THE GIFT OF
MAY TREAT MORRISON
IN MEMORY OF
ALEXANDER F MORRISON
ELEMENTS OF POLITICAL ECONOMY
-^^
ELEMENTS
OF
POLITICAL ECONOMY
BY
J. SHIELD NICHOLSON, M.A., D.Sc.
M
PROFESSOR OF POLITICAL ECONOMY IN THE UNIVEE8ITT OF EDINBFRGH; SOMETIME
EXAMINER IN THE UNIVERSITIES OF CAMBRIDGE, LONDON, AUX) VICTORIA
THE MACMILLAN COMPANY
LONDON: MACMILLAN & CO., Ltd.
1903
All rigfita reserved
COPTKIGIIT, 1903,
By the MACMILLAN COMPANY.
Set up, electrotyped, and published November, 1903.
NorluooU iPrtsa
J. S. Cushin- & Co. - Berwick Sc Smith Co.
Norwood, Mass., U.S.A.
r>-
PREFACE
This work is intended primarily for the use of students.
The leading principles are stated, as far as possible, with-
out the introduction of controversial matter. At the
same time, throughout the work indications are given of
the points still in dispute and of the difficulties involved
in the further development of the principles and theories
of which an elementary exposition is given. The work is
based on the "Principles of Political Economy" (3 vols.)
w by the same author. It is, however, not simply an ab-
stract. In the first four books the material used has
been almost entirely recast. In the last book it was
thought better to omit certain topics altogether rather
than attempt any further condensation of the argument.
In order to keep the volume within reasonable limits
the greater part of the historical matter which forms a
characteristic feature of the larger work has been ex-
cj eluded, though the results of the application of the his-
torical method have been retained. Little space also was
available for the history of economic thought and doc-
trines. In the text, however, the importance of these
"and other omitted topics has been emphasised, and the
student is recommended throughout to supplement his
reading by reference to special works. At the end of
each chapter references are given to books which the
V
434418
VI PREFACE
author has found useful and suggestive, and it is hoped
that the selection as far as it goes is representative and
impartial.
I am more than usually indebted to Mr. A. B. Clark,
M.A., my assistant in the University, not only for his
supervision and correction of the proofs, but also for the
very full index.
J. SHIELD NICHOLSON".
University of Edinburgh,
October, 1903.
CONTENTS
INTRODUCTORY
SCOPE AND METHODS
1. The Magnitude of Economic Literature .
2. Of the Relation of Political Economy to Other Sciences
3. The Scope and Definition of Political Economy
4. Tlie Uses of Definitions in Economics
5. Rules for Definitions
6. The Methods of Political Economy
7. The Laws of Political Economy
8. The Difficulties of Economic Studies
1
3
5
8
10
13
15
17
BOOK I
CONSUMPTION AND PRODUCTION
Chapter I. — Wealth, Utility, and Consumption
§ 1. The Popular Conception of Wealth 21
2. The Economic Analysis of Wealth 21
3. Utility and Disutility 22
4. The Relativity of Utility 23
6. Economic Meaning of Consumption 23
6. Total and ^Marginal Utility 24
7. Transition from the Individual to the Nation .... 21:!
8. The Measurement of Utility by Money — Consumers' Surplus 2(5
Note on the Use of Curves in Economics — Utility Curves . 29
Chapter II. — Production and the Agents of Production
§ 1. Meaning of Production .
2. The Agents of Material Production
3. Nature ......
4. Labour
32
34
35
37
vu
Vm CONTENTS
PAGE
5. Capital 41
6. The Connection between Consumption and Production . . 45
Note on the Curve representing the Quantity of Labour and
the Utility of the Product 45
Chapter III. — Division of Labour
§ 1. Meaning of Division of Labour 47
2. Advantages of Division of Labour 48
3. Division of Labour is limited by the Extent of the Market . 50
4. The Localisation of Industry ....... 51
5. Disadvantages of Division of Labour 52
Chapter IV. — Production on a Large and Small
Scale
§ 1. Production on a Large Scale in Manufactures ... 56
2. Other Cases 57
3. Counteracting Causes 57
4. Joint-stock Companies 69
Chapter V. — Prodxiction on a Large and Small
Scale in Agriculture
§ 1. Complexity of the Question 62
2. Large and Small Farming compared 64
3. Historical and Social Influences 65
Chapter VI. — Tlie Laws of Diminishing and Licreas-
ing Return
§ 1. Plan of the Argument 68
2. The Law of Diminishing Return to Land . . . . 68
3. Counteracting Causes 71
4. Other Applications of the Law ...... 73
5. The Law of Increasing Return 74
Chapter VII. — The Principle of Popidation
§ 1. The Theory of Mai thus 78
2. The Three Propositions of Malthus 79
CONTENTS • IX
Chapter VIII. — The Groivth of Capital
PAfJK
§ 1. Meaning of the Growth of Capital 83
2. The Limits to the Growth of Capital during any Period . 85
3. The Power to save 86
4. The Will to save 87
5. The Growth of the Different Species of Capital ... 89
6. The Limits to the Production of Wealth .... 91
BOOK II
DISTRIBUTION
Chapter I. — Distribution and PropeHy
§ 1. Meaning of Distribution 95
2. On the Nature of the Laws of Distribution .... 97
3. The Conception of Sovereignty and its Application to Distri-
bution 98
4. Economic Definition of Private Property .... 99
5. The Economic Bases of Private Property .... 100
Chapter II. — Inheritance and Bequest
§ 1. Economic to be distinguished from Legal and Ethical Ideas . 106
2. General View of Bequest and Inheritance .... 106
3. Inheritance 108
4. Bequest 109
Chapter III. — Property in Land — Expropriation —
Compensation
§ 1. Property in Land 112
2. Expropriation 114
3. Compensation 116
Chapter IV. — Socialism,
§ 1. Historical Variations in the Institution of Property . . 120
2. Definition of Socialism 122
3. Classification of Socialistic Schemes 123
CONTENTS
4. State Socialism or Collectivism
5. Tlie Socialist Critique of Individualism
6. Difficulties of Socialism .
7. The Benefits of Socialist Ideals
PASK
125
128
130
134
Chapter V. — Quantitative Distribution
§ 1. Of the Quantitative Distribution of Property .... 136
2. The Distribution of the Agents of Production as determined
by Law and Custom 137
3. The Quantitative Distribution of Incomes .... 139
4. Money Incomes and Real Incomes ...... 142
Chapter VI. — Wages and the General Bate of
Wages
1. "Wages as the Real Reward of a Quantity of Labour
2. Real as compared with Nominal Wages
3. Wages as Payment for Work done
4. The General Rate of Wages
5. The Wages Fund Theory
6. The Produce Theory of Wages
7. General Relations of Wages to Profits and Rents
145
146
147
149
154
160
164
Chapter VII. — Helative Wages
1. Differences of Wages
2. Pa7'ticular Cases ....
3. Wages of Individuals
4. The Effects of Machinery on Wages
5. Conclusion
166
169
171
172
173
Chapter VIII. — Profits
§ \. Analysis of Profits
2. Loan-interest and Profit-interest
3. Insurance against Risk . . . . ,
4. Wages of Management . . . . ,
6. The Reward of Enterprise and Good Fortune
6. The Tendency of Profits to Equality
7. The General Rate of Profits . . . .
174
175
178
180
181
182
18J
CONTENTS
XI
Chapter IX. — Harmonies and Conflicts of Labour
and Capital
1. Relations of Labour and Capital in General
2. Conflicts of Interest ; Origin of Trade Unions
3. Functions of Trade Unions
4. Wages and tlie Consumer
5. Wages and Profits
6. Evils of Conflicts of Labour and Capital
7. The Harmonies of Labour and Capital .
PAGE
185
186
187
188
191
195
196
Chapter X. — Economic Rent
§ 1. Different Meanings of the Term Rent
2. Economic Rent from Extensive Cultivation .
3. Economic Rent from Situation ....
4. Economic Rent from Intensive Cultivation
5. Economic Rent from Scarcity ....
6. Combination of the Different Forms of Economic Rent
7. Rent of Non-agricultural Land ....
8. Quasi-VQ-ai
199
201
202
203
204
204
206
208
BOOK III
EXCHANGE
Chapter I. — Value and Markets
§ 1. Exchange 211
2. Value 211
3. Value in Exchange 212
4. Relative Prices must be adjusted to Relative Values . . 215
5. A General Rise of Values is impossible 215
6. Other General Propositions on Value 216
7. Markets 217
Chapter II. — On Demand and Siqiply
§ 1. The Law of Demand 220
2. Changes in Demand — Rise and Fall in Demand . . . 222
3. The Law of Supply 224
Xll CONTENTS
PAOB
4. The Equation between Demand and Supply — the Temporary-
Equilibrium Price 225
5. The Immediate Effects of Changes in Demand and Supply . 227
6. Ulterior Effects of Changes in Demand and Supply . , 228
Notes on Curves illustrating Demand and Stipply and the
Immediate Effects of Changes in Demand and Supply on
Price 229
Chapter III. — Normal Value and Cost of Production
§ 1. Meaning of Normal Value 231
2. Keal Cost and Money Cost 232
3. The Analysis of Cost of Production 234
4. Case of Joint Products 239
Note on Expenses of Production 240
Chapter IV. — Bent and Value — Monopoly Value
§ 1. Economic Rent as a Factor in Price ..... 241
2. Quasi-\ei\t 243
3. Monopoly Value 245
4. Competition and Monopoly Prices compared .... 248
5. Conditions requisite to a Seller's Monopoly .... 249
6. Buyer's Monopoly 250
Chapter V. — Functions and Systems of Money
§ 1. What is Money ? 252
2. The Primary Functions of Money 253
3. The Qualities of Good Metallic Money 258
4. Systems of Metallic Money 259
Chapter VI. — TJie Quantity Theory of Money
§ 1. A Hypothetical Market 261
2. Influences modifying that of Quantity 263
3. Cost of Production of Gold in Relation to its Value . . 265
Chapter VII. — Gresham^s Law — Tokeii Coins —
Inconvertible Notes
§ 1. Gresham's Law 269
2. Token Coins 271
3. Inconvertible Notes 273
4. The Evils of Depreciation of Notes 276
CONTENTS XUl
Chapter VTII. — Credit and General Prices
PAGE
§ 1. Credit and the Quantity Theory of Money .... 278
2. Gold Reserves as a Limit to Credit Prices .... 279
3. The Limits imposed by Foreign Trade 281
4. Conclusion of the Quantity Theory of Money . . . 282
Chapter IX. — Bimetallism
§ I. Meaning of Bimetallism
2. Instability of Bimetallism in One Country
3. International Bimetallism
4. Difficulties of International Bimetallism .
6. The Advantages claimed for International Bimetallism
284
284
285
288
290
Chapter X. — Bayiks of Issue
§ 1. Development of Banking 292
2. Origin and Uses of Bank-notes 293
3. The Limitation of the Issues of Notes ..... 296
4. The Denomination of Notes 298
Chapter XI. — Banks of Deposit and Commercial
Crises
§ 1. Progress of Deposit Banking 304
2. Limits to the Creation of Bank Money ..... 305
3. The Management of Banking Reserves 306
4. Commercial Crises 309
Chapter XII. — TJie Rate of Interest and the Hate
of Discount
§ 1. Interest on Capital and Interest on Money .... 311
2. Interest on Loanable Capital 312
3. Interest on Loanable Money — the Rate of Discount . . 316
4. Causes of Difference in the Rates for Long and Short Periods 320
5. The Relative Stability of the Rate for Long Periods . . 322
6. The Exchange Value of Money and the Rate of Interest . 324
XIV CONTENTS
Chapter XIII. — The Theory of Foreign Trade
PAGE
1. The Problems of Foreign Trade 327
2. Meaning of Foreign Trade 328
3. Tlie Pure Tlieory of Foreign Trade 329
4. Tlie Tlieory of Comparative Cost in Terms of Barter . . 332
5. The Theory of International Values 3;J6
6. Money iu International Trade 333
Chapter XIV. — The Foreign Exchanges
1. International Debts
2. International Debts are payable in Money
3. The Mint (or Nominal) Par of Exchange
4. Gold Points
5. Favourable and Unfavourable Exchange
6. Effects of Depreciation of the Currency
7. Indirect Effects of a Depreciation of the Currer
Foreign Trade of a Country
8. On the Distribution of Gold throughout the Commercial
World 354
. 340
. 343
. 345
. 346
. 347
. 350
cy on the
351
Chapter XV. — Advantages and Disadvantages of
Fo7'eign Trade
1. The Real Advantages of Foreign Trade 350
2. Possible Disadvantages of Foreign Trade to a Particular
Country 358
BOOK IV
ECONOMIC PEOGRESS
Chapter I. — Tlie Nature and Measurement of Eco-
nomic Progress
§ 1. Connection of Economic Progress with General Progress . 367
2. The Nature of Econonuc I'rogross ...... 369
3. Progress and Utility 372
4. Progress in Production, Exchange, and Distribution . . 374
CONTENTS XV
Chapter II. — Progress in Money and Prices
PAGE
§ 1. Progress and Money 378
2. Progress and General Prices 380
3. Progress and Relative Prices 383
Chapter III. — Eejit and Progress
1. Rent as a Measure of Progress 387
2. Progress and Urban Rents 388
3. Progress and Agricultural Rents ...... 389
4. The Effects of Improvements on Agricultural Rents . . 391
Chapter IV. — Progress and Profits
§ 1. General View 395
2. Progress and Loan-interest 396
3. Progress and General Profits 398
4. The Tendency of Profits to a Minimum , . . . . 401
Chapter V. — Progress and Wages
§ 1. Progress and the Price of Labour .,,... 405
2. The Relations of Labour and Capital 410
BOOK V
THE ECONOMIC FUNCTIONS OF GOVERNMENT
Chapter I. — Economic Functions of Government
§ 1. The Principle of Natural Liberty, Laisser-faire, or " Mini-
mum Interference " 415
2. The Principle of Maximum Utility 416
3. Summary of the Benefits and Defects of Individualism . . 418
4. The Methods of Legal Interference 420
5. The Methods of Governmental Action 423
6. General Limitations to Governmental Interference . . . 425
XVI CONTENTS
Chapter II. — Character and Definition of Taxation
§ 1. The General Characteristics of Taxation 429
Chapter III. — The Canons of Taxation
PAGE
1. Adam Smith's Canons of Taxation : First Equality
2. Equality of Sacrifice
3. The Faculty Theory of Tixxation ....
4. Taxation of Unearned Increments ....
5. The Benefit or Social Dividend Theory of Taxation
6. The Social Function of Taxation ....
7. The Principle of Formal Justice ....
8. Adam Smith's Other Canons of Taxation
9. Other Rules of Taxation
434
437
440
442
444
445
447
447
449
Chapter IV. — Incidence of Taxation
§ 1. Direct and Indirect Taxes 452
2. The Incidence of Taxation as determined by Law and Custom 454
3. Incidence of Taxation as determined by Contract and
Exchange 455
4. The Immediate Effects on Price of a Tax .... 456
5. Ulterior Effects of Taxation on Prices 458
Note on Curve illustrating the Immediate Effects on Price of
a Tax 459
Chapter V. — Taxes on Rent and Land
§ 1. Taxes on Pure Economic Rent : Agricultural Land . . 461
2. Taxes on Economic Rent : Building Land .... 463
3. Taxation of Land Values : Practical Conclusions . . . 466
Chapter VI. — Taxes on Consumable Commodities
§ 1. Methods of taxing Commodities 471
2. The Incidence of Taxes on Commodities .... 474
3. Rules for Taxes on Consumable Commodities . , . 480
4. Direct and Indirect Taxes compared 481
Chapter VII. — Free Trade and Protection
§ 1. Meaning of Free Trade 484
2. Free Trade and tlie Consumer 485
CONTENTS XVll
3. The Protection of Home Industries : General View . . 486
4. The Assumptions of the Geueial Argument for Free Trade . 487
5. Theoretical Exceptions to Free Trade 490
6. The Negative Argument for Free Trade 494
Chapter VIII. — Principles of Public Expenditure
§ 1. Nature of Public Expenditure 497
2. Classification of Public Expenditure 499
3. Analogies from Taxation 501
4. The Principles of Expenditure 502
Chapter IX. — Colonies and Dependencies
§ 1. Early History of British Colonies and Dependencies . . 511
2. The Profit and Loss to the Mother Country of Colonies and
Dependencies 515
3. Trade and the Flag 516
4. Imperial Federation 518
ELEMENTS OF POLITICAL ECONOMY
INTRODUCTORY
SCOPE AND METFOJDS
1. The Magnitude of Economic Litt^rature. — fc TS4.5 there
was published a book which now has a considerable scarcity
value ; namely, the Literatwe of Political Economy^ by J. R.
McCulloch. This work is described as a classified cata-
logue of select publications in the different departments of
that science. It begins with the general treatises and the
fundamental principles, occupying some thirty pages ; the
second chapter, on commerce and commercial policy, is
divided into ten sections and covers more than a hundred
pages ; and there follow eighteen more chapters on various
topics, e.g. money, banks, prices, roads, canals, railways,
statistics, fisheries, insurance, interest, population, wages,
poor laws, property, successions, revenue, and finance, con-
cluding with a chapter entitled miscellaneous. The index
of authors gives about eight hundred names, and the index
of books about double that number. Even in 1845 the
work only professed to give a selection, and since that time
attention has been directed to many works not noticed by
McCulloch, of high value in economic literature. The
number of works that have been written since 1845 is
enormous, and of recent years the rate has been increasing
B 1
2 ELEMENTS OF POLITICAL ECONOMY
rapidly. Some idea of the present range of economic
studies may be formed by a glance at Palgrave's Diction-
ary of Political Economy^ in the compilation of which he
had the assistance of nearly two hundred experts. It is
not only in England, or even principally in England,
that this growth of economic literature is observed. In
Germany, Austria, the United States, in France, Italy,
Switzerland, and Holland, many books have been written
in ev-ery department,- and in addition there are a number
of special jouinaib devoted to the subject. Such and so
g-teeft'i's ^'6 literature- of economics. It follows at once
that it is quite impossible to give any adequate idea of
this literature in an elementary treatment of principles.
At the same time it may be observed that the study of
economic literature is probably of more importance than
the study of the literature of almost any other science. In
most sciences the latest authority may be expected to have
digested or at least to have congested the best results
of his predecessors. But in economics we cannot fully
appreciate the real meaning of fundamental conceptions
and leading principles without tracing their gradual devel-
opment. And especially if we wish to understand the
industrial and commercial or more generally the economic
history of a people, we must understand the ideas by which
it was dominated at various periods ; and in his standard
work on the economic history of England Dr. Cunningham
has done well to introduce chapters on opinions, ideas, and
theories, although economic history is concerned with the
positive treatment of facts and institutions.
There are also great advantages to the student in
reading at first hand the works of the principal writers.
SCOPE AND METHODS 3
Adam Smith's Wealth of Nations cannot be reduced to
an abstract, and the attempt to frame a short and simple
creed of economic doctrine out of this ehiborate work was
not only a failure, but caused very great miscliief. And
even as regards many forgotten writers and obscure
pamphlets, it is surprising what may be gained. The
great writers, notably Adam Smith himself, fed largely
on the little writers.
The history of the development of economic theories is
an important study for which there is ample material. In
the present survey of principles, liowever, it can only be
introduced occasionally by way of illustration.
2. Of the Relation of Political Economy to Other Sciences.
— The progress of all the sciences has been associated with
ever increasing specialisation. When Adam Smith was
Professor of Moral Philosophy in the University of Glas-
gow, his course of lectures was divided into four parts.
The first embraced Natural Theology ; the second. Ethics
in the narrow sense of the term ; the third examined more
at length " that branch of morality which relates to jus-
tice," and it is noteworthy that in dealing with this sub-
ject he adopted largely the historical method ; and in the
fourth part he gave the lectures which were afterwards
expanded into the Wealth of Nations. His course on
Ethics was the foundation of tiie essay on the theory of
Moral Sentiments which was in its day as famous as his
economic work; and he had intended to develop his course
on jurisprudence in a similar way, but was overtaken by
old age and sickness. The separation of economics from
ethics and jurisprudence was an example of the necessity
of specialisation after a certain point had been attained ;
4 ELEMENTS OF POLITICAL ECONOMY
and it also explains the emphasis laid in the Wealth of
Nations on one part of social and political life to the
apparent exclusion of interests of at least equal impor-
tance. So far from underestimating the principles of
morality, law, and religion, lie supposed that they were of
such importance that they required special investigation.
The object of the course on economics is recorded by one
of his students in these words: " In the last part of his lec-
tures he examined those political regulations which are
founded, not on the principle of justice^ but on that of ex-
pediency^ and which are calculated to increase the riches,
the power, and the prosperity of a state. Under this view
he considered the political institutions relating to com-
merce, finance, and to ecclesiastical establishments," and
there may be added to this account, the expense of the
administration of justice and of the provision of national
education in the broadest sense of the term.
This specialisation of economics was continued by the
English successors of Adam Smith with few exceptions,
and indeed by the systematic writers it was carried far-
ther, that is to say, the field of inquiry was contracted
and stress was laid on the scientific character of Political
Economy as distinct from its practical applications.
Recently however, in the reaction against this excessive
specialisation, there has been a tendency to bring in on
the one side moral and political considerations, and on
the other to give the science a more practical character
in relation to business in the narrow sense of the term.
Without expressing any opinion on the controversy
involved, regarding this change of attitude, it is sufficient
in this place to state that the scientific treatment of eco-
SCOPE AND METHODS 5
nomic principles and methods, to the exclusion of these
various moral and social influences and of various prac-
tical applications, is a subject of sufficient importance
and difficulty for specialisation, and forms the best intro-
duction to these wider and more practical applications.
To take one or two examples : the theory of money is
a necessary preliminary to banking; that of monopoly
values, to trusts ; that of wages and profits, to trade unions ;
that of the incidence of taxation, to finance, — and the
list might be extended indefinitely. It is not too much
to say that every day the newspapers offer problems that
involve, for their adequate understanding and an appre-
ciation of their bearings, the use of economic methods
and principles, but it would be impossible to anticipate
the actual problems that will arise. The social reformer,
the legislator, and the man of business (whose name is
legion) will all benefit from the preliminary study of
scientific economics, although the special problems in
which they are interested are not treated in the text-
books. In precisely the same way the engineer may
benefit from mathematics, the miner from geology, and
the navigator from astronomy, although the industrial arts
are not directly treated of in the corresponding sciences.
At the same time it is, no doubt, often desirable to
illustrate the theory by reference to actual or historical
examples that in themselves are interesting and impor-
tant; although, on the other hand, in certain parts it is
better to show the abstract nature of the treatment by
making an avowed use of hypothetical examples.
3. The Scope and Definition of Political Economy. — The
scope of Political Economy may be indicated by show-
6 ELEMENTS OF POLITICAL ECONO:ay
ing its relation to other sciences. It must be classed
with the group of moral or mental sciences because it
deals primarily with human beings as possessing certain
moral or mental characteristics. Its fundamental con-
ceptions always have reference to qualities of mind. It
is true that sometimes physical facts are of great im-
portance. Thus, it is often said that the laws of pro-
duction partake of the character of physical laws, e.g.
the law of diminishing return ; and often definite appeals
are made to physical facts and conditions, e.g. in treat-
ing of the causes affecting the efficiency or the degradation
of labour, or the influence of natural resources and cli-
matic conditions on the production and accumulation of
wealth. But the end in view is not the mere statement
of physical facts, but their relations to human beings.
Wealth itself is treated as giving pleasure and involv-
ing effort, and not as possessing weight, extension, or
other physical characters ; that is to say, it is considered
from the human standpoint. During the first half of
the nineteenth century great social evils arose from the
materialisation of wealth, or forgetting the end in the
means.
Of the moral sciences some treat mainly of the indi-
vidual, e.g. psychology, some of the social relations of
human beings, e.g. jurisprudence. The term political,
taken in its original sense, implies tliat in the main
economic science deals with man in his social relations.
Sometimes, no doubt, in the preliminary explication of
conceptions, it is useful to isolate the individual, e.g. in
treating of utility we may begin with the direct con-
sumption of the individual. Also in the study of the
SCOPE AND METHODS 7
motives to action we may begin with the individual
and in general before considering the probable effects
of legal regulations, it is best to show the probable re-
sults, if individuals are left to their own devices. But
the object in view is always to discover the effect on
the whole society or some group, and not merely on the
individual.
Again, in its mode of dealing with social phenomena,
political economy must be classed with the positive
sciences. In the main, it deals with facts and not with
ideals ; it observes certain kinds of social facts in order
to make classifications, and to discover uniformities and
causal connections. It describes what has happened in
the past, or is actually occurring in the present, and will
probably occur in the future under similar conditions.
I3ut strictly speaking from this positive standpoint, it
does not lay down moral precepts or deliver moral judg-
ments. And the reason is not that moral and religious
elements are not of importance in practical problems,
but simply that they are outside the sphere of economics.
If Adam Smith found it desirable in the eighteenth cen-
tury to separate economics from morality and religion,
that is to say, for scientific treatment, the presumption
is that in the twentieth century this specialisation must
be retained. And it is observed in the study of eco-
nomic history, that, as a matter of fact, the economic
elements can be considered apart. No doubt the moral
and the religious ideas of people often have indirectly
an economic influence, but again, as throughout, it is a
question of emphasis. We may, for example, consider
the economic aspects of the meditcval church apart from
8 ELEMENTS OF POLITICAL ECONOMY
its moral or religious teaching. And similarly, in investi-
gating present conditions, we can distinguish between
the positive examination of facts, and the suggestion of
reforms with the view of promoting certain ideals. We
may, indeed, in some cases go be^'ond the actual facts
and pass from the past and the present, to the future,
and consider the probable effects of various proposed
economic reforms. But even here we are in the domain
of facts in so far as these proposals are such as to modify
human action and are not purely imaginary. Thus we
may discuss socialism, and consider the meaning, the
advantages and disadvantages, etc., on the ground that
socialistic ideas influence present legislation and eco-
nomic action — in other words, the socialistic tendency
of much modern governmental action is an economic fac-
tor that must be taken account of. But in considering
any social reform or proposed remedy, we must remem-
ber that, in general, there are more than the economic
elements to be considered. Wealth, the subject-matter
of economic inquiry, even in the most extended mean-
ing and having regard to its remote influences, is only
one element of civilisation, and often not the most
important.
Political economy, then, may be defined as the science
which investigates the nature and the causes of the
wealth of nations ; it seeks to discover the laws affecting
the production and the consumption, the distribution and
the exchange, of wealth. All of these terms, it will appear
in the sequel, require careful analysis.
4. The Uses of Definitions in Economics. — Most m ords
used in economics are used also in ordinary language or at
SCOPE AND METHODS 9
any rate in the language of the market-place, and there are
relatively few technical terras. The question then natu-
rally arises, Why should we waste time over definitions and
explanations when the words are already familiar ? The
answer is that this very familiarity is deceptive and
sometimes conceals real difficulties, and sometimes leads
to positive errors. If we search carefully into the mean-
inof of these familiar terms, we shall often be led to notice
important facts instead of stopping at a verbal explana-
tion. For a long time people were accustomed to say that
wages were high because capital provided a large wages
fund, which in most cases had no more meaning than the
assertion that the labourers receive much, when the employ-
ers pay much, in wages. But the inquiry into the meaning
of this familiar expression led to the discovery of the true
relations between labour and capital. Again, people were
accustomed to say that the fall in prices that set in in gold-
using countries after 1874 was caused b}^ the appreciation
of gold, and in most cases this had no more meaning
than the statement that the fall in prices was caused
by the fall in prices. But the inquiries that were made
as to the meaning of these expressions were again, to say
the least, fruitful in their results. Real difficulties were
exposed and some advances were made towards their
solution.
But very often this familiar use of economic terms led
people into positive errors, and even governments into
mistaken lines of action. Most of the crude fallacies
of protection can be exposed by the careful analysis of
the terms employed. The idea, formerly so prevalent and
still not extinct, that the advantage of foreign trade can
10 ELEMENTS OF POLITICAL ECONOMY
be measured by the excess of exports over imports is
shown to be fallacious by analysing the terms. Similarly
also, many of the popular fallacies regarding the connec-
tion between labour and prices, consumption and pro-
duction, low wages and cheap labour, may be got rid of
by a consideration of what ideas the words stand for.
It is true that in all these cases much more than verbal
analysis is required, but in all cases also it is a necessary
preliminary.
Some of the definitions of terms in constant use prove
on inquiry to involve such difficulties that a simple defi-
nition is impossible, e.g. capital, money, etc. Accordingly
it is found desirable to lay down certain rules for defi-
nitions in economics. The rules now generally accepted
are as follows : —
5. Rules for Definitions. — (1) As far as possible our
definition should coincide with the best popular usage.
Otherwise, if a writer gives a different meaning in the
course of his argument, he may be led by association to
use the term in its popular sense, and thus be involved
in error ; or even if he himself escapes the confusion, his
argument may be misunderstood and misquoted. This
difference between the popular and the quasi-technical
usage is the source of many of the popular delusions re-
garding the teachings of economists. Thus, for example,
in the pure theory of economic rent, the term is used in
a sense far more narrow than the popular meaning.
The proposition that with the progress of society rents
tend to rise was only lield in reference to these economic
rents, but when used in popular arguments in reference
to uneained increments the wider meaning was given.
SCOPE AND METHODS 11
Similarly, the economic use of the terms labour and
wages is much wider than in popular discourse ; and
propositions which economists have framed with regard
to labour in the wide sense are repeated with the
narrower meaning. In the economic sense all wealth
may be said to be the result of labour, if we include the
highest professional skill, the labour of '•'first occupancy,"
and an endless number of forms of human activity be-
sides mere manual labour. But too often, in popular
discussions, what is attributed by the economists to labour
in general is confined to manual labour in particular.
The only safeguard seems to be to make a liberal use of
qualifying adjectives, so as to indicate the precise meaning
intended. Thus the money of the money market consists
only to a small extent of actual coin or even notes, whilst
on the other hand a large part of gross profits in economic
analysis appears as a form of wages. It is often of the
highest practical importance to distinguish between the
diiferent forms of money and the different forms of wages,
and the distinctions are best indicated by the use of
appropriate qualifying terms, e.g. standard money, wages
of management, etc.
(2) The second rule, closely connected with the first
is that definitions should not be made too rigid or precise.
The nature of the subject does not admit of the accuracy
that is possible in some parts of mathematics. Conceptions
and ideas which are very different in extreme cases often
overlap or admit of debatable margins. The recognition
of continuity, and of resemblance in difference, is much
insisted on by recent writers. It is usual to say that there
■ are three great agents of production of wealth : namely,
12 ELEMENTS OF POLITICAL ECONOMY
land, labour, and capital. And in simple cases nothing can
be more clear than the differences implied. In north-
west Canada we distinguish readily and clearly between
the land, the labour of the immigrants, and the ploughs
and other implements which they have to purchase. Land,
capital, and labour seem quite different in kind. But on
analysis in a complex industrial society, the distinctions
are often by no means clear. Thus labour and capital are
in many respects so much alike that Adam Smith includes
the natural and acquired abilities of a people under the
fixed capital; similarly also, for many purposes, land is
placed under capital.
(3) In different parts of the subject, stress is laid on
different characteristics of a complex conception ; and
it is advisable to begin with provisional definitions of a
general character and later on to frame special definitions
for special purposes. Thus, we may begin with a defini-
tion of money which calls attention to its function as a
general medium of exchange, and later the special function
of legal tender may be made prominent.
(4) After all, it must be remembered that " words are
the servants of things " and in some cases it may be desir-
able to make a new technical term or to give to an old
term a special meaning. Some writers have maintained
that in scientific language we ought only to use scientific
terms. " In each particular science we are never concerned
to know what are the meaning's attached to the term
either in vulgar parlance or in any other science " (Pan-
taleoni). But it ma}^ be objected that economic science
draws much of its materials from facts expressed in com-
mon language, and to understand the facts we must exam-
SCOPE AND METHODS 13
ine the language ; and even pure economics, to be of any
value, must not be so abstract as not to be capable of
application to the actual world. And again, political
economy also draws largely from other sciences, and it
would cause endless confusion if the words are to be
employed in totally different senses. The better opinion,
then, seems to be that technical terms ought not to be
multiplied beyond necessity. The use of a new word is a
very different thing from the discovery of a new idea.
(5) It is sometimes useful to supplement the positive
definition by considering the opposite — to state not only
what is included, but also what is excluded. Thus, the
meaning of equality of taxation may be clarified by refer-
ence to the marks of inequality. In the same way, when
we test our definitions by instances — in logical phrase
the connotation by the denotation — it is well to take
examples of the negative as well as of the positive.
(6) Finally, it may be added that just as it is well not
to diverge from the popular meaning without cause, so
also, if a quasi-technical meaning has been generally
adopted by economic writers, that meaning should not be
altered without sufficient reason. If every writer is to
give his own shade of meaning to every term, a vast amount
of unnecessary labour will be required.
6. The Methods of Political Economy. — Economists have
used two distinct methods, or rather groups of methods,
to which different significant names are applied accord-
ing to the stress laid on different characteristics.
In the first place, we have the methods known accord-
ing to their special uses as deductive, a priori^ abstract,
hypothetical, mathematical, analytical, etc. ; and secondly,
14 ELEMENTS OF POLITICAL ECONOMY
we have the methods styled inductive, positive, a pos-
teriori, historical, comparative, etc.
In the typical deductive method we start with cer-
tain broad facts, obvious from observation, or with prin-
ciples supposed to be already established. From these
general propositions we deduce some particular conclu-
sion. We then refer to experience to test or verify this
deduction. Then if we discover that there is not an
exact coincidence, we try to discover the disturbing
causes.
In the typical inductive method we start with the
observation and classification of concrete facts and ascend
to general principles. We may conversely test our in-
ductions by using them as the basis of new deductions.
In its extreme form the deductive method starts with
hypotheses, and proceeds to draw conclusions by the
aid of mathematics. It is possible that the hypotheses
may be so remote from facts that the only use of the
method in this form is didactic. Similarly also, in its
extreme form the inductive method may never advance
beyond the first stage, namely, the collection or observa-
tion of facts. Masses of facts have been recorded by
various royal commissions in England, which are stored
away in blue books. Again, in the works of Anderson,
Macpherson, Eden, Tooke, Newmarch, Rogers, Vicomte
d'Avenel, and many other economic historians, only a
relatively small part of the material has been used for
scientific purposes.
On the other hand, however, even the most extreme
forms of the deductive method have often led to a more
adequate and true interpretation of facts ; and again, the
SCOPE AND METHODS 15
collections of facts and figures which had been set aside
as useless have come to be of the highest importance.
It is now generally admitted tliat all these various
methods, or these various forms of the deductive and
inductive methods, are applicable in various cases. In
certain parts of the subject, e.g. in the theory of value
and of money and prices, it is necessary in the first
place to begin with the deductive method and to use
hypotheses. In other parts, e.g. in considering the causes
of the efficiency of labour, or the effects of climate on
production, induction is necessary from the outset. In
the present survey numerous examples will occur of
these various methods, so that further illustration is
unnecessary.
7. The Laws of Political Economy. — The conclusions
arrived at by the use of these various methods are in
some cases styled the laws of political economy. This
phrase has been much misunderstood, and requires care-
ful analysis. The meaning of the expression may be con-
sidered with advantage both positively and negatively.
(1) Positively, the laws of political economy may be
divided into two classes, according as the conclusions on
which they are based are obtained from the use of the
deductive or the inductive methods respectively.
The laws due to the deductive method are in general
abstract or hypothetical, and so long as the conditions
laid down hold good they are necessarily true. That is
to say, if the premises are admitted, the conclusion
depends simply on correct reasoning. Take, for example,
Gresham's law, which in its popular form states that bad
money drives good money from circulation. So long as
16 ELEMENTS OF POLITICAL ECONOMY
the conditions are fulfilled, the result follows. But in
practice it rarely happens that the conditions answer the
strict requirements of the theory. Even in this relatively
simple case we often find bad and good money circulat-
ing side by side. Generally it may be said that these
abstract or hypothetical laws are only true in the absence
of disturbing causes.
The laws due to the inductive method are in general
empirical, and cannot be far extended in time or space.
That is to say, the probability is that in different times
and places there will be an essential change in the con-
ditions. Thus, the law of population laid down by Mal-
thus was based on an inductive inquiry, and was carefully
worded. But as popularly expressed in a summary form,
it is supposed to state that population will always increase
if food increases. In certain cases this generalisation is
adequate and correct; the recent experience, however,
of several great countries, notably France, shows that the
law in this summary form does not hold good. Simi-
larly, all arguments that are based on appeals to history
or to the experience of other countries, or in other words,
all the so-called laws due to the historical and compara-
tive methods, can only be safely applied to new cases if
we are assured that the essential conditions are similar.
It follows, generally, that the laws of political economy
when applied to the explanation of facts, or the advo-
cacy (or condemnation) of proposed reforms, have vary-
ing degrees of force. In the classical phrase they express
tendencies only, and are liable to be counteracted.
(2) Negatively, economic laws are to be distinguished
both from legal enactments and from moral rules; they
SCOPE AND METHODS 17
are not commands or imperatives. It is one thing to
point out the meaning, causes, and effects of certain lines
of conduct, and quite another to assert that therefore
certain rules ought to be obeyed. When the authority of
the classical economy was at its height in popular estima-
tion, no phrase was more in vogue in political discussions
than " contrary to the laws of political economy." In par-
ticular any interference with freedom of contract was sup-
posed to offend against these laws. All, however, that
economic science does with regard to freedom of contract
is to explain what will happen if people are left free ; and
in some cases the obvious conclusion from the inquiry is,
that in the interests of justice or morality or public ex-
pediency such freedom ought to be restrained.
Sometimes, it is true, this scientific attitude of econo-
mists is overstrained. In certain cases the only elements
of importance are economic. Indeed, one principal mean-
ing of economy is the least wasteful or most effective
means to attain any given end, as, for example, when we
speak of the economic employment of time, labour, or
money. And yet, even in these cases it may sometimes be
desirable on moral or social grounds to adopt the more
expensive or less economical methods.
8. The Difficulties of Economic Studies. — The student
must be prepared to meet with different kinds of difficul-
ties in economics. Sometimes the object is to ascertain
by a kind of Socratic induction the meanings of popular
terms and the content of popular conceptions ; or the
difficulty may consist in a complete or adequate enumera-
tion of details with a reasoned classification, e.g. in esti-
mating the relative advantages of cultivation on a large
18 ELEMENTS OF POLITICAL ECONOMY
and on a small scale in agriculture ; or, again, the strain
of attention may be diverted to abstract principles which
require for their development mathematical methods, as in
most parts of the theory of value ; sometimes the appeal
to history is the main difficulty, as in considering the
effects of the navigation acts or the origin of trade
unions — and here the labour is increased if the historical
is supported by the comparative method, as in tracing the
development and decay of village communities ; in cer-
tain parts of the subject we come in contact with the
principles of jurisprudence and ethics, as in discussing
the economic bases of private property or the laws of
bequest and inheritance ; and, finally, in the pursuit of
descriptive and realistic economics, the student may have
to contend on the one side with the facts of commercial
geography, and on the other with the methods of statistics
by which he will again be brought back to mathematical
abstractions.^
1 Cf. Principles of Political Economy, by H. Sidgwick, "Introduction" ;
The Scope and Method of Political Economy, by J. N. Keynes ; Intro-
duction to the Study of Political Economy, by Luigi Cossa (translated
by L. Dyer) ; The Elements of Statistics, by A. L. Bowley ; Cours d^£co-
nomie Politique (Tome 1), by V. Pareto,
BOOK I
CONSUMPTION AND PRODUCTION
CHAPTER I
■WEALTH, UTILITY, AND CONSUMPTION
1. The Popular Conception of Wealth. — Political Economy
is the science of wealth, and logically the first problem is
to give a definition of wealth. Referring to the rules of
definition, we may first take the definition of wealth which
is the best known and most popular. "Wealth consists
of all useful or agreeable things which possess exchange
value ; or in other words, all useful or agreeable things
except those which can be obtained in the quantity desired
without labour or sacrifice" (Mill). At first sight this
seemed simple enough, but as soon as the definition came
to be tested by particular cases all sorts of difficulties
were discovered. Must the things be material? Is the
wealth of a nation simply the aggregate of that of its
individual members? Is the wealth of the nation to be
measured by its exchange value? Is exchange value
essential to national wealth ? A vast amount of ingenuity
was exercised in the discussion of these questions, and it
became clear that wealth is a complex conception which
demands a careful analj'sis.
2. The Economic Analysis of Wealth. — In the popular
definition there are implied several distinct ideas each of
which requires careful exposition ; namel3% utility, valuo,
labour, and appropriation. That is to say, the things that
are included under wealth are in general the result of
21
22 ELEMENTS OF POLITICAL ECOXOMY
labour ; they possess exchange value ; they are appropri-
ated ; and in all cases they must possess utility. It is found,
also, that in different departments and in different prob-
lems the emphasis is laid with varying force on these
fundamental ideas. Thus, in consumption the stress is on
utility, in production on labour, in distribution on appro-
priation, in exchange on value ; whilst in dealing with
economic progress and with the economic functions of
government, the relative importance of these ideas varies
at different points. It is not implied, however, that the
attention is exclusively directed in production, only to
labour; or in distribution, only to appropriation; and that
in exchange, value alone is considered. Some writers
make value fundamental in distribution, and in any
account of value reference must be made to the agents
of production, e.g. labour. In fact, it is only for scien-
tific purposes that this logical separation of departments
can be made. But logical separation of some kind is nec-
essary for the scientific treatment of any complex phe-
nomena. We may consider first utility and consumption,
to which, since Mill, the attention of economists has been
largely directed. It is now possible to present the main
results in a simple form, though some of the deductions
and applications are still open to controversy.
3. Utility and Disutility. — By the utility of a thing we
mean its power to satisfy a desire or serve a purpose. To
what extent this satisfaction is accompanied by pleasure
or happiness, or is really beneficial to the individual or to
society, are matters for special inquiry ; but to begin with
we need a term that is neutral or colourless. Utility in
this wide sense lies at the root of demand, and there is no
WEALTH, UTILITY, AND CONSUMPTION 23
doubt that, whether we consider individuals, or social
classes, or a whole nation, there are extensive demands for
things that are productive of misery and degradation.
But these things to these people possess utility in the
sense that they satisfy their desires. Disutility is simply
negative utility. It thwarts the satisfaction of desires.
Where utility causes pleasure disutility causes pain ;
where utility is beneficial disutility is injurious ; in a
wide or a narrow sense the one is the opposite of the
other. It may be observed that throughout the whole
range of economics this opposition is of importance.
4. The Relativity of Utility. — Although we speak of
the utility being in the things, a little reflection shows
that the term utility has no meaning except in reference
to human beings. This is implied in the expression,
the satisfaction of desire. It might be thought that prac-
tically the point is not of much importance. In the same
way it may be said colours and other qualities of material
things have only a meaning in reference to sentient beings,
but for all practical purposes we may say the rose is red,
and so on, without descending into the mysteries of psy-
chology or metaphysics.
In the case of utility, however, this relativity is often
of the greatest importance. The utility assigned to
things is subject to all kinds of variations, and it is
to the scientific examination of these causes of variation
that much of the change in the statement of economic
theory since Mill is to be ascribed. In particular, there
is the distinction between marginal (or final) and total
utility.
5. Economic Meaning of Consumption. — The object of
24 ELEMENTS OF POLITICAL ECONOMY
consumption is to satisfy desire. This simple statement
needs no illustration ; but, as is generally the case in
economic conceptions, we easily pass from the obvious to
the paradoxical. And the reason is the continuity of
economic conceptions. Logically, we may class as con-
sumable commodities all things that possess utility. Thus
sunshine is a consumable commodity. It is true that it
has none of the other marks of wealth; but, fortunately
for human beings, many even of the necessaries which
they consume are not wealth, though according to the
old term they are riches.
The example of sunshine introduces another point.
In some cases the consumption of things destroys wholly
or partially their utility. But this is not always the case.
Pictures may be gradually destroyed by time, etc., but
not by being looked at, which is their real consumption.
Houses are consumable commodities, and so are the lands
on which they are built. The houses are gradually de-
stroyed by consum]3tion, but their sites remain.
6. Total and Marginal Utility. — As already stated, the
utility assigned to or derived from things is subject to
variation. Even when we consider the same individual
and the simplest case of consumption, the utility is found
to vary. To begin with, we may suppose that as con-
sumption is increased desire is satiated, and in conse-
quence less satisfaction is derived from further portions
of the thing.
The utility derived from the last portion consumed is
called the marginal (or final) utility. The aggregate of
the utilities of all the portions is the total utility.
It is important to notice that the marginal utility is
WEALTH, UTILITY, AND CONSUMPTIOX 25
not necessarily or even generally zero. On the one side,
it may well happen that tlie consumer would gladly con-
sume more if he could get it, and on the other, he may
by excess pass through the zero point to disutility. As
regards direct consumption (as distinct from the acqui-
sition of commodities), the general rule is that, to begin
with, for small amounts, the utility of the successive
portions increases; then, after a certain point is reached, it
continuously diminishes to zero, and then passes into
disutility that also continuously increases. Consider, for
example, the consumption of water — from a few drops to
the torture of the Inquisition.
If disutility is involved, we must deduct the amount in
estimating the total utility. Thus it is possible that the
total utility may be negative. The fall in utility (after
a certain point is reached) is often referred to as the law
of diminishing utility and is best illustrated by a graph.^
The fall in utility refers to the successive portions and
not to the aggregate utility. So long as the utility re-
mains positive, the total utility increases, though at a
lessening rate till the zero point is reached, after which
the total utility diminishes as the disutility increases.
Even in this simplest case, that is to say, the direct
consumption of an individual, there are certain questions
to be answered (e.g. so long as any consumption is volun-
tary, can it be said to cause disutility in the sense defined?),
but the real difficulties begin when we pass from the in-
dividual to the social group or the nation. And it may
be noted that many fallacies have arisen in all parts of
economics from supposing that what is true of an indi-
1 See note appended to this chapter.
26 ELEMENTS OF POLITICAL ECONOMY
vidual in isolation is true of any number taken together.
In general the transition cannot be made so easily.
7. Transition from the Individual to the Nation. — We
may pass from the individual to the class and the nation
in two modes. (1) The individual may be taken as a
representative type. (2) By the aid of statistics we may
construct an average. The value of the former plan
depends on how far the case taken is fairly representative ;
that of the latter, on the way the average is obtained.
In the first plan, if we simply assert that what is true
of A is true of all people exactly similar, the statement is
only formal. In the second plan we may, if the figures
are given, estimate the consumption per head of the
whole nation of all kinds of things ; and, indeed, this is
one of the most popular methods of estimating material
progress. In England, for example, during the last fifty
years there has been a great increase per head in the con-
sumption of tea, sugar, etc. But we cannot say that any
law of diminishing utility applies to this general (or per
head) consumer. And in this connection it may be
observed that the utility of the same things will depend
on the way in which they are distributed, as well as on
variations in the capacities of the recipients.
When we consider the variety of individuals of which
a nation is made up, of all sorts of ages and capacities, it
seems probable that the variations in the utility of con-
sumption can only be estimated in the roughest and most
indirect methods. These points, however, are best taken
up in Book IV, which deals with economic progress.
8. The Measurement of Utility by Money — Consumer's
Surplus. — In modern societies people make few things for
WEALTH, UTILITY, AND COXSUMPTION 27
their own personal consumption, and in general must
obtain their goods by purchase. Thus the utility of con-
sumption is closely associated -with the trouble or dis-
utility of acquisition. We may suppose that any person
regards the spending of money as involving in itself
disutility, as in any case it deprives him of the pleasure
of possession, etc. Thus we may say that a prudent con-
sumer will try so to adjust his expenditure that in return
for this disutility of expenditure he may obtain a maxi-
mum of utility.
It is easy to show theoretically (especially with the
aid of graphs) that the expenditure should be so con-
ducted that the marginal utility in each case is equal. If
it is less in some case, too much has been spent on that
thing; if it is more, too little.
It may also be shown that this final utility should at
least balance the final disutility of expenditure.
As regards most incomes it may be supposed that the
spender has a surplus of utility, and in some cases a very
great surplus. Thus when we take into account the law
of diminishing utility we see that the utility derived from
the first portions of necessaries may be indefinitely great.
But owing to the equality of prices the same price is paid
per unit for each portion — for the first as for the last.
Accordingly, if the last purchase just balances the loss of
the money, all the former purchases must give a surplus.
If we add together these gains, or these savings from what
the man would have been willing to give, they constitute
for that thing to that consumer what is called the con-
sumer's surplus (or rent, on an analogy to be explained
later).
28 ELEMENTS OF POLITICAL ECONOMY
Considering the limitation of incomes, it is possible that
the last penny spent may yield a surplus. It is only when
there is some money left over that the loss by the last
penny will just balance the gain.
In any case, " We cannot speak of price measuring
marginal utility in general, but onl}^ with reference to
some individual purchaser" (Marshall).
It would seem, then, that the measurement of utility
by money is something like measuring the heights of
creatures in terms of their own feet. But then it may
be replied that the standard foot is actually derived from
this mode of measurement, and similarl}^ of most measures
they are connected with variable natural objects.
I have dealt with these difficulties elsewhere, and here
I will only suggest that the advantages supposed to be
measured by consumer's surplus, or rent, may be expressed
in more general terms without any loss in precision.
Every person has a limited income, and in consequence,
since the modes of expenditure and his desires may be
considered as unlimited, he could always gain in utility
by an increase of income. If, then, owing to any cause,
some of the things which he ordinarily consumes fall in
price (his income and other things remaining the same),
he has more money to spend, and, just as by an increase
of income, he can gain in utility. He may buy more of
the old things, or better qualities, or new things. Or he
may save the money for future needs. The real gains of
increasing cheapness and plenty can onl}^ be estimated
in a variety of ways ; the nominal gain is tlie saving of
money on the things formerly bought. It is sometimes
useful, from the national standpoint, to compare the cost
WEALTH, UTILITY, AND CONSUMPTION
29
of things at present prices (say the total imports) with
the cost if prices had been unchanged. ^
Note on the Use of Curves in Economics — Utility Curves
In the pure theory of economics the nature and relations of some of
the fundamental conceptions can be most clearly shown by the use of
curves. Curves of this kind intended for the illustration of abstract
theories are always drawn with the proviso of hypotheses carefully
laid down. They are not supposed to represent the results of statis-
tical inquiries. For abstract purposes cm-ves may be of great use
when it is quite impossible to obtain the corresponding statistics.
The principal use of curves of a simple kind is to illustrate in a
graphical form the continuous variations in the quantity of one thing
in response to changes in tlie quantity of another (or the connection
between changes in the independent and in the dependent variable).
Thus, as regards utility, the leading ideas and their interconnections
may be represented by the following curves : —
Fig. 2
Successive portions of the commodity are measured along OX and
the corresponding degrees of utility along OY. In Fig. 1 for a time
there is an increase of utility, but after a point is reached the utility
begins to diminish and passes through zero into disutility — below
the axis of X. This curve would illustrate the direct consumption of
1 See Jevons' Theory of Political Economy ; Wieser's Natural Value;
Marshall's Principles, Book III.
30 ELEMENTS OF POLITICAL ECONOMY
a necessary, e.g. water by an individuaL The utility of the first very
small portions would be inappreciable to allay thirst or support life.
In this curve it is of no importance how the utility is measured ; the
sole object is to show how the utility varies in response to successive
units consumed. If P is a point on the curve, and a perpendicular
PM is let fall on OX, then, if the consumption stops at M, PM repre-
sents the marginal utility ; where the curve cuts OX the marginal
utility is zero, and beyond this point it becomes negative, as in P^My
The total utility is represented by the area bounded by PM, OM,
and the curve ; if PM becomes negative, the aggregate disutility must
be deducted from the positive utility.
In Fig. 2 we may suppose, as before, that units of the commodity
are measured along OX and the corresponding utilities are measured
along OF by the prices that would be given for successive portions.
To a single consumer the utility may be supposed to be measured in
this way. Any price higher than OPj is to him a prohibitive price,
and after this point he will give less and less as his desire decreases.
AVe may suppose that he will cease his purchases of the commodity
in question at the il/th portion, when the market price as determined
by outside agencies is PM. If the market price were to rise, he would
buy less, and if it fell he would buy more. But in any case his
marginal purchase would depend partly on what he could do with the
money if not spent on this thing. The only advantage of bringing
in money at all is as a measure that can be applied to other things.
If for every portion he is only obliged to give PM, the market price,
while he would be willing to give more for each portion up to the
ilfth, he makes a gain or saving on these portions, and the aggregate
may be called consumer's surplus. This would be represented by the
area P^CP.
PJM^, considered as a negative price, would mean that he would pay
something to get rid of the thing.
The abstract nature of the reasoning is seen when we consider that
the continuity of the curve implies that both quantities and prices
move by infinitesimal gradations. An approximation is made to
reality by Professor ISIarshall in taking the consumption of a large
market and adopting tlie device, to begin with, of thin parallelograms
passing into thick straight lines {Principles, 4th ed., p. 203 n.). The
assumptions given by Professor Marshall must be carefully noted.
WEALTH, UTILITY, AND CONSUMPTION 31
[On the use of curves the student may consult Wicksteed, Alpha-
bet of Economic Science; Pantaleoni (translated), Pure Economics;
Jevons, Theory of Political Economy ; Pareto, Cours cV Economic
Folitique (Tome 1, lutrod.). Most English readers will probably find
the footnotes in Marshall's Principles the most satisfactory introduc-
tion, and for advanced treatment the Appendix of Mathematical Notes ;
Edgeworth's Mathematical Psychics is a work full of ideas.]
CHAPTER II
PRODUCTION AND THE AGENTS OF PRODUCTION
1. Meaning of Production. — The definition of the
terms productive and unproductive, as applied to labour
and consumption, was the occasion of one of the most
prolonged controversies in economics, a part in which was
taken by all the leading economists from Quesnay and
the Physiocrats to Mill. And even now traces of the
difficulties which were so hotly discussed are found to
survive. It would be most instructive to trace the devel-
opment of the controversy, which is one of the best in-
stances of the necessity of examining carefully the
meanings of terms in jDopular use. For the reasons
already given, however, the history of economic thought
must be passed over.
Eventually, it became clear, as was pointed out by Mill,
that the terms productive and unproductive can only
have a meaning in reference to some correlative. Pro-
ductive must mean productive of something. What is
that something? The appeal to popular usage gives a
vacillating answer ; so also does the appeal to the author-
ity of economists. Mill thought the correlative ought
to be wealth; but this answer only leads up to all the
difficulties involved in the definition of wealth itself.
The only plan, then, seems to be to give the meaning that
is best adapted to the exposition of economic conceptions.
Production, then, may be defined as the production of
32
PRODUCTION AND THE AGENTS OF PRODUCTION 33
economic utilities ; those, namely, which in general are the
result of labour, possess exchange value, and are appro-
priated (which may be taken as the definition of wealth
so far as that is possible).
If we substitute for wealth the expression economio
utilities, we get rid of many vague and inconsistent ideas
popularly associated with the term.
In any case it is convenient to consider separately
what, for brevity, may be called material and immaterial
production.
Material production simply puts utilities into material
things or adapts them for consumption. The principal
point to notice is that the corresponding utilities may be
of the most varied kinds. Thus transport puts in the
things the utility of being in the place where they are
wanted ; so also do wholesale and retail trade. " The
act of production is not complete till the commodity is
in the hands of the consumer."
Similarly, it may be argued that the mere appropriation
of land or other agents is, in a sense, economic production.
History shows very clearly that production in the narrow
sense cannot go very far until the utility of being appro-
priated is planted in the things. Thus it is often argued
that the appropriation of land was essential to the disap-
pearance of slavery, which is the most wasteful of all
forms of labour, and any economy of labour is equivalent
to an increase of productive power.
In immaterial production we have, first, the utilities
fixed and embodied in persons, e.g. forms of technical
skill ; secondly, the ideas that find expression in art,
science, and literature ; and lastly, personal services.
34 ELEMENTS OF POLITICAL ECONOMY
Even in the earliest societies it is observed that some
utilities are only possible with associations of individuals,
and the varied utilities of organisation become of more
and more importance with the progress of society. The
building up of a system of banking and credit, which in
the last resort must be reduced mainly to mental elements,
is as necessary to economic production in general as the
development of the material means of transport. Simi-
larly education, both of individuals and of groups, is as
essential as the exploitation of natural resources. The
importance of the immaterial factors of production was
admirably brought out by List, whose work on the
National System of Political Economy may be taken as a
corrective to the popular system derived from Adam
Smith, though his critique of the real Adam Smith is
often unfair or exaggerated.
