The Development of Economics

CHAPTER X

THE PERIOD INTERVENING BETWEEN 1815 AND 1848

A. Economic Conditions

The period which intervened between the publication of Ricardo’s Principles and Mill’s Principles was, in many respects, a continuation of the preceding one. In England it witnessed the practical completion of the process of the substitution of capitalist cultivators and agricultural laborers for die yeomen farmers, and the extension of the factory system to the point of dominance in the industrial life of the nation. The principle of individual liberty in economic affairs also dominated the policy of the English government to a greater extent during this period than ever before. As evidence of this may be cited the repeal of the laws permitting the assessment of wages by justices of the peace, the taking-away of the last vestiges of trade monopoly from the East India Company, the repeal of the corn-laws, and a radical modification of the Navigation Acts.

Characteristic of the period also was the clearer revelation of some consequences of the operation of the new economic forces. The most important of these was the effect they were producing on the laboring class. In the country the agricultural laborer was now almost entirely dependent upon his wages. His rights in the commons and his by-industries were gone, and a vicious system or poor-relief had gone far towards pauperizing him. In the manufacturing districts, slums, unsanitary factories, and child labor threatened the health, happiness, and well-being of the workers. The early factories were constructed with little reference to the health and comfort of those who had to work in them. Many of them indeed were buildings constructed for other purposes which had been transformed to adapt them mechanically to their new uses. Children were employed in large numbers, and the hours of employment were long and the wages frequently low. Conditions in the mines were even worse than in the factories.

The new forces also revealed during this period new aspects of the phenomena of commercial crises and new phases of the operation of credit. The crises of 1810, 1826, 1837, 1839, and 1847 were results of essentially new commercial and credit conditions. The old methods of adjusting production to consumption had disappeared with the almost complete separation of the industries of agriculture and manufacturing and of the capitalist class from the labor class and with the necessity under which England found herself placed of regularly bartering her manufactures for the products of foreign agriculture. New methods had not yet evolved or been devised. The free play of competition proved to be inadequate, and the result was frequent and serious maladjustments.

A new credit system had also been evolved. Country banking, which began much earlier, developed rapidly in this period, and the note issues through which it operated became an important element in the currency of the country. Their ready acceptance and easy circulation as hand-to-hand money opened wide the door for loose banking and for an overextension of credit. The new industrial and commercial enterprises of the period offered abundant opportunity for utilizing these apparent advantages, and the result was the extension of credit to enterprises that should never have been encouraged, and of too much credit to those which deserved some, with results which were new in those days, but which have become very familiar to us of the present time. The introduction of banks of discount and the bank act of 1844 were the direct effects of the new phenomena, but further reaching and probably more important from the point of view of economic science were the discussions and the thinking for which they were responsible.

The application of steam to the industry of transportation in the form of the steamship and the locomotive was a transforming influence of the first magnitude. Its chief effects belong to subsequent periods, but some of them were experienced in this.

B. Reform Movements

These rapidly changing economic conditions were accompanied by agitation for reform, in which the economists were active and by which they were influenced. Their leader and chief inspiration in this phase of their work was Jeremy Bentham, whose life spanned the period from 1748 to 1832. His influence as a writer, thinker, and social reformer began in 1776 when he published A Fragment on Government, in which he criticized Blackstone and expressed some novel and almost revolutionary ideas about government in England. He attended Oxford University at an early age and subsequently studied law at Lincoln’s Inn; but, contrary to the desire and intention of his father, who was a solicitor of considerable means, he did not practise the profession for which he had been trained but instead devoted his long life to a study of the fundamentals of social philosophy and the reform of social institutions. His principal published writings were Introduction to the Principles of Morals and Legislation (1789), Theory of Pains and Recompense (1811), Tactics of Legislative Assemblies (1816), Treatise on Judicial Evidence (1823), and Judicial Organization and Codification (1823). The first of these was popularized by Dumont, a Frenchman, who published in 1802 his Traité de legislation civile et pénale, which seconded and greatly extended Bentham’s influence.

