By Nassau Senior
Definition of the Science.–
We propose in the following Treatise to give an outline of the Science which treats of the Nature, the Production, and the Distribution of Wealth. To that Science we give the name of Political Economy. Our readers must be aware that that term has often been used in a much wider sense. The earlier writers who assumed the name of Political Economists avowedly treated not of Wealth but of Government. Mercier de la Riviere entitled his Work The Natural and Essential Organization of Society, and professed to propose an organization “which shall necessarily produce all the happiness that can be enjoyed on earth.” Sir James Steuart states, that “the principal object of the Science is to secure a certain fund of subsistence for all the inhabitants, to obviate every circumstance which may render it precarious, and to provide everything necessary for supplying the wants of the society.” The modern continental writers have in general entered into an equally extensive inquiry. “Political Economy,” says M. Storch, “is the Science of the natural laws which determine the prosperity of nations, that is to say, their wealth and their civilization.” M. Sismondi considers “the physical welfare of man, so far as it can be the work of government, as the object of Political Economy.” “Political Economy,” says M. Say, “is the economy of society; a Science combining the results of our observations on the nature and functions of the different parts of the social body.” The modern writers of the English school have in general professed to limit their attention to the theory of Wealth; but some of the most eminent among them, after having expressed their intention to confine themselves within what appears to us to be their proper province, have invaded that of the general legislator or the statesman. Thus Mr. M’Culloch, after having defined Political Economy to be “the Science of the laws which regulate the production, accumulation, distribution, and consumption of those articles or products that are necessarily useful or agreeable to man, and possess exchangeable value” or, “the Science of Values;” adds, that “its object is to point out the means by which the industry of man may be rendered most productive of wealth, to ascertain the circumstances most favourable to its accumulation, the proportions in which it is divided, and the mode in which it may be most advantageously consumed.” [From the Introduction]
First Pub. Date
London: Richard Griffin and Co.
The text of this edition is in the public domain. Picture of Nassau Senior courtesy of The Warren J. Samuels Portrait Collection at Duke University.
- Chapter 1, Introduction
- Chapter 2, Nature of Wealth
- Chapter 3, Statement of the Four Elementary Propositions of the Science of Political Economy
- Chapter 3, Statement of the Four Elementary Propositions of the Science of Political Economy, continued
- Chapter 4, Distribution of Wealth
- Chapter 4, Distribution of Wealth, continued
- Chapter 4, Distribution of Wealth, continued
DISTRIBUTION OF WEALTH.
Of the three great branches of Political Economy, the Nature, the Production, and the Distribution of Wealth, we have now considered the two former, and we proceed to treat of the last, namely, of the laws according to which all that is produced is
Distributed among those who become its ultimate consumers. In that state of society which is presupposed by the Political Economist, this is principally effected by means of Exchange. We may indeed conceive a state of human existence admitting of this distribution without the intervention of Exchanges. But such a situation of society, if it can be called society, neither deserves nor requires scientific investigation. Political Economy considers men in that more advanced state, which may fairly be called their natural state, since it is the state to which they are impelled by the provisions of nature, in which each individual relies on his fellows for the greater part, in many cases for the whole of what he consumes, and supplies his own wants principally or wholly by the Exchanges in which he contributes to theirs.
But we must admit that we use each of the words Production and Exchange in a sense rather more extensive than is usual. We have already stated that we apply the word Production to much that would commonly be called appropriation, and that we include under Exchanges what are usually termed public burdens. We consider all that is received by the officers of government as given in Exchange for Services affording protection, more or less complete, against foreign or domestic violence or fraud. It is true, as we have already remarked, that this Exchange is conducted on peculiar principles. In those governments which are not democratic or representative, the rulers themselves assess the amount which they are to receive, and generally assess it at the utmost which, under such circumstances, can be extorted from their subjects. And even under representative or democratic institutions, no individual inhabitant is permitted to refuse his share of the general contribution, though he should disclaim his share in the general protection. But the transaction, though often involuntary, and still more often inequitable, is still an Exchange, and on the whole a beneficial exchange. The worst and most inefficient government affords to its subjects a cheaper and a more effectual Protection than they could obtain by their individual and unaided exertions.
The laws by which Exchanges are regulated may be divided into two great branches. The one comprises those laws which apply generally to all Exchanges; the other those which apply specifically to the respective kinds of Exchanges in which the owners of the different Productive Instruments exchange specifically with one another the Produce of those Instruments.
In treating of the one, we have to consider the general laws which regulate Exchanges; in treating of the other, the relative proportions in which different classes of the community benefit by those laws. The things exchanged will be the principal subjects of the one discussion, the exchanging parties of the other.
One of the greatest difficulties to which a writer on Political Economy is exposed, arises from the mutual dependence of the different propositions constituting the Science; a dependence which makes it difficult to explain any one without a frequent allusion to many others. And this is particularly the case with respect to distribution. The proportions in which different classes of the community are entitled to the things that are produced, cannot be explained without a constant reference to the general Laws of Exchange; and, on the other hand, those Laws cannot be discussed without a constant reference to the exchanging parties. Admitting, as we are forced to do, that no arrangement can be free from objection, we have thought that the least objectionable mode of presenting the subject of distribution will be to begin by a general classification of the parties among whom the results of the different instruments of production are divided; then to proceed to state the general laws of exchange; and, lastly, to point out the general circumstances which decide in what proportions the different classes of the community share in the general distribution.
Society divided into Three Classes—Labourers, Capitalists, and Proprietors of Natural Agents.
According to the usual language of Political Economists, Labour, Capital, and Land are the three Instruments of Production; Labourers, Capitalists, and Landlords are the three classes of Producers; and the whole Produce is divided into Wages, Profit, and Rent: the first designating the Labourer’s share, the second that of the Capitalist, and the third that of the Landlord. We approve, on the whole, of the principles on which this classification is founded, but we have been forced, much against our will, to make considerable alterations in the language in which it has been usually expressed; to add some new terms, and to enlarge or contract the signification of some others.
It appears to us that, to have a nomenclature which should fully and precisely indicate the facts of the case, not less than
twelve distinct terms would be necessary. For each class there ought to be a name for the
Instrument employed or exercised, a name for the
Class of persons who employ or exercise it, a name for the
Act of employing or exercising it, and a name for the
Share of the produce by which that act is remunerated. Of these terms we have not much more than half, as will appear if we examine each class separately.
Nomenclature applicable to the First Class, the Labourers.—For the first class we have the terms “to Labour,” “a Labourer,” and “Wages.” Neither of these terms expresses the instruments of production: the substantive “labour” and the verb “to labour,” express merely an act. “A labourer,” is an agent, and wages are a result: but what is the thing employed? what is it that the labourer exerts? Clearly his mental or bodily faculties. With the addition of this term the nomenclature of the first class will be complete. To Labour is to employ strength of body or mind for the purpose of Production; the person who does so is a Labourer, and Wages are his remuneration.
Nomenclature applicable to the Second Class, the Capitalists.—In the second class we have the words Capital, Capitalist, and Profit. These terms express the instrument, the person who employs or exercises it, and his remuneration; but there is no familiar term to express the act, the conduct of which profit is the reward, and which bears the same relation to profit which labour does to wages. To this conduct we have already given the name of Abstinence. The addition of this term will complete the nomenclature of the second class. Capital is an article of wealth, the result of human exertion, employed in the production or distribution of Wealth. Abstinence expresses both the act of abstaining from the unproductive use of capital, and also the similar conduct of the man who devotes his labour to the production of remote rather than of immediate results. The person who so acts is a Capitalist, the reward of his conduct is Profit.
Nomenclature applicable to the Third Class, the Proprietors of Natural Agents.—The defectiveness of the established nomenclature is more striking when we come to the third class. Wages and Profits are the creation of man. They are the recompense for the sacrifice made in the one case, of ease, in the other, of immediate enjoyment. But a considerable part of the produce of every country is the recompense of no sacrifice whatever; is received by those who neither labour nor put by, but merely hold out their hands to accept the offerings of the rest of the community.
The powers of nature, as distinguished from those of man, are necessary to afford a field for the exercise of human abstinence and labour. Of these, some from their abundance and the notoriety of the means of employing them, are incapable of appropriation. Being universally accessible, they bear no price notwithstanding their utility; and what has been produced with their assistance has no value beyond that of the labour and abstinence which it has cost. It sells therefore for a price equal to, but not exceeding, the sum of the wages and profits which must be paid if the production is to be continued. The agency of nature is equally essential to the production of timber in the forests of Upper Canada and in England. But the supply of timber in the forests of Upper Canada is practically unlimited. No portion of the price of a Canadian hut is paid for the agency of nature in producing the logs of which it is constructed. The pine while standing was valueless. The purchaser pays only for the labour and abstinence necessary to fell and to fashion it.
But the assistance of an
Appropriated Natural Agent may render possible the production of a commodity more valuable than the result of equal labour and abstinence without such assistance. Such a commodity sells for a price exceeding the sum of the wages and profits which are sufficient to repay the capitalist and the labourer who have been employed on it. The surplus is taken by the proprietor of the natural agent, and is his reward, not for having laboured or abstained, but simply for not having withheld what he was able to withhold; for having permitted the gifts of nature to be accepted.
If we subtract from the price of an English oak what must be paid for the labour of him who planted the sapling, and for the abstinence of those who allowed it to grow for a century, still something is to be paid for the use of the land by which it was nourished. And that is the price of the agency not of man but of nature.
Of the Agents afforded by nature, the principal is the Land, with its Rivers, Ports, and Mines. In the rare cases in which the quantity of useful land is practically unlimited, a state of things which occurs only in the early stages of colonization, Land is an agent universally accessible, and, as nothing is paid for its use, the whole produce belongs to the cultivators, and is divided, under the names of wages and profit, between the capitalists and the labourers, of whose abstinence and industry it is the result.
But in all old Countries, and even in colonies within a very few years after their foundation, certain Lands, from peculiar advantages of soil or situation, are found to make more than the average return to a given expenditure of capital and industry. The proprietor of such lands, if he cultivate them himself, receives a surplus after having paid the wages of his labourers and deducted the profit to which he is entitled on his capital. He of course receives the same surplus if, instead of cultivating them himself, he lets them out to some other capitalist. The tenant receives the same profit, and the labourers receive the same wages as if they were employed on land possessing merely average natural advantages; the surplus forms the rent of the proprietor, or, as we usually term him, the landlord. The whole produce, instead of two, is divided into three shares—Rent, Profit, and Wages. If the owner is also the capitalist or farmer, he receives two of these shares, both the profit and the rent. If he allow it to be cultivated by the capital of another, he receives only rent. But rent, with or without profit, he necessarily receives. And when the whole of a Country has been appropriated, though it be true, as will be shown hereafter, that some of the produce is raised by the application of additional capital without payment of additional rent, and may therefore be said to be raised rent free, yet it is equally true that a rent is received from every cultivated acre; a rent rising or falling according to the accidents of soil and situation, but the necessary result of limited extent and productive power.
It is obvious, however, as we have already stated, that land though the principal, is not the only natural agent that can be appropriated. The mere knowledge of the operations of nature, as long as the use of that knowledge can be confined either by secrecy or by law, creates a revenue to its possessor analogous to the rent of land. The knowledge of the effect on the fibres of cotton of rollers moving with different velocities, enabled a village barber to found in a very few years a more than aristocratic fortune. Still greater wealth might probably have been acquired by Dr. Jenner, if he could have borne somewhat to limit the benefits which he has conferred on mankind.