2. The Agents of Material Production. — It is commonly
said that there are three great agents of production :
namely, land (which is taken as representative of nature
and natural resources generally, and thus includes water),
labour, and capital. Some have denied original rank to
capital on the ground that it is derived from the other
two. But this objection seems to carry the analysis too
far. In the same way nature might be held to include
human nature. In the earliest times we find that all the
essential forms of capital are of importance in production.
In prehistoric times many of the most imj)ortant aids
to production were discovered: e.g. taming of animals,
working in metals, boat-building, weaving, ploughing, etc.
That is to say, we find examples of capital in the sense of
wealth, auxiliary to labour. We also find examples of
1
I
PRODUCTION AND THE AGENTS OF PRODUCTION 35
sustaining capital which enabled primitive man to " wait "
for distant returns, and of those relatively permanent
sources of utility that modern analysis classes as consump-
tion-capital. Through the whole range of economic
history we find that the possessors of production-capital
were able to obtain some revenue for its use. In the
village community those who provided the various parts
of the great plough and the oxen had shares of the pro-
duce in return, just as the driver of the oxen had for his
labour.
Some writers have added to the three agents another
under the title of organisation. And unless the term
capital is extended so as to cover this agent, the addition
seems to be justified.
3. Nature. — Nature provides materials and powers.
In all forms of material production there is only the
adaptation for man's use or consumption of what is given
by nature.
The question was much discussed, in connection with
the controversy on the meaning of the terms produc-
tive and unproductive, whether nature assists more
in some things than in others ; but it is now only of
historical interest, especially in connection with the
development of the theory of rent. It illustrates forci-
bly the difficulty of attaining clear ideas in economics,
and the necessity of examining the terms already familiar.
With us it is difficult to enter into the real meaning of
these old controversies, but that they were real is shown
by the practical proposals to which they gave rise, e.g. the
single tax. Here all that can be noted is that the study
of the development and decay of the Physiocratic doc-
36 ELEMENTS OF POLITICAL ECONOMY
trine and of its influence on thought is well worthy of
attention. Any short summary, however, is apt to be
misleading.
Of the gifts of nature some are practically unlimited,
others limited. The division is relative to the numbers
of the people and to the degree of civilisation they have
attained, both as regards the desires for consumption and
the arts of production.
In considering the productive powers of different
nations, or of any one nation at different stages of its
development, the influence of natural conditions is always
of importance in several ways. This is a topic in which
the details must be filled in by reference to economic
history and to commercial geography. Here little more
than the basis of classification can be given.
The chief points for consideration and inquiry may be
classed under the followinsc headingfs : climatic condi-
tions, including the mean temperature and the extremes
and variations of heat and cold, force and direction of the
winds, healthiness or the reverse. The great trades of
the world depend largely on these differences, as also do
variations in the efficiency of labour.
The geological character of the country must be taken
in various aspects, e.g. as regards coast line and natural
harbours, mountains and plains, fertility of the soil, and
supply of minerals and raw materials. The discovery of
gold or coal may in a few 3'ears transform a country.
The Avater supplies are of importance : as regards the
means of communication, the necessity of elaborate
drainage, or providing motive power.
The situation of a country relatively to others may
PRODUCTION AND Till: AGENTS OF PRODUCTION 37
under different conditions be the dominant factor in the
supply of its wealth, — as is shown in the history of the
transference of commercial supremacy.
When we put all these influences together, we see that
even the most highly civilised nations under present con-
ditions depend largely on these natural conditions. To
take one example, the present industrial prosperity of
Great Britain depends to a great extent on its moist and
temperate climate, its coast line (no place being far from
the sea and natural harbours), the suitability of its soil
for various agricultural products, its coal and iron, its
navigable rivers, and, finally, its geographical position.
At the same time, natural conditions are not always of
predominant importance, as is shown both by history and
by the present state of nations.
4. Labour. — The importance of labour is so great that
it appears through the whole range of economic inquiry.
At this stage only the meaning will be investigated.
Labour must always be considered from two points of
view, which, for brevity, may be called subjective and
objective, — more popularly, from the point of view of the
feeling of the worker, and from that of the work done.
As regards the subjective meaning, most economists
have assumed that labour is essentially painful, or, more
generally, involves an element of disutility. This view
is often too narrow, and the socialists have done good
service in pointing out that, with a proper distribution
of work, and under good conditions, labour may well be
directly productive of enjoyment. Most people in full
health need regular exertion, and the fact that they earn
money by it, as in their regular work, need not destroy
434418
38 ELEMENTS OF POLITICAL ECONOMY
the pleasure of the work itself. At the same time, it may
be admitted that the continuous steady work which is
necessary to keep the national production at full pressure
involves a strain and a sacrifice of freedom which will
only be submitted to in the hope of an adequate reward.
In a general view of economic labour it is best to begin
with a survey of the elements involved in a "quantity
of labour" from the subjective side. The expression is
to be taken in the sense given to it by Adam Smith in
a celebrated passage.
Under this term are included all those influences which
affect the minds and the lives of the workers in doing
the work. Such are : —
The time involved. At first, time may be taken as
uniform, e.g. five times as much labour in five hours as
in one, but after a point there is a rapid increase in the
quantity of labour, e.g. the twentieth hour of the man
in the signal box.
The next point is the intensity of the labour. " There
may be more labour in an hour's hard work than in two
hours' easy business."
Logically we ought to include in the real cost of the
labour (which is another name for this subjective quan-
tity), not only the prime cost, but also the supplementary
cost in the way of education or preparation. "There
may be more labour in an hour's application to a trade
which it cost ten years to learn, than in a month's in-
dustry at an ordinary and obvious employment." We
must also take account of the environment of the worker :
the physical and sanitary, as well as the mental and moral
conditions under which the labour is performed.
PRODUCTION AND THE AGENTS OF PRODUCTION 39
Finally, it may be said that the unit of time ought to
be the whole life. Statistics of the different employments
show that the conditions of work have an eifect on the
duration of the power to labour, and anything that
shortens life must be held to intensify the labour, though
it may not be perceived at the time.
When we regard labour from the objective point of view
we are mainly concerned with the causes affecting the
efficiency of labour. These may be divided into two
groups: those affecting the individual, and those affect-
ing combinations of labour. At this point only the
former need be considered.
Such are qualities of race and the influences of heredity,
of great importance, but liable to be exaggerated. The
supply of food, or more generally of necessaries, is some-
times an essential factor, as in the "economy of high
wages." On this point, the change of opinion is remark-
able ; it used to be accepted doctrine, that, the less peo-
ple had, so much the harder they would be compelled
to work, e.g. that they would work harder in dear years.
Lately the exaggeration has been toward the other
side in many cases. To revive an old term, all consump-
tion is not productive, or, in other words, does not add
to efficiency. The full treatment of this topic would
involve an elaborate inductive inquiry.
The environment affects, not only the feelings of the
worker, but also his efficiency — and in many ways.
The intellectual ability, natural and acquired, involves,
for adequate treatment, an examination of systems of
education. The opinion may be hazarded that, at present,
too much stress is laid on direct technical training.
40 ELEMENTS OF POLITICAL ECONOMY
Similarly, the moral capacities and activities operate
on the effectiveness of the worker in a great variety of
ways. As an illustration on a large scale, we may take
the gradual transition from slavery through all degrees
of serfdom up to free labour. There is no doubt that
one of the principal agencies in this transformation was
the increasing efficiency of labour with increasing free-
dom. In conclusion, it must be laid down with the
greatest emphasis, that labour, as an agent of production,
must be held to include the very highest professional
skill of all kinds, as well as the labour of unskilled
workers and artisans ; we must include, not only the
labour of those engaged in business in the ordinary
sense of the term, but that of those employed in educa-
tion, in the fine arts, in literature, in science, in the
administration of justice, and in government in all its
branches ; and we must include also, not only the labour
that results in a permanent form, but also that which
renders services that perish in the act.
Since the time of Adam Smith (who took a very wide
view) there has been a tendency to narrow unduly the
interpretation of the term labour^ and in that way to take
a limited view of the range of economic inquiry. At pres-
ent there are problems connected with the expenses of
education, and the expenses of defence, which, to say the
least, are as important as the actions of trusts and trade
unions ; and one essential part of these problems is the
training of the individuals. Even under modern con-
ditions, with our large-scale methods, in the last resort
the economic unit is not a corporation or an army, but
a man.
PRODUCTION AND THE AGENTS OF PRODUCTION 41
5. Capital. — Capital, like labour, is dominant in every
department and has also an endless variety of forms. On
the meaning and the functions of capital, volumes have
been written, and, to judge by the economic journals, vol-
umes are still being written and no doubt will continue
to be written. Properly viewed, this is not a matter for
regret, as it simply indicates that capital is one of the
most far-reaching conceptions, and that with changing con-
ditions its content is subject to change (as soon as we
leave generalities). The present section must be regarded
as an introduction only, to the study of these generalities
and this brief treatment must of necessity be selective
and dogmatic. In its origins (or one of them) capital
means the principal in a loan of money (eapitalis pars
dehiti) as distinct from the interest. Gradually, though
many chapters of economic history are required to trace the
details of the process, it became clear that not only money,
but anything that yields interest, ought to be placed
under capital. Money itself only yielded interest by
being employed, and the interest was earned by other
things.
Thus the conclusion is reached that it is of the essence
of capital to yield a revenue. This is the root idea with
Adam Smith and still may be considered as prominent
in popular discourse.
This idea of yielding revenue is generally the most
important from the point of view of the individual. A
person will class as capital the loan advanced to an un-
productive landlord or an extravagant government, so
long as his fund is secure. If the revenue is forthcoming,
the capital from his point of view is always there ; and if
42 ELEMENTS OF POLITICAL ECONOMY
the revenue ceases with no chance of renewal, the corre-
sponding capital disappears as a bad debt.
But especially when we look at capital from the national
standpoint, we have to consider how the revenue is ob-
tained. A nation considered as self-dependent cannot
make a revenue unless its resources are employed pro-
ductively ; a nation of money-lenders would soon realise
the barrenness of money. Seeing, then, that the revenue
of capital must be produced, some writers have found the
essential character of capital is its productiveness. And
if a nation begins to consume its capital without replacing
it by production, it must sink into poverty. As its capital
disappears so also will its income. This is self-evident,
if capital is one of the fundamental agents of production,
and in one sense at least it must be so regarded. It
seems best, however, to emphasise the idea of revenue
from the individual standpoint. But in some respects
this idea also needs modification or supplement. If, to
begin with an example, a dwelling-house is to rank as
capital when let to a tenant for a rent, then it must also
so rank when occupied by the owner (and by the severe
logic of the British income-tax gatherers, even when not
occupied). This leads up to what may be called con-
sumption-c?ii)ital in the specific sense of the term. This
form of capital (or capital from this point of view) con-
sists of things which yield utility, not in the shape of
money revenue, but in some form of direct enjoyment
or satisfaction. Take, for example, the movables in the
houses of individuals, and the forms of public property,
such as picture galleries, museums, etc. This class of
wealth, by whatever name it is called, is of great impor-
PRODUCTION AND THE AGENTS OF PRODUCTION 43
tance. Sir R. Giffen, in his calculations of the capital of
the United Kingdom, reckoned the movables in the
houses as of about half the value of the houses.
Thus, on this line of treatment, there are three great
species of capital ; namely, production-cn^itol, revenue-
capital, and consumptio7i-c?iT^ital.
If now it is asked : Is there any root idea common to
these three species ? it may be said to be found in the sat-
isfaction of future needs, as contrasted with present and
immediate consumption. Even in the last species named,
i.e. consumption-capital, things are not included unless
they are designed for future as well as immediate use.
Thus, in this view, the relative permanence of capital is
contrasted with the relatively immediate consumption of
income. " Prospectiveness," not productiveness, is in this
way the most general characteristic of capital, if only
one term is to be employed.
There can be no question that one of the best signs of
national progress is the growth of this power of looking
to the future, and either directly by the creation of con-
sumption-capital, or indirectly by that of means of pro-
duction, giving effect to this idea of "prospectiveness."
For some purposes, however, we have to specialise, and
besides the species of capital already considered there are
others.
Recently some economists have insisted on a general
view of capital that at first sight seems directly opposed to
that just presented. It is said that the distinction between
capital and income is simply a difference in the modes of
measuring wealth, whether of individuals or of nations.
The capital of an individual or a community is an amount
44 ELEMENTS OF POLITICAL ECONOMY
of wealth in existence at a particular moment, while the
income is wealth obtained during a certain period. To
the present writer this view of capital seems rather adapted
to accounting than to economics. The mere valuation of
a nation's wealth at any particular moment, if it could be
effected, would be of no interest except as the basis of
comparison with a similar estimate at some other date ;
and the comparison for economic purposes would be of no
use without analysis, and such analysis would bring out
the ideas already examined.
When joro(Z^(cf wH-capital is examined, several species are
discovered. Circulating capital "fulfils the whole of its
functions in a single use, e.g. raw materials or necessaries
for labour " (Mill) ; fixed capital can be used in produc-
tion more than once without losing its form. Adam
Smith defined circulating capital as that which yields a
revenue by circulating or changing hands. Perhaps the
most interesting point in Adam Smith's treatment is that,
in spite of his realism and popular style, he is led by the
stress of his argument to use the term immediate as possi-
bly covering generations and to rank buildings as capital
only when they yield a revenue, not only to the owner, but
to the occupier, — another striking instance of the difficulty
of adapting popular ideas and language to scientific pur-
poses.
Mill's four propositions on capital (in his sense of pro-
duction-capital) are of interest in the development of
economic thought. With the exception of the unfortu-
nate fourth, — demand for commodities is not demand for
labour, — they are taken from Adam Smith. So far as
true they simply assert that capital (in Mill's sense) is
PRODUCTION AND THE AGENTS OF PRODUCTION 45
a necessary agent of production and that it is being con-
tinually destroyed (Mill says consumed) and reproduced.
These propositions are of interest in connection with the
wages fund theory, and of use in disposing of certain
crude fallacies on the nature of saving and the powers of
governments.
6. The Connection between Consumption and Production.
— At this point attention may be called to the old dis-
tinction between productive and unproductive consump-
tion. Only that consumption was classed as productive
which was necessary to the efficiency of labour and keep-
ing up the supply of labour for productive purposes.
Thus not all the consumption even of the most poorly
paid labourers was productive. Carried to this extreme,
the distinction proved to be of little value, and the point
involved is better treated under the causes affecting the
efficiency of labour.
Generally, it may be said that consumption means using
things, and production means adapting them for use ; and
logically the two ideas are better kept distinct.^
Note on the Curve representing the Quantity of Labour
AND the Utility of the Product ^
Along OX measure units of time devoted to labour. At first there
may be some disutility OL; this gradually decreases and passes
through the zero of indifference R to positive utility corresponding
to the moderate pleasure of active work RSRy After a point T on axis
1 See Higgs, Physiocrats ; Mill, FrincipJes, Book I; Marshall, Princi-
ples, Book II ; Boehm-Bawerk, Capital and Interest and Positive Theory
of Capital; Cannan, Theories of Production and Distribution ; Smith,
Wealth of Nations, Book IV, Chap. IX.
2 See Jevons, Theory, p. IfiS.
46
ELEMENTS OF POLITICAL ECONOMY
the utility diminishes and passes through zero 7?^ to disutility, which
rapidly increases ; this corresponds to the excessive fatigue of over-
work.
QP is the utility curve which represents the utility obtained from
the product of the successive units of time devoted to labour. The
first portions may be supposed to provide for necessaries, and the
utility is indefinitely great, but after a point the utility diminishes.
It will pay the worker to continue up to the point at which the
utility PM obtained in return for the last unit of labour time is just
equal to the disutility P^M involved. L^p to that point there is a gain
of utility, but after this point there is increasing disutility. It will
be noted that the curves are only intended to illustrate the general
relations between labour (subjective) and the utility of the result.
CHAPTER III
DIVISION OF LABOUR
1. Meaning of Division of Labour. — Like other economic
terms of popular derivation, division of labour embraces
several distinct but allied conceptions. Briefly stated, it
includes the division or specialisation of employments
within a nation, and of processes within an employment.
This division again involves combination and organisation,
including exchange. The expression division of labour
was used by Adam Smith in the widest sense, although
to begin with he takes the simple case of pin-making, and
in consequence is often supposed to use the term only in
the most special and narrow sense.
As showing the importance of both aspects, it may
be recalled that ]\Iill entitles the corresponding chapter
combination of lahour.
In any case it is found that division of labour involves
a corresponding division and combination of capital —
both material and immaterial.
The separation of employments is of very early origin,
and is well illustrated by the industrial offices of the
village communities. But in these self-sufficing com-
munities only a very limited division of employments was
possible. To get the benefits of this separation to its full
extent, a large nation and even the whole commercial
world is required. Thus it is sometimes said that free
47
48 ELEMENTS OF POLITICAL ECONOMY
trade is an example of the advantages of division of
labour : the productive powers of each country are devoted
to what it can best produce.
Division of labour in the narrowest sense refers to the
separation of processes within any particular industry or
employment.
2. Advantages of Division of Labour. — The advantages
commonly enumerated, following Adam Smith, are : The
increased dexterity of the workers through constant prac-
tice of the same thing. This may be illustrated from
primitive times in the skill shown in making the serrated
edges of the flint arrows. But the full power is only seen
when taken with the appropriate auxiliary capital. In all
the higher forms of labour such specialisation seems neces-
sary to success. This advantage apj^ears most in improve-
ments of quality rather than in economy of productive
power. In both respects labour has to compete with
machinery. On the whole, however, contrary to popular
opinion, the development of mechanical appliances since
the industrial revolution has increased the skill of the
individual workers, or, what is the same thing, this
increased division of labour demands greater skill.
Under a system of minute division of labour the various
workers can be classified according to their several capaci-
ties, and full employment can be given to the auxiliary
capital. This can be illustrated indefinitely by reference
to the employment of men, women, and children, in each
case with great varieties of skill.
There is an economy of time ; e.g. no waste in passing
from one form of work to another and in starting different
operations, in early times a point of much importance.
DIVISION OF LABOUR 49
Under present conditions the time element is chiefly of
importance in cases in which the work could not be done
in the time required without division of labour.
The continuous specialisation promotes the discovery of
inventions. No doubt, as is shown by history, the original
creative idea may often be due to outsiders ; but the full
development for practical purposes is only possible by
little increments of invention. In material production it
seems that progress is more continuous than in other
departments of human activity, e.g. literature and
especially poetry. It is rarely tliat improved processes
of production are lost and the beginnings of most of
the industrial arts can be carried back to prehistoric
times : the dug-out canoe is the forerunner of the steel
iron-clad.
In any of its varied meanings division of labour in-
volves a corresponding specialisation of auxiliary capital.
And for this purpose capital must be taken in the most
extensive sense. Thus we must include the mental
capital of the nation and of the world as exemplified in
the various practical sciences, such as chemistry, engi-
neering, etc.
The combination of labour is of two kinds : simple and
complex. In simple combination the advantage lies in
numbers doing the same thing at the same time ; e.g. in
the harvesting of primitive communities or the naviga-
tion of a great ship in modern times. The latter example
also serves to illustrate complex cooperation, which is still
better shown in the building of the ship. Here the idea
is that numbers of different operations are combined to
produce a complex result. In some cases we have a com-
K
60 ELEMENTS OF POLITICAL ECONOxMY
bination of labour extending over generations, as in the
construction of vast systems of drainage.
The advantages of division of labour have, up to the
present, been realised to a greater extent in material than
in immaterial production ; and the progress of the specu-
lative, as distinct from the practical, sciences would be
greatly promoted by more systematic organisation.
3. Division of Labor is limited by the Extent of the
Market. — Division of labour involves, as a rule, produc-
tion on a large scale, and this again depends on the extent
of the market. Thus an increase of foreign trade by
rendering possible production on a larger scale may
cheapen the commodity in the home market. At present,
aided by protective tariffs and trusts, this advantage is
often transferred to the foreigner. The course of English
economic history shows very clearly the influence of the
growth of foreign trade on the development of industry,
e.g. at first in woollen manufactures and later in cotton.
Theoretically it might be advantageous to give bounties
on production if the economies of division of labour could
be introduced to such an extent that they would more
than compensate for the payment of the tax.
In immaterial production also the division of labour is
limited by the extent of the market ; e.g. in law, medicine,
education, and the various professions the greater the
demand (or the market for the corresponding services)
so much greater is the specialisation. A good example is
found in banking. It is thus clear that division of labour
is closely connected with exchange, and this forcibly
illustrates the interconnection of the great departments
in economics. Exchange, again, involves the protection of
DIVISION OF LABOUR 51
property and the enforcement of contracts and generally
security. In this way division of labour is also connected
with distribution and governmental control. Finally, it
may be said that economic progress is to a great extent
dependent on the development of division of labour, and
there was good reason why Adam Smith should make
this principle the starting-point of his inquiry.
4. The Localisation of Industry. — The localisation of
industry depends partly on the specialisation due to
division of labour. It is one of the most interesting
problems in economic history to trace the reasons why
certain industries have become settled in certain localities.
To begin with, there may be some natural advantage, e.g.
proximity to the source of materials or powers provided
by nature ; political or social influences may create a local
demand; and in certain notable cases in English history
there have been settlements of foreign artisans, sometimes
attracted to this country by the hope of gain, sometimes
driven from their own by political or religious persecu-
tion. Again, protection may stimulate production in cer-
tain places, and in the mediaeval period the towns adopted
a protectionist policy against one another.
At this stage, however, it is more important to observe
that, if for any reason an industry has once been estab-
lished in any locality, there are strong reasons why it
should continue to flourish there and not be transported
to other places. Both labour and capital become special-
ised and there is a continuity of improvements ; industries
grow up that are subsidiary to the main industry ; the
means of communication are adapted both to the acquisi-
tion of raw materials and to the marketing of the products ;
52 ELEMENTS OF POLITICAL ECONOMY
in short, there are all the internal and external economies
of which Professor Marshall has given so full and lucid an
account.
Too much stress, however, ought not to be laid on these
initial advantages, and in general any attempt at monopoly-
has been defeated. The restrictive policy of the old gilds
and corporations was a failure. Just at the very time
when, owing to a variety of causes, the economic system
of the Middle Ages was giving place to the modern, and
England was entering on a period of prosperity, we find
constant complaints of the decay of the towns and of their
staple industries. The chief reason was that the industries
were migrating to the county districts, where they were
free from these monopolistic restraints. In the same
way, in modern times, protection has often failed to
neutralise foreign competition.
The principles and the progress of localisation are also
exemplified in the case of immaterial production. Uni-
versities and law courts remain settled in certain places,
and banks and credit institutions once established may
retain their position, though it would seem that other
places have greater advantages. Here also, however, the
initial advantages cannot be maintained unless there is
continuous adaptation to the progress of society.
5. Disadvantages of Division of Labour. — When the dis-
advantages of division of labour are spoken of, it is not
meant that they are such as are necessarily inherent in the
system, but only such as experience has shown are likely
to occur and ought to be guarded against. Such disad-
vantages arise from the excessive specialisation of the
individual, from the concentration of labour in large facto-
DIVISION OF LABOUR 63
ries and in cities, and from the delicacy of the industrial
organisation. In a general survey these disadvantages
may be classed in three groups ; namely, physical, mental,
and social. It was observed by an Italian writer, early in
the eighteenth century, that particular physical diseases
are associated with certain employments. Under modern
conditions this liability might be indefinitely illustrated,
and a large part of the factory legislation is intended to
provide a remedy for these abuses. In fact, it may be said
that there is hardly any great industry which is not sub-
jected by law to certain compulsory sanitary regulations.
It is, however, a curious fact that the workers themselves
often place obstacles in the way of efficient inspection and
of the discovery of the infringement of the acts. In the
matter of the relative healthiness of employments the only
safe rule is to appeal to experience. Thus coal-mining,
apart from the liability to accidents, is a healthy employ-
ment, whilst very often out-of-door occupations, owing to
special circumstances, are relatively unhealthy.
More stress has been laid on the mental evils that spring
from excessive specialisation than seems to be warranted
by facts. Here the principal evil alleged is the monotony
of the work, which is supposed to have a cramping effect on
the mind. This has been forcibly brought out by Adam
Smith. In an eloquent passage he contrasts the driving
of horses with the driving of machinery. So much was
he impressed by the evil of monotony that it was one of
the chief grounds why he thought the education of the
common people demanded the special attention of the
state. In modern times the evil has been denounced with
still greater eloquence by Ruskin, though the eloquence
54 ELEMENTS OF POLITICAL ECONOMY
is marred in his case by ignorance of economic facts and
principles. Perhaps the difficulty is most forcibly put by
the French writer who asks what can be expected of the
mind of a man whose activities are constantly devoted to
making the eighteenth part of a pin.
In this argument, however, it is assumed too readily
that the minds and characters of men are moulded entirely
by their occupations. But it should be remembered that
the very monotony of the work saves the energies of the
individual, and in his leisure he can do something better
than merely satisfy his physical wants. Thus the opera-
tives of Lancashire are devoted to music. Many cases are
recorded in which a factory hand has come to the front
through educating himself in his spare time ; but spare
time without spare energy is worthless. It is remarkable
also, in the highest branches of labour, how often the
workers find relaxation in different pursuits. At present
it may be said that the sports and the habits of the masses
of the people have more to do with mental narrowness
than any monotony connected with their work.
The monotony itself is also liable to be exaggerated The
more monotonous the work, so much the more probable is
it that there will be a substitution of machinery for labour.
Again, as regards the evils attributed to tlie cities
compared with the country they are liable to be exag-
gerated. In the past freedom began with the towns, and
in one of his best chapters Adam Smith has described
how the commerce of the towns led to the improvement
of the country. In modern times it is too readily assumed
tliat the immigration from the country to the towns is in
every case due to a want of correct judgment on the part
DIVISION OF LABOUR 65
of the immigrants. But the cities offer their gains as well
as their losses, and class for class the workers in the town
will compare favourably with those in the country. When
we look at the broad facts of progress, we find that, on the
whole, the modern system, with its complicated machinery
and its use of scientific methods, involves a much higher
development of the race than was possible under simpler
conditions. In the Middle Ages there were artists and
men of genius, and some of the most wonderful personali-
ties the world has ever seen. But the mediaeval serfs who
formed the bulk of the population were under less favour-
able conditions for development than the lowest labourers
of the present. But for the progress of cities and manufac-
tures England would have remained as backward as Russia.
At present, also, it is in the employments in which there
is least division of labour and the greatest survival of
older and simpler methods that there is as a rule most
misery, e.g. the workers on canal barges, the nailers in
Staffordshire, and generally those engaged in what are
called the domestic industries.
The social disadvantages that arise from the delicacy of
the industrial organisation, the interdependence of indus-
tries, the oscillations between periods of inflation and
depression, excessive competition, and the sudden action
of the " law of substitution," are to be ascribed, not only
to division of labour, but to other forces and conditions that
fall to be considered in other departments of economics.-^
1 On special topics in this chapter, for fuller treatment, see Nicholson,
Effects of Machinery on Wages; Hobson, Evolution of Capitalism;
Cunningham, Alien Immigrants into England; Marshall, Principles of
Economics^ Book IV, Chaps. VIII-X.
CHAPTER IV
PRODUCTION ON A LARGE AND SMALL SCALE
1. Production on a Large Scale in Manufactures. — The
tendency to production on a large scale consequent on the
extension of division of labour and the associated auxiliary-
capital (material and immaterial) is best treated by taking
different typical cases separately — and first, manufactures.
Here the concentration of labour and capital and the amal-
gamation of small industries has been most noticeable since
the industrial revolution, and quite recently a further
development has taken place by the creation of trusts.
The process of concentration can only be explained ade-
quately by an inductive inquiry, and here it is only possi-
ble to give an outline of the lines to be followed.
The effi.ciency of the productive agents is greater in
many ways in large production, e.g. there can be a better
classification of labour according to its capacity ; applied
machinery can be so adjusted as to give full employment
to the motive power ; improvements can be more readily
adopted ; small inventions can be encouraged ; expert skill
can be called in to a greater extent ; better agents can be
employed in the selection of materials and of processes;
and the control of departments and subdepartments can
be put in the hands of competent managers while the
energies of the head of the firm are devoted to general
superintendence and organisation.
66
PRODUCTION OX A LARGE AND SMALL SCALE 57
A variety of internal and external economies (Marshall)
can be adopted in large scale production, the details of
which vary in different cases and can only be enumerated
in special works.
2. Other Cases. — The tendency to large production is
also shown in a pronounced manner in the means of com-
munication and transport. The history of railways, of
shipping, and of telegraphs is the history of amalgamations.
Similarly the distribution by the wholesale and retail
merchants, which logically is part of production, has fol-
lowed the same lines.
Mines are worked by larger capitals, so are gas and
water companies.
The same tendency also appears in various forms of
immaterial production. Thus joint-stock banks have
swallowed up the private banks to a great extent, and
the larger insurance companies have displaced the smaller.
In fact, when we take a rapid survey of the history of
the nineteenth century, the tendency to large scale produc-
tion becomes so prominent that it seems to give a basis
to a universal law or generalisation.
Of late, in particular, the spread of the trust system has
induced the fear that in the course of time there will be
no small industries left, and that the industries of all the
great nations will be concentrated in the hands of a num-
ber of gigantic trusts. Thus it is important to consider
the counteracting causes.
3. Counteracting Causes. — The localisation of indus-
tries renders it possible in some cases for a number of rela-
tively small businesses, that specialise in certain branches,
to succeed as well as if the processes were carried on by
58 ELEMENTS OF POLITICAL ECONOMY
the same firm. The loss incurred in small economies may
be made good by the greater specialised skill on the whole.
Again, to all large industries there are subsidiary indus-
tries which provide certain things only required to a small
extent or occasionally. Thus there may be a variety of
trades in the hands of small masters.
In the course of progress new wants arise that are met
by new luxuries. Very often these are of such a kind
and of such variety as to be best produced on a small
scale, e.g. photographs, scientific instruments, etc.
The force to be attributed to these and other counter-
acting causes can only be properly estimated by an induc-
tive and historical inquiry beyond the limits of these
pages. But as the point is at present of much interest,
a few significant figures may be quoted from a recent
investigation by Leroy Beaulieu. He shows that in the
British textile industries there were in 1896 as many as
9891 factories belonging to 7900 firms compared with
5961 factories in 1870. In France the patentes or taxes
on businesses have grown steadily from 1,163,255 in 1830
to 1,752,315 in 1900, and the population is far from having
grown in the same proportion. This growth of small
industries is explained by a variety of causes : industrial
operations formerly done at home are now specialised,
and give rise to small industries, e.g. laundry work and
baking ; brokers and middlemen, though displaced in some
directions, have been more than proportionately increased
in others ; and many of the recent inventions have fa-
voured the growth of medium businesses — such as
those connected with electricity and the manufacture of
bicycles, and even of motors. Wealth and luxury, being
PRODUCTION ON A LARGE AND SMALL SCALE 59
more general, have called into existence numerous small
industries for the production of articles de luxe. "There
has been quite a swarm of new small and medium indus-
tries " — is the general conclusion.
Much attention has been recently directed to the fact
that in the United Kingdom there are registered every
year a large number of joint-stock companies with rela-
tively small capitals. This is the more noticeable be-
cause it is generally supposed that the chief inducement
to joint-stock enterprise is the magnitude of the capital
required.
4. Joint-stock Companies. — The economic history of
companies is of the highest interest, and for the origins
we must go back to the mediaeval period. Joint-stock
companies proper were preceded by various forms of
organisation, notably regulated companies, but the joint-
stock principle proper was well established in the seven-
teenth century.
The speculative manias that arose in France in connec-
tion with the schemes of John Law, and in England with
the South Sea Bubble, and the little success that at-
tended the foreign trade companies, gave rise to a general
distrust of the principle, as is shown by the increasing
stringency of legislation. Adam Smith himself was so
much impressed by the facts of history, that he main-
tained no company could hope to succeed unless it had a
monopoly, or was such that its business was of a purely
routine character. In support of this narrow view, he
emphasised the want of self-interest on the part of the
managers and the tendency to the neglect of small sav-
ings. These difficulties, however, have been obviated to
60 ELEMENTS OF POLITICAL ECONOMY
a great extent by the encouragement of professional
skill, by gradual promotion to valuable appointments,
and by giving a certain interest in the business to the
employees. Profit-sharing, however, has not succeeded
to the extent that might have been expected.
The advantages of joint-stock companies are: they
can undertake operations too large for private enter-
prises, e.g. railroads; in some cases they can offer the
security of a larger reserve fund, as in banks, in which,
even if the liability is limited, there is generally a large
uncalled capital ; in companies generally there is greater
publicity as regards the accounts, and thus so far greater
security in credit transactions ; they serve for the invest-
ment of small savings, and thus provide also for the
distribution of risks; they can afford to work for lower
gross profit as the shareholders only expect a fair return
in the shape of interest, and not profits of management ;
conversely, where the risks are great, but the chances of
gains are also great, a company may be floated where
private enterprise would be repelled. The adoption of
the principle of limited liability has given a great stimu-
lus to companies.
The resultant effect of these and of other influences
of a more special character in different circumstances,
has been that companies have displaced to a great extent
private enterprise in many important industries. As
already observed, however, many of these companies are
relatively small, in fact, in some cases, so small that it
may be supposed that the principal inducement has been
the limited liability. From a recent return (1902), to
the income tax assessments in the United Kingdom it
PRODUCTION ON A LARGE AND SMALL SCALE 61
appears that, of over 25,000 public companies, less than
6000 earn more than X5000 per annum, whilst more than
half of the total number earn less than XIOOO per
annum. 1
1 See Marshall, Pririciples, Book IV, Chaps. XI and XII, Book VI,
Chap. VII; Macrosty, Trusts and the State; S. and B. Webb, Industrial
Democracy ; Hobson, Evolution of Modern Capitalism.
CHAPTER V
PRODUCTION ON A LARGE AND SMALL SCALE Df
AGRICULTURE
1. Complexity of the Question. — In comparing the
relative advantages of large and small farming, there are
several distinct questions involved. Besides the question
of production pure and simple, there are various social
and moral factors, which it is difficult to keep separate
in any particular case.
If we confine the attention only to production, the ques-
tion becomes : under which system will the efficiency of
labour and capital, when applied to land, be the greater?
This implies that equal amounts of the productive
agents are compared. One favourite argument, however,
in support of the small system is the greater ardour of
work, the long hours, the devotion to the land, etc ; and
on analysis this surely implies that more labour is applied,
and so far there should be a greater return. And then
the further inquiry should be made : what might be done
with this labour if devoted to other pursuits ? Thus, in
the Highlands of Scotland, an amount of labour is often
spent on the small crofts which would give a far greater
return if employed in fishing, or in work on the larger
farms. More generally, the growth of towns and the
advance of civilisation has been only possible by the trans-
fer of labour from the land.
62
PRODUCTION IN AGRICULTURE 63
Again, when dealing as far as possible with production
merely, there is still the difficulty of the measure to be
adopted.
We can only compare different kinds of produce by
estimating the money value of the returns. And then
from the national point of view the question arises
whether we ought to take simply the net return, or the
gross yield. In practice the net return would be the
rent. It is clear, however, that the maximum rent in
some cases might be yielded with an insignificant amount
of gross produce, as when a large tract of country, for-
merly cultivated, is thrown under deer. The rental
may rise ; indeed, that will be the motive for the change,
but to the nation at large the value of the product is
far less.
To a less extent the substitution of sheep farms for
arable has similar effects, as in the enclosures in the fif-
teenth and sixteenth centuries.
Again, in making the comparison, it is not just to
place on one side peasant properties, which are supposed
to be free from mortgages (their greatest danger) and on
the other tenancies with imperfect leases. The much-
quoted aphorisms of Arthur Young are only half-truths :
"The magic of property turns sands into gold." "Give
a man the secure possession of a bleak rock, and
he will turn it into a garden ; give him a nine years'
lease of a garden, and he will turn it into a desert."
As will appear later on, equitable leases may be pref-
erable to occupying ownership. Generally, it may be
said that the effects of different systems of land tenure
have been the subject of a vast amount of economic
CHAPTER V
PRODUCTION ON A LARGE AND SMALL SCALE IN
AGRICULTURE
1. Complexity of the Question. — lu comparing the
relative advantages of large and small farming, there are
several distinct questions involved. Besides the question
of production pure and simple, there are various social
and moral factors, which it is difficult to keep separate
in any particular case.
If we confine the attention only to production, the ques-
tion becomes : under which system will the efficiency of
labour and capital, when applied to land, be the greater?
This implies that equal amounts of the productive
agents are compared. One favourite argument, however,
in support of the small system is the greater ardour of
work, the long hours, the devotion to the land, etc ; and
on analysis this surely implies that more labour is applied,
and so far there should be a greater return. And then
the further inquiry should be made : what might be done
with this labour if devoted to other pursuits ? Thus, in
the Highlands of Scotland, an amount of labour is often
spent on the small crofts which would give a far greater
return if employed in fishing, or in work on the larger
farms. More generally, tlie growth of towns and the
advance of civilisation has been only possible by the trans-
fer of labour from the land.
62
PRODUCTION IN AGRICULTURE 63
Again, when dealing as far as possible with production
merely, there is still the difficulty of the measure to be
adopted.
We can only compare different kinds of produce by
estimating the money value of the returns. And then
from the national point of view the question arises
whether we ought to take simply the net return, or the
gross yield. In practice the net return would be the
rent. It is clear, however, that the maximum rent in
some cases might be yielded with an insignificant amount
of gross produce, as when a large tract of country, for-
merly cultivated, is thrown under deer. The rental
may rise ; indeed, that will be the motive for the change,
but to the nation at large the value of the product is
far less.
To a less extent the substitution of sheep farms for
arable has similar effects, as in the enclosures in the fif-
teenth and sixteenth centuries.
Again, in making the comparison, it is not just to
place on one side peasant properties, which are supposed
to be free from mortgages (their greatest danger) and on
the other tenancies with imperfect leases. The much-
quoted aphorisms of Arthur Young are only half-truths :
"The magic of property turns sands into gold." "Give
a man the secure possession of a bleak rock, and
he will turn it into a garden ; give him a nine years'
lease of a garden, and he will turn it into a desert."
As will appear later on, equitable leases may be pref-
erable to occupying ownership. Generally, it may be
said that the effects of different systems of land tenure
have been the subject of a vast amount of economic
64 ELEMENTS OF POLITICAL ECONOMY
research, and no simple or summary answer on their
relative merits is possible.
2. Large and Small Farming Compared. — If we take
farming in the common sense, of arable and stock mixed
in varying proportions, we may conveniently compare the
advantages under three headings — according to the three
great agents of production.
As regards land^ a large surface can be better split up
into the necessary enclosure, it can be better provided with
drains and roads, better adajDted for the different kinds of
produce required, and many of the operations can be
more economically performed on relatively large fields.
As regards capital, the large farms usually have an
advantage in buildings, implements, machinery, kinds of
stock, insurance against risk, etc.
As regards labour on the large farms, there can be a
better adjustment according to capacity, a greater com-
mand of scientific skill, etc. On the other hand, we have
the greater interest in the work of the small holder who
works for himself.
It was maintained by Mill that in farming not much
division of labour was required, and that in the operations
where combination of labour was needed cooperation
might be adopted. For a time, both in France and the
United Kingdom, this remained a counsel of perfection;
but it is noteworthy that recently the cooperative princi-
ple has been applied with much success in agriculture,
notably in Ireland and also in France.
The ardour of work, which used to be so much praised
as the great virtue of the peasant proprietor, has of late
years been painted in more sombre colours — the expe-
PRODUCTION IN AGRICULTURE 65
rience of France shows that the toil may be carried to the
extent of the utter degradation of life. In the United
States, however, three-fourths of the farms are cultivated
by the owners ; but as a rule they are of a class superior
to the peasants of Europe, and do not suffer from the
same drawbacks.
Comparisons are sometimes made of the average yield
per acre of different countries with the implication that
the highest yield has the best system. The question,
however, does not admit of such an easy test, because the
intensity of cultivation varies with the stage of develop-
ment, the demand, etc. (cf. the law of diminishing return
to land — Chap. VI below).
3. Historical and Social Influences. — As a matter of fact
the actual distribution of the land of a country in large
and small holdings depends on a variety of causes apart
from the mere efficiency of the productive agents in the
two schemes.
Among such influences to be considered are the con-
ditions affecting the capital available for agriculture.
Large farms involve as a rule large capitals, which may
not be forthcoming, e.g. in new countries. In former times
the want of large capitals was made good on the great
manorial estates by forced labour and the forced loan of
the oxen and ploughs of the serfs.
Conversely, economic conditions generally might be
favourable to small farms, but there are not small capitals.
The rate of profit is often the determining factor.
With high farming profits the large system is encour-
aged, while with falling profits the small system tends
to take its place. Thus after the Black Death (1349-
66 ELEMENTS OF POLITICAL ECONOMY
1350) the rise in the cost of labour and materials
dissipated the profits of farming by the lords of manors
on a large scale. Through the land and stock lease
(Rogers) and other modes of tenancy, the lands were
let to small holders, many of whom eventually bought
their holdings and became yeomen.
The small holder looks rather to a good return to his
own labour and that of his family than to a profit in the
strict sense on his capital.
In Scotland at present the conditions are favourable
to the creation of small farms, but the difficulty is to
find small tenants with sufficient capital.
Next to the influence of the conditions of capital we
may notice the effects of the kind of produce for which
the country or district may be adapted. Some of the
products of the soil require minute care and supervision,
others are naturally adapted to production on a large
scale. Vines and wool may be taken as typical.
Closely connected with the kind of produce are the
climatic conditions and the fertility of the soil. Thus
in France itself, which is generally referred to as the
country par excellence of the small system, nearly half
of the total area is in farms of over one hundred acres,
and only about a quarter of the total area is in holdings
of twenty-five acres and under.
The demand, the proximity of towns, facilities of trans-
port and marketing, are sometimes the most important
factors to be considered.
The influence of the land laws is liable to be ex-
aggerated, and seems to have more effect on the amount
of the produce than on the size of the holdings.
PRODUCTION IN AGRICULTURE 67
Under modern conditions the relative rates of wages
to be obtained in the towns and in the country have
great influence. The small farmer, like the small shop-
keeper, is a wage-earner, and does not subsist on his
profit mainly.
From these considerations it is clear that we cannot
argue from the success of one system in a certain time
and place that it ought to succeed in times and places
in which the essential conditions may be different — e.g.
the Channel Islands and the Hebrides — Westmoreland in
the eighteenth century and the twentieth, etc.^
1 On the subject of this chapter there is a vast literature. For the
general principles Passy's Systemes de Culture is still the best ; Lady
Verney's Peasant Properties may be used as a corrective to Mill, and to
such works as Kay's Free Trade in Land. See also Marshall, Princi-
ples, Book VI, Chap. X ; Nicholson, Tenant's Gain not Landlord's Loss.
70 ELEMENTS OF POLITICAL ECONOMY
increase, and any increase of the produce must be at an
increasing cost, which is another way of saying that the
return per unit diminishes.
This leads to the second form of the law in the case of
land; namely, beyond a certain point every additional
quality of land taken into cultivation gives a diminishing
return per unit of productive power.
We may suppose that, to begin with, having regard to
the state of the arts of agriculture, only the best quality
of land is cultivated. In the shifting agriculture of primi-
tive tribes they change their fields per annos and always
superest ager^ and whatever else these disputed words may
mean, they describe a state of things to which this second
form of the law does not apply. There is plenty of good
land.
But in long-settled old countries that are self-support-
ing, after a certain density of population has been reached,
the food supplies can only be increased either by the in-
tensive application of capital to the land already in use,
in which case the law in its first form comes into play, or
resort must be had to inferior land, when the second or
extensive form of the law operates.
As regards this second statement, it seems best to refer
to different qualities of land, the quantities or areas being
adjusted to the capital expended.
In the case of the produce being consumed at a distance
from the place of origin, distance may be held to have the
same effects as inferior quality. The cost of transport
acts both on the materials and on the product. The prin-
ciple may be applied that the act of production is not com-
plete till the commodity is in the hands of the consumer.
LAWS OF DIMINISHING AND INCREASING RETURN 71
In general the laAv will operate simultaneously in the
intensive and the extensive forms ; that is to say, the old
settlements will be more highly farmed, and at the same
time less fertile and more distant or less advantageously
situated lands will be taken into cultivation.
The most economical application of the productive
powers of the nation will be made when the marginal
return in every case is just equal. (The analogy of the
equality of marginal utility in the expenditure of a sum
of money on different things may be noted.)
3. Counteracting Causes. — So long as the conditions
laid down remain the same, the law in this combined
form is like a law of nature in the physical sense (Mill).
But the main interest of its application is in regard to
the food supplies of any nation. Thus the question
arises: As population increases, will the additional
food always involve an increasing cost? And it is in
the answer to this question that the counteracting causes
are of such importance. As soon as we introduce the
element of time, we have the probability in progressive
nations of essential changes in the conditions. And the
longer the period taken, the greater the chance of change.
Amongst the counteracting causes may be noticed :
improvements in agricultural methods, e.g. rotation of
crops, use of machinery, and scientific processes ; improve-
ments in the means of communication, which Adam Smith
called the greatest of all agricultural improvements, —
the introduction of new forms of produce, e.g. the potato
and roots for feeding cattle. This topic might be indefi-
nitely illustrated both from earlier and from modern
times. Quite recently the cross fertilisation of grain
72 ELEMENTS OF POLITICAL ECONOMY
seems to have enormously increased the return to the
capital expended.
It may be noted, also, that land which is inferior under
certain conditions may become the best land under a
different regime. Thus in new countries, even in modern
times, the lands are first cultivated that are most acces-
sible, and do not require much expenditure in clearing,
just as for the same reasons the primitive tribes culti-
vated the hill-tops, which were near their rude forts
and villages, and were also less covered with luxuriant
vegetation. As Mill observes, there is scarcely any im-
provement in the arts of production generally which
may not serve to counteract this law. Thus, improve-
ments in machinery, and in transport, or in the manu-
facture of food products, or in the avoidance or the
utilisation of waste — may add to the productive power
of the society as regards its food supplies. Thus, the law
does not state, that in the course of time, with the in-
crease of population, the absolute marginal cost will
increase, or that the last " dose " of labour (and capital)
applied, will yield less and less as the years pass. Even
when we take an isolated country, or one dependent on
its own food supplies, this cannot be predicated. And
still less when we take account of foreign supplies.
Thus the conclusion is reached that the law is only
true under statical conditions, and that it cannot be
formulated under dynamical or changing conditions,
except under hypotheses which really reduce this case
to the former. There are other theoretical difficulties
that can only be indicated. Except in the simplest
hypothetical cases, it will generally be necessary to meas-
LAWS OF DIMIXISHING AXD INCREASING RETURN 73
ure both the applications of the doses of capital, and also
the returns in terms of money. Otherwise it is not pos-
sible to take account of different modes of cultivating
and of different kinds of produce.
But this again introduces the difficulty, that the price
of the produce must always depend as much on demand
as supply, and the influence of increasing population can
only operate through demand. The growth of wealth
may lead to food products being given to animals not
themselves designed for meat.
4. Other Applications of the Law. — The law may be
applied, mutatis mutandis^ to fisheries, mines, and other
products from land in the extended sense. A similar law
may also be framed as regards building sites. Suppose
that the main business of a town is carried on at the
centre, or that for any reason the centre is preferable
for residence. Then, as the margin of building extends,
there will be diminishing convenience. At the same
time, the buildings near the centre will be raised in
height, and we may suppose the top story will cost more,
and also that it will be less convenient.
Again, we may trace the growth of towns and cities,
and discover counteracting causes similar to those in
agriculture. Under different conditions, the attractive-
ness of the centre may be less, the means of transit to
the outskirts, or again to the top stories, may be improved,
and so on ; so that we cannot say that with the increase
of population, it will cost more and more to provide the
marginal accommodation including under that term the
access to employment. Some of these points will again
come up for discussion under the theory of rent, and
74 ELEMENTS OF POLITICAL ECONOMY
also in the treatment of economic progress. In con-
clusion, it may be pointed out, that this law of diminish-
ing return is deserving of close study, not only on account
of its importance as applied to other parts of economic
theory, e.g. rent, population, value, etc., but also as an
example of method. In the abstract form, it is the best
illustration of the working of marginal increments, whilst
on the inductive and historical side, it gives rise to many
fruitful lines of inquiry.
5. The Law of Increasing Return. — The law of increas-
ing return in its formal statement is the exact analogue
of the law of diminishing return : under certain conditions
every additional unit of productive power gives a more
than proportionate return.
As thus stated, the law may be observed under certain
conditions even in agriculture. In fact, it is only after
a certain point is reached that diminishing return sets
in, and up to that point there may be increasing return.
This is constantly observed in new countries. And there
the law may be said to apply to the whole productive
powers of the community; that is to say, in new and
undeveloped countries every increase of capital and of
labour may give a more than proportionate return. This
is the theoretical justification of large borrowings for
productive purposes and of bounties direct or indirect on
immigration.
In a sense the law may be said to express in a sum-
mary form the advantages of division of labour and
of production on a large scale which render possible
the adoption of various internal and external economies
(Marshall).
LAWS OF DIMINISHING AND INCREASING RETURN 75
It is a matter of common observation that with many
things an increasing quantity can be produced at a les-
sened cost per unit on the average, e.g. books, etc. Again,
in most manufactures, up to a certain point, every increase
of the scale of production seems in general to give increas-
ing return. English writers under the influence of the
industrial conditions that prevailed after the industrial
revolution were inclined to suppose that in the course
of progress diminishing return always came into play in
agriculture and increasing return in manufactures.
But once we leave static conditions, no such tendency
can be proved to prevail. It has already been shown that
in the case of land diminishing return may be counter-
acted in a variety of ways, and as regards manufactures
generally the most potent causes of improved production
are to be found, not in the economies introduced by
extending the scale of the business, but in all kinds of
scientific discoveries. But from this point of view it
is possible that over any long period there may be greater
discoveries in the production of raw materials of all kinds,
including food supplies, than in the corresponding manu-
factures.
It may also be pointed out that as regards particular
businesses there must be a limit to the advantage to
be gained by an increase in size, or in each industry
there would soon be only one firm left. A reference to
facts of modern industry show that the same result may
be achieved in very different ways. The law of increasing
return does not state that every increase of the size of
manufacturing concerns is associated with an increase
of productive power.
76 ELEMENTS OF POLITICAL ECONOMY
Again, if we refer to the localisation of industries, no
doubt the growth of towns and cities is often accompanied
by an increase of facilities of transport and of various
other economies of production in the extended sense ;
but it cannot be said that there is any necessary con-
nection between the growth of cities and the growth
of their manufacturing industries. It is quite possible
that with the great improvements in transport we are
on the eve of centrifugal distribution of industrial
power.
These questions will call for further consideration in
considering economic progress. (See below. Book IV.)
One of the principal applications of these laws of increas-
ing and diminishing return is in the theory of normal
value, especially in dealing with the effect of an increase
of demand for certain things. In this connection the law
of constant return is also of importance ; so far as produc-
tion is concerned it may be said to indicate the balancing
of diminishing and increasing return. As a rule in every
case we have a conflict of opposing tendencies, and accord-
ing to the result we have constant, diminishing, or in-
creasing return. And as regards the same commodity
at different times under different conditions, we find
that it may be produced according to each of these laws
in turn — that is to say, it is not the kind of commodity,
but the conditions of production that determine which
law operates. 1
1 See Marshall, Principles, Book IV, Chaps. Ill and XIII ; Sidgwick,
Principles, Book I, Chap. VI ; Iladley, Economics, Chap. VI ; Cannan,
Production and Distribution.
LAWS OF DIMINISHING AND INCREASING RETURN 77
Illustrative Curves
O M
Along OX measure units of productive power and along OY
the corresponding products to the successive portions. Fig. 1 repre-
sents diminishing return ; Fig. 2 increasing, and Fig. 3 constant
return. For different purposes the units of power and the returns
may be measured in different ways. Later, in the theory of rent, it is
convenient to separate produce and money rents. In general it is
simplest to consider money expended and the money return. In the
figures as given no more is intended than an illustration of the
variations in the returns. The mode of measurement is a matter of
indifference.
CHAPTER VII
THE PEINCIPLE OF POPULATION
1. The Theory of Malthus. — The limits of this work do
not admit of any history of the development of theories.
If an exception were to be made, some account might well
be given of the Essay on the Principle of Population, by
Malthus, and its influence on subsequent thought. Here it
must suffice simply to warn the student that his work has
been much misunderstood, and that J. S. Mill is to blame
for much of the misunderstanding. Mill's morbid dread of
the increase of population was pushed to such an extreme
that it vitiated his whole treatment of the wages question.
It led him also to disfigure his work with irrelevant reflec-
tions on the immorality of large families, and generally
on what may be called the immorality of imprudence ; and
for these extreme opinions there is no support in the
Essay of Malthus or in the history of peoples, or it may
be said in the common-sense of mankind. Indeed, Mill's
morbid dread of the increase of population is one of the
curiosities of economic literature, and is especially cu-
rious under present conditions. In France, of recent years,
there seems to have been not only a falling off in the
rate of increase, but actually a fall in population itself;
and Leroy Beaulieu has maintained that the natural
tendency of the democratic principle is to lead to a check
78
THE PRINCIPLE OF POPULATION 79
in the growth of population. Recent publications have
also shown that the opinions of Mill, at the time, called
forth an answer which showed that, even in savage com-
munities, in spite of the abundance of the means of sub-
sistence, the population might dwindle.
The connection of the work of Malthus with that of
Darwin has also been misrepresented, and a critical study-
shows that the leading ideas of the Darwinian theory are
not applicable to human beings, at any rate in historical
times. The growth of population depends on a multitude
of social and moral factors, as well as on physical condi-
tions. One of these causes — or it would be better to say
one group of causes — is found in the demand for labour,
an aspect of the question to which much attention is
being given at present (though it also was emphasised by
Adam Smith). Another cause, it is true, is always found
in the conditions affecting the food supplies or necessa-
ries generally. It is to this latter cause that the work of
Malthus was mainly directed, though indirectly, owing to
the necessary connection of economic forces, other con-
siderations are introduced.
2. The Three Propositions of Malthus. — The theory of
Malthus as summarised by himself may be stated in three
propositions and a qualification.
The first proposition states that population is necessarily
limited by the means of subsistence. This proposition
is obviously true, and the only point to notice is that the
phrase means of subsistence must include more than food,
e.g. fuel and the means of providing clothing and shelter ;
and as civilisation advances a still more extended mean-
ing must be given. But taking food alone, it is plain
80 ELEMENTS OF POLITICAL ECONOMY
that the supply of food itself is one of the necessary
limits to any possible increase of population.
The second proposition may be given in Malthus's own
words, "Population invariably increases when the means
of subsistence increase, unless prevented by powerful and
obvious checks." This proposition is itself given with
an important qualification, namely, that the increase in
the means of subsistence must be such as the masses of
the people can command ; that is to say, the actual system
of the distribution of wealth must be taken into account.
It is plain that this second proposition, even with the
qualification appended, needs an inductive proof. And
such a proof is attempted by ISIalthus in an elaborate
investigation.
This proposition has also been most liable to misunder-
standing. The point is not that population must increase
if subsistence increases, but only that it will so increase
unless the tendency is counteracted by certain checks.
As a matter of history, taking the population of any nation
as a whole, there has very seldom been any pressure on
the means of subsistence, though there has nearly always
been a certain class of the society which, having regard to
its command of purchasing power, has not sufficient food
to rear the children that are born.
The question then arises. What are these checks? and
the answer is given in the third proposition. " These
checks and the checks which keep the population down
to the level with the means of subsistence are moral re-
straint, vice, and misery." The ultimate check is the
want of food, but this ultimate check is never the imme-
diate check except in cases of actual famine. Famine is,
THE principlp: of population 81
however, comparatively rare, and consequently the imme-
diate checks must be sought for in other conditions.
These checks may be divided into two great classes,
namely, those which tend to diminish the birth-rate and
those which increase the death-rate ; the former are
styled preventive and the latter positive. The preven-
tive checks are, speaking broadly, either of the nature of
moral restraint or of vice. By Malthus, the expression
moral restraint is used in a narrow sense as equivalent
to abstinence from marriage not accompanied by irregular
gratifications. The preventive checks that come under
the head of vice are found to exist in the lowest stages of
barbarism and in the highest stages of civilisation.
Of the positive checks some arise unavoidably from the
laws of nature, e.g. the inclemency of the seasons or the
exhaustion of natural resources. To these the name of
misery is specially applied. Other positive checks, how-
ever, are wholly or partially the results of vice (in a large
sense), such as wars and excesses of various kinds. For
the illustration and the inductive proof of the operation
of these checks, the student must refer to the essay itself.
He will find incidentally many correctives to popular
opinions. Thus the permission of infanticide, as in China,
is said to be a cause of increase, not of diminution of
population ; for the permission removes the fear of the
consequences of early marriages, but when the children
are born, the natural instincts override the permission
except in cases of extreme necessity. Again, slavery is
unfavourable to an increase of numbers, while with great
and continuous emigration population may increase.
