoretically at least positions of unstable equilibrium: they are the dividing boundaries between two positions of stable equilibria, the watersheds, so to speak, dividing two river basins, and the price tends to flow away from them in either direction.
When demand and supply are in unstable equilibrium, then, if the scale of production be disturbed ever so little from its equilibrium position, it will move rapidly away to one of its positions of stable equilibrium; as an egg if balanced on one of its ends would at the smallest shake fall down, and lie lengthways. Just as it is theoretically possible, but practically impossible, that an egg should stand balanced on its end, so it is theoretically possible, but practically impossible, that the scale of production should stay balanced in unstable equilibrium.
Thus in fig. 38 the curves intersect several times and the arrow heads on Ox show the directions in which, according to its situation, R tends to move along Ox. This shows that if R is at H or at L and is displaced slightly in either direction, it will, as soon as the disturbing cause is over, return to the equilibrium position from which it was displaced: but that if it is at K and is displaced towards the right, it will continue, even after the cessation of the disturbing cause, to move to the right till it reaches L, and if displaced towards the left it will continue to move to the left till it reaches H. That is to say, H and L are points of stable equilibrium and K is a point of unstable equilibrium. We are thus brought to the result that:—
The equilibrium of demand and supply corresponding to the point of intersection of the demand and supply curves is stable or unstable according as the demand curve lies above or below the supply curve just to the left of that point; or, which is the same thing, according as it lies below or above the supply curve just to the right of that point.
We have seen that the demand curve is inclined throughout negatively. From this it follows that, if just to the right of any point of intersection the supply curve lies above the demand curve; then, if we move along the supply curve to the right, we must necessarily keep above the demand curve till the next point of intersection is reached: that is to say, the point of equilibrium next on the right-hand side of a point of stable equilibrium, must be a point of unstable equilibrium; and, it may be proved in like manner, that so must the adjacent point of intersection on the left-hand side. In other words, in cases in which the curves cut each other more than once, points of stable and unstable equilibrium alternate.
Also the last point of intersection reached, as we move to the right, must be a point of stable equilibrium. For if the amount produced were increased indefinitely, the price at which it could be sold would necessarily fall almost to zero; but the price required to cover the expense of producing it would not so fall. Therefore, if the supply curve be produced sufficiently far towards the right, it must at last lie above the demand curve.
The first point of intersection arrived at as we proceed from left to right may be a point either of stable or of unstable equilibrium. If it be a point of unstable equilibrium, this fact will indicate that the production of the commodity in question on a small scale will not remunerate the producers; so that its production cannot be commenced at all unless some passing accident has caused temporarily an urgent demand for the commodity, or has temporarily lowered the expenses of producing it; or unless some enterprising firm is prepared to sink much capital in overcoming the initial difficulties of the production, and bringing out the commodity at a price which will ensure large sales.
82. For instance, the shape of the supply curve in fig. 38, implies that if the ware in question were produced on the scale OV annually, the economies introduced into its production would be so extensive as to enable it to be sold at a price TV. If these economies were once effected the shape of the curve SS' would probably cease to represent accurately the circumstances of supply. The expenses of production, for instance, of an amount OU would no longer be much greater proportionately than those of an amount OV. Thus in order that the curve might again represent the circumstances of supply it would be necessary to draw it lower down, as the dotted curve in the figure. Professor Bullock, Quarterly Journal of Economics, Aug. 1902, p. 508, argues that this dotted curve should not slope upward from T however gently: but should slope downward, to indicate that the diminished production will lower marginal cost, "by forcing out of business the weakest producers," so that the marginal cost will in future be that of more competent producers than before. This result is possible. But it must be remembered that the marginal cost of the weakest producer does not govern value, but only indicates the force of the causes which govern it. In so far as the economies of production on a large scale are "internal," i.e. belonging to the internal organization of individual firms, the weaker firms must speedily be driven out of existence by the stronger. The continued existence of weaker firms is an evidence that a strong firm cannot indefinitely increase its output; partly because of the difficulty of extending its market, and partly because the strength of a firm is not permanent. The strong firm of to-day was probably weak, because young, some time back; and will be weak, because old, some time hence. With a smaller output there will still be weak firms at the margin; and they will probably in the course of time be weaker than if the scale of total production had been maintained. Also the external economies will be less. In other words the representative firm will probably be smaller, weaker, and with less access to external economies. See Prof. Flux in the same Journal for Feb. 1904.
84. One difficulty arises from the fact that a suitable time to allow for the introduction of the economies appertaining to one increase in the scale of production is not long enough for another and larger increase, so we must fix on some fairly long time ahead, which is likely to be indicated by the special problem in hand, and adjust the whole series of supply prices to it.
