The Development of Economics

CHAPTER IX

DAVID RICARDO AND HIS THEORY OF DISTRIBUTION

The literature produced by the controversy over the corn-laws, especially the pamphlets of Malthus, were read by David Ricardo, a gentleman of independent means, who during the so-called “bullion controversy” had acquired an excellent reputation as a sound thinker and economist. These writings inspired him to prepare in 1815 a pamphlet entitled Essay on the Influence of a Low Price of Corn on the Profits of Stock. In this publication there was suggested an explanation of the distribution of wealth which, as subsequently developed, was accepted as the classical theory on that subject. Its importance in the development of the science of economics, as well as the influence of some of its author’s other doctrines, justify at this point a brief account of Ricardo’s personal history and character.

He was born in London in 1778, his father being a Dutch Jew who had established himself in business in the English capital. After an elementary education in the schools of London and two years’ instruction in a trade-school in Holland, he was employed confidentially by his father in the business of the Stock Exchange. Later, having renounced the Jewish faith and severed business connections with his father, he operated independently on the Exchange with such success that at a comparatively early age he had acquired a fortune of sufficient magnitude to render him financially independent. Writing of this phase of his career, McCulloch quotes the following passage from an account of his life in the Annual Obituary for 1823, supposed to have been written by one of his brothers: “The talent for obtaining wealth is not held in much estimation; but perhaps in nothing did Mr. R. more evince his extraordinary powers, than he did in his business. His complete knowledge of its intricacies; his surprising quickness at figures and calculation; his capability of getting through without any apparent exertion the immense transactions in which he was concerned; his coolness and judgment combined certainly with (for him) a fortunate tissue of public events, enabled him to leave all his contemporaries at the Stock Exchange far behind, and to raise himself infinitely higher, not only in fortune, but in general character and estimation, than any man had ever done before in that house. Such was the impression which these qualities had made on his competitors, that several of the most discerning among them, long before he had emerged into public notoriety, prognosticated in their admiration, that he would live to fill some of the highest stations in the state.”

B. Ricardo’s Conception of the Problem of Distribution and the Doctrines Employed in Its Solution

In his explanation of the distribution of wealth as thus defined Ricardo accepts the differential theory of rent, the doctrine of diminishing returns in agriculture, and the Malthusian doctrine of population explained in the preceding chapter and combines with them a doctrine of value which he expounds in his first and fourth chapters and which first demands our attention.

C. Ricardo’s Doctrine of Value

Essential to an understanding of Ricardo’s doctrine of value is the distinction he drew between what he termed “natural” and “market” values. By the latter term he meant the actual price at which commodities change hands from day to day. By natural value, on the other hand, he meant some point—rather difficult to describe—about which market values fluctuate and which they tend to approach. Unfortunately he did not define accurately and carefully this latter conception. We are obliged to gather it from the context, to infer it from his treatment of the various aspects of the subject.

In support of the doctrine that goods of this latter class exchange for each other in proportion to the amounts of labor required to obtain them, he quotes with approval from the fifth chapter of the first book of The Wealth of Nations the following passages:

“The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it, or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people.”

“Labour was the first price—the original purchase-money that was paid for all things.”

“In that early and rude state of society, which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another. If, among a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for, or be worth two deer. It is natural that what is usually the produce of two days’ or two hours’ labour should be worth double of what is usually the produce of one day’s or one hour’s labour.”

“The estimation in which different qualities of labour are held, comes soon to be adjusted in the market with sufficient precision for all practical purposes. . . . The scale, when once formed, is liable to little variation. If a day’s labour of a working jeweler be more valuable than a day’s labour of a common labourer, it has long ago been adjusted, and placed in its proper position in the scale of value.”

“In comparing, therefore, the value of the same commodity, at different periods of time, the consideration of the comparative skill and intensity of labour, required for that particular commodity, needs scarcely to be attended to, as it operates equally at both periods.”

“If a piece of cloth be now of the value of two pieces of linen, and, if, in ten years hence the ordinary value of a piece of cloth should be four pieces of linen, we may safely conclude, that either more labour is required to make the cloth, or less to make the linen, or that both causes have operated.”

“As the inquiry to which I wish to draw the reader’s attention, relates to the effect of the variations in the relative value of commodities, and not in their absolute value, it will be of little importance to examine into the comparative degree of estimation in which the different kinds of labour are held. We may fairly conclude, that whatever inequality there might originally have been in them, . . . the variation is very inconsiderable from year to year, and, therefore, can have little effect, for short periods, on the relative value of commodities.”

From the point of view of completeness and adequacy of statement and proof these quotations, and for that matter all that Ricardo wrote on this subject, leave much to be desired, but the essence of his doctrine obviously is that freely reproducible commodities exchange for each other in proportion to the amounts of labor required in their production and that in determining those amounts one day of a particular kind of skilled labor counts for as many days of unskilled or common labor as the market value or wages of a day of common labor is contained in the market value or wages of a day of the kind of skilled labor under consideration.

“Even in that early state to which Adam Smith refers, some capital, though possibly made and accumulated by the hunter himself, would be necessary to enable him to kill his game. Without some weapon, neither the beaver nor the deer could be destroyed, and therefore the value of these animals would be regulated, not solely by the time and labour necessary to their destruction but also by the time and labour necessary for providing the hunter’s capital, the weapon, by the aid of which their destruction was effected.