To resume the main argument ; the sum of all these
82 ELEMENTS OF POLITICAL ECONOMY
preventive and positive checks taken together forms the
immediate check to population ; and in every country
some of them are in constant operation with more or less
force. In general, also, there is a part of the population
that tends to multiply to such an extent as to press on
the means of subsistence — always, that is to say, having
regard to its command of purchasing power. It is quite
possible, however, that apart from this lowest class the
increase of population may be less rapid than is advanta-
geous to the community at large. Accordingly, in deal-
ing with questions of population, it is necessary to consider
the various classes as well as the aggregate. ^
1 See Bonar, Malthus and his Work ; also Philosophy and Political
Economy, Bk. Ill, Chap. I ; Cannan, Theories of Production and Distri-
bution; Nicholson, Historical Progress and Ideal Socialism.
CHAPTER VIII
THE GROWTH OF CAPITAL
1. Meaning of the Growth of Capital. — There is a
popular idea that the greater part of the capital of a
nation has been accumulated in the distant past, and that
each year only produces the increase. The principal
object of Mill's third proposition on capital was to call
attention to the erroneous nature of this idea ; he points
out that all capital is consumed (meaning destroyed as
such), and is being continually reproduced. In modern
societies it may be said that it is only the value that
remains constant, the things that possess the value being
subject to change. From this point of view any differ-
ence in value constitutes profit (or loss) ; and if there is
a surplus profit, it may be added to capital or immediately
consumed as income.
The root idea of the various forms of capital is, as
already explained, " prospectiveness " ; in other words,
the characteristic utility of capital is the satisfaction,
directly or indirectly, of future needs and desires. The
constituents of real income satisfy present needs. It
follows that the simplest form of creating capital is put-
ting aside directly a stock of consumable goods for future
use, e.g. the corn buried by the ancient Germans in the
ground, and similar primitive hoards. This is saving in
the most elementary sense. Even in this case it may well
83
84 ELEMENTS OF POLITICAL ECONOMY
happen that the saving is made from a stock that is for
the time being superfluous ; but in general the provision
of the surplus will involve a certain amount of labour or
effort, or there may be a conflict between present and
future needs. Thus, generally it may be said that the
creation of capital involves in some way the sacrifice of
present to future utility. This, however, is only true in
the broad meaning of the terms, and it cannot be said that
in modern industrial societies the sacrifice on the part of
the great capitalist involves any personal abstinence from
present consumption. As regards smaller incomes, how-
ever, this choice between the present and the future must
often be made.
In modern societies, however, even in these cases, the sav-
ing is not of the character of hoarding. It depends rather
on the direction that is given to industry by the demand,
or on the distribution of purchasing power. The process
is at the same time facilitated and concealed by the inter-
vention of money. A person with a certain money income
has so far a certain command of the national wealth. His
money demand or expenditure will set in motion certain
industrial forces. He may elect to buy things for direct
immediate use of such a kind that they are destroyed
without leaving anything of utility for the future. Or
he may demand quasi-permanent forms of consumption-
capital ; or directly by purchase for his own business or
indirectly by investment in the businesses of other people
he may demand various forms of productive capital. The
most effective criticism of Mill's fourth proposition on
capital (that demand for commodities is not demand for
labour), is afforded by regarding the real national income
THE GROWTH OF CAPITAL 85
as a flow or stream of commodities that is continuously
resulting from the use of the national productive agents.
According to the orders of consumers or of those possess-
ing the money incomes, more or less of this stream is
directed to the satisfaction of future wants, and thus to
the future employment of labour.
2. The Limits to the Growth of Capital during any Period.
— In modern industrial societies, in measuring the growth
of capital it is necessary to use money. We cannot, like
the ancient patriarchs, enumerate the details of our posses-
sions, the oxen, the camels, the asses. It is only by
using money as the measure that we can allow for
substitutes, and the increasing variety of the forms of
capital.
With this proviso it may be said that the maximum
that can be added to the material capital of any society
during any period, say a year, is the total net product, —
that is to say the excess of the annual produce above
what is needed to provide for the efficiency-necessaries of
the workers, the supply of raw material, etc., the repair of
the auxiliary capital, etc., and keeping up the consumption-
capital (e.g. the dwelling-houses). The forms of capital,
and also the net product must be, as explained above,
measured in money. This real net product, measured in
this way, obviously includes more than the profits on
capital (in the widest sense of the term profits), as sav-
ings (in the economic sense) may be made from wages,
especially if the term is used so as to cover the highest
forms of labour, e.g. professional skill.
The amount of the net product will depend in the
first place on the total annual dividend or real national
86 ELEMENTS OF POLITICAL ECONOMY
income. The larger the gross income, so much larger,
other things remaining the same, is the net product.
The net product will be increased by anything that
increases the efficiency of the productive agents or econo-
mises their use. Thus, in considering the possible in-
crease of the net product, we are concerned with the
limits of the power to save ; in considering the causes
that induce people to save rather than to consume their
wealth immediately, we are concerned with the will to
save. The actual saving affected during any period will
depend on these two groups of causes.
3, The Power to Save. — In considering the causes that
affect the power to save, and changes in that power, we
must take account of all the factors of national produc-
tion. Here it will suffice to enumerate simply the princi-
pal headings under which the inquiry must be made as
regards the aggregate production and its cost — including,
under the term cost^ the various elements noticed above
requisite to keep the forms of capital in statu quo.
Such are the natural resources and powers (see Chap. II) ;
the efficiency of labour and capital (see Chaps. II- V) ;
and the amounts taken by government for public purposes.
In this last case the indirect expenses (^e.g. restraints on
trade), and burdens (e.g. conscription), as well as the
taxes, must be taken account of ; and per contra the nature
of the expenditure of the public revenue must be consid-
ered. Other elements to notice are the extent of foreign
trade, the means of transport and communication, and the
credit system of the country. Whether credit itself should
be included under capital is a question of definition, but
there can be no doubt that credit increases the efficiency
THE GROWTH OF CAPITAL 87
of the productive agents in the same way as improvements
in auxiliary capital, and it also effects economies that are
equivalent to the saving of capital.
4. The Will to Save. — The will to save, in the economic
sense of turning wealth to capital uses, depends on and
varies with a number of factors.
One of the most far-reaching and varied in its modes of
working is security. If there is to be any saving at all,
there must be security that what is saved will be pre-
served to or enjoyed by the owner, at any rate to such
an extent as to balance the sacrifice and effort required
to create the capital. Even slaves, it has been found, will
save out of their small pecuUum if sure of their savings.
Security includes the security afforded by the state against
violence or fraud or breach of contract on the part of
individuals, and also protection against the arbitrary exac-
tions of the government itself. Arbitrary and oppressive
taxation is one of the greatest hindrances to the accumu-
lation or investment of capital. Compare the provinces
under Turkish misrule with Egypt under British adminis-
tration. There must also be security against the violence
and uncertainty of the powers of nature. If a country is
liable to frequent earthquakes or other physical disasters,
or has an unhealthy climate, life and property are uncer-
tain and little store is set by the future.
What is spoken of as the effective desire of accumula-
tion really consists of a group of motives. It may be
weak from intellectual deficiency or lack of the telescopic
faculty (Marshall), as in the case of the Indians men-
tioned by Mill, and indeed of primitive peoples gen-
erally ; or there may be moral deficiencies, e.(^. no strong
88 ELEMENTS OF POLITICAL ECONOMY
interest in others, no sufficient family affection, no desire
to avoid dependence in old age. The hope of rising in
the social scale and the importance attached to the mere
possession of wealth as such, apart from its uses, have
always been factors of importance, and were perhaps never
stronger than at present.
The way in which the aggregate of the national wealth
is distributed amongst the different classes of the com-
munity often makes considerable difference. Thus, as
wealth was transferred from the landed aristocracy to
the mercantile and industrial classes the growth of capital
increased. Facilities for investment promote saving ; the
savings of the working classes have been greatly stimu-
lated by the extension of savings-banks, building societies,
etc., while the development of joint-stock enterprise has
promoted saving generally. In the latest returns to
Schedule D of the British Income Tax the gross assess-
ments on the incomes of public companies exceeds the
amount on the profits of private persons and firms.
The effect of the rate of interest depends on a balancing
of opposing influences. If the rate is high, or rises, so far
there is a greater reward for saving, and thus a direct
encouragement to save. This high rate may, however,
react on labour. For, other things remaining the same,
if more goes by way of interest to capital, there is so
much less for the wages of labour ; thus, so far there is
less stimulus to exertion, less efficiency, and on the whole
a smaller fund or " flow " from which savings can be
made. Thus a very high rate may check accumulation by
lessening production. Adam Smith argued that the high
rate of profit due to the monopoly of the colonial trade
THE GROWTH OF CAPITAL 89
had, on the whole, an adverse influence on accumulation
partly because it increased the extravagance of merchants
and checked "parsimony."
Again, a high rate may be a sign of insecurity generally.
Thus, on the whole, we cannot say that if the rate of
interest rises there will be an increase in the rate of
accumulation.
If the rate is low, or falls, people must save more for an
annuity of a certain amount, and thus more is devoted to
the forms of insurance. Labour also obtains a greater
reward, and the industrial machine works so far at higher
pressure. A low rate of interest also gives a stimulus to
new undertakings that give promise of a better return.
"John Bull can stand most things but he cannot stand
two per cent."
A low rate of interest may be a sign of good security.
5. The Growth of the Different Species of Capital. — So
far the question of the growth of capital has been treated
as if the national capital were homogeneous in character
and as if the various causes examined operated uniformly ;
it is necessary, however, to distinguish different cases.
As regards circulating capital, including raw materials,
labourers' necessaries, etc., the better the industrial organ-
isation so much the less need is there for an accumula-
tion of stocks. The forms of capital are continuously
replaced as they are required. In place of the storing
up of a fund we have the direction or control of a stream
or flow. The idea of public granaries is a case of rever-
sion to a primitive tj'pe.
On the other hand, the forms of consumption-capital
(in the sense defined), e.g. houses and their furnishings
90 ELEMENTS OF POLITICAL ECONOMY
of all kinds, tend to increase greatly, both in quantity
and in value (as indicating quality). This is especially
the case with a low rate of interest, because it becomes
cheaper to build new, than to rent old, houses. In the
course of industrial progress, the forms of fixed and
auxiliary capital tend to increase greatly. The law of
substitution (Marshall), that is to say the substitution of
less expensive for more expensive agents or factors
of production, is exemplified by the displacement of costly
labour by machinery. The application of new scientific
ideas to industry also generally involves the creation of
new forms of capital.
Land and natural agents are not as a rule included
under capital in the department of production, and strictly
they are incapable as such of increase. But they may be
indefinitely improved by the capital that is sunk in
them. Adam Smith regarded agricultural improvements
of a permanent character as the most advantageous of
all the forms of national accumulation. But the amount
of capital in this form depends largely on the competition
of foreign supplies with home produce. Recently in the
United Kingdom, in contrast with the great 'growth of
capital, generally there has been a falling off in many
districts in the amount of the capital sunk in the land.
And capital in this form, like other forms of capital,
needs constant renewal.
Similar reasonings may be applied, mutatis mutandis, to
the various forms of immaterial capital, e.g. the develop-
ment of banking and credit generally, and of systems of
education. Some of these forms are more fully treated
at a later stage (Book III).
THE GROWTH OF CAPITAL 91
6. The Limits to the Production of Wealth. — As illus-
trating the course of the argument of the last three chap-
ters, attention may be directed to the statement by Mill,
that the limited quantity of land and its limited produc-
tiveness form the real limits to the production of wealth.
This position appears to be due partly to Mill's exag-
gerated idea of the operation of the law of diminishing
return, and its consequences on population and the food
supplies, and partly it seems to be a survival of the
Physiocratic analysis of production, namely, that only
labour devoted to the land could increase the aggregate
of national wealth. But even if we take an isolated
country, and suppose that for a long period the same
amount of raw materials of all kinds are taken from the
earth by the same methods, there may still be a contin-
uous increase in the quantity of wealth. The labour
may become indefinitely more efiQcient and skilful, and
the raw materials may be worked up into more and more
complex and artistic forms of wealth. In fact, as Malthus,
himself pointed out, wealth may increase indefinitely
long after agriculture has become stationary.
But notably in the modern world, and specially as
regards the United Kingdom, any one country is not
isolated as regards its food and raw materials. In any
country, the production of manufactures can be increased
indefinitely so long as the labour and capital are forth-
coming; and the whole world is open for the provision
of materials and food supplies. So long then as this
country can find markets for its manufactures, the limita-
tion of its land cannot check the growth of its wealth.
It is sometimes argued that the food-supplying countries
92 ELEMENTS OF POLITICAL ECONOMY
themselves, increase in population, and will in time re-
quire all that they produce. But, as will appear more
clearly under foreign trade, a nation must not be regarded
as an individual ; it consists of a number of classes with
divergent interests ; it is to the interest of the farmers
to sell to the highest bidder, and a rich manufacturing
nation would always furnish a richer set of customers
than the poorest classes in the food-producing country.
Of course theoretically there might be some danger of
prohibition of the export of food, but this could hardly
arise in all countries at once, and the blow to the agricul-
tural interest would be so severe that the case is of little
practical concern.^
1 See Giffen, Growth of Capital ; Marshall, Principles, Book IV,
Chap. VII; Boehm-Bawerk, Cajpital and Interest (translated by Smart).
BOOK II
DISTRIBUTION
CHAPTER I
DISTRIBUTION AND PROPERTY
1. Meaning of Distribution. — In popular discourse, the
term distribution often refers to the transference of com-
modities from place to place or from person to person ;
or, in other words, the term refers to the operations of
wholesale and retail trade as contrasted with production
in the narrow sense of manufacture, etc. But as already
explained, logically distribution in this sense is part of
production: there is a continuity of processes until the com-
modity is in the hands of the consumer. There is no
doubt one aspect of trade that calls for special treatment,
namely, the causes that determine the rates of exchange.
This is the problem of the third great department of
economics.
Distribution in the economic sense (here adopted) refers
to the division of the wealth of a nation amongst the
different classes. The leading conception is appropriation.
The first problem of distribution in this sense is to
examine the meaning and the economic foundations of
the institution of property, and the limitations that are
imposed on the right of property under different condi-
tions. It is found that the idea varies between two
extremes : in the one the power of the individual is as
large as possible ; in the other, the power of the state, as
expressed by the central or local authorities, is dominant.
95
96 ELEMENTS OF POLITICAL ECONOMY
Thus, on the one side, we have the various forms of private
property ; and on the other the various forms of property
in common (^e.g. village communities) that have existed
or still exist, and the various forms of socialism that for
the most part must be regarded as ideal.
The second great problem is to determine the economic
laws that govern the quantitative distribution : first, of
the agents or means of production, that is, the land, the
capital, and the labour (when labour, as in slavery, is the
subject of appropriation) ; in this connection it may be
remarked that the economic characters and the effects of
the laws of bequest and inheritance are of fundamental
importance. And secondly, this part of distribution
treats of the incomes derived from these agents ; that is,
the rents, profits, and wages. Here, in modern societies,
exchange is in many respects fundamental, and the dis-
tribution of incomes may be said to depend on contracts
made for the exchange of the services of the productive
agents. But exchange has not always been predominant
in this way; on the contrary, here also the movement of
progressive societies has been from status to contract;
incomes were formerly determined largely by law, and
custom with the force of law, external to the individuals
concerned, and independently of their particular bargains.
Even under modern conditions the forces included under
law and custom affect distribution to a considerable
extent. Lately in Ireland and the Highlands of Scot-
land, there has been a reversion to the method of judicial
rents, and in some of the colonies attempts have been
made at judicial wages.
It is plain from this brief survey that the problems of
DISTRIBUTION AND PROPERTY 97
distribution in the sense defined cannot be brought logi-
cally under exchange. In the department of exchange, as
a rule, nothing is said of the institution of property or the
laws of bequest and inheritance ; similarly, there is little
scope for the discussion of the economic effects of laws
affecting certain forms of property (e.g. the land laws), or
of laws affecting certain contracts for wages, especially
real wages.
At the same time it may be admitted that many of the
problems of distribution, especially as regards incomes,
depend on value. But, as already observed, all the eco-
nomic departments are closely interconnected.
2. On the Nature of the Laws of Distribution. — It was
shown at an earlier stage that the expression economio
Imvs admits of very different interpretations as regards
cogency. Mill tried to show that there Avas a sharp dis-
tinction between the laws of the production and those of
the distribution of wealth. The former, he declared, par-
take of the character of physical laws — there is nothing
optional or arbitrary about them ; whilst the latter are of
human institution only. I have examined this distinction
(which Mill regarded as his most important contribution
to political economy) in detail in the larger work ; for the
present purpose it may suffice to say that the distinction
is one of degree only : the laws of production are not
purely physical nor are the laws of distribution purely
arbitrary ; though, in certain cases in the latter, human
wishes have greater influence than in the former. The
reason why Mill attached so much importance to his dis-
covery was that in it he found a theoretical justification
for socialism, even in its most extreme forms. On this
98 ELEMENTS OF POLITICAL ECONOMY
view, " once the things are there " (as determined by the
conditions of production), the state or society may do as
it pleases with the distribution — or in Mill's phrase, none
of these ideal schemes are truly impracticable, that is to
say, not in the sense in which an indefinite increase from
a limited portion of land is physically impossible. It
may be replied that the practicability of socialistic schemes,
with any real meaning of the term, cannot be decided in
this abstract manner. In reality. Mill's argument relies
on a legal or political conception that requires careful
qualification in jurisprudence or political science, and in
economics is of doubtful value in any sense. I refer to
the conception of sovereignty.
3. The Conception of Sovereignty and its Application to
Distribution. — The idea of sovereignty as expounded in
analytical jurisprudence (e.g. by Austin, who had great
influence on Mill) is that in every independent political
society there is, so to speak, a centre of power which, rela-
tively to the members of the society, is absolutely supreme.
In the theory of jurisprudence this idea is sometimes
useful, and it must be assumed, generally, that any
positive law enacted by the supreme political power can
be enforced. But as used by Mill it was associated with
another idea which 'may be expressed in the form of the
"indefinite pliability of public opinion." This was the
great motive power on which the old radicals such as
Godwin relied. Since, at any rate, in any democratic
society, public opinion is the ultimate source of political
power, we have only to get any scheme approved of and
it may be put into operation ; and if enforced by the
sovereign power it must succeed (theoretically).
DISTRIBUTION AND PROPERTY 99
It may be objected to this line of argument that it is
exactly opposed to the leading idea of the traditional
economic doctrine that begins with Adam Smith and
culminates in Mill himself (in the last chapter of his
work). The fundamental assumption of laissez faire is
that the economic power of government is extremely
limited, especially for the achievement of beneficial objects.
At this point it is impossible to do more than state the
fundamental opposition between these ideas of the un-
limited, and the extremely limited, powers of government.^
4. Economic Definition of Private Property. — In modern
industrial societies the institution of private property is
generally prevalent as contrasted with primitive societies,
in which land in particular was held in common. The
extent to which private property has prevailed at different
stages of progress is a subject to which great attention
has been devoted recently, and a certain reaction has set
in against the extreme views that were current on the
communistic character of Jill forms of primitive property.
It is a case in which it is absolutely necessary to apply
the historical method. Nothing can be more fallacious
than the attempts to construct the social arrangements of
primitive societies by the simple plan of divesting human
beings of their civilised surroundings and supposing that
otherwise there would be no change in their thoughts or
ideas ; to suppose, for example, that primitive man actu-
ally did act just as civilised man might be supposed to act,
if thrown by shipwreck on a desert island. In truth, as
Sir Henry Maine (the great populariser of the historical
1 The economic functions and powers of governments are examined at
length in Book V of this work.
100 ELEMENTS OF POLITICAL ECONOMY
method in tliis country) observes, in general, it would be
safer to suppose that in primitive times men would act
in quite a different manner. Recent researches on
comparative superstitions have shown in a striking way
how widely different are the ancient and the modern ideas
of what is natural in social arrangements. And in primi-
tive times religion had great influence on economic ideas
and practices. With this brief indication of the diffi-
culties involved in tracing the actual development of
private property, we may pass at once to the definition as
applicable in modern industrial societies. And for this
purpose the statement of Sidgwick {Elements of Politics,
Chap. V) may be taken as the basis. " The right of prop-
erty, when used without qualification, involves the com-
plete right of exclusive and quasi-permanent use, the right
to destroy, and the right to alienate (i.e. to dispose of
to another by gift or sale) but not necessarily or logically
the right of bequest." It may be remarked, as showing
the difficulty of the subject even when we are dealing
with abstract conceptions, that Mill is of opinion that the
right of bequest is logically included. Leaving for the
present the discussion of this point, we have next to con-
sider what are the economic foundations of this right.
5. The Economic Bases of Private Property. —"The
foundation of the whole institution," says Mill, " is the right
of producers to what they have themselves produced."
This first basis may be called briefly the labour basis of
property. It may be traced through Adam Smith to John
Locke, and in a less definite form to older writers. It is
often associated with the right to freedom of labour, i.e.
the right to exercise one's powers and faculties in any
DISTRIBUTION AND PUOrERTY 101
way that may seem good to the'itidiridiial.. Soineti-nes
also it is associated with the right to labour, in the sense
that the state ought in case of need to provide its mem-
bers with work. Mill, who in this part of the subject
avowedly introduces ethical reasonings, argues that this
right to the results of one's own labour is a natural right
of mankind; but, without entering into the difficulties
involved in the conception of natural right, the expediency
of this basis may be justified on purely economic grounds ;
namely, unless we allow freedom of labour and the right
to enjoy the fruits of labour, the labour will not be forth-
coming, or at any rate not to the same extent. Stated in
this general form, the principle may be illustrated abun-
dantly from economic history. As already pointed out in
another connection, slave labour is of all forms of labour
the least efficient, and as freedom is granted and the share
in the proceeds is increased, the quantity produced also
increases. The principle is also seen in modern times in
profit-sharing, and it is well illustrated by the greater zeal
displayed in piece-work in which the extra reward is
directly associated with the extra effort.
A closer examination, however, shows that this basis,
simple and obvious as it may appear at first sight, is beset
with difficulties. In the first place, as soon as we intro-
duce division of labour and a complex result due to the
combination of many different forms of labour, there is
the difficulty of separating the shares, e.g. in building a
great ship, and, indeed, in any form of manufacture.
Again, in the economic justification given, it will be
observed that the right (or the expediency of it) is stated
with a qualification, namely, "to the same extent." In
102 ELEMENTS Q^ POLITICAL ECONOMY
the . inatbematical languaga that is now so much used in
economics, the work done is a function of the reward.
But, as shown in the very examples just cited, a moderate
reward may suffice to call forth considerable energy on
the part of labour, and thus a large amount of the produce
may be left over for other claimants — the state itself or
various privileged classes. In fact the economic justifica-
tion is little more than the principle that is involved in
the economy of high wages; and it would be absurd to
say that the masters should in the pursuit of this economy
surrender all their profits.
This illustration naturally leads to the statement of a
second basis of property also admitted by Mill. People, it
may be said, have a natural right to the results of their
capital. On Mill's view the capital is itself the result of
saving or sacrifice, and ought as such to be rewarded.
But again, without introducing the ethical "ought," an
economic justification may be given as in the correspond-
ing case of labour. In fact, as already shown, a large
part of capital in modern industrial societies is the result,
not of saving or sacrifice in the narrow sense, but of that
high form of labour called enterprise. It may also be said
that, if a man has a right to the work of his head, he has
a derivative right to any results from that work. But,
apart from any right, the economic principle is that, unless
capital receives at least a share in the product, it will not
be forthcoming, or at any rate not to the same extent;
and thus it is to the interest of even manual labour to pay
something for the use of capital. The difficulty, however,
again emerges as to the amount of the reward that is
necessary or expedient.
DISTRIBUTION AND PROPERTY 103
The reference to the distribution of shares in a complex
product for which many forms of labour and capital are
combined leads up to a third basis of property which also
is admitted by Mill, on moral grounds, namely, the co7i-
tract basis. On this view, people have a right to the
results of their contracts and bargains. Under this head-
ing may also be brought the right to receive gifts from
others — which at first sight would seem to cover the right
to give and receive by bequest. (See the next chapter.)
This contract basis may also be justified on economic
grounds. Freedom of contract is the very breath of
industry in modern societies, as is forcibly illustrated by
the fact that, according to the Constitution of the United
States no infringement of this right is admitted. And it
may be argued also that such a right is necessary to give a
real meaning to the other two bases — that rest, namely,
on labour and capital. On this view, freedom of labour
means freedom to make a bargain for wages, which again
means (when there is a product) a certain share in the
product. And similarly of capital. The first and most
natural meaning to give to these rights of labour and
capital is that the shares of the various parties concerned
should be adjusted by freedom of contract, especially in
the form of freedom of competition.
And again, it may be pointed out that competition is the
greatest stimulus to production, and that any check on
competition lessens the aggregate produced.
This contract basis also at first sight seems natural and
obvious, but it may easily be shown that there are great
difficulties involved. In fact, it is to get rid of the abuses
that are alleged to arise in connection with freedom of
104 ELEMENTS OF POLITICAL ECONOMY
contract and competition that all the efforts of socialism
are directed. Socialists maintain that the terms of the
endless series of industrial contracts in modern industry
will only be equitably adjusted if all the parties are on an
equal footing as regards opportunity, knowledge, and
generally the power of making and understanding a bar-
gain. And it is urged that capital as a whole has greater
power than labour, and that some forms of labour have
greater power than others ; and besides, there are all the
complications introduced by the existence through genera-
tions of inheritance and bequest.
There is still a fourth basis to consider, namely, the
right founded on prescription, which may be defined
for the present purpose as resting on undisturbed posses-
sion for a time. The period necessary to give such a
prescriptive right varies in different cases and is different
in different systems of law. This basis obviously depends
rather on expediency than on moral right, and may be
justified by such arguments as the necessity of a finis
litium and of giving certainty to the interpretation of
contracts. And again, it may be said that security is
essential to the prosperity of industrial societies, and that
the general reason for allowing a title by prescription is
the necessity of avoiding the disturbance of security.
At the same time it is equally clear that there is no
prescriptive right in institutions. The mere antiquity
of an institution does not even give a presumption that
it ought not to be disturbed. In fact, with modern ideas of
evolution, the presumption may be said to lean the other
way ; what was suited to the ancient or the mediaeval
man it may be thought will probably not be suited to
DISTRIBUTION AND PROPERTY 105
the modern with the great change in social conditions.
And it would be absurd to suppose that no change in
the institutions of a country is to be made simply because
in the period of transition there must be some shock to
security and some disappointment of even reasonable
expectations. In making changes of this kind the princi-
pal question that arises is : have the interests adversely
affected any claim to compensation ? — a question which
demands separate consideration at a later stage.^
1 This chapter corresponds to Book II, Chaps. I and II of the
Principles. As a general introduction see Maine, Ancient Law; and
on special points Menger, Bight to the Whole Produce of Labour (trans-
lated) with Foxwell's Introduction ; Sidgwick's Political Economy,
Book III, Chaps. VI and VII ; and Elements of Politics, Chap, V ;
Wagner, Volksioirthschaftslehre, Part I, Chap. IV ; De Laveleye, Primi-
tive Property.
CHAPTER II
INHERITANCE AND BEQUEST
1. Economic to be distinguished from Legal and Ethical
Ideas. — In treating of the laws of inheritance and bequest,
it is necessary to separate, as far as possible, the economic,
from the purely legal and moral aspects. The actual
positive laws that prevail in countries of the same degree
of civilisation, e.g. England, France, Scotland, present
considerable differences, which can only be explained by
an examination of the historical development of the sys-
tems of law in these countries. Again, these laws, such
as they are, might be criticised from the moral stand-
point, and various reforms might be suggested in order
to promote moral ideals. It is beyond the range of
economic inquiry to consider, except indirectly, these legal
and moral questions.
The economic effects of inheritance and bequest are,
however, always of great importance. The actual dis-
tribution of wealth at any time (especially of land)
depends largely on the cumulative effects of these laws ;
they also indirectly have an influence on production, and
they must be considered in dealing with the tax system
of any country.
2. General View of Bequest and Inheritance. — It is
obvious on simple inspection that bequest and inheritance
are logically opposed. If absolute freedom of bequest
is allowed, there can be no compulsory rules of inheritance,
106
INHERITANCE AND BEQUEST 107
and, conversely, so far as such niles prevail they must
limit the right of bequest.
Some writers {e.g. Mill) consider that freedom of
bequest is part of the right of property. The idea is
that a person can do as he pleases with the results of his
labour and capital and contracts, and that logically death
makes no difference to this right. Other writers, how-
ever, maintain that freedom of gift inter vivos is on quite
a different footing from freedom of bequest. It is ad-
mitted on both sides that the modern idea of property
implies exclusive use and power of alienation ; but those
who approve of special limitations on bequest argue that
as soon as a person dies his individual power ceases, and
the state must decide what is to become of his property, —
the state may respect his expressed or presumed wishes,
or it may act on other principles of distribution. And it
is the fact that, both in the past and the present, freedom
of bequest has been and is more limited than gift inter vivos.
It seems clear that the right of inheritance as such can-
not be deduced from the right of property economically
considered; it does not follow from any of the funda-
mental bases, and there is no prescription of institutions.
In ancient law (Maine) the unit of society was the
family, and the property was, so to speak, held by the
head in trust for the other members ; in the case of death
another took his place. So long as this was the ruling
idea inheritance altogether overrode bequest. But one of
the characteristic features of economic progress has been
the disintegration of the family, and freedom of the indi-
vidual has displaced the bonds of blood relationship to
a considerable extent.
108 ELEMENTS OF POLITICAL ECONOMY
The development of freedom of bequest is of interest
in showing the influence of other social factors on eco-
nomic distribution. The mediaeval church, for example,
taught that every person ought to leave a part, at least,
of his wealth to the church, for the benefit of the poor
and the good of his soul. In time, on account of this
teaching, death without making a will and fulfilling this
duty was looked on with the greatest horror, and it
became sinful to put off too long making a will. One of
the horrors of sudden death was intestacy, and the greatest
calumny to the dead was to say that he died intestate.
An old chronicler records of an enemy of his convent that
he was found poisoned, — and the climax is striking —
"dead, black, stinking, and intestate." The origin and
results of the rules of inheritance and bequest under the
feudal system are also indirectly of economic interest, and
their influence survives to the present day.
In the present survey it must suflice to say that the
right of inheritance cannot be supported merely on the
ground of long-established custom. The custom was partly
due to social ideas and conditions no longer prevalent, and
the custom itself had long since begun to be modified in
favour of bequest.
3. Inheritance. — The grounds on which inheritance (as
distinct from bequest) is at present supported may now be
briefly noted. First, it is said that, in case the right of
bequest is not exercised, the state should endeavour to do
as the deceased presumably would have done. Intestacy
is regarded as a mere accident. It is true that the state
cannot look into the supposed wishes in every particular
case, it must act on general rules. The question then
INHERITANCE AXD BEQUEST 109
arises, What ought to be the basis of these rules ? The
usual answer is that the state should found its rules on
the prevalent customs of bequest. So far it is implied
that inheritance is to be considered as supplementary to
bequest. Thus, if, as a rule, when people are left to
themselves, they leave their wealth equally amongst their
children (Adam Smith speaks of this distribution as
natural), then in case of intestacy the state should make
a similar distribution. If, on the other hand, as regards
property in general or some form, e.g. land, primogeniture
is the custom of bequest, then it ought also to be the
rule of this supplementary inheritance. Mill, however,
argues in effect that the state should consider, not the
prevalent custom, but what the owner ought to have done
according to some ideal of moral duty. Logically, this
argument seems only applicable to the limitation of
bequest in general in favour of this ideal. And even
in modern times limitations are imposed on bequest.
4. Bequest. — In considering the limitations on the
freedom of bequest, it may be observed, first of all, that,
even if the right of bequest is supposed to be part of the
right of property, we may still appeal to more fundamental
principles. The economic bases of property (with which
alone we are now concerned) only justify the institution
in so far as it is necessary or expedient as a stimulus to
the exertions of labour and to the efforts and enterprises
of capital. No doubt the institution of property may be
and is justified on other grounds, — ethical, jural, and
political, — but with these we are not concerned. From
the economic standpoint (as here understood) the ground
for allowing the right of bequest is that to a considerable
110 ELEMENTS OF POLITICAL ECONOMY
extent the wishes of the deceased must be carried out as
regards the disposal of his wealth, or a clieck is placed
on enterprise and accumulation. But, leaving this prin-
ciple intact, there are several obvious limitations that are
generally accepted. Thus, admitting for the present that
property in land is expedient on economic grounds (see
next chapter), still, the right to lay down the order of
descent of property in land for an indefinite period —
entails in the strict sense of the term — is certainly not
necessary to stimulate the owner to keep up and improve
the property, and on economic grounds, indeed, may be
shown to be the reverse of beneficial. The tendency of all
recent legislation has been to diminish the power of tying
up land. Again, as regards endowments, e.g. for relief of
the poor, education, or religion, it is generally admitted
that after a certain time (that varies according to cir-
cumstances) the state may change the rules and regula-
tions laid down. Thus it has often happened that
endowments for the relief of the poor of a certain locality
have, in the course of time, by attracting worthless people
from other places, done more harm than good. Similarly,
endowments for some particular forms of education, owing
to changed conditions, may be actually injurious to the
educational interests of a locality or a whole country.
Obviously, also, any bequest that is against the public
interests should be restrained, and sometimes these inter-
ests are mainly economic.
In most countries, however, bequest is chiefly limited
in favour of the children — that is to say, certain rules
of inheritance are compulsory. If these rules are prac-
tically such as would be followed if freedom of bequest
INHERITANCE AND BEQUEST 111
were allowed, the restraint might seem to be only formal.
And in the majority of cases this would be so, but some
exceptions may be noticed. Compulsory inheritance may
weaken parental control and lead to idleness on the part
of the children. The advantage of primogeniture, said
Dr. Johnson, is that it makes only one fool in the family.
Again, it may well happen that an unequal division would
be more advantageous to the children as a whole — some
might need more than others to enable them to carry
on their business or profession. And, especially in the
case of very large fortunes, the testator might with ad-
vantage bequeath more to public objects than the law
of inheritance would admit. Any hardship of this kind
could, however, generally be surmounted by the simple
expedient of gift inter vivos, which, besides, in most cases,
is preferable to death-bed charity (Gladstone).
This last consideration leads up to the position that
it is useless to attempt to limit too severely the right of
bequest in the supposed interests of the public. Mill's
idea that no one should be allowed to obtain by bequest
or inheritance more than a certain minimum (not very
high even in the case of children) is plainly impracticable.
It would be defeated either by open gifts during life or
by secret trusts — a device that has often been resorted
to in order to evade unpopular laws. Here again we
have an illustration of the effectiveness of the limitations
imposed on the theoretical sovereign power by the actual
will of the subject.^
1 Compare Mill, Principles, Book II, Chap. II, sees. 3 and 4 ; Sidg-
wick, Folitics, Chap. VII ; Maine, Ancient Law, Chap. VI ; Pollock
and Maitland, History of English Law, Vol. II, Book II, Chap. VI.
CHAPTER III
PROPERTY IN LAND — EXPROPRIATION — COMPENSATION
1. Property in Land. — The question has been much
discussed whether private property in land ought to be
allowed. On the matter of right, it is said, that, since land
as such is not the result of labour or of saving, it is on a
different footing from other forms of wealth. For the
time being it may be necessary or expedient to give ex-
clusive use, but this need not involve the other incidents
and privileges of private property. Under primitive con-
ditions there was a periodical or possibly an annual divi-
sion, and in Russia and in India a large part of the land
is held by village communities. Even in the most ad-
vanced societies, it is maintained that the state or local
authorities might fulfil the functions of landlord and
take the rents. But, although agricultural land in its
original state is not the result of labour and capital,
most of its valuable qualities are (Mill).
It is best to consider first agricultural land, reserving,
in the meantime, the case of building land. It is prob-
able that the land of England, as it exists at present, owes
most of its valuable qualities to the cumulative effects of
labour and capital, e.g. as expended on drainage, en-
closures, roads, and good tillage. Thus, so far as these
qualities are concerned, land (agricultural) is the result
of labour — it is saved, it is even manufactured.
112
PROPERTY IN LAND 113
Logically, then, land may be said to consist of two
parts, namely, natural qualities (incapable of improve-
ment or change), and capital of an ordinary kind mixed
up with them. Mill argues that so far as these primary
qualities are concerned, there ought not to be private
property, but there might be in the case of the secondary
qualities due to labour and capital. Thus he says :
" Property in land is only justifiable so long as the owner
is the improver ; " and " Whenever the proprietor ceases
to be the improver political economy has nothing to say
in defence of landed property as there established." And
again, "In no sound theory should the landlord be
merely a since urist quartered upon the land." No doubt
IMill's views were influenced by the condition of Ireland
when he wrote, and by its history ; and no one at present
would defend the system, the evils of which were so gross
and palpable. It is, however, always dangerous to argue
from a particular case, and the general question must be
considered on its merits. And here it seems enough to
state that on all forms of capital interest is received, and
for the interest, as such, the owner does nothing ; take
for example, the interest on consols or railway deben-
tures, or any shares from which the element of risk is
eliminated, and in which the shareholder takes no part
in the management. Why, then, should the owner of
land incur particular censure because he ceases to be the
improver ?
There are certain advantages of the landlord and tenant
system as it prevails in England. As a rule competition
will insure that the best use is made of the land ; a good
farmer can extend his holdings by renting more land as
z
114 ELEMENTS OF POLITICAL ECONOMY
a trader may borrow more capital; the farmer's capital
may be used ou the land instead of being sunk in pur-
chase ; the landlord may undertake the permanent im-
provements which are hardly possible without ownership ;
and the landowner is satisfied with a small return in the
way of interest on the value of the land as a whole, on
account of the social and other amenities incident on
projDerty in land, and thus the farmer gets the improve-
ments cheap.
No doubt, if the full advantages of this system are to
be obtained, there must be security for the investment of
the capital of the tenant, and there must be bona fide
competition and not monopoly. In the case of very small
holdings it is possible (as Mill forcibly argues) that
special legislation may be desirable ; but tenant farmers,
farming for profit on a relatively large scale under equit-
able leases, are, as a rule, quite as competent as any land
court to secure fair rents, leases of suitable length, and
compensation for their improvements. If the state were
to become the universal landlord, it would be compelled
to resort to routine methods, or else to leave the powers
at present exercised by the private owners in the hands
of officials, with all the risks of caprice or jobbery.
It is, however, hardly seriously maintained that there
would be any gain by the substitution of state for private
management of land ; as a rule, those who advocate what
is called the nationalisation of land think the advantage
is to be found in the financial gain that would accrue to
the state. And this naturally leads to the consideration of
the principles of expropriation and compensation in general.
2. Expropriation. — The right of expropriation on the
PROPERTY IN LAND 115
part of the state simply means that any government can
directly or indirectly take away, limit, restrict, or destroy
any proprietary rights of individuals. As, for example,
it may abolish some forms of property formerly allowed,
e.g. slaves ; restrictions may be imposed that lessen the
value, as in the case of the three F's in Ireland (fair rents,
fixity of tenure, and free sale of tenant right) ; the state
may make any changes in taxation, which changes
directly and indirectly deprive people of their property ;
it may abolish debts under certain conditions, e.g. arrears
of rents and more generally the debts of a bankrupt ; and
finally, the state may transfer any form of property from
one set of persons to another, as in giving compulsory
powers of purchase to a railway or to some local authority.
Furthermore, it may be easily shown that in the course of
progress frequent occasions are sure to arise when it will
be necessary or expedient to exercise this right in one or
other of its forms.
At first sight it might appear that the right of expro-
priation is part of the idea of sovereignty, and thus is
subject to no limitations. As already explained, how-
ever, sovereignty in this sense is a purely abstract con-
ception and has a very limited range in economics. As
regards expropriation, governments have been and are
limited in many ways, e.g. in the United States by the
Constitution (as shown in the case of the proposed in-
come tax) ; and, in particular, public opinion and moral
ideas of what is just or fair render it necessary for the
state to give compensation. This right to compensation
is the most effective limit to the arbitrary action of the
state and is of the greatest economic importance.
116 ELEMENTS OF POLITICAL ECONOMY
3. Compensation. — It is found, however, that when
expropriation takes place (of any of the kinds indicated)
the compensation given varies indefinitely. It may exceed
the market value (as in the pretium affectionis approved
of by Mill in the case of land) ; it may aim at being just
the market value, as in goods purchased for the public
service (though the old practice of preemption on the part
of the crown was only gradually annulled) ; sometimes
much less than the market value is held to be sufficient,
e.g. insanitary dwellings ; and sometimes no compensation
is given, as when arrears of rents are cancelled ; and some-
times not only is there no compensation, but a further loss
is involved as in changes of taxation.
The degree of compensation to be awarded cannot be
decided on economic grounds only, but so far as such
grounds are valid they seem to be reducible to two general
principles. First, the state must avoid any shock to
security; and secondly/, it must be prepared to recognise
expectations sanctioned by public opinion in the interpre-
tation of contracts.
Neither of these principles is to be taken as implying an
absolute command or imperative. In economies there are
no imperatives. Bentham's dread of insecurity was as
intense as Mill's of over-population, but even Benthara
recognised and stated that sometimes security must give
place to security — a shock to security in one part of the
body economic may establish more firmly the security of
the whole system.- Endless examples could be given from
economic history. One of the best instances is found in
the gradual mitigation of penalties for debt and in the
development of the law of bankruptcy. In the same way
PROPERTY IN LAND 117
the limitations imposed on proprietary rights in land and
capital of various kinds, which have been found necessary
in the course of progress to prevent or remedy certain
abuses, have in reality strengthened the institution of
private property. Private property itself, economically
regarded, is only a means to an end, namely, the provi-
sion of economic utilities to the community as a whole.
Thus it is quite possible that the compensation given on
the purely economic principle of security might be less
than would be given according to prevalent custom or
actual law, and the question arises whether the actual
practice rests on some deeper moral principle, or if it per-
sists merely through the unreasoning force of habit, in
which latter case it must in time give way to economic
considerations.
Similarly, as regards the reasonable expectations implied
in certain contracts, no hard and fast rule can be laid
down. The important object from the economic stand-
point is that the reality and efficiency of freedom of
contract should be preserved. And again, greater free-
dom on the whole may be obtained by restrictions in
certain directions, and the reasonable expectations of the
community may be set against the particular and inter-
ested expectations of individuals. In case of conflict the
best means of reconciliation often consist in giving a
long notice that certain practices will no longer be per-
mitted. We constantly find that a change in public
opinion foreshadows legislation which will restrict pro-
prietary rights ; and contracts entered into with the
reasonable prospect of such reforms being made ought to
provide for their own insurance.
118 ELEMENTS OF POLITICAL ECONOMY
The question of the recognition of the right of compen-
sation would, as Mill says, in many cases turn on what in
the circumstances was sufficient to constitute prescription,
that is to say, not on strictly legal, but on moral grounds.
It is clear that, as the circumstances change, so also
does the moral prescriptive right or, what for the present
purpose is the same thing, the reasonable economic
expectation.
At the same time a change in public opinion in itself
does not justify the immediate abolition of proprietary
rights without compensation. Action of this kind might
not only injure innocent third parties (for all monetary
contracts are far-reaching), but it might affect adversely
security and contract in the society as a whole, and thus
the state would lose far more indirectly by refusing com-
pensation than it would gain directly.
Similar reasoning may be applied to the proposals that
involve arbitrary confiscation of property in the disguise
of taxation.
The case of land will serve to illustrate in the concrete
the general principles involved.
Suppose that the state were suddenly to destroy private
property in land without compensation to the present
owners. The land itself would remain ; and also its pro-
ductive power in agriculture and its amenities and advan-
tages for building would be unimpaired. But when once
it is remembered that contracts based on the private
ownership of land affect every part of the industrial
system (^e.g. through banking and insurance companies),
it is plain that the shock to security and to freedom of
contract would involve losses to the community far in
PROPERTY IN LAND 119
excess of any gain to the state through the confiscation.
And the loss on balance would be still greater if an
attempt were made to separate what were called above
the primary and the secondary qualities, and to restrict
the confiscation to the former.
Nor would there be the slightest difference in the real
effects if the confiscation took the form of taxation to the
full extent of the rental. Taxation, as will appear later
(see Book V),^ must be imposed on certain principles, e.g.
equality, certainty, etc., and as proved by history in cases
of the first magnitude, excessive and arbitrary taxation
may suffice to destroy the economic activities of a nation.^
1 The taxation of the unearned increments of building land is ex-
amined in this book.
2 See Sidgwick, Politics, Chap. XII ; also Political Economy, Book III,
Chap. IV, §§ 1,3, 14 ; Mill, Principles, Book II, Chap. II ; Burke, Sejlec-
tions on the French Eevolution.
CHAPTER IV
SOCIALISM
1. Historical Variations in the Institution of Property. —
People who have become accustomed to particular laws
and institutions are apt to suppose that they are essential
to the well-being, if not to the very existence, of society.
Mill, as already observed, attempted to get rid of this idea
by appealing to the conceptions of sovereignty and the
indefinite pliability of public opinion. A more effec-
tive way is found in the substitution of the historical for
the analytical method. The appeal to history shows that
in the past societies have attained a high degree of civili-
sation under laws, customs, and institutions, affecting prop-
erty and the distribution of wealth, very different from
those that prevail at present in England. We find, for
example, the various forms of village communities and of
feudalism appearing all the world over, as if they were nec-
essary stages in the development of nations. Each of these
systems, no doubt, had its abuses, and each was inimical
to certain kinds of progress ; but in idea, apart from the
abuses, there was much that was attractive in both systems,
and, so far as the idea was realised, security and the essen-
tial elements of social order were attained. History also
shows that, as these systems decayed, the parts that sur-
vived were often those that were most beneficial, not to
the nation as a whole, but to the ruling class ; thus in the
120
SOCIALISM 121
great enclosures in England in the fifteenth and sixteenth
centuries the ill-defined customary rights of the villagers
were sacrificed to the technical legal rights of the lords
of the manors.
Again, the feudal privileges enjoyed by the so-called
owners of land survived the obligations incident on feudal
tenures, and to this day dealings in land are hampered by
survivals of feudal law.
The results of the appeal to history are confirmed by
the survey of existing conditions and recent changes.
The elements of economic well-being may be secured under
very different systems, and when a revolution of system
is effected, it may benefit a class more than a people.
In England, and generally in the industrial nations of
the West, the course of reform as regards property con-
sisted mainly in the abolition of useless or harmful sur-
vivals which had been retained partly through the vis
inertice of mere habit and partly through the active sup-
port, when threatened, of interested classes. At the same
time there were always reformers who wished to go much
further, and to introduce revolutionary^ changes in the
laws affecting property and tlie distribution of wealth.
Some of these reformers seemed to think that their object
would be best achieved by adapting the old ideas to the
new conditions. Thus some looked to modernised and
purified communities as the ideal, others to a modernised
feudalism in wliich the king, for example, would be the
first industrial, and the captains of industry take the
place of the feudal barons. The phalansteries of Fourier
and the chefs industriels of St. Simon are the best-known
types respectively of these ideas.
122 ELEMENTS OF POLITICAL ECONOMY
Besides these, however, all sorts of schemes were pro-
posed which involved revolutionary changes in the exist-
ing systems of property and distribution. And at the
present time new schemes are constantly being put for-
ward with the immediate or ultimate object of effecting
a social revolution. All these schemes may be embraced
under the comprehensive name of Socialism, though each
of them is apt to arrogate to itself alone the pleasing but
exclusive attribute — " the true."
Whether we apply the analytical or the historical
method, it may be admitted of all these schemes that
they are theoretically possible ; there is nothing immutable
about the present laws of distribution ; whether socialism
in any of its forms would be desirable or practicable is
a different thing.
2. Definition of Socialism. — In a recent work on social-
ism, it is said that " no definition of socialism, at once
true and precise, has ever been given or ever will be
given" (Flint). The opinion is supported in the con-
crete by the critique of many attempts at definition, and
in the abstract by the argument that "socialism is essen-
tially indefinite and indeterminate ; it is a tendency or
movement towards an extreme; it may be very great or
very small; it may manifest itself in the most divers
social and historical connections; it may assume and it
has assumed a multitude of forms." Economists, how-
ever, are constantly beset with similar difficulties of
definition ; they are always dealing with tendencies, con-
tinuities, and debatable margins, and economic ideas
assume an indefinite variety of forms in particular in-
stances, e.g. capital, labour, etc.
d
SOCIALISM 123
The following definition seems to cover most of the
forms of socialism, omits none of importance, and effec-
tively contrasts socialism with the present system of
individualism : " Socialism in the generic sense of the
term, embraces all such schemes as are intended to further
the claims of society for social purposes as against the
present system of individualism ; or to promote the in-
terests of the whole as against those of particular classes
and individuals ; the object of all such schemes being
directly or indirectly revolutionary as distinct from mere
reforms of the present system." In brief, the essence of
socialism is, positively to promote the good of the whole
society ; and negatively, to destroy the present system
(individualism) which generates or permits the injurious
privileges of classes and individuals. Accordingly, just
as socialists are critics of individualists, so they in turn
are critics of socialists as regards wages, capital, property,
interest, etc. And in a sense, the whole of political
economy, when treated from the standpoint of the present
system, is a critique of socialism. In this wide meaning,
socialism has a vast literature, and the first requisite is to
give some kind of classification of the varied schemes.
3. Classification of Socialistic Schemes. — In classifying
the different schemes, we may take as the guiding prin-
ciple the amount and degree of state interference that
would be required as compared with the present system.
With this leading idea we have : —
(1) Schemes that would involve less state control
than at present. Of this kind were the schemes that
sprang from the ideal of liberty of the French Revolution.
It was supposed that social evils were, for the most part,
124 ELEMENTS OF POLITICAL ECONOMY
the results of the interferences of governments with the
course of nature. Hence, in the extreme form, these
schemes seek to destroy governments and restore natural
conditions. Modern instances of this idea are found in
anarchism and nihilism. It is not necessary, however,
that, in order to promote this idea, resort should be made
to violence; in England, for example, Godwin relied
entirely on education and the power of opinion, though
he hoped for the perfectibility of man with a minimum
of legislative control.
(2) Next, there are the schemes that propose to estab-
lish witJmi the existing state a number of separate socialistic
bodies or communities. These would only require suffer-
ance from the existing authorities. A number of experi-
ments of this kind were made in America (e.g. Brook
Farm). The names of Fourier and Robert Owen are
best known in connection with this idea of socialism.
Schemes of profit-sharing, cooperation, and industrial
partnership do not come under the definition, as they
are essentially only modifications of the present system.
Strictly speaking, these socialistic communities within the
state might also be excluded on the ground that they do
not promote the good of the whole society, but only that
of their members. But in intention, at any rate, they are
designed to leaven the whole lump.
(3) There are the schemes that involve a greater degree
of state control both in legislation and in administration.
In the extreme form we have collectivism or state social-
ism. The writer most referred to in this connection is
Karl Marx, though he has derived many of his leading
ideas from the early English socialists (Foxwell's Intro-
SOCIALISM 126
ductiontoMenger). Some collectivists approve of effect-
ing the revolution by force ; others seek within the limits
of the present law to permeate society with socialistic
ideas and gradually to socialise our institutions. To begin
with, no doubt, writers of this school are only advanced
reformers, but they are properly classed as socialists
because their ultimate object is a social revolution.
It is sometimes said that the poor laws, factory acts,
free education, etc., are socialistic in tendency, and the
old phrase has been revived: "We are all, then, social-
ists." But such a large use of the term would take away
all definiteness from the meaning, as the writers who are
recognised as the strongest supporters of individualism
may also approve of the legislation just cited. All econ-
omists, from Adam Smith, have admitted that abuses
might arise under the present system which would call
for governmental intervention, and also that certain indus-
trial functions ought to be performed by the state. (See
below, Book V.)
4. State Socialism or Collectivism. — The form of social-
ism that at present is most in favour is state socialism or
collectivism, and a more detailed account may be attempted
of the features, or rather tendencies, of this system. It is,
however, difficult to form an adequate notion even of the
tendencies involved, on account of the very different pro-
posals that have been described under the expression
state socialism. For the present purpose it seems best
to take the system in an extreme or ideal form, so as to
bring out the leading ideas in sharp contrast to the present
system. From this standpoint the ideal aimed at may
be described as the substitution of collective for private
126 ELEMENTS OF POLITICAL ECONOMY
ownership and management of the means of production
(land and capital), and the displacement of competition
by organisation under state control.
Under the present system, indeed, capital is often col-
lected in large masses, and there is also, to a great extent,
organisation of labour. But aggregation and organisation
of this kind are the effects of the voluntary actions of
individuals, — voluntary, that is to say, in the sense that
they are not due to the initiative or direction of the state.
If, now, we seek to carry to its logical conclusions the
proposal that the state should control and organise pro-
duction, the first result is that there would be involved a
similar control of distribution. If the state assigns the
tasks, the state also must assign the corresponding rewards.
Accordingly, obedience to authority must take the place
of freedom of contract. The next logical result would
seem to be that the state (through its official statisticians)
must estimate the needs or the deserts of consumers.
That is to say, instead of demand being estimated by
retail and wholesale traders it must be estimated by
authority in some form. This again would naturally lead
to the abolition of trade and exchange. And, finally, with
the abolition of exchange, the mechanism of exchange
would no longer be required, and thus money, also, would
disappear.
Extravagant as this conclusion may seem to be, it is
only the logical sequence of the fundamental idea of col-
lectivism. And it is worthy of attention on two grounds.
In the first place, the supporters of the present system
maintain that it is the result of a long process of evolu-
tion in which the substitution of a money economy for a
SOCIALISM 127
natural economy lias played the most important part.
The extension of the use of money is, in this view, the
economic form of progress from status to contract. Of
course under the use of money must be included the use
of what is called representative money, or generally the
development of banking and credit.
Secondly, it may be observed that many socialists
(notably Marx) ascribe a large part of the abuses of
the present system to the use of money; it is money
that conceals the exploitation of labour by capital. And
actually in the nineteenth century several crude attempts
were made to substitute for money some kind of labour
exchanges. Thus at any rate it may be said that the
individualist emphasises the advantages of a money
economy; the socialist, its disadvantages and abuses.
Some of the abuses and unjust inequalities of the
present system are ascribed to the cumulative effects
of the institutions of inheritance and bequest, which per-
petuate the injustice of the past. And accordingly the
abolition or serious modification of the laws of succession
is generally part of the extreme socialist programme. But
altogether apart from this historical source of injustice it
is maintained that the system of capitalistic production
under present conditions is productive of a continuous
exploitation or robbery of labour. A redistribution of
wealth would effect no radical or permanent cure of the
social disorder — it is the system that is at fault. It was
supposed that this conclusion (the continuous robbery
of labour by capital) was the logical deduction from the
analysis, by Ricardo and the so-called orthodox economists,
of the system of production under the control of private
128 ELEMENTS OF POLITICAL ECONOMY
capitals. The natural tendency of wages (owing partly
to the imprudent increase of population and partly to the
greater bargaining power of capital) was to fall to a
bare subsistence minimum — the celebrated iron (eherne, lit.
brazen) law of wages ; whilst surplus profits necessarily
tended to increase indefinitely, and in particular the rents
of lands tended to rise through the very causes that
depressed the wages of labour. It was further supposed
that in the course of the natural development of this
capitalistic system the larger capitals would in time
swallow up the smaller. Ultimately, then, the result
of this evolution would be the division of society into
two classes, a very small class of very rich and an
enormous class of very poor — the millionaires on one
side and the proletariat on the other. The evolutionary
socialists, as they call themselves (though, curiously
enough, Herbert Spencer is an extreme individualist),
think that when this stage has been reached or is in sight
the state must intervene and take over the large capitals,
and that, owing to their magnitude and methods, the task
will be easy.
Such, then, being the origins, the leading ideas, and
logical consequences of state socialism in its extreme
form, they may now be examined from different points of
view. And, first, is this indictment of the present system
justified ?
5. The Socialist Critique of Individualism. — In the
first place, it must be pointed out that every economist
admits that in the present system there are very great
social evils, e.g. pauperism, overcrowding, insanitary
dwellings, and generally amongst the poorest such con-
SOCIALISM 129
ditions of livelihood and living as are destructive of all
that is good in human life. And at the other end of the
social scale (as measured by the possession of wealth)
there are the evils connected with monopolies, the pro-
motion of unsound companies, speculation, gigantic frauds,
commercial crises, etc., and also all the evils that arise
from misdirected or extravagant or immoral expenditure
on the part of the very rich. These abuses are admitted
by all observers. The conflict of opinion arises, first, on
the extent and the degree of the evils, and secondly, on
the causes. And it may be said at once that the questions
involved can only be fully answered by inquiries that
imply a reference to every part of economic science. In
this place it must suffice to bring forward a few salient
points for consideration.
