The Development of Economics

CHAPTER XXVII

OTHER DEVELOPMENTS IN THEORY

In addition to the developments reviewed in the preceding chapters, there have been a number of attempts to amend and improve individual theories, especially those pertaining to value and distribution. Among these should be noted the so-called social value theories, the central idea of which is that value is a social rather than an individual product.

A. Social Value Theories

A social value theory of a somewhat different kind is presented by Mr. B. M. Anderson in his book entitled Social Value, the essence of which is that the actions of individuals on the market are themselves socially and not individually determined and that, therefore, social and not individual values antedate and explain exchange or market values.

(a) That it involves reasoning in a vicious circle: “When I ask you what the value of wheat is, you refer me to corn, and then when I ask you the value of corn, you refer me again to wheat.”

“Value as merely relative,” he says, “is a thing hanging in the air.”

(2) The fact that ratios of exchange are expressed quantitatively implies, he thinks, that the commodities exchanged “must have a common quality, present in each in a definite quantitative degree . . . for the quantitative specification depends on the extent to which the homogeneous quality is present in each of the goods.” “We can have no quantitative ratios,” he says, “between unlike things.”

An examination of the reasoning employed in the development of the propositions involved in these considerations reveals some confusion in the use of the terms quantitative, quantity, relative, relativity, measure, commensurable, etc. As economists use and need to use these terms, are there any substantial differences between those who think of value as a ratio of exchange and those who think of it as a quantity?

Let us attempt to answer this question, in the first place, by noting our actual procedure in what we call “measuring and expressing” value. In the United States we note the actual or estimated ratios of exchange between 23.22 grains of gold and the commodities whose so-called values we wish to measure or express. These ratios supply us with figures, quantitative expressions, which are homogeneous and combinable into sums, since they indicate multiples and subdivisions of 23.22 grains of gold.

Now is it not precisely this procedure and its results that economists describe, and properly describe, by the terms measure and express values? And does this procedure involve reasoning in a circle? Does not all measuring and quantitative expression of its results involve comparison and consequently relativity? We measure linear extension by comparing an arbitrarily selected unit of it, a foot-rule or a yardstick, with the length of the room or the field the linear extension of which we wish to measure; we measure the cubical contents of a box with an arbitrarily selected unit of cubical contents, a bushel basket, a quart measure, etc., etc., and in like manner we measure ratios of exchange by comparing them with an arbitrarily selected ratio, namely that with a specified amount of gold. In each case we compare like things: linear extension with linear extension, cubical contents with cubical contents, ratios of exchange with ratios of exchange; and in each case these comparisons result in quantitative expressions, figures which can be added, subtracted, multiplied, and divided. Comparison, which suggests the idea or concept of relativity, and quantitative expression, which suggests the idea of quantity, thus appear to be com-plementary procedures or different phases of the same procedure. Measuring is comparison and noting between the things compared of certain relations which can be and are expressed in figures. The things or qualities that we compare are like things or qualities and therefore comparable.

It appears, therefore, to be a mistake to say that “reciprocal comparisons give no sums” and that ratios of exchange do not enable us to measure wealth and deal with its quantitative aspects. Whether or not they afford an “answer to the economist’s chief inquiries” is another and quite different matter.

The answer to the question whether the process of exchange causes value as well as measures it, which according to Mr. Anderson should be negative, must depend upon the meaning assigned to the verb cause. If by cause, we mean what the early economists evidently meant by it, a phenomenon or the phenomena necessarily precedent to ratios of exchange and essential to them, then exchange certainly causes value. Obviously we cannot have ratios of exchange without exchange, and the latter may, without violence to language, be said to cause or create the former.

Of course, in the argument we are examining Mr. Anderson was using the word cause in the sense of “final” or “ultimate” cause. He was in search of something that lies back of the process of exchange itself, that causes, or at least explains, that phenomenon. What we have said in the preceding paragraphs, therefore, does not invalidate his contention that for this latter purpose we need a quantitative concept of value, or at least something more than the concept of value as a ratio of exchange.

An examination of his reasoning in support of this contention, however, reveals superficiality in his analysis of what is implied in what he calls “the quantitative concept of value” or at least failure to give due weight to the fact, already noted, that this concept is complementary to the “relative concept.”