“If we suppose the occupations of the society extended, that some provide canoes and tackle necessary for fishing, others the seed and rude machinery first used in agriculture, still the same principle would hold true, that the exchangeable value of the commodities produced would be in proportion to the labour bestowed on their production; not on their immediate production only, but on all those implements or machines required to give effect to the particular labour to which they were applied.

“If we look to a state of society in which greater improvements have been made, and in which arts and commerce flourish, we shall still find that commodities vary in value conformably with this principle.”

One circumstance, however, connected with the use of machines and other forms of “fixed and durable capital” presents an obstacle to the application of the labor principle which Ricardo was not so successful in surmounting. It was the fact that besides the replacement of the capital used up in the process of production and which, in determining its influence upon value, Ricardo regarded as the equivalent of the amount of labor required in its production, interest must be paid during the period of its use. This fact would occasion no difficulty provided the amounts of these interest payments were always proportionate to the amounts of labor directly and indirectly consumed, but he saw that they were not always so proportionate. The following from Section IV of his chapter on value relates to this point:

“If men employed no machinery in production but labour only, and were the same length of time before they brought their commodities to market, the exchangeable value of their goods would be precisely in proportion to the quantity of labour employed.”

“If they employed fixed capital of the same value and of the same durability, then, too, the value of the commodities produced would be the same, and they would vary with the greater or less quantity of labour employed in their production.”

“But although commodities produced under similar circumstances would not vary with respect to each other, from any cause but an addition or diminution of labour necessary to produce one or other of them, yet, compared with others not produced with the same proportionate quantity of fixed capital, they would vary from the other cause also which I have before mentioned, namely, a rise in the value of labour, although neither more nor less labour were employed in the production of either of them.”

D. Ricardo’s Doctrine of Rent

In the explanation of the rent of land Ricardo employs the differential principle and the doctrine of diminishing returns in agriculture in substantially the same manner as did Malthus and West. There are some peculiarities in his treatment of the subject, however, which deserve attention.

Several corollaries or collateral propositions accompany this doctrine. One is that “the capital last employed pays no rent,” which means that the landlord can exact no share of the product of the last increments of labor and capital employed or that the total product of these last increments are divided between the laborers who supply the labor and the capitalists who supply the capital. Ricardo does not expound the process of reasoning by which this conclusion is reached, but it seems to be about as follows: After the conditions of a lease have been fixed, including the amount of rent to be paid, the tenant is free to apply to the cultivation of the leased land or to any unappropriated lands as much labor and capital as he can command, and the net returns of any new, additional applications after the lease is made are beyond the reach of the landlord. He does not seem to consider what would happen when all lands have been appropriated and leases have expired and must be renewed.

Another of these collateral propositions is that rent does not enter into price. This doctrine was emphasized by Malthus and others in the corn-laws controversy. Ricardo’s manner of expressing it is indicated in the passages which follow.

“When land of the third quality is taken into cultivation, rent immediately commences on the second, and it is regulated as before, by the differences in their productive powers. At the same time, the rent of the first quality will rise, for that must always be above the rent of the second, by the difference between the produce which they yield with a given quantity of capital and labour. With every step in the progress of population, which shall oblige a country to have recourse to land of a worse quality, to enable it to raise its supply of food, rent on all the more fertile land will rise.”

E. Ricardo’s Doctrine of Wages

“It is when the market price of labour exceeds its natural price, that the condition of the labourer is flourishing and happy, that he has it in his power to command a greater proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and numerous family. When, however, by the encouragement which high wages give to the increase of population, the number of labourers is increased, wages again fall to their natural price, and indeed from a reaction sometimes fall below it.

“When the market price of labour is below its natural price, the condition of the labourers is most wretched; then poverty deprives them of those comforts which custom renders absolute necessaries. It is only after their privations have reduced their number, or the demand for labour has increased, that the market price of labour will rise to its natural price, and that the labourer will have the moderate comforts which the natural rate of wages will afford.”

The force that is here counted upon to regulate the size of the laborer’s family and through it the supply of labor is the will of laborers, the strength of the prudential check as Malthus termed it, and not natural law as it operates in other branches of the animal world—the law, namely, in accordance with which offspring born into the world under the operation of the sex instinct die from starvation and the diseases incident to undernourishment if the food available for their nourishment is inadequate, but grow to maturity and flourish if the food supply is adequate or more. This natural law could operate in the case of labor only when the standard of life of the laboring classes is the lowest possible, namely at the point of subsistence.

“In the natural advance of society the wages of labour will have a tendency to fall, as far as they are regulated by supply and demand; for the supply of labourers will continue to increase at the same rate, whilst the demand for them will increase at a slower rate. . . . I say that, under these circumstances, wages would fall, if they were regulated only by the supply and demand of labourers; but we must not forget that wages are also regulated by the prices of the commodities on which they are expended.

“As population increases these necessaries will be constantly rising in price, because more labour will be necessary to produce them. If, then, the money wages of labour should fall, whilst every commodity on which the wages of labour were expended rose, the labourer would be doubly affected, and would be soon totally deprived of subsistence. Instead, therefore, of the money wages of labour falling, they would rise; but they would not rise sufficiently to enable the labourer to purchase as many comforts and necessaries as he did before the rise in the price of those commodities” (italics mine).

It is not clear from Ricardo’s discussion whether he means to imply by the above statements that the standard of life of the laboring classes is likely slowly to fall with the advance of society or simply that this would be the result if they did not prevent it by decreasing the number of their members. There is nothing in the principles he expounds to prevent laborers from not only maintaining but even raising their standard of life. Everything depends upon the way in which their wages react upon the size of their families.