The " iron " law of wages is not now accepted by any
economist, even as a first approximation to the theory of
wages. The larger part of gross profits is not mere interest
obtained through the otiose ownership of capital, but is
the result of enterprise and ability which, by the econo-
mies and improvements introduced, benefit society to a
still greater extent, e.g. the profits obtained from the
development of the means of transport and communication
in the last century were small relatively to the advantages
obtained by the nation or the world. Pauperism has many
causes, and it is doubtful if the system of large capitals
can be considered in itself as one of them (small hold-
ings of land and the so-called domestic manufactures, as
experience shows, may be at least associated with pau-
perism). There are counteracting causes to the amalgama-
tion of capital (as already explained). The professional
130 ELEMENTS OF POLITICAL ECONOMY
classes, whose only capital is their skill, in many cases
obtain higher " wages " than the employers of labour ;
manual labour is only one form of labour, and between
the lowest and the highest forma of labour (in the ex-
tended economic sense) there are endless gradations.
Production on a large scale can only exist with large
markets, which implies large demand, which again means
a multitude of consumers — this applies to every kind of
production in the widest sense of the term ; railways and
ships can only grow by an increase of traffic, and as
regards passengers it is the masses that pay best. There
has been during the nineteenth century in the great
industrial countries a rise in money wages and a still
greater rise in real wages, and a fall in interest as such ;
and on the whole the condition of the masses of the
people, in whatever way tested, has immensely improved.
Thus it appears that the socialist critique of the present
system, in the extreme form which regards the rich as the
parasites of the poor and large (private) capitals as
the root of all evil, is not supported by the first siftings
of economic inquiry.
It remains to notice briefly the difficulties of the remedy
proposed, namely, the collective ownership of capital.
6. Difficulties of Socialism. — Certain difficulties that
are common to all forms of socialism may be noticed very
briefly, as they are part of the common thought of the day.
As regards the demand for commodities (in the broad
sense) there would be a difficulty in the distribution of
the things that are limited in quantity and of varying
degrees of quality, e.g. the best sites for houses, the most
pleasing parts of the country for occupations, etc. In
SOCIALISM 131
general, however, the difficulties of consumption might
be met partly through the extension of the public means
of enjoyment, e.g. gardens, theatres, etc., and partly by
official estimates of the natural demand for various things,
and the adoption of some scale of relative utilities that
would command general acceptance; in the ancient
village communities the appeal to chance {e.g. lots) was
often resorted to, and in all times the judgments of chance
have been popular. There was also the method of peri-
odical division. An official average estimate might easily
be made of the things that can be produced in practically
unlimited quantities, freedom of choice in the ratios of
the public utility scale being left to individuals. The
real difficulty of consumption arises in connection with
distribution. (See below.)
Given the estimated demand, or what the state in its
wisdom considers a fair allowance of all sorts of things,
the next question is : how are these things to be pro-
duced? Here the difficulties are more serious. Such
are: as regards the choice of employment or occupation,
and the apportionment of work, the alternatives would be
authority with quasi-military power or a system of extra
rewards in proportion to the hardship etc., of the work,
or it may be the ability of the worker. In any case it
would be difficult to give equal opportunities to each, and
to exact equal quantities of labour. Other difficulties in
connection with production are found in the motives that
will induce the people to work in the new order of things.
Self-interest would not operate to the same extent; but
on the other hand it might be expected that there would
be an increase of public spirit and esprit de corps (Mill).
132 ELEMENTS OF POLITICAL ECONOMY
The conditions of labour would also be much improved,
and the idea that labour was something to be shirked
would, it might be hoped, disappear. On this point it
may be noted that, under the present system, the self-
interest of the workers is only remotely aroused in the
case of time wages, and also that a good workman all the
world over takes a pride in good work. The disutility
of work in itself has been ridiculously exaggerated.
Given reasonable hours, healthy conditions, and above all
contentment with the reward, and in most cases the work
itself ought to rank as a pleasure.
The word contentment naturally leads to the difficul-
ties of distribution.
On what principles are the various forms of wealth —
material and immaterial — to be distributed? Apart from
the forms of public or social wealth open to all, how
much of general purchasing or controlling power is to be
given to each? If money is retained in the socialist
state, how are the rates of money wages to be deter-
mined when competition is excluded ? As Mill observes,
absolute equality (communism in his sense) might be
accepted, so might chance (the spirit of gambling is uni-
versal), but not authority. The really weak point of
most socialist schemes is in the excessive wisdom they
require on the part of the necessary officials, and the
excessive appreciation of the wisdom of the controlling
powers on the part of those controlled. To all these
familiar objections (and others might be added, e.g. the
dangers of overpopulation, the difficulties of foreign
trade, etc.) it is replied that the socialist state would
only be gradually evolved, and that in the meantime, the
SOCIALISM 133
object ought to be to socialise our institutions. Ap-
parently it is thought that the process might be stayed as
soon as signs of failure appear. The difficulty of dealing
with socialism in this form is that in the earlier stages
there is nothing to distinguish it from reform of the
present system. The only real distinction seems to be
that the socialists would approve of the extension of gov-
ernmental functions (central or municipal) partly on
account of the educative effect on public opinion, or with
the very idea of inducing people to rely on the state,
instead of relying on themselves. The opposition of
ideas is thus marked even when the same immediate
object is approved, both by the individualist and the
socialist.
The conflict between the two ideals from this point of
view involves a consideration of the advantages and the
limitations of governmental action in general — a topic
that is so large as to require separate treatment (see
below, Book V). Here it may suffice to say that in deal-
ing with any case for governmental action (under present
conditions) we have to answer two questions. First, Is
the evil or defect complained of incapable of remedy by
the free action of individuals? Is there o, prima facie
case for the interference, or at least for the deliberation, of
government? And secondly. Can the government pro-
vide a remedy? Economic history is full of examples in
which the remedy attempted by the state has only aggra-
vated the disease, although at the same time there are
examples, also on the largest scale, which show that the
intervention of the state was too long deferred, and in
the end was most beneficial (e.g. the factory legislation).
134 ELEMENTS OF POLITICAL ECONOMY
7. The Benefits of Socialist Ideals. — It is only fair, in
conclusion, to notice briefly some of the benefits that may
be fairly ascribed to the writings and the practical efforts
of socialists. And first, as regards the development of
economic theory, they may claim to have contributed
greatly to the analysis of capital and labour. In some
directions they pushed tlieir conclusions too far, but they
did much to restore to its proper place the human element
in the production and the distribution of wealth. They
realised that in production, against the cheapness of the
product we must set the real cost in labour. It is impos-
sible to exaggerate the horrible degradation of labour, in
many industries on a large scale, after the industrial revo-
lution. There is a foolish idea that examples that are
notorious lose efficacy in proportion to the familiarity.
The lessons of the horrors of child labour in the early
part of the nineteenth century ought never to be for-
gotten or be dulled by familiarity. The socialists through
their ideas promoted the legislation that remedied this
and other evil conditions of labour. There were no doubt
other influences (religious and moral), but the socialist
analysis played an important part. Secondly, the social-
ists may claim a share in restoring to its proper place, in
the national economy, the industrial functions of the
state. Adam Smith, himself, it is true, had assigned to
governments tasks enough to occupy all their energies ;
but his attacks on the abuses of state management had
been so strong and so successful, that a species of laissez
/aire had become popular, which, if carried to its logical
conclusion, would have reduced society to a state of
nature (in the modern and historical sense of a state of
I
SOCIALISM 135
savagedom). The socialists did much to get rid of the
excesses of laissez faire, both in theory and in practice-
Finally, the socialists emphasised the importance of pub-
lic spirit and of solidarity, which had been underestimated
in the stress laid on the benefits of individual freedom.^
1 The corresponding chapter in the Priticiples, Book II, Chap. XV,
is written from a different standpoint. The literature of socialism and
the allied topics is so vast, that a short selection of works is difficult.
Kirkup, History of Socialism; Graham, Socialism New and Old;
Rae, Contemporary Socialism ; Conner, The Socialist State ; Ely, French
and German Socialism; Karl Marx, Capital; Seligman, Economic
Interpretation of History ; Schaffle, Quintessence of Socialism ; Holyoake,
History of Cooperation (Vol. I) ; Flint, Socialism; Nicholson, His-
torical Progress and Ideal Socialisin ; Menger, Bight to the Whole
Produce of Labour (especially Foxwell's Introduction on the Early Eng-
lish Socialists) ; and the publications of the Fabian Society; Macrosty's
Trusts and the State, and Webb's Industrial Democracy have an in-
direct bearing on socialism.
CHAPTER V
QUANTITATIVE DISTRIBUTION
1. Of the Quantitative Distribution of Property. — In the
preceding chapters of this book we have been occupied
mainly with qualitative distinctions. We have com-
pared the general characteristics of production and dis-
tribution ; we have considered the economic bases of
private property; we have examined the nature of the
laws of inheritance and bequest, or the modes in which
property is allowed to pass from the dead to the living ;
and by way of interlude we have looked at the features
of some of the ideals which have been set up in the
hope of revolutionising these proprietary ideas and
institutions.
Resuming now the main argument, the next problem
or set of problems is to determine the causes that affect
the quantitative distribution : first, of the agents of
production themselves, and secondly, of the produce of
those agents.
In both cases when we make a general survey we may
distinguish between two sets of causes : first, those
that are embraced under law and custom in the widest
sense of the terms, and secondly, those that come under
freedom of contract and competition, these terms also
being taken in a large sense.
136
QUANTITATIVE DISTRIBUTION 137
2. The Distribution of the Agents of Production as deter-
mined by Law and Custom. — The actual distribution
of land, even at the present time, in old countries
depends largely on law and custom. According to a
recent calculation two-thirds of the whole of England
and Wales are owned by 10,207 persons, two-thirds of
Ireland by 1942 persons, and two-thirds of Scotland by
330 persons. Twelve owners have a quarter of Scot-
land, and nine-tenths of the whole of Scotland belongs
to fewer than 1700 people.
In France, on the other hand, 50,000 proprietors
possess each an average of 750 acres, 500,000 an average
of 75 acres ; and 5,000,000 an average of 7| acres.
There are in France 1,000,000 self-sufficing freeholds
supporting 1,000,000 families without the need of earn-
ing wages. In Great Britain, so late as the nineteenth
century, the large estates swallowed up a large number
of the small properties of " statesmen " and yeomen.
There can be little doubt that this great difference in
the distribution of property in land is to be ascribed
principally to differences in the laws and customs that
have prevailed and still prevail in the two countries.
In England, strictly speaking, the customs have had
greater influence than the laws ; in other words, the
laws that have prevented the splitting up of the large
estates in Britain are in the main permissive ; the prac-
tice of family settlements has probably had most in-
fluence. In B^'rance, on the other hand, the rule of
compulsory and equal inheritance has had considerable
effect.
The actual quantitative distribution of capital depends
138 ELEMENTS OF POLITICAL ECONOMY
to a much less extent than land on law and custom.
Their influence, however, is still great even in those
countries in which freedom of contract is developed to
the greatest degree, e.g. inequalities of fortunes are at
any rate continued by the laws and customs affecting
successions. But, in origin, the accumulation of capital
in the hands of individuals is for the most part the effect
of a series of contracts. It is doubtful if the direct
operation of law could even restrict this concentration
of capital so long as the principle of freedom of contract
is left as the basis of the industrial system. More and
more, with the progress of society, capital is distributed
by monetary influences. And money is essentially mobile.
The growth of the money power is best seen in the case
of capital. As the history of the usury laws shows, the
money economy, even in its most rudimentary forms,
eluded the edicts of law and the dictates of religion ; and
with the development of banking and credit the freedom
of money has increased. In economic analysis it is, no
doubt, still important for many purposes to distinguish
between the actual forms of material capital, and their
money measures ; but as regards both revenue-capital and
production-capital, it may be said that the money value
is essential to their existence. Machinery that loses its
money value can no longer be ranked as fixed capital;
similarly, if the revenue, reckoned in money, from any
source ceases, the source is no longer capital. Even the
quasi-permanent forms of consumption-capital (in the
sense defined) are generally alloAved to decay if their
comparative money value dwindles.
In the case of labour, that is to say as regards owner-
QUANTITATIVE DISTRIBUTION 139
ship, the direct influence of law is least of all under
present conditions in the great industrial countries.
Slavery in all forms has been abolished. Man, from
being the chief form of property (Aristotle), has ceased
to be property. Thus the laws of succession have here
no place. So long as slavery existed, the distribution of
slaves was of the utmost importance, and the various
degrees of serfdom were only modifications of slavery.
The abolition of proprietary rights in man is the most
important strand in economic history. The owners of
land and capital have, no doubt, still in many cases great
powers over labour, analogous in some respects to the
former powers of the owners of slaves and serfs, but they
are better considered under the quantitative distribution
of incomes (especially real wages, and on analogy, real
rents).
3. The Quantitative Distribution of Incomes. — The great
flow or stream of wealth, or produce (Sidgwick), or eco-
nomic utilities (as here defined) finds its way ultimately
through minute capillaries to the millions of individual
consumers. But, to begin with, we may say that it is
distributed in three main channels. Or, without further
metaphor, there are three great species of income that
correspond to the three great agents of production. The
owners of land, capital, and labour obtain rents, profits,
and wages respectively. Taking a broad view, and with
simple or hypothetical illustrations, these incomes seem
quite distinct. But economic analysis soon reveals that
in reality they overlap or are blended in varying propor-
tions. Economic rent, the share of the natural qualities
of the land, is, in practice, inextricably blended with
140 ELEMENTS OF POLITICAL ECONOMY
profit rent, the share of the acquired qualities of the
land ; the largest part of gross profits is a form of wages.
Even ill the eighteenth century Adam Smith reduced a
part of wages to profits of capital sunk in the production
of the finished labourer ; while at the end of the nine-
teenth Professor Marshall has reduced a part of the earn-
ings of labour and capital to quasi-rents. It follows that
all these kinds of income will require careful analysis to
discover their real meaning and the real nature of their
claims to rank as distinct species. The quantitative dis-
tribution of these incomes, or the discovery of the laws
(economic) that govern the amounts of rents, profits, and
wages, is a matter of still greater difficulty. It is to this
group of problems that the attention of economists has
recently been most directed.
It will be found that in each case law and custom still
exercise considerable influence, but in the course of
progress their influence has been more and more sub-
ordinated to that of contract. For a long period in
England rents were paid in labour and produce, and real
wages were paid in rights of occupancy of land, while the
relations of the lord of the manor to his serfs were deter-
mined by custom with the power of law. And during
this period most of the labour of the country was more
or less bound to the soil. Even in trades, until the repeal
of the Statute of Apprenticeship (finally in 1814), the
justices of the peace were supposed to fix the rates of
wages, though the law had long before fallen into disuse.
At present, it is true, in many industries the distribution
of earnings between wages and profits is determined by
what is called collective bargaining, and though the direct
QUANTITATIVE DISTRIBUTION 141
influence of law is small, that of custom is large. The
direct effect of law is best seen in real wages, in which we
take account of the conditions of work, etc.
The influence of custom is also still greatly felt in the
department of consumption. It is astounding how little
regard is paid to real utility, and how ill the means are
adapted to the attainment of what is supposed to be the
end of all consumption. But it is consumption that
governs demand, and demand guides production, and pro-
duction is intertwined with exchange and distribution.
To resume, a full inquiry into the quantitative distri-
bution of incomes ought to explain : —
(1) How the three great species of incomes arise, and
what are the causes that determine the relative amounts
of each. Take, for example, the national income of the
United Kingdom as measured in terms of money. Given
the necessary statistics, it could be divided into three parts
that are assigned respectively to the owners of land, capital,
and labour. It is found also that the proportions as-
signed vary. What, then, are the causes and conditions
that determine the relative amounts of these three great
incomes at any time, and the changes from time to time ?
We are here concerned with general wages, general
profits, and (by analogy) general rents. .
(2) It should explain also the reasons of the differ-
ences in the subspecies of these great incomes, the
causes of variations in the return to different kinds of
labour, capital, and land. Here we are still dealing with
comparatively large classes and aggregates. Taking
labour in the extended economic sense, we pass by insen-
sible steps from the simplest form of spade work to the
142 ELEMENTS OF POLITICAL ECONOMY
most complex form of brain work ; the continuity is
illustrated by the fact that the efficiency of the navvy
varies with his skill, and the greatest engineer must learn
with his hands (Nasmyth).
Similarly, profits may vary from the no-profit margin
(Walker) up to the enormous profits of successful trusts.
In rents, the continuity in the gradations and the dif-
ferences in the extremes are still more striking. Land
(also taken in the extended economic sense) is used for
very different purposes, and the aggregate rental of land
will be distributed in different ways under different
conditions. Even when we take economic rent in the
strict sense as arising solely from natural qualities,
there are different kinds with different origins.
(3) To some extent an explanation must be given
why incomes vary from individual to individual in the
same class. In all the highest forms of labour, e.g. in
the professions, there are great differences between indi-
viduals, and it is most important to distinguish between
the aggregate remuneration of the class and individual
gains and losses (taking account of the expense of train-
ing, etc.). Similarly, there are immense differences in the
profits of individuals, and the reasons of these divergences
from the average must be examined.
4. Money Incomes and Real Incomes. — The real income
of a nation consists of economic utilities, including con-
sumable commodities and services that perish in the act.
The largest class of labour is that of domestic servants
of all kinds, and their services ought to be reckoned as
equal in value to the amount of their wages, including
the value of their food, lodging, etc. By analogy, also,
QUANTITATIVE DISTRIBUTION 143
we ought to include in the real national income similar
services for which no money is paid, and which are not
estimated in terms of money; such are the services per-
formed by the members of a family for one another.
In considering the share in the real national income that
is consumed by any class or individual, this is often far less
than is indicated by the money income. Any one who
invests part of his income in any form in reality transfers
to that extent his consuming power to other people. The
millionaire himself may not consume for his own personal
wants a hundredth jDart of his income ; in his case a large
part of his real income must be considered to be in the
form of accumulated rights of property. And in estimat-
ing the value of this property the same things must not be
reckoned twice over. Thus we ought not to include both
the income of the railways and also the aggregate of the
incomes of the shareholders. In dealing with wages in
the narrow sense of the term it is usual to assume, in dis-
tinguishing between real and money wages, that all the
money is spent for direct consumption. It is often con-
venient to distinguish between money rents and produce
rents. In this case also it is usually assumed that the
actual produce rent is all turned into money. But in the
one case money wages may be saved and in the other prod-
uce may be directly consumed.
In conclusion, it may be observed that the distinction
between nominal and real incomes, whether national or
particular, is always of importance, and a transition must
never be made from one meaning to the other without
considering the essential differences.
It seems hardly necessary to point out that the distinc-
144 ELEMENTS OF POLITICAL ECONOMY
tion between the classes of income is only logical. The
same person may have an income composed of every species
of revenue to which economists have given names. ^
1 It has been found necessary to omit the subject-matter of Principles,
Book II, Chaps. VI-IX on "Village Communities," "Feudalism," "Con-
tracts for the Hire of Land," and "Modern Ownership of Land." On
the influence of competition and custom in the distribution of land : See-
bohm, English Village Community ; Systems of Land Tenure (Cobden
Club) ; Field, Systems of Landholding ; and on the general question:
Mill, Principles, Book II, Chaps. Ill and IV and Book IV, Chaps. Ill
and VII, sec. 7 ; Sidgwick, Principles, Book II, Chaps. I and XII ;
Marshall, Principles, Book II, Chap. IV, and Book VI, Chaps. I and II ;
Cannan, Production and Distribution, Chaps. VI- VIII ; Smart, Distribu-
tion of Income.
CHAPTER VI
WAGES AND THE GENERAL KATE OF WAGES
1. Wages as the Real Reward of a Quantity of Labour. —
Wages, like labour, may be regarded from two points of
view, subjective and objective. By wages from the sub-
jective point of view we mean, in the more familiar language
of Adam Smith, the reward for laying down so much ease
and happiness ; or, in the more precise language of to-day,
the utility that accrues to the labourer in return for the
disutility of his toil.
If we reckon the reward simply in terms of money, the
wages are called nominal ; if we go behind the money and
consider what it will purchase, and if we also take into
account all the other desirable things the worker obtains
in return for his toil, we arrive at the conception of real
wages.
In either sense — whether we take nominal or real
wages — the correlative term is a quantity of labour. In .
nominal wages, as a rule, the only element considered in
the quantity of labour is the time ; the money wages are
calculated by the hour, day, week, or year, as the case may
be. From the point of view of labour with which alone
we are at present concerned, the j^ear is the best unit of
time to take in estimating the money or nominal earnings,
though the bargain may be struck by the hour or the day.
L 145
146 ELEMENTS OF POLITICAL ECONOMY
In estimating the real wages that correspond to a certain
amount of money wages, and taking as the unit of time the
year, we have to consider a number of variable elements.
2. Real as compared with Nominal Wages. — First, as
regards the quantity of labour involved in the course of the
year, we must consider how the time is distributed. The
work may be uncertain and irregular ; it may vary between
periods of great intensity and periods of enforced idleness.
Other things being the same, the same money wages per
annum will mean greater or less real wages, according to
the quantity of labour involved ; at one extreme a person
might pay so much for permission to perform labour which
in itself gives positive utility (or the nominal wages are
negative) ; at the other extreme the nominal wages would
not balance the disutility involved in the labour, and enough
will not be obtainable without compulsion. An author
who publishes a book at his own expense generally gets
negative wages for his labour, whilst an adequate supply
of soldiers may need conscription.
Secondly, as regards the reward obtained, we have to
consider variations in the purchasing power of the money.
A certain amount of annual money earnings varies from
time to time and from place to place in its purchasing
power. These variations may be due to general causes
(examined later in the theory of money and prices), or to
special causes of a local or temporary character. In the
course of economic progress the prices of commodities that
are easily transported tend to become uniform throughout
a country ; but there are always variations in some things,
e.g. house rents. Movements of prices from year to year
are also less violent than formerly, but we can still distin-
WAGES AND THE GENERAL RATE OF WAGES 147
guish between dear and cheap years as regards important
articles of consumption. This suggests another point. It
is maintained that the material prosperity of the working
classes can be measured by the proportion of their income
spent on food, that is to say, the smaller the proportion the
greater the prosperity (sometimes called Engel's law,
though this is generally taken in the converse : the poorer
the family the more spent on food). It follows that, other
things being the same, a fall in the price of food, or more
generally of necessaries, has more effect on real wages
than a fall in non-necessaries. In estimating real wages
we must then always consider the distribution of the
money earnings in the nature of the family budgets of
the working classes.
Besides the annual money earnings of the head of the
family by his ordinary employment, we must take account
of the oj^portunities afforded for extra earnings by him-
self or the members of his family. It may be noted that
for many purposes in estimating real wages it is best to
take the family as the wage-earning unit.
Besides the money, we must also make allowance for
any additional payments in kind or services. This factor
is often of great importance in estimating the real wages
of agricultural labour, especially at distant periods : thus
there may be allowances of food, lodging, fuel, and cloth-
ing ; there may be some share in the stock or produce, or
the right to the use of land or common, etc.
Finally, for some purposes, it may be best to take as the
unit of time not the year, but the average lifetime in the
employment considered.
3. Wages as Payment for Work Done. — From the objec-
148 ELEMENTS OF POLITICAL ECONOMY
tive standpoint we have to consider wages as payment
made for so much work done, e.g. raising so many foot
pounds or rendering so much service. The quantity of
labour (subjective) is now only of importance indirectly as
affecting the efficiency of labour. To the employer, the
first consideration is not what the labourer feels, but what
he does : the cost of labour to the capitalist now takes the
place in the wages question of real wages to the labourer.
By analogy, we must now take account not only
of the money paid, but of everything the employer must
provide in addition. The amount of work done, may
be measured in different ways, of which a very com-
plete account is given in the Methods of Industrial Re-
muneration., by D. F. Schloss. There are two principal
methods of measuring the work done, and the corre-
sponding wages are called time-v^SigQs and jDiecg-wages.
Even these two methods are not so distinct as at first
sight may appear. In time-wages there is always a tacit
or expressed condition that so much work measured by
some other standard is to be done in the time ; and con-
versely in piece-work limits of time are always imposed
within which the work must be done. When the time
in which the task or a definite minimum must be per-
formed is fixed, the wages are called tos^-wages. The
difference, between these species depends on the adjust-
ment of the emphasis as is usually the case with economic
conceptions and classes. Thus even in domestic service,
where there is no vendible product, there are implied
conditions as to the amount and kind of service to be
rendered in a certain time. Although the illustrations
following the usual practice have been taken from com-
WAGES AND THE GENERAL RATE OF WAGES 149
mon or manual labour, the same ideas may be applied
to the highest forms of labour in the economic sense.
Thus the professional man must also consider the cost of
living as well as the amount of the fees or salary obtained
in a year, and mutatis mutandis he must allow for all sorts
of disutilities and utilities.
There are the same distinctions also from the objective
standpoint. Payment may be made to the professional
man by the employer by time or piece or task.
Perhaps the most striking point of contrast between
manual and professional labour is that in the former case
one employer has many workers, in the latter one worker
has several employers.
The wide extension of the terms labour and wages in
economics is one of the difficulties in attaching an accu-
rate meaning to the expression, a general rate of ivages.
4. The General Rate of Wages. — It is stated by Pro-
fessor Marshall : " Such phrases as the general rate of
wages or the wages of labour in general are convenient
in a broad view of distribution, and especially when we
are considering the general relations of labour and capital.
But, in fact, there is no such thing in modern civilisation
as a general rate of wages. Each of a hundred or more
groups of workers has its own wage problem, its own
special causes, natural and artificial, controlling the supply
price, and limiting the number of its members; each has
its own demand price governed by the use that other
agents of production have of its services." It is of
course true that there is no such thing as a uniform rate
of wages at any time. In a great industrial country
there are thousands of occupations in which there are
150 ELEMENTS OF POLITICAL ECONOMY
different rates of wages; and even in the same industry
and the same department of it there are often differences,
e.g. in agricultural wages in different counties in England.
All economists, however, have admitted that there are
such differences, and have tried to explain them; but
most of them have also used this conception of a general
rate, and have sought to explain movements in the gen-
eral rate as distinct from these movements in particular
occupations that are due to changes in the particular
demand and supply or to changes in the quasi-permanent
causes of difference.
In truth, precisely the same ideas and the same difficul-
ties appear in dealing with the general rate of wages as in
dealing with the wider conception of the general level of
prices. As will be shown in detail in the theory of
money and prices, we distinguish between general and
relative prices ; there may be great changes in the general
level of prices, whilst the relative values of commodities
inter se remain undisturbed.
Similarly, it is maintained that there may be changes
in the general rate of wages without any corresponding
disturbance of relative wages.
But changes in the general rate of wages do not refer
to any change in the value of money ; the changes referred
to are real changes. Broadly speaking, a rise in the gen-
eral rate of wages means that throughout the whole range
of labour the real reward rises. If, for example, the prices
of commodities, wliich are of importance in workmen's
budgets, remain the same, but on the whole money wages
rise (measured in the same way at the two dates), there is
said to be a rise in the cfeneral rate.
WAGES AND THE GENERAL RATE OF WAGES 151
As a rule, in any great industrial country, changes are
constantly taking place in the actual rates of wages paid
in the particular occupations. Accordingly, the move-
ments in the general rate can only be discovered by
taking averages of fairly representative types.
In either case it is assumed that there are certain causes
at work of a general character that operate through the
whole range of industry. In any particular case the effect
of these general causes may be hidden by some particular
change in the conditions affecting the kind of labour con-
cerned. But it is assumed that these particular changes
will be small compared to the great mass, that the changes
will to some extent also counteract one another, and that
beneath the particular changes the influence of the general
causes can be discovered.
To begin with, indeed, we are concerned simply with a
question of measurement. If it is found that whilst on
the whole the ratios of relative wages are much the same,
but that on the average ever}' kind of labour obtains more
money, and that there has been no corresponding rise
in prices (possibly, indeed, prices may have moved in the
opposite way), then the fact of the general rise is estab-
lished, although opinions may differ as to the causes of the
rise. We have records of wages both for England and
France extending over several centuries (Rogers and
Vicomte d'Avenal) ; and although the records are imper-
fect, and there have been errors in calculating the averages,
there can be no question that there are discoverable
changes in the general rate. And during the last fifty
years there have also been remarkable changes in the
general rates of wages in the great industrial countries.
152 ELEMENTS OF POLITICAL ECONOMY
Thus in a paper by Mr. A. L. Bowley, on wages in the
United Kingdom in the nineteenth century, it is said, " In
1891 a million men, women, and children earned per head
40 per cent more in actual coin and 92 per cent more real
wages, if the increased purchasing power of money is
allowed for, than their million predecessors in the same
trades in 1860." If it is assumed that this million of
workers is fairly representative, the fact of a great rise in
the general rate is established to whatever cause or causes
it may be assigned. There are no doubt many practical
difficulties in comparing different times : the conditions of
work change, skilled labour may give place to machinery,
new processes may be created, etc., so that though we
compare the same names, we do not perhaps compare
exactly the same things. New industries also arise and
old industries disappear, and thus the trades chosen may
not be fairly representative. There are also difficulties as
regards the quotations and their interpretation.
Precisely similar difficulties, however, appear in all
general estimates or averages in progressive societies, e.g.
the growth of foreign trade.
The conception of a general rate may also be of use in
comparing different countries at the same time instead of
the same country at different times. If when we take
representative industries of a similar character we find
that in one country the average is higher or lower, we
argue from the samples to the whole, and the validity
of the conclusion depends on the assumption that there
are general causes at work, and that the samples are fairly
representative. A general rise in the rate of wages has
taken place in the United Kingdom, the United States, and
WAGES AND THE GENERAL RATE OF WAGES 153
France to about the same extent in each, comparing 1844-
1853 with 1891. It is not implied that the general rates in
the respective countries are the same at either period, but
only that the rise in each case has been nearly the same.
These examples are of course only illustrative, but at
any rate they raise the presumption that there are certain
very general causes that affect all kinds of wages.
One more difficulty, however, may be noticed. In the
examples taken for illustration the references are to wages
of labour in the common and narrow sense of the term.
Are we to assume that they are causes of such a general
character that they will affect wages in the professions
and also the wages of superintendence or management
that form so large a part of gross profits ? An affirmative
answer is suggested by two considerations : firsts there
seem to be comparatively stable ratios between the wages
of different kinds of labour from the highest to the lowest,
and these differences depend on comparatively general
causes ; and, secondly, if these ratios are to be preserved,
any movement that affects the mass of the lower grades
may be expected, by what is conveniently called sympathy,
to affect also the higher grades. There are no doubt
great difficulties in passing directly from one group to
another, even in the same grade, and still greater when
different kinds of employment are compared, and this
sympathetic action must not be exaggerated.
The question cannot, however, be adequately answered
until the theories have been examined which profess to
give the causes of movements in the general rates. It
may appear that some of these causes are such as to
operate throughout the whole range of industry, whilst
154 ELEMENTS OF POLITICAL ECONOMY
others may be such as to act differently in the higher and
the lower grades of labour. ^
And even as regard the lower grades of labour there are,
it will be found, differences of a vital character so far as
some of the general causes are concerned, e.g. the largest
class of all (servants of all kinds) do not produce vendible
articles. Thus their wages are not directly affected by
the amount produced or by the price obtained for the
product ; both of these factors, however, are considered of
the greatest importance in industries which afford material
products and not temporary or perishable services.
We may now examine the theories that have been ad-
vanced to explain the causes of general wages and of
movements in general wages. The first is the celebrated
Wages Fund theory.
5. The Wages Fund Theory. — The wages fund theory is
of interest to the student in three ways : for its place in
the history of economic thought; from its influence on
popular opinion and thus indirectly on practical labour
questions, and because properly guarded it may still be
considered as a first approximation to an adequate theory
of general wages. In this place the attention must be
confined to the third of these topics.
The theory is correct in that it calls attention to certain
real causes affecting wages ; but it is partly incorrect and
iThe difference between the higher and tlie lower grades of labour
is often exaggerated because people take the average of the lower
grades, but only the exceptions (who obtain extraordinary earnings) in
the higher. Thus taldng all those employed in law, medicine, education,
business, etc., tlie average earnings may not be much above artisans.
The same increase of wealth which increases the demand for the labour
of masons, etc., increases also that for doctors, lawyers, etc.
WAGES AND THE GENERAL RATE OF WAGES 155
partly incomplete because it lays too much stress on these
causes and takes no notice of others that are sometimes of
even greater importance.
Stated so as not to be a mere truism or verbal statement
of the problem to be solved, the theory may be expanded
into three propositions : —
(1) In any country at any time there is a determinate
amount of capital to be devoted unconditionally to the
payment of labour. This is the wages fund; it is the
effective demaiid for labour.
(2) In any country at any time there is a determinate
number of labourers who must work independentlt/ of the
rate of wages. This is the supply of labour.
(3) The fund is distributed amongst the labourers
under the influence of competition. In the labour
marhet competition is the ruling force.
The theory as stated, even in this expanded form, is
plainly an example of the deductive or abstract method.
Accordingly it is necessary to apply the test of verification.
In some cases it seems to explain the facts in a satisfac-
tory way ; in others it fails partially or completely.
The great rise in wages after the Black Death (which
is properly described by Seebohm as the watershed of
economic history in the mediaeval period) may be ac-
counted for in terms of this theory. The population was
halved; the demand for labour to till the ground, etc.,
was practically unaffected, and competition broke through
the fetters of law and custom.
Again if we consider the general wages fund to be made
up of smaller wages funds distributed over different local-
ities, it seems also in many cases correct. If any part of
156 ELEMENTS OF POLITICAL ECONOMY
a country is overpeopled (congested) relatively to the
demand for labour (or the fund seeking to purchase
labour), the rate of wages is low. Similarly, if we take
particular employments in place of localities if a trade is
overstocked with people and understocked with capital,
wages are low. The converse is also true of places and
trades. These references to particular wages funds may
be brought under the general theory under review more
formally by the assumption that in the first case we are
dealing with a small country, and in the second with a
country in which there is only one main employment (as
agriculture in the mediseval period).
But when we turn to other facts, the theory seems to
fail or at best only to explain the facts by being twisted
from its natural interpretation. Thus a population may
be decreasing rapidly without any corresponding effect on
wages; in Ireland from 1848 to 1851 (when a million
people left the country), in spite of the fall in the supply
of labour the rate of wages actually fell. Similarly, there
may be a rapid increase in capital without a correspond-
ing increase in population, and wages may not rise as
was constantly illustrated in the early part of the nine-
teenth century. One of the most striking failures of the
theory (unless unduly strained) is in the high wages cur-
rent in new countries in which, as a rule, there is a rapidly
increasing population and a marked deficiency of capital.
And in old countries we often find that there is what is
called a glut of capital with no increase of population
coincident with a fall in wages, as in a depression of trade
after an inflation and crisis.
In the light of this apparent conflict of facts it is neces-
WAGES AND THE GENERAL RATE OF WAGES 157
sary to examine the theory again to discover the disturbing
causes. The first proposition, that there is an amount of
capital destined to be given unconditionaUi/ to the payment
of hibour, is clearly overstated, although stress must be
laid on this term if we are to avoid the barren verbalism
that the wages fund is equal to the sum actually paid in
wages. If we consider the great staple industries in which
the capital is employed in the production of material com-
modities for sale, it is plain that the owners or employers
of the capital will adjust their demand for labour partly
at any rate by the actual and expected profit, which again
depends proximately on the course of prices. This close
connection of wages with prices is so well recognised that
in many cases the principle of a sliding scale has been
adopted, the wages being adjusted to movements in prices
automatically or by reference to authority for the precise
determination.
Again, if we consider the other great class of ordinary
labour, namely, servants, it is not correct to say that the
employers set aside a certain portion of their means uncon-
ditionally for this purpose ; they consider what they can
get, and what they can do without, when they compare
this mode with other modes of expenditure. Similarly, if
we take the demand for the labour of the professional
classes, — doctors, lawyers, singers, clergymen, etc., — there
is again a debatable margin.
But, as so often insisted on already, although in all
economic conceptions there are debatable margins, the con-
ceptions are still workable. And in these examples we
discover that there is an element of truth offered by the
wages fund theory by way of explanation. In manufac-
158 ELEMENTS OF POLITICAL ECONOMY
tures and the like the existence of a certain amount of
fixed and specialised capital involves the continuous appli-
cation of a certain amount of labour ; works may even be
run at a loss for a time in order not to disorganise the
business. Again there is a quasi-necessary demand for
services of all kinds, — from that of doctors and nurses,
who may be necessary to save life, to that of domestics, who
are thought necessary for comfort or fashion.
It may also be objected to the capital element in the
wages fund theory that the idea of a fund — preaccumu-
lated and predetermined — is out of place. The harvest
of a simple state of society does not fairly represent mod-
ern industries. We have a continuous stream of products.
Part of this stream is devoted to labour. Still even here
it may be replied that a large part of this stream of prod-
ucts may be called circulating productive capital, and con-
sists of things adapted and only adapted for the consumption
of the masses, that is to say, of the labouring classes as a
whole. And in truth more broadly all the productive
powers of the country at any time are devoted to provid-
ing for the wants of the nation according to the actual
distribution of wealth. It would obviously be impossible
to turn the capital invested in the production of things on
a large scale for thousands and millions to the production
of luxuries for the wealthy owners of mines, factories, etc.
In a broad sense, but also a very true sense, a large part
of the productive capital of a country is devoted to the
provision of things of use only to labour, and these real
things must be so used or not used at all. The latter alter-
native may be taken under certain conditions (Fourier), and
more frequently the things once produced may no longer
WAGES AND THE GENERAL RATE OF WAGES 159
be produced, but then in either case the wages fund may-
be said to diminish.
The second proposition as regards the number of labour-
ers is in general much nearer the truth and the whole truth
than the former. Still even here, as is shown by the returns
of the employment of labour, by the fluctuations in pau-
perism, by strikes to prevent a fall in wages, etc., there is
always a debatable margin ; it is not true to say that labour
must work independently of the rate.
It is perhaps to the tidrd proposition that in recent
economic books most exception has been taken ; namely,
the proposition which declares that the wages fund is dis-
tributed by competition. Competition may be considered
positively and negatively. On the positive side competi-
tion implies that every person tries to attain his own
economic interests regardless of the interests of others.
Negatively it is implied that the self-interest is not attained
by combination or by law or by custom. Competition also
implies, if perfect, that each person knows his own inter-
ests and that there is perfect mobility of labour. If this is
a fair account of what is to be understood by competition
in the wages fund theory, it is clear that in practice it is
liable to be modified by disturbing causes. Thus there
is at present the influence of combinations both of employ-
ers and employed, and especially when real wages are taken
there is still considerable influence on the part of law.
Custom also imposes many obstacles to the passing of
labour from group to group, and in some cases influences
directly the rate of wages (as in the case of women). At
the same time, however, competition is sometimes concealed,
tliough really at work. Custom is often a form of slowly
100 ELEMENTS OF POLITICAL ECONOMY
moving competition (Marshall), and within the combinations
of labour and capital the law of substitution (Marshall) is
a form of competition.
6. The Produce Theory of Wages. — In trying to bring
out as far as possible the elements of truth contained in
the wages fund theory, to some extent the opposing theory
(the produce theory) has been anticipated. It may be well
then to state definitely first of all the points in which the
two theories are most opposed. The wages fund is sup-
posed to be preaccumulated, and predetermined in its
amount and its application. (The student later on will
see that in the quantity theory of money in its simplest
form the amount of money is similarly fixed and it must
all be circulated.) In the produce theory stress is laid on
the fact that wages are paid out of a continuous stream, and
not out of a fund, stored up it may be a long time before.
In this later theory it is also assumed that the amount of
the flow of wealth devoted to labour will depend partly on
forces that cannot be summed up under competition.
If we suppose that the real national income or flow of
wealth is divided into rent, wages, and profits, it is clear
that the amount of any one will depend first on the
amount of the total stream, and next on what is taken
by the other two. If we leave for future consideration
rent which is of the nature of a surplus, and the revenues
of government which are taken by compulsion, we have
left the aggregate earnings to be divided between labour
and capital. Here we are again met by the difficulties
of definition and classification which have so often been
noticed before.
It seems best, then, in the first place, to narrow the
WAGES AND THE GENERAL RATE OF WAGES 161
teiMii irnijes to the earnings of labour in industries which
yiehl vendible products, e.g. manufactures. The so-called
wages of management are placed under profits, and the
profits of the emj^loyers are opposed on this view to the
wages of their employees.
Speaking broadly, the distribution between wages and
profits (as now defined) will depend on the relative
strength of capital and labour. This relative strength
again will depend on various elements. The first may-
be called the intensity of the reciprocal demand of labour
and capital for their mutual services. This brings in
under another aspect the competition element on which
the older theory lays so much stress. If capital increases,
labour, being the same, the owners of capital compete for
labour to a greater degree and so far wages rise. And
more generally, in response to changes in the relative
proportions of labour and capital, wages rise or fall or
remain steady. (All these cases are worked out in detail in
Mill, Book IV, Chap. Ill — a survey which Marshall thinks
is the necessary complement to the wages fund, and not
so misleading.) But on the modern view this recipro-
cal demand is not sufficient. The relative strength may
be affected directly by the influence of law and custom.
In former times these influences were largely on the
side of capital. Thus wages were lower than they would
have been if perfect competition had prevailed. On
the side of capital there was open or tacit combination
to keep down wages, with no corresponding combination
on the side of labour, and in effect capital had a buyer's
monopoly.
At present the influence of law affects wages in favour
162 ELEMENTS OF POLITICAL ECONOMY
of the workers indirectly, and is best considered by tak-
ing the elements in real wages. Thus, legislation may
improve the conditions of work; it may prevent truck
in some cases, and in others insist on a certain quantity
of food, etc., being provided (sailors); it may affect the
kind of house accommodation, sanitation, education, etc.
Compulsory compensation may be awarded in case of
injury received in the employment, and the hours of
labour may be limited. The example of some of our
colonies shows that compulsory arbitration may be
adopted, and in this case the wages are supposed to move
between limits. The old allowance system was apparently
intended to enforce the principle of a legal minimum
or " living wage," though the standard was on a compara-
tively low scale. These and similar objects, when not
attained by law, are aimed at by trade unions, which
may be brought logically under custom. (See below,
Chap. IX.)
But although in this case especially the wages fund
theory must be modified and supplemented, the causes
indicated in that theory are always real and always of
importance. The amount of capital and the number of
labourers are always of primary importance, and compe-
tition is more often overshadowed than displaced by the
other influences noted.
The wages fund theory, however, naturally suggests
that wages cannot be directly benefited as in the case
of improvements, etc., except first of all more capital is
saved. The produce theory, on the other hand, naturally
suggests that the state of trade, the efficiency of labour,
and all the factors that affect the real national income,
WAGES AND THE GENERAL RATE OF WAGES 163
may benefit labour directly, if only labour, either through
law or combination, can exercise its full strength in bar-
gaining.
When the view of wages is extended, so as to cover
the reward or the share in the real national income of
all kinds of labour, then the produce theory as applied
to manufactures appears too narrow. As regards ser-
vants and the professional classes, the demand for their
services increases with the flow of national wealth, which
is devoted to services in preference to consumable com-
modities or forms of productive capital. The supply of
labour of this class depends partly on the general increase
of population, and partly on the relative attractiveness
of different employments. The distribution as between
the great classes depends partly on influences that may
be brought under competition, and partly on such as
are logically considered under law and custom. [The
causes of differences of wages in different employments
are considered in the next chapter.] It is clear that
these causes of relative differences have an effect on
the so-called general rate if that term is narrowed down,
as is often the case in the statement of the produce
theory so as to include only the wages of those employed
in material production for the profit of their employers
(Walker). The large part of profits that is called wages
of management is closely related to the earnings of the
professions, and the wages of those employed in factories
is related to the wages of domestic servants. We are
not entitled to say more than that there is a mutual in-
teraction between these various rates; we certainly can-
not say that the rates in manufactures, mining, etc., are
164 ELEMENTS OF POLITICAL ECONOMY
first fixed, and then the other rates in the various "ser-
vices " are fixed in proportion (Hadley).
7. General Relations of Wages to Profits and Rents. — So
far we have considered the general causes affecting wages
without introducing the other great species of incomes,
profits and rents except indirectly. The changes in the
relative proportions are properly considered under the
effects of economic progress (see Book IV). Of course, as
already observed, so long as the national income remains
the same, the share of any one will depend on the pro-
portionate shares of the other two. But the point of
most interest and difficulty is in the indirect effect of a
change in the proportions on the total income. Thus if
either through the power of trade unions or the direct
influence of socialistic legislation the share of capital were
greatly reduced, the immediate effect might be a rise in
wages (absolutely) ; but if the productive capital were to
begin to dwindle owing to this fall in its share, the effect
on the aggregate national income might be such that real
wages would fall. Thus to take an extreme case the
proportionate share of labour might continually increase
until that original state of things was restored in which
"the whole produce of labour belongs to the labourers."
This is the state that, according to Adam Smith, precedes
the appropriation of land and the accumulation of stock.
It needs no showing, however, that in the Saturnia regna
of history the real wages of labour were never so low, or,
what is practically the same thing, the condition of the
people so miserable.
Just as in foreign trade it is false to suppose that one
nation must and can only gain if another loses, so also in
WAGES AND THE GENERAL RATE OF WAGES 165
the exchange of the services of the great productive
agents and of the various industrial groups it is false
to suppose that mutual injury is the source of benefit.
There are no doubt points of conflict between the
interests of labour and capital, and what one loses the
other will gain ; but there are also points of harmony.
And so far as distribution can be considered as based on
exchange, the leading idea must be one of mutual benefit.
These points will call for further attention after the
examination of profits. (See below, Chap. IX.)^
1 All the text-books treat largely of general wages. The treatment in
Adam Smith contains in germ both the later theories, and may well be
taken as a beginning. Malthus, Essay on Population, Book III, Chap. V,
Book IV, Chap. III. Mill's chapters on Pop^iJar Remedies for Low Wages
and his own remedies show the real meaning of the wages fund theory
and that as stated by Mill it needed modification. Sidgwick's chapter on
the General Bate of Wages {Principles, Book II, Chap. VIII) may be
taken next, and then Marshall's chapters on the relations of distribution
and exchange. Principles, Book VI, Chaps. I and II. Special works are :
Walker, Wages Question; Taussig, Wages and Capital; Davidson, The
Bargain Theory of Wages ; Nicholson, Effects of Machinery on Wages ;
Smart, Distribution of Income ; J. B. Clark, Distribution of Wealth ;
Cannan, Theories of Production and Distribtition ; Schloss, Methods
of Industrial Remuneration ; Webb, Industrial Democracy.
CHAPTER VII
RELATIVE WAGES
1. Diiferences of Wages. — Experience shows that there
are at any time differences in the rates of wages actually-
paid whatever measure is adopted ; and a number of par-
ticular causes of difference have been pointed out by econo-
mists, the lines of treatment of Adam Smith in a famous
chapter being generally followed. It seems best, however,
in this summary, to begin with the most general causes
and conditions by which these particular influences may
be explained.
Wages as already shown must always be considered
from two points of view. On the subjective side the
labourer will take into account all the utilities and disu-
tilities involved in the work, and in what is obtained
from expending the money received, and any extra earn-
ings. If competition were perfect, and all tlie conditions
requisite to mobility of labour were forthcoming, the net
advantages of all employments would tend to equality.
Thus extra disutilities of any kind would be compensated
by extra wages ; and conversely, if the work itself had
positive utility, it would command so far less wages. In
this way we may take account of such natural causes of
differences as are enumerated by Adam Smith, e.g. the
agreeableness or disagreeableness of the employment ; the
easiness or the reverse in learning the business (the greater
166
RELATIVE WAGES 167
the trouble, the greater the disutility); the regularity
of the employment, and the chance of success or the
reverse.
This tendency to equality, however, from the subjec-
tive side, is, like all other economic tendencies, liable to
be counteracted. The causes indicated are only part of
those that affect the suppli/ of labour in the different
employments ; and in addition there are all the causes
affecting the demand for particular kinds of labour.
The introduction of demand involves the consideration
of labour from the objective point of view. Here we have
to take account of the fact that different degrees of abili-
ties, natural and acquired, are demanded in different
employments. Thus, a long training not only involves
more disutility (subjective), but also greater expense. It
is only those who have the means who can train them-
selves or their children for these more exacting employ-
ments. Sometimes exceptional natural qualities are
needed, — it may be of intellect, or keenness of sense,
or even morality (e.g. the greater or less trust pointed
out by Adam Smith).
Again, the work required to be done may be done
in different ways : by a small amount of highly efficient
labour or by a much greater amount of less efficient
labour. From the point of view of demand, it is in-
different to the employer what method is adopted so
long as the cost is the same. It is clear, however, that
the more efficient the labour, so much the higher may be
the pay.
Thus on the objective side we arrive at the proposition
that equal efficiency tends to he paid for at equal rates ;
168 ELEMENTS OF POLITICAL ECONOMY
and so far as competition is effective, equal degrees' of
skill should command the same price.
It is evident that when we are comparing different
employments it is not easy to estimate the amount of
skill required; it is, however, certainly taken account
of whenever any substitution is possible.
Besides these natural causes that affect the demand
for and the supply of labour under the assumption of
perfect competition and mobility, there are actually all
the causes which render these conditions imperfect.
Here the general principle is that anything that modi-
fies competition or mobility so far modifies wages. Adam
Smith pointed out that "the policy of Europe" in some
employments had unduly restrained competition, e.g. the
regulations of gilds and corporations by restricting
entrances ; in some occupations the competition had been
unduly increased, e.g. the church, education, and literature,
through charitable endowments ; in other cases, the nat-
ural passage of labour from place to place and from trade
to trade had been hindered, e.g. by the ill-contrived law of
settlements ; and sometimes the law had directly inter-
vened to fix wages in certain employments.
The general result of all these influences, both natural
and artificial, is that there is practically a special wages
problem in every group (Marshall) . Whilst this is
admitted, at the same time it appears that the general
causes noticed in the last chapter are always at work ;
and thus we may have movements in the general level
of wages, the ratios between the different employments
remaining relatively constant or only changing in re-
sponse to particular causes. (For examples, see below,
RELATIVE WAGES 169
Book IV.) If in any group having regard both to disu-
tility involved and efficiency required the rate of wages
is above or below this general rate, it will be unstable
and causes will come into play that will tend to bring
it toward its natural or normal rate. The influence
of the natural causes may of course be counteracted by
the artificial effects of law and custom in various forms.
2. Particular Cases. — One or two particular cases may
be noticed which illustrate the argument of the last
section. It is often found that the most disagreeable em-
ployments are the worst paid (the evil paradox of Profes-
sor Marshall) . From the side of supply this is explained
by the fact that the labourers have no choice : they are
the dregs of the people ; from the point of view of demand
their labour is extremely inefficient, but it may be so
cheap as to cost even less than more efficient but higher
priced labour. The wages in agriculture have generally
been lower than would be indicated by an estimate
of the skill required and the hardships, etc., endured.
This seems accounted for by the fact that the supply
naturally increases, whilst the demand either remains
steady or even falls. Thus for centuries there has been
a movement of labour from the country without the
"natural" proportion being attained.
The wages of women are in most cases lower than
those obtained by men for work of similar difficulty and
disutility. The main reason is that the employments
open to women are restricted by custom.
The case of those avIio have other means of support
is of interest, e.g. peasant proprietors and other small
landholders. A peasant who is already sure of a liveli-
170 ELEMENTS Of POLITICAL ECONOMY
hood can refuse to work for wages in his spare time
and may set a high reserve price on his labour. On the
other hand, he may set a low value on his spare time
and on leisure, and may be keen to earn a little money
for luxuries. Mill accounted for the high wages current
on the continent for any supplementary work by the first
principle, whilst Adam Smith gives examples from Scot-
land of extra work being done by cottars for very small
remuneration. In modern phraseology the marginal
utility of money was higher in Scotland than in
France.
If an industry is declining, the rate of wages falls
below the average, owing to the want of mobility of
labour, e.g. the hand-loom weavers. On the other hand,
a new industry offers more wages to attract labour, and
it is the more enterprising and efficient labour that is
attracted, and thus the rate of wages may be for some
time above the general level for the class of work.
Again, any sudden rise in the demand for labour in
an old occupation raises the rate of wages until the
supply can be adjusted. In such cases as this the differ-
ential wage may be described as a quasi-rent (?ilarshall).
The rise in the demand for labour may be in the direct
demand, e.g. for servants ; or in the derived demand
(Marshall), i.e. derived from the demand for the com-
modity to which the labour in question contributes.
With the extension of the principle of association or
combination, both the sellers and the buyers of labour
try to substitute monopoly for competition. If a large
trust has the practical command of a group of industries,
it may be able to establish a buyer's monopoly and even
RELATIVE WAGES 171
refuse to deal with combinations of labour; and, con-
versely, a strong trade union against divided or keenly
competing masters may establish a seller's monopoly.
The rate of wages will tend, in the first case, to be
below, and in the second above, the natural rate. The
limits of the rise and fall can, however, only be explained
after the theory of monopoly value.
3. Wages of Individuals. — We have now considered the
causes that affect the general rate of wages throughout
an industrial country, and the causes that give rise to
differences of wages in different employments. In both
cases we have been concerned with averages, and for fuller
treatment the student should refer to works on statistics
(^e.g. A. L. Bowley). The general result is that differ-
ences in the general rate and differences between the rates
in different employments are under the influence of
economic laws or tendencies of a more or less general
character.
When, however, we turn to individuals, we notice such
differences in extreme cases that they seem to elude any
general explanation, e.g. the wages of the most successful
lawyers or doctors or singers, etc. In the first place it
must be observed that if the professions in question em-
ploy a large number of persons, in spite of the high wages
obtained in some cases, the average may be low, having
regard to usual causes of differences. Thus the average
earnings of actors are probably below those of carpenters,
in spite of the large sums earned in special cases. In
these exceptional individual cases the high pay is ex-
plained on the principles of scarcity value. The excep-
tional demand is not for actors, but for Duse or Bernhardt.
172 ELEMENTS OF POLITICAL ECONOMY
The scarcity factor explains both the high fees of the
fashionable doctor (who by the testimony of his colleagues
is no better than a hundred others), and also the high fees
paid for really exceptional skill.
In other cases, however, the differences in the rates of
pay are accounted for on the principles of rent. If the
marginal labourer earns so much, the more efficient
labourers will earn so mucli more in proportion to their
extra efficiency.
4. The Effects of Machinery on Wages. — As illustrating
the principles involved in the wages question, some of the
effects of machinery on wages may be briefly noticed.
The sudden and extensive adoption of labour-saving
machinery so far tends to throw labour out of employ-
ment. There is immediately a less demand, whilst the
supply remains for the time the same, and wages fall.
Such sudden and extensive substitution are, however,
rare. A revolutionary idea takes a long time for its full
development in practice, and thus there is time for the
gradual withdrawal of labour. If, however, the labour
concerned by habit or necessity still competes witli the
machinery, the wages must fall, and until this is effected
the machinery earns a quasi-vent.
On the other hand, as the use of the machinery is ex-
tended, the price of the article falls, and it is possible that
the consequent extension of the market may eventually
lead to an increase of employment and a rise of wages
in the industry concerned (Cotton). The proximate
cause of the adoption of machinery is the hope of
extra profit, and part of this extra profit will be in-
vested in the demand for more labour in some form.
RELATIVE WAGES 173
Generally the use of machinery means increased power
over nature and a greater return to the productive agents
of the society. The rise in the national dividend so far
tends to raise the general rate of wages. Since also, on
the whole, a much greater amount of skill is required on
the part of labour under a regime of machinery, wages so
far will tend to rise. (See my essay on the Effects of
Machhiery on Wages.^
5. Conclusion. — In conclusion it may be observed that in
treating of wages it has been necessary to anticipate to
some extent ideas and principles that are more fully in-
vestigated at a later stage (theory of rent, value, etc.).
Anticipation of this kind is, however, necessary, whatever
the order of exposition chosen. If we begin with value,
we must anticipate to some extent wages and profits.
The statement, " that the value of labour must be deter-
mined by the value of the produce, not the value of the
produce by that of the labour," is far too narrow unless
the term produce is extended to cover services of all kinds,
and the sentence is interpreted to mean that the value of
labour depends not only on subjective feelings, but on
objective results.^
1 Book II, Chap. XII, of Principles deals with the effects of law and
custom on wages from the historical side. See Wealth of Nations, Book I,
Chap. X, still the most suggestive treatment ; Hadley, Economics, Chaps,
"X and XI ; Marshall, Principles, Book VI, Chaps. III-VI ; and the works
cited in the last chapter ; Sidgwick, Principles, Book. II, Chap. IX ; Pier-
son, Principles of Economics (Eng. trans.) Part I, Chap. VI, §§ 6,8;
also on effects of machinery, Hobson, Evolution of Modern Capitalism.
