The Development of Economics

CHAPTER XVIII

CONDITION OF THE SCIENCE IN THE EARLY SEVENTIES

A. John E. Cairnes

To remedy this condition, John Elliot Cairnes, professor of Political economy from 1856 to 1859 in Dublin and later in Queen’s College, Galway, and from 1866 to the time of his death in 1875 at University College, London, undertook the defense of the classical system in a series of lectures delivered in Dublin in 1857 and subsequently published in book form under the title The Character and Logical Method of Political Economy.

Cairnes carefully analyzed the doctrine that cost of production is the regulator or determinant of natural or normal value, with the result of limiting the scope of its application to a much narrower field than had been assigned to it by Ricardo and Mill and of measuring it by the sum total of the sacrifices, rather than of the expenses, of production. The fundamental premise of the reasoning by which he arrived at these conclusions is that cost of production determines normal value only in cases in which competition operates perfectly, that is, in cases in which capital and labor can and do move freely from points of lower to those of higher returns. Whenever there are obstacles to such movements, the doctrine either does not hold at all or holds only imperfectly.

The second part of his book, entitled “Labor and Capital,” is devoted to a defense of the wages-fund doctrine, which had been severely criticized and which Mill had abandoned. The third, entitled “International Trade,” gives an exposition of the conditions of international trade and of the theory of international values, following with some emendations Ricardo in the first case and Mill in the second. In the second part he also expressed his views regarding the effects of labor-unions on wages, and in the third he criticized the arguments of the advocates of protection.

B. The Wages-Fund Controversy

This controversy was primarily due to the activities of trades-unions, which raised the question of their ability to raise wages through strikes and other forcible means. According to the current doctrine, the general level of wages was said to be determined by a predetermined fund of capital divided by the number of laborers and consequently to be impossible of change by trades-union or similar tactics. It was held that the wages of particular groups of laborers might be raised by trades-union pressure, but only at the expense of other groups, the real effect of the unions in such cases being to divert a portion of the wages fund from certain groups to others without raising the general level of wages.

The critics attacked the reasoning employed in support of this doctrine, especially the proposition that there is a fixed and predetermined fund devoted to the payment of wages which cannot be increased by pressure exerted by the laboring classes or other agencies. The argument consisted in part of an attempt to show that there is no such fund in the possession of individual capitalists and consequently none in the possession of the entire capitalist class. The chief source of wage payments, it was contended, is not previously accumulated capital but the proceeds of the sale of the products of labor, the portion of these proceeds to be paid out as wages not being predetermined but influenced by a variety of conditions, among them the bargaining power of laborers and the power of entrepreneurs to divert funds at their disposal from productive to unproductive uses.

In attacking the demand-and-supply doctrine Thornton’s procedure consisted in citing instances or examples in which the relations, as ordinarily explained, between demand and supply change without causing a change in price and in which price changes without a corresponding change in the relations between demand and supply, and in showing that these instances represent actual conditions more frequently than those in which the law of supply and demand as usually expounded holds. Ordinarily, he held, goods are not thrown unreservedly on the market, as the theory demands, but are sold over a considerable period of time at different prices until the supply is disposed of—at no time, except possibly at the very end of the process, supply and demand and price being in the relation to each other required by the theory. He showed that prospective supply and demand, which cannot be accurately estimated, and the fear of competition play an important role in the price-determining process and that these forces cannot be brought into the demand-and-supply formula.

Regarding the difference between the manner in which the price-determining forces operate in the case of commodities in general and in the case of labor, Thornton notes some peculiarities of labor, namely, that it “is almost always offered for sale without reservation of price” while “other commodities never or scarcely ever are”; that it “will not keep”; and that it is at a disadvantage in bargaining.

C. Vulnerable Points in the Chief Doctrines of the Classical School

In spite of the efforts of Cairnes and others to restate and correct the doctrines of the classical economists, there still remained vulnerable points and open questions which challenged subsequent theorists and which help to explain their attempts to reconstruct the science. One of them is revealed in the form in which they left the subject of value.

1. The Doctrine of Value.

In the treatment of this subject they built upon foundations laid by their predecessors, fully developing certain lines of thought and neglecting others.