“It appears, then, that the same cause which raises rent; namely, the increasing difficulty of providing an additional quantity of food with the same proportional quantity of labour, will also raise wages, and therefore, if money be of an unvarying value, both rent and wages will have a tendency to rise with the progress of wealth and population.

“But there is this essential difference between the rise of rent and the rise of wages. The rise in the money value of rent is accompanied by an increased share of the produce; not only is the landlord’s money rent greater, but his corn rent also; he will have more corn, and each defined measure of that corn will exchange for a greater quantity of all other goods which have not been raised in value. The fate of the labourer will be less happy; he will receive more money wages, it is true, but his corn wages will be reduced; and not only his command of corn, but his general condition will be deteriorated, by his finding it more difficult to maintain the market rate of wages above their natural rate. While the price of corn rises 10 per cent, wages will always rise less than 10 per cent, but rent will always rise more; the condition of the labourer will generally decline, and that of the landlord will always be improved.”

F. Ricardo’s Doctrine of Profits

“We have seen that the price of corn is regulated by the quantity of labour necessary to produce it with that portion of capital which pays no rent. We have seen, too, that all manufactured commodities rise and fall in price, in proportion as more or less labour becomes necessary to their production. Neither the farmer who cultivates the quantity of land, which regulates price, nor the manufacturer, who manufactures goods, sacrifices any portion of the produce for rent. The whole value of their commodities is divided into two portions only; one constitutes the profits of stock, the other the wages of labor.

“Supposing corn and manufactured goods always to sell at the same price, profits would be high or low in proportion as wages were low or high. But suppose corn to rise in price because more labour is necessary to produce it; that cause will not raise the price of manufactured goods in the production of which no additional quantity of labour is required. If, then, wages continued the same, the profits of manufacturers would remain the same; but, if, as is absolutely certain, wages should rise with the rise of corn, then their profits would necessarily fall.”

“It has been already remarked that if the labour of ten men will, on land of a certain quality, obtain 180 quarters of wheat, and its value be 4£. per quarter, or 720£.; and if the labour of ten additional men will, on the same or any other land, produce only 170 quarters in addition, wheat would rise from 4£. to 4£. 4s. 8d.; for 170 : 180 : : 4£. : 4£. 4s. 8d. In other words, as for the production of 170 quarters, the labour of ten men is necessary in the one case, and only that of 9.44 in the other, the rise would be as 9.44 : 10, or as 4£. : 4£. 4s. 8d. In the same manner, it might be shown that if the labour of ten additional men would only produce 160 quarters, the price would further rise to 4£. 10s.; if 150, to 4£. 16s., etc., etc.

“But when 180 quarters were produced on the land paying no rent and its price was 4£. per quarter, it sold for £720.

“And when 170 quarters were produced on the land paying no rent, and the price rose to 4£. 4s. 8d., it sold for £720.

“So 160 quarters at 4£. 10s. produce........£720.

And 150 quarters at 4£. 16s. produce........£720.

“Now, it is evident that if, out of these equal values, the farmer is at one time obliged to pay wages regulated by the price of wheat at 4£., and at other times at higher prices, the rate of his profits will diminish in proportion to the rise in the price of corn.”

“This tendency,” he adds, “. . . is happily checked at repeated intervals by the improvements in machinery connected with the production of necessaries, as well as by discoveries in the science of agriculture, which enable us to relinquish a portion of labour before required, and therefore to lower the price of the prime necessary of the labourer.” It should be noted, however, that in the opinion of Ricardo such improvement and discoveries check but do not eliminate the tendency of profits to fall. In spite of them profits will fall, but not so rapidly as without them.

G. Conflicting Interests of Landlords, Laborers, and Capitalists

Footnotes

1 The facts regarding Ricardo’s life and character herewith presented are taken from the account given by J. R. McCulloch in the introduction to his edition of Ricardo’s works published in London in 1888.

2 J. R. McCulloch, The Works of David Ricardo (London, 1888), p. xvii.

3 Ibid., p. xviii.

4 Ibid., p. xxviii.

5 Ibid., p. xxxi.

6 Ibid., p. xxx.

7 McCulloch, ed., op. cit., p. 5.

8 Ibid., p. 5.

9 Ibid., p. 7.

10 Ibid., p. 8.

11 Ibid., p. 15.

12 McCulloch, ed., op. cit., pp. 16 and 17.

13 See Ricardo’s explanation of profits, described later in this chapter.

14 See Ricardo’s illustration in Sections IV and V of his chapter on Capital.

15 McCulloch, ed., op. cit., p. 24.

16 Ibid., p. 47.

17 Ibid., p. 49.

18 Ibid., p. 34.

19 Ibid., p. 35.

20 Ibid.

21 Ibid., pp. 35 and 36.

22 McCulloch, ed., op. cit., pp. 36 and 37.

23 Ibid.

24 Ibid., pp. 37 and 38.

25 Ibid., pp. 38 and 39.

26 McCulloch, ed., op. cit., p. 40.

27 Ibid., p. 36.

28 Ibid., p. 41.

29 Ibid.

30 Ibid., p. 11.

31 Ibid.

32 Ibid., p. 50.

33 Ibid., p. 51.

34 McCulloch, ed., op. cit., p. 50.

35 Ibid., p. 52.

36 Ibid.., p. 51.

37 Ibid.

38 Ibid.

39 Ibid., p. 53.

40 The reasons for this statement are developed in Ricardo’s chapter on profits, where he attempts to show that profits tend to fall with the natural advance of society and connects the rate of profits and the rate of increase of capital as cause and effect.