When the author of a useful discovery puts it himself in practice, he is like a proprietor farming his own property; the produce, after paying average wages for the labour and average profits for the capital employed, affords a still further revenue, the effect not of that capital or of that labour, but of the discovery, the creation not of man but of nature. If, instead of using it himself, he let out to another the privilege of using it, he obtains a revenue so precisely resembling the rent of land, that it often receives the same name. The payment made by a manufacturer to a patentee for the privilege of using the patent process, is usually termed, in commercial language, a Rent; and under the same head must be ranked all the peculiar advantages of situation or connection, and all extraordinary qualities of body and mind. The surplus revenue which they occasion beyond average wages and profits is a revenue for which no additional sacrifice has been made. The proprietor of these advantages differs from a landlord only in the circumstance that he cannot in general let them out to be used by another, and must consequently either allow them to be useless or turn them to account himself. He is forced, therefore, always to employ on them his own industry, and generally his own capital, and receives not only rent, but wages and profit. If, therefore, the established division is adhered to, and all that is produced is to be divided into rent, profit, and wages,—and certainly that appears to be the most convenient classification, and if wages and profit are to be considered as the rewards of peculiar sacrifices, the former the remuneration for labour, and the latter for abstinence from immediate enjoyment, it is clear that under the term “rent” must be included all that is obtained without any sacrifice; or, which is the same thing, beyond the remuneration for that sacrifice; all that nature or fortune bestows either without any exertion on the part of the recipient, or in addition to the average remuneration for the exercise of industry or the employment of capital.
But though we see no objection to this extension of the word rent, the terms land and landlord are too precise to admit of being equally extended. It would be too great an innovation to include under the term land every natural agent which is capable of appropriation, or under the term landlord every proprietor of such an agent. For these terms we must substitute those of
natural agent, and
proprietor of a natural agent. And the third class will then have a term for the third instrument of production, a term for the owner of that instrument, and a term for the share which he receives of the produce; terms corresponding with the terms faculties of body and mind, labourer and wages, as applied to the first class, and with capital, capitalist, and profit, as applied to the second. We shall still want a term corresponding with labour and abstinence,—a term indicating the
conduct which enables the proprietor of a natural agent to receive a rent. But as this conduct implies no sacrifice,—as it consists merely in not suffering the instrument of which he is the owner to be useless, it perhaps does not require a distinct designation. When a man possesses an estate, we take it for granted that he does not allow it to lie waste, but either uses it himself, or lets it to a tenant. In ordinary language the receipt of rent is included under the term ownership. There will therefore be little danger of obscurity if we consider the word “possess,” when applied to the proprietor of a natural agent, as implying the receipt of the advantages afforded by that agent, or, in other words, of rent. Talents, indeed, often lie idle, but in that case they may be considered for economical purposes as not possessed. In fact, unaccompanied by the will to use them, they are useless.
But though the whole produce may be considered as divided into three shares, one which is taken by the capitalists, another by the labourers, and another by the proprietors of the natural agents which have concurred in the production, it is very seldom that any given commodity, or the produce of any one productive exertion, is thus actually divided. The nearest approach to it takes place in those cases in which producers belonging to different classes become partners, and agree that the produce of their join exertions shall be sold and the price divided between them. Such a partnership is often formed between a capitalist and his labourers when the success of the enterprise depends much on the zeal of the labourers, and the capitalist is unable to overlook them. Such is the case in the Greenland fishery. The men seldom receive preascertained wages, but, on the termination of the voyage, the blubber is sold, and the price divided between the owners and the crew. The practice is the same in privateering, and probably in many other maritime speculations. Somewhat similar is the mode of letting land called the métayer system. Under that system, which is still common on the Continent of Europe, and probably is always to be found in a certain state of society, the landlord supplies the capital as well as the land, and receives half the crop, the remainder forming the wages of the tenant or head labourer, and of the inferior work-people in his employ. But these are exceptions occasioned by the peculiarities of the adventure, or by the poverty or ignorance of imperfect civilization. The usual practice is to consider one of the parties as entitled to the whole product, paying to the others a price for their co-operation. The person so entitled is uniformly the capitalist: the sums which he pays for wages and rent are the purchase-money for the services of the labourer, and for the use of the natural agent employed.
In most cases a considerable interval elapses between the period at which the natural agent and the labourer are first employed, and the completion of the product. In this climate the harvest is seldom reaped until nearly a year after it has been sown; a still longer time is required for the maturity of oxen; and a longer still for that of a horse; and sixty or seventy years may pass between the commencement of a plantation, and the time at which the timber is saleable. It is obvious that neither the landlord nor the labourer, as such, can wait during all this interval for their remuneration. The doing so would, in fact, be an act of abstinence. It would be the employment of land and labour in order to obtain remote results. This sacrifice is made by the capitalist, and he is repaid for it by his appropriate remuneration, profit. He advances to the landlord and the labourer, and in most cases to some previous capitalist, the price of their respective assistance; or, in other words the hire of the land and capital belonging to one, and of the mental and bodily powers of another, and becomes solely entitled to the whole of the product. The success of his operations depends on the proportion which the value of that produce, (or, in commercial language, the value of his returns,) bears to the value of his advances, taking into consideration the time for which those advances have been made. If the value of the return is inferior to that of the advance, he is obviously a loser; he is a loser if it be merely equal, as he has incurred abstinence without profit, or, in ordinary language, has lost the interest on his capital. He is a loser even if the value of his returns do not exceed that of his advances by an amount equal to the current rate of profit for the period during which the advance has been made. In any of these cases the product is sold, so far as the capitalist is concerned, for less than the cost of its production. The employment of capital, therefore, is necessarily a speculation; it is the purchase of so much productive power which may or may not occasion a remunerative return.
The common language of Economists, therefore, which describes the landlord, the capitalist, and the labourer as sharers of the produce, is a fiction. Almost all that is produced is in the first instance the property of the capitalist; he has purchased it by having previously paid the rent and wages, and incurred or paid for the abstinence, which were necessary to its production. A portion of it, but generally a small portion, he consumes himself in the state in which he receives it; the remainder he sells. He may, if he think fit, employ the price of all that he sells in purchases for his own gratification; but he cannot remain a capitalist unless he consent to employ some portion of it in the hire of the land and labour, by the assistance of which the process of production is to be continued or recommended. He cannot, generally speaking, fully retain his situation as a capitalist unless he employ enough to hire as much land and labour as before; and if he wish to raise himself in the world, he must, generally speaking, not merely keep up, but increase the sum which he devotes to the purchase of productive force. If, for instance, he has hired the use of a farm for a year for £1000, and has paid £2000 more as wages to his labourers, and has expended £1000 in the purchase, from other capitalists, of Agricultural stock, and at the end of the year has sold the produce for £4400, he may, if he like, spend on his own gratification the whole of that £4400; or he may so spend only £400, and employ the rest in hiring the farm and the labourers, and purchasing stock for another year; or he may spend on himself only £200, and by employing productively £4200 instead of £4000, hire more land, or more labourers, or purchase more stock and provide for the increase of his capital and his profit. But in whatever way he employ his £4400, he still must pay it to landlords, (using that word to comprise all proprietors of natural agents,) capitalists, and labourers.
It has been objected, however, that this nomenclature is incomplete. Rent, profit, and wages, it has been said, designate only those portions of the annual produce which the producers consume for their own gratification. They form the
revenue of a nation. A further portion and a very large one, must be employed, not as revenue, but as capital; not in directly supplying the wants or directly ministering to the enjoyments of either landlords, labourers, or capitalists, but merely in keeping up the instruments of production. Thus of the farmer’s whole return, which we have supposed to be of the value of £4400, we may suppose a portion, amounting in value to £200, to have consisted of corn which he returned to the earth as seed, and another portion amounting to the same value, to have consisted of the forage which he gave to his working cattle. It has been said that neither this seed nor this forage was rent, profit, or wages.
The answer to this objection is, that the seed-corn and forage in question were the result of land, labour, and abstinence; they were entitled, therefore, when produced, to be denominated rent, wages, or profit, and the circumstance that they were employed to produce future instead of immediate gratification, does not vary their character. When produced, they were revenue: their
conversion into capital was a subsequent accident. No one would except against the expression that such and such a labourer has
saved part of his wages and employed them in stocking his garden. If the words revenue and income were co-extensive with expenditure, the common statement, that a man is living within his income, would be a contradiction in terms.
Perhaps this may be made clearer if we retrace the history of capital.
The primary instruments of production were labour, and those productive agents which are spontaneously afforded by nature. The first dwellers on the earth had only rent and wages. The savage who, instead of devouring the animals which he had entrapped, reserved them to become the origin of a domesticated flock, and he who reserved, to be employed as seed, some of the grains which he had gathered, laid the foundation of capital. The produce of that flock and of that seed was partly rent, partly wages, and partly profit. And it did not cease to be so, although he refused to employ the whole of it on his immediate gratification.
It must be admitted, however, that the portion of the annual produce which is employed in the production or the support of brute or inanimate capital is not usually termed rent, wages, or profit. It has not, in fact, any specific name. But it appears to us to be the most philosophical arrangement to consider it as rent, wages, or profit, according to the character of its proprietor, without regard to its subsequent destination.
Having made this general classification of the parties among whom the results of the different productive instruments are divided, we now proceed to consider the general laws which regulate the proportions in which those results are exchanged for one another. To a certain degree this question was considered when we treated of value; but not having at that time explained the words production, wages, profit, or rent, we were unable to do more than to state and illustrate the following propositions:—
First, that all those things, and those things only, are susceptible of exchange, which, being transferable, are limited in supply, and are capable, directly or indirectly, of affording pleasure or preventing pain; a capacity to which we have affixed the name of utility. Secondly, that the reciprocal values of any two things, or, in other words, the quantity of the one which will exchange for a given quantity of the other, depend on two sets of causes; those which occasion the utility and limit the supply of the one, and those which limit the supply and occasion the utility of the other. The causes which occasion the utility and limit the supply of any given commodity or service, we denominated the
intrinsic causes of its value. Those which limit the supply and occasion the utility of the commodities or services for which it is capable of being exchanged, we denominated the
extrinsic causes of its value. And, thirdly, that comparative limitation of supply, or, to speak more familiarly, though less philosophically, comparative scarcity, though not sufficient to constitute value, is by far its most important element; utility, or, in other words, demand, being mainly dependent on it. We had not then shown the means by which supply is effected. Having done this, having shown that human Labour and Abstinence, and the spontaneous agency of Nature, are the three instruments of production, we are at liberty to explain what are the obstacles which limit the supply of all that is produced, and the mode in which those obstacles affect the reciprocal values of the different subjects of exchange.
Price.—In the following discussion, however, we shall in general substitute
price, or value in money, for general value.