In Book IV, Chap. VII, of my Principles (Vol. Ill) a number of examples
are given of ratios of wages.
CHAPTER VIII
PKOFITS
1. Analysis of Profits. — "The profits of stock, it may
perhaps be thought, are only a different name for the wages
of a particular sort of labour — the labour of inspection or
direction. They are, however, altogether different, are
regulated by quite different principles and bear no propor-
tion to the quantity hardship or the ingenuity of this sup-
posed labour of inspection and direction" (Adam Smith).
Most economists, however, have not followed Adam Smith
in excluding from profits this form of wages. Thus Mar-
shall, " What remains of his profits after deducting interest
at the current rate (allowing, where necessary, for insur-
ance), may be called his earnings of management."
From the business point of view it is usually said that
profit is the excess of the money return over the money
cost. But this statement explains nothing, and the ques-
tion still remains : Why does a thing obtain more than its
cost? That is to say, when all the parties to the produc-
tion and acquisition are supposed to be fully alive to their
own interests, and competition is assumed to be perfect.
To this question two main answers have been given
which correspond mutates mutandes to the twofold treat-
ment of wages ; namul}^ subjective and objective. In the
first answer it is said that, on the whole, the owners of
capital must receive a sufficient reward for abstinence, an
174
PROFITS 175
indemnity for risk, and wages for the trouble of manage-
ment ; in brief, these three utilities must at least balance
the three disutilities involved in the creation and employ-
ment of the capital.
The objection to this answer is that it only lays down
the necessary conditions for the continuous supply of capi-
tal. So much, at least, must capital receive ; but why
not more?
The second answer looks to the utility, efficiency, or pro-
ductive power of the capital. It assumes that capital is
one of the agents that contribute to the national income,
and the owners exchange its services against the services
of the other agents, e.g. labour of all kinds. From this
point of view profits depend on the demand for, as much as
on the supply of, capital. The demand for capital may
increase, the supply remaining the same, in which case the
profits will rise independently of any extra exertion on the
part of the owners of capital.
The principal use of the first analysis is not to give
any ethical justification of profits, but to show that the
term includes different elements that depend on different
causes. These elements will be examined in order.
2. Loan-interest and Profit-interest. — The simplest form
of profit is the interest derived from capital lent on perfect
security and without any trouble on the part of the lender,
e.g. when an old lady instructs her banker to put her divi-
dends on deposit receipt, or her broker to invest in more con-
sols. To explain this form of interest it is not necessary
to carry the analysis very far. The old lady has the com-
mand of money, and other people wish to get the command
of money immediately. For this privilege of immediate
176 ELEMENTS OF POLITICAL ECONOMY
use they are willing to promise more money in the future ;
so long as repayment of the principal is deferred, the sum
agreed on for its use will be paid. The history of the
development of this simple form of loan-interest is most
instructive, especially in connection with the legal and
moral aspects of usury on money. From the earliest times,
however, usury (the old name for interest) was obtained
on all sorts of things, — " usury of victuals, usury of any-
thing that is lent upon usury." And in modern industrial
societies the money that is borrowed at interest is in general
only the means for the acquisition of " things." (The case
in which the money is required as such, e.g. to meet prior
monetary obligations, is treated separately at a later stage.)
Thus a man may borrow money to buy a house to live in,
or to buy machinery to work his land, and tlie money he
obtains from the bank for the purpose may not even leave
the bank. The security afforded may also be, for all prac-
tical purposes, perfect.
Money may of course be lent without interest (as by the
Jew to his brother) on various moral grounds, but apart
from these cases it is important to notice that even in com-
mercial transactions in which no altruism is present, inter-
est in certain cases may be nil or even negative. Under
present conditions the banks hold, on the whole, large
sums of money without interest, e.g. the balances of cur-
rent accounts. In the origins of banking it was not un-
common for the depositors to pay something for safe
custody. As soon as we pass from money to things, nega-
tive interest in particular cases becomes quite common ;
e.g. a business may be run at a loss, and a creditor may
bear some of the loss, and even send good money after bad
PROFITS 177
to provide more capital, in the hope that ultimately the
negative interest may be balanced by future gains.
Leaving for the present the element of risk, we may next
observe that although, on the wliole, in modern commercial
transactions loans of money and of capital in other forms
yield interest, it by no means follows that money or capi-
tal, if not lent, will also yield interest.
Money itself is obviously as barren now, as the wisdom
of the Bible and Aristotle declared it to be in old times.
And although it is usual to reckon that part of the profits
of a business that corresponds to the current rate of inter-
est as interest on the capital invested in the business, it is
clear that this profit-interest, as it may be termed, is on
quite a different footing from loan-interest. The mere fact
of the employment of capital does not assure interest to the
employer anymore than the mere possession of capital assures
interest to the possessor. The interest on production-capital
must be earned ; that is to say, it must be produced out of
the sale of products above the price of the other elements
of cost.
Passing from particular cases, which are only of use to
clarify ideas, it is possible, even when we take a country as
a whole, that after allowing for the other elements in
profits, the rate of profit-interest may fall far below the
level of loan-interest. Loan-interest may be obtained
from abroad or from taxes ; but the capital of a country,
already fixed and specialised, cannot be sent abroad or
advanced to the state. In the course of time, however,
the absence of interest would affect the national production-
capital, as it does that of a particular trade, and on the
capital left interest will again arise.
178 ELEMENTS OF POLITICAL ECONOMY
It may be thought that capital, as a whole, would refuse
to lend its services to labour as a whole, unless it obtained
interest. But no such combination of capital can exist
under competition, and even if there were a perfect monop-
oly on the part of capital, interest as such might not be
forthcoming. Under certain conditions even monopolists
may have to sell at a loss.
In modern industrial countries, however, it may be
easily shown that the capital invested in productive un-
dertakings as a whole does yield interest over and above
insurance for depreciation and wages of management, —
namely, by reference to the growth of joint stock enter-
prise. In industrial companies, as a rule, the interest ele-
ment can be taken separately, and such undertakings on
the whole yield profit-interest that corresponds to the
current loan-interest, besides the other elements of profits.
The tendency of all modern industry is to work more and
more with borrowed capital.
3, Insurance against Risk. — The element of risk may first
of all be considered in the case of ?c»a/i-interest. " High
interest means bad security ; " it is, however, generally
assumed that a number of risky securities may on the
average give a perfectly safe return. Whether this is
actually the case in any society at any time or over a
series of years, depends on the resultant of conflicting
causes. If we take as representative of loans the invest-
ments of the public in stock exchange securities, it appears
that the chance of high gains is generally as much over-
estimated as in ordinary gambling.
All, then, that we are entitled to say, is that there is a
tendency to equality in loaji-intoTGSt proper, after allow-
PROFITS 179
ance is made for risk ; and like all other economic
tendencies it is liable to be counteracted.
When we turn to risk as it is found in j^ro/^interest,
the difficulties of computation increase and the tendency
to equality is subject to more disturbing elements. In
some trades the risk element can be partially separated and
allowed for by way of insurance ; e.g. in shipping, both
ship and cargo may be insured ; but there is no insurance
against the loss through a fall in freights or a lack of
orders. Risks of this kind can only be met by a higher
profit in good years to balance the losses of the lean
years. It is impossible to determine by any general
principle whether on the whole the uncertain trades will
effect their own insurance. There may be great risk to
individuals in a trade and little risk to the aggregate
capital employed in that trade, as shown in the history of
banking. In some cases, however, there may be a con-
tinuous loss of capital on the whole, which is only made
good from other funds, as is well illustrated in many
mining industries. No one, it is said, can make money
out of a Cornish mine but a Cornish man, and he only
does so by selling it.
The risk factor has been surmounted in two ways in
joint stock enterprise : investors have been able to divide
their risks and thus apply the methods of insurance, and
the princii)le of limited liability lias made such a division
of risks still more practicable and certain. It has some-
times been supposed that if tlie risks of capital are very
great in any country, owing to general insecurity, a high
return is necessary for accumulation to take place at all.
But the truth rather is that insecurity checks the accumu-
180 ELEMENTS OF POLITICAL ECONOMY
lation of capital directly, and, taking a broad view, with
general insecurity through bad government there is less
to divide between capital and labour, and both may suffer
at once. There is no effective insurance against the risks
of a state of general insecurity. In such a state of things,
when account is taken of all the losses of capital, the
aggregate gross profit will not suffice to cover the actual
depreciation, and the whole country becomes impoverished.
4. Wages of Management. — Capital to be continuously
employed must yield something more than interest and
compensation for risk. Otherwise every one would try to
lend simply and get the same income without any trouble.
As shown in economic history, this sometimes happens on a
large scale and a wliole nation becomes a lending state.
When we take an isolated country, however, if many
people try to lend instead of employing their capital in
business, the rate of interest must fall, and in this way an
encouragement will be again given to trade and produc-
tion, and a margin will appear for wages of manage-
ment.
The element of earnings of management as distinguished
from other elements in gross profits is best seen in the case
of joint stock companies. The debenture holders receive
the pure interest; the deferred shareholders receive the
reward for risk, not allowed for in actual insurance, and
the managers and directors receive a kind of wages for the
labour of inspection and direction.
In the case of companies these charges will be on the
same footing as the other higher forms of wages.
The rates of remuneration of the managers will in
general not be exactly proportioned to the magnitude of
PROFITS 181
the capital engaged. The hirger the business no doubt
the higher the manager will be paid, but in no definite
proportion. If, instead of estimating earnings of manage-
ment by the salaries supposed to be earned (say) in a year,
we were to estimate them by the rate per cent of the capi-
tal engaged, this want of proportion becomes still more
marked. It is the smallest businesses that always appear
to pay the highest rates of profit, simply because the wages
of management are so high relatively to the capital em-
ployed. The diminution of this expense is no doubt a
strong factor in the tendency to amalgamation of all kinds
of capital already examined.
Wages of management, taken strictly and separated
from other elements in profits, are subject to the relative
causes that determine the differences in other forms
of wages (see last chapter). The special characteristics
of the earnings of management have been admirably
worked out by Professor Marshall. ^
5. The Reward of Enterprise and Good Fortune. — There
is an element in gross profits which cannot be properly
placed under any of the three headings already noticed.
It is so much the peculiar characteristic of profits that
in certain cases it overshadows the rest. It is, in fact,
the reward of enterprise and good fortune. Enterprise,
in the highest forms, is a combination of exceptional
ability with exceptional risk. The ability is of the kind
that defies definition ; it is analogous to the genius of
the soldier as distinguished from the knowledge of the
military student. It demands at the same time stubborn
perseverance in what seems hopeless waste of energy
1 Principles, Book IV, Chap. XII ; Book VI, Chaps. VII and VIII.
182 ELEMENTS OF POLITICAL ECONOMY
and also tlie utmost readiness to adopt changes in re-
sponse to tlie opportunities of good fortune. The risks
in these exceptional cases may be far beyond those of
any actual calculation : a man may risk the whole of
his capital, and, besides, all that he can borrow on the
chance or the hope of success. It is enterprise of this
kind that has played the greatest part in economic
progress ; it is the necessary practical complement to
the discoveries of tlie creative genius in science.
Enterprise of less degree but similar in kind may also
appear in old-established industries, as in the adoption
of better organisation, or improved processes, or minor
economies. This element in profits is in some re-
spects analogous to economic rent, in others to quasi-
rent.^
6. The Tendency of Profits to Equality. — In the light
of this analysis it is clear that we cannot speak of any
general tendency of gross profits to equality, in the
sense that, if we take a long enough period, the average
gross profits on all employments of capital tend to be
equal. All that we are entitled to say is, that if any
of the elements in profits is above the average, having
regard to the special causes of difference, such a rate
is unstable (and conversely of low rates). In the case
of interest (after allowing for risk) the instability of
exceptional rates is felt most quickly ; in management
proper, exceptional rates of wages are also unstable,
though the period of readjustment is longer ; whilst,
in the last element examined, namely entei'prise, the
exceptional gains will provoke imitation and competition,
1 Of. Marshall, Principles (4th ed.), p. 601 n.
PROFITS 183
but the exceptional reward of the first promoters will
not be obtained by his followers. True enterprise,
however, will appear again in other forms and places,
and the knowledge that in former instances these great
rewards have been obtained, will stimulate enterprise of
all kinds. Good fortune in trade and in war, as the
name implies, is not to be averaged.
Throughout this treatment of profits it has been
assumed that competition is the prevailing influence.
The exceptional gains derived from monopolies can
only be explained after the theory of value.
7. The General Rate of Profits. — Since gross profits
are analysed into elements that depend proximately on
different causes (^e.g. interest and wages), and are
measured in different ways, it is not easy to form a
conception of a general rate of profits. Interest measured
per cent may be falling, whilst wages of management
reckoned per caput may be rising. We can, however,
easily form an idea of a general rate of interest, and
of a general rate of wages of management when taken
separately. Such conceptions are useful in the theory
of value, and also in considering the nature and results
of economic progress.
When we are considering the general distribution of
wealth, we may, for certain purposes, put together the
total earnings of capital, including interest, wages of man-
agement, and also the rewards of enterprise, and com-
pare them with the earnings of labour, in the sense of
ordinary manual labour; and with this interpretation
we compare the aggregate earnings of capital and labour,
and consider under what conditions the one may rise
184 ELEMENTS OF POLITICAL ECONOMY
at the expense of the other. Questions of this kind arise
in dealing with socialism and also in treating of some
of the ulterior effects of trade unions, cooperation, etc.^
1 Marshall, Principles, Book IV, Chaps. XII and XIII ; Book VI,
Chaps. VI-VIII ; Hadley, Economics, Chap. IX ; Sidgwick, Principles,
Book II, Chap. IX, § 3 ; Walker, Political Economy ; Cannan, Pro-
duction and Distribution; Pierson, Principles, Part I, Chap. V.
CHAPTER IX
HARMONIES AKD CONFLICTS OF LABOUR AND CAPITAL
1. Relations of Labour and Capital in General. — In the
present chapter the terms labour and capital will be taken
in the restricted popular meaning; that is to say, labour
is only that hired by the employer of production-capital
with the view to a profit. The term labour is further
restricted to ordinary labour, thus excluding the higher
professional labour which is also hired by the undertakers
of business, and also the various forms of the labour of
direction and inspection.
As already shown in the analysis of wages, it is to the
economic interest of the worker to give a minimum quan-
tity of labour (subjective) for a maximum real reward ;
and it is to the interest of the employer to obtain a maxi-
mum of work (objective) at a minimum real cost to
himself. Thus the elements of conflict are always present
and are generally intensified by prejudice, and want of
appreciation of the harmony of interests in many re-
spects. To take the simplest case : the worker naturally
wishes to work fewer hours a day for higher wages, whilst
the employer would like more hours' work for less wages ;
the former is apt to forget that wages after a certain
point must fall if hours are reduced, because the product
must fall off, whilst the latter does not allow enough in
many cases for the increased efficiency of shorter hours
185
186 ELEMENTS OF TOLITICAL ECONOMY
and better pay. There are, however, in any case real
divergences of interests ; or, in the popular phrase, real
conflicts of labour and capital.
2. Conflicts of Interests ; Origin of Trade Unions. —
There is not one of the elements that go to make up a
" quantity of labour " that may not give rise to an ap-
parent if not real conflict of interests ; and this is equally
true of the corresponding real reward.
During the nineteenth century the conflict of interests
has been forcibly illustrated by the history of trade
unions. With reference to this history, only the main
lines of inquiry can here be indicated.
The connection of the trade unions with the craft gilds
is one of analogy, not of descent. And the points of
analogy must not be overstrained. The craft gilds in
mediaeval England did not originate, according to the
view which Brentano had at one time made popular, from
conflicts between labour and capital such as arise in
modern times with large production. Nor is there much
foundation for the wider contention of Brentano that
the weak alwaj's resort to combination, and the strong
to competition — witness the modern trust. The chief
point to notice as regards the craft gilds, as bearing on
trade unions, is that what was evil in them (and the
chief cause of their decay) was due to the tendency to
monopoly, which they soon revealed, and what M-as sup-
posed to be of real public benefit Avas transferred from
the gild regulations to the statute book (Statute of
Apprenticeship, 1563). These regulations and the cus-
toms to which they gave expression dominated the wage
system of the country until the industrial revolution.
LABOUR AND CAPITAL 187
When this customary order broke down, the relations of
labour and capital became utterly disorganised, to the
great detriment of the working classes ; and it was to
remedy these abuses that trade unions were formed.
They were from the first associations of labour. The
craft gilds in England, on the other hand, were local
bodies under the local authority of the town, though at
first they occasionally derived their authority from the
king or lord of the manor. Their ostensible objects were
to benefit the public by securing good work and materials,
and the master was responsible for the good upbringing of
his apprentices, who in turn might hope to become masters.
During the early years of the nineteenth century the
trade unions were subject to severe legal restraints and
disabilities, and in general were held up to popular odium
by the press and those who sought to guide popular
opinion ; they were written down as anarchist secret
societies that sought for the ruin of capital and industry.
At present the pendulum has swung to the other ex-
treme, though there are still survivals of old prejudices.
In considering the economic functions of trade unions, it
is most important to distinguish between their normal
actions in normal times, and their actions in strikes and
times of acute conflict.
3. Functions of Trade Unions. — Trade unions are vol-
untary associations of labour for mutual assistance, pro-
tection, and benefit. Their objects are (in the phraseology
here used) to diminish the quantity of labour involved
in work and to increase the real reward ; they are de-
signed to add to the power of labour in making bargains
by the substitution of combination for competition.
188 ELEMENTS OF POLITICAL ECONOMY
It is clear from this wide definition that there are many
ways in which the unions may seek to interfere with
the conditions of employment; and conflicts arise, some-
times pushed to the extreme of a strike, that have noth-
ing to do with money wages. The unions also in many
cases perform the functions of benefit or insurance soci-
eties, and of bureaus for the organisation and employ-
ment of labour. Their object has been described in
sympathetic language as to elevate the social position
of the members (Webb). In the present work the at-
tention must in the main be confined to the influence of
the unions (in relation to associations of employers) in
fixing money wages and earnings. From this point of
view it will be necessary to consider not only their
effects on particular wages, but also their effects on what
may be called the general rate of wages. The object of
trade unions, as regards money wages, is to raise them
above the rate that they would attain under "natural"
conditions and competition. The fundamental assump-
tion is that combinations of labour can make better bar-
gains than labourers in isolation.
Such a rise above the competition rate may be effected
in one or other of three ways : at the expense of the con-
sumer of the product ; at the expense of other wages ; at
the expense of profits.
4. Wages and the Consumer. — A rise of wages at the
expense of the consumer of the particular product implies
that the particular class of labour considered can in effect
obtain a monopoly price without checking too much the
demand for the commodity. The conditions to make such
a combination effective are : that other labour can be
LABOUR AND CAPITAL 189
excluded, and that machinery cannot take the place of
labour; in brief, there must be an effective limitation of
the supply of one of the requisites of production. Next,
from the point of view of demand, there must be on the
part of the consumer a non-elastic demand so that a rise in
price will have little effect on the quantity demanded ;
there must also be an absence of acceptable substitutes.
If the labour in question is necessary, but of small value in
comparison with the total product, a considerable rise of
wages might take place without any appreciable effect on
the total price and the demand, and if the other factors of
production are relatively weak in bargaining power, then
also the rise of wages is so much the more easily made in
the fortunate group.
Favourable conditions of this kind would be offered if in
any locality there were a sudden and great demand for
houses. In this case there is no effective substitute, and a
considerable rise in price might have little immediate
effect on the demand. Thus, if other labour could be
excluded, the local house builders might force a rise at the
expense of the consumer of the houses. Any particular
branch of labour required that happened to have a very
effective union (and the sympathy of the members of the
trade throughout the country) might raise its particular
wages still more in proportion to the other trades engaged
in building. It is plain that such conditions as those indi-
cated are not likely to occur generally, or to continue for
any time. Suppose, then, that these favourable conditions
are absent, and yet that, for the time being, a rise of wages
is effected by a strong combination in some group of labour
at the expense of the consumer of the product. If the
190 ELEMENTS OF POLITICAL ECONOMY
rate of wages is above the " natural " rate, tliat is having
regard to the conditions of the employment, etc., labour
will be attracted to that group, and the children available
will be kept in that trade. Thus it will be difficult to
regulate or control the supply of labour. If the rate of
pay is kept up, the annual earnings must fall, unless there
is an increase in the demand for the commodity.
But when we turn to demand, in general the rise in
price will check the demand and will encourage the use of
substitutes and economies, and thus, on the whole, the field
for employment will be lessened.
Some of the indirect effects may be noticed if the article
raised in price is widely consumed directly, and indirectly
in other forms of production, e.g. coal.
The rise in price is equivalent to a tax on a necessary,
and falls most severely on the poorest; it is equivalent
also to a tax on the raw material of manufactures or the
motive power, and the consequent rise in price again taxes
the home consumer. It will tend also to check exports
and indirectly to check the imports sent in return for the
exports. Thus there is so far a tax both on the productive
power and on the consuming power of the nation at large.
If, to carry the argument a stage further, a similar policy
is attempted by all the important trades, and an attempt is
made to raise all wages at the expense of the consumer in
general, the effect is so far obviously suicidal because the
labourers themselves constitute the great mass of con-
sumers. Such a policy also, in view of the effects of unre-
strained foreign competition, would probably lead to a
demand for protection.
The conclusion then appears to be that, although wages
LABOUR AXD CAPITAL 191
and earnings may in exceptional circumstances rise at the
expense of the consumer througli the action of a strong
union, a general rise at the expense of the general consumer
would lower real wages by a still greater amount.
5. Wages and Profits. — The next question is : Can
wages be raised above the competition rate at the expense
of profits ?
As regards any particular trade, if the profits are struck
at more than in other trades, capital will tend to leave that
trade or will not be replaced. Accordingly, under the
ordinary conditions of competition, a rise of wages at the
expense of the particular profits concerned would lead to a
lessened demand for labour ; and if the rate of wages were
kept up, still the annual earnings would fall. If, however,
the trade that was attacked by the union had been obtain-
ing exceptional or monopoly profits, a considerable rise of
wages might be effected without lessening the demand for
the labour in question.
When we consider the possibility of a rise in general
wages at the expense of general profits, the case is in one
important respect essentially different from that of a par-
ticular trade under competition. If all capital is struck at
simultaneously, the owners cannot indemnify themselves by
transferring the capital to other trades. And if capital is
sent abroad, it will only earn interest (and not wages of
management) unless the owner also emigrates. Accord-
ingly, to some extent, it seems that general wages may be
raised by strong unions at the expense of general profits.
There can be little doubt that if the unions had been
stronger in the beginning of the nineteenth century, such
a rise might have been effected, and in all probability the
192 ELEMENTS OF POLITICAL ECONOMY
general rate of wages in the second half of that century
has been raised through the unions. At the same time the
fallacy of post hoe ergo propter hoc must be avoided. Dur-
ing the same period wages in agriculture have risen, and
the wages of domestic servants have risen still more ; and
in these cases the direct action of trade unions has been
n'll^ and even the indirect effect probably not very great;
though no doubt if unions have raised other wages, there is
a sympathetic rise in occupations not directly affected.
It is always difficult to separate the effect due to one
particular cause from a complex result. The general
growth of wealth, due to improved methods of production,
would of itself tend to raise wages ; and conversely, the
restrictive action of the unions might to some extent retard
the accumulation of capital, and thus so far check the
natural rise in wages.
Again, under present conditions what may be termed
the debatable surplus is relatively small. From the sell-
ing price of the product must be deducted all the nec-
essary expenses, if the production is to continue, and
amongst these are to be enumerated a sufficient amount
to cover the depreciation and wear and tear of capital,
and a necessary minimum of profits. By the latter
term is now meant no more than such an amount of
profits as will suffice to keep up the supply of capital.
No doubt also amongst the necessary expenses must be
reckoned wages sufficient to keep up the supply of labour;
but the larger the amount already taken by labour as its
living wage, so much the more is the debatable surplus
contracted. Other considerations may be advanced to
support this line of argument. Thus, as already shown,
CAPITAL AND LABOUR 193
profit is complex, and we may consider the possible
effects of trade unions on each of the elements taken
separately. Profit-interest is so closely associated with
loan-interest that there is always an interaction between
the two. It is clear that trade unions can have little
or no power in reducing loan-interest, and thus their
influence on profit-interest is also limited. Again, the
present rate of pure interest is so low that if the whole
of it were taken from productive capital it could not
raise wages very much. The element of insurance against
risk ought properly to be included in the expenses of
production, just as the replacement of wear and tear.
Wages of management seem to offer a better object for
attack, but again they must be divided into two parts.
A large part of the gross wages of management is only
the "natural" payment for professional skill of a high
character, and may be said to be earned out of the
greater productiveness of industry as a whole under the
guidance of the entrepreneur. If we take the wages of
management in an ascending order, from the wages of
foremen and the heads of departments up to the highest
organising skill, the importance of this factor is readily
seen. Any attempt to transfer this part of the wages
of management to ordinary labour would probably result
in a fall in wages through the check to efficiency. There
remains the smaller part of wages of management that
is of the nature of rent or quasi-rent. This is the part
that is directly most open to attack, and as a rule a
share in any good fortune that befalls the industry of a
country can be taken by labour, beyond what would be
obtained by the natural effects of competition, provided
194 ELEMENTS OF POLITICAL ECONOMY
the labour combinations are strong. Similarly as regards
the effects of improvements, part of the benefit may be
transferred to the consumer in a fall of price, but part
may be retained by labour at the expense of quasi-rents.
In this case, however, the indirect effects must also be
taken into account. It is the hope of these exceptional
rewards that gives such a stimulus to enterprise on the
whole, and if it were possible for ordinary labour to
appropriate every gain as it arises, there would soon be
a dearth of these gains. It must always be remembered
that competition of capital for labour tends to raise
wages, and the object of trade unions is to raise wages
above this so-called natural rate. The unions are not
able to affect the demand for labour and for the varied
products of labour, and the utmost they can do is to take
advantage of favourable conditions.
The influence of the unions is best seen in preventing
a fall in wages. If a fall is rendered really necessary by
the conditions of trade, as in a period of general depres-
sion, the unions can only keep up rates of wages at the
expense of greater losses in earnings. But, on the other
hand, any economy in the wages bill gives so great a
gain to profits that the tendency is for masters to reduce
wages whenever occasion offers. At present the chief
object of unions as regards money wages seems to be to
make a relatively high minimum wage a necessary condi-
tion of production, just as certain sanitary conditions are
made necessary. It is maintained by those who approve
of this policy, that the other parts of the competitive
system will be left unaffected, and that on the whole
the efficiency of industry will be increased by insisting
CAPITAL AND LABOUR 195
on this reasonable minimum. And there is little doubt
that a continual cheapening of labour might lead to deg-
radation and inefficiency, whilst in a narrow sense it is
to the interest of individual employers to try to cheapen
labour; for to the individual the gains of promoting the
general welfare of labour seem too far off compared with
the present gains of a reduction in wages.
6. Evils of Conflicts of Labour and Capital. — In disputes
between labour and capital, with trade unions on one
side and associations of employers on the other, the
ultimate appeal is to a strike or lockout. It is easy to
show that the direct loss incurred during a strike by the
loss of wages may take years to recover from, even if
the strike is successful. The amount in dispute is often
not more than five per cent; but suppose that it is as
much as ten per cent, and the strike lasts only six weeks.
The total loss of wages during this time will need a year
to effect a compensation, if the strike is successful — and
the rise is retained. If the percentage in dispute is
less and the period of the strike is longer, so much longer
Avill be the period requisite for compensation. Apart
from the direct losses of the strike there are the evil
effects on the families of the workers and the losses
occasioned by forced sales and debts. On the side of
the masters there is no actual physical distress, and there
may be no immediate injury to most of the fixed capital ;
but there are great losses as a rule through the disorgan-
isation of business connection and the openings given
to foreign competition. The masters in some cases have
every compensation in the rise in prices of accumulated
stocks and in the maintenance of prices for a time, even
196 ELEMENTS OF POLITICAL ECONOMY
after the strike has ceased. But on the whole a strike
or lockout involves much more than a loss of profits
during the time.
In a general view, also, account must be taken of the in-
crease of class animosity and jealousy, and of the feeling of
insecurity as regards enterprise, which in the end will ad-
versely affect the general productive power of the country.
Accordingly, everything that tends to substitute the
methods of industrial peace for conflict, other things
being the same, is a national gain.
7. The Harmonies of Labour and Capital. — In many
cases the economic interests of labour and capital are
only in apparent conflict, and the difficulty is for the
stronger side to recognise the real harmony. There can
be no doubt that many institutions, laws, and customs,
apparently only designed in the interests of labour, have
been indirectly of advantage to the employer. Improved
conditions of work have increased the efficiency of labour.
So also, on the whole, has the rise in money wages. The
economy of high wages expresses a great truth, especially
when we regard the effects from the national standpoint.
Even as regards the debatable surplus, methods of
conciliation are to be preferred whenever possible.
Among such methods may be noticed first of all
sliding scales. The principle of the sliding scale is the
recognition of the connection of wages and prices. The
chief difficulty is that wages is not the only element in
cost, and sometimes is not the most important. The
price of the product may rise because the raw material
is dearer, or the coal. Again, there are difficulties caused
by the differences in qualities and in the methods of
CAPITAL AND LABOUR 197
production. Thus it has been said, that with a perfect
sliding scale, a different scale would be required for every
mine. The great advantage of this method is that it is
automatic, if once the scale is agreed on, and the mode
of ascertaining the movements in prices, and the intervals
at which the readjustments are to be made, have been settled.
In theory, the methods of so-called industrial partner-
ship, or profit-sharing, or "bonus" grants, seem most
attractive. In effect, labour is supposed to create the
extra profits or bonus that it receives by greater effi-
ciency and economies. The chief difficulty is when
with falling prices the bonus disappears and the workers
think it is a case of mismanagement. Industrial partner-
ships of this kind do not imply, as a rule, any share in
the management or any share in the losses (apart from
the loss of the bonus).
A development of this system is found when an
opportunity is given to the workers to acquire a certain
amount of shares in the business (Carnegie). Here
again the danger is in the risk of the loss of the capital
in bad times.
Lastly, there is the method of cooperation, in which,
in its full development, the workers provide both the
capital and the business management. Cooperation has
had an immense success in trade as distinguished from
production in the narrow sense. But although recently
there has been some increase of cooperative production,
the aggregate amount in the industrial world is of little
importance. The great difficulty seems to be in the
management. There is a natural reluctance to give either
sufficient powers or sufficient wages to the managers.
198 ELEMENTS OF POLITICAL ECONOMY
On the whole, then, it seems that the wage system
will be retained and the difficulties will be best surmounted
by boards of conciliation and arbitration adapted to the
circumstances of particular industries. Boards composed
equally of masters and men, with an independent chair-
man with a casting vote, or with some provision for
reference to a neutral authority, seem to have worked
well over long periods. The difficult question then
arises, whether arbitration in some form should not be
made compulsory, especially in the case of industries
in which there are great national interests at stake (e.^.
railways, shipping, coal, etc.). An adequate opinion on
the relative merits, and the difficulties involved in these
various methods, can only be formed after a careful
inductive inquiry. General principles and ideas can
only give guiding clues. ^
1 The theory of combination of labour and capital as connected with
the theory of monopoly value is treated in Principles, Book III, Chap.
VIII. On the subject of this chapter there is a vast literature. The
History of Trade Unions and Industrial Democracy, by Mr. and Mrs.
Webb, give the latest and most complete realistic treatment ; Brentano,
Gilds and Trade Unions, may be corrected by the Gild Merchant of Dr.
Gross ; Industrial Peace, by L. L. Price, may now rank as a standard
work ; Marshall, Economics of Industry, Book VI, Chap. XIII, gives an
excellent account of trade unions ; see also Hadley, Economics, Chaps.
XI-XII ; Oilman, Profit-Sharing ; Nicholson, Strikes and Social Prob-
lems ; Pierson, Principles, Part I, Chap. VI, § 2 ; Sidgwick, Principles,
Book II, Chap. X ; the older ideas are well stated in Holyoake, History
of Cooperation and Conflicts of Labour and Capital.
CHAPTER X
ECONOMIC RENT
1. Different Meanings of the Term Rent. — The term
rent is used in various senses. It is applied to the total
revenue derived by the owners from lands, houses, mines,
forests, fisheries, and various other forms of property. In
former times the towns paid a rent to the king for their
privileges and to the feudal superior for their markets.
With this wide extension of the term, rent is sometimes
equivalent to the interest on some forms of capital ; some-
times it includes besides interest other elements of profits ;
rent may be in effect a payment by instalments for raw
materials or minerals ; it may be a tax imposed by author-
ity, or the result of a monopoly created by circumstances.
In separating economic rent from these other usages it
seems best to begin with the meaning assigned to it by
Ricardo in dealing with the rent of agricultural land.
This was the meaning for a long time so generally adopted
that the pure theory of economic rent was known alterna-
tively as the Ricardian theory.
This case is at any rate of importance in itself, and it has
the advantage of bringing out with great clearness the
fundamental conceptions and their mutual relations.
When once these leading ideas are made clear, it is easy to
extend the theory in whole or in part to similar cases ;
e.g. to houses, mines, fisheries, etc., and to the varied
199
200 ELEMENTS OF POLITICAL ECONOMY
forms of income to which Professor Marshall has assigned
the name quasi-rent.
To begin with, the primary object is to unfold the mean-
ing of the theory, and for this purpose all the non-essential
features must be abstracted. Later on, in dealing with
historical or practical problems, account can be taken as
the abstract method demands of various disturbing causes.
In the abstract method, it may be recalled, we start with
certain propositions that are obvious in themselves, or at
any rate may be taken for granted. Such are in this case
the law of diminishing return to land in its two forms
(intensive and extensive) : the equality of prices for the
same produce in the same market, and the tendency to
equality of profits (or better, the instability of exceptional
rates).
It will be found that the theory assumes different forms ;
but the following may be taken as the definition of
economic rent (in the case of agricultural land).
Economic rent is the differential profit that arises from
differences in the cost of production, owing to differences
in permanent natural conditions.
Ricardo used the expression yiatural and indestructible
powers of the soil, and he did not bring out the abstract
nature of the theory. He made clear, however, one of the
fundamental assumptions that is often overlooked or mis-
understood; namely, that the same amount of labour and
capital, or productive power, is applied under different
natural conditions, but not necessarily to the same amount
of land. In brief, the object is to explain not the differ-
ences in rent per acre, but the differences in profits, although
no doubt greater simplicity may be attained by the further
ECONOMIC RENT 201
assumption that each acre of land requires the same amount
of capital.
2. Economic Rent from Extensive Cultivation. — The
theory may be first worked out with the law of diminish-
ing return in its extensive form : we assume that there are
various qualities of land, and that the better qualities are
limited.
Take, for simplicity, a new country dependent on its
own supplies and occupied by a body of settlers. At first
we may suppose that there is an abundance of the best land
and that it is practically free. In this case only the best
land will be used, and the produce will sell so as to just
cover (with current wages and profits) the expenses of
production. It cannot sell for more as that would pro-
voke competition, and there is plenty of good land avail-
able. So far, there is no differential profit and thus no
economic rent.
As population increases the yield from the best land
(the methods of cultivation remaining the same) will not
meet the demand. The relative scarcity raises price, and
at this higher price it pays to resort to inferior land. Now
the same amount of capital yields different amounts of
produce on the two qualities of land ; but since all the
produce must sell at the same price, a differential profit
emerges from the better land. This constitutes economic
rent and may be measured in produce or in money. (In
theoretical problems both measures may be useful.) The
land that yields no rent is called the land on the margin of
cultivation, and the capital that yields no differential profit
is the marginal capital.
As the population is supposed to increase still more, this
202 ELEMENTS OF POLITICAL ECONOMY
second quality may not suffice to meet the demand; in
this case the margin is again extended to inferior land, and
the former marginal land now yields a rent and the best
land a higher rent. The process may continue indefinitely
so long as population increases and there remains inferior
land to be taken into cultivation. Under these supposi-
tions there is always some land on the margin that pays
no rent, and with every extension of the margin rent
rises. The theory as so far developed involves three main
results which it is best to make explicit.
(a) So long as the demand, say the number of
people, remains the same and tlie methods of cultivation
are unchanged, the price must remain high and the eco-
nomic rent is permanent. In the case of other things in
which the supply can be increased without resort to
more difficult conditions, an extra profit, due to a rise
in demand, can only be temporary.
(5) Rent depends on price and not price on rent.
It is the rise in price that pushes out the margin.
(e) The price depends on the most expensive portion
necessary to satisfy the demand — that is, on the cost of
production on the land on the margin that pays no rent.
Thus again we see that rent does not govern, but depends
on price ; and the price depends on the marginal cost.
3. Economic Rent from Situation. — It is easy to show
that advantages of situation act in the same way as
degrees of fertility. In order to isolate this element,
suppose all the land is equally fertile, but at different
distances from the market. At first, only the nearest
land is used ; with an increase of demand and rise of
price, it will pay to go to more distant land ; the rise
ECONOMIC RENT 203
of price just compensates on the marginal land the extra
cost of carriage of materials and products, and the nearer
lands can pay rent.
4. Economic Rent from Intensive Cultivation. — Suppose
now that all the land is of the same quality and equally
distant from the market. If the land is as abundant as
before, there is no rent ; but if after all the land has been
taken up, it is desired to raise more produce, in response
to a rise in demand the law of diminishing return, in
its intensive form, will come into play. More capital
will be applied to the land, but there will be a diminish-
ing return per unit. The idea now is, that if the last
applications of capital just gives ordinary profit, the
prior "doses" must give more. If, however, the last or
marginal dose is to be applied year after year, the price
must remain high. Therefore the differential profits on
these prior doses must arise every year, and the economic
rent is permanent so long as the conditions of demand
and of production remain the same.
It is this form of economic rent that generally presents
most difficulty. It is well to remember that the marginal,
or last dose of capital, is not necessarily the last in time.
It may be in the form of extra labour in cleaning the land
whicli in time would be first expended. The separation
of the " doses " and of the corresponding returns, though
difficult in practice, has to be calculated in some way ;
that is, the farmer must decide on the intensity of the
cultivation that will pay, and stop the applications of
capital at the margin of profitable return. In theory, the
separation is seen most clearly by means of diagrams (see
end of this chapter).
204 ELEMENTS OF POLITICAL ECONOMY
5. Economic Rent from Scarcity. — Suppose now that
all the land is equally fertile and well situated, and
that the conditions of cultivation are such that the returns
to successive doses of capital are equal; that is to say, the
law of diminishing return is not supposed to operate.
As before, if the land is abundant, there is no rent, but
if the land is limited and scarce, with a rise in demand,
economic rent will emerge. The produce will sell at
such a price that it will give a differential profit over
the ordinary applications of capital in other industries ;
this profit will be permanent so long as the conditions
of demand and production remain the same ; and it may
be ascribed to permanent natural conditions. It thus
comes under the definition adopted above of economic
rent.
The chief point to notice is, that the rent in this case
is not a monopoly rent ; the land may be in the possession
of different owners in competition with one another, and
there may not be even tacit or customary combination.
Scarcity alone is not enough to give monopoly ; all things
that have value are relatively scarce.
6. Combination of the Different Forms of Economic Rent. —
For the sake of clearness in the exposition, the different
forms of economic rent have been treated separately. We
must next observe that in practice they are generally com-
bined. The same rise in price, consequent on an increase
of demand, will render it profitable to cultivate the old
land more highly and also to resort to less fertile and
more distant lands ; and after a certain point it may
happen that all the land in cultivation will yield a
scarcity rent.
ECOXOMIC RENT 205
Although the treatment adopted has been abstract, it
is to be noted that all the causes are real or true causes.
A good practical illustration of a rise in rent is afforded
by England in the early years of the nineteenth century.
Recently in England we have had an example of a fall
in agricultural rent. To account for this fall in rent,
we have only to take the fall in the price of produce as
given ; it is in fact due to foreign competition. In
response to the fall in price the margin has receded.
In the exposition of the theory the usual plan has
been followed of supposing first an increase in population,
and as a consequence an extension of the margin. The
theory, however, is essentially the same if we suppose
that, in the first place improvements are made so that
there is a greater produce at the same cost. To begin
with, the produce will fall in price; but if the fall in
price stimulates population, the price will again rise to
its former level. Under these circumstances there will
be first a fall and then a rise in rents.
The theory of the effects of improvements on rents
leads to some difficult problems that can only be solved
by the aid of diagrams or mathematics. The general
principle applied is that improvements counteract the law
of diminishing return, and since rent in most forms arises
from the operation of this law, as the law is counteracted
the rent falls. The improvements are of course supposed
to be general ; improvements on one portion of land only
would increase its particular rent.
The general effects of economic progress on rent are
treated in the fourth book in the plan here followed.
So far only the elements of the theory of value have
206 ELEMENTS OF rOLITICAL ECONOMY
been assumed: no more indeed than may be taken for
granted after the exposition already given of wages and
profits. At a later stage some attention must be given
to some of the relations of rent and value that are not
so obvious (see Book III).
7. Rent of Non-agricultural Land. — Land, in its ex-
tended meaning in economics, is held to cover the income
from natural resources in general. The gross rent of
mines is partly payment by instalments for a stock of
material and partly a differential payment for relative
advantages in position or working. If it is assumed
that there is a continuous gradation of mines of vary-
ing degrees of productiveness and accessibility, it is the
marginal cost that determines the price, and any saving
in cost in the more easily worked mines (including trans-
port) is economic rent. It differs from agricultural rent
in that it is not permanent: it is similar in that dimin-
ishing return may act both extensively and intensively ;
more distant and inferior mines may be worked, and in
the best mine more costly methods of extraction may be
adopted.
In sea fisheries there is no rent, because there is no
appropriation. When appropriation is possible, as in the
case of salmon, a rent arises. In this case, since the stock
is renewed annually by natural means, the rent closely
resembles that of agricultural land; and again we have
extensive and intensive diminishing return.
In building land, we have the best example of the
permanence of natural qualities, namely, extension and
situation. In the case of cities with widely extended
suburbs, there is continuity from the central positions that
ECONOMIC RENT
207
pay enormous rents, to the land on the margin that pays
no rent (jwa building) or only the equivalent of agricul-
tural rent. The case is exactly similar to that of agricul-
tural rental with a difference only in the kind of produce :
the kindly fruits of the earth are now amenity for dwell-
ing-places and advantages in business. There is often
y
Fig. 1.
Fia. 2.
H K
Let OA, AB, BC (Fig. 1) be three equal portions of land or "doses"
of capital. Let OE, AG, BK be their respective corn product. Then
if AB is the marginal portion or "dose," Rent = DF ; while, if BC is
the marginal portion, Rent = DL + FH.
If, as in Fig. 2, we take the portions of land or " doses" of capital to
be very small, then corresponding returns become lines, the ends of
which form a curve. If the M^^ be taken as the marginal dose, then
Rent equals BPL.
present also the scarcity element which as before must
be distinguished from monopoly. If commodities are
sold at the same price in shops in different streets, the
higher rent in some is to be ascribed to the economies pos-
sible with greater and more continuous custom. If the
more fashionable neighbourhoods exact higher prices,
they must be considered in part only as payment for the
208 ELEMENTS OF POLITICAL ECONOMY
thing, and in part as payment for entry to the locality :
a kind of tacit or customary entrance fee. This part of
the price is naturally transferred to the owner of the
locale as economic rent.
8. Quasi-rent. — Quasi-rent is properly taken after the
theory of value. It resembles true economic rent in that
it depends on price, and is not a determinant of price.
It differs in that it is not due to natural conditions, and
is not permanent, but tends to disappear under the influ-
ence of competition.
It is sometimes useful to represent economic rent by
rectangles as well as by the usual curves. The connec-
tion of rent with diminishing return is well shown in
Marshall's Principles (4th ed.), pp. 232-235. The leading
ideas are brought out in the figures given above. ^
1 For elementary exposition without mathematics, see Walker, Land
and its Bent ; in Marshall's Principles (see Index) the treatment is rather
scattered ; Hadley, Economics, Chap. IX ; Nicholson, TenanVs Gain not
Landlord's Loss; Pierson, Principles^ Parti, Chap. II.
BOOK III
EXCHANGE
CHAPTER I
VALUE AND MARKETS
1. Exchange. — The third great department of political
economy — namely, exchange — is closely related to the
other two. With the progress of society production in-
volves more and more division of labour, which is limited
by the extent of the market. In distribution, also, status
and custom give place to contract ; and contract from the
economic standpoint also involves the idea of exchange.
At the same time, both production and distribution involve
other ideas and topics, e.g. population, property, etc., which
are only indirectly of importance in this third department.
In exchange the fundamental idea is value., and the main
problems are the relations of values. The first requisite
is to make clear the conception of value.
2. Value. — The term value., as was pointed out by Adam
Smith is used popularly in at least two senses. It may
mean value in use or value in exchange. To say that
a thing has value in use is to say that it has utility. As
already shown, utility is the widest term in economics, and
accordingly it is not suited for specialisation in the de-
partment of exchange. Utility is a complex conception
(e.g. total and marginal utility), and the ideas which it
involves may be made clear by reference to consumption
and production without bringing in exchange. Utility
211
212 ELEMENTS OF POLITICAL ECONOMY
is indeed essential to exchange value, but exchange value
is not essential to utility. Again, utility is subjective in
the last resort, whilst exchange is objective. In the same
market at the same time every one pays the same price
for the same thing, but the utility to each purchaser may
be different. Records of prices are actual definite facts
like the readings of the barometer or the markings of
geological strata, but there is no such objective record
of utilities.
At the same time the very idea of exchange — its mo-
tive power — is the gain of utility ; and in considering
the real advantages of exchange and the real cost in-
volved we are thrown back on the fundamental ideas of
utility and disutility.
3. Value in Exchange. — Exchange value implies two
things at least ; value, in other words, is a relative term :
the intrinsic value of one thing can only mean its utility.
The exchange value of a thing can be expressed theo-
retically, in terms of any other thing that is exchangeable.
In practice in modern societies the other thing taken
for comparison is generally standard money. In this case
value becomes price. The question then arises : Are we
to say that exchange value is always to mean price ? and
that the distinction between value and price is to be aban-
doned?
The answer is that in some important problems it is
necessary to contrast the prices with values measured in
some other way.
The essential thing to remember is that value is a purely
relative term; it expresses the rate of exchange of one
thing compared with one or more other things.
VALUE AND MARKETS 213
Theoretically, we may express the value of any one
thing in terms of all other exchangeable things taken to-
gether. This is Mill's idea. The value of a thing as
distinct from its price, on this view, is its general pur-
chasing power.
This conception of general purchasing power proves to
be unworkable unless we introduce the idea of price ; to
find out the general purchasing power of a thing, we must
usually compare its price with the general level of prices.
Rogers compared the average prices of a large number of
commodities in the period 1400-1540 with their prices
in the period 1540-1581, and he found that everytliing
except glass had risen in price ; here it might be said that
the value of glass, in the sense of its general purchasing
power, had fallen.
The case, however, that is always of the greatest im-
portance in this mode of estimating value, is the case of
money itself. It is often of importance to measure
changes in the purchasing power of money in reference
to things in general. Thus the depreciation of incon-
vertible notes may be measured either in reference to
gold or in reference to commodities.
Again, as will be shown in the theory of money, the
price of gold is fixed by law ; its value in terms of things
is constantly changing. To find the changes in value in
this sense, we take certain things as representative, and
from the movements in their prices we estimate (by some
method of index numbers) the general movement in
prices. If prices measured in this way have risen, that
means the value of gold has fallen ; and if prices have
fallen, the value of gold has risen.
214 ELEMENTS OF POLITICAL ECONOMY
From the mode adopted in measuring changes in the
value of gold, it is clear that we are not entitled to argue
that the change in value has been uniform throughout
the whole range of commodities. Thus it might happen
that although general prices as estimated by the index
numbers had fallen, several of the things of importance
in workmen's budgets (^e.g. house rents), had risen ; in
this case it might happen that the purchasing power of
money wages had actually fallen in spite of the rise in
the value of gold.
It is sometimes convenient to express the value of
particular things in reference to something else instead of
money. Here attention may be called to the fallacious
idea that so long prevailed that there was something
discoverable that by nature was especially adapted to
measure values as distinct from prices — a supposed real
measure as contrasted with money, the nominal measure.
Thus Adam Smith speaks of real and nominal price : by
nominal price he means value in terms of money ; by real
price, value in terms of labour. The distinction is some-
times useful, but the notion that value in terms of labour
is more real than value in terms of some other thing is
quite false.
It is not a question of reality but of methods of com-
parison. ]M ill's idea that the proper correlative in the
expression of value is " things in general," seems to imply
that this is the one real meaning of value ; and this may
be said also of recent attempts to reduce value to utility.
The point to grasp is that for different purposes we may
express the relation of value in different ways ; we
generally choose money, but not always ; e.g. in the
VALUE AND MARKETS 215
theory of rent it is often useful to take corn as the meas-
ure, and sometimes in practice grain rents have been
preferred to money rents.
4. Relative Prices must be adjusted to Relative Values. —
It has already been implied that the general level of prices
may change, and the causes of such movements will be
examined in the theory of money. At this stage, however,
the proposition may be laid down, that whatever changes
take place in the geiieral level, relative prices must he ad-
justed to relative values. A change in the level of general
prices is the same thing as a change in the measure of
values, and the mere change in the measure cannot in itself
affect the relative value of the things. The relative
values depend on real causes, e.g. the quantity of labour
and capital required to produce them, etc. ; and these
causes are not affected by the mode of measurement.
At the same time it may be indicated that during the
period of transition from one level to another there is
often a temporary disturbance of relative prices, and thus
of values. It may happen also that a change in general
prices may itself be due to a disturbance of relative values,
though the explanation involves one of the most difficult
points in monetary theory. At present all that is intended
is to make clear the meanings of, and the connections
between, values and prices.
5. A General Rise of Values is Impossible. — If the term
general is taken in the strict sense as applicable to all the
things that are the subject of exchange, it is a truism that
if some fall in value the remainder must rise in value
relatively to the first set. If any one thing obtains more
of all the rest, the value of all the things except that one
216 ELEMENTS OF POLITICAL ECONOMY
falls compared with that one ; but the exclusion of that
one makes the fall not general in the strict sense. If the
one thing that rises in value is gold, that means a fall in
general prices : gold obtains more of all other things, and
they obtain less gold. Thus a general fall (or rise) in
prices is quite possible, and such movements are constantly-
taking place, as is indicated by the changes in the index
numbers of the Economist or Mr. Sauerbeck (^Statistical
Journal).
6. Other General Propositions on Value. — Other general
propositions on value, of wide-reaching import, and closely
connected, are that : commodities pay for commodities ;
that demand and supply are reciprocal ; that all exchange
is ultimately barter ; and that money is the medium of
exchange. An increase in the supply of commodities
means indeed that those who make these things desire to
obtain money; but then they usually desire to spend
this money when obtained, either in consumable things or
in so-called intermediate goods, and thus exchange becomes
barter and the extension of supply involves an extension of
demand. In foreign trade the form assumed by these prop-
ositions is that imports are paid for by exports, and that the
balance of trade is adjusted by reciprocal demand.
It is no doubt true that there may be a disorganisation
of the means of exchange, as in monetary and credit crises,
and thus, relatively to the means of distribution by the
agencies of trade, there may seem to be a general excess of
supply or a deficiency of demand. In this sense overpro-
duction may be very real ; but not in the sense that more
things of all kinds are produced than people in general
desire to consume or are able to purchase. The disoi'gan-
VALUE AND MARKETS 217
isation of markets through overproduction of some things
or through the scarcity of money (or its credit representa-
tives that will be accepted) is of frequent occurrence in
modern times ; but such disorganisation does not contro-
vert the truth of these general propositions, but rather
serves to illustrate the truth by contrast.
7. Markets. — The simplest case of barter consists of
the exchange of two commodities by two individuals ; and
in order to illustrate the advantages of exchange in the
gain of utility, this case may be useful. But in general,
exchange implies that there are a number of buyers and a
number of sellers, and that the things are not directly bar-
tered, but in the first place the sellers sell for money and
the buyers buy ivith money. The organisation by which
exchanges of this kind are effected is called a market.
The history of the development of markets is one of the
most important parts of the history of economic progress.
At first there were definite limits of time and place, as in
the market days of market towns, and in the great fairs
that still survive. From the earliest times markets came
to be held under conditions that insured publicity in the
transactions, freedom of trade, and competition ; in mediae-
val times regulations were in force to prevent sales being
effected on the way to market, and special privileges were
granted to traders at fairs and markets. A typical, highly
organised market of modern times shows these characters
more fully developed. The limits of space and time have
been extended in the sense that the conditions of demand
and supply all the world over, as also the prospective con-
ditions, affect the dealings of any particular market ; for
the great staples of international trade the market-place is
218 ELEMENTS OF POLITICAL ECONOMY
the whole world ; and, similarly, there is a continuous flow
of goods, instead of varying supplies at intervals. Pub-
licity has attained such a point that dealings in distant
places are recorded at once by telegraph; and the re-
straints formerly imposed on speculation have practically
disappeared, though occasionally attempts are made to
bring them back (Germany) ; and dealings in " futures "
are the chief characteristic of some modern markets. In
spite, however, of the extension and development of mar-
kets, both time and space still impose their limitations.
The demand alike for consumable commodities and for
the raw materials and the appliances of manufacture is a
demand for immediate use, and must be met at the time
and place considered; and the prospective supply and
demand only affect the present supply and demand
indirectly.
At any rate, for the purposes of theory it is still best to
assume that the market is held or made within certain
fixed limits of time and space, and that market prices are
the results of actual bargains at particular times and
places, as contrasted with normal prices, which are the
ideals that are the results or goals of tendencies.
Every one knows that market prices are determined by
demand and supply ; but these terms are by no means so
clear as they are familiar. In the analysis that is requi-
site two cases must be distinguished : there may be per-
fect competition on both sides, or there may be various
degrees of monopoly.
To begin with, we may follow the usual practice, and
suppose that there is perfect competition, which implies
that all the buyers and sellers in the market are equally
VALUE AND MARKETS 219
well informed as to the conditions affecting demand and
supply.
It is found best for clearness to take separately the laws
of demand and supply, and then to explain what is called
the equation or equilibrium which determines the market
price. In order that a thing may possess exchange value
it must have utility, and there must be some difficulty in
the attainment. Neither condition alone is sufficient.
Utility is of most importance in demand ; difficulty of
attainment in supply: but, as will appear in the analysis,
demand and supply are correlative. Demand implies power
to purchase, and supply implies desire to exchange ; and
thus demand involves an estimate of the difficulty of get-
ting money, and supply an estimate of the utility of
getting it.i
i This chapter is based on Book III, Chaps. I, II, III, and X, of the
Principles (Vol. II), and is much abbreviated. Value is treated in all
the text-books, and it seems unnecessary to give special references to the
general theory. The peculiar doctrines of the Austrian school are well
summarised in Smart's Introduction to the Tlieory of Value; the Meas-
urement of General Exchange Value is the title of an able and elaborate
monograph by Correa Moylan Walsh ; for index numbers, see Bowley,
Elements of Statistics ; a brief account of the simplest method is given in
Money and Monetary Problems (pp. 132-134).
CHAPTER II
OF DEMAND AND SUPPLY
1. The Law of Demand. — By demand is meant the quan-
tity demanded at a certain price, it being assumed that
the buyer can and will pay the price or that the demand
is effectual.
It is clear that demand must mean more than desire
to possess, because every one desires everything ; and the
less the means of payment or the chance of acquisition,
so much greater may be the desire. The qualification
"at a certain price" is essential, because, as a rule, for
every price there is a different quantity demanded.
This is expressed by saying that the quantity demanded
is a function of the price.
The general law of demand states that as the price
falls, other things remaining the same, the quantity de-
manded increases (or better, as Sidgwick says, is ex-
tended\ and conversely, as the price rises the quantity
demanded decreases (or better, is contracted').
The law of demand, as thus stated, is applicable to
everything that bears a price, or is the subject of bar-
gaining in terras of money. It applies, no doubt, to
manufactures (the usual illustration), but it also applies
to all the varied forms and usages of land labour and
capital. If the price of land rises, other things being
the same, the demand falls off ; if wages fall, the demand
for servants will so far increase ; if the rate of discount
220
OF DEMAND AND SUPPLY 221
rises, the demand for advances is checked ; and if on
the stock exchange some security falls in price, it will
so far extend the demand.
In theory we may suppose that there is a perfect
continuity in prices and in quantities (as illustrated in
the demand curve). Above a certain price there is none
demanded, or the price is prohibitive ; as the price falls,
more and more will be demanded, but at last no more
will be taken even at a nominal or zero price ; and after
this point is reached, the demand will become negative, or
the seller must pay something to get rid of the thing.