41 McCulloch, ed., op. cit., pp. 54 and 55.

42 Ibid., p. 56.

43 Ibid., p. 55.

44 McCulloch, ed., op. cit., p. 60.

45 Ibid., p. 62.

46 Ibid., p. 66.

47 McCulloch, ed., op. cit., p. 63.

• 1Professor Schmoller found the key to the explanation of this aspect of the system in the development of the national economies of the various European states. These succeeded (in order of time) territorial, municipal, tribal, and family economies, each representative of a certain stage in the history of European civilization, and each produced by the struggle of contending forces, a higher and broader organization in each case subordinating to itself lower and narrower ones. “The essence of this system,” he says, “lies not in some doctrine of money, or of the balance of trade; not in tariff barriers, protective duties, or navigation laws, but in something far greater, namely, in the total transformation of society and its organization, as well as of the state and its institutions, in the replacing of a local and territorial economic policy by that of the national state.” More specifically he says, “The whole internal history of the seventeenth and eighteenth centuries, not only in Germany but everywhere else, is summed up in the opposition of the economic policy of the state to that of the town, the district, and the several estates; the whole foreign history is summed up in the opposition to one another of the separate interests of the newly rising states, each of which sought to obtain and retain its place in the circle of European nations, and in that foreign trade which now included America and India. What was at stake was the creation of real political economies as unified organisms, the center of which should be, not merely a state policy reaching out in all directions, but rather the living heart-beat of a united sentiment.”
• 2Professor Schmoller found the key to the explanation of this aspect of the system in the development of the national economies of the various European states. These succeeded (in order of time) territorial, municipal, tribal, and family economies, each representative of a certain stage in the history of European civilization, and each produced by the struggle of contending forces, a higher and broader organization in each case subordinating to itself lower and narrower ones. “The essence of this system,” he says, “lies not in some doctrine of money, or of the balance of trade; not in tariff barriers, protective duties, or navigation laws, but in something far greater, namely, in the total transformation of society and its organization, as well as of the state and its institutions, in the replacing of a local and territorial economic policy by that of the national state.” More specifically he says, “The whole internal history of the seventeenth and eighteenth centuries, not only in Germany but everywhere else, is summed up in the opposition of the economic policy of the state to that of the town, the district, and the several estates; the whole foreign history is summed up in the opposition to one another of the separate interests of the newly rising states, each of which sought to obtain and retain its place in the circle of European nations, and in that foreign trade which now included America and India. What was at stake was the creation of real political economies as unified organisms, the center of which should be, not merely a state policy reaching out in all directions, but rather the living heart-beat of a united sentiment.”
• 3The industrial organization of the towns was also gradually weakened by conflicts of interest between townsmen themselves and the oppression of the weaker trades by the stronger, and by the growth of domestic industries. Increasing interference of the central government in town affairs was invited by these conditions, and the power of resistance to it was weakened. The growth of a merchant class in London and some of the other large towns also contributed to the same result. The interests of this class extended beyond the boundaries of the town in which they lived and were promoted by the breaking-down of local trade barriers. The power of this class grew rapidly in and after the sixteenth century.
• 4By the seventeenth century a national commercial and industrial organization had developed, the chief organs of which were middlemen who intervened between producers and consumers and between different classes of producers. Among those of chief importance were the wool-staplers, the clothiers, the drapers, and the foreign trading companies. The wool-staplers purchased the farmers’ wool, their most important staple, and sold it to manufacturers or foreign merchants. The clothiers acted as middlemen between the carders, spinners, weavers, and other handicraftsmen engaged in transforming the wool into cloth. They purchased the wool from the staplers, delivered it to the carders and spinners, distributed the yarn among the weavers to be woven into cloth, and then placed the cloth in the hands of the “fuller,” “walker,” or “tucker” to be fulled and cleansed. The spinners, carders, weavers, and fullers were scattered throughout the hamlets and villages as well as the cities of the country, in many, perhaps most cases, doing agricultural work as a main or a side occupation. The drapers purchased the cloth and sold it to consumers or to foreign merchants; some of them were themselves connected with one of the trading companies. Foreign commerce was chiefly carried on by these latter organizations, to each of which a charter had been granted conferring the exclusive right to trade in a specified part of the world. The Eastland Company, for example, had the exclusive right to trade with Scandinavia and the Baltic region; the Russian Company, with Russia; the Merchant Adventurers, with the Netherlands; the Levant Company, with the Mediterranean region; the Guinea or African Company, with Africa; the East India Company, with the countries of Asia; and several other companies with portions of the American field. At the beginning of the seventeenth century France, Spain, and Portugal were the only countries with which trade could be carried on by an Englishman not a member of one of the companies.
• 5The literary remains of Colbert are of the same general character as those of Sully in that they consist of letters, instructions, and memoirs. They differ from Sully’s, however, in the extent to which they reflect mercantile doctrines. Colbert was the chief executor of the mercantile policy of France, and among his letters, instructions, and other papers may be found expositions and defense of nearly every feature of it. Much more completely than the English writers he reflected the doctrines of nationalism and of the entrepreneur relation of the state to industry. To a greater extent than in any other country these doctrines were realized in the practices of France during the reign of Louis XIV, and for this fact Colbert was largely responsible. Louis XIV aspired to be not only absolute sovereign in France but the dictator of Europe, and he fully realized that foreign commerce and command of the world’s supply of the precious metals would assist in the accomplishment of his purposes.