Unfortunately Mr. Anderson is vague, probably necessarily so, in his explanation of what he means when he says that value is a “quantity.” He does not and cannot tell us of what it is a quantity, any more than the physicist can tell us what electricity is. The latter measures and treats electricity quantitatively, however, and one wonders whether Mr. Anderson really means, or can mean, by the statement that value is a quantity anything more than that it is something that we must and do treat quantitatively and whether this does or can mean anything more than that we must measure it and express the results of such measurements in figures which can be added and otherwise treated mathematically. As we have already shown, such measurements require the arbitrary selection of units—i.e., units of the conventional kind (in most cases nowadays, weight units of the precious metals) and comparisons of certain qualities of such units: usually, though not necessarily, their ratios of exchange (it might equally well be their marginal utility)—with the same qualities as the object we are measuring. Comparisons imply relativity and what Mr. Anderson calls the “relative concept.”

The fact is that this negative argument was not at all vital to the support of Mr. Anderson’s chief contention, namely, that value is a social product which the individual consciously or unconsciously inherits or absorbs and which motivates his action on the market. There are several steps in the process of reasoning by which he attempts to establish this proposition.

The first is that economic value is a species of the genus “value,” other species of which are to be found in the other social sciences, ethics, esthetics, jurisprudence, etc. (p. 93).

“The fact is, simply, that ethical and esthetic values may constantly reinforce economic values, economic values reinforce ethical values, or economic and ethical or other values may oppose each other, and marginal equilibria are constantly worked out between them. Or, better, among them, for, while in the consciousness of the moment we may have only two opposing values in mind, and may have our equilibrium apparently between just two, yet in fact the whole system of values is constantly tending toward equilibrium, ethical, religious, economic, esthetic, all asserting themselves and finding their place in the scale, and getting their ‘margins’ fixed—extensive margins and intensive margins.”

These values which thus control and motivate individual action cannot, according to Anderson, be “completely accounted for on the psychical side by what goes on in the individual mind; every individual mind is part of a larger whole; every thing in the individual mind has been influenced by processes in the minds of others; every process in the individual mind influences, directly or indirectly, processes in the minds of others. There is a social mind. And the values in the mind of an individual constitute no self-complete and independent system, either in their origin, in their interactions, or in their consequences for action. In our psychological phrase, their ‘presuppositions’ include elements in the minds of other men, and they themselves constitute part of the ‘presuppositions’ of the values in the minds of other men. Finally, there are values which correspond to the values of no individual mind, great social values, whose presuppositions are tremendously complex, including individual values in the minds of many men, as well as other factors which we shall have to analyze in considerable detail, great social values whose motivating power directs the activities of nations, of great industries, of literary and artistic ‘schools,’ of churches and other social organizations, as well as the daily lives of every man and woman, impelling them in paths which no individual man foresaw or purposed.”

Mr. Anderson’s argument is very convincing in support of the proposition that, as he puts it, economic value is a species of a genus which is represented in all the social sciences and that in their effect upon the human mind and upon the decisions, even the economic decisions, of men these other species are potent, sometimes reinforcing and sometimes opposing economic value, and that in the determination of the decisions and activities of men they cannot be separated; but it is not equally convincing in support of his contentions that other value theorists, especially the marginal utility theorists, have ignored the existence of this so-called social value, and that the recognition of its existence proves their theories to be incorrect and inadequate for the purpose for which they were devised.

That purpose was to explain ratios of exchange, and especially prices, on competitive markets. The older economists, especially the classicists, made important and valuable contributions to this explanation, but did not complete it. Their work was supplemented, not superseded, by the marginal utility theorists, who also threw light into many dark corners the older economists had left entirely unilluminated. Mr. Anderson may be said to have supplemented the marginal utility theory by contributing to the explanation, or by at least pointing out that an explanation is needed, of what the marginal utility theorists did not pretend to explain, namely the wants of individuals. They started with these as a datum, recognizing frankly that their explanation must be sought in the entire life of individuals, past and present, individual and social.

Granting all that Mr. Anderson claims regarding the influence of tradition, custom, social institutions, imitation, the mutual effect of individuals upon each other, etc., etc., does not annihilate individualism and personality and make men and women mere automata, moved in this direction and that and motivated in their economic activities entirely or even chiefly by outside forces. When men and women meet and compete in the market-place, they are individuals, acting independently, and through their actions helping to make those social values which Mr. Anderson talks about. No amount of analysis or phrase-making or terminology-conjuring can alter this fact of universal experience and observation, which theories of value have taken as their point of departure.

The recognition of a source of income different from natural agents, labor, and capital came rather late in the history of economics. The classical economists discovered that the shares called rent, wages, and profits were composite in character, each being a genus with several species of income derived from labor and capital as well as from natural agents other than land, but they persisted in associating what they called profits primarily with capital and in thinking of the capitalist as the profits-receiver par excellence, though they recognized that he might also receive “wages of superintendence,” just as they recognized that the laborer might also receive profits and rent, and the landlord, wages and profits.