The general value of any commodity, that is, the quantity of all the other subjects of exchange which might be obtained in return for a given quantity of it, is incapable of being ascertained. Its specific value in any other commodity may be ascertained by the experiment of an exchange; the anxiety of each party in the exchange to give as little and obtain as much as possible, leading him to investigate, as accurately as he can, the intrinsic causes giving value to each of the articles to be exchanged. This is, however, a troublesome operation, and many expedients are used to diminish its frequency. The most obvious one is to consider a single exchange, or the mean of a few exchanges, as a model for subsequent exchanges of a similar nature. By an extension of this expedient it may become a model for exchanges not of a similar nature. If given quantities of two different articles are each found by experience to exchange for a given quantity of a third article, the proportionate value of the two first-mentioned articles may, of course, be inferred. It is
measured by the third. Hence arise the advantages of selecting, as one of the subjects of every exchange, a single commodity, or, more correctly, a species of commodities constituted of individuals of precisely similar qualities. In the first place, all persons can ascertain, with tolerable accuracy, the intrinsic causes which give value to the selected commodity, so that one half the trouble of an exchange is ready performed. And, secondly, if an exchange is to be effected between any other two commodities, the quantity of each that is usually exchanged for a given quantity of the third commodity is ascertained, and their relative value is inferred. The commodity thus selected as the general instrument of exchange, whatever be its substance, whether salt, as in Abyssinia, cowries, as on the Coast of Guinea, or the precious metals, as in Europe, is
money. When the use of such a commodity, or, in other words, of money, has become established, value in money, or
price, is the only value familiarly contemplated. The scarcity and durability of gold and silver (the substances used as money by all civilized nations) make them peculiarly unsusceptible of alteration in value from intrinsic causes. On these accounts we think it better, in the following discussion, to refer rather to
price than to general value, and to consider the value of money, so far as it depends on intrinsic causes, to be unvarying.
We must preface our explanation of the effect on price of the causes limiting supply, by a remark which may appear self-evident, but which must always be kept in recollection, namely, that
where the only natural agents employed are those which are universally accessible, and therefore are practically unlimited in supply, the utility of the produce, or, in other words, its power, directly or indirectly, of producing gratification, or preventing pain, must be in proportion to the sacrifices made to produce it, unless the producer has misapplied his exertions; since no man would willingly employ a given amount of labour or abstinence in producing one commodity, if he could obtain more gratification by devoting them to the production of another.
We now revert to the causes which limit supply.
There are some commodities the results of agents no longer in existence, or acting at remote and uncertain periods, the supply of which cannot be increased, or cannot be reckoned upon. Antiques and relics belong to the first class, and all the very rare productions of Nature or Art, such as diamonds of extraordinary size, or pictures, or statues of extraordinary beauty, to the second. The values of such commodities are subject to no definite rules, and depend altogether on the wealth and taste of the community. In common language, they are said to bear a fancy price, that is, a price depending principally on the caprice or fashion of the day. The Boccaccio, which a few years ago sold for £2000, and after a year or two’s interval for £700, may, perhaps, fifty years hence, be purchased for a shilling. Relics which, in the ninth century, were thought too valuable to admit of a definite price, would now be thought equally incapable of price in consequence of their utter worthlessness. In the following discussion we shall altogether omit such commodities, and confine our attention to those of which the supply is capable of increase, either regular, or sufficiently approaching to regularity, to admit of calculation.
The obstacle to the supply of those commodities which are produced by labour and abstinence with that assistance only from nature which every one can command, consists solely in the difficulty of finding persons ready to submit to the labour and abstinence necessary to their production. In other words, their supply is limited by the cost of their production.
Cost of Production.—The term “cost of production” must be familiar to those who are acquainted with the writings of modern Economists; but, like most terms in Political Economy, though currently used, it has never been accurately defined; and it appears to us impossible that it should have been defined without the assistance of the term “abstinence,” or of some equivalent expression.
Mr. Ricardo, who originally introduced the term “cost of production,” uses as an equivalent expression, “the quantity of labour which has been bestowed on the production of a commodity.” Mr. Mill (Ch. iii. sec. 2,) appears to consider cost of production as equivalent to “quantity of labour.” Mr. Malthus more elaborately defines it as “the advance of the quantity of accumulated and immediate labour necessary to production, with such a per centage upon the whole of the advances for the time they have been employed as is equivalent to ordinary profits.” (
Definitions, p. 242.)
In a note to the third edition, page 46, Mr. Ricardo admits that profit also forms a part of the cost of production. Mr. Mill, by a stretch of language, in the convenience of which we cannot concur, includes profit under the term labour. The definitions of Mr. Ricardo and Mr. Mill appear, therefore, to coincide. And that adopted by Mr. Malthus only differs from them in referring, not to the labour that
has been employed, but to that which must be employed if the production must be continued. In this respect the language of Mr. Malthus is undoubtedly the most correct. The sacrifices that
have been made to produce a given commodity have no effect on its value. All that the purchaser considers is the amount of sacrifice that its production would require at the time of the exchange. If the expense of producing a pair of stockings was suddenly to fall or to rise by one half, a rise or fall in the value of the existing stockings would be the consequence, although the labour that
has been employed on them is of course unalterable. And when Mr. Ricardo and Mr. Mill speak of the labour which
has been employed on a commodity as affecting its value, they must be understood as implying that the circumstances of production remain unchanged.
Colonel Torrens considers cost of production as equivalent to “the amount of capital expended on production,” and refuses to consider profit as forming one of its elements. His remarks throw so much light on the whole subject, that we will venture to extract them at some length.
“Those writers who contend for the general equality of market and natural price, include the customary rate of profit under the term natural price, or cost of production. But this classification is highly unphilosophical and incorrect. The profits of stock never make any part of the expense of production; they are, on the contrary, a new creation brought into existence in consequence of this expense. The farmer, we will suppose, expends one hundred quarters of corn in cultivating his fields, and obtains in return one hundred and twenty quarters. In this case twenty quarters, being the excess of produce above expenditure, constitute the farmer’s profit, but it would be absurd to call this excess or profit a part of the expenditure. The expenditure or cost of production was one hundred quarters. It has been now repaid with a surplus of twenty quarters; and, unless the surplus which remains after the expenditure is replaced, be a part of the expenditure, unless, in fact, one hundred and twenty quarters be equal to a hundred, it is impossible that market price should be equivalent to natural. Supposing that corn is £3 per quarter, then, in the case we have stated, the natural price of the farmer’s produce, or the one hundred quarters expended upon production, will be equivalent to £300; while the produce of one hundred and twenty quarters obtained in return will be equivalent to £360. The excess of market above natural price, or cost of production, is profit; and to contend that this profit is included in the cost of production, is the same thing as contending that the hundred quarters, or £300 laid out in cultivation, are equal to the one hundred and twenty quarters, or £360 thereby obtained.
“In manufacturing, as well as in agricultural industry, the profit of stock is distinct from the cost of production. The master manufacturer expends a certain quantity of raw material, of tools and implements of trade, and of subsistence for labourers, and obtains in return a given quantity of finished work. This finished work must possess a higher exchangeable value than the materials, tools, and subsistence, by the advance of which it was obtained; otherwise the master could have no inducement to continue his business. Manufacturing industry would cease if the value produced did not exceed the value expended. But it is the excess of value which the finished work possesses above the value of the materials, implements, and subsistence expended, that constitutes the master’s profit; and therefore we cannot assert that the profit of his stock is included in the cost of production without affirming the gross absurdity, that the excess of value above expenditure constitutes a part of expenditure. Supposing that the materials, tools, and subsistence cost £300, and that the finished work is worth £360, then the difference will be the master’s profit; and we cannot maintain that the annual profit is included in the amount of expenditure, or cost of production, without urging the contradiction that £300 are equal to £360.
“The profit of stock, so far from forming any part of the cost of production, is a surplus remaining after this cost has been completely replaced. In carrying on their business, the farmer and manufacturer do not expend their profit, they create it. It forms no part of their first advances; on the contrary, it forms a part of their subsequent returns. It could not have been employed in carrying on the work of production, because, until this work was completed, it had no existence. It is essentially a surplus, a new creation, over and above all that is necessary to replace the cost of production, or, in other words, the capital advanced. It is hoped that enough has been said to convince the reader of the nature of the error into which those Economists fall who maintain that the profit of stock is included in the expense of production, and that natural and market price tend to an equality. Market price is that which we give in order to obtain a commodity by exchange in the market: natural price is that which we give to effect a purchase at the great storehouse of nature: it consists of the several articles of capital employed in production, and cannot by possibility include the surplus or profit created during the progress of production.”
Colonel Torrens’s remarks are just, so far as they apply to the mere expressions which he is criticising. Profit is certainly not a means, but a result. It is true that unless that result were expected, production would not be continued. Neither the farmer nor the manufacturer could be induced by any other motive to abstain from the unproductive enjoyment of his capital; so food would not be produced unless its consumption were necessary or agreeable. But the obtaining a profit is no more a part of the cost of producing a harvest than the gratification of appetite is a part of the cost of producing a dinner, or protection from cold part of the cost of producing a coat.
Want of the term abstinence, or of some equivalent expression, has led Mr. Malthus into inaccuracy of language. He seems to have felt that something besides mere labour is essential to production. He felt that simple industry would not convert a naked heath into a valuable wood; that the planter, in addition to the labour of inserting and protecting the saplings, incurred the additional
sacrifice of directing his labour to the production of remote results; and that the successive generations of proprietors, in suffering the young plantation to become mature, sacrificed their own emolument to that of their successors. He seems to have felt that these sacrifices were part of the cost of producing the wood, and, having no term to express them, he denominated them by the name of their reward. When he termed profit a part of the cost of production, he appears to us to have meant not profit, but that conduct which is repaid by profit: an inaccuracy precisely similar to that committed by those who term wages a part of the cost of production; meaning not wages, which are the result, but the labour for which wages are the remuneration.
Colonel Torrens’s error is an error of omission. He refuses to consider profit as part of the cost of production, but he does not substitute for it abstinence or any equivalent expression. Although he admits that where equal capitals are employed the value of the products may differ if the one be brought to market sooner than the other, he has not stated the principle on which this difference depends. That principle is that, though in both cases the labour employed is the same, more abstinence is necessary in the one case than in the other.
Cost of Production Defined.—By
Cost of Production, then, we mean the sum of the labour and abstinence necessary to production. But Cost of Production, thus defined, must be divided into the cost of production on the part of the producer or seller, and the cost of production on the part of the consumer or purchaser. The first is of course the amount of the labour and abstinence which must be undergone by him who offers for sale a given class of commodities or services in order to enable him to continue to produce them. The second is, the amount of the labour and abstinence which must be undergone by those to whom a given commodity or service is offered for sale, if, instead of purchasing, they themselves, or some of them on the behalf of themselves and the others, were to produce it. The first is equal to the minimum, the second to the maximum, of price. For, on the one hand, no man would continue to produce, for the purpose of sale, what should sell for less than it cost him to produce it. And, on the other hand, no men would continue to buy what they themselves, or some of them on the behalf of themselves and the others, could produce at less expense. With respect to those commodities, or, to speak more accurately, with respect to the value of those parts or attributes of commodities, which are the subjects of equal competition, which may be produced by all persons with equal advantages, the cost of production to the producer and the cost of production to the consumer are the same. Their price, therefore, represents the aggregate amount of the labour and abstinence necessary to continue their production. If their price should fall lower, the wages or the profits of those employed in their production must fall below the average remuneration of the labour and abstinence that must be undergone if their production is to be continued. In time, therefore, it is discontinued or diminished, until the value of the product has been raised by the diminution of the supply. If the price should rise beyond the cost of their production, the producers must receive more than an average remuneration for their sacrifices. As soon as this has been discovered, capital and industry flow towards the employment which, by this supposition, offers extraordinary advantages. These who formerly were purchasers, or persons on their behalf, turn producers themselves, until the increased supply has equalized the price with the cost of production.