• 6Becher was at one time a court physician and professor of medicine in Mainz, whence he went to Wurzburg, and later to Vienna. At the two latter places, he was connected with the carneræ of the reigning sovereigns. He wrote on natural science as well as Kameralwissenschaft, his chief work in the latter field appearing at Frankfurt in 1668 under the title Politische Discurs von den eigentlichen Ursachen des Auf- und Abnehmens der Städte, Lander und Republiken, in specie, wie ein Land Volkreich und Nahrhaft zu machen und in rechte Societaten civilen zu bringen. In this book he defines a city as eine volkreiche, nahrhafte Gemeine and defends the following fundamental propositions: The more populous a city, the more powerful it is; but in order to be populous, it must be supplied with an abundance of nourishment; the membership of a community consists of (a) those who serve it and are supported by it, for example, government officers, clergy, learned men, physicians, apothecaries, soldiers, etc.; and (b) those who really constitute it, namely, peasants, handicraftsmen, and merchants. These three classes are essential each to the other. In explaining their mutual relations, however, he makes the following argument: “Consumption is the soul of the three classes, the only bond which holds them together and enables them to live by each other. It is on account of consumption that the merchant class is so necessary in a community, however large the peasant class may be. . . . Since the nourishing of a community can only be accomplished through the trading [Verhandlung] and turning into money [Versilberung] of goods . . . everything which hinders these operations hinders and weakens the populousness which results from it.”
• 7Wilhelm Freiherr von Schroder was in the service of Austria as conductor of a factory according to plans outlined by Becher. He wrote several books, the most noteworthy of which was entitled Fürst-liche Schatz und Rentkammer, which was published in 1686. He was a strong advocate of absolute monarchy and admirably set forth the mercantilistic view of the relation of a sovereign to his people, in the following passage: “A Prince is like a housefather. Now a housefather must fertilize and plough his fields if he would reap a harvest therefrom. He must well stock his pond if he would have fish. He must feed his cattle if he would slaughter them, and well fodder his cows if he desires them to give much milk. Thus a Prince must first help his subjects to a good living, if he wishes to take anything from them.”
• 8In the Détail he gives a discussion of the relation between money and wealth in which he says: “As gold and silver are not and never have been wealth in themselves and are valued only in relation to other things necessary to life,—to which things they serve only as a guarantee and a measure of value,—it is a matter of indifference whether we have much or little of them, provided the same results are produced.” That the same results are produced by much or little he attempts to prove by the following: “Thus we learn from the old accounts that in 1250 a laborer in Paris, who to-day earns 40 or 50 sous a day, earned only 4 pennies a day, 12 one-hundredths part of what he earns now. Nevertheless he then lived with as much comfort as now because all things were in proportion. He satisfied his wants with his four pennies as well as one of the same trade now does with his 50 sous. It follows that a man who at that time had a thousand livres of rent was as rich as one who at present has one hundred thousand.”
• 9In other connections he says: “It is very certain that it [money] is not a good in itself and that the quantity of it does nothing for the opulence of a country in general provided there is enough of it to sustain the prices of the goods necessary to life.”
• 10Silver and gold, he says, have as competitors copper, leather, shells, and “a simple piece of paper which costs nothing but nevertheless performs all the functions of money to the amount of millions by passing from hand to hand an infinite number of times.” By way of illustration he refers to the Lyons fair in the following manner: “In a commerce consisting of purchases and sales to the amount of more than eighty millions not a ‘sou marque’ of money is seen. Everything is done by bills of exchange which after passing through an infinite number of hands, finally return to the original drawer.”
• 11In other connections he emphasized the need of an equilibrium between purchases and sales and the importance of proper adjustments of prices, especially of the prices of raw produce and manufactures.
• 12In order to secure these and other needed adjustments, he affirmed that reliance can be placed only on nature. The following words of his taken from Chapter V of the Dissertation present this doctrine clearly:
• 13In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 14In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 15In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 16The author, Richard Cantillon, was born in Ireland between 1650 and 1690. Soon after the death of Louis XIV he removed to Paris and engaged in the business of banking during the period in which John Law flourished. Being confident of the ultimate failure of the Mississippi scheme, Cantillon speculated on the bear side of the market and made a fortune, but incurred the enmity of Law and was obliged to leave France. He was murdered in London on May 16, 1734, by a discharged man-servant, who set fire to his house and stole some of his papers.
• 17The deviation of the market prices of commodities from “their primary and natural price” Ricardo also described as “accidental and temporary.” The demand and supply of a commodity at the moment may be such as to establish a price for it above or below the point indicated by the labor principle, but in that case the profits of the capital employed in its production will be above or below the average in other industries, and this fact will increase in the one case and decrease in the other the amount of capital employed in this industry, thus causing changes in the supply which will tend to bring the market into accord with the natural price. He concludes his discussion with these words: “In speaking, then, of the exchangeable value of commodities, or the power of purchasing possessed by any one commodity, I mean always that power which it would possess, if not disturbed by any temporary or accidental cause, and which is its natural price.”
• 18The first is indicated in the statement that “rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” He thus excludes from this category any payment received by the landlord for capital invested in or on his lands in the form of buildings, drains, hedges, fences, walls, fertilizers, and other improvements, as well as gains resulting from the removal of timber, the digging of coal or other minerals, or the quarrying of stone. Those payments he classified as profits, and said that “this is a distinction of great importance . . . for it is found, that the laws which regulate the progress of rent are widely different from those which regulate the progress of profits, and seldom operate in the same direction.”