A change in this method of procedure in the explanation of the distribution of wealth resulted from a more minute and accurate analysis of the technique of production under modern conditions and of the functions of capital. Such analysis raised a question regarding the validity of the proposition, expounded by Adam Smith and maintained in one form or another throughout the classical period, that one, at least, of the functions of capital is “to set labor in motion” or to employ labor. The real employer of labor and the performer of other important functions in modern economic life was revealed as what the French have called the entrepreneur and the English sometimes the “captain of industry.” These functions have been distinguished from those of labor with which, so far as they were recognized at all, they were classed by the classical economists, as well as from those of capital and natural agents.

1. Francis A. Walter’s Theory.

In this differentiation of the entrepreneurial function from the functions of the other agents in production many economists have taken a hand, one of the earliest and the most successful being Francis A. Walker, an American economist of note and high rank in the last quarter of the last century. In his book entitled The Wages Question, first published in 1876, and later in his Political Economy he not only clearly described these functions, but insisted that the services of the entrepreneur are rewarded in accordance with a law analogous to that of rent and that these rewards are not subtracted from those of labor.

“If the number of men of exceptional abilities were sufficient or more than sufficient to do all the business that required to be done, of all sorts and in all places; if (2) these men, however much they surpassed all other members of the industrial society, were among themselves equal in all respects which concern the conduct of business; and if (3) this class, so constituted and so endowed, were distinguished from all not of their class so clearly and so conspicuously that no one having these exceptional abilities should fail to be recognized, and no one lacking such abilities in full measure should esteem himself capable of conducting business, or be so esteemed, for the purpose of obtaining credit, we should have a situation closely analogous to that which we described (par. 255) in the case of a community near which was found an amount of good land, of uniform quality, adequate or more than adequate, to raise all produce required for the support of the community.”

The result of such a situation he thought would be a rate of remuneration for the services of a man of this class “practically equal to what he would receive if employed by another.” This remuneration he called wages, and he thought that what he regarded as profits would be non-existent in such a situation.

“The qualifications for the conduct of business are not equal throughout all of a sufficiently numerous class. On the contrary, the range of ability is almost world wide. First we have those rarely-gifted persons who, in common phrase, seem to turn everything they touch into gold; whose commercial dealings have the air of magic; who have such insight as almost to seem to have foresight; who are so resolute and firm in temper that apprehension and alarms and repeated shocks of disaster never cause them to relax their hold or change their course; who have such command over men that all with whom they have to do acquire vigor from the contact and work for them as they would not, perhaps could not, work for others.

“Next below, though far below, we have that much larger class of men of business, of a high order of talent, though without genius or anything savoring of magic, whose unqualified success is easily comprehended, even if it can not be imitated; men of natural mastery, sagacious, prompt and resolute.

“Then we have men who, on the whole, do well, or pretty well in business; men who enjoy a harmonious union of all the qualities of the entrepreneur, though only in moderate degree, or in whom some defect, mental or moral, impairs a higher order of abilities; men who are never masters of their fortunes, are never beyond the imminence of disaster, and yet, by care and pains and diligence, win no small profits from their business, and, if frugality be added to their other virtues, accumulate in time large estates. . . . Lower down in the industrial order are a multitude of men who are found in the control of business enterprises for no good reason; men of checkered fortunes, sometimes doing well, but more often ill; some of them, perhaps, filling a place that would not otherwise be filled, but, more commonly in business because they have forced themselves into it under a mistaken idea of their own abilities, perhaps encouraged by the partiality of friends who have been willing to place in their hands the agencies of production, or entrust them with commercial or banking capital. The industrial careers of these men are not peculiarly happy, though the degree in which they suffer from the constant imminence of loss, perhaps of bankruptcy, is very much a matter of temperament. Some take it extremely hard, and when they fall make no effort to rise again; others are irrepressible as Harlequin, jumping up, alert as ever, after being apparently hanged, drawn and quartered by the common executioner.”

“All profits,” he adds, “are drawn from a body of wealth which is created by the exceptional abilities (or opportunities) of those employers who receive profits, measured from the level of those employers who receive no profits, just as all rents are drawn from a body of wealth, which is created by the exceptional fertility (or facilities for transportation of produce) of the rent lands, measured from the level of the no-rent lands.”

2. Charles W. Macfarlane’s Theory.

In the production of all such goods, according to Mr. Macfarlane, there is present a monopoly element, characterized by the fact that the supply is limited or controlled in such a manner that the price, even on the margin, yields a surplus above the cost of production. This surplus is available to all producers, marginal as well as supramarginal; while in the case of freely reproducible goods, cost of production and marginal price are identical, there being included in the former merely a “normal wage” for the entrepreneur, and no surplus above costs is available to marginal producers.