Some years ago London depended for water on the New River Company. As the quantity which they can supply is limited, the price rose with the extension of buildings, until it so far exceeded the cost of production as to induce some of the consumers to become producers. Three new Water Companies were established, and the price fell as the supply increased, until the shares in the New River Company fell to nearly one-fourth of their former value; from £15,000 to £4000. If the metropolis should continue to increase, these transactions will recur. The price of water will increase and exceed the cost at which it could be afforded. New Companies will arise, and, unless the additional supply is checked by greater natural obstacles than those which the existing Companies have to surmount, the price will again fall to its present level.
But though, under free competition, cost of production is the regulator of price, its influence is subject to much occasional interruption. Its operation can be supposed to be perfect only if we suppose that there are no disturbing causes, that capital and labour can be at once transferred, and without loss, from one employment to another, and that every producer has full information of the profit to be derived from every mode of production. But it is obvious that these suppositions have no resemblance to the truth. A large portion of the capital essential to production consists of buildings, machinery, and other implements, the results of much time and labour, and of little service for any except their existing purposes. A still larger portion consists of knowledge and of intellectual and bodily dexterity, applicable only to the processes in which those qualities were originally acquired. Again, the advantage derived from any given business depends so much upon the dexterity and the judgment with which it is managed, that few capitalists can estimate, except upon an average of some years, the amount of their own profits, and still fewer can estimate those of their neighbours. Established businesses, therefore, may survive the causes in which they originated, and become gradually extinguished as their comparative unprofitableness is discovered, and the labourers and capital engaged in them wear away without being replaced; and, on the other hand, other employments are inadequately supplied with the capital and industry which they could profitably absorb. During the interval, the products of the one sell for less, and those of the others for more, than their cost of production. Political Economy does not deal with particular facts but with general tendencies, and when we assign to cost of production the power of regulating price in cases of equal competition, we mean to describe it not as a point to which price is attached, but as a centre of oscillation which it is always endeavouring to approach.
We have seen that, under circumstances of equal competition, or, in other words, where all persons can become producers, and that with equal advantages, the cost of production on the part of the producer or seller, and the cost of production on the part of the consumer or purchaser, are the same, and that the commodity thus produced sells for its cost of production; or, in other words, at a price equal to the sum of the labour and abstinence which its production requires; or, to use a more familiar expression, at a price equal to the amount of the wages and profits which must be paid to induce the producers to continue their exertions. It has lately been a general opinion that the bulk of commodities is produced under circumstances of equal competition. “By far the greater part of those goods,” says Mr. Ricardo, (
Principles, &c. p. 3,) “which are the objects of desire, are produced by labour, and may be multiplied almost without any assignable limit, if we are disposed to bestow the labour necessary to obtain them. In speaking then of commodities, of their exchangeable value, and of the laws which regulate their relative prices, we always mean such commodities only as can be increased in quantity by the exertion of human industry, and in the production of which competition operates without restraint.”
Now it is clear that the production in which no appropriated natural agent has concurred, is the only production which has been made under circumstances of perfectly equal competition. And how few are the commodities of which the production has in no stage been assisted by peculiar advantages of soil, or situation, or by extraordinary talent of body or mind, or by processes generally unknown, or protected by law from imitation? Where the assistance of these agents, to which we have given the general name of natural agents, has been obtained, the result is more valuable than the result of equal labour and abstinence unassisted by similar aids. A commodity thus produced is called the subject of a
monopoly; and the person who has appropriated such a natural agent, a
Monopolies may be divided into four kinds.
Where the monopolist has not the exclusive power of producing, but only certain exclusive facilities as a producer, and can increase, with undiminished, or even increased facility, the amount of his produce.
The value of a commodity produced under such circumstances approaches more nearly to the cost of production on the part of the seller, than that of any other monopolised commodity. It is obvious that its price can never permanently fall below the value of the sacrifices which must be paid by the producer, and, on the other hand, that it never can permanently rise above the value of the sacrifices which must be made by the consumers, if, instead of purchasing, they, or some persons on their behalf, were to turn producers. Sir R. Arkwright’s yarn could not sell for more than yarn of an equal quality produced without the aid of his patent machinery; nor would Arkwright have sold it for less than the value of the labour and abstinence employed in its production. The first was the cost of production to the consumer, the second the cost of production to the producer. But the difference between the two was enormous; the cost to Arkwright was not one-fifth of what it would have been to his customers.
His inventions enabled him to produce a greater quantity, but not a better quality. The finger and thumb constitute an instrument more delicate than any system of rollers, and the muslin formed by the comparatively unassisted labour of the Hindoo is finer and more durable than the produce of our elaborate manufactories. The price which Arkwright
could exact was therefore limited, as we have seen, by the competition of other productive instruments, more expensive but quite as efficient. The price which he
did exact was still further limited by a regard to his own interest. He had discovered an instrument of which the powers, instead of being exhausted, increased with every increase in its application. To erect a mill for the purpose of spinning annually a hundred or a thousand pounds of cotton would be madness. The expense of spinning ten thousand pounds very little exceeds the expense of spinning one thousand, and forty thousand might probably be spun at less than double the expense of ten thousand. As the quantity produced is increased, the relative cost of production is diminished. If, therefore, on the sale of ten thousand pounds weight of yarn at a given price, which we will call £10,000, his profit amounted to £5000, the profit of selling one hundred thousand weight at the same price might have amounted to £90,000, and his profit on selling one million pounds weight to £900,000. But to effect this was obviously impossible. As value depends mainly on limitation of supply, he could not have at once offered a large quantity for sale without diminishing the price, if he left that price to be fixed by the competition of the purchasers, or without having a large portion unsold, if he refused to submit to that diminution. His only mode of stimulating a constant increase of consumption was to submit to such a constant lowering of price as should constantly widen the circle of those able and willing to purchase. As is usually the case, his own interest and that of the public coincided, and led him to accept a price far exceeding indeed the cost of production to himself, but falling short by a still wider interval of what would have been the cost of production to them.
Sir R. Arkwright’s monopoly, therefore, was of the most limited kind. His remuneration was bounded, and it was not his interest even to approach that boundary.
2. A second kind of monopoly is in the opposite extreme.
It exists where price is checked neither by the hopes nor by the fears of the producer, where no competition is dreaded, and no increased supply can be effected. The owners of some vineyards have such a monopoly. Constantia owes its peculiar flavour to the agency of a few acres of ground, and that flavour would be destroyed if high cultivation were employed to force from that grornd a larger quantity of wine. As no person but the proprietor of the Constantia farm can be a producer, the price is not checked by any cost of production to the consumer. It is not checked by any wish of the proprietor to increase the consumption, since the quantity produced, and consequently the quantity consumed, is incapable of increase. The price cannot of course fall below the cost of production, but may indefinitely exceed it. It is limited solely by the will and the ability of the consumers. And if fashion were to make it an object of intense desire among the opulent, a pipe of Constantia, produced perhaps at the expense of £20, might sell for £20,000.
3. A third and more frequent kind of monopoly lies between these two extremes, and is neither so strict as the last, nor so comparatively open as the first.
This comprises those cases in which the monopolist is the only producer, but, by the application of additional labour and abstinence, can indefinitely increase his production. The book trade affords an illustration. While a work is protected by copyright, no person but the proprietor of that copyright can produce copies; and he may multiply them indefinitely by the application of additional labour and abstinence. There is here no cost of production on the part of the purchaser, and, as far as he is concerned, the price is limited only by his will and ability. The efficient check arises from the interest of the publisher. As is the case with manufactures generally, the relative expense of publication diminishes as the number of copies published increases. It is his interest, therefore, to encourage a large sale by affixing a price but slightly exceeding the cost of production, diminished as that cost is by the magnitude of the produce. A hundred copies of
Waverley might, perhaps, have been sold at ten guineas a copy; but there can be no doubt that a larger aggregate profit was obtained by selling ten thousand at a guinea and a half.
The fourth and last class of monopolies exists where production must be assisted by natural agents, limited in number, and varying in power, and repaying with less and less relative assistance every increase in the amount of the labour and abstinence bestowed on them. It is under these circumstances that the greater part of the raw produce, whatever it be, which is the staple food of the inhabitants in every Country, potatoes in Ireland, wheat in England, or rice in India, is produced. It is, in fact, THE GREAT MONOPOLY OF LAND; and as there are scarcely any commodities of which the supply is not in some measure limited by the limited extent of the land essential or serviceable to some process in their production, all general theories as to value must be subject to error until the general laws regulating the value of the assistance to be derived from land have been ascertained. It will be necessary, therefore, to examine them at some length.
Land.—The soil of every extensive district is of different degrees of fertility and convenience of situation, and the soils of each degree constitute a distinct class of natural agents, affording each a distinct amount of assistance to the cultivator. And we have seen that each portion of soil, whatever be its fertility, agricultural skill remaining the same, generally gives a less and less proportionate return to each additional quantity of labour and abstinence bestowed on its cultivation, and may be said, therefore, to comprise within itself a system of natural agents of different powers. The different classes of natural agents will be successively employed, in proportion to their efficiency; an inferior class being never resorted to while a superior one is equally accessible: and each class, until it has been completely appropriated, may be considered as practically unlimited in supply, since it is universally accessible. What shall be the worst natural agent employed, or, in other words, to what extent inferior soils shall be cultivated, or additional labour and abstinence employed at a comparative disadvantage on the cultivation of those which are more fertile or better situated, must always be determined by the wealth and wants of the community; by the quantity of agricultural produce which they have the power and the desire to purchase. While those wants can be satisfied by slightly cultivating only a portion of the most fertile and best situated land, that land, though highly productive, indeed more productive in proportion to the labour and abstinence bestowed on it than at any subsequent stage, cannot be a separate and independent source of value. It is then a natural agent universally accessible, and its produce, however large, will exchange only for the value of the labour and abstinence employed on its production. In short, the cost of production to the producer, and the cost of production to the consumer, are, under such circumstances, the same. This is the state of some of the fertile and thinly-peopled districts of the tropics. The inhabitants of the greater part of the Tierra Caliente, of Mexico, appropriate at will from the fertile wilderness over which they are scattered the small patches which afford them the materials of lodging, food, and raiment. We are told that in these districts the labour of a week will provide subsistence for a year, but even this vast productive power, or even any conceivable increase in it, is incapable of giving value to the assistance afforded as long as the supply of that assistance remains unlimited.
It becomes limited, however, in the very earliest stages of improvement. Both the causes and the consequences of this event may be illustrated by tracing the progress of a Colony.
When a body of emigrants arrives on the coast of an unoccupied district, their first operation must be to fix the situation of their future metropolis; the seat of government, of law, of foreign trade, and of those manufactures which require the congregation of numerous workmen. We may suppose their numbers and the local advantages to be such as to enable them to occupy, within such a distance from their infant town as to render the expense of carriage immaterial, as much land of the highest fertility as each agricultural family may wish to cultivate. The agricultural produce thus obtained must sell for its cost of production to the producer; every consumer being able at will to turn a producer, with advantages equal to those enjoyed by the existing producers, and being unwilling to give for the result of a given amount of labour and abstinence on their part more than the result of an equal amount of labour and abstinence on his own part. Such a commodity rapidly increases in numbers and in wealth, and that increase is accompanied by an increased desire and ability to purchase agricultural produce. Until the supply of raw produce has been increased, the price must now rise above the cost of production. But when the most fertile lands within a given distance of the town have been occupied, there remain only three modes of increasing the supply; either, 1. by cultivating the fertile lands at a greater distance from the town; or, 2. by cultivating the inferior land in its neighbourhood; or, 3. by employing additional labour and abstinence in the cultivation of the lands already occupied. Whichever of these plans be adopted, and probably they will all be adopted, the additional quantity must be supplied at an increased expense. The first is loaded with the expenses of carriage; and we know that a given amount of labour and abstinence is employed to comparative disadvantage, when applied either to the cultivation of inferior land, or to the further improvement of the best land.