We could get much nearer to nature if we allowed ourselves a more complex illustration. We might take a series of curves, of which the first allowed for the economies likely to be introduced as the result of each increase in the scale of production during one year, a second curve doing the same for two years, a third for three years, and so on. Cutting them out of cardboard and standing them up side by side, we should obtain a surface, of which the three dimensions represented amount, price, and time respectively. If we had marked on each curve the point corresponding to that amount which, so far as can be foreseen, seems likely to be the normal amount for the year to which that curve related, then these points would form a curve on the surface, and that curve would be a fairly true long-period normal supply curve for a commodity obeying the law of increasing return. Compare an article by Mr Cunynghame, in the Economic Journal for 1892.
86. In the adjoining diagram, SS' is not a true supply curve adapted to the conditions of the world in which we live; but it has properties, which are often erroneously attributed to such a curve. We will call it the particular expenses curve. As usual the amount of a commodity is measured along Ox, and its price along Oy. OH is the amount of the commodity produced annually, AH is the equilibrium price of a unit of it. The producer of the OHth unit is supposed to have no differential advantages; but the producer of the OMth unit has differential advantages which enable him to produce with an outlay PM, a unit which it would have cost him an outlay AH to produce without those advantages. The locus of P is our particular expenses curve; and it is such that any point P being taken on it, and PM being drawn perpendicular to Ox, PM represents the particular expenses of production incurred for the production of the OMth unit. The excess of AH over PM = QP, and is a producer's surplus or rent. For convenience the owners of differential advantages may be arranged in descending order from left to right; and thus SS' becomes a curve sloping upwards to the right.
Proceeding as in the case of consumer's surplus or rent (III. VI. 3), we may regard MQ as a thin parallelogram or as a thick straight line. And as M takes consecutive positions along OH, we get a number of thick straight lines cut in two by the curve SA, the lower part of each representing the expenses of production of a unit of the commodity, and the upper the contribution which that unit affords towards rent. The lower set of thick lines taken together fill up the whole space SOHA; which therefore represents the aggregate of the expenses of production of an amount OH. The upper set of thick lines taken together fill up the space FSA, which therefore represents producer's surplus or rent in the ordinary sense of the term. Subject to the corrections mentioned above (III. VI. 3), DFA represents the surplus satisfaction which consumers get from an amount OH over that, the value of which is represented to them by a sum of money equal to OH × HA.
Now the difference between the particular expenses curve and a normal supply curve lies in this, that in the former we do, and in the latter we do not, take the general economies of production as fixed and uniform throughout. The particular expenses curve is based throughout on the assumption that the aggregate production is OH, and that all the producers have access to the internal and external economies which belong to this scale of production; and, these assumptions being carefully borne in mind, the curve may be used to represent a particular phase of any industry, whether agricultural or manufacturing: but they cannot be taken to represent its general conditions of production.
That can be done only by the normal supply curve, in which PM represents the normal expenses of production of the OMth unit on the supposition that OM units (not any other amount, as OH) are being produced; and that the available economies of production external and internal are those which belong to a representative firm where the aggregate volume of production is OM. These economies will generally be less than if the aggregate volume of production were the larger quantity OH; and therefore, M being to the left of H, the ordinate at M for the supply curve will be greater than for a particular expenses curve drawn for an aggregate production OH.
It follows that the area SAF which represents aggregate rent in our present diagram would have represented something less than the aggregate rent, if SS' had been a normal supply curve even for agricultural produce (DD' being the normal demand curve). For even in agriculture the general economies of production increase with an increase in the aggregate scale of production.
If however we choose to ignore this fact for the sake of any particular argument; that is, if we choose to assume that MP being the expenses of production of that part of the produce which was raised under the most difficult circumstances (so as to pay no rent) when OM units were produced, it remains also the expenses of production (other than rent) of the OMth unit even when OH is produced; or, in other words, if we assume that the increase in production from the amount OM to the amount OH did not alter the expenses of production of the OMth unit, then we may regard SAF as representing the aggregate rent even when SS' is the normal supply curve. It may be occasionally convenient to do this, attention being of course called every time to the nature of the special assumption made.
But no assumption of the kind can be made with regard to the supply curve of a commodity that obeys the laws of increasing return. To do so would be a contradiction in terms. The fact that the production of the commodity obeys that law, implies that the general economies available when the aggregate volume of production is large, are so much greater than when it is small, as to override the increasing resistance that nature offers to an increased production of the raw materials of which the industry makes use. In the case of a particular expenses curve, MP will always be less than AH (M being to the left of H) whether the commodity obeys the law of increasing or diminishing return; but on the other hand in the case of a supply curve, for a commodity that obeys the law of increasing return, MP would generally be greater than AH.