In developing these aspects of distribution Macfarlane pictured the different branches of production arranged in series according to the degree of their productivity and in each branch entrepreneurs arranged in series according to their abilities. In the first series certain branches of production are carried on by entrepreneurs with monopoly advantages of various kinds, turning out scarcity goods whose prices leave to the producers even at the margin a surplus over costs. Entrepreneurs in the other branches of production in this series do not enjoy monopoly advantages. The same opportunities they have are open freely to every one, and production in these lines may be extended indefinitely, the only limitations being in the available supplies of labor and capital. These supplies are conditioned by certain payments to laborers and capitalists respectively, without the receipt of which in the long run they will refuse to maintain the supplies of labor and capital.

In this manner he visualized three surpluses or funds: one absorbed by supramarginal entrepreneurs and the owners of supramarginal lands, measured by the differential principle and price-determined; a second absorbed by the marginal entrepreneurs engaged in the production of scarcity goods and price-determining, since it conditions the supply of such goods; and a third absorbed by capitalists and price-determining, since it conditions the supply of freely reproducible goods and is a necessary element in the cost of production of goods in the marginal industries. The first of these surpluses he proposed to call rents, the second profits, and the third interest.

It should be noted that in this analysis Macfarlane revealed a surplus or fund not noticed by Walker and in their explanation of the distribution of wealth neglected by the classical economists, namely, monopoly gains other than those absorbed by the owners of supra-marginal lands. This surplus is shunted into the pockets of entrepreneurs who enjoy monopoly privileges by the power these privileges give them over the supply of the goods they produce and not as a result of their superior abilities. Neither is it in any proper sense to be regarded as a product of or a payment for the exercise of the entrepreneurial function as usually defined.

3. The Residual Claimant Theory.

C. The Marginal Productivity Theory of Distribution

In recent times, in the explanation of the distribution of wealth, wide use has been made, especially in the United States, of the concept of the marginal productivity of land, labor, and capital. The theory is that, from the point of view of the entrepreneur, each of these agents of production is subject to the law of diminishing returns and within limits may be substituted for any other at the margin; that under competitive conditions the entrepreneur will continue to use additional units of each, substituting one for the other, whenever it is profitable, until the amount added to his product by the last unit of each just equals its cost; and that, since in a competitive market the price of each unit of the total supply of each of these agents will be the same and will be fixed by that of the marginal unit, the price of the product of that marginal unit multiplied by the number of units will equal each agent’s share in the social dividend.

Up to this point the reasoning simply leads to the conclusion that there is equality between the value or price of the marginal products of land, labor, and capital and what is paid for the use of these agents. It does not explain what determines either. The entrepreneur confronts a market in which the prices of his products and the costs of land, labor, and capital are already fixed in advance. The theory explains how he reacts to these conditions. It is necessary to explain further how his reaction affects the market situation for both products and agents. From another point of view it may be said that the marginal productivity theory explains the entrepreneur’s demand for the agents of production, leaving unexplained the supply side of the problem. As a theory of distribution it is, therefore, incomplete and must be supplemented by other theories.

D. Theories of Money and Credit

For centuries the importance of the role played by money, credit, and prices in the economies of individuals and nations has been increasing and the scope of their operations has been broadening, during the last few decades at a constantly quickening pace. Evidence of this may be seen in the constantly increasing proportion of productive operations that are carried on for the supply of markets and for profit instead of for the direct supply of the wants of the producers themselves; in the growth of the credit system and of banking institutions, stock and produce exchanges, and the machinery required for their operation; in the constantly increasing volume of private and public indebtedness; and in the phenomena which accompany so-called business cycles, perhaps in the business cycle itself.

On the development of economics the effect of these changes is evident in the increasing amount of attention devoted by economists to monetary and credit phenomena, in the place they have assigned to these topics in their systems of thought and in their theories regarding them. Contrary to the practice of the classical school, many economists, Alfred Marshall for example, have made price phenomena the starting point of their analysis instead of assigning them a merely subordinate place. In the field of theory the chief outcome has been criticism of the quantity theory and attempts to restate and revamp it, elaboration and extension of the theory of banking, and the development of theories regarding the stabilization of prices.

1. Restatements and Criticism of the Quantity Theory.

The need for an accurate definition of the word money in terms of concrete things, which would enable one to determine whether he would include under that head bank-notes, deposits subject to check, etc., apparently did not impress Walker. His definition of this term must be deduced from his discussion of the functions of money and from such statements as those quoted, above.