He attempted to demonstrate this proposition by carefully defining its key words and phrases, by analyzing and explaining their meaning, and by criticizing the two opposing principles of human conduct which he called “asceticism” and “sympathy and antipathy.” He then presented a detailed analysis and classification of pleasures and pains and a plan for their measurement, in which he prescribed, as features to be considered, their intensity, duration, certainty or uncertainty, propinquity or remoteness, fecundity (or “the chance . . . of being followed by sensations of the same kind”), and purity (“or the chance . . . of not being followed by sensations of the opposite kind”).

Bentham’s philosophy and personality made him the central figure and inspiration of a group of reformers known as the Philosophical Radicals who were very active and effective during the period here under consideration. It included James Mill and his son, John Stuart Mill, Ricardo, several members of Parliament, the prominent Whig, Sir James Mackintosh, the one-time Lord Chancellor Henry Brougham, the second Sir Robert Peel, prominent journalists, authors, and other influential persons.

These people believed that the time had come for radical reforms in the government and social life of England. In particular they held that the distribution of seats in Parliament and the right to vote for its members should be changed so as to make that body more nearly representative of different sections of the country and classes of the people; that local government should be made more independent and democratic; that criminal law and court procedure should be thoroughly overhauled in the interests of common sense and justice; that education for all the people should be provided at public expense if necessary; that the laws, which created discriminations against Catholics and Dissenters and which forbade combinations among laboring men and the corn-laws should be repealed; and that the poor laws and their administration should be changed. Bentham’s philosophy supplied a rational foundation for these and other reforms. The Philosophical Radicals did not affiliate with either of the great political parties but employed all available agencies, including the press, the platform, and societies formed especially for this, and sometimes those formed for other, purposes. They frequently joined with other groups of reformers with many and perhaps most of whose aspirations they were not in sympathy, notably with radical labor leaders and associations.

The reform legislation which characterized this period cannot, of course, be placed to the exclusive credit of this group, but that its influence was important and efficient cannot be questioned. The laws against the combination of laborers and against Catholics and Dissenters were repealed. An act passed in 1832 abolished the so-called “pocket boroughs,” diminished the number of representatives in Parliament allowed to a number of favored cities, and redistributed the vacated seats among the counties, not adequately represented, and the new cities that had sprung up or greatly increased in size since the beginning of the industrial revolution and which were entirely unrepresented. The franchise was also extended, but not nearly so much as the reformers desired. A municipal reform act was passed which substituted uniformity for the great diversity of local governments which had developed during the preceding centuries and gave the municipalities greater independence in the management of purely local affairs and a much more democratic constitution. In 1834 a new poor law was passed which substituted the workhouse for the allowance system and transferred administration from the parishes to larger units. One after another during the period, duties upon imports were abolished or lowered and in 1846 the corn-laws were repealed. In 1844 the so-called “bank act” was passed which changed the constitution of the Bank of England and the credit system of the country. A beginning in factory legislation was also made which gave some protection to the children exploited in the factories and mines. Parliament also began more liberally to provide funds for popular education and gave attention to the subjects of public hygiene and sanitation.

The influence of the events of this period upon political economy and political economists was not so direct and is not so easy to specify as was the case in the preceding one. Abstract thinking according to the method made popular by Ricardo played a larger role than ever before, but there were other and diverse influences at work. Critics, especially of some of Ricardo’s doctrines, appeared, some of them— e.g., Malthus, Richard Jones, and Nassau Senior—being in agreement on most points but taking exceptions to and insisting on modifications of others, while others—e.g., Robert Owen and radical labor leaders—were hostile to the whole system of thought Ricardo represented. The laissez-faire doctrine, which more nearly dominated the practice of this period than any preceding one, met vigorous opponents in the advocates of factory legislation, trades-unions, and other forms of social legislation. The influence of the period on political economy, however, can best be seen in the life and writings of John Stuart Mill. Before discussing that topic, however, we shall describe the dissenting ideas of the minor critics and the doctrinal modifications they proposed.