• 19The first is indicated in the statement that “rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” He thus excludes from this category any payment received by the landlord for capital invested in or on his lands in the form of buildings, drains, hedges, fences, walls, fertilizers, and other improvements, as well as gains resulting from the removal of timber, the digging of coal or other minerals, or the quarrying of stone. Those payments he classified as profits, and said that “this is a distinction of great importance . . . for it is found, that the laws which regulate the progress of rent are widely different from those which regulate the progress of profits, and seldom operate in the same direction.”
• 20The explanation of rent in this restricted sense he finds in the fact that land is limited in quantity and not uniform in quality. “On the common principles of supply and demand,” he says, “no rent could be paid for such land [fertile land in quantities greatly beyond the needs of the population] for the reason stated why nothing is given for the use of air and water, or for any other of the gifts of nature which exist in boundless quantity.” And further : “If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because, in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.”
• 21The explanation of rent in this restricted sense he finds in the fact that land is limited in quantity and not uniform in quality. “On the common principles of supply and demand,” he says, “no rent could be paid for such land [fertile land in quantities greatly beyond the needs of the population] for the reason stated why nothing is given for the use of air and water, or for any other of the gifts of nature which exist in boundless quantity.” And further : “If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because, in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.”
• 22Even before land of inferior fertility is taken into cultivation, superior lands may bear rent, according to Ricardo, provided the point of diminishing returns in their cultivation has been reached. “It often, and, indeed, commonly happens,” he says, “that before No. 2, 3, 4 or 5, of the inferior lands are cultivated, capital can be employed more productively on those lands which are already in cultivation.” By way of illustration he assumes that equal amounts of capital and labor will produce on land of qualities numbered 1, 2, and 3, 100, 90 and 80 quarters of corn respectively and then adds: “It may perhaps be found, that by doubling the original capital employed on No. 1, though the produce will not be doubled, will not be increased by 100 quarters, it may be increased by eighty-five quarters, and that this quantity exceeds what could be obtained by employing the same capital on land No. 3.”
• 23“In such a case, capital will be preferably employed on the old land, and will create a rent; for rent is always the difference between the produce obtained by the employment of two equal quantities of capital and labour.” The reason for the creation of rent in this case is that the only available opportunities for the employment of additional labor and capital under the conditions assumed are either on land No. 3 or at a diminished return on land No. 1; and, since two rates of profits on the same market are impossible under competitive conditions, capital and labor must be content with the diminished returns represented by their lower productivity when added to the amounts already employed in the cultivation of No. 1, and the landlord can command the difference between their present and their former productivity.
• 24“The exchangeable value of all commodities, whether they be manufactured, or the produce of the mines, or the produce of land, is always regulated, not by the less quantity of labour that will suffice for their production under circumstances highly favorable, and exclusively enjoyed by those who have peculiar facilities of production; but by the greater quantity of labour necessarily bestowed on their production by those who have no such facilities; by those who continue to produce them under the most unfavorable circumstances; meaning by the most unfavorable circumstances the most unfavorable under which the quantity of produce required renders it necessary to carry on production.” In the case of production from land, the most unfavorable circumstances are those represented by the last application of capital and labor, namely those applied to the poorest quality of land or at the lowest returns on the superior qualities, and these, according to the proposition just discussed, yield no rent.
• 25In another passage he says: “The reason, then, why raw produce rises in comparative value, is because more labor is employed in the production of the last portion obtained, and not because rent is paid to the landlord. The value of corn is regulated by the quantity of labour bestowed on its production on that quality of land, or with that portion of capital, which pays no rent. Corn is not high because a rent is paid, but a rent is paid because corn is high.”
• 26A third corollary is that “the rise of rent is always the effect of the increasing wealth of the country, and of the difficulty of providing food for its augmented population. It is a symptom, but it is never a cause of wealth; for wealth often increases most rapidly while rent is either stationary, or even falling. Rent increases most rapidly, as the disposable land decreases in its productive powers” “When, in the progress of society,” he says, “land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.
• 27A third corollary is that “the rise of rent is always the effect of the increasing wealth of the country, and of the difficulty of providing food for its augmented population. It is a symptom, but it is never a cause of wealth; for wealth often increases most rapidly while rent is either stationary, or even falling. Rent increases most rapidly, as the disposable land decreases in its productive powers” “When, in the progress of society,” he says, “land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.
• 28Conversely “it follows from the same principles, that any circumstances in the society which should make it unnecessary to employ the same amount of capital on the land, and which should therefore make the portion last employed more productive, would lower rent.”
• 29Besides a decreased volume of capital and a smaller or worse fed population, Ricardo mentions “such marked improvements, in agriculture, as shall have the same effect of diminishing the necessity of cultivating the poorer lands, or of expending the same amount of capital in the cultivation of the more fertile portion” as a circumstance that may cause rents to fall. He concludes with the statement “that whatever diminishes the inequality in the produce obtained from successive portions of capital employed on the same or on new land, tends to lower rent; and that whatever increases that inequality, necessarily produces an opposite effect and tends to raise it.”
• 30Besides a decreased volume of capital and a smaller or worse fed population, Ricardo mentions “such marked improvements, in agriculture, as shall have the same effect of diminishing the necessity of cultivating the poorer lands, or of expending the same amount of capital in the cultivation of the more fertile portion” as a circumstance that may cause rents to fall. He concludes with the statement “that whatever diminishes the inequality in the produce obtained from successive portions of capital employed on the same or on new land, tends to lower rent; and that whatever increases that inequality, necessarily produces an opposite effect and tends to raise it.”