Money he defined as “that valuable thing or economic good which possesses in any country or community universal acceptability as a medium of exchange or means of payment.” In the United States he said, it is gold and gold only. He used the term currency when he wished to include in his discussion both money and other elements of the medium of exchange.

Demand for money he declared to be determined not by the desire for it nor by the total volume of goods on the market nor even by the quantity offered for sale, but by “the quantity sold,” and used for till money and for bank reserves. “Exchanges being made for money in a given community on a given day and the total value of goods and services so exchanged” equal, he said, “the total volume of money exchanges” and determine “the demand for money for use as a medium of exchange.” It should be noted that in this statement he included the “value of goods and services” among the influences that enter into the determination of demand.

In this distinction between the supply of money units and the supply of money value or money utility he aimed to reveal what he considered to be the vital point, the very essence, of the quantity theory. A given amount of money value may be embodied, he thought, in any number, small or large, of money units, and the amount embodied in a single unit must vary inversely with the number.

(a) “No exchanges are to be made unless money (which, to be quite unreal and simple, we may suppose to consist of counters of a certain size made of the bones of the dodo) actually passes from hand to hand at every transaction,” credit and barter being alike unknown.

(b) “The money is to be regarded as of no use whatever except to effect exchanges so that it will not be withheld for hoarding.”

(c) There are “ten traders, each with one kind of commodity and no money, and one trader with all the money (100 pieces) and no commodities” who place “an equal estimation on all the commodities.”

Under these conditions, he said, “all the money will be offered against all the goods, and every article being assumed of equal value, the price given for each will be ten pieces, and the general level of prices will be ten.” Assuming that “each piece of money changes hands only once, . . . it is perfectly clear, under these suppositions, that if the amount of money had been 1000 pieces the general level would have been 100 pieces per article, and if only ten pieces, the price per article would have been one piece only.”

This exposition clearly reveals the essential features of the theory, namely: that the value of money is entirely independent of the value of the material of which it is made (dodo bones being absolutely worthless things, i.e., having no commodity value but value as money only); that this value varies inversely with the number and the rapidity of the circulation of these units and that it is in no manner influenced by changes in the relative estimates people put upon different goods (one of the assumptions in this hypothetical market being either that the man with the money estimates each commodity equally or that each trader in turn wants one of the commodities only). Another merit of Nicholson’s exposition is that it avoids the difficulty experienced by Walker, Johnson, and others in defining the terms demand, supply, and money, and in accurately explaining their meaning in terms of the actual elements of the medium of exchange and of the goods bought and sold on real markets.

In the most recent versions of this theory the so-called “equation of exchange” has been substituted for the old demand-and-supply formula, symbols on one side of an equation being used to designate the money and credit elements of the problem while those on the other represent the commodity elements. The sign of equality between the two sides of the equation suggests the nature of the argument to be substituted for the demand-and-supply doctrine of the older versions.

Fisher’s equation is MV + M’V ‘ = PT, M standing for the amount of money in circulation, V for the velocity or rapidity of the circulation of money, M’ for the volume of bank deposits subject to check, V’ for the velocity or rapidity of circulation of these deposits, T for the total quantity or volume of goods exchanged, and P for the prices of these goods.

Having thus introduced price (p) as a factor in the determination of T, it was necessary to define P, not as a new element in the equation, but as a modifier of the elements already there, namely the p’s and the Q’s which determine the content of T. He, therefore, defined it as a weighted arithmetical average of the ratios of the P’s of a given year to those of a base year.

It is now pertinent to inquire whether these new statements and expositions of the quantity theory have made it impregnable and rendered it satisfactory as an explanation of prices or of “the price level.” Critics have answered these queries emphatically in the negative. They have noted the following defects:

1. In all forms of the statement of the theory, the new as well as the old, prices, the phenomena to be explained, are assumed. They all involve the summation of the quantity of goods sold upon the market, and the method of summation used by all is the price method, i.e., adding, averaging, etc., the prices at which the goods sold. All of the expositors of the theory have found it impossible to compare the quantity of money with the quantity of goods, an essential feature of the theory, without stating the two magnitudes in the same terms; the bushels, tons, yards, pounds, etc., in which the quantities of goods are conventionally stated had to be stated in terms of dollars, francs, marks, etc., before they could be summarized and compared with the number of dollars, francs, marks, etc., in circulation. To explain these prices is the problem, for which task obviously the quantity theory, in any of the terms in which it has yet been stated, is incompetent.