C. Malthus’s Criticism of the Ricardian Doctrine of Rent

While Malthus and Ricardo were in accord regarding some of the essential features of the explanation of rent, they differed widely on others. Malthus’s dissenting views were expressed in correspondence with Ricardo and in his Principles of Political Economy, first published in 1820 (second edition in 1836). He objected especially to the doctrine that rent is the payment for a monopoly, and to Ricardo’s analysis of the effect of improvements.

“First, and mainly, that quality of the soil by which it can be made to yield a greater quantity of the necessaries of life than is required for the maintenance of the persons employed on the land.

“Secondly, that quality peculiar to the necessaries of life, when properly distributed, of creating their own demand, or of raising up a number of demanders in proportion to the quantity of necessaries produced.

“And thirdly, the comparative scarcity of fertile land, either natural or artificial.”

Malthus uses the second circumstance mentioned above to explain why this surplus has a high value. It is because population tends to increase in proportion to the volume of necessaries available for consumption. The more necessaries, the more people, and, since people cannot live without these necessaries, a demand for them is assured. He insists that in this particular the products of the soil, food and other necessary raw materials, differ from all other products.

The third circumstance noted by Malthus in his explanation of the difference between the value of the produce of land and the costs of its production, namely, “the comparative scarcity of fertile land,” accounts for what he describes as “the necessary separation of the rent of land from the profits of the cultivator and the wages of the labourer.” It is because some lands are more fertile than others and because those of relatively high fertility are relatively scarce that rent is paid to landlords and that we need to distinguish rent from wages and profits.

On this latter point Malthus and Ricardo were in substantial agreement. They differed in the importance to be attached to the two preceding ones. The circumstances which separate rent from wages and profits, to Ricardo, were the all-important ones. It was the proportion between those three shares in the national dividend that he aimed to explain and that constituted the subject of distribution as he understood and explained it. Malthus’s objections to his use of the word monopoly in describing the landlord’s share touched a side issue rather than a vital point in his theory. In part also the differences between them concerned the meaning of the word monopoly, and the differences between land and other monopolies.

According to Ricardo, the effect of improvements is to counteract the influence of the law of diminishing returns. The immediate effect is to diminish either corn rents or money rents or both, and the ultimate effect is to prevent as rapid a rise of rents as would be liable to take place under other circumstances. Malthus denied this doctrine and maintained the opposite. According to his view, the effect of improvements is always to increase rents. His argument is based upon the general proposition that rent is the difference between the value of the produce and the cost of producing it and that improvements, if worthy of the name, diminish the cost of production. He admits that the immediate effect may be to raise profits instead of rents, but claims that competition between capitalists occasioned by such an increase would speedily bring profits down to their former level and enable the landlord to reap the benefit of the improvement.

D. Richard Jones

His investigations also led him to the conclusion that rents cannot be explained by any single principle; on the contrary, that different principles have operated at different times and under different circumstances. When the cultivators of the soil consist of peasants, who work with their own hands and a scanty capital and pay rent directly to a proprietor who is either a sovereign or a great landlord, rents are determined by custom or by the kind of contract these peasants are able to make with their landlords. These he classes as Peasant Rents. On the other hand, when capitalist farmers rent land from proprietors and hire laborers under competitive conditions and carry on the business of agriculture for the profits they can make on the employment of their capital as other capitalists conduct manufactures and commerce, rents are determined by very different principles. These he classed as Farmers Rents. Peasant Rents, which he subclassified as Labor or Serf Rents, Metayer Rents, Ryot Rents, and Cottier Rents, have been in the past and still are the most common. Farmers’ rents are exceptional, being found chiefly in England and to some extent in Holland and parts of the United States.

“Let A represent a class of land which returns only the ordinary profits of stock at 10 per cent and pays no rent. Let B, C, and D represent other portions of better land, also cultivated with a capital of £1oo, and let their produce be as follows:

A	B	C	D
£110	£115	£120	£130

All above £110 in each, will be surplus profits, or rent of which B will pay £5, C £10, and D £20. Next let the capital employed on each be doubled, without a diminished return, and without disturbing the proportion between the produce of each or altering their relative fertility, their produce will be as follows:

A	B	C	D
£220	£230	£240	£260

All above £220 in each will be surplus profit, or rent, of which B will pay £10; C £20; and D £40. That is, the rent of each will be doubled.”

