On the Principles of Political Economy and Taxation
By David Ricardo
On the Principles of Political Economy and Taxation, was first published in 1817 (London: John Murray, Albemarle-Street), with second and third editions in quick succession.We present Ricardo’s final revision, the third edition, published in 1821, here.The three different editions encompassed several substantive changes in the development of Ricardo’s ideas. A comprehensive, readable comparison of the three editions can be found
Works of David Ricardo, Vol. 1, ed. by Pierro Sraffa with the collaboration of M. H. Dobb, Cambridge: Cambridge University Press, 1951. We are indebted to this fine work and have relied on it to correct occasional typographical misprints in the 1821 edition.Minor editorial modifications in this edition are: removing periods after the roman numerals designating kings and “per cent.” We have also substituted modern £ symbol for the historical
l. and added commas in numbers greater than 1,000.Editor
Library of Economics and Liberty
First Pub. Date
London: John Murray
The text of this edition is in the public domain. Picture of David Ricardo courtesy of The Warren J. Samuels Portrait Collection at Duke University.
- Ch.1, On Value
- Ch.2, On Rent
- Ch.3, On the Rent of Mines
- Ch.4, On Natural and Market Price
- Ch.5, Of Wages
- Ch.6, On Profits
- Ch.7, On Foreign Trade
- Ch.8, On Taxes
- Ch.9, Taxes on Raw Produce
- Ch.10, Taxes on Rent
- Ch.11, Tithes
- Ch.12, Land-Tax
- Ch.13, Taxes on Gold
- Ch.14, Taxes on Houses
- Ch.15, Taxes on Profits
- Ch.16, Taxes on Wages
- Ch.17, Taxes on Other Commodities
- Ch.18, Poor Rates
- Ch.19, Changes in the Channels of Trade
- Ch.20, Value and Riches
- Ch.21, Profits and Interest
- Ch.22, Bounties on Exportation, Importation
- Ch.23, On Bounties on Production
- Ch.24, Adam Smith concerning the Rent of Land
- Ch.25, On Colonial Trade
- Ch.26, On Gross and Net Revenue
- Ch.27, On Currency and Banks
- Ch.28, Comparative Value of Gold, Corn, and Labour
- Ch.29, Taxes Paid by the Producer
- Ch.30, Influence of Demand and Supply on Prices
- Ch.31, On Machinery
- Ch.32, Mr Malthus's Opinion on Rent
It may not be uninstructive to consider the effects of a bounty on the
production of raw produce and other commodities, with a view to observe the application of the principles which I have been endeavouring to establish, with regard to the profits of stock, the division of the annual produce of the land and labour, and the relative prices of manufactures and raw produce. In the first place let us suppose that a tax was imposed on all commodities for the purpose of raising a fund to be employed by Government, in giving a bounty on the
production of corn. As no part of such a tax would be expended by Government, and as all that was received from one class of the people, would be returned to another, the nation collectively would neither be richer nor poorer, from such a tax and bounty. It would be readily allowed, that the tax on commodities by which the fund was created, would raise the price of the commodities taxed; all the consumers of those commodities, therefore, would contribute towards that fund; in other words, their natural or necessary price being raised, so would, too, their market price. But for the same reason that the natural price of those commodities would be raised, the natural price of corn would be lowered; before the bounty was paid on production, the farmers obtained as great a price for their corn as was necessary to repay them their rent and their expenses, and afford them the general rate of profits; after the bounty, they would receive more than that rate, unless the price of corn fell by a sum at least equal to the bounty. The effect then of the tax and bounty, would be to raise the price of commodities in a degree equal to the tax levied on them, and to lower the price of corn by a sum equal to the bounty paid. It will be observed, too, that no permanent alteration could be made in the distribution of capital between agriculture and manufactures, because as there would be no alteration, either in the amount of capital or population, there would be precisely the same demand for bread and manufactures. The profits of the farmer would be no higher than the general level, after the fall in the price of corn; nor would the profits of the manufacturer be lower after the rise of manufactured goods; the bounty then would not occasion any more capital to be employed on the land in the production of corn, nor any less in the manufacture of goods. But how would the interest of the landlord be affected? On the same principles that a tax on raw produce would lower the corn rent of land, leaving the money rent unaltered, a bounty on production, which is directly the contrary of a tax, would raise corn rent, leaving the money rent unaltered.
57* With the same money rent the landlord would have a greater price to pay for his manufactured goods, and a less price for his corn; he would probably therefore be neither richer nor poorer.