They confined their attention almost exclusively to the problem of exchange value, following the lead of Adam Smith, who, while recognizing the existence of what he called use value, did not give it extended consideration because he failed to see its connection with the other problem. The fact which he observed that water, a commodity of the greatest utility, was practically valueless, while a diamond of small utility was very valuable, convinced him that the explanation of value must be sought elsewhere than in utility. The other members of the school shared this conviction and employed the conception of utility in the explanation of value only to the extent of recognizing it as one of the qualities which all valuable goods must possess, another being limitation of quantity in respect to need.

In the realm of exchange value, like their predecessors, the classical economists were chiefly interested in fluctuations in ratios rather than in their status at any particular point of time, and among these fluctuations they distinguished those which are temporary from long-time movements, describing the former as market and the latter as natural or normal prices. Regarding the relative importance of these two categories of fluctuations, a difference of emphasis is noticeable among the different writers, but practically all of them centered interest and thought in natural or normal value, using the doctrines developed in its explanation as the basis of other fundamental doctrines in their system of thought.

An explanation of this fact is to be found in the conviction that natural or normal value is the point at which the value-creating forces are in a state of equilibrium, market prices exhibiting a tendency to approach this point whether at a given moment they be above or below it. Normal value seems therefore to attract or to draw market values toward itself and to reflect the operation of forces that are fundamental and permanent rather than accidental and temporary.

The classical economists agreed that the explanation of natural or normal value should be sought in the cost of production, but they were not in complete agreement regarding what should be included under that head. Indeed, an interesting progression of ideas on this subject is observable during the classical period. With Adam Smith, Ricardo, and all the earlier writers, cost of production was thought of in terms of days’ labor directly and indirectly expended, but they recognized that profits must in some way be included, and Adam Smith also included the rent of land. After Ricardo rents were omitted, since it was cost of production on no-rent, marginal land that was believed to determine natural value. Ricardo also held that profits need to be considered only to the extent that they are not proportional to the amounts of labor expended. According to his view, the use of a given volume of capital goods, produced by say 1,000 days’ labor, in the case of one commodity might be extended over a period of one month and in that of another over a period of two months, in which case two months’ interest would have to be included in the cost of production of the second and only one month’s in that of the first, so that to this extent the ratio of exchange between the two commodities would vary slightly from the proportions between the amounts of labor expended on the two commodities. Variations from the labor-cost principle due to this cause, however, Ricardo considered to be relatively small and therefore practically negligible. Ricardo also excepted from the labor-cost principle all goods not freely reproducible, such as the pictures of a dead artist, rare coins, etc., but he did not consider this exception of sufficient importance to prevent his use of the labor-cost principle in his reasoning in the field of distribution and elsewhere.

Ricardo’s method of treating the relation of profits to value was unsatisfactory. It was a recognition of the problem without any attempt to solve it. Others wrestled with it but with results little, if any, better. One attempt at solution took the form of a definition of costs in terms of the outlays or money expenses of the entrepreneur. Ricardo had reckoned costs in terms of the amount of common or ordinary labor expended, measured in days or hours, and had held that changes in wages could affect ratios of exchange only to the extent that they were greater in some industries than in others. According to the theory now under consideration, the amount paid to labor in wages or the money costs of labor to the entrepreneur plus all other necessary outlays, such as the money paid out for raw materials, wear and tear of machinery and buildings, taxes, and interest on the capital employed, constitute the costs which determine natural values.

In this theory two major difficulties are apparent. One is that it merely explains the costs of one good in terms of the value of other goods and of labor, and hence offers no real solution. The problem now becomes that of explaining wages and the value of the various cost-goods employed and interest, another value problem like the first.

The second difficulty arises from the inclusion of the entrepreneur’s own profits among his outlays. Torrens called attention to this and insisted that profits could not be counted as a cost of production, but as a surplus above costs which, however, obviously must be included in normal values. He made the claim that this surplus was created by the entrepreneur himself but failed to explain how and in what way it becomes a necessary element of value.

Another attempt to solve this problem was made by Senior and others who explained costs in terms of sacrifice. These persons declared that the sacrifices put forth by laborers, plus the sacrifices of abstinence, risk, and all others involved in production, determine natural value. This explanation had the advantage of making the elements of costs homogeneous and of being ultimate. The sacrifices of production are a fact back of which it is not necessary to go for a real, final explanation, but is it true that commodities tend in the long run to exchange for each other in proportion to the sacrifices involved in their production? Do the facts of the case support this explanation?