The immediate consequence of the increase of supply must be a fall of price, but a fall not equal to the previous rise. The additional supply is produced under circumstances of equal competition, every consumer having it in his power to turn producer by occupying the more distant or less fertile territory; it sells, therefore, for the cost of production to the producer. But commodities of precisely the same qualities cannot sell in the same market for different prices. The purchaser of a bushel of wheat does not inquire whether it was grown within a furlong or at ten miles from the place of sale. The produce, therefore, of the fertile lands in the immediate vicinity of the market, sells at the same price as that of the distant or inferior land.
That price, as it is equal to the cost of production of what is produced at the greatest expense, must exceed the cost of production of what is produced at the least expense. The proprietor of the most fertile and best situated land has no motive to take less, as he cannot, like the owner of a patent, increase the amount of what he produces and continue to produce at equal advantage; and the purchaser cannot support an offer of less, as he cannot turn producer but by submitting to disadvantages which equalize the current price and the cost of production.
As the Colony grows into a People and an Empire, the same processes are repeated. Every increase of wealth and population raises the price of raw produce. Increase of price occasions an increase of supply, raised at a comparatively greater expense. The price falls in consequence of the increased supply, but is prevented from falling to its former level by the increase which has taken place in the cost of producing that part of the whole supply which is brought to market at the greatest expense.
The effect will be the same whether we select for the scene a continent or an island; a district containing soils of every degree of fertility, or of precisely uniform quality. The Anglo-Americans have supplied their constantly increasing wants chiefly by spreading themselves backwards over their unbounded Western territory, and have made little use of inferior soils, or of high cultivation, except in the immediate vicinity of their cities. In Malta, a single acre receives more labour than would be devoted to a square mile in the Illinois; but precisely the same motives impel the Maltese to terrace his mountains into gardens, and the American to reclaim the prairies of the Missouri.
It may be inferred, from the picture which we have given of the progress of society, that we believe an increased difficulty of obtaining raw produce to be the natural incident to an increase of population. In the absence of counteracting causes it certainly would be so; but those causes are so powerful, that, unless checked by legislation, they in many respects balance the causes which we have been considering. In a colony, the counteracting causes appear likely to preponderate for a period, the duration of which must of course depend in part on the quantity of fertile and unoccupied land in its vicinity. As the circle of appropriated land expands, and the expense of bringing food to the consumers becomes more oppressive, there is a tendency in the consumers to follow the food. The colonial capital, now turned into a metropolis, may continue to send out portion after portion of her increased inhabitants, until the whole territory acquires something approaching to an average amount of cultivation. Again, in every Country increased wealth and numbers are accompanied by increased agricultural skill and improved means of transport. The use of implements, the division of labour, and physical knowledge are powerful aids to the agriculturist, though they do not afford to him the almost magical increase of power which they give to the manufacturer. The improvements in carriage are still more important: a given amount of labour applied for twenty years to a given piece of land, would probably now produce a return four or five times as great as would have been obtained at the Conquest. But the labour necessary to transport that produce one hundred miles is probably now not one one-hundredth of what it was then. No improvements in husbandry instruments, or in breeding, or in the rotation of crops, have been so efficient as the substitution of the waggon, the Macadamized road, the canal, the navigable river, and the railway, for the pack-horse of our ancestors and the dangerous tracks through which they beat out and picked their way. The intervention of a hill or a morass was then an obstacle sufficient to allow the price of corn on one side to be double that on the other; and London was so dependent on the immediately adjacent Counties, that the landlords of those Counties petitioned against the opening of roads, as interfering with their vested right to a monopoly of the metropolitan supply; a petition which failed because the immediate interests of other landlords opposed it.
But the principal means by which a Country, when increasing in wealth and population, may avoid the necessity of raising its raw produce at a constantly increasing disadvantage, is by importation.
We have seen that additional labour employed in manufactures produces an increasing proportionate effect; that if one thousand men can in a given time work up one million of pounds of cotton, two thousand men would be able to work up in the same time more than two millions of pounds, and four thousand men, much more than twice as much as two thousand. As a nation increases in opulence and population, it becomes the interest, therefore, of the community to devote their additional population rather to manufactures, in which they have a constantly increasing advantage, than to agriculture, at a constantly increasing disadvantage. As their industry becomes more and more efficient, they are in general able to purchase with the produce of a given amount of labour and abstinence a larger and larger amount of the produce of the industry of their less advanced contemporaries. The produce of the labour of a single Englishman employed for a given time in fabricating cotton, will purchase the cotton grown by the labour of five, or perhaps ten Hindoos, or the wheat grown by three, or perhaps five, Lithuanians or Poles.
It must be recollected, indeed, that a nation, while extending its manufactures, must increase its importation of raw produce; and we have already stated that the increased labour at which the additional produce must be obtained would retard the progress of such a community. But though this is unquestionable, though it is even certain that, if sufficient time be allowed, this obstacle is able not merely to retard, but almost to arrest, the advance of manufactures, there seems to be little to fear from it within any of those periods within which calculations for practical purposes are generally confined. In the first place, the stimulus of an advantageous trade must tend to increase the agricultural skill of the exporting nations, and increase the facilities of transport; causes which, especially in the earlier stages of a nation’s improvement, often enable it, and for considerable periods, to bring to market an increased quantity of raw produce with the same or even less proportionate labour. And, secondly, even if we suppose the manufacturing nation to be supplied by its agricultural customers at an increased proportionate expense to
them, it does not follow that the proportionate expense to
her need be increased. The increased difficulty on the one side may be balanced by the increased facility on the other. We will suppose that at present one hundred thousand yards of muslin, fabricated by twelve Englishmen, can be exchanged for one hundred and fifty quarters of wheat, raised by thirty-six Poles; that an increase in population of one-third makes it necessary to import two hundred instead of one hundred and fifty quarters, and that the two hundred quarters are raised, not by forty-eight, the former proportion, but by sixty Poles. If the increase in our skill has kept pace with our increase of numbers, it is probable that eighteen Englishmen would be able to fabricate at least two hundred thousand yards of muslin, instead of one hundred and fifty thousand, the former proportion. The exchange under such circumstances, instead of being less, would be more beneficial than before. England would purchase more corn, and Poland more muslin, at a less proportionate amount of labour.
It must be carefully remembered that the preceding remarks apply not to the higher or lower
price of raw produce, but to the greater or less difficulty in obtaining it; things which have no necessary connection; one of them depending on the causes which affect the general value of raw produce, the other on the causes which affect the general value of money. At the same time, and in the same place, the prices of articles exactly measure the difficulty of obtaining them. It is exactly half as difficult to get a commodity that costs one sovereign as to get a commodity that costs two. But this is only true at the same time and in the same place. Though in England a quarter of corn now costs about fifty shillings, and in the reign of Henry VIII, cost about twenty, it is probable that it was then more difficult to obtain one than it is now. This must have been the case if it was then more difficult to obtain twenty shillings than it is now to obtain fifty. It is equally clear that, although a quarter of wheat now costs in England about ten ounces of silver, and about six ounces in Poland, yet, if it is easier in England to obtain ten ounces of silver than in Poland to obtain six ounces, it is easier in England to obtain a quarter of wheat than it is in Poland. Experience shows that wealth and population almost always increase together, though not in equal ratios, the increase of wealth being, as we have already stated, generally greater than the increase of population. The increased capital and labour of an increasing population are naturally directed to manufactures, in which, as we have already seen, every increased production is more easily effected. As their labour becomes more productive, the value of the products of a given quantity of that labour rises in the general market of the world; or, in other words, they obtain in return for it a greater amount of the precious metals; or, in other words, a higher price. Therefore, although they may have to pay a higher price for a given quantity of raw produce, whether of home growth or imported, it does not follow that the difficulty of obtaining that given quantity has increased; it is possible, and not improbable, that it may have diminished. A nation so situated may be compared to an individual whose income happens to be rising at the same time when the price of corn is rising. If the rise of his income more than counterbalances the rise of corn, he finds it every year more easy to purchase a given quantity, though he may have to give a higher and higher price for it.
Effects of the Cost of Production on Price.—We have seen that production may take place under five different circumstances.
1. Absence of monopoly; all persons being capable of producing with equal advantage.
2. A monopoly under which the monopolist has not the exclusive power of producing, but exclusive facilities as a producer, which may be employed indefinitely with equal or increasing advantage.
3. A monopoly under which the monopolist is the only producer, and cannot increase the amount of his produce.
4. A monopoly under which the monopolist is the only producer, and can increase indefinitely, with equal or increasing advantage, the amount of his produce.
5. A monopoly under which the monopolist is not the only producer, but has peculiar facilities which diminish and ultimately disappear as he increases the amount of his produce.
The price of those commodities which are comprehended in the first class appears to be subject to laws capable of accurate investigation. Where labour alone has been employed, the price must be equal to the wages of that labour. Where that labour has been assisted by abstinence, or, in other words, where a period has elapsed between the employment of the labour and the sale of its produce, the price must be equal to the amount of the wages of that labour and the remuneration to be paid either to the labourer for having suffered the payment of his wages to be deferred, or to the capitalist who has paid those wages in advance.
There are, however, very few commodities of which the whole price can be resolved into the remuneration for the labour, or the abstinence, or both, which must be bestowed on their production.
Mere abstinence can produce nothing. Labour, or the agency of nature, must afford the subject with respect to which it is to be exercised. It is possible, indeed, that a natural agent universally accessible may sometimes afford a product of no value at first, but capable of becoming valuable by mere keeping; but no instance of the kind occurs to us, and some little trouble is generally requisite for the mere safe custody of any article.
does produce a very few articles. The laver collected and sold on the coast of Devonshire is an example. It grows naturally on the unappropriated rocks within the influence of the tide, and in abundance practically unlimited. No instruments are necessary to gather or prepare it, and, as it will not keep, it is sold as soon as it has been collected and washed. The price of a given quantity consists, therefore, merely of the wages of those who gather, wash, and bring it to market.
A class of commodities, perhaps rather larger, but still inconsiderable when compared with the general mass, is produced by labour and abstinence, assisted only by those natural agents which are universally accessible. It is difficult, however, to point out an article, however simple, that can be exposed to sale without the concurrence, direct or indirect, of many hundred, or, more frequently, of many thousand different producers; almost every one of whom will be found to have been aided by some monopolized agent.
There are few things of which the price seems to consist more exclusively of wages and profits than a watch;
*21 but if we trace it from the mine to the pocket of the purchaser, we shall be struck by the payment of rent (the invariable sign of the agency of some instrument not universally accessible) at every stage of its progress. Rent was paid for the privilege of extracting from the mines the metals of which it is composed; for the land which afforded the materials of the ships in which those metals were transported to an English port; for the wharfs at which they were landed, and the warehouses where they were exposed to sale; the watchmaker pays a rent for the land covered by his manufactories, and the retailer for that on which his shop is situated. The miner, the shipwright, the house-builder, and the watchmaker, all use implements formed of materials produced by the same processes as the materials of the watch, and subject also in their different stages to similar payments of rent. The whole amount of all these different payments forms probably a very small portion of the value of the watch; but if we were to attempt to enumerate them, they would be found subdivided into ramifications too minute for calculation. What remains consists of the wages of the workmen, and the profits of the capitalists who paid those wages in advance. The attempt to trace back these wages and profits to their earliest beginnings, would be as vain as the attempt to enumerate all the payments of rent. In estimating, therefore, the value of a manufactured commodity, we seldom go farther back than to the price paid by the manufacturer for his materials and implements, a price which must have included all previous payments of rent, wages, and profits.