Now, whether such a measure would have any operation on the wages of labour, would depend on the question, whether the labourer, in purchasing commodities, would pay as much towards the tax as he would receive from the effects of the bounty, in the low price of his food. If these two quantities were equal, wages would continue unaltered; but if the commodities taxed were not those consumed by the labourer, his wages would fall, and his employer would be benefited by the difference. But this is no real advantage to his employer; it would indeed operate to increase the rate of his profits, as every fall of wages must do; but in proportion as the labourer contributed less to the fund from which the bounty was paid, and which, let it be remembered, must be raised, his employer must contribute more; in other words, he would contribute as much to the tax by his expenditure, as he would receive in the effects of the bounty and the higher rate of profits together. He obtains a higher rate of profits to requite him for his payment, not only of his own quota of the tax, but of his labourer’s also; the remuneration which he receives for his labourer’s quota, appears in diminished wages, or, which is the same thing, in increased profits; the remuneration for his own appears in the diminution in the price of the corn which he consumes, arising from the bounty.
Here it will be proper to remark the different effects produced on profits from an alteration in the real labour, or natural, value of corn, and an alteration in the relative value of corn, from taxation and from bounties. If corn is lowered in price by an alteration in its labour price, not only will the rate of the profits of stock be altered, but the condition of the capitalist will be improved. With greater profits, he will have no more to pay for the objects on which those profits are expended; which does not happen, as we have just seen, when the fall is occasioned artificially by a bounty. In the real fall in the value of corn, arising from less labour being required to produce one of the most important objects of man’s consumption, labour is rendered more productive. With the same capital the same labour is employed, and an increase of productions is the result; not only then will the rate of profits be increased, but the condition of him who obtains them will be improved; not only will each capitalist have a greater money revenue, if he employs the same money capital, but also when that money is expended, it will procure him a greater sum of commodities; his enjoyments will be augmented. In the case of the bounty, to balance the advantage which he derives from the fall of one commodity, he has the disadvantage of paying a price more than proportionally high for another; he receives an increased rate of profits in order to enable him to pay this higher price; so that his real situation, though not deteriorated, is in no way improved: though he gets a higher rate of profits, he has no greater command of the produce of the land and labour of the country. When the fall in the value of corn is brought about by natural causes, it is not counteracted by the rise of other commodities; on the contrary, they fall from the raw material falling from which they are made: but when the fall in corn is occasioned by artificial means, it is always counteracted by a real rise in the value of some other commodity, so that if corn be bought cheaper, other commodities are bought dearer.
This then is a further proof, that no particular disadvantage arises from taxes on necessaries, on account of their raising wages and lowering the rate of profits. Profits are indeed lowered, but only to the amount of the labourer’s portion of the tax, which must at all events be paid either by his employer or by the consumer of the produce of the labourer’s work. Whether you deduct £50 per annum from the employer’s revenue, or add £50 to the prices of the commodities which he consumes, can be of no other consequence to him or to the community, than as it may equally affect all other classes. If it be added to the prices of the commodity, a miser may avoid the tax by not consuming; if it be indirectly deducted from every man’s revenue, he cannot avoid paying his fair proportion of the public burthens.
A bounty on the production of corn then, would produce no real effect on the annual produce of the land and labour of the country, although it would make corn relatively cheap, and manufactures relatively dear. But suppose now that a contrary measure should be adopted, that a tax should be raised on corn for the purpose of affording a fund for a bounty on the production of commodities.
In such case, it is evident that corn would be dear, and commodities cheap; labour would continue at the same price if the labourer were as much benefited by the cheapness of commodities as he was injured by the dearness of corn; but if he were not, wages would rise, and profits would fall, while money rent would continue the same as before; profits would fall, because, as we have just explained, that would be the mode in which the labourer’s share of the tax would be paid by the employers of labour. By the increase of wages the labourer would be compensated for the tax which he would pay in the increased price of corn; by not expending any part of his wages on the manufactured commodities, he would receive no part of the bounty; the bounty would be all received by the employers, and the tax would be partly paid by the employed; a remuneration would be made to the labourers, in the shape of wages, for this increased burden laid upon them, and thus the rate of profits would be reduced. In this case too there would be a complicated measure producing no national result whatever.
In considering this question, we have purposely left out of our consideration the effect of such a measure on foreign trade; we have rather been supposing the case of an insulated country, having no commercial connexion with other countries. We have seen that as the demand of the country for corn and commodities would be the same, whatever direction the bounty might take, there would be no temptation to remove capital from one employment to another: but this would no longer be the case if there were foreign commerce, and that commerce were free. By altering the relative value of commodities and corn, by producing so powerful an effect on their natural prices, we should be applying a strong stimulus to the exportation of those commodities whose natural prices were lowered, and an equal stimulus to the importation of those commodities whose natural prices were raised, and thus such a financial measure might entirely alter the natural distribution of employments; to the advantage indeed of the foreign countries, but ruinously to that in which so absurd a policy was adopted.