It should also be noted that in the above illustration he assumed that the demand for the products of the soil keeps pace with the supply, an assumption which he considers quite as well justified as the one Ricardo made when he assumed demand stationary and argued that an increase of production under such circumstances would throw the poorest lands out of cultivation and diminish rents.

Throughout this discussion the contention of Jones is that Ricardo has erred in associating increasing rents exclusively with diminishing returns in agriculture, and that on the contrary rents may and do normally increase as a result of increasing production from a given area of land due to the application of additional units of labor and capital and to the increasing efficiency of each unit.

E. Senior’s Doctrine of Abstinence

These conceptions of labor and abstinence and of their relations to production prepared the way for some noteworthy modifications of the current theories of value, interest, and capital.

In his explanation of natural value Ricardo recognized the necessity of taking account of the fact that interest must be paid on the capital consumed in production. The substance of the capital itself he treated as stored-up or past labor which, added to the labor immediately or currently employed, constituted the total labor costs. The fact that the amount of interest normally paid on this capital is not always, and perhaps never, exactly proportional to these costs forced him to admit that goods do not naturally exchange for each other in exact proportion to their labor costs, but he considered this deviation from the labor cost principle so small as to be negligible, and in consequence he disregarded it in his reasoning on topics in which the subject of value was fundamental.

“Colonel Torrens’ error is an error of omission. He refuses to consider profit as a 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.”

A corollary of this doctrine of costs is the theory that interest is the payment made to capitalists to induce them to undergo the sacrifices of abstinence necessary to give efficiency to the labor and natural agents available for production, just as wages are the payments made to laborers to induce them to undergo the sacrifices essential to their role in production. As Senior put it in the passage quoted above (p. 26), abstinence “stands in the same relation to Profit as Labour does to Wages.” In another place (p. 43) he speaks of “the wages and profits which must be paid to induce the producers to continue their exertions.” In still another (pp. 56 and 57) he says, summarizing portions of a previous discussion, “we explained that labour cannot be efficient unless assisted by, what is the result of abstinence, capital; nor abstinence in itself efficient unless assisted by labour; that each is disagreeable and must therefore be called into exertion by the prospect of its specific remuneration; abstinence by the hope of profit, and labor by the hope of wages.”

Unfortunately Senior did not further develop the line of thought suggested in these passages. When he came to the subject of distribution, he confined his discussion to the explanation of the “relative proportions of rent, profit and wages,” developing a form of the wages-fund doctrine and making wages and profits mutually dependent. In this connection he makes no use of the sacrifices endured by either capitalists or laborers.

F. Senior’s Doctrine of Monopoly

G. The Wages-Fund Doctrine

It has already been noted in Chapters VII and IX that in the explanation of wages both Adam Smith and Ricardo made use of a demand-and-supply theory in which the former is considered as determined by a fund of wealth advanced or appropriated to the employment of labor and the latter by the number of laborers seeking employment.

According to Smith this fund of wealth consists in part of what he called revenue and in part of what he called stock, and it increases and decreases with the increase and decrease of national wealth. According to Ricardo, it consists of and fluctuates with capital.

According to Smith, the supply of labor tends to keep pace with the demand, lagging somewhat behind it in progressive countries and occasionally going beyond it in backward ones, while Ricardo, in accordance with the Malthusian doctrine of population, regarded it as regulated by the standard of life of the laboring class, which is determined by habit and custom. With Malthus he thought that, if the relation between the fund of wealth advanced to labor and the number of laborers seeking employment is such that the wages received enable laborers to consume more than they have been accustomed to enjoy, population will increase at such a rate as to bring wages down to the accustomed level; and that in the opposite case, that is, if demand and supply fix wages at a point so low that laborers cannot consume the accustomed amount, population will decline at such a rate as to bring wages back to that level. Ricardo admitted that in new countries and under exceptional conditions the wages fund might for a long time increase more rapidly than the number of laborers, but under normal conditions in old countries like England he believed that market wages tend to conform to the laborer’s standard of life, fluctuating, to be sure, now above and now below it.

