The Theory of Political Economy
By William Stanley Jevons
THE contents of the following pages can hardly meet with ready acceptance among those who regard the Science of Political Economy as having already acquired a nearly perfect form. I believe it is generally supposed that Adam Smith laid the foundations of this science; that Malthus, Anderson, and Senior added important doctrines; that Ricardo systematised the whole; and, finally, that Mr. J. S. Mill filled in the details and completely expounded this branch of knowledge. Mr. Mill appears to have had a similar notion; for he distinctly asserts that there was nothing; in the Laws of Value which remained for himself or any future writer to clear up. Doubtless it is difficult to help feeling that opinions adopted and confirmed by such eminent men have much weight of probability in their favour. Yet, in the other sciences this weight of authority has not been allowed to restrict the free examination of new opinions and theories; and it has often been ultimately proved that authority was on the wrong side.There are many portions of Economical doctrine which appear to me as scientific in form as they are consonant with facts. I would especially mention the Theories of Population and Rent, the latter a theory of a distinctly mathematical character, which seems to give a clue to the correct mode of treating the whole science. Had Mr. Mill contented himself with asserting the unquestionable truth of the Laws of Supply and Demand, I should have agreed with him. As founded upon facts, those laws cannot be shaken by any theory; but it does not therefore follow, that our conception of Value is perfect and final. Other generally accepted doctrines have always appeared to me purely delusive, especially the so-called Wage Fund Theory. This theory pretends to give a solution of the main problem of the science—to determine the wages of labour; yet, on close examination, its conclusion is found to be a mere truism, namely, that the average rate of wages is found by dividing the whole amount appropriated to the payment of wages by the number of those between whom it is divided. Some other supposed conclusions of the science are of a less harmless character, as, for instance, those regarding the advantage of exchange (see the section on “The Gain by Exchange,” p. 141). [From the Preface to the First Edition]
First Pub. Date
London: Macmillan and Co.
3rd edition. Includes Preface by Harriet Jevons.
The text of this edition is in the public domain. Picture of William Stanley Jevons: Photogravure after a photograph of W. Stanley Jevons, taken by Maull & Co., London., courtesy Liberty Fund, Inc.
IT is no part of my purpose in this work to attempt to trace out, with any approach to completeness, the results of the theory given in the preceding chapters. When the views of the nature of Value, and the general method of treating the subject by the application of the fluxional calculus, have received some recognition and acceptance, it will be time to think of results. I shall therefore only occupy a few more pages in pointing out the branches of economic doctrine which have been passed over, and in indicating their connection with the theory.
The doctrine of population has been conspicuously absent, not because I doubt in the least its truth and vast importance, but because it forms no part of the direct problem of Economics. I do not remember to have seen it remarked that it is an inversion of the problem to treat labour as a varying quantity, when we originally start with labour as the first element of
production, and aim at the most economical employment of that labour. The problem of Economics may, as it seems to me, be stated thus:—
Given, a certain population, with various needs and powers of production, in possession of certain lands and other sources of material: required, the mode of employing their labour which will maximise the utility of the produce. It is what mathematicians would call a change of the variable, afterwards to treat that labour as variable which was originally a fixed quantity. It really amounts to altering the conditions of the problem so as to create at each change a new problem. The same results, however, would generally be obtained by supposing the other conditions to vary. Given, a certain population, we may imagine the land and capital at their disposal to be greater or less, and may then trace out the results which will, in many respects, be applicable respectively to a less or greater population with the original land and capital.
There is another inversion of the problem of Economics which is generally made in works upon the subject. Although labour is the starting-point in production, and the interests of the labourer the very subject of the science, yet economists do not progress far before they suddenly turn round and treat labour as a commodity which is bought up by capitalists. Labour becomes itself the object of the laws of supply
and demand, instead of those laws acting in the distribution of the products of labour. Economists have invented, too, a very simple theory to determine the rate at which capital can buy up labour. The average rate of wages, they say, is found by dividing the whole amount of capital appropriated to the payment of wages by the number of the labourers paid; and they wish us to believe that this settles the question. But a little consideration shows that this proposition is simply a
truism.The average rate of wages must be equal to what is appropriated to the purpose divided by the number who share it. The whole question will consist in determining how much is appropriated for the purpose; for it certainly need not be the whole existing amount of circulating capital. Mill distinctly says, that because industry is limited by capital, we are not to infer that it always reaches that limit;
*127 and, as a matter of fact, we often observe that there is abundance of capital to be had at low rates of interest, while there are also large numbers of artisans starving for want of employment. The wage-fund theory is therefore illusory as a real solution of the problem, though I do not deny that it may have a certain limited and truthful application, to be shortly considered.