• 31Ricardo concludes his chapter on rent by noting that the landlord profits in two ways by increasing difficulties in the production of raw produce, namely by securing a larger share of the total produce and by a rise in the price and thus in the purchasing power of each unit of the product. The following are his words : “Since the same cause, the difficulty of production, raises the exchangeable value of raw produce, and raises also the proportion of raw produce paid to the landlord for rent, it is obvious that the landlord is doubly benefited by difficulty of production. First he obtains a greater share, and, secondly, the commodity in which he is paid is of greater value.”
• 32In the discussion of wages Ricardo distinguishes between what he calls the natural and the market price of labor and defines the former as “that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution,” and the latter as “the price which is really paid for it, from the natural operation of the proportion of the supply to the demand.” In this case, as in that of commodities in general, market price tends to conform to natural price and for the same reason, namely that, whenever the market deviates from the natural price, changes in the relation between the demand and the supply of labor take place which tend to bring them into conformity with each other. On this point Ricardo says :
• 33In the discussion of wages Ricardo distinguishes between what he calls the natural and the market price of labor and defines the former as “that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution,” and the latter as “the price which is really paid for it, from the natural operation of the proportion of the supply to the demand.” In this case, as in that of commodities in general, market price tends to conform to natural price and for the same reason, namely that, whenever the market deviates from the natural price, changes in the relation between the demand and the supply of labor take place which tend to bring them into conformity with each other. On this point Ricardo says :
• 34It is important to note that Ricardo thought of natural wages in terms of the necessaries and comforts of life, i.e., of the commodities and services laborers use in the satisfaction of the wants of themselves and their families. “The power of the labourer to support himself and the family which may be necessary to keep up the number of labourers,” he says, “does not depend on the quantity of money which he may receive for wages, but on the quantity of food, necessaries, and conveniences become essential to him from habit which that money will purchase. The natural price of labour, therefore, depends on the price of the food, necessaries, and conveniences required for the support of the labourer and his family. With a rise in the price of food and necessaries, the natural price of labor will rise; with the fall in their price, the natural price of labour will fall.”
• 35Ricardo’s thinking at this point is substantially like that of Malthus in his Essay on Population. Both thought that there is a certain quantity of necessaries, comforts, and conceivably luxuries to which laborers become so accustomed by habit that, if they receive less than the amount required to purchase these, they will refuse to raise families large enough to maintain their numbers; and that, if they receive more than this amount, they will raise families so large that their numbers will increase. Both believed that the amount of these necessaries, comforts, and luxuries required to induce laborers to maintain their numbers without either increase or decrease is not fixed and unchangeable, but that it varies from time to time. “It is not to be understood,” says Ricardo, “that the natural price of labor, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country and very materially differs in different countries.” It seems to have been Ricardo’s opinion that in England at least it was larger in his time than it had been in times past. “Many of the conveniences now enjoyed in an English cottage,” he says, “would have been thought luxuries at an earlier period of our history.”
• 36The demand for labor, which, in accordance with the actually existing supply, determines actual or market wages, is, according to Ricardo, determined by the amount of capital or, more accurately perhaps, is in proportion to the amount of capital. “In proportion to the increase of capital,” he says, “will be the increase in the demand for labour; in proportion to the work to be done will be the demand for those who are to do it.” In another passage he says: “Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, etc., necessary to give effect to labour“ (italics mine). Since the amount of capital may for a time increase more rapidly than the numbers of the laboring class, market wages for a considerable period may be above natural wages. “Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse which an increased capital gives to a new demand for labour be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people.”
• 37The demand for labor, which, in accordance with the actually existing supply, determines actual or market wages, is, according to Ricardo, determined by the amount of capital or, more accurately perhaps, is in proportion to the amount of capital. “In proportion to the increase of capital,” he says, “will be the increase in the demand for labour; in proportion to the work to be done will be the demand for those who are to do it.” In another passage he says: “Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, etc., necessary to give effect to labour“ (italics mine). Since the amount of capital may for a time increase more rapidly than the numbers of the laboring class, market wages for a considerable period may be above natural wages. “Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse which an increased capital gives to a new demand for labour be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people.”
• 38The demand for labor, which, in accordance with the actually existing supply, determines actual or market wages, is, according to Ricardo, determined by the amount of capital or, more accurately perhaps, is in proportion to the amount of capital. “In proportion to the increase of capital,” he says, “will be the increase in the demand for labour; in proportion to the work to be done will be the demand for those who are to do it.” In another passage he says: “Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, etc., necessary to give effect to labour“ (italics mine). Since the amount of capital may for a time increase more rapidly than the numbers of the laboring class, market wages for a considerable period may be above natural wages. “Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse which an increased capital gives to a new demand for labour be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people.”