This violent contrast and conflict of views is due in part to a difference between the price concepts of the two parties. One associates prices with the medium of exchange, the other with the standard of value. The quantity theorists do not differentiate between the two. To them the phrase standard of value describes merely one of the services of the medium of exchange. To their critics it describes a thing which is independent of the medium of exchange and which may or may not be one of its elements. To these critics price is the numerical statement of the value of individual goods in terms of the value of this thing, and value is conceived not as a ratio of exchange but as an essential factor in the determination of ratios of exchange. The one party thinks of the gold standard as having been “abandoned” and ceasing to function, when inconvertible notes take the place of coin as the circulating medium of a country; the other insists that it continues to function in that case, since the figures on the faces of the notes still mean a definite weight of gold. The former, therefore, explains the value of such notes by reference to their use as a medium of exchange solely, while the latter insists that the value of the standard commodity is an essential factor in the problem.

3. In all the versions of this theory the effect of credit on prices is explained by reference solely to the effect upon the volume of the circulating medium of the use of credit instruments as one of its constituent elements. The critics of the theory insist that this is but one of the aspects of this problem and by no means the most fundamental one.

(a) The equation is an identical proposition. There are not a goods side and a money side, as Fisher claims, but two money sides. “On one side of the equation we have M, a quantity of money, multiplied by V, an abstract number; on the other side of the equation, we have P, a quantity of money, multiplied by T, an abstract number. The product, one each side, is a sum of money. These sums are equal because they are identical. The equation asserts merely that what is paid is equal to what is received.” There is, of course, no objection per se to an identical equation. It is only the value of such an equation as a revelation of causal relations that is questioned by Anderson.

(b) Anderson also questioned the arguments and interpretations of facts employed by Fisher in proof of his assertions regarding the relation between V, M, and T and between M’ and M, on the basis of which assertions Fisher arrived at the conclusion that prices must “vary proportionally with quantity of money and with its velocity of circulation and inversely with the quantities of goods exchanged.” In opposition to Fisher’s contentions Anderson presents facts and arguments which indicate that changes in the M of Fisher’s equation may cause compensating changes in V, that most of the influences which affect V also correspondingly affect T, that M is also influenced by T, and that M’ is not solely determined by M but is also influenced by T. In other words, he shows that when changes take place in M or T or both, Fisher’s equation may be satisfied by compensatory changes in the other elements of the equation without corresponding changes in P.

2. Other Explanations of Prices.

The price problem thus becomes that of the explanation of the values of the goods involved, including that of the standard commodity, for which no special, independent theory is required or employed, that used in this case being identical with the one used in all other cases.

Regarding the medium of exchange, since each of its elements has stamped or printed on it a figure or figures indicating the number of units of the standard commodity of the conventional kind for which it is supposed or desired or expected to be the equivalent in exchange, the problem of its valuation is that of explaining the why and the degree of its deviation from this equivalence, in case there is such deviation.

In case each of these elements is convertible on demand into the standard commodity, in the amount indicated by the figures stamped or printed on it, there is nothing to explain. A problem appears only in case convertibility is suspended or abandoned or in any way interfered with; then appears the phenomenon of depreciation, which calls for explanation. An essential feature of this explanation is the fact that inconvertibility is regarded as a species of default in an implied or expressed contract for payment; another is that, in the case of all forms of so-called paper money, the valuation influences obviously operative in the case of all other forms of credit instruments and daily illustrated on stock-exchanges and elsewhere are considered pertinent and applied; a third is that purely subjective influences are accorded a leading role. The volume of these elements or the total quantity in circulation is treated not as the sole, and in many cases not as the chief, factor in their valuation, but as one among many.

The explanation of the influence of the volume of the circulating medium on the value of the standard itself also marks a vital difference between the advocates and the critics of the quantity theory. The former insist that the standard of value is a coin, the value of which is derived solely from its use as a medium of exchange, its bullion value influencing it only to the extent that it limits the quantity of this medium. The critics on the contrary insist that the bullion value is the vital thing and consequently that the demand for the standard commodity for non-monetary purposes is an essential and ever-present factor in the determination of its value, of such magnitude as to vitiate the quantity theory explanation.

3. Banking Theory.

The older theories of banking were chiefly concerned with the use and regulation of note issues. The rapid growth of deposit banking and the use of checking accounts as a medium of exchange in recent times, especially during the last half-century, have pushed these aspects of banking into the foreground and resulted in some modification and extension of banking theory.

Noteworthy among these developments is the theory that deposits subject to check operate upon the national economy and affect prices in substantially the same manner as bank-notes and that in both cases the effects are explainable in terms of the quantity theory. Critics of the quantity theory note the resemblances between bank-notes and deposits subject to check but deny the utility of the quantity theory in the explanation of their effects upon the national economy, and especially upon prices. They note particularly that the volume of both note issues and deposits subject to check is quite as often the effect as the cause of price changes and that, in the cases in which it may be regarded as cause, its influence is not explainable by the quantity theory.