It remains to say that if we are dealing with a problem in which some even of those appliances for production which were made by man, have to be taken as a given quantity for the time, so that their earnings will be of the nature of a quasi-rent; we may then draw a particular expenses curve, in which MP stands for the expenses of production in the narrower sense in which such quasi-rents are excluded; and the area SAF would thus represent the aggregate of rents proper and of these quasi-rents. This method of treating short-period normal value problems has attractions, and may perhaps ultimately be of service: but it requires careful handling, for the assumptions on which it rests are very slippery.
89. Prof. Ashley in a suggestive criticism of this Note, as part of an attempted "Rehabilitation of Ricardo" (Economic Journal, Vol. I.), insists that it has been commonly believed that Ricardo did in fact habitually think of mere quantities of labour as constituting cost of production, and governing value, subject only to "slight modifications"; and that this interpretation of him is the most consistent with his writings as a whole. It is not disputed that this interpretation has been accepted by many able writers: otherwise there would have been little need for rehabilitating, i.e. clothing more fully his somewhat too naked doctrines. But the question whether Ricardo is to be supposed to have meant nothing by the first chapter of his book, merely because he did not constantly repeat the interpretation clauses contained in it, is one which each reader must decide for himself according to his temperament: it does not lend itself to be solved by argument. It is here claimed not that his doctrines contained a complete theory of value: but only that they were in the main true as far as they went. Rodbertus and Marx interpreted Ricardo's doctrine, to mean that interest does not enter into that cost of production which governs (or rather takes part in governing) value: and as regards this Prof. Ashley appears to concede all that is claimed here when (p. 480) he takes it as beyond question that Ricardo "regarded the payment of interest, that is, of something more than the mere replacement of capital, as a matter of course."
91. See an article on Jevons' Theory by the present writer in the Academy for April 1, 1872. The edition of his Theory brought out by his son in 1911, contains an Appendix on his account of interest, with special reference to that article (see also above VI. I. 8). He contends that his father's theory is "true as far as it goes" though he "followed the unfortunate practice of the Ricardian school by abstracting for treatment certain ideas, and assuming that his readers are familiar with their relations and taking his point of view." The son may be accepted as the true interpreter of the father: and the debts of economics to the father are no doubt so great as to be comparable with its transcendent obligations to Ricardo. But Jevons' Theory had a combative side, as well as a constructive. In great part it was an attack on what he called in his Preface, "that able but wrong-headed man, David Ricardo" who "shunted the car of Economic science on to a wrong line." His criticisms on Ricardo achieved some apparently unfair dialectical triumphs, by assuming that Ricardo thought of value as governed by cost of production without reference to demand. This misconception of Ricardo was doing great harm in 1872: and it seemed necessary to show that Jevons' Theory of Interest, if interpreted as he interpreted Ricardo, is untenable.
93. These three paragraphs are reproduced from a paper written for the Cooperative Annual, and reprinted in the Report of the Industrial Remuneration Conference, 1885, which contained the outlines of the central argument of the first two chapters of Book VI.
95. Considerable light has been thrown on the subject of the Wages-fund by Walker's writings, and the controversies connected with them. The instances which he has collected of employees rendering their services in advance of payment bear effectively on some turns of the controversy, but not on its main issue. Cannan's Production and Distribution, 1776-1848, contains much acute, if sometimes too severe, criticism of the earlier wage theories. A more conservative attitude is taken in Taussig's weighty Capital and Wages; to which the English reader may be specially referred for a fuller account and criticism of the German doctrines mentioned in the text.
97. At all events according to most definitions. There are some indeed who confine capital to "intermediate goods," and must therefore exclude hotels, and lodging-houses, and workmen's cottages, at all events as soon as they are used. But grave objections to the adoption of this definition have already been indicated in Appendix E, 4.
98. See above, p. 785. Again, an increased use of brass furniture that needs much cleaning, and generally of modes of living that require the assistance of many indoor and outdoor servants, operates on the demand for labour in the same way as the use of hand-made goods in place of goods made by expensive machinery and other fixed capital. It may be true that the employment of a great number of domestic servants is an ignoble and wasteful use of a large income: but there is no other equally selfish method of spending it which tends so directly to increase the share of the national dividend which goes to the working classes.
102. Ch. II. Collected Works, p. 42. Comp. Cannan's Production and Distribution, 1776-1848, pp. 325-6. Ricardo's distinction between his two classes of improvements is not altogether happy, and need not be considered here.
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