• 39According to Ricardo, the relative rates of increase of capital and population and thus of the demand and supply of labor are different in different “stages of society” and depend chiefly upon the “abundance of fertile land.” He says : “In new settlements, where the arts and knowledge of countries far advanced in refinement are introduced, it is probable that capital has a tendency to increase faster than mankind; and if the deficiency of labourers were not supplied by more populous countries, this tendency would very much raise the price of labour. In proportion as these countries become populous, and land of a worse quality is taken into cultivation, the tendency to an increase of capital diminishes ; for the surplus produce remaining, after satisfying the wants of the existing population, must necessarily be in proportion to the facility of production. Although, then, it is probable that under the most favorable circumstances the power of production is still greater than that of population, it will not long continue so; for the land being limited in quantity, and differing in quality, with every increased portion of capital employed on it, there will be a decreased rate of production, whilst the power of population continues always the same.”
• 40According to Ricardo, the relative rates of increase of capital and population and thus of the demand and supply of labor are different in different “stages of society” and depend chiefly upon the “abundance of fertile land.” He says : “In new settlements, where the arts and knowledge of countries far advanced in refinement are introduced, it is probable that capital has a tendency to increase faster than mankind; and if the deficiency of labourers were not supplied by more populous countries, this tendency would very much raise the price of labour. In proportion as these countries become populous, and land of a worse quality is taken into cultivation, the tendency to an increase of capital diminishes ; for the surplus produce remaining, after satisfying the wants of the existing population, must necessarily be in proportion to the facility of production. Although, then, it is probable that under the most favorable circumstances the power of production is still greater than that of population, it will not long continue so; for the land being limited in quantity, and differing in quality, with every increased portion of capital employed on it, there will be a decreased rate of production, whilst the power of population continues always the same.”
• 41In his discussion of the interaction of the forces which determine market and natural wages, Ricardo makes some statements which indicate his belief that in the natural advance of society laborers will meet with increasing difficulty in maintaining their standard of life. For example, he says :
• 42In a statement following he gives numerical illustrations of his doctrines in which he assumes that the money wages of laborers will be so adjusted that they will be able always to purchase the same quantity of commodities. He expresses the same view in the following words : “In proportion as corn becomes dear, he would receive less corn wages, but his money wages would always increase, whilst his enjoyments, on the above supposition, would be precisely the same. But as other commodities would be raised in proportion as raw produce entered into their composition, he would have more to pay for some of them. Although his tea, sugar, soap, candles and house rent would probably be no dearer, he would pay more for his bacon, cheese, butter, linen, shoes, and cloth; and therefore, even with the above increase of wages, his situation would be comparatively worse” (italics mine).
• 43The pessimistic view of the probable future of the laboring classes suggested in the passages above quoted is placed by Ricardo in contrast with that of the landlord class in the following statements :
• 44Having explained the share in the joint product of land, labor, and capital obtainable by landlords and laborers respectively, Ricardo treats the capitalist as the residual claimant, assigning to him what remains. To Ricardo, therefore, profits are total product minus the sum of the rents and wages paid to the cooperating landlords and laborers. He simplifies the problem still more by directing attention to the no-rent or marginal lands and the no-rent application of capital, thus eliminating rent from the calculation and explaining profits as the product of no-rent lands and no-rent capital minus the wages paid to the coöperating laborers. It follows, therefore, that the greater the share of labor the smaller that of capital. Ricardo says:
• 45Under the same circumstances Ricardo claims that the profits of farmers as well as those of manufacturers would fall in spite of the fact that the rise in the price of corn increases the value of each unit of their product. This is true because, according to his doctrine of value, the rise in the price of each bushel of corn produced on the margin and the number of bushels produced are so related that the total money value of the marginal product remains constant, and, since a larger amount must be paid to laborers in order to enable them to command the same quantity of necessaries, the amount left for the farmers is necessarily smaller. In the following passages Ricardo makes this clear by means of numerical illustrations:
• 46Ricardo puts his doctrine in a nutshell in the statement “that profits depend on high or low wages, wages on the price of necessaries, and the price of necessaries chiefly on the price of food” and concludes that “the natural tendency of profits then is to fall; for, in the progress of society and wealth, the additional quantity of food required is obtained by the sacrifice of more and more labour.”
• 47According to the reasoning outlined in the preceding sections of this chapter, the cost of producing corn on the margin of cultivation is a force of major importance in the distribution of wealth. Changes in it affect the proportions between rent, wages, and profits in such a manner as to indicate a real conflict of interest between landlords on the one hand and laborers and capitalists on the other. When this cost rises, rents increase not only absolutely but proportionally, profits fall, and, while money wages rise, real wages, that is what the money wages will buy, at the best remain stationary and at the worst slightly fall. A fall in costs on the margin causes a fall in rents both absolutely and relatively, a rise in profits, and a fall in money but not in real wages. The interests of landlords seem, therefore, to be opposed to that of the other two classes. Ricardo’s manner of expressing this conflict from the standpoint of laborers was indicated in a quotation at the close of the section on wages. From the standpoint of capitalists it is expressed in the following passage : “The farmer, then, although he pays no part of his landlord’s rent; that being always regulated by the price of produce, and invariably falling on the consumers, has, however, a very decided interest in keeping rent low, or rather in keeping the natural price of produce low. As a consumer of raw produce, and of those things into which raw produce enters as a component part, he will, in common with all other consumers, be interested in keeping the price low. But he is most materially concerned with the high price of corn as it affects wages. With every rise in the price of corn, he will have to pay out of an equal and unvarying sum of £720, an additional sum for wages to the ten men whom he is supposed constantly to employ. We have seen, in treating on wages, that they invariably rise with the rise in the price of raw products.”