In recent times, especially since the World War, economists have reconsidered and to some extent revised older theories regarding the operation and policies of central banks. The public functions and responsibilities of these banks have always been emphasized, especially in regard to the regulation of discount rates and of the international flow of the precious metals, but recently new theories have been devised for their guidance in these and other matters. Formerly the prevailing theory was that the safety and profits of the institution itself were adequate guides to policy, but nowadays the responsibility of these banks for the control of the expansion and contraction of credit throughout the banking system is emphasized, and theories are current regarding the manner in which such control can be exercised and made effective, as well as regarding why such control is desirable.

Regarding the need and desirability of such control, the theories are vague and for the most part unformulated. They appear to be the result of the conviction that automatic regulation is inefficient and inadequate and is responsible for rash speculation, inequitable distribution of credit, and, in part at least, for the alternation between periods of boom and depression which characterize modern economic history and the effects of which seem to become more and more serious as time advances and the complexities of economic life increase.

The theories regarding the methods of credit control concern chiefly the effects of the manipulation of discount rates and the open-market operations of central banks. Their weakness consists in a tendency to exaggerate the power of these banks and in a failure adequately to appreciate the degree of independence of the individual banks and other parts of our financial mechanism and the difficulty of segregating and tracing the effects of a single action or force in a situation in which a constantly changing number and variety of actions and forces are operating at the same time. It is questionable whether the science of economics has yet reached a stage of advancement at which it is possible to formulate valid and useful theories regarding the effects of the combined action of the constantly changing complex of forces which characterizes modern economic life, and it is precisely this task that these theorists undertake.

4. The Stabilization of Prices.

A fruitful source of speculation and theorizing in recent times has been the conviction that the level of prices should be and can be “stabilized.” The harm that may be done by fluctuating prices has long been recognized and frequently discussed. Examples of it are to be found on every hand and are familiar to everybody. The desire to find a remedy naturally resulted in attempts to find the cause or causes of the phenomena, and to this end the older economists noted that changes in the value of the standard commodity affect the prices of all other commodities and, since this commodity is also the almost universal standard of deferred payments, that changes in its value are bound seriously to interfere in the relations between debtors and creditors, always to the financial injuring of one party or the other. Stabilization of the value of the standard commodity thus became a desideratum.

Among means to this end that have been suggested are bimetallism and the utilization of substitutes for the use of the standard metal in the medium of exchange. The former did not prove to be theoretically tenable or practically feasible, nor the latter adequate, though to a degree efficient.

As a substitute for stabilization of the value of the standard commodity, the adoption of an independent standard for deferred payments, the so-called tabular standard, has been urged by many economists on the theory that a group of commodities could be found the fluctuations in the value of which would be less than that of the standard commodity.

One is that, by classification, averaging, weighting, and other devices applied by statisticians to price statistics, it is possible to segregate those influences which operate upon prices through the standard of values from those that operate through the multitude of other commodities that are bought and sold on the markets and thus to measure the fluctuations in the value of the standard commodity.

In estimating the validity of this theory it is necessary to avoid the confusion that may arise from the two meanings of the term value in common use among economists, namely, “purchasing power” and “marginal utility” (or “subjective” and “objective,” or “internal” and “external,” value). The question of definition of terms is not here in question, but the assumption, not infrequently consciously or unconsciously made by those who make use of the theory under consideration, that, when the purchasing power of the standard commodity has been determined and measured, the causes which determine that purchasing power and cause it to vary have also been revealed or at any rate separated into two groups, one consisting of those that operate on the commodity, and the other of those that operate on the other side of the equation of exchange. The only basis for this assumption, if indeed there is any basis for it, is the further assumption that the devices employed in the selection, averaging, weighting, etc., of the price statistics, manipulated, in some unexplained manner, neutralize the effect of all the influences operating on that side of the equation of exchange. No statistician, however, has as yet supplied convincing proof of the validity of this assumption. Even if it could be demonstrated that such neutralization had been effected (through balancing the increases in the prices of part of the commodities comprised in the group manipulated by the decreases in the prices of the remainder), it would not prove that such balancing would be effected in any other period of time, and, consequently, that the change in price levels revealed by comparison of the averages for two periods was produced by influences operating on the standard commodity alone.