We will now trace the causes which increase the value of those materials after they have been the property of the manufacturer. We will suppose a watchmaker’s capital to consist of materials worth £500, that he has bought the land covered by his buildings for £500, and has expended £900 in erecting them, that his tools have cost him £100, and that an annual expense of £100 is necessary to keep his buildings and tools in repair. We will suppose him to employ ten workmen, each receiving at an average £100 a-year, and that one year is the average period from the commencement to the sale of a watch. We will suppose that his ten workmen can annually convert his £500 worth of materials into five hundred watches, and that the average rate of profit in his business amounts to ten per centum per annum. To give him this profit it is clear that his watches must sell for
|Value of materials,||£500|
|Wages for a year,||1000|
|Repairs for a year,||100|
|Profit on the advance of these sums, and on the
value of the land, and buildings, and tools, for
half-a-year, at 10 per cent. per annum,
It will be observed that, although a year is supposed to elapse between the commencement and the sale of a watch, we suppose the cost of its production to have been advanced for only half-a-year. The fact is that some part of the advances must have been made for more, and some for less than half-a-year. Supposing a workman to have been employed on the watch for a year, and paid daily, he received his first day’s wages one year before the watch was sold, but his last day’s wages on the very day of the sale; six months, therefore, is the average period for which the whole were advanced before the sale; just as large a proportion having been advanced for a shorter as for a longer period.
It will be observed, too, that we suppose the whole value of the materials, repairs, and wages to be repaid, but only a profit on the value of the land, buildings, and tools. The first are annually expended by the capitalist, the second remain to be used as instruments of further production. The land is indestructible, and the damage done to the buildings and tools is paid for by the £100 supposed to be expended in repairs.
But the whole cost of production has not yet been enumerated.
In the first place, some wages must be allowed to the master watchmaker himself for his labour in superintending his business; and, secondly, some profit on the expense of his education. And as his knowledge and habits, which form his mental capital, will not survive him, something more than the average rate of profit is necessary to replace their value.
If we suppose the expense of his education to have amounted to £1000, and that it will be replaced with average profit by an annual return of £15 per cent., and the average wages of labour to be £30 a-year, we have £180 to add to the price of the watches, and £9 more for the advance of this sum for half-a-year, making £1944.
The last source of expense is taxation, or, in other words, the wages and profits of those who have protected all the different producers of the watches from foreign and domestic violence and fraud. A considerable portion of the price paid by the watchmaker for his materials, tools, and buildings, probably consisted of the taxation to which those commodities had been previously subjected; but the taxation which we are now considering is that which he incurs during the year supposed to be employed in manufacturing the watch.
This is an expense little capable of previous estimation; partly because the expenses of government are subject to constant variation, and partly because no general principle regulates the proportions in which those expenses are divided among the contributors. In England they are in general imposed upon the persons using or producing certain commodities; upon the use, for instance, of a carriage or window, and upon the production of candles or glass. We will suppose the annual taxation imposed on the shop and other instruments of production used by the watchmaker to amount to £53 7s., the profit on the advance of this sum for half-a-year would exceed by a slight fraction £2 13s., together £56, making with the £1944, the amount of our previous calculation, the sum of £2000, the whole cost of production of the five hundred watches, or £4 a-piece.
The different sums in this example have of course been taken at random; but we have thought it worth while to go through it partly as an instance of the calculations on which every manufacturer must found his estimate of the profit or loss likely to follow any given undertaking; and partly to show in how many shapes, labour, abstinence, and the agency of nature, or, in other words, rent, profits, and wages, are constantly re-appearing in every productive process.
When we speak, therefore, of a class of commodities as produced under circumstances of equal competition, or as the result of labour and abstinence unassisted by any other appropriated agent, and consider their price as equal to the sum of the wages and profits that must be paid for their production, we do not mean to state that any such commodities exist, but that, if they did exist, such would be the laws by which their price would be regulated; and that so far as labour or abstinence, or both, are conducive to the production of any given commodity, it is to be considered as produced under circumstances of equal competition, and as worth the wages or profits, or both, with which that labour or abstinence, or both, must be remunerated.
Effects of Monopolies on Price.—The prices of the commodities comprised in the second, third, and fourth classes, are but little governed by any general rules. The prices of those comprised in the second class, cannot rise above the cost of production when unassisted by the monopolized agent, but have a tendency to approach the cost of production to the monopolist. The prices of those comprised in the third and fourth classes have no necessary limits, but approach much more nearly to the cost of production in the fourth class, where the monopolist can increase his produce, than in the third class, where nature strictly limits the amount that can be produced.
Rent.—The price of the commodities comprised in the fifth and last class, those which are produced under what may be called unequal competition or qualified monopoly, where all persons may become producers, but every additional quantity is obtained at a greater proportionate expense, has a constant tendency to coincide with the cost of production of that portion which is continued to be produced at the greatest expense. The annual supply of London requires about one million five hundred thousand quarters of wheat. Of this quantity, perhaps fifty thousand can be obtained only by means of high cultivation, or very distant carriage, at an expense of about 50s. a quarter. While the wants and the wealth of the inhabitants of London are such as to make them require, and enable them to purchase, one million five hundred thousand quarters, and the expenses of carriage and cultivation remain unaltered, it is clear that the whole quantity, supposing it to be of uniform quality, must sell at the rate of 50s. a quarter. If it were to sell for less, the last fifty thousand quarters would cease to be produced, and the price would again rise in consequence of the deficiency of the supply. But of the whole one million five hundred thousand quarters, a portion, perhaps fifty thousand, might be produced by slightly cultivating the most fertile and best situated land, at the expense of 10s. a quarter. A hundred thousand may cost the producer 20s. a quarter, two hundred thousand 25s., two hundred thousand more 30s. a quarter, and the cost of production of all, except the last fifty thousand, must have been less than the 50s. for which they are sold. The difference between the price and the cost of production is
Rent. It is an advantage derived from the use of a natural agent not universally accessible. It is taken, therefore, by the owner of the agent by whose assistance it was obtained.
A portion of the whole supply, however, that portion which is produced at the greatest expense, is produced without any payment of rent. If the cost of producing and sending to market from a given farm be in the following proportions: for one hundred quarters £100, for ninety more £100, for eighty more £100, for seventy more £100, for sixty more £100, for fifty more £100, for forty more £100, and for thirty-three and one-third of a quarter more £100, and the price per quarter is 60s., it is clear that the landlord’s rent will be in the following proportions:—
|On the first||£100||expended,||£200|
|On the second||100||170|
|On the third||100||140|
|On the fourth||100||110|
|On the fifth||100||80|
|On the sixth||100||50|
|On the seventh||100||20|
And it is equally clear that no rent can be paid by the farmer for the privilege of producing the last thirty-three one-third quarters, as the whole £100 for which it sells is absorbed by the cost of production. The last thirty-three one-third quarters will continue to be produced as long as the wants and the wealth of the purchasers render them willing and able to purchase a quantity of corn, the whole of which cannot be supplied unless this last and most expensive portion is produced. If those wants and wealth should increase, it might become necessary to raise an additional supply at a still further additional expense, at the cost, we will say, of £100 for only twenty quarters. But it is clear that this could not be done unless the price should be £5 a quarter, since that is the lowest price at which the cost of producing the last supply would be repaid. The price, indeed, would probably have previously risen to above £5 a quarter, since an interval must have elapsed between the increased demand occasioned by the increased wants and wealth of the purchasers and the increase of the supply. During that interval the price must have risen somewhat above the price at which it would settle when the additional supply had been obtained. The appearance of that additional supply would sink it to £5 a quarter, the cost at which that supply is produced, but it could not permanently fall below that price unless a diminution should take place either in the wants or wealth of the purchasers, or in the expenses of cultivation or conveyance.
All this appears almost too plain for formal statement. It is, however, one of the most recent discoveries in Political Science: so recent that it can scarcely be said to be universally admitted even in this Country,and abroad it does not seem to be even comprehended. If any writer could be expected to be fully master of it, it would be Say, the most distinguished of the Continental Economists, and the annotator on Ricardo. In his notes to the French translation of the
Principles of Political Economy and Taxation, he constantly objects to Mr. Ricardo’s Reasonings, the fact that all cultivated land pays rent; as if such a fact were inconsistent with the existence of corn-raised without the payment of rent. He repeats this objection in a note to a passage in which Ricardo has demonstrated its falsity. In the twenty-fourth chapter of the
Principles, Mr. Ricardo examines Adam Smith’s opinions on rent.
“Adam Smith,” observes Mr. Ricardo, “had adopted the notion that there were some parts of the produce of land for which the demand must always be such as to afford a greater price than what is sufficient to bring them to market; and he considered food as one of those parts.
“He says that ‘land in almost every situation produces a greater quantity of food than what is sufficient to maintain all the labour necessary for bringing it to market, in the most liberal way in which labour is ever maintained. The surplus, too, is always more than sufficient to replace the stock which employed that labour, together with its profits. Something, therefore, always remains for a rent to the landlord.’
“But what proof does he give of this? No other than the assertion that ‘the most desert moors in Norway and Scotland produce some sort of pasture for cattle, of which the milk and the increase are always more than sufficient not only to maintain all the labour necessary for tending them, and to pay the ordinary profit to the farmer or owner of the herd or flock, but to afford some small rent to the landlord.’ Now of this I may be permitted to entertain a doubt. I believe that as yet in every Country, from the rudest to the most refined, there is land of such a quality that it cannot yield a produce more than sufficiently valuable to replace the stock employed on it, together with the profits ordinary and usual in that Country. In America we all know that this is the case, and yet no one maintains that the principles which regulate rent are different in that Country and in Europe. But if it were true that England had so far advanced in cultivation, that at this time there were no lands remaining which did not afford a rent, it would be equally true, that there formerly must have been such lands;
and that whether there be or not, is of no importance to this question, for it is the same thing if there be any capital employed in Great Britain on land which yields only the return of stock with its ordinary profits, whether it be employed on new or old land. If a farmer agrees for land on a lease for seven or fourteen years, he may propose to employ on it a capital of £10,000, knowing that at the existing price of grain and raw produce he can replace that part of his stock which he is obliged to expend, pay his rent, and obtain the general rate of profit. He will not employ £11,000 unless the last £1000 can be employed so productively as to afford him the usual profits of stock. In his calculation whether he shall employ it or not, he considers only whether the price of raw produce is sufficient to replace his expenses and profits, for he knows that he shall have no additional rent to pay. Even at the expiration of his lease his rent will not be raised; for if his landlord should require rent, because this additional £1000 was employed, he would withdraw it, since by employing it he gets by the supposition, only the ordinary and usual profits which he may obtain by any other employment of stock.”
Principles, &c., 389-391.
To this passage, M. Say affixes the following note: “This is precisely what Adam Smith does not admit, since he says that the worst land in Scotland gives to its proprietor a rent.” We answer to M. Say: “This is precisely what Mr. Ricardo declares to be immaterial, since a portion of what is produced on a farm giving a rent of ten guineas an acre, may be produced without any rent being paid for the privilege of producing it.”