Another part of the current doctrines of Economics determines the rate of profit of capitalists in a very simple manner. The whole produce of industry must be divided into the portions paid as rent, taxes, profits,
and wages. We may exclude taxes as exceptional, and not very important. Rent also may be eliminated, for it is essentially variable, and is reduced to zero in the case of the poorest land cultivated. We thus arrive at the simple equation—
A plain result also is drawn from the formula; for we are told that if wages rise profits must fall, and
vice versâ. But such a doctrine is radically fallacious;
it involves the attempt to determine two unknown quantities from one equation. I grant that if the produce be a fixed amount, then if wages rise profits must fall, and
vice versâ. Something might perhaps be made of this doctrine if Ricardo’s theory of a natural rate of wages, that which is just sufficient to support the labourer, held true. But I altogether question the existence of any such rate.
The wages of working men in this kingdom vary from perhaps ten shillings a week up to forty shillings or more; the minimum in one part of the country is not the minimum in another. It is utterly impossible, too, to define exactly what are the necessaries of life. I am inclined, therefore, to reject altogether the current doctrines as to the rate of wages; and even if the theory held true of any one class of labourers separately, there is the additional difficulty that we have to account for the very different rates which prevail in different trades. It is impossible that we should accept for ever Ricardo’s sweeping
simplification of the subject, involved in his assumption, that there is a natural ordinary rate of wages for common labour, and that all higher rates are merely exceptional instances, to be explained away on other grounds.
The view which I accept concerning the rate of wages is not more difficult to comprehend than the current one. It is that
the wages of a working man are ultimately coincident with what he produces, after the deduction of rent, taxes, and the interest of capital. I think that in the equation
the quantity of produce is essentially variable, and that profit is the part to be first determined. If we resolve profit into wages of superintendence, insurance against risk, and interest, the first part is really wages itself; the second equalises the result in different employments; and the interest is, I believe, determined as stated in the last chapter. The reader will observe the important qualification that wages are only
ultimately thus determined—that is, in the long run, and on the average of any one branch of employment.
The fact that workmen are not their own capitalists introduces complexity into the problem. The capitalists, or
entrepreneurs, enter as a distinct interest. It is they who project and manage a branch of production, and form estimates as to the expected produce. It is the amount of this produce which
incites them to invest capital and buy up labour. They pay the lowest current rates for the kind of labour required; and if the produce exceeds the average, those who are first in the field make large profits. This soon induces competition on the part of other capitalists, who, in trying to obtain good workmen, will raise the rate of wages. Competition will proceed until the point is reached at which only the market rate of interest is obtained for the capital invested. At the same time wages will have been so raised that the workmen reap the whole excess of produce, unless indeed the price of the produce has fallen, and the public, as consumers, have the benefit. Whether this latter result will follow or not depends upon the number of labourers who are fitted for the work. Where much skill and education is required, extensive competition will be impossible, and a permanently high rate of wages will exist. But if only common labour is requisite, the price of the goods cannot be maintained, wages will fall to their former point, and the public will gain the advantage of cheaper supplies.
It will be observed that this account of the matter involves the temporary application of the wage-fund theory. It is the proper function of capitalists to sustain labour before the result is accomplished, and as many branches of industry require a large outlay long previous to any definite result being arrived at, it follows that capitalists must undertake the risk of any branch of industry where the ultimate profits are
not accurately known. But we now have some clue as to the amount of capital which will be appropriated to the payment of wages in any trade. The amount of capital will depend upon the amount of anticipated profits, and the competition to obtain proper workmen will strongly tend to secure to the latter all their legitimate share in the ultimate produce.
For instance, let a number of schemes be set on foot for laying telegraphic cables. The ultimate profits are very uncertain, depending upon the utility of the cables as compared with their cost. If capitalists make a large estimate of those profits, they will apply much capital to the immediate manufacture of the cables. All workmen competent at the moment to be employed will be hired, and high wages paid if necessary. Every man who has peculiar skill, knowledge, or experience, rendering his assistance valuable, will be hired at any requisite cost. At this point it is the wage-fund theory that is in operation. But, after a certain number of years, the condition of affairs will be totally different. Capitalists will learn, by experience, exactly what the profits of cables may be; that amount of capital will be thrown into the work which finds the average amount of profits, and neither more nor less. The cost of transmitting messages will be reduced by competition, so that no excessive profits will be made by any of the parties concerned; the rate of wages, therefore, of every species of labour will be reduced to the average proper to labour of that degree of skill. But if there be required in any branch
of the work a very special kind of skilled and experienced labour, it will not be affected by competition in the same way, and the wages or salary will remain high.