Another theory is that stabilization of the price level would remedy the evils, or at least the major evils, resulting from fluctuating prices. No group of commodities can be selected the stabilization of the average price of which would guarantee the stabilization of the innumerable individual and group prices the fluctuations of which cause the troubles that need remedy. Each group of manufacturers is interested in the stabilization of different groups of prices, the farmers in still different groups (the cotton farmers’ group differing from the grain farmers’), the laboring classes in other groups, those who derive incomes from interest-bearing securities in still others, etc., etc. The most that could legitimately be urged in favor of any plan for stabilization that might be found practicable is that it might in some degree mitigate for certain classes the evils of fluctuating prices.

Regarding the various plans for stabilization that have been suggested, it may be said that the practical difficulties involved are in most cases great and in many cases insurmountable and that the theoretical ones are usually very serious. All things considered, it seems probable that more of real importance can be accomplished by analysis of the influences operating upon the demand and the supply of the standard commodity and by the manipulation of these influences than by the more ambitious schemes of stabilization.

Footnotes

1 For an analysis of the doctrines of Clark and Seligman, see Anderson’s Social Value, Chs. I and VII. Professor Clark’s doctrine was expounded in the New Englander as early as 1881 and later in his Philosophy of Wealth; Professor Seligman’s, in his Principles of Economics.

2 B. M. Anderson, Social Value, pp. 13, 14.

3 Ibid., p. 15.

4 lbid., p. 15.

5 Ibid., p. 18.

6 Ibid., p. 13.

7 Social Value, p. 27.

8 Social Value, p. 112.

9 Ibid., pp. 105, 106.

10 To the theories described under this head should be added that of Professor John B. Clark described in Ch. XXV. See also Gide and Rist, A History of Economic Doctrines, translated by William Smart and R. Richards, Bk. V, Ch. II.

11 Francis A. Walker, The Wages Question (New York: Henry Holt and Company, 1891), pp. 244, 245.

12 Ibid., p. 245.

13 Ibid., pp. 247-249, 251.

14 Political Economy, 2d ed. (New York: Henry Holt and Company, 1887), pp. 236, 237.

15 Ibid., pp. 238, 239.

16 Political Economy, pp. 239, 240.

17 Ibid., pp. 240, 241.

18 Charles W. Macfarlane, Value and Distribution (Philadelphia: J. B. Lippincott Company, 1899), p. 120.

19 Value and Distribution, p. 124.

20 Ibid., p. 127.

21 Richard T. Ely, Outlines of Economics, rev. ed. (New York: The Macmillan Company, 1908), Ch. XXV.

22 Richard T. Ely and George Ray Wicker, Elementary Principles of Economics, revised (New York: The Macmillan Company, 1917). Part IV, Ch. V.

23 Charles Jesse Bullock, Introduction to the Study of Economics, 3d cd., revised (New York: Silver, Burdett and Company, 1908), Ch. XIV.

24 See Ch. XVIII, sec. 5.

25 Political Economy, pp. 169-173.

26 Money, Trade and Industry (New York: Henry Holt and Gjmpany), p. 40.

27 Joseph French Johnson, Money and Currency (Boston: Ginn and Company, 1906).

28 Ibid., p. 26.

29 Ibid., pp. 27, 28.

30 Ibid., p. 28.

31 Ibid., p. 16.

32 2d ed. (London: Adam & Charles Black, 1893).

33 Pp. 57, 58.

34 Nicholson, op. cit., p. 63.

35 See Kemmerer’s Money and Credit Instruments in Their Relation to General Prices (New York: Henry Holt and Company, 1907); Fisher’s The Purchasing Power of Money (New York: The Macmillan Company, 1922); and Keynes’s A Treatise on Money, 2 vols. (New York, Harcourt, Brace and Company, 1931).

36 Purchasing Power of Money (New York: The Macmillan Company, 1922), p. 18.

37 The Purchasing Power of Money, p. 151.

38 Ibid., p. 196.

39 Ibid., pp. 199-203.

40 See Anderson’s The Value of Money, pp. 162-164 and 363; and Wilson’s review of Fisher’s book in Bulletin of the American Mathematical Society, Apr., 1914, pp. 377-381.

41 Op. cit., p. 175.

42 Ibid., p. 180.

43 Sec Anderson’s Value of Money, Ch, XV.

44 (New York: The Macmillan Company, 1917), p. 161.

45 See Laughlin’s The Principles of Money (New York, Charles Scribner’s Sons, 1903) and A New Exposition of Money, Credit, Prices, 2 vols. (Chicago: Chicago University Press, 1931) and Scott’s Money and Banking, 6th ed. (New York: Henry Holt and Company, 1926).

46 Bank. Credit (New York: The Macmillan Company, 1920).

47 Ibid., p. 64.

48 See Joseph Stagg Lawrence’s Stabilization of Price (New York: The Macmillan Company, 1928).

• 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.”