The last phrase leads to the remark that the law of
demand may be stated in a converse form, namely, that
in any market under given conditions, to get rid of a
larger supply prices must be lowered. So long as the
conditions prevailing in the market are given, it makes
no difference whether we begin with the prices or the
quantities, since the law of demand simply expresses
the relations between the two. In fact, if, instead of
curves, we use demand schedules (Marshall), we set
down on one side, or in one column, prices, and in the
other the corresponding quantities, — and which is on
the right hand and which on the left is of no conse-
quence. The first statement, however, seems preferable,
because it refers only to demand, whilst the second in
form refers rather to supply.
The degree or the rapidity of the change in the
quantity demanded in response to changes in price,
varies in different cases. If for a small rise or fall in
price there is a great change in the quantity demanded,
the demand is said to be elastic ; and conversely, if a
222 ELEMENTS OF POLITICAL ECONOMY
considerable change in price has little effect on the
quantity demanded, the demand is non-elastic (Marshall).
Variations in elasticity are shown in the shapes of the
demand curves, but the idea may be made clear by con-
crete examples. A tax on bread, which in this illustra-
tion may be supposed to raise the price, will check the
demand to a small extent only, even if the tax is heavy,
— that is, the demand is non-elastic ; on the other hand
it is said that any addition to the tobacco tax would so
check the demand that it would yield no more revenue
— the demand is elastic. The elasticity of demand is of
great importance in connection with the elasticity of
revenue. With regard to the effect of small variations
in price, as represented in the continuity of curves, the
supposition is not so unreal as might appear at first
sight. In estimating the total demand in any market
we must add together the demands of all the different
persons for all sorts of purposes. Thus in the case of
sugar, there is not only the demand for direct consump-
tion, but the demand also for cakes, jam, and beer.
Similarly, as regards the factors of production of various
kinds we must take the aggregate demands including
indirect, derived, and joint demands. These terms may
be explained by an example. The demand for new
houses for occupation is a direct demand : there is a joint
demand for the various forms of labour and raw material,
etc., used in the building trade ; and for any one of these
factors — e.g. the labour of house-painters — there is a
derived demand (Marshall)
2. Changes in Demand — Rise and Fall in Demand. —
Any change in the conditions affecting the demand for
OF DEMAND AND SUPPLY 223
a thing will cause a change in the nature of the demand
(illustrated by a change in the curve). Thus, if there
is a rise in the relative utility assigned to a thing, a
higher price will be given for a certain quantity. This
rise in demand may be expected to operate at every range
of prices, although it is unlikely that the rise will be
exactly uniform throughout. (In the language of curves
the new curve will be above the old curve, but not
raised to the same extent exactly throughout.)
By a fall in demand is meant, that at given prices
people will take less; or lower prices will be offered
for the same quantities. (The new demand curve would
fall below the old curve.)
Changes in the law of demand for a thing may arise
from various causes. Such are the extension or contrac-
tion in the use of substitutes ; an increase or decrease in
the wealth or means of people ; changes in the utility
assigned to the thing or, it may be, in the estimates of
present and future uses.
With regard to the influence of changes in utility it is
the marginal utility that must be considered. As already
explained, the utility of the first portions of necessaries
may be considered practically infinite ; but after a certain
point is reached more utility may be obtained by expend-
ing the next sum of money on some luxury. The total
utility of the luxury is less, but at the point reached the
degree of utility is greater.
In the same way the total utility of present consump-
tion may be greater than that expected from the creation
of some form of capital, but after a point it may be more
acceptable to save than to spend.
224 ELEMENTS OF POLITICAL ECONOMY
The value of the distinction between total and marginal
utility extends far beyond the possibility of exact measure-
ment.
3. The Law of Supply. — The law of supply may be
stated, mutatis mutandis, as the exact analogue of the
law of demand. Supply means the quantity offered for
sale at a price. The quantity offered, other things remain-
ing the same, will vary with the price. The supply, like
the demand, is a function of the price. The general law
of supply is that : As the price rises, other things remain-
ing the same, the quantity offered at that price Avill in-
crease, and as the price falls the quantity offered at that
price will diminish. The law is thus exactly symmetri-
cal with the law of demand. Similarly also, it is applied
to anything that bears a price or is saleable. Other things
being the same, with higher wages more labour will be
offered, with higher interest more loanable capital, and
generally with higher prices more land, more works of
art, more stock exchange securities, and in short, more
of everything vendible will be thrown on the market.
And conversely of falling prices ; some of the former
sellers will draw back and withhold their supply. These
examples show that the law of supply extends far beyond
the range of manufactured articles. If a saleable thing is of
such a kind that if time is allowed it can be increased, then
no doubt the conditions of production and the period re-
quired for adding to the effective supply will indirectly
affect the price at which supply will be forthcoming. But
it is best logically to take this case separately. (See
next chapter.)
It is easy to show that we may also apply the same
OF DEMAND AND SUPPLY 225
ideas of elasticity, rise and fall, etc., to supply as were
applied in the case of demand. Thus with some things
a slight rise in price will bring out large stocks, in other
things it will have little effect; and the supply may be
said to be elastic and non-elastic respectively. Again, if
through the whole range of the schedule of prices for a
thing more is offered than before, that constitutes a rise
in supply (and conversely of a fall in supply^, if we use
the terminology already adopted in the case of demand.
People may be more willing to sell than before, owing to
temporary pressure for money, as in a crisis, or there may
be the possibility of substitutes from other sources not
formerly available.
4. The Equation between Demand and Supply — The
Temporary Equilibrium Price. — We may now combine the
two laws of demand and supply so as to show the way in
which demand and supply determine market price. As
before, this general statement of the operation of demand
and supply will apply to anything for which there is a
market (that is to say, under the conditions of competi-
tion— the case of monopoly being deferred).
In any market at any time (or in a unit of time) the
price will be so adjusted, through the competition of
buyers and sellers, that the quantity demanded will be
equal to the quantity offered at that price. This is the
equation price (Mill), or temporary equilibrium price
(Marshall).
It is necessary to bring out in some way, by reference
to competition or to the higgling of the market, the
fact of the process of adjustment. Otherwise we are
landed in the barren verbalism that in any market the
Q
226 ELEMENTS OF POLITICAL ECONOMY
quantity bought is always equal to the quantity sold
(Cuirnes).
It may be advisable to make explicit other conditions
that are generally taken for granted in the determination
of market prices. Mill, for example, writes of markets :
" in which the axiom prevails that for the same article of
the same quality there cannot be two prices." This
assumption is only true in so far as the conditions requisite
to perfect competition prevail, e.g. equality of knowledge
on the part of all the buyers and sellers concerned.
The possible buyers are not supposed to go into the
market absolutely determined to buy so much — coiite qui
coute — whatever the price ; but their demand will be
adjusted according to the state of prices ; and similarly of
the supply and the sellers. Thus there will be all degrees
(within limits) in the intensity of the desire to buy and to
sell respectively. An eager buyer, to be safe, may open
the market by offering more than would have been neces-
sary if he had waited foi- the effects of competition, and
conversely an eager seller may accept less than he might
have obtained if he had waited. The higgling of the
market consists in finding out by tentative offers what are
the real conditions affecting the demand and the supply
on the whole, and what price will leave the least unsatis-
fied demand or supply (in the limit make them just
equal). Thus on the stock exchange the prices of specu-
lative stocks in periods of excitement will vary from
moment to moment ; in fact every sale so far alters the
conditions of the market, to say nothing of the interven-
tion of external causes in the shape of rumours. And
even in non-speculative securities there are movements in
I
OF DEMAND AND SUPPLY 227
the prices, although we may calculate the price of the day
on the average.
In times of panic and disorganisation there are widely
different prices at the same time in the same market.
Similarly, if we take the case of undeveloped markets, such
as the bazaars of the East, there is a set of independent
bargains at different prices.
5. The Immediate Effects of Changes in Demand and
Supply. — So far we have supposed that both demand and
supply are functions of the price, and that, given the con-
ditions or the schedules or curves, we can determine the
price at which sales will take place under the influence of
competition.
We must now consider the immediate effects of changes
in demand or supply or both (of the nature already de-
scribed) upon the price.
This consideration leads to a second form of the law of de-
mand and supply. If the demand rises, supply remaining
the same, the price rises ; and conversely, if demand falls,
the price falls. Similarly, we may suppose that the change
begins with the supply, the demand remaining the same ;
or there may be changes, in the same or in different
directions, in both demand and supply.
The various possible cases and the effects on price are
best illustrated by means of curves : but they are all de-
ducible from the real meaning of these changes.
A rise in demand means that people will take more at
the old price ; and accordingly if the old price were to re-
main undisturbed, there would be unsatisfied demand, and
then the competition of buyers raises the price. Similarly,
a rise in supply means that people will sell more at the
228 ELEMENTS OF POLITICAL ECONOMY
old price, and therefore if that price remained, there would
be unsatisfied supply ; and by the competition of sellers the
price would fall.
6. Ulterior Effects of Changes in Demand and Supply. —
We may now consider the ulterior effects. Take first the
case of a rise in price due to a rise in demand. If the sup-
ply cannot be increased, then the rise of price is permanent,
as in the case of building land in growing cities.
If the supply can be increased, the ultimate effect de-
pends on the conditions of production. If the conditions
are such that the law of diminishing return comes into
play, then also the rise of price is permanent so long as the
conditions remain the same. If, on the other hand, the in-
creased supply brings into play the economies of large
production (or the law of increasing return), though the
price rises in the first instance, it will ultimately fall to a
lower level. The reason simply is that if the old price
were maintained there would be exceptional profit.
If in the conflict of opposing forces there is a balance of
increasing and diminishing return, the price after the tem-
porary rise will return to the former level. This is the
case of constant return.
Similar reasoning may be applied in the case of a fall in
price due to a fall in demand. One example may suffice.
Suppose that the commodity is produced according to in-
creasing return. Then as the production is contracted the
cost rises. Thus in the end the price may rise to a higher
level than before. This process may go on, the rise in
price checking the demand, and thus again contracting
the supply, until the commodity ceases to be produced.
In this, as in the other cases taken, there are various coun-
OF DEMAND AND SUPPLY
229
teracting causes. Thus the so-called law of increasing
return does not act in such a way that all the economies
are lost if the production is contracted. It may happen
simply that the weaker producers are driven from the
market.^
At the price OP, none is de-
manded ; at zero price Q, no
more than OQ will be taken
(satiety) ; between these limits
with every fall in price the
quantity demanded increases.
To induce people to take more
than 0Q,2i bounty must be given
or the price becomes negative.
If the curve is steep, it is
non-elastic, if flat, elastic. In
the limit if the curve becomes
parallel to OF, that means per-
fect non-elasticity, — whatever the price, the same quantity is demanded ;
if the curve becomes parallel to OX, there is perfect elasticity, — the
smallest change in price extends or contracts the demand indefinitely.
At price OS, none is offered ; as price
rises, more is offered ; if after S\, the curve
becomes parallel to OY, whatever the
change in price no more is offered, —
scarcity prices.
1 See Principles, Vol. II, Book III, Chaps. IV and VI. The law of de-
mand is treated by Marshall in Principles, Book III, and the equilibrium
of demand and supply in Book V. Book IV treats of the agents of pro-
duction. Tlie treatment differs from that here adopted in that the sym-
metry of demand and supply is not insisted on.
230
ELEMENTS OF POLITICAL ECOXOMY
Fig. I
Fig, 2
D Di
MgMMj,
Fig. 3
S Si
DgD
MjM Ml
Fig. 4
Sz S
MoM
Changes in Demand and Supply and their Immediate
Effects on Price.
I. Demand only changing : (a) VAsing — effect P, .^r,'> P .V .p. i.
(/.) Falling- " P, .V2< /'.)/■ (*'^- ^>-
11. Supply only changing : (a) IJising — effect P, .1/, </' .)/" ,,;,. „,
(MFalhng- " P^Jf,> PJf ^^'S- ^>-
III. Both Demand and Supply changing, and in the mine direction :
((/) Rising (Fig. 3) ; (//) Falling (F"ig. 4). Whether now price will be greater or less
than the old [irice is indeterminate.
IV. Both Demand and Supply changing, but in oppnuite directions :
(a) Demand rising and Sujiplv falling — effect /'j J/3> /" J/(Fig. 5) ; (6) Demand
falling and Supply ri.sing -- ctlVct /'j -V, < P M (Fig. 6).
In all these cases the rise or fall is supposed to be uniform throughout.
CHAPTER III
NOKMAL VALUE AND COST OF PRODUCTION
1. Meaning of Normal Value. — Market prices are the
actual prices recorded in actual market quotations, and in
theory they are the prices determined under the conditions
of demand and supply that represent the essential condi-
tions of these markets. These market prices are subject to
incessant fluctuations, but [in certain cases] there is a
central or natural price to which the prices of [some] com-
modities are continually gravitating (Adam Smith). The
conception of natural or normal price is generally associ-
ated with commodities that are manufactured or produced
in the narrow sense of the term, and in general also it is
said that the natural or normal price depends on cost of
production. It is often further supposed, as by Mill,
that on an average of years sufficient to enable the oscilla-
tions on one side of the central line to be compensated by
those on the other, the market value agrees with the
natural value ; that is to say, that in the " long run "
natural cost of production and average come to the same
thing. Later analysis, however, has shown that the term
normal, which has displaced the question-begging term
natural must be carefully distinguished both from cost
of production and from average values. The word norma
is literally the square used by carpenters to get their work
in proper proportion : it gives the ideal to which their
231
232 ELEMENTS OF POLITICAL ECONOMY
efforts are directed. By analogy the term has been
extended to mean the law or pattern to which any varia-
tions tend to conform or be restored. Normal may thus
be taken to be the adjective that corresponds to economic
law (Marshall). In this sense it is obviously much
wider than cost of production. Thus we can speak of
normal rates of wages and profits in which the idea of cost
of labour or capital is out of place. Again we may say
that normal monopoly value is that which gives the
maximum net return, and in general this is above the value
that would result from cost of production under compe-
tition.
This last example also illustrates very clearly the
difference between normal and average, for the actual
monopoly profit can never exceed the normal and is sure
sometimes to fall below it, unless the monopolist is supposed
to be omniscient. In the first seventy years of the nine-
teenth century the normal ratio of gold to silver was Ib^ to
1, but it was only remotely influenced by cost of production,
Adam Smith himself observed in dealing with ordinary cost,
the market price is likely to remain longer above than below
this cost; and whether this opinion is accepted or not, it
shows that on this view the average price for a long time
might exceed the natural price.
But althougli normal value is wider than cost value and
different from average, one important form of normal value
is that which is determined by cost of production, and
in general the cost of production value is closely connected
with the average. We may now examine the relations of
cost of production to market values.
2. Real Cost and Money Cost. — By real cost in econom-
NORMAL VALUE AND COST OF PRODUCTION 233
ics is meant the sum of the efforts and sacrifices that are
necessary to produce a thing. So far as this conception is
capable of analysis, it has been dealt with in the examination
of the meaning of production and again of real wages.
In some of the problems of value it may be necessary
again to go back to this ultimate cost (as in considering
the real advantages of foreign trade and distribution of
the advantages between the countries concerned). In
general, however, in this department we do not go beyond
the money wages and profits that are necessary to call forth
these efforts on the part of labour and capital.
From this point of view the ultimate elements of cost of
production are the money wages and profits of all the
various persons concerned in the production ; that is, we
consider the money values required to compensate the
disutilities of real cost.
Strictly speaking again, in modern industrial societies,
this would involve an endless series of prices. There is
the cost of buildings, of transport, etc., and even the cost
of the government to be taken account of ; and at first
sight this endless series of money costs would seem to be
as unworkable as the corresponding disutilities of real cost.
But we can adopt the common device of neglecting
forces below a certain magnitude, and we may confine the
attention to the more general causes ; and we must try to
discover general formulae that are applicable to many
particular cases.
It must never be forgotten that value is a relative term ;
the problems of value are problems of ratios, and in normal
values we are dealing with normal ratios.
It follows, then, that in dealing with cost as the deter-
234 ELEMENTS OF POLITICAL ECONOMY
minant of values we cannot simply take the money cost of
one thing by itself : we have to deal with the relations of
the cost of different things.
As in most parts of the theory of value it is necessary to
adopt the abstract or deductive method. The most ardent
advocate of the realistic treatment of economics could
make nothing of the records of millions of particular prices
unless he had some guiding ideas for their classification.
Even the calculation of averages will not itself reveal
causes, and some idea of causes must be formed before the
subjects of statistical investigation can be selected. A
glance over the volumes of Thorold Rogers or the later
prices of Tooke and Newmarch will at once show how
hopeless it is to appeal directly to what are supposed to be
facts.
According to the deductive or abstract method, we
begin with the operation of certain forces under hypotheti-
cal conditions. It must be premised, however, that al-
though the conditions are hypothetical, the causes are real
and always of fundamental importance.
3. The Analysis of Cost of Production. — Suppose first
that all the things considered are produced by labour of
the same kind and efficiency, and that the contribution of
capital is so small that it may be neglected. Under these
conditions, as was pointed out by Ricardo, the values of
the things would vary simply and directly with the
amount or quantity of labour that they required. If all
the labour is uniform and paid at the same rate, the gen-
eral rate of wages makes no difference. It is usual to illus-
trate by reference to " economic savages," but it is easy
to give examples in modern societies in which the chief
NORMAL VALUE AND COST OF PRODUCTION 235
determinant in relative values is the quantity of unskilled
labour required to make the things, e.g. in the relative
costs of parts of canals, railways, etc.
Again, if we regard capital itself as the product of
labour, the relative values of the buildings, machines, etc.,
required to assist labour, will depend partly, at any rate,
on the amount of labour involved in their construction,
though in this case it is complicated by the variations in
the kinds of labour and degree of skill.
In order to take adequate account of differences in the
hinds of labour, it is necessary to bring in the money
measures or the differential 7-ates of wages. We refer back
to the causes of differences of wages in different employ-
ments. We may take it that under given industrial
conditions there are certain normal ratios of wages for
different kinds of w^ork. These are the normal ratios
about which the market rates of wages oscillate.
In estimating now the relative values of commodities
produced by labour (the influence of capital being still
negligible), we compare the labour bills reckoned in
terms of money. If all the labour were uniform, and
paid at the same rates under the supposition that only
the cost of the labour need be considered, a rise or fall in
the rate of money wages would have no effect in disturb-
ing relative values. Any change in relative rates, how-
ever, would have an effect ; in the respective labour bills
a change in the rate of wages in one case operates as
effectively as a change in the quantity of labour.
The introduction of money wages as a determinant of
cost and thus of value, demands a word of explanation
in the light of some recent but one-sided developments
23G ELEMENTS OF POLITICAL ECONOMY
of the theory of value. If (in the absence of capital and
profits) the price obtained for the product is distributed
in wages paid to the producers, it may seem a verbal
truism to say that the cost depends on the wages. But
the point is that we are not dealing with the particular
cost of a particular thing, but with the relative normal
values of various things. There are certain real causes
that determine relative wages, e.g. a plumber gets more
than his boy, a carpenter gets more than an agricultural
labourer, a man gets more than a woman. These dif-
ferences in rates may be illustrated at any time or over
relatively long periods. If, then, one thing requires, for
the most part, highly skilled and trustworthy labourers,
and another requires only unskilled labourers, without
characters, the value of the former will be so much higher.
The amount of labour (the number of men, the hours of
work, etc.) is still the dominating factor, but it is no
longer a case of every one counting for one, and no one
for more than one.
If the market price of anything happens to rise, then
for the time being the labour required, if strong enough
in bargaining power, may obtain more than the normal
rate current for that kind of labour, but such a rise in
price would not, in general, suffice to permanently raise
the relative wages of that particular form of labour. And
if in certain cases such were the effect, it must be ascribed
to the conditions affecting the supply of that labour at
least as much as to the movement in price. After this
explanation, which applies later on mutatis mutandis to
relative profits, the results of the further analysis may be
indicated very briefly.
NORMAL VALUE AND COST OF PRODUCTION 237
Suppose next that all the things are made directly by
capital without the intervention of labour directly. We
may suppose that we have everlasting machines that only
require the eye of the master to keep going. The relative
values of the things so manufactured will be determined,
in the first place, by the relative amounts of capital re-
quired. This is exactly analogous to the quantity of
labour of the first case ; and if we bring in relative profits,
we have the analogy to the second case. If the machines
are indestructible, the only element in cost is the profits,
for the machine remains. Under these conditions a rise
or fall in general profits would not affect relative values ;
but any change in relative profits would disturb the rela-
tions just as effectively as a change in the quantities of
capital required.
We may now approach nearer to actual conditions and
suppose that things are made partly by labour directly and
partly by auxiliary capital. In this case a rise or fall in
general wages, compared with general profits, will disturb
relative values according to the proportions in which la-
bour and capital enter into the cost of the different things.
Further complications are introduced when we take
account of the different degrees of durability of the fixed
capital and the amounts of labour required in constructing
the different forms. The principle applied throughout is
that anything that affects values equally does not disturb
their relations, because a general rise or fall of values is
impossible.
The raw material of some manufactures is of more
importance than the labour bill (as in paper made from
esparto or rags). The value of the raw material will again
238 ELEMENTS OF POLITICAL ECONOMY
depend on the relative conditions of production. There
may be elements of monopoly or scarcity ; or diminishing
return may come into play, in which case the normal value
of the material depends on the marginal cost.
These closer approximations to actual conditions, though
in one way they complicate the general argument, in some
respects they make it more clear. When we take account
not only of what is called the prime cost, but also of the
share borne by a thing of the supplementary cost, it becomes
still more clear that the normal prices of finished goods do
not determine the rates of wages, but rather the converse.
Railways and steamers are essential to the cotton manufac-
ture and to all the other manufactures of the country. A
rise in the price of one of these manufactures might for
the time raise the wages of the labour directly concerned,
but it could hardly affect the wages of the thousands en-
gaged in transport.
In conclusion it may be repeated that the normal values
must be expressed in relation to something besides money.
Cost must be separated into its component factors ; and for
each of these factors there is a demand that is relatively
large compared to the demand derived from the particular
product.
The principle that tends to make the market values
gravitate to the normal is in modern industry on a large
scale the so-called tendency of profits to equality. The
expression is apt to be misleading, and as explained in
the chapter on Profits, it is better to speak of the insta-
bility of exceptional rates.
The "law of substitution". (Marshall) expresses the con-
tinuous striving for new economies in production ; these new
NORMAL VALUE AND COST OF PRODUCTION 239
economies, so long as the old price is maintained, give
exceptional rates of remuneration which are a species of
quasi-ieni. But quasi-rents, like true economic rents, de-
pend on prices and not prices on quasi-vents. (See next
chapter. )
Case of Joint Products. — If we suppose that two or more
things can only be produced together, or that it would be
just as expensive to produce any one as this one with the
others, we have the case of joint cost: e.g. wool and mutton,
etc. In this case the normal price of the two together will
tend to conform to the aggregate cost of production, and
the relative prices of the joint products will depend on
demand and supply. Suppose that there is a rise in the
demand for wool, so far that raises its price, but the demand
for mutton may be supposed to remain undisturbed.
There will be a rise in the value of the wool and mutton
combined, or there will be exceptional profits in sheep
farming. Accordingly more sheep will be reared until the
total yield gives an ordinary return. With the increase of
supply the price of wool will fall to some extent, but the
price of the mutton will fall still more.
It should be observed that the producers of joint products
can in general exercise some influence on the relative
proportion of supply of the two factors, or at any rate can
influence the quality. Thus with a rise in wool sheep
would be bred with the idea of improving the stock as
regards wool, and conversely of mutton. The general
principles applicable to the aggregate joint cost will vary
with the conditions of production, e.g. increasing or dimin-
ishing return. The case of joint products is of much
wider application than is generally supposed at first sight,
240 ELEMENTS OF POLITICAL ECONOMY
e.g. nearly every manufacture has some product which
was formerly considered as waste, but, owing to improve-
ments in production or changes in demand, acquires
value. ^
Note on Expenses of Production.
In the article on Value by the present author in the Encyclo-
pcedia Britannica (9th ed.), a formula is given which illustrates
the complexity of the expenses of production of ordinary commodi-
ties. In this formula account is taken of the amount of fixed capital
required, the rate of wear and tear, the rate of profit, the amount of
labour, the price in wages of the labour, and the time of production.
No special reference is made to raw material or to the elements of
supplementary cost or to differences in the rates of wages of the
different employees. And yet even as so simplified the formula
seems complex. To compare the relative expenses of two commodi-
ties and thus their cost values, we must take a similar formula for
the second commodity.
Let E^ represent the expense of production (as indicated) of com-
modity A. Qj is the value of the fixed capital, i\ the rate of wear
and tear per annum, Pj is the rate of profit on the whole capital, Q2
the number of labourers, w^ the rate of wages, and t^ the time. Then
for commodity A we have
^- = N4 + ;) + «'•«■■'(' +^0)]'-
and for commodity B,
Changes are constantly taking place in all the elements taken, and
others have been omitted. It thus appears that under modern con-
ditions normal values are liable to frequent changes, if by normal we
mean cost value.
1 Principles, Book III, Chaps. V and VI ; Mill, Principles, Book III,
Chaps. Ill and IV ; Marshall, Principles, Book V.
CHAPTER IV
RENT AND VALUE — MONOPOLY VALUE
1. Economic Rent as a Factor in Price. — It has been
shown in the pure theory of rent that under the condi-
tions laid down rent depends on price and not price on
rent. The marginal cost determines the price and neither
the marginal land nor the marginal dose of capital pays
rent.
Certain exceptions, however, may be noticed to this
rule when the conditions are changed.
Suppose that land can be used for other purposes and
accordingly the land available for agriculture is diminished,
e.g. if large quantities of land are afforested. Other things
being the same, the marginal cost of the agricultural pro-
duce will rise. And the reason of this rise is that the
distribution of land for different purposes is determined
by the rent which it will yield.
Again, if we take the case of any new product the
experimenters must pay the economic rent of the land
that they require, and this rent will be an element in
the cost. This assumes of course that for this product
marginal land that pays no rent is not available, or is not
of good enough quality. Indirectly also, as before, the
price of the agricultural produce would be affected. The
principle applied is that land is limited and the better
qualities are still more limited. Accordingly, once it is
u 241
242 ELEMENTS OF POLITICAL ECONOMY
fully taken up, any appropriation for other purposes must
diminish the supply for agricultural produce; this will
raise the price and it will be profitable to resort to more
intensive cultivation. Thus the exaction of rent for
other purposes raises the price of agricultural produce.
In the intensive form of the theory of rent it is assumed
that the application of capital stops at the last dose that
yields ordinary profits. If the application were to be
carried farther and the total capital employed were still
to obtain ordinary profits, the deficiency on the last dose
could only be made up out of rent. Thus there is a
constant struggle between farmers and landowners as
regards the advantage of certain improvements. If the
farmer is to retain his profit, any loss that occurs, if the
capital expenditure is pushed too far, must fall on rent.
It is analogous to a tax levied on rent. At the same time
the increase of produce due to the improvements will so
far tend to lower the price, which again will lower rent.
It is to the economic interest of the landowner to prevent
this double fall in rent by limiting the intensity of the
cultivation. This limitation, however, so far raises the
price.
The necessity for limitation in order to maintain rent is
still more clearly seen in the case of labour applied to small
holdings. If crofters and squatters are allowed to apply as
much labour as they choose to land, the rent will disappear.
The increase of supply of produce, however, will so far
tend to lower the price ; though it is probable in this
case that the inferior methods of cultivation adopted will
more than neutralise this influence. The case of peasant
properties is similar. If a value were placed on the
RENT AND VALUE — MONOPOLY VALUE 243
labour, the economic rent in many cases would be ab-
sorbed. Thus the displacement of peasant properties
by large estates that are worked to pay a maximum rent
would tend to reduce the amount produced and so far
raise its price. On the other hand the recession of the
margin would diminish the marginal cost so far as
natural conditions are concerned.
Similar reasoning may be applied in the case of building
land. Every landowner is supposed to let the land so as
to give the highest rent ; and it may pay best to keep the
land vacant for a long time, rather than let it at a low
rent for buildings which it would be expensive to
remove when the land might be let on better terms for
other purposes. So far this holding up of land gives the
remainder a scarcity value, which indirectly raises the
cost of houses to the occupiers. Whether this reservation
of land is so much against the public interest as at first
sight appears is another matter. (See Principles, Book V,
Chap. XI.)
If the owners of land make a tacit or open combination
the case reduces to monopoly value. So far as there is no
combination, however, there is no monopoly.
2. Qwas/'-rent. — Quasi-rQxvt is the term used by Pro-
fessor Marshall to describe the "net incomes derived
from appliances of production already made by man "
which in some respects resembles true economic rent.
"When we are considering periods of time too short to
enable the supply of such appliances to respond to a
change in the demand for them, the stock of them has
to be regarded as temporarily fixed. For the time they
hold nearly the same relations to the price of the things
244 ELEMENTS OF POLITICAL ECONOMY
which they take part in producing as is held by land or any
other free gift of nature of which the stock is permanently
fixed, and whose net income is a true rent." The term
appliance of ptroduction is taken in a wide sense and is
extended by analogy to business ability and manual skill.
Suppose that there is a rise in demand for any com-
modity and therefore for the time being a rise in price.
The appliances of production cannot be immediately
increased, and therefore those already in existence will
earn exceptional rates of remuneration. Such excep-
tional rates may fairly be called quasi-rents. If the
rise of price continues in time, the appliances will be
increased, and quasi-rents considered as exceptional
profits or wages will tend to disappear. In the same
way if one firm makes an improvement, the differential
profit may be called a quasi-rent, which will tend to
disappear as the improvement is generally adopted. So
far the conception is simple. A difficulty, however, is
sometimes felt when we come to the case of a fall in
demand and in j)rice. Under these conditions the worst
appliances will no longer be woi'ked or there will be a
recession of tlie margin. Some of the appliances will
just yield the actual expenses of working them, but no
surplus. But the excess of the price got by the goods
made by the better appliances over their wear and tear,
and the actual expenses of working them will be the
net income which tliese appliances yield during the
short period of depression. In this case the quasi-rent
derived from the appliances (that is, the net income
reckoned in the way described) will be less than the
normal profit on the original investment. (Marshall,
RENT AND VALUE — MONOPOLY VALUE 245
Economics of Lidustry, 3rd edition, Appendix D, and
Pri7iciples, Book V, Chap. IX.)
The conception quasi-ient must be taken with Professor
Marshall's conception of normal value. Over a period
long enough for the factors of production to conform
to their cost of production, the price of the product
depends on the costs of the factors, and it is to these
long periods that the term 7iormal is applied. If the
period taken is too short for the supply of the factors
to be readjusted to any change in the demand, the price
of the product determines the income of the factors.
3. Monopoly Value. — The principles of monopoly value
are of special interest at the present time owing to the
extension of trusts, and the application of combinations
to labour and capital. The general principles of monop-
oly can be explained without the aid of mathematics,
and in this place only so much will be attempted.
We may begin with the simplest case of a seller's mo-
nopoly. Suppose (with Cournot) that an individual pos-
sesses a natural well that supplies some unique mineral
water which practically involves no cost in the distri-
bution. The owner must find out the law of demand.
A very high price may be prohibitive, and at a very low
price customers may be turned away, or in any case the
return may be much smaller than if a medium price
were adopted. The owner must try to discover what
price will give him the maximum return. Whether this
will be relatively high or low depends on the nature
of the demand. It may happen that either a low price
or a high price would give practically equal results.
It is clear that a low price would be to the advantage of
246 ELEMENTS OF POLITICAL ECONOMY
the public, and thus so far there is a case for govern-
mental control.
So far it has been assumed that the monopolist charges
the same price (high or low) to all his customers. It is,
however, easy to show that, theoretically, it would be to
the advantage of the owner of the source to charge differ-
ent prices to different consumers according to the sup-
posed intensity of their desires, or simply according to
their ostensible wealth and the supposed marginal utility
of their money.
If in theory we assume perfect monopoly, it may be said
that, just as perfect comj)etition naturally leads to equality
of prices, so monopoly leads to inequality. It is possible
theoretically that it might be equally to the advantage of
the monopolist and of the public that different prices
should be charged to different classes. In general, how-
ever, discriminations of this kind, in the case of monopo-
lies, have given rise to such abuses that they have been
prevented. This suggests a second ground for the gov-
ernmental regulation of monopolies. Thus, in principle,
railways and cabs are not allowed to charge differential
rates. In the modern "trusts" a favourite device is to
charge lower prices abroad, especially if the home market
is protected by a tariff.
In general the monopolist must take into account, not
only the conditions of demand, but those of supply. Here
different cases must be distinguished. If the expenses of
production are independent of the quantity produced, they
merely give a limiting or minimum price. The aggregate
revenue must give at least this much, but the actual price
fixed will, as before, depend on demand.
RENT AND VALUE — MONOPOLY VALUE 247
In most cases, however, the aggregate cost will vary with
the amount produced. Even if the product is subject to the
law of increasing return, and the supply can be increased at
a diminishing cost, still this larger supply can only be sold
at a lower price per unit, whilst the total cost is, of course,
increased. In a case of this kind the calculation of the
price that will give the greatest net revenue is a matter
of great difficulty. It may be said, however, that in gen-
eral the simplicity and the lessened risk of high prices
prove most attractive to the monopolist. Thus it was
only under the stimulus of governmental control that the
railways discovered that the low third-class fares would
give them the best return.
A case of great theoretical interest is that of a change
in the conditions of cost, as by the imposition of a tax.
Suppose that the monopolist has discovered the price that
will give him a maximum net revenue, and that suddenly
a tax is imposed. Tlie question is, can he indemnify him-
self wholly or partially by raising his price. If the cost
is independent of the quantity, and the tax is in the nature
of a license to sell, also independent of the quantity, he
can gain nothing by changing his price. If the tax is
heavy enough, it may stop his production altogether, but
he cannot transfer it to the consumer. In any case he has
to pay the aggregate cost, and if he could gain after the
tax by raising his price, he could have gained before the
tax was imposed — but by hypothesis he has already fixed
the best price.
If, however, the cost varies with the quantity, and the
tax is so much per unit, then by diminishing his supply
he so far diminishes his cost, and at the same time be can
248 ELEMENTS OF POLITICAL ECONOMY
sell the smaller supply at a higher price per unit. His
revenue must, in any case, be reduced, but he may suffer
less by raising his price and diminishing his sales. To
take a simple illustration : Suppose the tax imposed is
just equal to his original price per unit. If he still sells
at the old price, he gets only enough to pay the tax, and
he loses all the expenses of production. But if he raises
the price, say, by the amount of the tax, he will, indeed,
sell so much less ; but on every unit sold he will gain the
same net return as he would have done before on that
amount.
4. Competition and Monopoly Prices Compared. — Under
certain conditions monopoly prices may be more steady
and uniform than competition prices. Under competition
the stronger sellers may strive to undersell the weaker,
and drive them from the market with the view of after-
ward establishing a practical monopoly. Thus there may
be oscillations between low and high prices. Again, it
is not necessary that monopoly prices should be higher
than competition prices. The amalgamation of a number
of small concerns may lead to great economies, so that the
monopoly price, though .fixed above the monopoly cost,
may be still below the old competition price. This is
the great argument used in defence of trusts.
Again, competition sometimes leads sellers to agree to a
fixed price, without restrictions as to quantity. Competi-
tion in this form may be very keen and yet the consumer
gains nothing, as in the case of retail trade with customary
prices at a high level. Here competition may keep prices
higher than would be to the advantage of a great
monopolist.
re:st and value — monopoly value 249
In certain undertakings the public interest is best pro-
moted by granting a monopoly to a company at any rate
for a term of years. Suppose the undertaking is sucli as
to require a large capital, and to involve a great experi-
mental risk, whilst if successful it will at once provoke
competition ; a monopoly in such a case would be no
more than the recognition of a species of copyright or
patent.
5. Conditions Requisite to a Seller's Monopoly. — The
monopolist to succeed must be able to regulate both the
supply and the price. If the price only is regulated, the
excess of supply may eventually destroy the monopoly.
It is not sufficient to control the new supplies only ; e.g.
if old material can be used, as in the case of copper, or
if the supply accumulates, as in the case of inconvertible
notes, the monopoly price cannot be maintained. The
case of the Bank of England during the restriction of cash
payments is a good illustration. The notes were issued at
par value, and the issues were supposed to be adjusted to
the demands of trade, and yet in the end depreciation set
in, or, in other words, the monopoly price could not be
maintained. The new issues were regulated, but the notes
already in circulation were beyond control.
Similarly, the monopolist must be able to prevent the
use of substitutes. One of the great objections to the
grant of patents is that similar discoveries must be sup-
pressed to protect the patent rights.
Finally, the monopolist must be able to adjust quickly
and easily both price and supply to any change in demand.
If with a fall in demand he tries to maintain the old price,
he will no longer obtain the maximum profit possible under
250 ELEMENTS OF POLITICAL ECONOMY
the circumstances, and he may even incur a loss. If he
lowers the price but does not check sufficiently the supply,
in the end his monopoly must break down.
It follows that monopoly is not likely to succeed in
things for which the demand is variable and the supply
not capable of ready adjustment.
In modern times monopolies are in general based not
on government grants, but on voluntary combinations of
individuals. Such combinations are difficult to maintain.
If the price is fixed above the natural competition rate,
there is the danger of external competition, especially if
the commodity enters into foreign trade ; and tliere is also
the danger of internal competition, since any one producer
may, by various devices, really lower his price without
ostensibly infringing the regulations. The law will not
enforce contracts in restraint of trade, and such voluntary
combinations must depend on esprit de corps, etc.
6. Buyer's Monopoly. — In a buyer's monopoly the whole
effective demand is on the part of one individual or a
group acting in concert. Accordingly, to effect sales the
sellers must submit to the buyer's terms; and such a
buyer's monopoly may keep prices below the natural com-
petition rate for a considerable time. Thus there may
be an effective combination of employers as regards the
demand for some kind of labour. The labourer cannot
readily take to other occupations or hold out for a
better bargain, and thus may be forced to accept the
employer's terms. The only effective remedy seems to be
to meet combination by combination.
An effective combination of tenants may keep rents
below the competition rates, in which case part of the
RENT AND VALUE - MONOPOLY VALUE 251
true economic rent is transferred to the tenant. Such a
result is really obtained when there is a low level of cus-
tomary rents. When anything is naturally scarce or is
the subject of a natural or artificial monopoly, the price
may be lowered by an effective buyer's monopoly.
If a commodity is produced by labour and capital under
the ordinary conditions of competition, a buyer's monopoly
can only be successful for a short time, as the labour and
capital will be withdrawn, or at any rate not replaced. In
the same way the buyer's monopoly will fail if the com-
modity attacked can be transferred to other uses or other
places. 1
1 Principles, Vol. II, Chaps. VII-IX. For historical examples of
monopolies, see Principles, Vol. Ill, Book V, Chap. II. The effects of
combinations of labour and capital on wages and profits are discussed
in Principles, Vol. II, Book III, Chap. VIII ; for the relations of rent
and value, see Marshall, Principles, Vol. I, Book V, Chap. VIII-X ; and
for the theory of monopolies, Ibid., Chap. XIII; Hobson, Evolution of
Modern Capitalism.
CHAPTER V
FUNCTIONS AND SYSTEMS OF MONEY
1. What is Money? — The difficulty involved in the
definition of money is best seen by considering the very
different things that have performed, and still perform,
monetary functions of primary importance. Materials of
all kinds have been used. The gold sovereign displaced
the silver pound, which was originally a pound weight of
silver, just as the pound of silver displaced the older stand-
ard of value, namely, the man slave. Similarly, the ox was
probably the origin of the shilling. Besides gold and sil-
ver, all the common metals and a great variety of other
things have been used as material money, e.g. corn, oil,
dried fish, tobacco, etc. In the course of monetary evolu-
tion coins took the place of ingots of merchandise ; bank-
notes were issued to represent coins and were convertible
into coins on demand ; convertible notes suggested incon-
vertible notes that represent nothing but hopes of deferred
payment ; banks created by their credit the bank money
that is circulated by means of cheques ; and the cheque is
itself a development of the bill of exchange which is still
of the first importance in the settlement of international
transactions.
It is practically impossible to give a satisfactory defini-
tion of money that will cover all these varieties of things
that do the recognised work of money. It seems then
252
FUNCTIONS AND SYSTEMS OF MONEY 253
best to adopt (though with a wider significance) the
phrase of tlie late Professor Walker £lnd to say : Money is
that money does. We may then proceed to consider what
money does or the principal monetary functions.
2. The Primary Functions of Money. — It is hardly nec-
essary to illustrate the difficulties of barter. To avoid
these difficulties something must be found, which having
regard to the stage of development of the society, will be
universally accepted. This is the essential characteristic
of money considered as a medium of exchange. At first
the thing must be such that it is highly prized on its own
account, e.g. oxen, slaves, or the precious metals ; but in
the course of time the monetary function becomes of such
importance in itself that things may perform the functions
of a medium of exchange although they have no value for
other than monetary purposes, e.g. bank-notes.
The importance of money as a medium of exchange is
best seen in connection with the development of division
of labour. The substitution of a money economy for a
"natural" economy, or the commutation of payments in
produce or in services into payments in money, marks the
course of progress in every nation.
We pass now to the second primary function of money.
It is plainly impossible to exchange all sorts of things
against any one thing, unless there is also some accepted
standard measure of values. The function of money as a
staridard of value is of coordinate importance with its
function as a medium of exchange, and the two functions
are intimately connected. It is not necessary, however,
that the actual medium should itself be the standard ; it is
sufficient if it is related as multiple or sub-multiple, or in
254 ELEMENTS OF POLITICAL ECONOMY
any definite relation that is capable of exact interpretation.
Thus at present in the United Kingdom the sovereign
is the standard unit of value; and all values are meas-
ured in parts and numbers of sovereigns. The actual pay-
ments, however, are made only to a small extent in gold
coins ; the actual medium of exchange consists of bronze,
silver, and paper ; and of banking transactions only a small
fraction are effected by means of gold or coin of any kind.
The unit of value need not be a coin. The pound of
silver was at first only coined into silver pennies, and for
centuries even the shilling was only a money of account.
It is worth noting that in the mediaeval period money val-
uations were often adopted for the purpose of keeping ac-
counts before the corresponding payments were effected
by means of money: e.g. the villein services were meas-
ured in terms of money before they were actually com-
muted into money payments.
The difference between the measure and the medium
may be illustrated by reference to produce, — say grain
rents. Here the stipulated rent means so much grain,
but the rent may be actually paid in money. In this case
grain is the measure of value, and money is the medium
of exchange.
The standard measure ought to be such that it will
measure values not merely in a particular market at a
certain moment, but it should also serve as a standard for
deferred payments.
This function of money in the course of progress has
become of so great importance that it is often described as
a third primary function.
Experience shows that this requisite of money is diffi-
FUNCTIONS AND SYSTEMS OF MONEY 255
cult to fulfil. In one way it is simple enough to provide
for certainty in the interpretation of contracts. It is suffi-
cient to state that the unit of value is a certain weisrht
of a certain substance of a certain quality, as we have in
the legal definition of the sovereign or pound sterling.
But the real meaning of monetary contracts involves the
idea not of weight but of value. So long as inconvertible
notes remain undepreciated, they serve the purposes of
money equally well with gold. Even when depreciated,
they would also serve equally well to measure values and to
exchange commodities at the same time and place., but if
from place to place or time to time their value changes,
they vitiate so far the real meaning of monetary contracts.
The evils of uncertainty of value in the money in terms of
which contracts are expressed is also well illustrated in
the debasement or depreciation of a metallic currency.
(See the famous description by Macaulay of the disordered
state of trade and especially of wages in the period preced-
ing the recoinage of silver in 1696.)
Stability of value over long periods, or at least over
periods for which monetary contracts are usual, is then
one of the requisites of a good monetary standard.
It is, however, easy to show that perfect stability of
value is unattainable except under the assumption that
everything, including the prices of commodities and ser-
vices, is fixed and stationary. Whatever substance is
chosen as the material basis of the standard, under the
conditions that at present prevail, it must be liable to
fluctuations in value.
But at the same time some things have greater com-
parative stability if we take as the test of stability of
256 ELEMENTS OF POLITICAL ECONOMY
value their general purchasing power, which for monetary
purposes seems the proper test.
Values depend on demand and supply, and causes of
fluctuations in value may arise on either side.
Thus on the side of supply, corn and other forms of
produce consumed within the year are not so stable as the
metals which are relatively durable. Gold in particular is
not only durable, but so precious that it is always taken care
of. Thus the stock of gold in the hands of man is always
very large compared with the annual supply. And so far
its value is likely to be more stable than that of wheat.
Again, consider the influence of demand. Some things
are liable to disturbances in demand through changes in
fashion, the discovery of substitutes, etc. ; but the precious
metals, and especially gold, are always valued for their
own uses as commodities, to say nothing of the monetary
value that they have acquired by long usage. The im-
portance of this last factor in demand is shown very
forcibly by the recent depreciation of silver, which is due
largely to a falling off in the demand for that metal for
monetary purposes.
The value of gold is no doubt subject to fluctuations,
but it is doubtful if on the whole they are so great as to
call for the adoption of another standard on that account.
Recently, however, the so-called appreciation of gold led
many economists and statesmen to advocate the adoption
of the double or joint standard of gold and silver. (See
below. Chap. IX.)
To provide against the evil of fluctuations in value,
what is termed the tabular standard has been proposed.
This is in effect an application of the theory of index
FUNCTIONS AND SYSTEMS OF MONEY 257
numbers, or it may be considered as a development of
grain or produce rents. According to this plan certain
representative commodities are chosen and their average
prices for a certain period are calculated. If this original
level is represented by 100, then according to the rise
or fall in the average of these representative prices at any
time this original index number of 100 is modified by the
necessary percentage. Suppose that prices measured in
this way had risen so that .£106 would now purchase only
what was formerly purchased by £100, then it is said, the
purchasing power or the value of gold has fallen in that
proportion, and that in equity the creditor for a gold loan
ought to receive X6 more per cent on the repayment of
the principal, and similarly of all contracts in terms
of money ; the debtor is supposed to agree to pay not so
much gold simply, but gold of so much purchasing poiver
as measured by this tabular standard. The objection to
this method is that it is unworkable in practice. Even
in the case of produce rents it was found preferable on
both sides to take the speculative risk of a change in the
value of gold.
Sometimes another function of money is explicitly
stated, namely that of a store of value. This, however,
seems to be derivative from money as a medium of ex-
change and as a standard for deferred payments. The
early form of storing money for this purpose was simply
hoarding; in modern times the chief store of material
money is in the form of banker's reserves, which support
a far greater amount of representative money. The
function of money for the transfer of values is also
derivative, and is now largely performed by credit.
268 ELEMENTS OF POLITICAL ECONOMY
3. The Qualities of Good Metallic Money. — It is easy to
show by reference on the one side to the functions of
money, and on the other to the qualities of the various
metals, that silver and gold are preeminently suitable for
money. The money material ought to be prized on its
own account, and it should possess in a high degree the
qualities of portability, durability, homogeneity of parts,
divisibility, and cognisibility (so that its purity is easily
tested). The latter quality is of special importance in the
case of coins. A coin is defined by Jevons as an ingot, of
which the weight and fineness are certified by the integ-
rity of the designs impressed upon the surface of the
metal. It is important that coins should show not only
the original fineness and weight, but the absence of any
subsequent alteration.
In former times false coinage was very general. At
first, as usual, a remedy was sought for in the severity
of the punishment; but here, as elsewhere, it was found
that prevention was a more efficient remedy than retribu-
tion. Accordingly, in the course of progress we find more
and more elaborate devices adopted so as to make imita-
tion difficult. When the coins were hammered, the im-
pression was feeble and the size irregular, and clipping
and sweating were encouraged; the elaborate machinery
of the modern mint cannot be readily made or worked in
secret.
The design on the coins is not only of interest as a his-
torical record and as indicating the extent of the king's
peace, but it prevents counterfeiting and the fraudulent
removal of the metal. The design should also be so con-
trived as to reduce the natural wear and tear to a mini-
FUNCTIONS AND SYSTEMS OF MONEY 259
mum. Under present conditions, when a large quantity
of silver is current in different countries as full legal
tender, although far below half its nominal or metallic
value, the necessity of preventing fraudulent imitation
is of great importance.
Coins have been made of all degrees of weight, and
the only rule that can be laid down is the rule of con-
venience. When the silver penny was the only coin, it
was too valuable for some payments, and too bulky for
others ; to remedy the first evil, leather tokens were is-
sued ; and to avoid the second, gold coins of foreign make
were used.
4. Systems of Metallic Money. — The simplest and the
most ancient system of metallic money is currency by
weight. The French livre and the Italian lira^ like the
English and Scottish pounds, refer originally to the pound
weight of silver. In this system the currency is practi-
cally a form of merchandise. Such a system, when found
at present, is a sign of backwardness in a nation (China).
It may also be resorted to in the case of a depreciation of
the actual coinage, when the depreciation is recognised,
and is not counteracted by restriction of the quantity.
(See below. Chap. VII.) In international payments the
exchanges are based upon the weights of the coins (the fine
metal), and remittances are often made in bars.
In the system of parallel standards, two or more metals
are coined, but no attempt is made to regulate by law
their relative values. This method is so inconvenient as
to be impracticable. When it is actually found, it is in
general the result of a breakdown of a system of bimet-
allism, in which the legal ratio is no longer recognised.
260 ELEMENTS OF POLITICAL ECONOMY
Of this there are several examples in English monetary
history which had important consequences.
In the single legal tender system only one metal is used
(generally silver), as in the old English system. As
already noticed, silver alone is inconvenient.
The inconveniences of the single legal tender are reme-
died by the composite legal tender system. The present
English system is an example of this plan. One metal
(gold) is full legal tender to any extent, whilst silver and
bronze are token money of limited legal tender.
Jevons, from whom these significant terms are derived,
also uses the term multiple legal tender system. On this
plan two or more metals are full legal tender at ratios
fixed by law. The most important case is bimetallism.
(See below, Chap. IX.) To these may be added the
suspended coinage system, which has resulted from the
breakdown of bimetallism in recent times. In France
and other countries silver is still full legal tender, but to
keep up its value it is no longer coined for this purpose.
In India, also, the coinage of silver has been suspended,
as an indirect consequence of the breakdown of bi-
metallism, which dislocated the foreign exchanges and
embarrassed the Indian government. ^
1 This chapter is abbreviated from Principles, Book III, Chaps. XI
and XII ; see also Nicholson, Money and Monetary Problems and
Bankers'' Money; Jevons, Money; Walker, Money.
CHAPTER VI
THE QUANTITY THEORY OP MONEY
1. A Hypothetical Market. — The quantity theory of
money is, perhaps, the best example of the abstract de-
ductive method. We begin with certain hypothetical
conditions, and gradually introduce more and more dis-
turbing forces, until we arrive at the complex relations
of the present commercial world. The object of the
theory is to explain the causes that determine the ex-
change value of money, or the general level of prices,
according to the standard considered.
It is to be observed that, although, as in dealing with
relative values, we begin with a very abstract statement
of conditions, from the outset we are dealing with real
causes. The point is that for the time being we abstract
or take away other causes that are introduced at subse-
quent stages.
Suppose then that a market is set up under the follow-
ing conditions : No exchanges are to be made without
money passing from hand to hand at every transaction,
thus excluding credit and barter. The money is to be
considered as of no utility except for immediate exchanges ;
that is, there is no hoarding or reservation of the money.
This condition implies that all the money is to be put
into circulation, and is made explicit by saying that every
261
262 ELEMENTS OF POLITICAL ECONOMY
piece of money is to be used at least once in the inter-
change of the commodities in the market. It is also
assumed that all the commodities must be exchanged for
money, that all are on sale, and sold for the best price
obtainable. Under these simple and fixed conditions,
the value of the money will vary inversely with its quan-
tity: in other words, the level of prices will depend on
the quantity of money on the one side, and on the com-
modities to be exchanged on the other. Thus, if the
money were increased tenfold (the commodities and the
exchanges remaining the same), prices would rise tenfold;
and similarly of a diminution of the money and a fall
in prices.
Although the rise and fall in general prices is only
exactly proportioned to the increase and decrease of quan-
tity under these or similar hypothetical conditions, the
quantity of the money is always a factor of the first im-
portance. Thus the great rise in prices that took place
in the sixteenth century is explained by the great dis-
coveries of silver. Similarly, the fall in the value of
gold after 1850 was ascribed to the gold discoveries in
Australia and California. The best illustration, as will
be shown later (see Chap. VII) is found in the depre-
ciation of inconvertible notes through excessive issues.
It must be observed, however, even at this early stage
of the exposition of the theory, that the quantity alone
is not sufficient to explain the changes in the value of
gold as is shown by the slight effect of the far greater
discoveries of recent times. Even inconvertible notes,
it will be shown, may be depreciated without excessive
issues, and with excessive issues may escape depreciation.
THE QUANTITY THEORY OF MONEY 263
We must then look for other causes, besides the quantity,
which affect the value of money.
2. Influences modifying that of Quantity. — Suppose,
now, that in effecting a given amount of transactions
each piece of money in this same hypothetical market is
used a number of times instead of once only. It is easy
to see that this must have the same effect on the level
of prices as if the quantity of money were increased in
like proportion. The increase in the number of times
the money is used is described as an increase in the
rapidity of circulation. The phrase is open to objection
(Mill), but it answers well enough if the idea is made
clear ; and this is, perhaps, best accomplished by a simple
example. Suppose, then, that at fu'st there are ten
things, and one hundred pieces of money, and let the
things be of equal value in the eye of the only possessor
of the money. He will then give ten pieces for each
thing; and each piece of money is used once only in
effecting these ten exchanges. If, however, the man
of money only desired one thing, and gave all the money
for that thing, and the receiver passed it on in the same
way in one lump to his neighbour in the market, and so
on through the whole set of things and merchants, each
thing would be sold for one hundred pieces instead of
ten ; and the essential point of difference is that each
piece of money is used ten times instead of once.
This influence also may be illustrated, though not so
sharply, by reference to actual commerce. Thus, if
money circulates rapidly, a less quantity will suffice to
keep up a certain level of prices. Again, with improve-
ments in the means of communication and of transport,
264 ELEMENTS OF POLITICAL ECONOMY
money circulates more rapidly, or, to adopt Mill's phrase,
the efficiency of the money is increased, and so far prices
rise. Other modifying influences are more obvious in
their effects. In all cases, however, it is best to compare
these effects to those of a corresj^onding increase or
diminution in the quantity of the money.
An increase in the volume of the trade is equivalent to
a decrease in the quantity of money or so far prices
fall. Thus, after the great discoveries of silver in the
sixteenth century the rise in prices was partly checked
by the increase in the volume of trade.
Suppose now that some of the exchanges of com-
modities are effected without the intervention of money,
as b}^ direct barter. This is equivalent in its effect to an
increase in the quantity of money. A certain amount
of money is set free to exchange the other things.
Next let us take account of the fact that the money
material (say, gold) has itself great utility apart from its
monetary functions ; which, to begin with, is one of the
requisites of a good medium of exchange. In this case
the use of the gold for these other purposes will so far
diminish the supply available for money, and thus prices
will be so much lower. At present the use of gold in the
arts, and for ornament, plate, etc., is very great, and it
has always been so. Large quantities have been ex-
ported to the East and there hoarded ; and in the West
a large mass of gold is hoarded by the great military
nations of Europe in tlieir war chests. Similarly, a great
part of the reserves of gold held in the European na-
tional banks has j)ractically no monetary influence: to
all intents and purposes it is hoarded.
THE QUANTITY THEORY OF MONEY 265
Tlie use of gold for industrial purposes illustrates
very clearly the distinction between the price of gold
and its value. The price is fixed by law. All that this
means in reality is that a certain amount of gold can
always be made into a certain number of sovereigns.
Thus, at present, the English mint will make out of an
ounce of standard gold (i.e. fine gold with a fixed pro-
portion of alloy) three sovereigns, and the fraction of
a sovereign that corresponds to seventeen shillings and
tenpence halfpenny is left over : in brief, the mint
price of gold is X3 17s. l()\d. But the purchasing power
of this gold is subject to constant variations. Suppose,
then, that owing to very great abundance of gold or any
other cause prices rise very much, then the money in-
comes of people will also rise ; and if the price of gold
were to remain the same, every one would be willing to
spend more on gold ornaments. Thus the gold would,
to this extent, be withdrawn from circulation, and so
far prices would again fall.
3. Cost of Production of Gold in Relation to its Value. —
The quantity of gold can only be increased at any time
under certain conditions at an increasing cost. Thus
gold considered as a metal would appear to have its
value determined by the marginal cost, as in the case of
other commodities produced according to diminishing
return. If, then, we also take for granted that an equal
weight of gold in the form of coins must be of just the same
value as the same weight of gold bullion (which is obvious
if there is no charge for mintage and no restriction on coin-
age) then the value of gold money seems to be determined
by the marginal cost of the production of gold bullion.