The facts seem to support the entrepreneur’s costs theory and, if this went to the root of the matter, it would be satisfactory; but, as we have seen, it does not go to the root of the matter. It simply explains the value of one thing in terms of the value of others. The sacrifice theory is offered as a substitute because it goes to the root of the matter, but the sacrifices of production do not correspond with the money costs of the entrepreneur. The wages of labor are not proportional to the sacrifices of labor and do not increase and decrease with those sacrifices, nor does the profits element of costs correspond with the sacrifices of abstinence.

The classical economists conceived of market values as variations from or fluctuations above and below natural values and explained them by the formula of demand and supply inherited from their predecessors. Some of them used the formula with more precision than others, but no one of them analyzed the forces back of demand and supply in such a manner as to reveal ultimate causes. These they sought in natural value, apparently not realizing that there was anything to be explained in market values except fluctuations about this norm.

Demand and supply were commonly explained as the quantities of a good respectively bid for and offered on the market. If these quantities are not identical, fluctuations in the exchange ratio take place, upward in case the amount bid exceeds the amount offered and downward in the opposite case. Some price was always assumed at which the bids and offers are made, and it was recognized that changes in this price would modify both the amounts bid and the amounts offered, the former increasing and the latter decreasing with a fall in the price and the opposite with a rise in the price. Thus was established a mutual interdependence between demand, supply, and market value without any real explanation of any one of them. It was recognized that an equation of demand and supply might be effected at many points above or below the natural price, but no one of the classical economists offered an explanation of what determined the price at which these various equilibria are established. The nearest approximation to such an explanation was the claim of Malthus and others that intensity of demand, whatever that might mean, had something to do with the matter, but how that could and did determine a price was not shown.

Demand and supply, thus imperfectly explained, were also relied upon by the classical economists for the explanation of the value of all goods not freely reproducible, including partially or wholly monopolized goods, and Senior had shown that most goods fall in this class. In the later classical period the doctrine of demand and supply thus assumed relatively greater importance, but this change of emphasis was not adequately reflected in other fields, notably in that of distribution.

2 . The Theory of Distribution.

In the explanation of the distribution of wealth the Ricardian doctrine had no competitors among the classical economists. Some additions to and slight modifications of his reasoning were made, but the main features of the theory remained unchallenged in the school itself. It was the classical doctrine par excellence.

The onslaughts made upon this doctrine by various groups of critics have been indicated in preceding chapters. There remain for consideration certain defects of a different character which were not without influence on the developments of the future.

One of these was the failure to recognize the entrepreneur as an independent claimant to a share in distribution, of coordinate and equal rank with the laborer, the capitalist, and the landlord. Profits in the Ricardian doctrine were clearly a composite, the elements of which needed to be distinguished and explained. John Stuart Mill made a beginning in this direction, but much more was needed to meet the demands of a satisfactory explanation.

A solid foundation was not laid by the classical economists for the doctrine of no-rent land so fundamental in the Ricardian theory. On the assumption of the existence of free land, readily available, the doctrine was easily defensible, but this assumption is tenable only at relatively early stages in the history of nations. The time is bound to come when all land will be appropriated. Will there then be no-rent lands? The classical economists answered, Yes. When the lands are once rented, the tenants will apply to their cultivation capital and labor in such quantities that the last doses will just repay wages and interest. But what will happen when the leases expire? What will prevent the landlords from then raising the rents? The capitalists and laborers cannot prevent them by using the club of free land. They must have the landlord’s land, a condition of things which prevents the competition between landlords essential to the working out of the no-rent doctrine. Thus leaving the no-rent doctrine in the air, so to speak, opened to attack the entire Ricardian theory of distribution.

The standard-of-life doctrine of wages was also one of the essentials of the Ricardian theory of distribution, but it was defective in that no adequate explanation of the determining factors in the standard of life itself was offered. Assuming the standard of life to be that quantity of necessaries, comforts, and luxuries to which the laborer has become so accustomed that any change in it affects his “population habits,” it may be urged that his wages over a long period of time determine that quantity and that a change in wages extending over a considerable period changes his standard. What needs explanation then is wages, the standard of life depending upon them instead of vice versa.