According to this view, the laborer’s standard of life, or, as Ricardo called it, “natural wages,” is the important thing to consider in the discussion of that part of the problem of distribution which concerns labor, the demand and supply or wages-fund theory playing a secondary role, since it is useful only in explaining fluctuations above and below the natural level. This being the case, Ricardo might have been expected to analyze and to discuss the conditions which affect and determine the standard of life of the laboring class, and especially to consider the relation to it of market wages, but beyond the assertion that habit and custom determine it he has little to say. Neither did the question whether the wages fund is for the time being fixed and predetermined by influences independent of the conditions or actions of the laboring classes occupy his attention. On this subject Adam Smith had little to say beyond the statement that the common wages of labor are determined by a contract between laborers and their employers and that each party attempts to influence this contract by combination, the employers usually being the more skilful bargainers and, on account of their relatively small numbers, combining more easily and efficiently.

In the editions of his Political Economy published during the period now under review, Malthus gave considerable attention to these neglected points in the theory of wages, with the strange result that he elevated the demand-and-supply doctrine, and the wages-fund form of it, to the place of primary importance in the explanation of wages.

I call this result strange in the light of the fact that it was Malthus who in his essay on population laid the foundations for the standard-of-life theory, to which he now accorded a secondary role in the explanation of wages—secondary in the sense that he held that the standard of life of the laboring classes is profoundly influenced, if not chiefly determined, by their wages instead of vice versa.

“The condition of the labouring classes of society must evidently depend, partly upon the rate at which the funds for the maintenance of labour and the demand of labour are increasing; and partly, on the habits of the people in respect to their food, clothing, and lodging.

“If the habits of the people were to remain fixed, the power of marrying early, and of supporting a large family, would depend upon the rate at which funds for the maintenance of labour and the demand for labour were increasing. And if these funds were to remain fixed, the comforts of the lower classes of society would depend upon their habits, or the amount of those necessaries and conveniences, without which they would not consent to keep up their numbers to the required point.

“It rarely happens, however, that either of them remains fixed for any great length of time together. The rate at which the funds for the maintenance of labour increase, is, we well know, liable, under varying circumstances, to great variation; and the habits of the people, though not so liable, or so necessarily subject to change, can scarcely ever be considered as permanent. In general their tendency is to change together. When the funds for the maintenance of labour are rapidly increasing, and the labourer commands a large portion of necessaries, it is to be expected that if he has the opportunity of exchanging his superfluous food for conveniences and comforts, he will acquire a taste for these conveniences and his habits will be formed accordingly. On the other hand, it generally happens that, when the funds for the maintenance of labour become nearly stationary, such habits, if they ever have existed, are found to give way; and, before the population comes to a stop, the standard of comfort is essentially lowered” (italics mine).

“From high real wages, or the power of commanding a large portion of the necessaries of life, two very different results may follow; one, that of a rapid increase of population, in which case the high wages are chiefly spent in the maintenance of large and frequent families; and the other, that of a decided improvement in the modes of subsistence, and the conveniences and comforts enjoyed, without a proportionate acceleration in the rate of increase.

“In looking to these different results, the causes of them will evidently appear to be the different habits existing among the people of different countries and at different times. In an inquiry into the causes of these different habits, we shall generally be able to trace those which, in old countries, produce the first result, to all the circumstances which contribute to depress the lower classes of the people, which make them unable or unwilling to reason from the past to the future, and ready to acquiesce, for the sake of present gratification, in a very low standard of comfort and respectability; and those which produce the second result, to all the circumstances which tend to elevate the character of the lower classes of society, which make them act as beings who look before and after, and who con-sequendy cannot acquiesce patiently in the thought of depriving themselves and their children of the means of being respectable, virtuous and happy.