I
266 ELEMENTS OF POLITICAL ECONOMY
This reasoning is, however, fallacious. The value of
gold, as so often insisted on, must mean its value com-
pared with other things, and for general purposes we
must take its general purchasing power; that is, the
value of gold varies with the level of general prices. It
is obvious, even at the present stage of the argument,
that the level of prices must depend on a number of
influences besides the marginal cost of gold. Such are,
for example, the volume of trade and the rapidity of
circulation: an increase in trade might more than neu-
tralise an increase of gold due to a fall in the marginal
cost, and an increase in the rapidity of circulation might
raise prices or lower the value of gold in spite of a
falling off in the annual supply, and an increase in the
marginal cost. As will appear later, the influence of
credit on prices in modern conditions is of the greatest
importance ; and it is clear that if money were compelled
to pass from hand to hand (as at first assumed) in every
transaction, to keep up the present level of prices the
sovereign must be reduced to the size of a grain of
sand.
But leaving for the present the influence of credit and
representative money, the fallacy of the argument under
review appears from another consideration. The annual
supply is only a small part of the total supply, and of this
annual supply only a small part is produced at the mar-
ginal cost. Thus at any time, or, say, over a period of ten
years, the marginal cost can have but a small effect on the
quantity of gold money. In any case, however, the value
of gold, as of all other things, must depend on demand as
much as on supply, and the demand for gold is governed
THE QUANTITY THEORY OF MONEY 267
by the work which it has to do in effecting monetary
transactions.
The truth then appears to be that at any time the value
of gold (or the range of prices) is one of the factors which
determine how far the margin of gold-mining will be
pushed. If, owing to a general rise in prices, the price of
labour and of machinery and of all the requisites of gold
production also rise, then so far the margin will recede :
the gold extracted at the old margin will no longer suffice
to make coins enough to pay for the labour, etc., required.
This recession of the margin will, in its turn, so far lessen
the quantity of the annual supply of gold and thus affect
also the amount available for money. In this way the
cost of production of gold at any time or over any short
period has an effect, though relatively slight, on the value
of gold (or the general level of prices measured in gold).
It is, however, worth pointing out that if we consider
very long periods, the cumulative effects of small causes
may be very great. Gold was produced in prehistoric
times, and the actual supply of gold at the present time is
the result of the expenditure of labour and capital in the
past. It is, then, no doubt true to say that had it not been
for the difficulty in production, especially in the past, the
quantity of gold would now be so much greater and the
level of prices so much higher. There is one case in which
cost of production is of special interest ; namely, in consid-
ering the relative values of gold and silver. It is no doubt
true that the recent depreciation of silver relatively to gold
is due much more to changes in demand than in supply.
But when we take into account very long periods so as to
consider the cost of producing the aggregate in the hands
268 ELEMENTS OF POLITICAL ECONOMY
of man, then one reason why silver has always been so
much less valuable than gold is that it has always been
produced at less cost. We have no records of the actual
cost of either metal, and the evidence is rather of a geolog-
ical character; but it is in geology that the effects of
cumulative causes are best seen.^
1 For fuller statement of the quantity theory on the same lines, see
Money and Monetary Problems ; and for the older view (especially as
regards the influence of cost), Mill, Principles, Book III, Chap. VIII and
IX.
CHAPTER VII
GRESHAM'S law — TOKEN COINS — INCONVERTIBLE NOTES
1. Gresham's Law. — The economic tendency now usu-
ally described as Gresham's law in its popular form asserts
that bad money drives good money from circulation, and
conversely good money will not displace bad money. A
preferable mode of statement which calls attention to the
real meaning is : There is an alternative use for good
mone}^ (or its material) for melting or export, and if it is
worth more for other uses, it will not be paid away as coin.
Suppose that a large part of the actual coinage of a
country has fallen below the legal weight, as was the case
with the English silver before the great recoinage of 1696.
Suppose, also, that the light mone)"", or a good deal of it,
still passes by tale, and that people have not yet reverted
to currency by weight. Under these conditions the best
coins will be chosen for export or use in the arts, because
their metallic value is greater, whilst as money (by tale)
they will only have the value of the worst coins that are
accepted. Thus in the course of time the better coins will
disappear, or in other words the aggregate coinage will get
worse and worse. The operation of Gresham's law in tliis
case depends entirely on the fact that the coin has two
values. If all the coin were weighed and passed at the
weight value, the good money would have an extra value
as coin, just as it has as bullion.
269
270 ELEMENTS OF POLITICAL ECONOMY
If, under the conditions at first laid down, the government
were to issue a mass of new full-weight coins without effec-
tively withdrawing the old coins from circulation, these
good coins would disappear, as the law states.
Like all other economic tendencies, this law is liable to
be counteracted. Just recently, in England, for example,
a large part of the gold coinage was below the legal
weight, but the good coins, as they were issued, remained
in circulation. The light coins were accepted as readily
as the Bank of England notes payable on demand in full-
weight coins, or as the full-value coins themselves. The
question arises : How is it that for monetary purposes
bad coins can remain on the same level with good
coins, or that good coins cannot be sold for more bad
coins ?
The first answer is that by gradual and habitual use
people have been accustomed to the inferior coins, and
that the law which enjoins people to refuse coins below
the proper weight is not observed, and probably in most
cases not known. It suffices for most people to know that
they in turn can pass on the coins. If, however, there
were any difficulty in getting rid of the light coins, the
depreciation would be recognised; the good coins would
have a greater value for certain purposes, and would be
withdrawn from circulation. Such a selective process had
begun in England before the recent restoration of the gold
coinage. The Bank of England only accepts gold by weight,
and this bank is the bankers' bank ; that is to say, it holds
the ultimate real reserve of the other banks, and all super-
fluous gold is returned to the Bank of England. Thus
the ordinary banks, in their own interest, would return the
TOKEN COINS 271
light gold to circulation, and send the better coins to the
Bank of England.
Apart from habit, however, there is a much more effec-
tive force that keeps up the value of the light coins. This
is the principle of limitation. With a certain level of
prices, and a certain amount of monetary transactions to be
effected, a certain quantity of money is necessary. Thus,
however small the metallic value of the coins, if they are
limited, they may keep up their nominal value. It is this
principle of limitation that explains most of the cases in
which coins are kept in circulation, although far below the
metallic value of other coins that pass at the same nominal
value. The silver coins, for example, in France and other
countries have not shared in the depreciation of the metal-
silver; their value has been kept up only by the suspen-
sion of the coinafje.
Experience shows that if the mints are open for both
metals, a very slight difference will suffice to make the
worse (or overvalued) coin drive the better (or under-
valued) coin from circulation. (See next chapter.)
2. Token Coins. — The principles examined in the last
section explain the regulations that have been found neces-
sary to keep the token coins of a country on a proper foot-
ing. Token coins are coins the metallic value of which is
avowedly and designedly below the nominal value, e.g
the silver and bronze in England.
It follows at once, from the definition, that it is neces-
sary to limit the right of coinage. If, under existing con-
ditions, any one could take silver to the mint and have it
coined into shillings, etc., there would be a profit of about
175 per cent on every transaction, at the present price of
272 ELEMENTS OF POLITICAL ECONOMY
silver (24c?.). In the seventeenth century, in England,
private tokens were allowed to be issued to any extent,
and there were naturally excessive issues. From 1648 to
1672 there were over twenty thousand different kinds of
tokens. Somewhat earlier London had been flooded with
the token farthings that had been issued by the patentees
to whom the crown had sold the right, and people were
sometimes forced to take as much as twenty shillings' worth.
It may be noted that, apart from the danger of excess, the
issue of private tokens is subject to the great disadvantage
of want of uniformity — as shown by the example quoted
above. This want of uniformity is fatal to efficiency as a
medium of exchange, and many of these tokens did not
circulate beyond a particular street.
To protect the limitation of the coinage of tokens they
are in general limited as legal tender to a certain maxi-
mum, e.g. in England 40s. for silver. This limitation
also has the advantage of securing the convenience of
people — they are not obliged to accept masses of silver.
The recent experience of many countries shows that the
limitation of legal tender is not essential to token money
if the coinage is strictly limited; and as regards the conven-
ience of people, it is found sometimes that there is a defi-
ciency of silver. The aim of the government is not profit,
but to answer the requirements of trade, and the estimates
may be underrated. Recentl}', in some of the manufactur-
ing towns of England there was a dearth of farthings, to
the inconvenience of the poorer classes. The sole object of
token coins is to promote the convenience of people. Were
it not for this, all the coins might be of gold, and the gold
penny would be about the weight of half a grain of wheat.
INCONVERTIBLE NOTES 273
3. Inconvertible Notes. — Inconvertible notes, as the name
implies, are bank-notes, the conversion of which into coin
(e.g. gold) is suspended, or indefinitely postponed. As
they arise, in fact, from the degradation of convertible
notes, it might be thought that the theory of convertible
notes should be treated first. In fact, however, the issues
and the value of inconvertible notes are determined by
quite different principles, and the reason for taking the
theory of inconvertible paper at this stage is that it forms
the best illustration of the quantity theory of money.
The conditions under which these notes are issued con-
form more nearly to the original conditions of our hypo-
thetical market than do the conditions that affect the
actual circulation of gold. The notes have no value except
as money, and as a rule people are reluctant to keep them
for any time through fear of depreciation ; in consequence
they are thrown into circulation. Again, after a certain
point has been reached in their issues, any further issue has
an immediate effect on prices; and if we suppose that the
other modes of exchange (through barter or credit) remain
the same, we can apply the logical method of difference.
In nearly all cases in which inconvertible notes have been
issued they have become depreciated. Such depreciation
may be estimated in reference to the standard which these
notes are supposed to represent (e.g. gold) or in reference
to commodities. We may consider first the depreciation
relatively to gold. As throughout monetary theory, it is
necessary to adopt the abstract deductive method.
Take, then, an isolated country and suppose that to begin
with it has a currency of two million gold sovereigns. Let
the government issue a million of inconvertible notes scat-
274 ELEMENTS OF POLITICAL ECONOMY
tered up and down the country in payment for all kinds
of things, so that the notes are effectively circulated at
once. Then by the quantity theory, other things remain-
ing the same, general prices will rise ; and therefore if all
prices rise, in theory gold also must rise in price, i.e. gold
bullion ; and therefore gold coins will be melted down so
long as there is any difference in price (Gresham's law).
Ultimately general prices will be restored to the former
level, the only difference being that a million of notes has
displaced a million of gold from the circulation.
At this point let another million of notes be issued ; the
same process will take place, and all the gold will event-
ually be driven from circulation. Suppose, next, that
when there is no more gold in circulation another million
of notes is issued, then, as before, all prices rise ; but now,
since there is no gold to displace the mass of the currency,
it remains inflated, and according to the pure quantity
theory all prices will have risen by one-half. Inter alia
the price of gold measured in notes will have risen fifty
per cent ; and this premium on gold, as it is termed, is the
measure of the depreciation of the notes compared with
standard money.
We must now bring in various influences and conditions
that modify the action of the pure theory.
Gold may still remain in circulation, the premium being
recognised or allowed for when payments are made in gold.
In this case it may be shown that the depreciation of the
notes relatively to gold will be somewhat less, and rela-
tively to commodities somewhat greater, than if all the
gold were thrown on the bullion market of the particular
country.
INCONVERTIBLE NOTES 275
The paper may become depreciated before there is any
excess of issues simply because it is discredited. In fact,
this element of possible discredit must always be taken
account of, though not, as some writers have supposed, to
the exclusion of the quantity.
In the modern world no country is in reality isolated,
and the gold may be exported. This is in fact the general
rule ; exports of gold cannot be prevented and will prob-
ably be stimulated, because as prices rise importation into
the country is encouraged, and the adverse balance will be
met in the first place by the export of gold.
Finally, it may happen that in some cases the paper will
not be depreciated in proportion to the excess of issues be-
cause, under the conditions prevailing at the time, more
currency is required. Thus inconvertible notes are often
issued in times of war or rumours of war, and at such
times there is a reluctance to accept the ordinary forms of
credit and the usual representatives of money. Thus there
may be room for a larger quantity of notes. Again, a state
of war always leads to exceptional demands for gold, and
the place of gold in the currency must be taken by the
notes (as in the early stages of the American Civil War).
But whatever modifications take place, the quantity is
always of fundamental importance ; after a certain amount
of notes have been issued, no matter what the credit of the
government or what the notes are supposed to "represent,"
they will be depreciated. The only effective safeguard
against depreciation is limitation of issues. The idea of
representation is only of use in checking depreciation in
so far as it affects the quantity in circulation. Thus, if it
is supposed that at some time the notes will be made con-
276 ELEMENTS OF POLITICAL ECONOMY
vertible, a certain number will be withdrawn from circula-
tion, and so far this contraction of the currency will lower
prices and check the depreciation. Similarly, if the issuers
of the notes make them " represent " anything that is
limited, — though not at once obtainable, — so far the issues
will be checked. In the period of the bank restriction
in England, when the directors issued their notes in re-
sponse to the bona fide demands of trade, for a long time
this " rule of thumb " limitation sufficed to stop deprecia-
tion ; though it failed in the end, as the notes overflowed
the natural channels of circulation.
4. The Evils of Depreciation of Notes. — The evils that
arise from the depreciation of inconvertible notes are
readily seen from a consideration of the functions of
money.
The uncertainty of the extent of the depreciation makes
them such a bad standard for deferred payments that, in
spite of severe penalties, people often insist on making
their contracts in terms of gold ; and it must be remem-
bered that in the modern world most exchanges involve,
directly or indirectly, an element of time. Amongst the
evils that arise from a depreciated standard we may notice:
creditors are defrauded ; trade is rendered uncertain and
speculative — " commerce is dead, and betting has taken
its place ; " the issue of the notes is, in effect, a most un-
just method of taxation, the only justification of which is
its necessity at times of national urgency ; there is a loss
of credit at first national, and then reflected to individuals ;
in extreme cases there is an increase of crime through the
encouragement to forgery (especially when the notes are
of small denominations), and through the evasion of the
THE EVILS OF DEPRECIATION OF NOTES 277
regulations forbidding the use of gold ; and in the last re-
sort even the government cannot get its work done, and
cannot meet its own expenses in the notes. All of these
evils were exemplified to a remarkable degree in the cele-
brated case of the French assignats at the time of the great
Revolution.^
1 Walker, ilTone?/ — Part III on " Inconvertible Notes" is excellent, and
has fall details of important historical cases. See also Pierson, Prin-
ciples, Part II, Chap. I. In my Principles, Vol. II, Book III, Chap. XV,
the difficult question is discussed as to whether the premium on gold is
the exact measure of the depreciation of notes relatively to commodities ;
in the essay on " Causes of Movements in General Prices" in Money and
Monetary Problems, the different effects of depreciation on foreign trade
are considered ; see also Bankers^ Money, Chap. IL
CHAPTER VIII
CREDIT AND GENERAL PRICES
1. Credit and the Quantity Theory of Money. — The
quantity theory was stated, to begin with, under various
conditions, and intei' alia, it was assumed that there were no
credit transactions. When we refer, however, to the con-
ditions of modern industry, we are at once struck by the
fact that, in the most advanced nations, the great mass of
wholesale transactions and a large part of all monetary
dealings are effected by forms of credit, and not by metal-
lic money. The " clearings " of London banks now amount
to nearly ten thousand million pounds per annum, and these
represent only part of the banking transactions of the
United Kingdom. In recent years there has been a great
extension of banking, both as regards the opening of new
branches and the acceptance of small accounts, involving
the substitution of small cheques for metallic money in
more and more transactions. The question then arises:
Is there any connection at present between the amount
of metallic money and the general level of prices? Or,
in other words, must we include, under the quantity of
money, all these forms of representative money and credit
instruments of various kinds which are so much used as
actual media of exchange ?
The answer to these questions involves some of the
most difficult points in monetary theory, many of
278
CREDIT AND GENERAL PRICES 279
which have been the subject of controversy from the
time of John Law (1671-1729), whose ideas on credit
involved France in the greatest speculative mania on
record (1719-1720).
The key to the answer is in the position that metallic
money — we may now say gold — is the necessary foun-
dation of this vast credit superstructure, or, without meta-
phor, that gold imposes real limits on the inflation of
prices through the influence of credit. Omitting other
points of controversy, the object of the present chapter
is to give an explanation of this central truth, which, in
some form or other, is generally accepted. As so often
happens in economic reasoning, it is necessary to antici-
pate to some extent principles that are developed at a
later stage, — in this instance the fundamental principles
of banking.
2. Gold Reserves as a Limit to Credit Prices. — The gold
reserves of a national banking system may be limited and
economised to a wonderful degree, as is shown especially
in the United Kingdom, in which the ultimate gold re-
serve is held by the Bank of England.
But, in spite of all economies, a certain amount of re-
serve is absolutely necessary for two purposes — first, to
meet a -possible foreign drain. Suppose that, with an in-
flation of credit and speculation, there is a general rise in
prices. A stimulus is given to imports, and so far there
is also a check to exports, with the result that eventually
there is an adverse trade balance that must be met by the
export of gold. Tlie pressure on the reserve of the bank-
ing system leads to a check to advances, and thus to a
contraction of credit, and prices fall. As will appear
280 ELEMEN'TS OF POLITICAL ECOXOMT
later, a fc reign drain maj arise from very different
causes; but the cause just noticed is a real cause, as
13 shown in the history of commercial crises.
Though not so striking iu its immediate effects, the
influence of an internal drain is equally real in imposing
limits to a rise of prices through an expansion of credit.
Wholesale transactions, it is true, are for the most part
effected by credit documents, e.g. cheques or bills of ex-
change ; and, as already observed, the cheque system has
been extended to smaller and smaller transactions in re-
cent years. At the same time, however, there is in every
country a great mass of dealings which require either
metallic money or some simple form of legal tender,
such as bank-notes. But — to anticipate once more the
principles of banking — every developed industrial coun-
try has foimd it desirable to place the issues of bank-
notes under stringent limitations. The general effect of
these regulations is that a very large reserve, in propor-
tion to the reserve against other liabilities, is kept against
the issues of notes. Accordingly bank-notes can only
take the place of gold to a very limited extent. Thus
the aggregate amount of legal tender is small, whilst
cash transactions, for which even cheques payable on
demand are not accepted, are a necessary part of the
economic system, e.g. the payment of wages, railway
fares, and purchases on retail trade. If, then, there is
an inflation of prices through an expansion of trade and
speculation, there is a greater demand for legal tender;
wages rise, and more money is spent on railway fares
and the like, and in retail trade. Thus, in the last re-
sort, there is an internal drain on the ultimate banking
CREDIT AXD GENERAL PRICES 281
reserve ; and, as before, advances are checked and prices
faU.
Apart from both of these possible drains, we may see
the reality of the metallic basis in another way. The
price of gold is fixed by law. Accordingly if prices, and
with prices money incomes, can rise indefinitely through
the expansion of credit, whilst the price of gold remains
fixed, there will be a great extension in the demand for
gold watches, plate ornaments, etc., which can only be
met either from the currency or the reserves of the banks.
In a short time all the gold of the country would be used
in this way if money incomes continued to rise : since gold
at its fixed price might become as cheap as silver or copper
which are subject to the general inflation. Such a suppo-
sition is obviously a reductio ad absurdum^ but it shows
very clearly that this draiyi for direct consumption, if it
occurred, would be the most effective of all drains : and it
must occur if there were no real limit imposed by gold upon
the expansion of credit prices, and thus of money incomes.
3. The Limits imposed by Foreign Trade. — The limits
imposed by the possibility of a foreign drain have been
noticed in the last section. The influence of foreign
trade may, however, be treated from a different standpoint.
Relative prices must be adjusted to relative values. (See
above, Chap. I.) This principle applies, not only to any
one country, but to what may be termed a system of coun-
tries connected by commercial relations. After allowing
for 5?//Ts/-permanent and special causes of difference, e.g.
protective duties and cost of transport, the level of prices
in any one country cannot remain above the general level
of the other countries connected with it bv commerce.
282 ELEMENTS OF POLITICAL ECONOMY
The truth of this interconnection or sympathy of prices
is seen at once in the case of any of the great staples of
international trade, e.g. wheat, cotton, etc. After allow-
ing for cost of transport and the like, the prices tend to
equality in all the great markets. But the same thing
is true of all commodities that can be readily bought and
sold and of which the cost of transport is not very great.
Any difference of price stimulates foreign trade — in fact,
this is the proximate cause of all foreign trade.
But this same principle of the adjustment of prices to
values shows that, if any large group of things is subject
to (say) a fall in price, then other things will fall in sym-
pathy. Thus a fall in agricultural products, e.g. wheat,
induces a fall in farmers' profits and rents, and contracts
the demands of the agricultural interests for other things.
Again, a fall in wheat or wool affects directly the various
substitutes, and so on through the whole range of com-
modities there is a sympathetic action, and thus even
things that are incapable of transport, such as lands and
houses, may fall in price through the effects of foreign
trade.
By these and similar reasonings it may be established
that the price level in any one country is a function of
the general level of tlie commercial world.
4. Conclusion of the Quantity Theory of Money. — We
now reach a very general conclusion as regards the quan-
tity theory of money and general prices, viz., a relative
scarcity of gold, in a system of gold-using countries com-
mercially connected, that is to say a short supply relative
to the work to be done by the gold, must make itself felt
in some part of these countries. Broadly, there are two
CREDIT AXD GENERAL PRICES 283
principal methods. The scarcity may affect the ultimate
banking reserves at the centres of commerce, in which case
it will contract credit transactions ; or it may affect
directly the circulating medium in the countries in which
credit is little developed, e.g. new countries that produce
raw material. But in either case there will be an inter-
action of prices, and the fall that begins in one country
will affect other countries, or must be counteracted in the
country concerned. If the fall were due to the contraction
of currency in the undeveloped countries, there might be
an apparent glut of money at the banking centres, due to
the sympathetic fall in prices and consequent depression
of trade. Such appears to have been the course of events, to
some extent at least, in the general fall in prices that
occurred after 1875. There may be a temporary and local
scarcity or glut of gold, but, on the whole, the value of
gold must he so adjusted that the demand and supply are
equated., or there is just enough to support the general
level of prices.^
1 On the influence of gold reserves see Bagehot, Lombard Street ; for
the development of the argument on the interaction of price levels see
Money and Monetary Problems, Chaps. VI-VIII, and the essay on
"Causes of Movements in General Prices," ibid., p. 342 (4th ed.). The
argument on the interaction of gold and silver prices (here omitted as
too controversial) is treated in the same essay, and in Frinciples, Book
III, Chap. XVII.
CHAPTER IX
BIMETALLISM
1. Meaning of Bimetallism. — Bimetallism, as usually
understood, imj)lies that gold and silver are both legal
tender to an}^ extent at the option of the debtor, and that
both are coined to an unlimited extent under the same
conditions. Free coinage does not imply that there is no
seigniorage (or charge for mintage), but simply that there
is no limitation of the quantity coined of either metal.
By way of contrast, it may be noticed that the silver coins
of England are limited in both respects. In some coun-
tries at present both metals are full legal tender, but only
gold is coined freely. This system is called the limping
standard (^etalon hoiteux). Bimetallism also implies that
government fixes the legal ratio of exchange of the gold
and silver coins (fixed ratio bimetallism is thus different
from parallel standards). Other forms of bimetallism
are sometimes proposed, e.g. that notes should be issued
against an amalgam (so to speak) of gold and silver ; that
is, the notes would represent so much gold and silver, —
literally, a joint standard.
2. Instability of Bimetallism in One Country. — It is
easy to show by theory and to confirm by experience the
instability of bimetallism if adopted by one country only.
The relative values of gold and silver in the commercial
world will be determined by a variety of causes affecting the
284
BIMETALLISM 285
demand and the supply. Suppose, then, that in the bullion
market the commercial ratio of exchange of the two metals
becomes different from the legal ratio, so that, for example,
a parcel of gold coins would obtain in the bullion market
more silver than is contained in the same nominal value
of silver coins. Any one with gold coins could melt them
down, sell them for silver bullion, get this silver coined at
the open mints, and make a profit. No one would meet
monetary obligations in gold at the legal ratio, and either
gold would be driven from circulation (Gresham's law) or
there would arise a premium on gold ; which means that
the ratio has broken down and that bimetallism has
degenerated into a system of parallel standards. It is
found on the appeal to history that a very slight difference
between the legal and the market ratio, if the mints are
open to both metals, is sufficient to drive the undervalued
metal from circulation or to put it to a premium. Thus
the overvaluation of gold to a very small degree (about
one and a half per cent) by Sir Isaac Newton, when
Master of the Mint in 1717, eventually led to the single
gold standard, the silver being displaced. Accordingly,
it is said that as regards any single country bimetallism
really means an alternating standard, the effective standard
being always that which is cheaper in commerce or over-
valued as coin.
3. International Bimetallism. — It is maintained, how-
ever, that although any one country might not be able to
maintain a bimetallic system, a combination of all the
great commercial countries might do so — that is, keep
both metals in circulation at a fixed ratio. The condi-
tions implied in international bimetallism are the same
286 ELEMENTS OF POLITICAL ECONOMY
as before, in the case of one country, in respect of open
mints and full legal tender at a fixed ratio ; and the only
difference of importance is that every nation concerned
keeps its own system of coivis : all that is requisite is that
one coin at least of each metal should be of full value
according to the ratio ; the smaller silver coins might still
be token coins. Thus international bimetallism is quite
different from international coinage. The latter system
involves difficulties (e.g. as in the Latin Union) as regards
the wear and tear of the coins and the profits on token
coins, that would not be found on the system proposed.
The question now to be answered is: why should a
number of nations succeed where one must fail? And
the answer is that over a wide area there is a compensa-
tory action of the double standard. The argument is best
presented by the aid of a numerical illustration. Assume,
then, for the sake of definiteness, that, instead of the
closure of the principal mints to the free coinage of silver,
after the adoption of the gold standard by Germany in
1873, all the great commercial countries had adopted a
system of international bimetallism on the lines laid down
above, at the ratio which for seventy years had been re-
garded as normal, namely, 15^ to 1. Could this ratio have
been maintained ?
The objection we have to meet is that silver would have
fallen in value relatively to gold, and that gold would
have been driven from circulation. Let it be assumed
that at the time the amount of gold and silver in use for
monetary purposes was in each case ^500,000,000, and
that whilst the production of gold remained at about
£20,000,000, that of silver rose to X60,000,000 per annum.
BIMETALLISM 287
Suppose that the use of gold for other purposes absorbed
£15,000,000, thus leaving only £5,000,000 of the new
gold for monetary purposes, whilst of the new silver
£40,000,000 was available for money.
Under these conditions let the market price of silver, if
possible, fall below that which accords with the legal
ratio. Then, gold as bullion will obtain more silver than
the corresponding amount of silver coins at the legal
ratio ; and naturally no gold will be used at the nominal
value for coins, and no new gold will be minted. The
melting of gold coins and the cessation of gold coinage
will go on so long as any divergence exists between the
market and the legal ratios.
According to the figures taken all the gold would be
driven from circulation in about fourteen years, that is,
supposing all the available silver is devoted to the pur-
pose. So far, then, it seems as if the ratio could not have
been maintained.
But a point of vital consideration remains : What is to
become of all this gold as it is displaced? According to
the figures taken, about fifteen millions of new gold was
used for industrial purposes, export to the East, etc.
But if to this annual supply there is added annually some
thirty-five millions of gold displaced from the currency
by silver, this enormous increase in gold must lower its rela-
tive value as a commodity ; and the fall in the relative
value of gold will involve in the end a return to the legal
ratio.
This reasoning is confirmed if we now look at silver.
Under these same conditions there is an exceptional
demand for silver to displace the gold, and thus silver
288 ELEMENTS OF POLITICAL ECONOMY
tends to rise in value. The conclusion, then, is that if
there is any divergence from the legal ratio (say, a depre-
ciation of silver), the increase in the supply of gold dis-
placed from the coinage, and the increase in the demand
for silver^ to take the place of the gold in the coinage,
must very soon restore the ratio. This, as indicated, is
called the compensatory action of the double stayidard.
4. Difficulties of International Bimetallism. — The argu-
ment of the preceding section is generally admitted to be
sound, even by those who object to the proposed system
on other grounds. The principal practical objections to
the system may be considered from the point of view of
the United Kingdom, to whose opposition the failure
of the proposed convention was mainly due.
It was said that the change proposed was "tremen-
dous." To this objection it was replied that in effect the
system was only a reversion to that which was practically,
though only tacitly, in existence before 1873. A suffi-
cient number of countries up to that time had adopted
bimetallism to insure the maintenance of the ratio of
15| to 1 with variations within very narrow limits for
seventy years. Even the Bank of England was allowed
by the Act of 1844 to keep part of the reserve against
notes in silver, and gold and silver were always linked
together in monetary arguments as the "precious metals."
The stability of the ratio survived through tremendous
wars and political revolutions. It survived also through
great changes in the relative proportions in the produc-
tion of the two metals, e.g. after 1850 it was feared that
gold would be depreciated, but the fall in its value rela-
tively to silver was very slight.
BIMETALLISM 289
Next it was objected that the commercial supremacy
of this country was Largely due to its gold standard, and
this no doubt was one of the reasons which induced
Germany to adopt the gold standard. It was replied, how-
ever, that the commercial supremacy was due to indus-
trial causes, and that no one mentioned the gold standard,
even as a contributory cause, before 1873, the year of the
dislocation of the metals.
It was objected, also, that England was a creditor
country, and that the interest on its loans to foreign
states was due in gold, and by the proposed convention
could be paid in depreciated silver. The answer was that
so long as the ratio was maintained there could be no
depreciation, and that the interest would be paid as before,
not actually in metal, but in an excess of imports.
Finally, it was objected that there would be a tacit
refusal on the part of banks and financial houses, in the
light of the actual depreciation of silver since 1873, to
accept it as the equivalent of gold.
And this was the objection wliich really proved fatal
to the scheme. It was generally admitted that the sys-
tem could not be even started unless with the bona fide
and cordial approval of the banking interest; and the
banking interest of the United Kingdom as a whole,
though there were notable individual exceptions, was
extremely hostile to the scheme. It was felt that in the
face of such hostility even the fear of the depreciation of
silver might suffice to give a premium to gold, and that
the two metals would be only used with an allowance
for this premium, or otherwise that silver would be
effectively boycotted. And it must be admitted that the
290 ELEMENTS OF POLITICAL ECOXO.AIY
essence of the compensatory action lies in the possibility
of using both metals without hindrance for monetary pur-
poses at the fixed ratio.
5. The Advantages claimed for International Bimetallism.
— The first advantage claimed for the system, if it could
have been introduced and effectively maintained, was that
it would counteract the tendency to the appreciation of
gold through lessened production. This argument has
lost its force through the enormous increase in recent
years of the gold supplies. If the former rate of produc-
tion only had been maintained, the adoption of the gold
standard by so many countries would no doubt have
caused serious difficulties through the "scramble for
gold" (Goschen).
Next, it was maintained that, if both metals were in full
use at the legal ratio for all kinds of payments, the great
banks of the world could keep up and manage their re-
serves much more easily, and the rates for money would
be lower and more uniform. And in support of this view
it may be said that at present gold is hoarded in Europe
in useless masses, whilst in India there is often great
monetary stringency which cannot be relieved under the
present system.
In the same way it was argued that bimetallism would
facilitate the operations of the foreign exchanges and
render the fluctuations much less severe. This argument
is also quite valid and generally admitted. And it may
be added that, so long as about half the commercial world
has a silver standard and the other half gold, any depre-
ciation of one metal, say silver, must have serious effects
on the levels of general prices, and thus cause a real dis-
BIMETALLISM 291
turbance of contracts and introduce a new element of
uncertainty into commercial transactions.
All these advantages claimed for bimetallism were both
real and considerable, but their force has recently been
diminished by important changes in the monetary situa-
tion. Such are the enormous increase in the supplies of
gold, and the effective adoption of the gold standard
throughout the commercial world. Under these conditions,
to revert to the ratio of 15 1 to 1, in the face of a market
ratio of 30 or 40 to 1, would not only be impossible prac-
tically, but would lead to such monetary disturbances as
would more than neutralise any possible advantages ;
and there is always the difficulty of agreement as to any
ratio, a difficulty which was never really surmounted even
in argument.
1 Principles, Vol. II, Book III, Chap. XVIII, and Vol. Ill, Book IV,
Chap. II; Walker, International Bimetallism; L.Daxwin, Bimetallism ;
Nicholson, Money and Monetary Prohlems. The Eeport of the Gold and
Silver Commission (1888) gives a valuable summary of the principal ai-gu-
ments for and against, and a r^sum^ of the chief facts of historical im-
portance. The annual reports of the United States Treasury give the
latest and most reliable statistics on the production of gold and silver,
the world's coinage, etc.
CHAPTER X
BANKS OF ISSUE
1. Development of Banking. — The best way to make
clear the meaning and real importance of the principles and
methods of banking is by the application of the historical
method. We then see that what we consider natural and
obvious was only attained by a long series of experiments,
often punctuated by disastrous failures. Under modern
conditions it is only in times of panic and crisis that the
axioms of banking seem the dangerous paradoxes that they
often actually were in the infancy of credit (cf. John
Law's Bank, 1720).
The functions of banks may be divided into two main
groups : the object of the first is to supplement, or it may
be displace wholly or in part, the metallic currency by
the creation of " representative money " ; that of the second
is to borrow and to lend money — a large part of which
is also "representative money."
These two functions may be illustrated by reference to
the Bank of England. By the Bank Charter Act of 1844
that bank is divided into two departments which are quite
distinct. The issue department is under definite legal
rules — in fact, the issue of notes may be said in ordinary
times to be automatic. The banking department, on the
other hand, is guided by the judgement of the direc-
tors as in the case of any other joint stock company.
202
BANKS OF ISSUE 293
The Bank of England is only a state bank in the sense
that it is the bank with which the government keeps
its accounts. The issue department, however, may-
be considered as in effect a government office, like the
mint.
2. Origin and Uses of Bank-notes. — Bank-notes are a
form of "• representative money " (Jevons), and their uses
may be connected both historically and theoretically with
the functions of money. One of the earliest uses was to
provide a better and more convenient medium of exchange
than the actual metallic currency. Coins became clipi)ed
and worn and of uncertain value, but bank-notes always
" represented " a certain definite quantity of the precious
metals. This origin and use of notes is well illustrated
in the case of the Bank of Amsterdam. (See Wealth of
Nations, Book IV, Chap. Ill, Part I.) This bank was
founded in 1G09. At that time Holland was the greatest
trading nation, and the great towns of Holland, especially
Amsterdam, were full of the moneys of all countries in
all states of deterioration. Accordingly, there was great
uncertainty in the negotiation of foreign bills. The
technical details present some difficulty, but in effect it
was enacted, when the bank was founded, that all foreign
bills of exchange above a certain sum were to be met, not
in common currency, but in an order on this new state
bank. The primary object of this bank was to take any
money offered to it, to recoin it, and for the full metallic
value to allow credit in its books. Accordingly, every mer-
chant with foreign dealings must either have a sufficient
amount of this bank money, or else he must buy it from
some one who had a credit at the bank, and at first, as
294 ELEMENTS OF POLITICAL ECONOMY
Adam Smith says, for every guilder of this bank money
there was actually a guilder in the bank. Naturally then,
the bank money came to bear an agio, or premium, that is,
it was worth a little more than its nominal value ; it was
secure, and did not require testing like the ordinary im-
perfect currency; and it could be obtained immediately,
i.e. the merchant would not have to wait for his coin to be
converted into bank money if he could buy a credit.
The consequence was that all the money taken to the
bank remained there because the owner or receiver of
a credit could always sell it for a little more than it was
nominally worth. These circulating credits were in
effect bank-notes ; and they were not only a better medium
of exchange, but also a better standard of value, than
the metallic currency.
Early forms of bank-notes were also found useful for
the remittance of values, and as soon as their credit was
well established they were recognised as a much more
convenient form of currency for this purpose than actual
coins. This is well shown in the history of Scottish
banking ; mainly on this account the one-pound note in
early times bore a slight premium in remote parts of the
country. At present the rouble notes of Russia are said
to be sometimes worth a little more than the silver that
they represent.
In this connection it may be observed that the pro-
portion of notes to gold in the circulation, if gold is the
standard currency, and the notes are strictly convertible,
is determined solely hy the convenience of people. Thus
in Scotland the one-pound note is generally preferred to
sovereigns, and a few years ago, when the notes were
BANKS OF ISSUE 295
seldom renewed, the more ragged and dirty they were,
the more readily were they accepted, apparently in this
case because the possible danger of forgery was less.
Bank-notes have, however, another use and another
origin. Merchants and private people found it danger-
ous to keep on hand large stores of metallic money.
They were glad to store their superfluous money in a
place of safety. In London at one time the mint was
used for this purpose ; but in 1640 Charles I " borrowed "
the money, and although it was soon restored, the shock
to credit made the merchants seek another kind of store.
The goldsmiths about this time began to receive money
on deposit, and for this money to give receipts. These
receipts may be considered as early forms of bank-notes.
At first they probably actually kept the money, as in the
case of the Bank of Amsterdam, but in time they found
that they could lend a good deal of it and yet meet all
possible demands. Thus they came to lend the deposits
on interest, and in order to increase their loanable funds
they sometimes gave interests on their deposits, in which
case the receipts, or notes, bore interest. The first run on
these earl)^ bankers was in 1667, when the Dutch sailed up
the Thames, and the next in 1672 ; when Charles II shut
up the Exchequer and would not pay the interest on his
loans from the goldsmiths, or restore the principal. This
repudiation caused such distress that after a time interest
was again paid, and eventually the principal, of over
£1,250,000, was recognised as the origin of the na-
tional debt.
The Bank of England was founded in 1694 on the
analogy of the finance banks of Italy, and especially
296 ELEMENTS OF POLITICAL ECONOMY
Genoa. The primary object was to advance the capital
of the shareholders to the government and to receive
interest in return. The issue of notes, was so to speak,
accidental (not essential to the working as in the early
Scottish banks) ; the notes bore interest, were payable
to order^ not to hearer^ and at first were not issued of
any denomination below <£ 20. They were thus not fitted
to form a part of the actual currency like the one-pound
notes in Scotland.
We may now consider the principles that should govern
the issues of bank-notes in commercial countries under
modern conditions, in which their principal function is
to form a convenient part of the currenc}^ though occa-
sionally, as will appear later, they are of importance in
deposit banking.
3, The Limitation of the Issues of Notes. — In consider-
ing the functions of bank-notes as currency under modern
conditions, the first question that arises is whether freedom
of issues should be allowed. In any case the notes would be,
of course, under certain legal rules, just as are cheques. But
the question is whether the banks should be left practically
as free, as regards the issues of notes, as they are in the
management of their dej^osits and advances. Or con-
versely, ought the government to undertake the control
and management, either directly, or by imposing strin-
gent regulations on the banks to which the function is
delegated ?
There are several reasons in support of governmental
control. It is the recognised duty of the government to
take charge of the currency according to the old saying, the
jus monetandi is in the bones of kings. At one time, as
BANKS OF ISSUE 297
already pointed out, private tokens caused great incon-
venience, and in a sense bank-notes may be regarded
as token money. Again, the issue of the notes can be
made a matter of pure routine, as at present in the
case of the Bank of England. The state can secure the
greatest uniformity and thus give the notes a wider
circulation than if they are left to private enterprise.
At present in England the notes of country banks that
still by the Act of 1844 retain the right of issue have a
limited circulation. The state can offer the greatest
security for convertibility, both immediate and ultimate.
The immediate security for convertibility is greater,
because the state can hold a larger reserve ; it need not
look for a profit on the issues ; it need not even look
to cover the necessary expenses; the issue of notes may
be regarded as a public function just as much as the
provision of the metallic currency in which the expenses
of management are borne by the government. In any
case the issues of notes partake of the nature of a monop-
oly, and in general would yield a profit, and it is claimed
that this profit ought to accrue to the nation at large.
Finally, it may be said that the control of the notes does
not under modern conditions check the development of
banking in the other functions. In the early stages of
banking the right to issue notes had important effects
on the development of banking in general. (Contrast
the history of banking in Scotland and in France. In the
former case the right of issue led to the extension of
the branch system, which was checked in the latter case
by tlie monopoly of the Bank of France.) Under present
conditions the right of issue is of relatively small impor-
298 ELEMENTS OF POLITICAL ECONOMY
tance for deposit banking ; the great English joint-stock
banks have no right of issue, and several of the coun-
try banks have surrendered their right.
The general conclusion, then, is that the state under
modern conditions should control or strictly regulate the
note issues.
4. The Denomination of Notes. — The next question is :
should any limit be placed on the denomination of the
notes in respect of value — that is, of course, a lower
limit? In England, at present, no notes are issued below
<£5, whilst in Scotland the lower limit is £1 (thanks
to Sir Walter Scott in the guise of Malachi Mala-
growther). A few years ago proposals were made to
issue notes in England for 10s. to replace the half-
sovereign, which by wear and tear is an expensive coin.
In some countries inconvertible notes have been issued
of very low denominations, e.g. dd. or 4c?., these notes
occasionally being torn into halves and quarters for
small change (like the old silver pennies). Inconvertible
notes are of course on a different footing from convertible
notes, but on the matter of the limit of value a reference
to their usage is relevant.
As already observed, if the notes are really convertible,
the proportion of notes to coin in the circulation depends
simply on the convenience of people ; and if it can be
shown by experience or in any other way that people
would prefer notes to (say) silver coins, why should
they not be allowed the option?
The objections to the issue of very small notes: the
liability to forgery — tliey are not so often returned to
the banks, and people are naturally more careless. On
BANKS OF ISSUE 299
this point the evidence of the inconvertible notes is
important, and it is well known that in this case the
small notes are liable to forgery to a greater extent.
The expense of these small notes is relatively great if
they are convertible. They are also likely to be held
mainly by the poorer classes, and in case of a panic the
danger would be greater and the suffering more severe.
All these objections, though of historical interest, are of
minor importance to one that still remains to be noticed.
It is said that if notes are allowed to be issued of low
denominations, there would be greater danger of overissue.
This objection leads to the more general question, which
is also of importance as regards the limitation of the
issues generally; namely. If notes are legally convert-
ible on demand is overissue possible? The answer to
this question brings out the opposition between the
two great principles that have been discussed so much
as regards the issues of notes, namely, the Currency and
the Banking principles.
The advocates of the banking principle maintain that
notes should be regarded simply as a form of bankers'
credit, and should be placed under no special regulations.
The supporters of the currency principle, on the other hand,
maintain that the notes are not merely forms of credit,
but money or currency in a special sense, and therefore
require special regulations. Some of the points raised
in this controversy have been discussed in a former
section, but the principal problem of historical interest,
and still of practical importance, is as regards this possi-
hility of overissue.
Overissue is plainly a relative term, and we have to
300 ELEMENTS OF POLITICAL ECONOMY
determine the proper correlative. In the first place, it
may mean overissue compared with the reserve ; the
contention is that, if the notes are not strictly limited, an
insufficient reserve will be kept. So far as the ultiynate
redemption is concerned, there is not much to fear even
if the issues are left to the discretion of bankers, and it
might easily be provided for, e.g. by compelling the banks
to hold government securities against their issues or some
other form of documentary reserve.
But in the case of bank-notes such ultimate convertibility
is not enough. Notes considered as part of the currency
ought under any circumstances to be instantly convertible.
In times of crisis and panic what is required is a certain
amount of gold itself, and that immediately ; suspended con-
vertibility is for the time the same thing as inconvertibility
and may lead to depreciation. The history of banking
shows that there is force in this objection. Unless the
issues of notes are limited, the reserve may be insufficient
for iminediate redemption ; the amount of gold may be
insufficient or the " documents " may be unsaleable.
In England the Bank Act of 1844 has secured the
absolute convertibility of the notes. When the act was
passed only £14,000,000 could be issued against securities,
and for some years before 1844, the average circulation
had rarely fallen below j£ 16,000,000. For every note
beyond the legal limit of £14,000,000, the Bank was
obliged to hold gold. The limit of issues against securi-
ties has been gradually raised by the lapsed issues
of other banks, and now stands at £18,750,000 ; and as
there is a total issue of about £52,000,000 tliere is gold in
the issue department to the extent of about £33,000,000.
BANKS OF ISSUE 301
There is thus no question tliat so long as the act remains
in force gold will always be obtainable for notes. (Whether
this gold would be only available against the notes in the
case of insolvency is a legal question that fortunately is
of purely theoretical interest.) It is often said that the
amount of gold held by the Bank is uselessly large. It
may be replied, however, that the saving of interest on
some X 30,000,000 is of small national importance com-
pared with the absolute convertibility of the notes. And
furthermore, this gold can be considered as an ultimate
reserve available for banking purposes in case of need
(as when the Bank Act is suspended by the govern-
ment).
But by those who designed this act, it was intended
not simply or mainly to secure the convertibility of the
notes, which had never been called in question since the
resumption of specie payments, but to prevent overissue
in another sense. It was maintained that, if the issues of
notes were not limited, they might be issued to such an
extent as to cause an inflation of prices and eventually a
commercial crisis.
This argument rested on the assumption that bank-
notes were currency in a different way from other forms
of bankers' credit ; that overissues of notes, even if con-
vertible, increased the quantity of money in circulation,
and thus by the quantity theory raised prices. The idea
that bank-notes raise prices more than any other forms of
credit because they are " money " is undoubtedly fallacious,
and the act failed to prevent crises in the way intended.
Still, there is a germ of truth in the doctrine. As already
seen, a certain amount of legal tender in the form of coin
302 ELEMENTS OF POLITICAL ECONOMY
or notes is required to effect certain transactions, and this
requirement imposes one real limit to the expansion of
prices by an inflation of credit ; or, in other words, it pre-
vents the inflation due to other causes and effected by
other forms of credit from attaining the height that
otherwise would be possible. It brings the crisis sooner to
a head and thus mitigates its intensity. Even before 1844
it was found that any excess of issues of notes took place
after a crisis, that is, to fill up the place of other forms of
credit. And under present conditions the chief objection
made to the Act of 1844 is that it prevents the Bank
of England giving relief in times of pressure when legal
tender is required in greater quantities. This point will
call for special notice in the chapter on deposit banks.
In conclusion it may be said that the experience of all
nations has shown that it is desirable to impose limits on
the issues of notes, and that the banking principle is not
a sufficient guarantee.
In a valuable chapter of Jevons's Money (Chap. XVIII)
a reasoned summary is given of the different methods that
have been adopted by different countries as regards the
issues of notes. The Imperial Bank of Germany has
followed the principle of the Bank of England, with the
exception of adopting an elastic limit for issues in case of
need, instead of making the government of the day respon-
sible for the suspension of the act.
At present the banking system of the United States is
in a condition that is generally considered unsatisfactory
as regards the issues of notes : one of the difficulties is
connected with method of a documentaiy reserve ; another
arises from the want of uniformity.
BANKS OF ISSUE 303
On the whole there seems to be little doubt that it is
best to make notes conform automatically, after a certain
point is reached, to the limits of expansion that would be
imposed by gold itself under ordinary conditions.^
1 Bagehot, Lombard Street ; Jevons, Money ; Walker, Money ;
Nicholson, Money and Monetary Problems, and Bankers'' Money ;
Clare, Money Market Primer ; Dunbar, Theory and History of Bank-
ing ; Graham, One Pound Note in Scotland ; Gilbart, History of Bank-
ing ; article " Banks " in Palgrave's Dictionary.
CHAPTER XI
BANKS OF DEPOSIT AND CO]MMERCIAL CRISES
1. Progress of Deposit Banking. — Historically the issue
of notes often precedes the institution of banks of deposit
and discount, the function of which is to receive and to lend
money. The principal theoretical difficulty of deposit
banking is as to the interpretation of the term money and
the limitations on the creation of bank money. " The
money market of the United Kingdom is an institution of
great importance and some complexity. It has gradually
grown to enormous proportions, and now embraces a fund
almost equal in amount to the sum of the national debt.
This fund is lield by the banks, is practically at call, and is
repayable hi gold ; and yet ninety-five per cent of it is en-
gaged in promoting the industries and the material interests
of the country and the world, and only five per cent is
actually held in coin." This sentence, from a paper by the
late eminent banker and economist. Dr. Gairdner, presents
in a striking form the magnitude of representative money
under modern conditions ; and it must be remembered that
in ordinary times gold coin plays a small part in effecting
the actual exchanges of commerce. We seem to have real-
ised the dictum of Sir James Steuart — the predecessor of
Adam Smith — that almost any form of wealth can be
melted down into bank money.
To understand the progress of deposit banking we have
simply to extend the ideas already applied in the case of
304
BANKS OF DEPOSIT AXD COMMERCIAL CRISES 305
notes, issued against gold (or silver), to other forms of
representative money, issued, so to speak, against other
forms of wealth. The early banker, who at first kept all his
deposits, soon found that he could safely issue notes with-
out an actual reserve to the full extent of his obligations.
It was but a step farther when he granted credit to be
drawn against by means of cheques, without the interven-
tion of notes, and only kept enough currency to meet any
probable demand.
The progress of deposit banking has consisted, on one
side, in making the proportion of metal that must be held
smaller and smaller ; and on the other side, in the exten-
sion of the field of operations to all the branches of trade and
production, and more generally to all finance operations.
The actual history of banking shows that the principles
that should govern the amount of reserve, and the kinds
of securities on which advances should be made, were only
made clear by a series of costly experiments; and the best
explanation of the theory of banking in this form is its
history.
Here it must suffice to indicate the limits that are
imposed on the creation of " bank money " in the shape of
credit other than notes.
2. Limits to the Creation of Bank Money. — It might
seem at first sight, considering the enormous proportion of
the forms of credit to the actual coin in the banking
system, that this credit is capable of indefinite extension.
It is easy to show, however, that there are very real limits.
Every one who obtains credit from a bank, to draw against
by cheques, must give some kind of security, which means
that credit rests upon real foundations.
806 ELEMENTS OF POLITICAL ECONOMY
Next the bank charges interest on advances of all kinds ;
which means that those who make the demand must be
willing to pay the interest ; that is to say, they must be able
to employ the money obtained at a profit or to meet the
interest as it arises from other funds.
Lastly, when a bank gives an extension of credit to a
customer, it must be prepared to meet his cheques in any
form the receivers require ; it may be in the form of coin to
pay wages or in the form of gold for remittance abroad.
Thus the advances of a bank, and of all the banks of a
country together, must be limited by the available reserves.
Eventually the same principle is involved as in the case of
note issues. Just as deferred convertibility or ultimate
solvency is not sufficient for notes, neither is it for cheques.
In many of the most striking failures on record the
banks have been able ultimately to meet all their liabilities,
but at the time their funds have been locked up and not
available.
3. The Management of Banking Reserves. — The prin-
ciples that should govern banks in the management of
their banking reserves have been admirably brought out by
Bagehot (Lombard Street, Chaps. XII, XIII) with special
reference to the Bank of England. Every banker must
consider the amount of his liabilities ; the time when they
become due, whether on demand or after notice ; the
iyitensity, or (perhaps it would be better to say) the con-
centration or similarity of the demands, that is, whether the
creditors are likely to be influenced by the same or by
counteracting causes as regards withdrawals and deposits.
He must consider how far the demands are calculable ; and
finally, he must estimate what kind of reserve will be
BANKS OF DEPOSIT AND CO:\EMERCIAL CRISES 307
required to meet the demands. The term reserve is an
elastic expression that varies according to different circum-
stances. In England, as Bagehot so well explains, there is
a 07ie reserve system, that is to say, as regards the ultimate
reserve of gold. The Bank of England is the bankers'
bank. If any bank has a balance with the Bank of Eng-
land, that is considered as the most real part of its reserve.
But the Bank of England itself does not keep these so-
called reserves, but only what it considers a necessary pro-
portion. Every bank has money due to it day after day, —
a stream of money flowing in, — and this may be reckoned
as sufficient to meet the normal stream flowing out. The
real reserve is held against possible differences, and the
differences are generally met by drawing on the Bank of
England.
When we consider the case of the Bank of England in
particular, and apply these general principles, at first sight
it would appear that it need keep only a relatively small
reserve. The principal customer of the bank is the gov-
ernment, and all the material facts relative to the revenue
and expenditure are well known and can be provided for.
Next, the payments made on account of the government
are often of the kind most satisfactory to a banker, e.g.
payments of dividends on the debt generally only lead to
a transfer in the accounts — that which is paid away as
dividends being returned in the form of bankers' balances.
And next to the government the other banks are the
principal customers of the bank. And in this case, in
ordinary times, the aggregate amount is not onl}^ stable,
but better than stable. Because on the threatening of
any monetary difficulty the other banks wish to strengthen
308 ELEMENTS OF POLITICAL ECONOMY
their position, and therefore to increase their balances with
the Bank of England.
And even in times of panic, if the panic were due to an
internal drain on the banking reserves, the danger could
be met by the issue of more Bank of England notes. All
that would be necessary is the suspension of the Bank
Charter Act by the government of the day, and already
three precedents have been established. In fact, it may
be said that in this country we have a constitutional
elastic limit for the issue of notes. It is to be observed
also that, except on one occasion, the bank, although hav-
ing the privilege of extra issues, did not find it necessary to
use it, because the mere announcement of the suspension
of the limits imposed on the issues of notes was sufficient to
restore confidence ; in the worst crises the notes of the Bank
of England have been above suspicion, at any rate since the
resumption of specie payments after the restriction.
All these considerations, however, in favour of a small
reserve are overborne by one important factor that often
dominates the situation, namely, a foreign drain may
arise in an unexpected way to an unknown extent. Bage-
hot gives as an illustration the payment of the French
indemnity after the war with Germany, which was largely
made through London. A more recent example of the
same kind was the payment of the Chinese indemnity to
Japan. The point to notice is that these foreign drains
may arise from very different causes, and they may be
sudden and unexpected. The best illustration of the
importance of the management of the banking reserves
from this point of view is furnished by the history of com-
mercial and financial crises.
BANKS OF DEPOSIT AND COMMERCIAL CRISES 309
4. Commercial Crises. — The term commercial crisis is
generally used in an extended sense so as to include crises
that are essentially monetary in their origin and principal
effects. " There is said to be a commercial crisis wlien a
number of merchants and traders at once have or apprehend
they shall have a difficulty in meeting their engagements "
(Mill). Essentially, then, a commercial crisis is a break-
down of credit, though it may be due ultimately to causes
affecting the material production of wealth. The causes
may be divided into two great groups, first, those that lead
to the inflation of credit and to overproduction or specu-
lation ; and secondly, those that precipitate the collapse.
In the first group we may notice, to begin with, the
effects of bona fide commercial causes. There may be an
expansion of trade — beginning with one great industry
and spreading to others, raising profits and wages with its
flowing stream. The increase of money incomes leads to
a growth of the funds available for investments. Old
securities rise in price and a stimulus is given to the crea-
tion of new. There is a great outburst in the promotion
of companies; many are unsound and most have over-
valued their chances of success. At first the investors
may look for a profit in dividends, but as speculation in-
creases they hope to make their gains by a rise in price of
the shares. Illustrations might be given from the time of
John Law and the Mississippi scheme, and the South Sea
Bubble, etc., early in the eighteenth century, down through
the decennial crises, so characteristic of the nineteenth.
The predisposing causes may, however, be found in
more purely financial causes, e.g. the undue extension of
banking, especially when notes were not properly regu-
310 ELEMENTS OF POLITICAL ECONOMY
lated; the mismanagement of loans and of reserves; the
after effects of great gold discoveries, or of the unlocking
of hoards. After the lapse of a certain time the effects of
former crises seem to be forgotten, and this is probably one
of the chief causes of the periodicity of commercial crises.
Amongst the second group of causes that lead to the actual
collapse are to be noticed any events that give a sudden
shock to credit, e.g. the outbreak of war, political revolu-
tions, repudiation on the part of a foreign state, the failure
of any firm of good standing and with extended connections,
and anything that affects the ultimate reserve, especially a
foreign drain. A drain may arise from many different
causes, e.g. advances of loans to foreign states ; an adverse
trade balance — which may be due to excessive imports
through speculative causes, or to a bad harvest (of impor-
tance in former times) ; or there may be a deficiency of ex-
ports, owing to the too rapid conversion of circulating into
fixed capital. All of these influences maybe illustrated in de-
tail from the commercial history of the nineteenth century.
And it seems probable, in spite of the improvements in
the methods of banking and in the organisation of industry,
that these causes will continue to operate. There is always
the possibility of gigantic fraud or culpable ignorance, and
the increasing delicacy of the industrial organisation in-
volves new dangers. 1
1 See Pnnciples, Book III, Chap. XXI ; Bankers^ Money, Chap. IV ;
Mill, Principles, Book III, Chap. XII. The earlier crises are fully de-
scribed in the great work on the History of Prices by Tooke and New-
march. The annual " Commercial Review " of the Economist and that of the
Statistical Journal are excellent sources of reference for the later history.