The state in which the wages-fund doctrine was left by the critics has already been indicated. Mill abandoned it without supplying a substitute, and both market and natural wages were thus left in the air, so to speak, without satisfactory explanation.

The most important additions to the Ricardian theory of distribution made by other economists in England and elsewhere were the explanations of interest they offered. Ricardo treated interest under the head of profits as a residual share after the deduction of rent and wages and offered no other explanation of it. The explanations offered by others have been classified by Böhm-Bawerk as productivity, use, abstinence, exploitation, and labor theories.

According to the productivity theory, interest is explained as the result of the productivity of capital, which is regarded as a factor in production coordinate with nature and labor. It is, so to speak, the wages of capital and is paid from wealth which capital itself creates. Adam Smith, and possibly Ricardo and others, held that what was paid to the capitalist was the product of labor and natural agents, deducted after society had become organized on the basis of the division of labor, a product all of which labor received in that primitive state which preceded such organization. The idea that capital actually produces wealth in the same sense that labor and nature do was a clear addition to the Smith-Ricardo doctrine.

The difficulty with the productivity theory was the failure of its advocates to appreciate the fact that interest is a problem of surplus value. To explain it one must account for the fact that the product of capital is valued more highly than the capital itself, interest being the difference between these two valuations. Merely to demonstrate that capital is productive is not enough. The question is, Why should the product of capital, whatever it is, be valued uniformly more highly than the capital goods which enter into it? This question was not answered by any member of the classical school.

According to the use theory, interest is explained as the payment for the uses of capital, these being conceived as objects of valuation, in addition to and independent of the substance of the capital itself.

The difficulty with this theory consists in the impossibility of demonstrating the existence of these independent uses. The fact is that the use of capital is simply and only the consumption of the substance of the capital itself, and the valuation of those uses is simply and only the valuation of the capital itself. The surplus value which constitutes interest thus remains unexplained.

The abstinence theory of interest is an offshoot of the sacrifice theory of value, the sacrifice of labor accounting for the value of the substance of capital and that of abstinence for interest. As compared with the productivity and use theories, this one has the merit of being a substantial explanation which does not vanish before an analysis of the substance of the theory itself. There is such a thing as abstinence, and it is a sacrifice different from that of labor, but does it account for interest?

The only support this explanation of interest has is supplied by the sacrifice theory of value, and that theory, in the form in which it was presented by the classical economists, was early seen not to be in accord with facts. As we shall show in subsequent chapters, the sacrifice theory has been revived in a modified form, and with it the abstinence theory of interest, but the classical form of this theory fell with the theory of value on which it was based.

The exploitation theory of interest was the one offered by the Socialists, who regarded labor as the only value-creating force and the capitalist as not only a non-producer but an exploiter whose income is taken from labor by force and without any justification in morals or economics. This theory was, of course, repudiated by all opponents of socialism and never had any standing outside of the Socialists’ ranks. It has no theoretical basis except the labor theory of value which, as we have seen, was the first of the value theories to be undermined and cast on the rubbish heap.

Some suggestions were made during the classical period looking toward the explanation of interest as the wages of a special kind of labor performed by capitalists. The indirect labor involved in the production of the substance of capital itself was referred to by nearly all the classical economists in connection with their discussions of value, but few of them associated it with the explanation of interest. To this rule, however, James Mill was an exception. He seemed to think that interest might be regarded as a kind of wage for this labor, but he completely failed to show how this labor could produce an addition to the value of the capital itself, that is, the surplus value which constitutes interest.

Courcelle-Seneuil and other Frenchmen spoke of the effort of intellect and will involved in the accumulation and conservation of capital as a special kind of labor performed by capitalists, the payment for which constitutes interest, but it is obvious that this labor is only another name for abstinence and that this explanation is simply a form of the abstinence theory. Another form of this theory was later developed in Germany, but it belongs to the post-classical period and need not, therefore, be considered here.

3. The Doctrine of Capital.

The classical economists also left the important subject of capital in a state of considerable confusion. They inherited this concept from the Physiocrats, who had handed on in a modified form a still earlier one. Originally the word meant a sum of money loaned and was used to distinguish that sum from the interest that was paid for it. During the discussions of the middle ages and early modern times regarding the legitimacy of interest on loans, the word came to be applied to the goods purchased by means of the money loaned as well as to the money itself, it being observed that it was the productivity or other profitable uses of these goods that justify interest. Turgot broadened the conception still more by applying it to the entire stock of saved or accumulated goods.