It must be admitted, however, that the doctrine in question has often been stated in a form likely to confuse the dull or inattentive, and liable to the cavils of the uncandid. Mr. Ricardo, who, though not its discoverer, is its best known expositor, was led, both by his merits and his deficiencies, into frequent inaccuracy of language. He was not enough master of logic to obtain precision, or even to estimate its importance. His sagacity prevented his making sufficient allowance for the stupidity or carelessness of his readers; and he was too earnest a lover of truth to anticipate wilful misconstruction.
Under the influence of these causes he is, perhaps, the most incorrect writer who ever attained philosophical eminence; and there are few subjects on which he has been guilty of more faults of expression than on rent.
He perceived that an increased will and power on the part of the community to purchase raw produce, and the impossibility of increasing the supply but at an increased expense, must necessarily raise rents, and must also occasion an extension of cultivation. Associating, therefore, in his own mind the ideas of the rise of rents and of the extension of cultivation, he has often spoken of them as if they stood in the relation of cause and effect: as if the extension of cultivation were a cause of the rise of rent, instead of being, as it obviously is, a means by which that rise is counteracted. The inaccuracy is so obvious that we can scarcely suppose it to have misled any reader of tolerable care and acuteness.
He has also too frequently used the expression “the corn raised
on land paying no rent,” as an equivalent for “the corn raised without the payment of rent.” And when his opponents reply, as is true, that “in old Countries all land pays a rent,” he has sometimes denied the truth of the reply, instead of showing, as he has done in the passage which we have quoted, that the doctrine is just as true when applied to a small district in which all the land is highly rented, as when applied to a colony where rent is the exception and freedom from it the rule.
Again, he has often spoken of the existence of rent as dependent on the cultivation of land of different degrees of fertility, or on the fact that the same land repays, with a proportionably smaller return, the application of additional capital. And yet it is clear that if we suppose the existence of a populous and opulent district of great but uniform fertility, giving a large return to a given expenditure of capital, but incapable of giving any return whatever on a less expenditure, or any greater return on a larger expenditure, such a district would afford a high rent though every rood of land and every portion of the capital applied to it would be equally productive.
Consequences of the Proposition that Additional Labour, when employed in Manufactures is MORE, and when employed in Agriculture is LESS, efficient in proportion.—We now proceed to consider some remarkable consequences of the proposition [see page 81,] that additional labour when employed in Manufactures is
more, and when employed in Agriculture
less, efficient in proportion; or, in other words, that the efficiency of labour increases in Manufactures in an increasing ratio, and in Agriculture in a decreasing ratio. And, consequently, that every additional quantity of manufactured produce is obtained, so far as the manufacturing of it is alone concerned, at a less proportionate cost, and every additional quantity of agricultural produce is obtained, generally speaking, at a greater proportionate cost.
I. Different effects of Increased Demand on Manufactured and Raw Produce.—So far as the price of any commodity is affected by the value of the raw material of which it is formed, it has a tendency to rise; so far as the price consists of the remuneration to be paid for the labour and abstinence of those employed in manufacturing it, it has a tendency to fall, with the increase of population.
It is obvious that commodities of rude or simple workmanship are subject to the first rule, and the finer manufactures to the second. Bread may afford an instance of the first kind, and lace of the second. The average price in England of a half-peck loaf is now about 1s. 3d. Of this sum 10d., at least, may be assumed to be the price of the wheat; the wages and profit of the miller, baker, and retailer absorbing the remainder. If circumstances should arise, requiring the present supply of bread to be immediately doubled from our home-produce, it is obvious that the increased supply of wheat could not be obtained by merely doubling the amount of labour now employed in its production. It is impossible to say to what amount the increased difficulty of production would raise the price of wheat; we will, however, suppose it to be doubled, and the price of the wheat necessary to make a half-peck loaf to be 1s. 8d. instead of 10d.: at the same time the increased labour employed in its manufacture and sale would become more efficient. The miller and the baker would employ better instruments and a greater division of labour, and the retailer would be able to double his sales at little additional expense. The price of bread, so far only as its manufacture and retail is concerned, would be reduced perhaps one-fourth, or from 5d. to 3¾d. In which case, the whole result of the increased production would be that the half-peck loaf would sell for 1s. 11¾d. instead of 1s. 3d.
We will now see what would be the effect of an increased use of lace.
At the present price of lace and cotton, a pound of cotton worth, in the Liverpool market, 2s., may be converted into a piece of lace worth 100 guineas. Suppose the consumption of lace to double, and the increased difficulty of producing the additional quantity of the cotton fit for lace-making to raise its price from 2s. to 4s. a pound; the price of the lace, supposing it still to be manufactured at the same expense, would be raised one thousand-and-fiftieth part, or from £105 to £105 2s. But it is impossible to doubt that the stimulus thus applied to the production of lace would improve every process of the manufacture. We should probably much underrate the amount of that improvement if we were to estimate the consequent saving of expense at one-fourth; in which case the whole result of the increased production would be that the lace would sell for £78 17s. instead of £105; the same circumstances which would nearly double the price of bread would reduce by one-fourth the price of lace.
II. Different effects of Taxation on the Prices of Manufactured and Raw Produce.—Another inference from the proposition in question is the difference between the effects of taxation when imposed on raw produce and when imposed on manufactured produce.
Taxes on manufactured commodities ultimately raise the price, and that by an amount exceeding the amount of the tax. Taxes on agricultural produce in its unmanufactured state do not necessarily occasion any ultimate rise of price, and raise it, if at all, by an amount less than that of the tax.
Effect of Taxation on Manufactured Produce.—The first proposition may be easily illustrated.
We will suppose a tax on watches of twenty-five per cent. on their value to have existed from the commencement of that trade. As there is no reason to suppose that the profits or the wages of master watchmakers or their workmen are, under present circumstances, above the average wages and profits of persons similarly employed, it is clear that, if such a tax had always existed, the price for the time being of watches must always have been one-fourth higher than it has been, or the trade of watchmaking would have been followed neither by labourers nor capitalists. It is clear also that such an increase of price must always have diminished or retarded in its increase the sale, and, consequently, the production of watches. But if fewer watches had been made, the smaller number would have been made at a greater proportionate expense. And the price of watches must have been higher than it actually has been, first by the amount of the tax, and, secondly, by the greater expensiveness of the more limited manufacture. It is equally clear that, after the removal of such a tax, the price of watches would sink, first by the amount of the tax removed, and, secondly, by the improvement in the manufacture consequent on an increased production. It is equally clear that, if such a tax were now for the first time to be imposed, the price of watches must rise, first by the amount of the tax, and, secondly, by the amount of the increased proportionate expense of making and selling the diminished quantity sold, or watchmaking would cease to be as profitable as the average of trades. It is clear, too, that the more the use of watches diminished, the higher the price must eventually rise. If only ten new watches were made every year, they would probably cost £500 a-piece. If only one were made, it would probably cost little less than the whole price of the ten. It is true that these effects would not immediately follow either the imposition or the removal of the tax; an interval must in either case elapse, during which, the existing capital in the watchmaking trade continuing the same, the supply of watches would be neither increased nor diminished, and, consequently, the price but little affected. During this interval, both the wages and the profits of those engaged in that business would be unnaturally high, or unnaturally low, and they would not acquire their natural level until, in the case of the removal of the tax, a sufficient number of persons were educated to the business, or, in the case of the imposition of the tax, the number of persons educated to the business had been sufficiently diminished, to enable the supply of watches to be proportioned to the demand, at a price giving average profits and wages to the capitalists and labourers employed in their manufacture and sale.
Effect of Taxation on Agricultural Produce.—But if agricultural produce were subjected to such a tax, relief would be afforded by precisely the same conduct which in manufactures aggravates the pressure, namely, by a diminution of production.
It may be assumed that capital is fairly distributed among the various channels for its employment, and that, in the absence of peculiar disturbing causes, agriculture, the most agreeable of all occupations, has not less than an average share of it. It may therefore be assumed, generally speaking, that capital is employed on land until its produce repays, but does not more than repay, the expense of cultivation; or, in other words, that the occupier of land pushes its cultivation until the additional produce obtained by means of the last labourers employed is just sufficient, at the existing price, to pay their wages, and average profits to himself, for the time during which those wages must be paid in advance. On the imposition of a tax, either the price of what he produces must rise by the amount of the tax, or the farmer must discontinue the production of that portion of his crop which is raised at the greatest expense.
We will suppose a farmer to occupy a farm containing six hundred acres of arable land of different degrees of fertility; one hundred acres of which, with the labour of ten men directly and indirectly employed on them, would give a return which, in order to reduce it to one denomination, we will call six quarters of wheat an acre; one hundred others capable of giving with an equal number of men only five quarters per acre; one hundred others, four quarters per acre; one hundred others, three quarters per acre; one hundred others, two quarters per acre; and the last and worst one hundred acres, only one quarter per acre. We will suppose, also, that the wages of ten men for a year amount at an average to £400, or £40 a man; that the farmer has to advance these wages for a year before the produce is sold; and that the average rate of profit in similar occupations, is ten per cent. per annum. Under such circumstances, when wheat was £2 4s. a quarter it would be worth his while to employ every man whose labour produced twenty quarters, the price of which would amount to £44, being £40 for the labourer’s wages, and £4 for the farmer’s profit. The forty men supposed to be employed on the four best qualities of soil produce each this amount and more; the ten men employed on the fifth quality of soil produce each precisely this amount, namely, a return of two hundred quarters, worth £440. The sixth and last quality of soil, on which one man could produce only ten quarters, would not repay the cultivation of wheat. Now, if a tax were laid on raw produce, which, to make the illustrations less complex, we will call a tax of 14s. 8d. on every quarter of wheat, and no rise of price should take place, it is obvious that it would no longer be worth his while to cultivate any land of worse quality than that in which the labour of ten men could produce three hundred quarters of corn; a return which, at the existing price of £2 4s. a quarter, would procure £660, being £220 for the tax, and £440 as before for wages and profits. But it would obviously be worth his while to cultivate land of that quality, and also to employ labour in the cultivation of his superior land up to the point at which the labour of an additional man would no longer produce an additional product of thirty quarters. Nothing but a tax so great as absolutely to prohibit agriculture, such a tax as never has existed, and which would, in fact, be rather a penalty than a tax, could induce him to discharge all his labourers, and leave his best land uncultivated. We do not deny that he would be a loser, even by the conduct which we have supposed him to adopt. We do not deny that he would much have preferred a rise in the price of corn equal to the tax,—a rise which would have enabled him to continue in its existing investment all his agricultural capital. But we deny that any imposition to which the name of a tax can fairly be applied, though unaccompanied by a rise of price, would induce him altogether to discontinue production. And we wish to draw the attention of our readers to the contrast between his situation and that of the manufacturer, whom any tax, however slight, if unaccompanied by a rise of price, must in time force to discontinue manufacturing. What is a remedy to the agriculturist is an aggravation of evil to the manufacturer; a diminution of capital makes what remains in agriculture more productive, and makes what remains in manufactures less so.
It has been supposed, however, that the price of agricultural produce would rise to the full amount of the tax, and that the whole amount of that tax would consequently fall on the consumer. This is the opinion of Mr. Ricardo and of Mr. Mill. And it is on this ground that they both maintain that the effect of tithes is to produce a rise in the price of raw produce equal to the whole value of the tithe, and affecting equally all classes so far as they are consumers of raw produce. We believe that the
immediate effect of a general tax on raw produce is to raise the price, but to an amount not equal to that of the tax; but that its
ultimate effect is to diminish the consumption and production of raw produce, but to leave its price unaffected.