“Among the circumstances which contribute to the character first described, the most efficient will be found to be despotism, oppression, and ignorance: among those which contribute to the latter character, civil and political liberty, and education.”

“It has been generally considered, that the demand for labour is proportioned to the circulating, not to the fixed capital of a country. But in reality the demand for labour is not proportioned to the increase of capital in any shape; nor even, as I once thought, to the increase of the exchangeable value of the whole annual produce. It is proportioned only, as above stated, to the rate of increase in the quantity and value of those funds which are actually employed in the maintenance of labour.”

Upon the underlying, determining causes of “the quantity and value” of these funds Malthus throws little or no light; neither does he indicate except by implication to what extent he considers them predetermined and beyond the influence and control of the laboring class itself.

“The capacity of a country to support and employ labourers is not measured by advantageousness of situation, richness of soil, or extent of territory. These undoubtedly, are circumstances of very great importance, and have a powerful influence over the rate at which a people advances, or may advance, in refinement and civilization. But it is not on them, but on the amount of its capital applicable to the employment of labour, and on the disposition of the owners of capital so to apply it, that the capacity of a country to support work-people at any given period, and the amount of their wages, wholly depends. A fertile soil may be made to add rapidly to the means of subsistence; but that is all. Before it can be cultivated, capital must be provided for the support of the labourers employed upon it, as it must be provided for the support of those engaged in manufacturing, or other departments of industry.”

“It is further evident, that the quantity of produce apportioned to each labourer, or his wages rated in commodities, is determined by the ratio which the capital of the country bears to its labouring population. When, on the one hand, capital is increased without an equivalent increase of population, the portions of it that go to individuals, or their wages, are necessarily augmented; and when, on the other hand, population happens to increase more rapidly than capital, the latter having to be distributed among a greater number of persons, their wages or shares are proportionately reduced.”

“A capitalist cannot increase his own stock without, at the same time, and to the same extent, increasing the wealth or the means of subsistence, of the working classes.”

“All the capital is sure, through the higgling of the market, to be equitably divided among all the labourers; and with every increase of the former, as compared with the latter, wages will necessarily rise.”

“It [the price of labor] depends on the number of labourers seeking employment, compared with the capital or fund which is to pay their wages, and is independent alike of the schemes and combinations of the buyers and those of the sellers.”

“No proposition can be better established than that the rate of wages, at any given moment, is determined by the proportion between capital and population.”

H. The Use Theory of Interest

“ ‘Technical processes are able,’ throughout all the change and combination of the usefulness of goods, to preserve the sum of their exchange values undiminished, so that goods, although successively taking on new shapes, still continue unchanged in value. Iron ore, coal, labor, obtain, in the form of pig-iron, a combined usefulness to which they all three contribute chemical and mechanical elements. If, then, the pig-iron possesses the exchange value of the three exchange goods employed, the earlier sum of goods persists, bound up qualitatively in the new usefulness, added together quantitatively in the exchange value.

“ ‘To goods that are of transitory material, technical processes, through this change of form, add economical durability and permanence. This persistence of usefulness and of exchange value which is given to goods otherwise transitory by technical change of form, is of the greatest economical importance. The amount of durable, useful goods becomes thereby very much greater. Even goods of perishable material and of only temporary use, by constantly changing their shapes while retaining their exchange value, become recreated so that their use becomes lasting. Thus, as it is in the case of durable goods, so it is in the case of goods changing their form qualitatively, while retaining their exchange value; this use may be conceived of as a good in itself, as a use [Nutzung] which may itself obtain exchange value.’ ”

Being economic goods, these uses of capital have exchange value, are actually bought and sold on the market, and the proceeds constitute the income which accrues to the owners of capital, or interest, so runs Hermann’s argument.

Footnotes

1 Except as indicated otherwise, all quotations are from, and references are to, the two-volume edition of W. Pickering, published in 1823 in London.