Adam Smith observed that Turgot’s conception was too broad, since it included goods destined for immediate consumption only as well as those which were to be used as the basis of income or interest. He, therefore, proposed to confine the use of the term to the latter group and within that group to distinguish a still narrower one, namely, those goods which serve the nation as a means of acquiring other goods. This latter group consists exclusively of goods used in production, since a nation can get income from goods in no other way. Individuals, of course, may get an income from certain forms of consumers’ goods, such as houses, masquerade dresses, furniture, etc., by loaning them to other individuals who use them as consumers’ goods. Smith thus excluded from the category of capital consumers’ goods not used by individuals through the loan process as a means of acquiring income, but included consumers’ goods which were so used as well as all producers’ goods, which he recognized as a separate subclass since they had the distinction of being both a means of production and a means of income to the nation.

It is noteworthy that Adam Smith tied together by the name capital two categories of goods possessing very different characteristics, namely, loaned consumers’ goods and producers’ goods, because of the accidental circumstance that both serve as the means of acquiring in come, notwithstanding the fact that the process by which the one category accomplishes this result is very different from that of the other, namely, by being loaned in the one case and by being produced in the other.

The term capital continued throughout the classical period to be used in the two senses suggested by Adam Smith. In discussions of the subject of distribution it meant the basis of interest or that for which interest is paid, and in discussions of production it meant goods which were used in the production of other goods or as a factor of production, coordinate with nature and labor. It was customary to pass unconsciously from the one use of the term to the other, often with confusing results, notably when the productivity of capital was assigned as the cause and explanation of interest, the fact that interest is paid for that category of capital which is not productive, as well as for that which is being forgotten or at least neglected.

In the solution of the problems associated with capital, conceived either as a factor of production or as a source of income, the classical economists made little more than a beginning. They were agreed that capital owes its existence to saving, and this doctrine has persisted without essential modification, but they were not all agreed regarding the manner in which capital produces. Adam Smith’s idea that it does so by “setting labor in motion” was accepted by all and bore fruit in the form of Mill’s propositions that industry is limited by capital and that demand for commodities is not a demand for labor and in the wages-fund doctrine, but Smith’s idea was supplemented by the idea advanced by Lord Lauderdale, Colonel Torrens, and others that it also supplants labor and performs work which labor cannot perform, that is, that it is an independent production agent, working side by side, with, and not simply through, labor. The facts that neither of these ideas applies in the same degree and perhaps in no degree to all capital goods and that each one characterizes different categories of goods and the consequent danger of using either one in reasoning about capital conceived as a factor in production were not fully appreciated.

The crude and undeveloped form of the various doctrines associated with the capital concept is indicated by Mill’s four propositions. That industry is limited by capital is, of course, true in a sense, but it is no more true than that industry is limited by labor and by natural resources. It is not a proposition which one can safely make a fundamental premise in reasoning. The same may be said of the proposition that a demand for commodities is not a demand for labor. That capital is the result of saving is the only one of the four which embodies a fundamental truth. The proposition that capital, though saved, is nevertheless consumed is a paradoxical statement of the simple fact that capital goods enter as elements into other capital goods or into final consumption goods, but it contains no doctrine of significance.

4. The Doctrine of Progress.

Probably the most important deduction made from the classical doctrine of distribution was that in a progressive community, that is, one in which population and capital continually increase and improvements in the technique and methods of agriculture, industry, and commerce continually take place, rents continually rise and profits continually fall, and wages remain stationary. Mill carried this process of deduction to the point of showing that progress of this kind must ultimately slow down almost to a vanishing point, since profits must ultimately reach an irreducible minimum at which point capital and population will cease to increase except to the very slight extent rendered possible by improvements in technique and methods, by the emigration of capital and labor to other countries, and by crises. Mill attempted to remove the pessimistic sting from this conclusion by arguing that such a state was to be desired, provided, before it be attained, the standard of life of the masses of people be raised to a point at which the necessities and some of the comforts and luxuries of life would be guaranteed them.

These important conclusions were deduced from Ricardo’s simple theory of distribution, and grave doubt was thrown upon them by the modifications and additions to that theory which were made during the classical period and which have been described in the pages immediately preceding. If the capitalist is not to be regarded as the residual claimant in distribution, and if interest is to be explained in accordance with the productivity, the use, or the abstinence theory, if there is or may be rent on marginal lands, if value is not to be explained by cost of production in any of the senses in which that term was used by the classical economists, if the standard of life is the result and not the determinant of wages, the reasoning back of the classical doctrine of progress does not hold and the entire question of the effects of progress upon distribution is open for reconsideration. Either the classical doctrine had to be abandoned or a new basis for it had to be found.

D. The Controversy over Method

The Nationalists and the Old Historical School raised the question of the methods appropriate to the social sciences and in particular to political economy. They charged the classical economists, especially Ricardo and his followers, with the almost exclusive use of deduction from a priori premises. They recommended in contrast the inductive method, in accordance with which conclusions are reached by generalizations from the facts of experience. A discussion over methods ensued which continued into and characterized the early part of the period now under consideration.

E. Money, Credit, and Prices

The phenomena of money, credit, and prices played a secondary role in the philosophy of the classical economists in the sense that their basic theories were developed either entirely without reference to these phenomena or with reference to them as modifying influences only.

The characteristic features of the treatment of these subjects by the classical economists may be summarized under the heads of the functions and value of money and the relation of credit and banking to money and prices.

1. The Functions of Money.

2. The Value of Money.

The classical economists explained the value of money in the same manner as that of other commodities. Ricardo and Mill distinguished between its temporary value, which they explained by demand and supply, and its long-run value (or permanent or average or natural value, all these terms being employed), which they explained by cost of production. In their application to money, however, the terms demand and supply received a special explanation, namely, that usually described nowadays as the quantity or quantitative theory.

(a) The value of money, by which is meant its purchasing power, “is inversely as general prices; falling as they rise and rising as they fall.” Its explanation is, therefore, concerned “with the causes that operate upon all goods whatsoever,” while that of the value of other commodities is concerned “with causes which act upon particular commodities, apart from the rest.”

(b) Its value as thus defined depends, Mill said, upon demand and supply, supply being “the quantity of it which people are wanting to lay out; that is, all the money they have in their possession, except what they are hoarding, or at least keeping by them as a reserve for future contingencies—in short the money in circulation at the time” and demand consisting “of all the goods offered for sale.” Mill adds that “the demand for money differs from the demand for other things in this, that it is limited only by means of the purchaser. The demand for other things is for so much and no more; but there is always a demand for as much money as can be got.” As a consequence of this difference, changes in the quantity of money affect its value “exactly in proportion” to the amount of the change, whereas in the case of other commodities, “the desire being for the thing itself, may be stronger or weaker; and the amount of what people are willing to expend upon it, being in any case limited in quantity, may be affected in very unequal degrees by difficulty or facility of attainment.” Mill summarized his doctrine in the statement that “as the whole of the goods in the market compose the demand for money, so the whole of the money constitutes the demand for goods. . . . They are reciprocally supply and demand to one another.”

(c) Both supply and demand in the case of money are affected by “rapidity of circulation.” “Each pound or dollar must be counted for as many pounds or dollars, as the number of times it changes hands in order to effect this object,” i.e., the exchange of the goods offered for sale, and “the greater part of the goods must also be counted more than once.” Mill insists that rapidity of circulation of money does not mean the number of times money changes hands in a given period of time, but the number of times it changes hands in order to perform “a given amount of traffic.” “We must compare the number of purchases made by money in a given time,” he said, “not with the time itself, but with the goods sold in that time.”

Mill’s final statement of the quantitative law is: “The amount of goods and of transactions being the same, the value of money is inversely as its quantity multiplied by what is called the rapidity of circulation.”

(d) He noted the following qualifications of this law:

First, it applies “only to the state of things in which money, that is, gold or silver, is the exclusive instrument of exchange and actually passes from hand to hand at every purchase, credit in any of its shapes being unknown.” “Where credit comes into play as a means of purchasing, distinct from money in hand . . . the connection between prices and the amount of the circulating medium is much less direct and intimate, and . . . such connection as does exist no longer admits of so simple a mode of expression.”

Second, only that quantity of money affects prices that is offered in exchange for commodities; that offered for the purchase of securities, for example, or used in speculative transactions may not affect the market for commodities. The same may be said of temporary increases in the supply of currency to meet seasonal needs.

3. Credit.

The classical economists usually discussed credit in connection with the subjects of paper money and banking. Adam Smith noted the saving in the expense required for the maintenance of the capital fund of society which is effected by the substitution for coin of bank-notes, bills of exchange, and the “cash accounts” of the Scotch banks, but, except by implication, he did not note the relation between credit and prices. As indicated in the preceding paragraphs, “Ricardo held not only that credit instruments, especially bank-notes, might be substituted for coin in the circulating medium, but that their value depends upon the quantity in circulation and, when not redeemable in coin on demand, is quite independent of the value of the metallic standard referred to in the figures indicating their denominations. He held that they may, therefore, become themselves standards of value and primary factors in the determination of prices.

“The amount of purchasing power which a person can exercise, is composed of all the money in his possession or due to him, and of all his credit. For exercising the whole of this power he finds a sufficient motive only under peculiar circumstances; but he always possesses it; and the portion of it which he at any time does exercise, is the measure of the effect which he produced on price.”

4. Vulnerable Points.

In this branch of the science as in others the arguments of the classical economists were not always impregnable or complete. On the following points they required supplementing or modification or both:

(a) Without adequate argument or historical backing they assumed that the standard-of-value function is a derivative from the medium-of-exchange function and that the standard of value affects prices only as it influences the quantity of the circulating medium. The query arises, Why may not a standard of value exist quite independently of a medium of exchange and become the measure of values by being purchased by all the members of a community for consumption or other purposes without being used as a medium of exchange or before being so used and as a condition of being so used? Is there not considerable historical evidence of such independent existence of value standards and measures, for example, in Homer’s account of the practice of the ancient Greeks in expressing values in terms of cattle? In that case prices are determined by a direct comparison of the commodity value of the standard commodity for consumption and other non-monetary uses with the value for the same purposes of other commodities without the intervention or even the use of a medium of exchange. If that were the case in primitive communities and before there was such a thing as a medium of exchange, may it not also be true after the development of a medium of exchange, and, if not, why not? Surely the assumption from which the classical economists made their deduction is not axiomatic and must either be adequately supported by arguments or facts or both or be abandoned.

(b) Their attempt to use the demand-and-supply doctrine in the explanation of the value of money was not altogether successful. Mill gave precision to this doctrine by showing that demand and supply can only be compared quantitatively when they mean the amounts of a particular commodity that will be purchased and offered for sale respectively at a given price and that these amounts are functions of this price, changing whenever it changes. In making application of this doctrine to money he substituted for a particular commodity, on the demand side, all the commodities not only on a particular market but on all markets and, on the supply side, all of the coin, bank-notes, etc., in circulation on all markets; that is, contrary to the requirements of his doctrine, in the case of money he expressed demand and supply quantitatively not in terms of the same commodity but of different commodities, and left entirely out of consideration bids and offers at a given price and the conditions necessary for effective competition, namely buyers or sellers bidding against each other in order to secure the quantity they want of a particular commodity or to get rid of the quantity they have of that same commodity. Do buyers of different commodities on all the markets of a country compete with each other and do possessors of money on all these markets compete with each other in the sense in which the term competition is used in the reasoning employed in support of the demand-and-supply doctrine? The proposition that they do so compete is certainly not axiomatic, but requires the support of either argument or facts or both. These the classical economists failed to supply.

Mill’s distinction between the demand for money and for other things on the ground that the former is limited only by the totality of one’s “means” and the latter by the desire for a particular commodity is also questionable, being based apparently upon the confusion of money with purchasing power. Do people demand more coin, bank-notes, etc., than they require for making purchases from time to time? Except perhaps on very rare occasions do they desire to turn all their “means” into these forms?

(c) The explanation of the influence of what the classical economists called “rapidity of circulation” also left much to be desired. Are the rapidity of circulation of money and the rapidity of circulation of goods independent phenomena or are they mutually connected as cause and effect; and, if the latter is true, do they affect prices, and, if so, how?

(d) The effect of credit on prices was traced by the classical economists almost exclusively through its influence upon the quantity of money in circulation. Seemingly Mill made an exception in the case of other forms of credit than inconvertible notes by noting that credit enables a person to offer for goods more money than he possesses, but he did not make clear whether he meant by this statement that credit enables a person to offer for goods money in the possession of other people or money not in any one’s possession; that is, whether or not he meant this as a real or only an apparent exception to the quantitative law.

The value of inconvertible notes was treated by both Ricardo and Mill as a clear illustration of the quantitative law. Both held that the value of such notes is entirely independent of the value of the standard commodity in terms of which that value is expressed. The only reason assigned for this belief is the quantitative law, and this proposition, so far as their treatment is concerned, stands or falls with the truth or falsity of that law.

Regarding the valuation of inconvertible notes the classical economists also failed to answer two fundamental questions:

First, are these notes credit instruments, and, if so, why is not their value to be explained in the same manner as that of other credit instruments? Surely, not simply because they are inconvertible and used as a medium of exchange. The valuation of other credit instruments with these qualifications—for example, defaulted bills of exchange—is not on that account accorded exceptional treatment, nor is their value explained by the quantitative theory. Precisely on what grounds is the valuation of these notes to be treated as exceptional?

Second, on what grounds may the fact be disregarded in their valuation that these notes, when issued in the promissory form, call for the payment of specified amounts of the commodity standard and, when issued in any other form, bear on their faces figures referring to specified amounts of the commodity standard and indicative of the values at which they are supposed to circulate? Are changes in the value of the commodity standard without effect upon the value of such notes, quite regardless of the quantity of them in circulation? If so, why?

F. Broadened Scope of the Science and New Methods

The criticisms described in the preceding chapters and changes in economic conditions and institutions broadened the scope of the science, improved its methods, and revealed defects in the doctrines which had been developed. The classical economists had restricted themselves to a comparatively narrow field and had left untouched a wide range of economic phenomena the importance and significance of which the critics had pointed out. The Old Historical School had entered this new field and worked it in such a manner as to guarantee it against neglect in the future. The Nationalists had emphasized the practical problems which nations are obliged to solve, their changing character, and the duty of economists to aid in their solution.

The methods appropriate to these new fields were, of course, different in many respects from those employed by the classical school. They included description, analysis, comparison, and induction as well as deductions from obvious and sometimes a priori assumptions. The importance of statistics and history and the use of the results of other, especially the social, sciences, had been revealed. The fruitful use of these new methods resulted in improvements, including a check in the tendency to excessive abstraction and unreality of which Ricardo and some of his successors had been guilty.

Footnotes

1 J. E. Cairnes, The Character and Logical Method of Political Economy, 2d ed. (New York: Harper & Brothers, 1875), p. 20.

2 Notably Jean-Baptiste Say and Auguste Comte.

3 Logical Method, p. 35.

4 Ibid., p. 34.

5 Ibid., pp. 68, 69.

6 Ibid., pp. 56, 57.

7 Published by Harper & Brothers, New York, 1874.

8 Ibid., p. 25.

9 Principles, pp. 66, 67.

10 Ibid., p. 85.

11 Ibid., pp. 86, 87.

12 Cairnes, Principles, p. 231.

13 Published by Longmans, Green & Co., London, 1866, and reprinted under the editorship of Professor Jacob B. Hollander in 1904.

14 Published by Macmillan & Co., Ltd., London, 1869.

15 Ibid., p. 43.

16 Mill’s Principles, Book III, Ch. VII, sec. 3.

17 Ibid., Book III, Ch. VII, sec. I.

18 See Wealth of Nations, Book I, Ch. IV; Mill’s Principles, Book III, Ch. VII, sec. 2.

19 Wealth of Nations, Book I, Ch. V.

20 Works, Ch. XXVII, p. 213.

21 Works.

22 Ibid., pp. 213, 214.

23 Ibid.

24 Ibid., p. 398.

25 Principles, Book III, ch. VIII.

26 See chapter on “Currency and Banks,” Ricardo’s Works; Mill’s Principles, Book III, Ch. IX.

27 Ibid., Book III, Ch. XIII.

28 Ibid., Book III, Ch. XII, sec. 1.

29 Ibid., Book III, Ch. XII, sec. 2.

30 Ibid., Book III, Ch. XII, sec. 4.

• 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.”