Encyclopaedia Britannica, article “Corn Laws and Trade,” are the following excellent suggestions and observations: “If we shall at any future period, think of retracting our steps, in order to give time to withdraw capital from the cultivation of our poor soils, and to invest it in more lucrative employments, a gradually diminishing scale of duties may be adopted. The price at which foreign grain should be admitted duty free, may be made to decrease from 80
s. its present limit, by 4
s. or 5
s. per quarter annually, till it reaches 50
s. when the ports could safely be thrown open, and the restrictive system be for ever abolished. When this happy event shall have taken place, it will be no longer necessary to force nature. The capital and enterprise of the country will be turned into those departments of industry in which our physical situation, national character, or political institutions, fit us to excel. The corn of Poland, and the raw cotton of Carolina, will be exchanged for the wares of Birmingham, and the muslins of Glasgow. The genuine commercial spirit, that which permanently secures the property of nations, is altogether inconsistent with the dark and shallow policy of monopoly. The nations of the earth are like provinces of the same kingdom—a free and unfettered intercourse is alike productive of general and of local advantage.” The whole article is well worthy of attention; it is very instructive, is ably written, and shews that the author is completely master of the subject.
“From this error Smith has drawn this false result, that the value of all productions represents the recent or former labour of man,
or, in other words, that riches are nothing else but accumulated labour; from which, by a second consequence equally false, labour is the sole measure of riches, or of the value of productions.” The inference with which M. Say concludes are his own, and not Dr. Smith’s; they are correct if no distinction be made between value and riches, and in this passage M. Say makes none; but though Adam Smith, who defined riches to consists in the abundance of necessaries, conveniences and enjoyments of human life, would have allowed that machines and natural agents might very greatly add to the riches of a country, he would not have allowed that they add any thing to the value of those riches.
Without such exportation, a part of the productive labour of the country must cease, and the value of its annual produce diminish. The land and labour of Great Britain produce generally more corn, woollens, and hardware, than the demand of the home market requires. The surplus part of them, therefore, must be sent abroad, and exchanged for something for which there is a demand at home. It is only by means of such exportation, that this surplus can acquire a value sufficient to compensate the labour and expense of producing it.” One would be led to think by the above passage, that Adam Smith concluded we were under some necessity of producing a surplus of corn, woollen goods, and hardware, and that the capital which produced them could not be otherwise employed. It is, however, always a matter of choice in what way a capital shall be employed, and therefore there can never, for any length of time be a surplus of any commodity; for if there were, it would fall below its natural price, and capital would be removed to some more profitable employment. No writer has more satisfactorily and ably shewn than Dr. Smith, the tendency of capital to move from employments in which the goods produced do not repay by their price the whole expenses, including the ordinary profits, of producing and bringing them to market.*
* See Chap. X. Book I.
the Government of which does not inspire much confidence, they have the further inconvenience of raising the interest of capital. Who would lend at 5 per cent per annum to agriculture, to manufacturers and to commerce, when a borrower may be found ready to pay an interest of 7 or 8 per cent? That sort of income, which is called profit of stock, would rise then at the expense of the consumer. Consumption would be reduced, by the rise in the price of produce; and the other productive services would be less in demand, less well paid. The whole nation, capitalists excepted, would be the sufferers from such a state of things.” To the question: “who would lend money to farmers, manufacturers, and merchants, at 5 per cent per annum, when another borrower, having little credit, would give 7 or 8?” I reply, that every prudent and reasonable man would. Because the rate of interest is 7 or 8 per cent there, where the lender runs extraordinary risk, is this any reason that it should be equally high in those places where they are secured from such risks? M. Say allows, that the rate of interest depends on the rate of profits; but it does not therefore follow, that the rate of profits depends on the rate of interest. One is the cause, the other the effect, and it is impossible for any circumstances to make them change places.
in favour of those who produce such commodities at home,
against those who consume them; in other words, those at home who produce them having the exclusive privilege of selling them, may elevate their price above the natural price; and the consumers at home, not being able to obtain them elsewhere, are obliged to purchase them at a higher price.” Vol. i. p. 201.
But how can they permanently support the market price of their goods above the natural price, when every one of their fellow citizens is free to enter into the trade? They are guaranteed against foreign, but not against home competition. The real evil arising to the country from such monopolies, if they can be called by that name, lies, not in raising the market price of such goods, but in raising their real and natural price. By increasing the cost of production, a portion of the labour of the country is less productively employed.
“The English Government has not observed, that he most profitable sales are those which a country makes to itself, because they cannot take place, without two values being produced by the nation; the value which is sold, and the value with which the purchase is made.” Vol. i. p.221.
I shall, in the
26th chapter, examine the soundness of this opinion.