2 Ibid., II. 1 and 2.

3 Pickcring, ed., op. cit., I, 4.

4 Raffolovich, Bentham (Petite Bibliothèque Économique), p. 45.

5 Political Economy, 2d ed., p. 140.

6 Ibid., p. 141.

7 Political Economy, 2d ed., p. 196.

8 Ibid., Ch. III., sec. VIII.

9 After Jones’s death the Reverend William Whewell, D.D., edited the existing manuscripts, and these were published in London in 1859 under the title Literary Remains Consisting of Lectures and Tracts on Political Economy of the Late Rev. Richard Jones. These cover in part the field of distribution.

10 Rev. Richard Jones, An Essay on the Distribution of Wealth and on the Sources of Taxation (London, 1831), p. II.

11 Jones, op. cit., p. 188.

12 Ibid., pp. 189 and 190.

13 Ibid., p. 204.

14 Ibid., p. 202.

15 Ibid., pp. 199 and 200.

16 Jones, op. cit., p. 237.

17 Ibid., pp. 245 and 246.

18 Ibid., pp. 248-255.

19 Ibid., p. 288.

20 For a list of his publications, see Handwörterbuch der Staatswissenschajten, Vol. V.

21 Political Economy (reprinted from the second revised edition of the Encyclopædia Metropolitana), p. 58.

22 Political Economy.

23 Ibid., p. 57.

24 Ibid., p. 58.

25 Ibid., p. 59.

26 Ibid.

27 See James Mill’s Elements of Political Economy, 3d ed., pp. 103 and 104, and Torrens’s An Essay on the Production of Wealth, p. 54.

28 Op. cit., p. 100.

29 Op. cit., p. 101.

30 Ibid., pp. 102 and 103.

31 Ibid., p. 111.

32 Ibid., p. 102.

33 Op. cit., pp. 114 and 115.

34 Ibid., p. 103.

35 Op. cit., pp. 223 and 224.

36 Ibid., pp. 224 and 225.

37 Ibid., p. 226.

38 Op. cit., p. 234.

39 Op. cit., p. 44.

40 Ibid., p. 59.

41 The first edition, which was a reprint of an article contributed to the Supplement of the Encyclopedia Britannica, appeared in 1825. The fifth edition, from which we quote, was published in 1864.

42 Ibid., pp. 316, 318, 319, 320, and 326.

43 Op. cit., p. 324.

44 Ibid., p. 330.

45 Political Economy, pp. 153 and 154.

46 Ibid., p. 174.

47 See Eugene v. Böhm-Bawerk, Capital and Interest, translated with preface and analysis by William Smart (London: Macmillan & Co., Ltd., 1890), Bk. III.

48 Nebanius, Carl Mario, Hermann.

49 Quoted by Böhm-Bawerk, op. cit., p. 195.

• 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.”
• 36Ricardo’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.”
• 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.”
• 39The 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.”
• 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.”
• 41According 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.”
• 42In 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 :
• 43In 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).
• 44The 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 :
• 45Having 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:
• 46Under 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:
• 47Ricardo 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.”
• 48According 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.”
• 49A variation from, and offshoot of, the productivity theory of interest has been named the use theory, its exponents distinguishing between the sale of the use of capital and of its substance, and identifying the value of the former with interest. Say’s use of the conception productive services of capital was so loose that it is difficult, and perhaps impossible, to determine whether he intended to distinguish between them and the consumption of the substance of the capital itself, and accordingly Böhm-Bawerk classified him among the use as well as the productivity theorists. The principal exponents of this theory, however, were Germans who differentiated between the uses and the substance of capital. In the case of durable goods the making of this distinction is a simple and easy matter. A horse, for example, may be sold outright or its services may be sold separately, as is the case when a liveryman lets it for hire. The same distinction is made every day in the case of a large number of durable goods. It is not so easy to make the distinction, however, in the case of perishable goods or of those capable only of a single use. What, for example, is the distinction between the use of the pig-iron used in the manufacture of steel and the consumption of the pig iron itself? Hermann attempted to point out this distinction in the following manner: