The Development of Economics

CHAPTER XXV

JOHN BATES CLARK

While the Austrian economists were developing their system of thought on the basis of Menger’s Grundsätze, a young American was working independently along lines in some respects similar. Like them he was attempting to reconstruct economic science, and in the field of value he developed a theory in fundamentals like theirs. In the field of distribution his thought followed different lines, and he worked out a body of theory quite different and much more rounded-out and complete than theirs. This young man was John B. Clark, who became interested in philosophical studies during his college course in Brown University and was introduced to the study of economics by President Seelye of Amherst College during his senior year in Amherst. This interest guided him in 1872 to Germany, where he studied for three years at Heidelberg under the inspiration and guidance of Karl Knies. Returning to the United States he taught economics successively at Carleton College, Smith College, Amherst, and, from 1895 to the date of his retirement, at Columbia University.

As a writer and thinker his best work has been done in the field of pure theory, though his interest extended to current economic and social problems, the highest social ideals having never been absent from his mind even in his theoretical studies. In his earlier writings these ideals were frequently stressed and in his first book, The Philosophy of Wealth, published in 1885, the ethical aspects and bearings of economics were placed in the foreground to such a degree as to justify the expectation that he would devote a much larger share of his future energies to these matters than was actually the case.

The fact that his major work was theoretical is probably to be explained by a natural bent in that direction which was quite likely strengthened by Knies, who, in spite of the fact that he is chiefly known as an historical economist, was much more of a theorist than an historian, a fact which appeared in his lectures, during the period that Clark was a listener, as well as in his books. It should also be noted that Professor Clark believed that the economics of his day needed heroic theoretical treatment and that its reconstruction must be sought along that line, his views in this respect contrasting radically with those of his old teacher, Knies, as well as with those of his great English contemporary, Alfred Marshall. Indeed it would be difficult to find in the academic literature of recent times a more interesting contrast than that between Clark’s Distribution of Wealth and Marshall’s Principles, both striving toward the same goal by methods diametrically opposite. Clark was “heroically theoretical,” while Marshall was continually placing limitations on the application of theories, noting exceptions to them, and refusing to be bound by carefully defined concepts.

A. Subdivisions of Economic Theory

B. The Universal Phenomena and Laws of Wealth

On the following page he shows that the law of diminishing utility applies to wealth in all stages of development. “Give to a man one unit of the article A,” he says, “and then another and another, till he has ten of them. While each of the articles in the series may do him some good, the amount of the benefit will steadily diminish, as the number grows larger, and the tenth one will benefit him least of all. In order to add to his stock of A, the man will never sacrifice more than what is, in his view, a fair offset for the benefit that he will get from the tenth and last unit.”

In like manner he shows that in the primitive pre-exchange economy as well as later, man gains by diversifying consumption and loses by diversifying his production.

“The industry of the savage state cannot carry the diversifying process far, because it cannot produce many kinds of goods. A man who should try to make many different kinds of articles entirely for himself would be jack of all trades, and would be so poor in most of them that he would lose as a producer more than, through diversity of the articles, he would gain as a consumer making a few things only. The savage can glut his desires for any one of them by an overproduction of it. The diminution in the utility of successive units of goods of one kind makes itself keenly felt, if he works too long in one occupation. If then, he has so much meat on hand that more will be of little use to him, he turns to hewing out canoes, fashioning bows and arrows, or building huts. Otherwise he will do nothing; since the utility of a further unit of an overproduced kind of wealth will not be enough to keep him working.”

“The law of final utility fixed the point at which such a producer will stop creating one product and begin making another. A modern laborer, with money in his pocket, is supposed to consult the law of final utility in making purchases and to spend each dime where, in view of the supply of different things already on hand, it will do him the most good. The savage in our assumed case has, not dimes, but efforts to expend; and he directs the expenditure of them according to the same principle. When he has dulled the keenness of his desire for one thing, he makes another. While markets and prices are, therefore, modern phenomena, the study of which has no place in a division of the science devoted to universal truths, the law of final utility which directs the purchases that are made in a modern market also directs the production of the isolated man, and is a universal law of economics.”

C. Social Statics

In this division of economics it is the duty of the economist to explain how and why division of labor and exchange developed and assumed their present forms and how under the conditions of socialized production thus brought about the social product is distributed among the members of the social group.

1. Exchange Is the Socializing Element in Production.

The terms exchange and division of labor describe the organized or social process of creating wealth. They are included in that division of economics which the older economists named “production.”

2. Social Production Involves Value and Distribution.

Professor Clark illustrates the distributive process by the following:

A ‘ ‘ ‘	B ‘ ‘ ‘	C ‘ ‘ ‘
A ‘ ‘	B ‘ ‘	C ‘ ‘
A ‘	B ‘	C ‘
A	B	C

3. Natural Prices, Wages, and Interest.

Professor Clark’s main thesis in this division of the subject (social statics) are that when prices and incomes are normal or natural, labor and capital each gets what it produces and that the two together absorb the entire social income.

4. Labor and Capital Get What They Produce.

In his attempt to demonstrate this proposition Professor Clark considers labor and capital separately. Beginning with labor, he notes that in the price-making process it is the last unit of the supply that fixes the price of all other units. Wages being a special case or manifestation of this process, it follows that the last unit of the labor supply fixes the wages of all laborers. It is upon the valuation of these final or marginal units of labor, therefore, that attention should be concentrated in the search for the explanation of wages.

“Here, then, is a marginal fraction of the supply of labor; and it would seem that it is in a position to set the market rate for all labor. Here, also, is a direct connection between the pay of this marginal part of the laboring force and the product that can be specifically attributed to it. Does this product of marginal labor set the standard of wages, as the price of a final increment sets the general standard of value of commodities? If so, the law of wages would stand thus: (1) By a common mercantile rule, all men of a given degree of ability must take what marginal men of the same ability get. This principle fixes the market rate of wages. (2) Marginal men get what they produce. This principle governs wages more remotely by fixing a natural standard for them.”

“The terms ‘zone,’ ‘area’ and ‘field’ are figurative expressions; and what they really signify is opportunity to labor. A fertile piece of land or a well-equipped shop offers to a certain number of men an opportunity to work in a highly productive way. This best opening for work may be represented by the figure of a central circle in the universal field of employment. Additional men create less than did the original ones, because their opportunities are poorer; and this fact may be indicated by locating them, in imagination, on zones surrounding the central area. There is a series of such opportunities for labor, each of which is poorer than the preceding ones, and the last is poorest of all. It is this most sterile of the fields, openings or opportunities for labor that we describe graphically as an outermost zone within which men produce only their wages. This is the zone of indifference from an employer’s point of view, because, if he sets men working within this area, he must give them all that they produce as wages. If one employer offers to them less than, by their productive power, they are worth, another will offer more, provided competition is perfectly free and efficient. Theoretically, there is competition between employers for every workman whose presence in an establishment affords to the owner any profit over what he pays to him; and the competition stops only when this profit is annihilated.”

“The opportunity for employment, which has been described by the term ‘zone of indifference,’ consists in the liberty to use capital-goods, or concrete instruments of production, in ways that make them yield more than they already do. Taking the working equipment of the world as it stands, we may get something more out of it, if we spend more labor in using it. This is a different thing from getting more out of a given capital by a similar intensifying of labor. A mill with its machines as they stand can take more laborers than are now employed in it; but if the mill is worth a million dollars, that amount of capital is capable of employing a much larger number of marginal workers than the mill can use as it stands. The vast stock of working appliances that the United States possesses can enable more men to work than are now working; but sixty-five billion dollars not confined to these appliances, but free to invest themselves in any other things, could give openings to a much greater number of additional workmen. There is a radical difference between the margin of employment that is offered by a particular stock of capital goods and the one that is offered by a given capital.”

“In many parts of the industrial field a few more men or a few less might be employed, in connection with the amounts of capital that are there already in use, and without any change in the form of that capital, . . . but there is no such limit to the number who can work with a fixed amount of capital, if the forms of it can be varied to suit the number of the men. If, whenever you added to the number of your workmen, you could instantly, and without waste, put your capital into new shapes that you might select, you might double, quadruple or octuple your force of men without adding to the amount of your capital as a whole. If, therefore, capital is not limited in its forms, the labor that can use it is not limited in quantity.”

The capacity of capital, by changing its form, to adjust itself to the labor supply is one of the postulates of Professor Clark’s reasoning, as is also the perfect mobility of labor, that is, its capacity to move freely from one industry to another—these two postulates being essential each to the other.

“Capital-goods follow one another in an endless succession, and each one has its day. Capital, on the other hand, has no periods. It works incessantly; and there is no way of dividing its continuous life, except by using arbitrary divisions, such as days, months or years. There is nothing in the function of it that can make a basis for such a division as we can trace in the life of capital-goods. Capital, as such, does not originate, mature and then exhaust itself, giving place to other capital. Goods do this but funds do not. No permanent capital ever ripens and begins to minister to direct wants; immaturity is of the nature of capital. Some raw materials, which are now capital-goods, do mature in this way; though in doing so they cross the division that separates producers’ wealth from consumers’ wealth; for when they are ripe and in use, they embody capital no longer.”

“Professor v. Böhm-Bawerk’s view is that short periods are highly productive, that larger periods are less so, and that every addition to the average length of the periods adds less to the products of industry than did the preceding additions. In our view, also, the average length of such periods as we are now considering might conceivably be made either longer or shorter, without affecting either the quantity of capital in existence or the rate of its earnings; for the period connected with the duration of capital itself cannot be lengthened. Here is a dilemma. If we measure productive periods by the duration of true capital, they are endless. If we measure them by the lifetimes of particular capital-goods, they may be lengthened or shortened without affecting the rate of interest. The deeper fact in the case is, that the periods which are measured by the duration of capital-goods have no significance as affecting the amount of waiting for the pleasures of consumption that a capitalist is supposed to do. Once the series of capital-goods is created and set working, there is no further waiting to be done. In its permanent static function capital does not make any one wait, although in its origin it causes its creator and owner to begin a period of endless waiting. Abstinence, in short, means a perpetual surrender of something, and not a deferring of it.”

“Any increase or diminution in the amount of labor that is employed in connection with a given amount of capital causes that capital to change its forms. Where there is a capital of five hundred dollars for each worker, that fund is one set of forms; and where there is a capital of a thousand dollars per man, it is in a different set. Now, the labor changes its forms in the same way. The men who are working with the smaller capital perform one set of acts, and those who have the greater capital in their hands perform another set. Arts are always practised in new and changed ways, when capital multiplies itself and takes the shape of costly and elaborate machinery. That the relative amounts of labor and capital should change, means that the forms of both should change: it means that each agent must fit itself to the other’s requirements.”

The criterion by which the amount produced by a unit of labor and a unit of capital respectively is determined is the observation of how much the combined product would be diminished by subtracting now a unit of labor and now a unit of capital or increased by adding now a unit of labor and now a unit of capital.

P1st minus P10th = surplus created by the first worker.

P2nd minus P10th = surplus created by the second worker.

P9th minus P10th = surplus created by the ninth worker.

“Labor, applied to the whole fund of capital, in land and all other instruments, is now subject to the law of diminishing returns,” and the product of the last unit applied sets the rate of wages and there is a surplus product on each of the other units and these surpluses added constitute the income or rent of the entire fund of social capital.

“Reverse now the situation. Let labor be the fixed element and let social capital enlarge, changing its forms, in the enlarging.

“The rent of the labor, if we use that expression, is the sum of the surplus products connected with the earlier units of capital but not attributable to them as a cause. The laborers seem to get a part of what the earlier units of capital produce; whereas, in reality, this is the difference between what capital and labor jointly produce and what capital alone contributes to the product of the combination.”

He concludes as follows:

“One law governs wages and interest—the law of final productivity. By one mode of statement of the law, we get wages as an amount directly determined by this principle. . . . Arithmetically stated, the earnings of all labor equal the product of the final unit of labor multiplied by the number of the units. . . .

“In pure theory, the statement of the vital fact of consumption should be this: Every article that a man buys for personal use contains a composite of elements, some one of which enters into his final increment of consumer’s wealth. What a man does, as his means increase, is, before anything else, to demand new qualities in the articles that he uses. Often he does not add at all to their number; but he causes them to be made of finer material or to be larger or handsomer. He adds to his wealth for consumption, not new things, but new utilities; and these are mainly attached to things of the kinds formerly consumed.”

According to Professor Clark, therefore, each commodity, for valuation purposes, should be looked upon as a bundle of utilities, each one of which is valued separately upon the market in accordance with the marginal utility law. The poorest of its kind may possess only one utility, but in each of the better ones there is some added utility or utilities—in the best, perhaps, several. To some groups of persons each of these utilities is final in the sense that it characterizes the highest grade or quality of that category of commodity for which any member of the group will compete, and it is the competition for that final quality or utility among members of the group that determines the value of the commodity on the market.

“(1) Power to keep a man afloat. A dead tree would have this quality.

“(2) Power to carry a man across stretches of deep water. A smooth log could render this service.

“(3) Power to keep an occupant dry and comfortable, and to carry his effects. A dugout would do this.

“(4) Power to move swiftly and to ride waves safely. A well-made sailing canoe would do this.

“(5) Power to gratify the owner’s taste. A gracefully shaped vessel, with appropriate colors and fittings, does this.”

“If the decoration of this vessel cost thirty dollars, the fisherman would buy a less ornate canoe. The demand for decorated vessels would thus be reduced, and the demand for vessels of the less ornate type would be increased. More canoes of the inferior kind would be made, and there would be fewer of the superior kind. . . . As many canoes would be made as before, but they would be without the special decoration that constitutes the final utility in the canoes of the highest quality. In canoes costing seventy-five dollars, this utility is clearly the only one measure of which is a gauge of the price.

“How, then, do the other utilities in the boat get their market valuation? There is a class of persons to whom the fourth utility in the canoe, its speed, is the final one. They buy boats of the fourth grade instead of those of the fifth, doing without the decorations. The amount that these men spend, in order to insure a boat that will sail by some points faster than another would do, yields to them, in pleasure, a result that is worth just what it costs. The floating power of the boat and its other intramarginal qualities are, however, worth to them more than they cost—they yield a ‘consumer’s rent,’ or a gain that exceeds the gain that can be had by a marginal purchase. To this class of men, therefore, only the fourth quality in the canoe is a price-making one. In consequence of the demand of this class of persons, this utility may bring twenty dollars in the market.”

“The law of final utility works as it would if each service-rendering power possessed by the boat was a distinct article. To all intents and purposes, the different utilities are different articles tied in bundles, some of which contain all five of the articles, some four, some three, etc. To no one consumer are all these virtually different things final utilities. A bundle, as a whole, is never a final unit of any one’s consumer’s wealth; but each element in it is a final utility to some class, and it is that class only whose mental estimate of it fixes its price.”

“The earning power of capital is fixed by the productivity of the final increment of it; and the final increment of capital does not, as a rule, consist of instruments of production in their entirety. It consists of elements in such instruments.”

“It is final increments of capital, as such, the productive power of which fixes the rate of interest. As entrepreneurs, we must pay for any capital that we hire what a final increment of it will produce; and that is what we and others can get, as a net addition to our products, by making our buildings by one degree longer or more substantial, our machines by one degree more rapid or more nearly automatic, our engines or our water-wheels by one degree more powerful, our raw materials by one degree finer, etc.”

“We affirm that interest is fixed by the earning power of the final increment of social capital; that that increment consists mainly of qualities of instruments of production, rather than of instruments in their entirety; that competition acts as a leveler, causing the earning power of such final productive elements in capital-goods to tend toward a certain normal level; and that any kind of instruments in which this element earns less than the standard amount must be thrown out of use.”

“If this is so, it is clear how far from being true is the conception of capital as existing, in bodily shape,—a stock of concrete instruments,—in the midst of competing entrepreneurs, and as ready in that shape to be drawn to this one or to that one, according as the one or the other offers the most for it. Capital is, in just this way, the subject of competition; but capital-goods are not. The capital that is competed for does not consist in instruments—concrete, visible, movable and ready for any of a dozen different uses: there is no stock of capital-goods that has such adaptability that all entrepreneurs are anxious to get shares of it. Yet there is a universal competition for capital, and the effect of it is to fix the rate of interest. Any entrepreneur in the entire system of social industry is a possible demander for any capital existing in the system. If he can make more with it than the present holder of it can make, his natural course is to bid higher for it than the present holder will bid and thus to secure it. No capital, as such, is fastened to one user or to one place in the system. Yet the goods that embody the capital are as fettered in their movements as the capital itself is free.”

The social processes of production and distribution, as Professor Clark conceives them, include (a) the increase of capital by qualitative increments; (b) the increase of labor as a result of the increase of population, and a qualitative change in it as new generations train for different tasks from the old; (c) the constant adjustment of the forms of capital-goods and labor to each other; (d) capital-goods constantly reproducing themselves; and (e) the valuation of consumers’ and producers’ goods and labor in accordance with the law of “final utility” and the “analytical valuation.”

While the motives of the movements of labor and capital are independent, “their movements are interdependent, since neither of them can move without changing the productive power of the other.”

The apportionment of labor and capital among the industrial groups in accordance with the laws above described synchronizes production and consumption. When this apportionment is perfect, capital goods flow in a continuous stream through the various ranks and into the reservoir of consumers’ goods. There is no waiting; neither are there any advances (in the proper sense of that term) by the producers of consumers’ goods to the groups engaged in producing the various ranks of producers’ goods. An advance implies the lowering of a stock and its replenishment at a later time, and there is nothing of this kind going on in a static society in which labor and capital have been properly apportioned. On the contrary, there is a continuous flow of raw materials entering at one end of the line and consumers’ goods emerging at the other in a continuous stream. The reservoir of consumers’ goods is drawn upon by each unit of capital and labor according to its relative value.

“Tools are productive, but time is the condition of getting tools—this is the simple and literal fact.”

“The first tool that is made separates work from its fruit—makes the men wait for what they want, and every added tool means more waiting. Every addition in days of labor to the cost of a tool extends the interval of time that thrusts itself before the enjoyment that is to come. The mass of raw material and enginery by which a modern society produces is the enormous wedge that civilization has driven between labor and products. It is solidified time, or the material result of waiting on a vast scale. It is the visible testimony to the fact that some one’s labor for present fruits began far back in the past.”

“Capital-goods imply waiting for the fruits of labor. Capital, on the contrary, implies the direct opposite of this: it is the means of avoiding all waiting. It is the remover of time intervals—the absolute synchronizer of labor and its fruits. . . . The very appliances which, in their extent and complexity, seem in one view to mean endless waiting, in another view mean no waiting at all but the instantaneous appearance of the final fruits of every bit of labor that is put forth.”

“(1) The difference between what the first division of workers created by the use of the whole capital and what they now create is an amount that is solely attributable to the extra capital they formerly had. (2) The difference between what one increment of labor produced, when it used the whole of the capital, and what two increments are now producing, by the aid of that same amount of capital, is attributable solely to the second increment of labor. We have, in this way, tested the specific productivity of a certain amount of capital, and we have also tested the specific productivity of one unit of labor.”

“It is with the latter test that we are immediately concerned; and what we have been careful to guard against is the notion that, at any one time, there is a difference between the products of different units of labor, as such. Each of them, with its share of the capital, produces one-half of the whole present output of the industry; but a half of the present output is less than was the whole output, when only one man was working with the aid of the entire capital. This reduction measures the product of one-half of the capital, as used by one unit of labor. On the other hand, the whole product, now that the two units of labor are working, is greater than was the whole product with one working; and this addition to the product is due solely to an accession of labor. The amount of the addition measures the product of that labor and of all labor under the present changed conditions.”

D. Social Dynamics

“It [an improvement] first gives a profit to entrepreneurs and then, in the way that we have described, adds something to wages and interest. This is equivalent to creation of new wealth. It has made a definite addition to the income of society, and from the moment when the improved methods have been put into operation the static standard of wages has been higher. The rate toward which the pay of labor is now tending is not what it was before the invention was applied, but it is a new and higher rate. Wages now tend to equal what labor can now produce and this is more than it could formerly produce. When the full fruits of this invention shall have diffused themselves throughout society, the earnings of labor will equal the new standard rate.”

“Let another invention be made that also effects an economy in production. It also creates a profit; and this profit, like the first, is an elusive sum, which entrepreneurs grasp but cannot hold. This sum, like the former one, slips in time through their fingers and bestows itself on all members of society.”

“If, instead of occurring at intervals considerably separated, the improvements in industrial methods were continually taking place,—if one followed another so closely that, when the second occurred, the fruits of the first were only beginning to make their impression on the earnings of labor,—then, as a result, we should have the standard of wages moving continuously upward and actual wages steadily pursuing the standard rate in its upward movement, but always remaining by a certain interval behind it.”

“This process represents the actual condition of industry.”

According to Professor Clark, therefore, dynamic forces tend constantly to improve the condition of the laboring classes. Capital, he thinks, is bound constantly to increase under the influence of the lure of profits and of the desire for an assured regular income in face of a declining rate of interest. The strength of the desire to maintain a rising standard of living and a rising social status will, he thinks, curb the sex instinct to such a degree as to ensure a rate of increase of population lower than that of capital and consequently to ensure the desired rate of increase in the standard of life or an approximation to it.

Many of the variations from static standards of value, wages, and interest which the separate operation of each dynamic force is likely to produce, Professor Clark thinks, will be neutralized when they operate, as they normally will, simultaneously and in conjunction with each other. The conditions which he has described as natural under the operation of static forces, therefore, will be more closely approximated in the world of actuality than to a superficial view might seem possible. He also emphasizes the constancy of the operation of these static forces even under dynamic conditions. They are never inactive, and the maximum influence of the dynamic forces will be to render the realization of static standards proximate instead of 100 per cent.

Two of these forces, however, may cause trouble and interfere with the optimistic outlook which Professor Clark’s reasoning up to this point seems to him to justify. One is the influence of backward countries upon the more advanced and the other is monopoly, which weakens, and possibly may annihilate, competition. The operation of the economic forces which Professor Clark has described is much less perfect in backward than in advanced countries, with the result that intercourse between the two regions may threaten, temporarily at least, the progress of the laboring classes which Professor Clark thinks is to be expected in the advanced group. Labor with lower standards of life is likely to flow from the less to the more advanced countries, while capital will flow in the opposite direction, thus narrowing the field of employment and increasing the numbers of the laborers in the latter and widening the field of employment and diminishing the number of laborers in the former. The net result may be advantageous to labor the world over but disadvantageous to the laboring classes of the advanced group.

Footnotes

1 See Paul T. Homan’s chapter on John B. Clark in his Contemporary Economic Thought.

2 John Bates Clark, The Distribution of Wealth (New York: The Macmillan Company, 1899), pp. 33, 34.

3 Ibid., p. 26.

4 Ibid., p. 41.

5 Ibid., p. 43.

6 The Distribution of Wealth, pp. 43, 44.

7 Ibid., p. 45.

8 Ibid., pp. 11, 12.

9 Ibid.

10 The Distribution of Wealth, p. 15.

11 Ibid., p. 16.

12 Ibid.

13 Ibid., p. 17.

14 Ibid., pp. 93, 94.

15 The Distribution of Wealth, p. 110.

16 Ibid., pp. 113, 114.

17 Ibid., p. 116.

18 The Distribution of Wealth, p. 124.

19 Ibid., p. 125.

20 Ibid., pp. 127, 128.

21 Ibid., p. 130.

22 The Distribution of Wealth, pp. 133, 134.

23 Ibid., p. 135.

24 Ibid., p. 137.

25 Ibid., p. 139.

26 The Distribution of Wealth, p. 157.

27 Ibid., pp. 158, 159, 160.

28 Ibid., p. 160.

29 Ibid., p. 160.

30 Ibid., p. 191.

31 Ibid., pp. 193, 194

32 The Distribution of Wealth, pp. 197, 198.

33 Ibid., p. 199.

34 Ibid., p. 200.

35 Ibid., p. 218.

36 Ibid., p. 214.

37 Ibid., p. 217.

38 Ibid., pp. 219, 220.

39 The Distribution of Wealth, p. 237.

40 Ibid., pp. 238, 239.

41 Ibid., pp. 240, 241.

42 lbid., pp. 243, 244.

43 The Distribution of Wealth, pp. 246, 247, 255, 256, 257.

44 Ibid., pp. 277, 280, 282.

45 The Distribution of Wealth, pp. 309, 311.

46 Ibid, pp. 325, 326.

47 The Distribution of Wealth, p. 404.

48 Ibid., pp. 405, 406.

49 Ibid., p. 410.

50 Ibid., p. 411.

51 The Distribution of Wealth, pp. 440, 441.

• 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:
• 50The final summary of his conclusions is thus expressed : “The economical progress of society constituted of landlords, capitalists, and labourers, tends to the progressive enrichment of the landlord class; while the cost of the labourer’s subsistence tends on the whole to increase, and profits to fall. Agricultural improvements are a counteracting force to the two last effects; but the first, though a case is conceivable in which it would be temporarily checked, is ultimately in a high degree promoted by these improvements; and the increase of population tends to transfer all the benefits derived from agricultural improvements to the landlords alone.”
• 51The first one he noted is described in the following passage : “When a country has long possessed a large production, and a large net income to make savings from, and when, therefore, the means have long existed of making a great annual addition to capital; (the country not having, like America, a large reserve of fertile land still unused), it is one of the characteristics of such a country, that the rate of profit is habitually within, as it were, a hand’s breadth of the minimum, and the country therefore on the very verge of the stationary state.” By the minimum of profits he meant “some particular rate of profit, which is the lowest that will induce the people of that country and time to accumulate savings, and to employ those savings productively”; and by the stationary state, the state of ”a country in which a minimum has been reached and in which consequently, “no further increase of capital can for the present take place.”