I think that it is in this way quite possible to reconcile theories which are at first sight so different. The wage-fund theory acts in a wholly temporary manner. Every labourer ultimately receives the due value of his produce after paying a proper fraction to the capitalist for the remuneration of abstinence and risk. At the same time workers of different degrees of skill receive very different shares according as they contribute a common or a scarce kind of labour to the result.
I have the more pleasure and confidence in putting forward these somewhat heretical views concerning the general problem of Economics, inasmuch as they are nearly identical with those arrived at by Professor Hearn, of Melbourne University. It would be a somewhat long task to trace out exactly the coincidence of opinions between us, but he certainly adopts the notion that the capitalist merely buys up temporarily the prospects of the concern he manages and the labourers he employs. Thus he says: “In place of having a share in the undertaking, the co-operator sells for a stipulated price his labour or the use of his capital. The case therefore comes
within the ordinary conditions of exchange; and the price of labour and the price of capital are determined in the same manner as all other questions of price are determined. Yet the general character of the partnership is not destroyed. Although each particular transaction amounts to a sale, yet for the continuance of the business a nearer connection arises. Although the whole loss of the undertaking, if the undertaking be unfortunate, falls upon the last proprietor, and the interests of the other parties have been previously secured, yet each such loss prevents a repetition of the transaction from which it arose. The capital which ought to have been replaced, and which if replaced would have afforded the means of employing labour and of defraying the interest upon other capital, has disappeared; and thus the market for labour and for capital is by so much diminished. Both the labourer and the intermediate capitalist are therefore directly concerned in the success of every enterprise towards which they have contributed. If it be successful, they feel the advantage; if it be not successful, they feel in like manner the loss. But this community of interest is no longer direct, but is indirect merely; and it arises not from the gains or the losses of partners, but from the increased ability, or the diminished demands, of customers.”
This passage really contains a statement of the views which I am inclined wholly to accept; but no passages which I can select will convey an adequate notion of the enlightened view which Professor Hearn takes of the industrial structure of society in his admirable work on
I have but a few lines more to add. I have ventured in the preceding pages to call in question not a few of the favourite doctrines of economists. To me it is far more pleasant to agree than to differ; but it is impossible that one who has any regard for truth can long avoid protesting against doctrines which seem to him to be erroneous. There is ever a tendency of the most hurtful kind to allow opinions to crystallise into creeds. Especially does this tendency manifest itself when some eminent author, enjoying power of clear and comprehensive exposition, becomes recognised as an authority. His works may perhaps be the best which are extant upon the subject in question; they may combine more truth with less error than we can elsewhere meet. But “to err is human,” and the best works should ever be open to criticism. If, instead of welcoming inquiry and criticism, the admirers of a great author accept his writings as authoritative, both in their excellences and in their defects, the most serious injury is done to truth. In matters of philosophy and science authority has ever been the
great opponent of truth. A despotic calm is usually the triumph of error. In the republic of the sciences sedition and even anarchy are beneficial in the long run to the greatest happiness of the greatest number.
In the physical sciences authority has greatly lost its noxious influence. Chemistry, in its brief existence of a century, has undergone three or four complete revolutions of theory. In the science of light, Newton’s own authority was decisively set aside, though not until after it had retarded for nearly a century the progress of inquiry. Astronomers have not hesitated, within the last few years, to alter their estimates of all the dimensions of the planetary system, and of the universe, because good reasons have been shown for calling in question the real coincidence of previous measurements. In science and philosophy nothing must be held sacred. Truth indeed is sacred; but, as Pilate said, “What is truth?” Show us the undoubted infallible criterion of absolute truth, and we will hold it as a sacred inviolable thing. But in the absence of that infallible criterion, we have all an equal right to grope about in our search of it, and no body and no school nor clique must be allowed to set up a standard of orthodoxy which shall bar the freedom of scientific inquiry.
I have added these words because I think there is some fear of the too great influence of authoritative writers in Political Economy. I protest against deference for any man, whether John Stuart Mill, or
Adam Smith, or Aristotle, being allowed to check inquiry. Our science has become far too much a stagnant one, in which opinions rather than experience and reason are appealed to.
There are valuable suggestions towards the improvement of the science contained in the works of such writers as Senior, Cairnes, Macleod, Cliffe-Leslie, Hearn, Shadwell, not to mention a long series of French economists from Baudeau and Le Trosne down to Bastiat and Courcelle-Seneuil; but they are neglected in England, because the excellence of their works was not comprehended by David Ricardo, the two Mills, Professor Fawcett, and others who have made the orthodox Ricardian school what it is. Under these circumstances it is a positive service to break the monotonous repetition of current questionable doctrines, even at the risk of new error. I trust that the theory now given may prove accurate; but, however this may be, it will not be useless if it cause inquiry to be directed into the true basis and form of a science which touches so directly the material welfare of the human race.