To prove our first proposition we need only show that the rise of price, which we admit to be the immediate consequence of the imposition of the tax, would diminish the consumption, and consequently the production of the taxed commodity. It has been shown already that as production is diminished, the expense of producing the quantity still produced is diminished: and that the price of agricultural produce depends on the expense of producing that portion of it which is produced at the greatest expense, or, in other words, under circumstances of equal competition. That no person would diminish his consumption of corn in consequence of the rise of its price, is therefore a premise necessary to the conclusion which we are combating. This is true as respects that portion of the population of England which is dependent on parochial relief. In those districts in which the amount of that relief is calculated with reference to the price of bread, their means of purchasing are unconnected with price, and neither rise with its fall nor sink with its rise. It is true, also, as respects the families of those opulent individuals (a prominent, but in fact a small portion of society) whose direct expenditure in bread and flour bears a small proportion to their general expenses. But the bulk of the community, consisting of the labourers who receive no parish assistance, and happily they are now the majority, and we trust, will soon be the great majority; and the smaller shopkeepers and farmers, unquestionably regulate, in a great measure, their purchases of wheat by its price. Much of their consumption, when it is comparatively cheap, consists of puddings and pies, articles of mere luxury, which, on the slightest rise, are immediately discontinued. If the rise continue, they turn from wheaten bread to cheaper subsistence: in the North to oatmeal, in the South to potatoes. And, indeed, without recurring to details, it may be laid down as a principle of universal application, that, in the absence of disturbing causes, every increase in the price of a commodity must diminish both the ability and the will to purchase it.
We now proceed to prove our second proposition, namely, that the ultimate effect of a tax on raw produce is not to raise its price, but to diminish the quantity produced. It will be at once admitted that the price of raw produce, in any Country, does not depend on the positive extent, or on the positive fertility of that Country, but, all the other things remaining the same, on the proportion which that extent, or that fertility bears to the number and wealth of the existing inhabitants. It may be low in a barren territory, if that territory be thinly peopled, just as it may be high in a fertile and populous one. It is high in the rich Lowlands of Scotland, and low in the sandy plains of Poland. And it will also be admitted that, all other things remaining the same, the population of a Country is in proportion to its extent and its fertility. Now, the ultimate effect of tithes, or of any other tax, on the cultivation of land, is precisely the same as if the Country in which they have long prevailed was thereby rendered rather less extensive, or rather less fertile, and, consequently, rather less populous, and probably also rather poorer than it otherwise would have been.
Tithes.—If England, from time immemorial, had been rather more extensive, or rather more fertile than it now is, no one will suppose that the price of provisions would have been lower than it now is. We should have had rather more corn, and a rather greater population to eat that corn, than we now have. The increase would have been positive, not relative. So if Devonshire or Lincolnshire had never existed, the agricultural produce and the population of England would each have been positively diminished; but, as they would have borne the same proportion to one another as they do now, the price of the existing quantity of corn could not have been higher than it is now. So if tithes had never existed, we should have had rather more corn and a rather larger and probably a rather richer population; every thing else would have been as it is. It is true that, if a new Devonshire, or a new Lincolnshire, fit for immediate cultivation, were now suddenly added to our shores, the immediate consequences would be an increased supply of provisions, and a fall in their price. But it is also true that, if this accession to our territory were followed by no change in our habits and institutions, the comparative cheapness, which would be its immediate consequence, would gradually disappear as our population rose with the increased supply of subsistence, and, ultimately, we should be just where we are now, excepting that we should be rather more numerous. So, if tithes were suddenly commuted, and their interference, such as it is, with agricultural improvement, got rid of, the same consequences would follow as if the extent of our territory, or its fertility, were suddenly augmented. And, supposing no improvement to take place in our institutions and habits, the consequent increase of our population would bring us back, as far as the price of provisions is concerned, to the point at which we are now.
It is probable, indeed, that the ultimate effect of the abolition of tithes would be not a lowering but an increase of the price of raw produce. A denser population cultivating a territory, the productiveness of which had increased in proportion to the increased number of its inhabitants, would probably advance in opulence. The productiveness of the soil of a Country in proportion to its population being given, or, in other words, the amount of raw produce and the number of people being ascertained, the smaller the extent of the land from which that amount is obtained the better. The expenses of transport, and the trouble and loss of time in journeys, are material elements of the cost of production both in agriculture and in manufactures, and the amount of these expenses depends principally on the extent of Country affording a given return. As our industry became more efficient the value of our labour would rise in the general market of the world, and the consequence would be a general rise of prices, in which agricultural produce would participate. But these statements form no part of our argument. We believe, indeed, that the ultimate effect of tithes is to lower the price of raw produce: but all that we have undertaken to show is, that they do not raise it.
From these premises follow very important practical inferences. If we lay a tax on the production at home of any manufactured commodity which is produced with the same, or nearly the same, facility abroad, it is absolutely necessary that a duty of the same, or a rather greater amount, should be imposed on the importation of that commodity. On the imposition of the tax the cost of production at home is increased, first by the tax, and, secondly, by the increased expense of producing the smaller quantity which, when the price becomes higher, continues to be demanded. But if importation were untaxed, the cost of production abroad would be diminished in consequence of the diminished proportionate expense of producing the larger quantity demanded. The domestic production, and with the domestic production the tax, would not be merely diminished, but absolutely destroyed, and the whole result would be gratuitous evil. But when a tax, unbalanced by any countervailing duty on importation, is imposed on any agricultural produce for which a foreign substitute can be obtained, the only result is to stop
that portion which is most expensive of the domestic production. The least productive part of the existing agricultural capital is withdrawn, or worn out without being replaced. The deficiency is attempted to be supplied by importation; but the increased demand, instead of lowering, as would be the case with manufactures, raises the cost of production abroad, just as the diminished demand, instead of raising, lowers the cost of production at home. The price of agricultural produce rises until the state of the population has accommodated itself to the change, and then falls to its former level. If our present heavy tax on the domestic production of glass were unbalanced by any duty on importation, all the English glass-works would in time be abandoned. Or, if some of our glass-works were free from the tax, and others subject to it, all those which were taxed would be ruined. But the lands in England which are subject to the payment of tithes are not thrown out of cultivation by the competition of those which are free from that burden, or by the importation of the tithe-free corn and cattle of Scotland, or of the comparatively tithe-free produce of Ireland. The estates which are subject to tithes continue to be productive, they continue even to afford a rent, though the burden diminishes the productiveness, and diminishes in a still greater degree the rent.
Before we quit the subject of tithes, it may be worth while to expose another error connected with them, namely, the popular opinion that their tendency to increase in amount is greater than that of rent. We believe the fact to be just the reverse.
Tithes are a definite, rent is an indefinite, share of the produce. Tithes can never exceed a tenth; rent need not be a tenth, or even a hundredth, but may amount to a fourth, a third, a half, or even more than a half. Tithes, therefore, can be exacted, where rent cannot be; but when once any spot of land can afford to pay both rent and tithes, there is no comparison between their respective powers of increase. This will immediately appear on a reference to the familiar illustration of the progress of rent.
If we suppose a Country to be divided into ten districts designated by the numbers from 1 to 10, each of equal extent, but each of a different degree of fertility, No. 1 producing, at a given expense, two hundred quarters of corn, and the amount of the produce, at the same expense, of each quality of land, diminishing by ten quarters, until we come to No. 10, which produces only one hundred quarters, we shall find that when No. 1 only will pay for cultivation, it affords twenty quarters for tithes, and no rent. When the price of corn has risen sufficiently to enable No. 2 to be cultivated, there will be on Nos. 1 and 2 thirty-nine quarters for tithes, and on No. 1 ten for rent. When No. 3 has become worth cultivation, there will be on Nos. 1, 2, and 3, fifty-seven for tithes, and on Nos. 1 and 2 thirty for rent. When No. 4 has become worth cultivating, there will be on Nos. 1, 2, 3, and 4, seventy-four for tithes, and on Nos. 1, 2, and 3, sixty for rent. When No. 5 has become worth cultivating, there will be on Nos. 1, 2, 3, 4, and 5, ninety for tithes, and on Nos. 1, 2, 3, and 4, one hundred for rent. Rent has now passed tithes, and its subsequent superiority is very striking. When No. 6 has become worth cultivating, there will be one hundred and five for tithes, and one hundred and fifty for rent. When No. 7 has become worth cultivating, there will be one hundred and nineteen for tithes, and two hundred and ten for rent. When No. 8 has become worth cultivating, tithes will be one hundred and thirty-two, and rent two hundred and eighty. When No. 9 has become worth cultivating, tithes will be one hundred and forty-four, and rent three hundred and sixty. And when No. 10 has become worth cultivating, tithes will be one hundred and fifty-five, and rent four hundred and fifty. And the same results will follow if, instead of supposing fresh land of a regularly decreasing fertility to be taken into cultivation, we suppose further capital to be applied to the same land, with a regularly decreasing proportionate return. Of course we do not mean that either of these suppositions represents what actually takes place, but they each represent the course of events to which there is a natural tendency. They represent the relative ratio at which rent and tithes would increase in the absence of disturbing causes. It must be recollected, however, that these events would not take place in the regular order in which we have placed them, except on the supposition of each different district which we have supposed to be successively cultivated being of the same extent, and of each successive application of capital being of the same value. If, for instance, No. 10 were ten times as large as any one of the other districts, and received ten times as much capital, it would increase the whole amount of titheable produce by one thousand quarters instead of by one hundred quarters, and tithes would be raised from one hundred and forty-four quarters to two hundred and forty-four quarters, while rent would have risen only from three hundred and sixty quarters to four hundred and fifty. In such an event, therefore, tithes would rise more than rent. And it must also be recollected that tithes and rent do not rise at precisely the same period. The highest amount of rent must be just
before the land producing the additional supply has been cultivated. The increased demand is then in full operation, and has not been counteracted by the increased supply. But the amount of tithes is not increased until
after the additional supply has been produced. Their increase, therefore, is generally contemporaneous with a temporary fall of rent: which is probably one of the causes of the popular opinion that their general tendency to increase is greater than that of rent. Another source of that opinion is, that in England the land has been for centuries subject to a constant process of subdivision, while tithes, except the comparatively small part which belongs to laymen, have not. The incumbent of a given benefice receives the tithes of the same quantity of land which was tithed by his predecessor three hundred years ago. But that land three hundred years ago may have belonged to one or two persons, and may now be divided between ten or twenty. The present incumbent’s income may bear a higher proportion than his predecessors did to the average income of a single landlord, though it bears a lower proportion to the aggregate income of all the landlords of the parish. And as a general proposition, we have no doubt that, in a progressive Country, the value of tithes will seldom increase in proportion to the increasing value of the land out of which they issue.
It appears, therefore, that in a new or ill-peopled Country where the abundance of land and the want of agricultural capital almost prevent the existence of rent, in the economical sense of the word, tithes are the only endowment which a Clergy can receive from the soil. We see, therefore, why they were adopted for the Israelites, who, in fact, were colonists, and by our Danish and Saxon ancestors. We see too why the attempt to endow with lands the Canadian Church has so signally failed. Tithes would not, perhaps, have been a politic, but they would have been an actual endowment. The reserves stand so many desert spots in the midst of improvements retarding the settlement, interrupting the communications, and injuring the wealth and civilization of all that is round them. Five centuries hence they might afford an ample provision.
On the Production of Wealth, 51-55