Palgrave's Bank Bate and the Money Market brings Bagehot's argument
up to date.
CHAPTER XII
THE EATE OF INTEREST AND THE RATE OF DISCOUNT
1. Interest on Capital and Interest on Money. — Some
account has already been given of interest as a constituent
element of profits, and indirectly of loan-interest in its
relations to profit-interest. In tliis chapter it is intended
to give some account of the causes that determine the rate
of interest. Interest for this purpose may be defined as the
price paid for the use of loanable capital for a time, the capi-
tal borrowed or its equivalent being returned at the end of
the time. In modern times the capital is in the first place
generally advanced in the form of money, and the same
money value is returned; but it is convenient to distinguish
between the case in which the money is looked on simply
as a means to the acquisition of capital in the form of other
things, and the case in which the money is borrowed defi-
nitely for monetary purposes — as for the settlement of some
prior monetary obligation. Thus a manufacturer may
borrow money in order to obtain the production-capital to
extend his business, or he may borrow money as in a period
of crisis to meet his bills. Interest in the first case may be
called interest on loanable capital and in the second
interest on loanable money. As is usually the case, the
distinction is one of the adjustment of emphasis : money
itself is a form of capital and logically even of production-
capital, and as already observed loans of other forms of
capital generally are made in terms of money. But the
311
312 ELEMENTS OF POLITICAL ECONOMY
distinction drawn is one of importance and is expressed
clearly enough in the terms employed. It is found also
that interest in the first case, namely, on loanable capital
(as explained), is generally for relatively long periods,
whilst interest on money as such is for short periods. In
this latter case, to make the distinction clear, the rate of
interest may be called the rate of discount, from the
principal form that it assumes in the money market.
Again, it may be noticed that on some theories all interest
is really a form of discount — the difference between the
present and future value of a "good " ; but at this stage it
is not necessary to pass into the metaphysics of interest,
which always has been and still is the subject of controversy.
2. Interest on Loanable Capital. — The interest on loan-
able capital, being the price paid for its uses, like all other
prices, depends on demand and supply. Consider first the
causes affecting the supply. The supply of loanable capital
must vary, other things being the same, with the supply of
capital in general, and this again depends on the causes
already examined in the first Book. (See Book I, Chap.
VIII.) We have next to consider the causes that induce
people to lend their capital rather than employ it them-
selves or keep it idle. Amongst such causes may be
enumerated the following: —
It may happen that the owners cannot employ the
capital themselves — they have no industrial knowledge
or opportunity. A large part of the wealth that is in-
herited must be invested in some form or lent to others.
Again, some people can only employ a certain amount
of their means in their own business, and they invest or
lend their surplus profits.
RATE OF INTEREST AND RATE OF DISCOUNT 313
The amount loanable will vary with facilities for in-
vestment. For a long time in England the field for
investment was narrowed to mortgages on land, and
this contraction of the field narrowed the supply. The
savings of the working classes have largely increased
since facilities for the investment of small savings have
been extended.
As already explained, demand and supply are correla-
tive, and according to the point of view any factor may
be considered as operating on demand or supply. The
extension of the field for investment is also an extension
of the demand. The slightest difference in security
affects the supply of the loanable capital. First-class
securities, even at low rates of interest, may be subscribed
for many times over, whilst it is not possible to float a
loan involving a high degree of risk. It may be con-
tended that we ought to consider pure interest apart
from the insurance against risk. Logically this may be
admitted, but at the same time it is convenient to con-
sider security as one of the causes affecting the willing-
ness of people to lend their wealth, and to increase the
supply of loanable capital.
The supply of loanable capital depends partly on its
mohility or the reverse. It may happen that a large
part of capital is in a highly specialised form, and can-
not be lent for general purposes. As a rule, loanable
capital must be lent in the first instance in the form of
money. Capital lent directly in other forms, the par-
ticular things (with or without an allowance for depre-
ciation) being returned, must be considered as yielding
profit-interest rather than loan-interest as here under-
314 ELEMENTS OF POLITICAL ECONOMY
stood. The rent of houses, for example, is divided into
ground rent and building rent ; the former is of the nature
of economic rent, and tlie latter is of the nature of profit
on building. And similarly, in agricultural land, we
may distinguish between the economic rent and the
profit-rent; and generally we distinguish between profit-
interest and loan-interest, although there is a connection
between the two rates. This connection has already been
treated from one point of view (Book II, Chap. VIII) ; it
may now be noticed as affecting the Bupply of loanable
capital. If profit-interest is relatively high, people are
more inclined to employ their capital themselves, and the
supply of loanable capital is diminished. Conversely, as
the rate of profit falls, people are more willing to lend.
In some cases the influence of laiv and puhlic opinion
is a factor of importance. When interest in most forms
was condemned by religion and morality, and subjected
to legal penalties, there must have been a considerable
effect on the supply of loanable capital. And this con-
traction of the supply no doubt so far tended to raise
the rate of interest, which was still further raised by the
extra risk involved. These two considerations are the
standard arguments advanced against the usury laws.
On the other hand, it may be said that these laws were
intended in effect to regulate the abuses of monopoly,
and so far they were economically justifiable.
The causes affecting the demand for loanable capital
are multitudinous in detail, but may be arranged under
two groups. The demand may be on the part of unpro-
ductive consumers — one of the few cases in which it is
useful to retain this old distinction. In early times this
RATE OF INTEREST AND RATE OF DISCOUNT 315
form of demand was of the greatest importance. People
borrowed to anticipate revenue in order to anticipate
their consumption. Estates were burdened, not to spend
the capital obtained in improvements, but in entertain-
ments or in providing for the expenses and risks of war.
Under present conditions this form of demand is spe-
cially illustrated in the case of governments. Most
national debts have been incurred for purposes that
economically would be classed as unproductive, though
it may be, as in war, for purposes of more importance
than opulence. The debts of local governments are
ostensibly for productive purposes to a much greater
extent, but the term productive must receive a wider
significance than is usually given to it in ordinary
trade.
The demand for productive purposes, as just indicated,
may be made by governments (especially for municipal
trading), but the greater part under this heading is for
industrial companies and private firms. The tendency in
modern times has been more and more for business of all
kinds to be carried on to a great extent with borrowed
capital. And this, indeed, is one of the most potent causes
of the extension of companies, as is shown by the creation
of so many small companies. (See Book I, Chap. IV.) A
glance over the causes just enumerated which affect the
demand and the supply of loanable capital is sufficient to
show that the rate of interest on loanable capital is subject
to variation, and it is impossible to lay down any general
proposition as regards the result and movement in the rate
under present conditions.
In addition to all the causes supposed to operate in any
316 ELEMENTS OF POLITICAL ECONOMY
one country we have to take account of international
influences. There is a constant expansion of the field for
investment in new and undeveloped countries consequent
on the improvements in communication and in security.
On the other hand, taking a broad view, capital seems to
be increasing in old countries much faster than labour, and
in consequence the share of capital in the annual produce
so far will tend to increase. (See Book IV, Chap. IV.)
3. Interest on Loanable Money — the Rate of Discount.
— We may now consider the rate of interest for loanable
money as such, and especially the " money " of the money
market. The need for a special examination may be
shown by an illustration. During the last fifty years, in
England, the rate of interest on first-class securities of a
permanent character has oscillated within narrow limits,
about three per cent if we take the yield to consols on the
purchase price as typical ; whilst the minimum rate of the
Bank of England, to take the typical example of interest
on short loans, has varied between ten per cent and two
per cent. It is true that the price of consols is subject to
peculiar influences, e.g. the special demand for trustee pur-
poses ; but the difference between the yield to consols and
that to (say) railway debentures or first-class mortgages
has probably never exceeded one per cent, whilst the market
rate of discount has diverged much more widely from the
bank rate.
The difference between the rates on capital and money
cannot be explained by a difference in security. In both
cases the security may be considered perfect. The Bank
of England does not make advances except on first-class
security, and the credit of the British government is not
RATE OF INTEREST AND RATE OF DISCOUNT 317
indicated by the fluctuations in the price of consols. The
reason of the difference in the two rates is that they de-
pend on different causes.
We have now to examine the causes that affect the sup-
ply of loanable money as such. Here, as throughout this
part of the subject, the difficulty arises from the elasticity
of the term money ^ not for purposes of verbal definition,
but for practical purposes.
Consider the supply of money that is lent and borrowed
in the money market. In the words of Mr. Clare, cheques
and bills form the principal currency of this country.
Money consists of a relatively small foundation of metallic
money and notes, and a large mass of representative money,
or of different forms of credit that for various purposes are
accepted as money and fulfil the functions of money.
Money may mean gold in the Bank of England or a cash
credit in a branch bank in some remote village in Scotland.
Similarly the demand for money is equally elastic. Some-
times the demand may be met by some form of credit; some-
times it is a demand for gold, and nothing else will suffice.
The causes that affect the demand and the supply of
loanable money are so intimately connected that they may
be taken together. The most important cause affecting
the rate of discount or the rate of interest on money for
short periods is the state of credit. Any sudden contrac-
tion of credit from any cause at once diminishes the avail-
able supply of money ; and at the same time also it increases
the demand. The banks have less to offer and their cus-
tomers require more.
Next to the state of credit, we may notice the amount of
the ultimate real reserve^ in this country the gold held
318 ELEMENTS OF POLITICAL ECONOMY
by the Bank of England for banking purposes. (This
reserve is held by the banking department for the most
part in the form of notes, but these notes can at once be
exchanged for gold in the issue department if required.)
If the real banking reserve falls below a certain point,
which of course varies according to circumstances, a crisis
is inevitable ; and the most marked symptom in general
of a monetary crisis is a great rise in the bank rate. It is
not the absolute amount of the reserve that is of impor-
tance, but the proportion of reserve to liabilities. This has
been well shown by Mr. Palgrave in his work on the bank
rates of England, France, and Germany.
The amount of this reserve itself depends on various
causes, some of which operate directly on the bank rate as
well as indirectly by affecting the reserve. Sometimes the
reserve may vary greatly with but little effect on the
rate, as when the cause of the withdrawal is well known,
and a reverse flow may be anticipated. Thus the pay-
ments of dividends by government and the remittance of
gold to Scotland at the " terms " may have little effect on
the rate, because it is expected that the gold will soon
be returned. At the same time these regular demands,
although for temporary purposes, tend to aggravate the
effect if they happen to coincide with withdrawals of an
exceptional character. "All the normal movements of
the currency are so well known as to be matters of news-
paper notoriety, and the foreknowledge deprives them of
their importance. The Bank knows, for instance, that gold
will be wanted for Scotland at stated periods, and can
therefore provide beforehand for the withdrawal. The
market also knows it, but, being aware also that the gold
RATE OF INTEREST AND RATE OF DISCOUNT 319
is still in the country and will soon be back, regards the
outflow with indifference. The same is true of other
cases, and it may be laid down as a rule that the ordinary
movements of the currency, being foreseen, are provided
for in anticipation and rarely have effect on the bank rate.
At the same time, if an outflow for home requirements
should happen to coincide with a demand for export, the
effect of the latter will be to that extent aggravated ; and
in this connection it is worthy of remark that the panic of
1857 occurred towards the middle of November and that of
1866 towards the middle of May, just the periods when the
Bank had been weakened by the Scotch withdrawals."
(Clare, Money Market Primer.')
Amongst the causes that affect the amount of the reserve
and also the rate directly is the activity of trade. A rise
in the bank rate after a long period of low rates is often
one of the best signs of a revival of trade. More currency
is required for wages, retail trade, etc. The course of for-
eign trade may have much greater and more sudden effects.
Any excess of imports over exports not accounted for by
the other elements of indebtedness (see below, Chap, XIV)
constitutes an unfavourable balance that may have to be
met by the actual export of gold. An unfavourable balance
of trade is no measure or sign of any disadvantage to the
nation in the way that the mercantilists supposed, but
under certain conditions it may be of great importance to
the banking interest and thus indirectly to the nation. In
itself the excess of imports is an advantage : the nation has
so much to consume ; but if the consequent stringency of
money causes a disorganisation of trade the advantage may
be more than neutralised in the end. (See Chap. XIV.)
320 ELEMENTS OF POLITICAL ECONOMY
One other point may be noticed briefly, to avoid any
misunderstanding. The bank rate has been taken as typ-
ical and representative of the rate of interest for loanable
money as such ; at times of pressure in the London money
market its influence may be supreme, but at other times
there may be considerable differences between the bank
rate and the market rate; a matter of much importance
when the Bank is trying to attract gold from abroad by
raising its rate. The technical differences between dis-
counts and interest on loans do not require notice in a
discussion of leading principles.
4. Causes of Difference in the Rates for Long and Short
Periods. — In considering the causes of the difference be-
tween the rates of interest for long and short periods,
we may, as before, take as typical the yield on the pur-
chase price of consols and the minimum bank rate respec-
tively.
Suppose interest on investments is higher than interest
for money as such. The question is : why should the
banks go on lending " money," it maybe for months, at two
per cent or less whilst they could get three or more per cent
on perfect securities ? The answer is that the banks can
only lock up a certain amount of their funds in these per-
manent investments — even consols. The difficulty is that,
if they had to realise at all suddenly, they might lose more
on the fall in price of the stocks than they would have
gained in the time by the difference in interest. This
applies to the best securities {e.g. consols), and still more
to those below the first rank, in which the yield of interest
is higher.
The low rates for money may be a sign of a want of
RATE OF INTEREST AND RATE OF DISCOUNT 321
confidence, as after a crisis there is little effective de-
maud for money as such owing to the stagnation of trade.
Consider now the case when interest for money is higher
than interest on investments for long periods, e.g. the
bank rate higher than the yield to consols. Under these
conditions the supply of money as such is relatively small,
and the demand is relatively great, as in a contraction of
credit in the development of a crisis. At such times what
people require is money as such, and not capital in other
forms. This consideration also explains why it is that the
banks cannot increase the available supply.
At the same time there is a reciprocal action between
the two rates, the nature of which is best seen in ordi-
nary times as distinct from times of crisis. If the rate
for money is likely to be low for a long period, the banks,
as a whole, will try to increase their holdings of first-class
securities, which give a better yield in interest, and under
the circumstances offer the chance of a rise in the capital
value. Conversely, a rise in the rate for money stimulates
the sale of securities. With a fall in the bank rate con-
sols tend to rise in price, and with a rise in the bank rate
tend to fall. Indirectly, then, any cause that affects the
ultimate reserve may indirectly affect the rate of interest
on permanent investments.
In former times, when the home harvest was of more
importance than at present as regards our food supplies,
any deficiency in the harvest might cause an adverse bal-
ance of trade, and thus lead to a drain of gold and a rise
in the bank rate ; and the anticipation of such a rise might
indirectly affect the price of consols. Thus it was no un-
common thing in the summer months to read that, owing
322 ELEMENTS OF POLITICAL ECONOMY
to the continued bad weather, consols had fallen in price.
This depression in consols was not due to the depression
in the spirits of dealers on the stock exchange, or to a
gloomy view of the credit of the British government, but
simply to a calculation as to a probable movement of gold
and its consequences.
5. The Relative Stability of the Rate for Long Periods. —
A question closely allied to that discussed in the last sec-
tion is this : why should the yield to first-class securities
(say consols) remain practically steady for long periods,
whilst relatively there are violent oscillations in the
rates for short loans of money? The rate of interest
in the first case is, no doubt, also subject to change,
but the point is that the changes are relatively slow,
and within narrow limits.
The essence of the answer seems to be that all invest-
ments that offer equal security, are equally marketable,
easily transferred, and, generally, possess equal net ad-
vantages, must give approximately the same yield. The
quasi-permanent differences mark differences of advan-
tage. Just as in the case of wages (other things being
the same), the more insecure and troublesome the em-
ployment, so much the higher the pay, so also in invest-
ments. On the other hand, consols have always had
special attractions for trustees and others ; and through
being specially named in bequests, so far have a fancy
price. It is probable that the extension recently of the
securities available by law for trustees, and the still
greater extension through the change of habits or
opinions as regards the exceptional advantages of con-
sols, have been the principal causes of their recent fnll
RATE OF INTEREST AND RATE OF DISCOUNT 323
relatively to other securities; that is, consols have lost
some of their exceptional value, not on account of the
war and the discredit of the government, but simply be-
cause investors, as a class, have come to give a wider
meaning to the expression first-class security. At one
time mortgages on land had exceptional claims to public
esteem, and were supposed to be especially safe because
"the land was always there."
Recently, through the whole range of securities, there
has been an approximation to more uniform rates, — the
yield to the first class has risen, and that to the lower
classes has fallen relatively.
To return from this digression. There is a general rate
of interest on loanable capital (as there is a general rate of
wages for hired labour), there are differences in relative
rates on different investments, and both are subject to
changes ; but the changes are relatively slow compared
to the oscillations that occur in the rates for short loans.
It is this tendency to equality that pervades the whole
mass of interest-bearing securities that really explains the
stability. The aggregate of such securities is enormous,
as is seen at once by a glance through the lists of the
stock exchange. Any change in the rate of interest
must affect all equally, after allowing for the special
causes of difference. The annual additions to the sup-
ply of securities is small compared to the mass in exist-
ence, and it is balanced more or less by the annual savings
that seek investment. Thus the changes in demand and
supply are, on the whole, not great, and operate slowly —
that is to say, when the comparison is made with the
smallness of the funds of the money market and the
324 ELEMENTS OF TOLITICAL ECONOMY
violent oscillations, both as regards the demand and
the supply of loanable money. In conclusion, it may be
pointed out that, if we take the average of the rates for
long and short periods over an extended time, say for fifty
years, there is not much difference.
6. The Exchange Value of Money and the Rate of Inter-
est.— ]Much attention has been directed to the discussion
of the connection between the value of money in the eco-
nomic sense of exchange value, and its value in the popular
sense of rate of interest. Perhaps so much attention would
not have been found necessary if other words had been
employed to express the points in dispute. In effect, the
question really amounts to this : What is the connection
(if any) between a high or low level of prices, and a high
or low level in the rate of interest? Put in this way,
the obvious answer would seem to be that there is no
connection whatever. A survey of monetary history
would show that the rate of interest is sometimes high
with high prices, and sometimes the reverse is the case.
And a reference to theory raises the presumption that a
change in the measure of value must affect equally all
prices, including the price for the use of loans. Or we
may apply the general principle that relative prices must
be adjusted to relative values, and say that the demand
and the supply of loanable capital are so far unaffected by
any movement in general prices.
This argument seems quite sound, with the proviso which
was found to be necessary ni the general theory, namely,
after time has been allowed for the readjustment. In other
words, in the period of transition from one level of prices
to another, there may be an effect on the rate of interest.
RATE OF INTEREST AND RATE OF DISCOUNT 325
The principle involved may be best explained in the
case of inconvertible notes, in which we can observe in
the most marked manner the effects of changes in price
levels.
Suppose the notes are issued by the government in
such a way that prices are directly affected, as when the
notes are scattered up and down the country in the pay-
ment of governmental expenses. All prices rise, and so
far there is a stimulus to trade and a demand for loans
from the banks. In this case, however, there is nothing
in the mode of issue to increase the funds of the money
market, and thus the rate of interest rises with the rise
in prices. Suppose, however, that the government issues
the notes in the first place to the banks, and the banks
throw them into circulation by making advances ; in this
case the rate of interest will fall, and prices will still
rise.
The same principle may be applied in the case of great
gold discoveries — although here the effects are not so
sharply defined. If the new gold is thrown directly into
the channels of circulation, and raises prices and stimu-
lates trade, then this increase in the supply of gold will be
accompanied by a rise in the rate of interest. If, on the
other hand, the new gold is first thrown on the loan mar-
ket, for the time it will lower the rate of interest on money,
though, as before, prices will rise.
Conversely, in the case of a fall in general prices, or an
appreciation of gold, if the fall of prices is due to a direct
contraction of tlie currency in the outskirts of commerce,
then there may be an apparent abundance of money in the
banks at the great centres, and the rate of interest may be
326 ELEMENTS OF POLITICAL ECONOMY
low. If, on the other hand, the scarcity of gold is first felt
at the centres, the rate of interest will so far rise.^
1 Principles^ Book III, Chap. XXII ; on the metaphysics of interest,
and the history of opinions, see the works of Boehm-Bawerk, translated
and edited by Smart ; on the money market, Bagehot, Lombard Street;
Jevons, Money; and Jevons, Investigations in Currency and Finance;
Clsixe, 3Ioney Market Primer; Nicholson, Bankers'' Money., Chap. Ill;
Giffen's Essays in Finance; Palgrave's Bank Bate and the Money
Market.
CHAPTER XIII
THE THEORY OF FOREIGN TRADE
1. The Problems of Foreign Trade. — The subject of
international or foreign trade is one of great complexity.
It includes the pure theory, the object of which is to bring
out the principles by the aid of hypotheses and the use of
the abstract deductive method ; it also embraces an account
of the foreign exchanges, than which there can be nothing
more definite and practical ; it involves the consideration
of the real advantages and possible disadvantages of foreign
trade and the application of the results to the opposing
policies of free trade on the one side, and the various
forms of protection, preference, monopoly, or the opposite
of free trade, by whatever name it happens to be called by
the fashion of the day. Each of these branches of the
subject has difficulties of its own. Any one who is inclined
to think that the use of hypotheses and the abstract
method involves simply the setting forth of a few self-
evident truths may be invited to peruse Mill's "stupen-
dous " chapter on international values, and then to com-
pare the critique by Cournot with the rehabilitation by
Professors Edgeworth and Bastable (who again differ in
certain respects). The very object of this pure theory is
to explain the operation of the economic forces which
govern the actual trade of the world; and the use of the
abstract method is not to deal with imaginary examples
327
328 ELEMENTS OF POLITICAL ECONOMY
from an imaginary world, but to make the principles of
this world of ours as clear as possible by abstracting or
taking away circumstances that are not essential.
Such being the complexity and difficulty of the subject,
the main object in the present chapter will be to set forth
what is generally accepted as clearly as possible, and to
indicate where the by-paths of controversy leave the main
track without pursuing them very far.^
2. Meaning of Foreign Trade. — International trade, as
the name implies, refers to trade between different nations.
As in the case of most economic conceptions, so in dis-
tinguishing between " domestic " and " foreign " trade we
must leave a debatable margin. If we compare two
" nations " with two " places " within the same country,
the following are the chief points of contrast : —
The two nations are politically independent and the
respective governments may impose various restrictions
on imports and exports ; labour and capital move with
comparative difficulty between two countries owing to
various causes, such as distance, differences in language,
religion, social customs, love of home, etc. ; the two
nations have different monetary systems, and payments
are made for the most part by means of bills of exchange
founded on the actual transactions of commerce. These
differences are, it will be seen, only differences of degree,
and it is not necessary that all should be present in every
case to constitute foreign trade. Stress is laid on differ-
1 In the treatment in my larger work, Vol. II, Book III, Chaps. XXIII-
XXVIII, a somewhat different order is adopted for the reasons there
given ; and some of the problems are discnssed in Hook V, Chaps. XIV,
XIX, after the treatment of the principles of governmental control and
taxation.
THE THEORY OF FOREIGN TRADE 329
eut elements in different problems ; in free trade and pro-
tection the political elements are of importance, whilst in
the pure theory of foreign trade the comparative immo-
bility of labour and capital is predominant ; again, in the
pure theory money is either excluded or the same standard
is applied throughout, whilst in the foreign exchanges a
large part of the subject is concerned with the exchange of
different moneys.
3. The Pure Theory of Foreign Trade. — In the pure
theory, as just indicated, the chief point of distinction
between home and foreign trade is in the difference in
the relative mobility of the productive powers. We as-
sume to begin with that within any country or nation the
mobility of labour and capital is perfect. In other words,
capital and labour flow readily to the districts in which
their productive power is greatest. If, for example, owing
to natural or acquired advantages, one place with a given
amount of labour and capital can produce more than any
other place in that country, the industry will be localised
in that favoured locality. And as we have seen (Book I,
Chap. Ill), there is actually in every country a tendency
to the localisation of industries, and the hypothesis of the
theory is approximately true.
A country considered as isolated produces a great num-
ber of products ; it has a variety of extractive industries,
such as agriculture, mining, fisheries, etc., and a variety
of manufactures in the broad sense of the term. It is
assumed that, as the result of competition and mobility,
the capital and labour will be so distributed as to give
the best return. The controlling force in this distribution
is the tendency to equality of real wages and real profits,
330 ELEMENTS OF POLITICAL ECONOMY
per unit of productive power or efficiency. In comparing
real wages in different places and employments in the
same country, for the purpose of theory, we may take
time as the unit of measurement of the labour and money
(of uniform purchasing power) as the measure of the
reward. If the labourers find that they can obtain more
money for the same number of hours of labour in the
towns, they will migrate thither from the country. Sim-
ilarly, the makers of goods in the towns will flock to the
district in which the reward is highest. In the same way
capital will be attracted to, or repelled from, certain trades
or places, according to the profit to be obtained.
In the markets of any one country it is assumed that
the same prices prevail for the same qualities of goods.
If, then, it should happen that, owing to any reason, it
takes more labour and capital to put goods on the market
from some place, than from others in which the thing is
produced, the makers of the thing in this ill-favoured
place will obtain a less reward than those in the more
favoured localities. Accordingly, the producers in the
first case will shift their quarters if they can, and it is
assumed that within the borders of the country concerned,
this is generally possible.
But when we constrast two " nations " with districts in
the same country, the essential difference for pure theory
is that between foreign countries capital and labour will
not move at all or only with difficulty.
This assumption of the pure theory is also approxi-
mately true, at any rate over a relatively short period.
The natural resources are obviously attached to each
country, and the mines, the cultivated lands, the means
THE THEORY OF FOREIGN TRADE 331
of communication, have large capitals sunk in them.
Similarly, the buildings, machinery, and most forms of
auxiliary capital are incapable of export once they have
been specialised. As regards labour, the saying of Adam
Smith is still true of foreign trade, " Man is of all bag-
gage the most difficult to be transported."
Now it is theoretically possible that, owing to economic
conditions, natural and acquired, one country may possess
an absolute superiority over another in productive power
in all its industries, or for the present purpose it may be
said, in all the industries that yield commodities capable
of export. Such, for example, is the case if we compare
a backward country with one at a much higher stage of
civilisation.
But the great staples of international trade must sell
for the same prices in the world's markets. Thus the
superior country for a certain amount of exports will re-
ceive a greater money reward per unit of productive
power than the inferior country, and the money will buy
more real things. It is, however, impossible for the inhab-
itants of the inferior country to betake themselves and
their capital to more favoured regions ; they must make
the best use they can of their powers within their own
borders and accept a lower rate of payment per unit of
productive power.
It is, however, possible that when trade is opened with
the superior country, the inferior country may gain by a
redistribution of its labour and capital, within its own
borders, and the lower money reward may command more
commodities than it otherwise would ; similarly, also, the
superior country may give even greater rewards to its
332 ELEMENTS OF POLITICAL ECONOMY
producers through the redistribution of its industries,
after the trade is established between the two countries.
How these higher rewards are obtained is explained by
the theory of comparative cost.
4. The Theory of Comparative Cost in Terms of Barter. —
It is usual to state the theory of comparative cost in terms
of barter, at any rate to begin with. The object is to
bring out the real advantage to be gained by foreign
trade ; and to do this we must pass behind the money
measures. In other parts of economics, as already shown,
it is necessary to distinguish between the nominal and the
real, as in wages ; but as shown in dealing with the rela-
tion of cost of production to value, it is not necessary
to refer constantly to the ultimate elements of real cost.
In the same way it may be said of international values,
that the theory might be worked out in terms of money,
and afterwards interpreted in terms of real cost and real
advantage.
It is important for the student who may be perplexed
by the controversies on the best method of procedure to
remember that the same ground ought to be covered in
the end, whether we begin with barter or with money.
The merit of the procedure by barter lies in the em-
phasis that is laid on the fundamental propositions that
all trade is ultimately barter and that commodities pay
for commodities. We thus get rid at the outset of some
popular fallacies regarding foreign trade which have
sometimes governed the policy of nations and still in-
fluence public opinion. The difficulty of this method lies
in the extremely hypothetical character of the conditions
that must be assumed and in the transition from the pure
THE THEORY OF FOREIGN TRADE 333
theory to the complexities of actual trade. This difficulty,
however, is characteristic of the abstract method as exem-
plified already in the theory of economic rent and the
quantity theory of money.
We may now notice the conditions that are usually
assumed in this form of the theory.
It is assumed, then, that there are two countries only,
say A and B, each producing the same two commodities
only and both capable of export. This assumption is not
so unreal as at first sight may appear, if the two com-
modities are taken as typical or representative of large
groups, e.g. agriculture and manufactures. It is further
assumed that cost of carriage and other impediments to
trade in the finished or exportable products may be neg-
lected. This assumption seems more unreal, seeing that
the 7'aison d'etre of foreign trade has been stated to lie in
these very impediments. It must be remembered, then,
that the impediments refer to the passage of the productive
powers — the land, the labour, and the capital — and not
to the products. The very idea of trade must imply the
actual passage of the things, whatever the impediments
may be. If two countries impose heavy import duties, the
volume of trade is checked, but it still goes on, unless
the duties are prohibitive, and an inquiry might be made
as to the effects on trade if the duties were abolished.
Transport charges may be compared to transport dues.
The units of productive power are generally taken in
terms of days' labour. This proviso requires careful ex-
planation. Labour is taken as representative of the pro-
ductive power of labour and capital combined. Just
as we assume that the labour is applied under the appro-
334 ELEMENTS OF POLITICAL ECONOMY
priate natural conditions, so also we assume that it is
applied with the appropriate auxiliary capital. In the
two countries considered these aids to labour will differ
even if the finished product is supposed to be exactly the
same. And also the efficiency of the labour itself will be
different or may be assumed to be different. Thus, if the
natural conditions and the forms of capital are the same
in both countries, we may still assume that the returns to
the labour are different. That is to say, a day's labour
in the two countries means different amounts of produce.
Let it be assumed, then, that each country can produce
both corn and cloth ; but that A has an absolute advan-
tage over B in both commodities. The theory of com-para-
tive cost states that if the advantage of A is equally great
in respect of both commodities 7io trade will arise, but if
it has a greater relative advantage in one thing it will
export that thing and import the other. In brief, the
trade arises, not because one country can produce things
at less real cost than another, but because there are differ-
ences in the relative or comparative costs.
We might indeed go farther, and say that in strictness
the absolute cost has nothing to do with the trade. The
object of the reference to absolute cost is simply to em-
phasise the necessity of bringing in comparative cost, just
as the physicist may introduce the term absolute rest or
motion to emphasise the relativity that is essential to these
ideas.
These general statements may be illustrated by numeri-
cal examples. Suppose first, as regards corn, that 100
days' labour in A (with the appropriate and available
natural agents and capital) will produce as much as 150
THE THEORY OF FOREIGN TRADE 335
days' labour in B (with its aid from nature and capital).
Also as regards cloth, let 100 days' labour in A produce
as much as 150 in B. In this case A has a great advan-
tage in both, or the productive power of its labour is much
greater. But no trade will arise, because in both respects
the advantage is the same.
But now supj)ose, secondly^ that in corn as before 100
days in A will produce as much as 150 in B, but in cloth
100 days in A will produce only as much as 120 days in
B (not 150 as before). Then A's superiority is compara-
tively greater in corn than in cloth, and a trade will arise;
A will export corn to B, and import cloth from B.
This may be worked out in the figures taken in the
following way : —
If A exports to B the produce of 100 days' labour de-
voted to corn, that is an amount of corn equal to the
produce of 150 days' labour in B, and, therefore, it will
command the value of 150 days' labour in B. (It is assumed
that commodities in the respective countries, taken sepa-
rately, exchange in proportion to their labour costs.) But
120 days' labour in B will obtain as much cloth as A could
make at home in 100 days. Therefore, if A, instead of
spending 100 days in making cloth at home, devotes this
labour to growing corn and exports this corn to B, A
can obtain for it the same amount of cloth which it
could have produced at home and in addition the value
of 30 days of B's labour.
This would be the advantage to A of the opening of
foreign trade — on the supposition that B remains entirely
passive and simply diverts some of its labour from corn to
cloth. All the advan tage of the trade will go to A.
336 ELEMENTS OF POLITICAL ECONOMY
But in the same way we may begin with B as active and
A as passive. If B exports to A the product of 150 days
in cloth, this will be equal to an amount that A could pro-
duce in 125 days (according to the figures taken above).
It will therefore obtain in A the value of 125 of A's
labour days. But with 100 of these days in A as much
corn can be grown as with 150 in B. Accordingly, at the
rate of exchange in A, B will gain 25 days' labour of
A's commodities. Thus it will pay B to turn its labour
from corn to cloth, and export its cloth to A and import
corn from A. Under this supposition all the advantage of
the trade will go to B.
It appears, then, that whether we consider A or B to
begin the trade there are reasons why a trade should arise.
But the advantage of the trade so far apjDears to be entirely
on the side of the country which takes the initiative.
There is probably always some advantage relatively to the
country that takes the active part, but at present this may
be put aside. Both countries may be supposed to share
equally in the activity of trade. They cannot, however,
both gain the whole advantage, or, in other words, the
advantage of the trade must be distributed. The answer
to this problem is given in the theory of international
values. (Cf. Mill, Principles, Book III, Chap. XVIII.)
5. The Theory of International Values. — In my opinion
it is better at this stage to introduce money as a measure.
(Cf. Principles, Book III, Chap. XXVII.) It must suffice
to indicate the principles that are applied in either case.
After the trade is established between the two countries,
the cloth and coin must exchange at the same rates in
each. 'J'his is obvious because cost of carriage is neg-
Tin: TIlKOltY OF FOKEKiX TRADE 387
lected. If the rate of exchange is that formerly cuiTeiit
ill B, then A will gain all the advantage (and conversely
B will gain all if the rate is the rate formerly current in A).
Tlie adjustment between these two extremes will depend
on two considerations, one arising from the conditions of
demand, the other from the conditions of suppli/. As
regards demand, if li is very keen to obtain corn, and A is
not very anxious to get cloth, the greater intensity of
B's demand will make it offer more cloth. Thus the
intensity/ of the reciprocal demand is one factor in the deter-
mination of the price. Again, the establishment of the
trade in the way supposed assumes that in each country
there is a transfer of productive power, in A from manu-
factures to agriculture, and in B from corn to cloth, to
take the concrete form of the same argument. But as
soon as we pass from the conditions of perfect mobility
that are assumed to prevail in each country, some induce-
ment must be offered in order that this transfer may take
place. The advantage in the international exchange will
be so far the greater on the side of the country to which
the greater inducement must be offered to have the trans-
fer accomplished.
This last consideration suggests also that other elements
must be introduced as we pass from the hypothetical
conditions at first laid down or tacitly implied.
Amongst these additional factors are to be noticed : the
conditions of production — whether the commodities can
be increased in response to the extension of the foreign
demand at the same, at a less, or at a greater, cost. Thus
if, as usual, it is assumed that corn follows the law of
diminishing return, whilst cloth follows that of increasing
338 ELEMENTS OF POLITICAL ECONOMY
return, so far the rate of exchange established will be in
favour of corn.
Another element to take account of is the relative mag-
nitude of the two countries and the relative importance of
the foreign trade in each to the total trade.
We must also introduce the complexities due to the
facts that foreign trade is a barter, not of two things only,
but of many things, that the cost of carriage is never a
negligible factor, that more than two countries must be
considered, and finally that the productive forces cannot be
adequately represented by days' labour of a uniform char-
acter in each country. We have also to take account of
the causes that affect the growth and the distribution of
capital, and the differences in the efficiency and in the
reward of labour in different employments. It is in work-
ing out the effects of these complicating causes that, in my
opinion, it seems necessary to introduce money. (Cf.
Principles, Book III, Cliaps. XXVII, XXVIII.)
6. Money in International Trade. — When the trade is
established between the two countries we must suppose
(omitting cost of carriage) that the prices of corn and
cloth are the same in both countries. The inducement to
trade arises because at these prices the labour in each
country will obtain a better reward, which may be reck-
oned in consuming power as regards both corn and cloth.
That is, we must compare money wages and prices in each
country under the old conditions and the new.
The introduction of money wages shows the importance
of considering the magnitude of the countries and of the
foreign trade, because in any one country the money
wages in the trade that produces for export must be pro-
THE THEORY OF FOREIGN TRADE 339
portioned to the general rate of wages current in that
country, having regard to the special causes of difference.
The money value of the exports must equal that of the
imports, and the relative prices of commodities must be
so adjusted that this equilibrium is effected. Otherwise
the country with an excess of imports must continuously
export money, and the drain of money would lower prices
until it paid to export some commodity, or not to import
some other, or at the same time exports might be increased
and imports diminished. This argument is of the nature
of a reductio ad absurdum, and shows rather why such a
drain could not continue if it arose, than why it could
not arise. As explained in dealing with the foreign
exchanges, an adverse balance may be met, not merely by
the export of gold, but by the export of anything saleable
for gold.
All that we can say as regards the distribution of gold,
considered as the world's standard money, is that it will
be so distributed, and the levels of prices will be so ad-
justed, that so far there will be no disturbance of relative
values, or in other words, that the trade of the world is
governed by real causes which are only measured in terms
of money. ^
1 The theoiy of foreign trade in terms of money is worked out in
Principles, Book III, Chap. XXVII, Sees. 4 to 11, and in Chap. XXVIII.
The subject is too difficult and complex for further compression than is
there attempted. Bastable's Theory of International Trade is an excel-
lent monograph on the whole subject, and the critical student may refer
to the papers by Professor Edgeworth, in the Economic Journal, Vol. IV,
p. 40, Vol. VII, p. 401, Vol. IX, p. 125. The appendix to Bastable's
third edition (1900) gives a clear and impartial account of the points
in dispute.
CHAPTER XIV
THE FOREIGN EXCHANGES
1. International Debts. — The term foreign exclianges
refers to the settlement of international debts. In the
analysis of international indebtedness tlie first element to
be considered is the amount of the exports and imports.
As shown in the last chapter, if there were no other ele-
ment in international indebtedness, imports must be paid
for by exports ; and this, indeed, is accepted as the
fundamental axiom of foreign trade.
This balancing of exports and imports is hidden in
practice by various conflicting circumstances. As Adam
Smith pointed out, it is practically impossible at any time
to say what is the actual balance of trade between two
countries. Accordingly, what is sometimes called the
real par of exchange in the sense of an equality of in-
debtedness would more properly be called the ideal or
hypothetical par., which is a useful assumption in certain
parts of the theory. It is altogether different from the
nominal or mint par., which expresses a definite relation
between the standard moneys of two countries.
It is usual to speak (as in the last chapter) of the trade
between two countries (say England and France) as if
the trade were run by a gigantic trust on each side or
by the respective governments. Nothing, of course,
could be further from the truth. It is only for brevity
340
THE F011EI{;X EXCHANGES 341
of expression that we speak of England trading with
France ; the trade between the two countries is not con-
ducted on the principle of two monopolists contending
with one another, but by a multitude of independent
merchants. ^'' Every tra^isaction in commerce is an inde-
pendent transaction^'' (Ricardo). Tlie reconciliation be-
tween the two positions is found in the course of prices.
All prices are determined by two sets of causes. There
are relative causes that affect the particular commodities,
e.g. special improvements in production or special changes
in demand, and there are general causes that affect the
level of prices over a wide range ; for some purposes
we consider causes so general that they operate through
the whole commercial world. In other cases we consider
the general causes that determine the level of prices in
a country, and in some cases the causes that affect the
prices of certain groups of things, e.g. the exports or the
imports. In the foreign exchanges we have to consider
mainly the latter. If a particular merchant wishes to
pay a creditor in a foreign country, the cost of his remit-
tance will depend on the general balance of the account
between the two countries at the time — not that he
makes any estimate of the aggregate of debts ; but there
is competition between the buyers and sellers of bills
drawn on the foreign country, and the nature of this
competition indicates the state of the indebtedness.
Besides the exports and imports of commodities, there
are other elements in international indebtedness on ac-
count of which payments have to be made. We have to
take account of payments in connection with freights,
stock exchange securities, the advance of loans at the
342 ELEMENTS OF POLITICAL ECONOMY
time at which the funds are remitted, the interest on the
loans, the repayment of the principal, the expenses of
government abroad or conversely receipts of tribute, the
expenses of foreign residents, the obligations of banks,
tlie profits on commissions of various kinds, and other
minor elements.
Just as in dealing vrith the quantity theory of money,
it was found convenient to consider all the varying in-
fluences as if equivalent to a corresponding increase or
decrease in the quantity of money, so here it is convenient
to translate these other elements of indebtedness into the
language of exports and imports. Tliat is to say, we
should consider what would be the effect on the state of
international indebtedness, if these various obligations
had arisen from an increase of exports or imports as the
case might be. This procedure is not only conducive to
clearness, but must be resorted to when we seek to ex-
plain why it is that one country can have year after year
an excess of imports over exports — apparently in glaring
contradiction to the fundamental axiom of foreign trade.
The truth is we must take account of what may be
called the quasi-exports and quasi-imports. Thus, for
example, a freight has been well called an invisible ex-
port; the advance of a loan to a foreign state is, so to
speak, an import of securities, and we must pay for these
securities by exporting more commodities ; the interest on
tlie loans, as it is received, is equivalent to so much addi-
tional imports — we now receive imports in return for the
coupons ih?it WQ export; the expenses of our government
abroad or of our absentees must be regarded as if we had
to pay for so much additional imports, these imports being
THE FOREIGN EXCHANGES 343
consumed on the way ; and finally foreigners have to pay
us something on account of commissions for the settle-
ment of various transactions which again is as if they
had to pay us for so much additional exports ; or these
commissions are invisible exports or quasi-exports. It is
owing to the balance of indebtedness on so many of these
invisible exports being so much in our favour that we are
enabled year after year to have an excess of imports.
It seems, then, not only that exports and imports are the
principal elements in international indebtedness in most
cases, but that they may be taken as typical of other forms
of indebtedness ; and in this way the central problem is
simplified without losing in reality.
2. International Debts are payable in Money. — Although
it may be taken as axiomatic that exports are paid for by
imports in the extended meaning of the terms, it is equally
certain that the producers of these exports are paid for
them in the money of their own country. It is all very well
to say that the coal exported from England is paid for by
the wine imported from France, but there is no direct barter
of this kind, and the exchange or payment is only possible
through the intervention of money. The producers of
English coal are paid in English money and the growers
of French wine in French money ; in some way or other
the French consumers of English coal must pay for it in
English money and they must pay this money in England
(and conversely of the wine). The way in which this is
done is explained by the foreign exchanges.
" The foreign exchanges are transfers from the money of
one country to that of another effected by the operation
of bills of exchange " (Tate's Cambist^. It may happen
344 ELEMENTS OF POLITICAL ECONOMY
that the different foreign countries have identical curren-
cies, but the essence of the operation is the transfer of
money power from one country to the other.
It has been pointed out above that every transaction of
commerce is an independent transaction ; but if this means
that all the transactions are settled independently, we
should have a multitude of parcels of coin flowing from one
country, passing in transit a similar multitude coming from
this other country ; and the mints of the respectirve coun-
tries would be constantly employed melting and recoining
foreign money. To avoid all these risks and inconven-
iences, the foreign bill of exchange was invented, and it
may be traced back to the Middle Ages and probably to
classical antiquity.
To explain the use of bills of exchange in the settle-
ment of international debts, suppose that American mer-
chants have exported to England corn, cotton, etc., and
they have drawn bills for the corresponding value on the
English purchasers or importers. These bills, being drawn
on London and accepted by the merchants there, entitle
the American exporters to receive the money for their ex-
ports in London. But so far they would be no better off,
as they would have to fetch the gold from London. But
now suppose that other American merchants buy from
London piece goods of the same value as this corn, etc.,
exported from America. They can of course settle their
debts in London by sending gold, but they can settle them
equally well by buying the bills from the exporters and
sending the bills to London, where they can be cashed by
the sellers of the piece goods. Li this case there is no
passage of gold at all ; by the intervention of the bills of
THE FOKKKiX EXCHANGES 345
exchange the American exporters receive American money
in America, and the English sellers of cloth, etc., receive
English money in London.
In the case supposed the debts are assumed to balance
exactly and the time of payment to be identical, and the
Americans are supposed to take the initiative as regards
both exports and imports. In the actual complexities of
commerce, however, the debts will not exactly balance in
this simple way, and there may be more money due for
American exports than for English exports (or con-
versely). It is this want of coincidence in the debts that
gives rise to the fluctuations in the exchanges. But be-
fore the fluctuations are dealt with the mode in which
the exchanges are quoted must be explained.
3. The Mint (or Nominal) Par of Exchange. — The bills
in our illustration being drawn in pounds sterling and
being sold for dollars, the first thing to consider is the
relative value of the pound sterling and the dollar. This
depends on the amount of fine gold each contains, and the
mint par of exehange expresses the relation between the two
standard coins in terms of their metallic value. Thus the
mint par is deduced from the legal definitions of the re-
spective standard coins. In making the comparison or cal-
culating this mint par we may consider one coin as fixed
and the other as variable. Thus, if we take the pound
sterling as fixed, or as the basis, the mint par with the
United States is 4.866 dollars, with France 25.2215 francs^
and with Germany 20.43 marks.
If the foreign coins were being exchanged at the same
spot in order to be melted down, and there were no ex-
pense in melting or in recoining, the mint par would give
346 ELEMENTS OF POLITICAL ECONOMY
the actual rate of exchange at the time at that place. But
seeing that the primary object of the foreign exchanges is
to settle debts at different places, we must take account of
the expenses of remittance, either of the gold itself or of
what will command gold. It is the variation in this ex-
pense, and the distribution of it between the two countries,
that causes the rise and fall in the exchanges.
4. Gold Points. — Suppose that at any particular time a
number of people in New York have to make remittances
to London, and that a number of other people in New York
are desirous of selling bills, etc., which entitle the holders
to receive money in London. If the demand exceeds the
supply, the price of these bills will rise. But the limit of
the rise will be given by the point at which it will be just
as cheap for the American debtor to send actual gold to
London. This is the outgoing gold point from New York,
and it is calculated as £1 = 4.891 dollars; conversely, if
the supply of bills exceeds the demand, the price falls and
it may fall to such a point that it would be just as profit-
able for the owner of the bill — the American creditor —
to send for the gold. This is the incoming gold point to
New York, and may be taken at XI = 4.831 dollars.
To resume : the mint par is .£1 = 4.866 dollars. If the
rate rises to 4.891 it generally pays to send us gold ; if it
falls to 4.83^, it generally pays to take gold from us. These
gold points or specie points cannot of course be fixed with
absolute precision, as they depend on the cost of transmit-
ting the gold ; but the average is approximately certain, and
at present it is only under exceptional circumstances that
these limits are exceeded. Such occasions arise when there
is great stringency in the money market, or it may be fear
THE FOREIGN EXCHANGES 347
of a monetary crisis. (See Goschen, Foreign Exchanges^
Chap. IV.)
5. Favourable and Unfavourable Exchange. — Fluctua-
tions in the foreign exchanges are described as being
favourable or unfavourable. The use of these terms is
best explained by their history. In former times there
was always much anxiety about the exchange of curren-
cies, and it was considered an unfavourable state of the
exchanges if more money of the home country had to be
given for foreign money than was indicated by the par of
exchange. Thus, if the imports into England had greatly
exceeded the exports, there would be keen competition on
the part of the importers to buy the foreign bills and the
price would rise to specie point ; people would give more
for bills than their nominal value up to the limit at which it
would be just as cheap to send gold. Such a state of the ex-
changes would seem to show that the English currency was
not obtaining the full value in terms of foreign currency.
It would also show that there was a danger of gold
itself being exported from the country, and the export
of gold was considered in itself unfavourable according to
the old mercantilist ideas.
In reality an unfavourable exchange is unfavourable only
to those who have to send money or pay money abroad
(say, the importers), but ^|>so facto it is favourable to the
exporters, who are able to sell their bills for so much more.
The real distribution of the loss and gain of fluctuations in
the exchanges will depend on the terras of the contract of
sale as between the buyers and sellers.
There is, however, a sense in which, under present con-
ditions, an unfavourable exchange may be said to be unfa-
348 ELEMENTS OF FOLITICAI. ECONOMY
vourable to the country as a whole, that is, when the export
of gold is such as to threaten the ultimate gold reserves of
the banking system. In this case there may be a sharp
rise in the rate of interest for money, and possibly a sudden
and severe contraction of credit.
It is the passage of gold from one country to another
under these exceptional circumstances that gives the prin-
cipal interest to movements in the exchanges to the mer-
cantile classes as a whole. To the great mass of people in
this country who are engaged in business of various kinds,
including banking, the movements of the foreign exchanges
are of no interest whatever, except in this one particular,
namely, if there is a rise or fall in the bank rate.
In considering the influence of the rate of interest on
the exchanges, it is necessary to distinguish between long
and short exchange. The typical instrument for settling
foreign payments is the bill of exchange. If, then, this
bill is not payable at sight, but (say) after three months,
its present value for purposes of remittance is subject to
three months' discount. Accoixlingiy, if in New York a
cable transfer on London could be bought (say) at par, that
is, for one pound payable in London, at once 1^4.866 would
be given, then for a pound payable after three months so
much less would be given — and how much less would
depend on the rate of discount in London. Thus at the
time of writing the New Yoik cable transfer exchange is
4.88|, and the exchange at sixty days' usance 4.85.
In certain cases the rate of interest in the country which
draws the bill may be of importance in affecting the ex-
changes. Suppose that the rate of discount in Paris falls
much below tlie London rate. One natural and obvious
Till-: FOKKKIN EXCHANGES 349
result would be that Paris bankers would wish to send
money for investment in London at the more profitable
rate, and thus the exchange would so far turn in our
favour. This natural and obvious influence would be
intensified by a less obvious cause. Bills drawn on Lon-
don by Paris, having their present value calculated at
the London rate, would be a good investment for Paris
bankers. Thus they would compete for these bills, not
for remittance, but for investment. This extra demand,
however, must also turn the exchange in our favour still
more, or at least make the movement more speedy. It is,
of course, the difference in the rates that is of importance,
and shows how a rise in the bank rate tends to attract
gold.
Closely connected with the rate of interest is the state
of credit in both the countries considered. The docu-
ments used for remittance are credit instruments, and the
typical bill of exchange rests ultimately on the credit of
both the drawer and the acceptor. The state of credit is
also an important factor in the determination of the rate
of interest. Although for the explanation of the prin-
ciples only two countries have been taken for illustra-
tion, the rates subsisting between two places will depend
partly on the rates with other places. It might be cheaper
to make a remittance by a roundabout method with a cer-
tain difference in the rates. The adjustment of these rates
is called the arbitrage of the exchanges. This arbitrage
tends to steady the exchanges as between any two places.
Similarly, the operations of banks add to this stability by
creating paper for remittance to pay for imports which are
really paid for by exports at a later date.
350 ELEMENTS OF POLITICAL ECONOJ^IY
6. Effects of a Depreciation of the Currency. — The im-
mediate effects of a depreciation of the currency on the
exchanges are easily understood simply by taking account
of the premium on gold. If a sovereign will buy so many
francs at the mint par, and if the francs are depreciated,
the sovereign must obtain so many more in proportion to
the extent of the depreciation. If the depreciation is very
great, as often happens with inconvertible notes, the appar-
ent course of the exchanges depends entirely on the fluc-
tuations in the depreciation. The other causes are still
there, e.g. the balance of trade, the rate of interest, etc.,
but their effect is hidden altogether by the premium on
gold. There are also in this case no limits to the nominal
or apparent rise in the exchange — that is, taking the
sovereign as fixed, and the depreciated currency as
variable.
Here it may be noticed that if we are considering the
case of remittance /row a country with a depreciated cur-
rency, so much more will have to be given for the bill
payable in gold in the foreign country, and the price may
rise to the extent of the premium on gold, plus the cost
of remitting the gold. Suppose, however, that no gold is
obtainable : in this case there seems to be no limit to the
rise in the price of the bills. The real limits are given by
the cost of sending some export that otherwise would not
have been sent. Thus we have not only gold points, but
also similar export points for all exportable commodities-
People who have to buy gold with a depreciated currency
may find that it will be cheaper to send some form of
produce to the foreign country, and to purchase the gold
there with the sale of the produce, rather than to buy the
THE FOREIGN EXCHANGES 361
gold at an extravagant premium, and in addition pay the
cost of remittance.
7. Indirect Effects of a Depreciation of the Currency on
the Foreign Trade of a Country. — We may now consider
the effects of the depreciation of a currency on its foreign
trade in general. And for simplicity the case of in-
convertible notes may be taken. It may be shown that
the effects will vary according to the mode in which
the depreciation takes place. Suppose that the notes
become discredited almost as soon as issued — that is to
say, that a premium on gold arises before there is any
depreciation of the notes as regards commodities or any
general inflation of prices. In this case exporters from
this country can sell their exports at the usual rates
abroad, and with the gold obtained they can purchase
more notes to the extent of the premium. And so long
as prices do not rise to the extent of this premium, there
will be this so-called bounty on exports. In the same
way it may be shown that there will be a check to im-
ports. The imports will only obtain the same prices as
before, but to remit the proceeds in gold more of the
notes must be given to the extent of the premium. Sup-
pose next that the notes are issued in such a way that
prices rise through the inflation of the currency before
the premium on gold is established. In this case ex-
ports to the country will be stimulated and exports from
it will be checked; the final result will be that the ad-
verse balance must be met in gold, and there will in time
arise a premium on gold ; it is possible that the rise in
the premium may be so great that there will be a rever-
sion to the first case.
352 ELEMENTS OF POLITICAL ECONOMY
If all the parties concei'iied, directly and indirectly, in
the export and import of commodities were to ignore
the proclamations of the government as regards the
use of notes, and were to persistently make all their
monetary bargains on a gold basis, and if they used the
notes at all, only did so at their value in terms of gold,
then there would be 7io effect on the foreign trade through
the depreciation. It is very doubtful if this theoretical
result is ever attained in practice. The people Avho
really pay for the imports are the consumers in the
country with the depreciated currency, and the people
who must eventually receive the money for the exports
from this country are the producers there ; and, in general,
both producers and consumers are obliged to use this
depreciated paper, and they do not understand fluctua-
tions or make accurate allowance for them. Thus, alto-
gether apart from foreign trade, it is well known that
the mercantile classes often gain at the expense of the
consumers, especially the working classes.
In any case the foreign trader may insure himself
against risk by making his bargains on a sterling basis
of exchange, but he cannot prevent the depreciation af-
fecting the conditions of demand and supply in the
internal markets of the country concerned ; these mar-
kets are influenced by the extent and the mode of the
depreciation, and indirectly they affect the foreign trade.
Similar reasoning may be applied to the case of the de-
preciation of silver, though this case is more complicated.
(See Money and Monetary Problems^ ]). 342 sq.^
There are other problems connected with foreign trade
that are in my opinion best explained by taking into
Tin: FOREIGN EXCHANGES 353
account Ihe foreign exchanges. Such are the effects on
the balance of trade and thus on the distribution of the
advantages of the introduction of some new export due
to a fall in price consequent on an improvement in pro-
duction. The argument adopted by Mill (^PrincijAes,
Book III, Chap. XXI) is as follows : this new export will
disturb the balance of trade; the imports to the country
will no longer balance the exports, and in consequence
money will flow to the country; prices will rise there
and fall in the other country in response to this redis-
tribution of the gold, and thus exports from the first
country will be checked and imports into it increased
until the balance is restored. If there are only two
countries to be considered, and if the price levels are
supposed to be adjusted directly in response to the
movements of gold and in proportion to the quantities,
and if various other hypotheses are made, this modus
operandi might serve as an explanation. But when we
consider that the new export may be sent to all parts
of the world, and that owing to other causes the flow of
gold may be in a different direction, this explanation
seems to fail to meet the complexities of real foreign
trade. In the same way the argument of Mill, to the
effect that the respective countries gain and lose in a
general way by these effects on their respective price
levels, though highly ingenious and as an example of
abstract reasoning very instructive, seems inapplicable
to actual conditions. The case of the payment of a
tribute from one country to another involves the same
reasoning and the same assumptions.
The preferable view in my opinion in both of these
354 ELEMENTS OF POLITICAL ECONOMY
cases is that the adjustment of the payments is made not
by any operation on general prices and the transmission of
gold, but by the export of any exportable commodity that
is on the " margin of doubt " as to its destination. (See
Principles, Vol. II, Book III, Chap. XXVI, Sees. 12-14.)
8. On the Distribution of Gold throughout the Commer-
cial World. — If we take a system of gold-using countries,
the levels of prices in particular countries are adjusted
to the general level throughout the system having regard
to special causes of difference. Broadly speaking, gold
may be sent from one country to another for two pur-
poses. It may be sent to meet previous obligations; but
it will not be so sent if cheaper modes of remittance are
available. Exports pay for imports through the medium
of bills, and it is only when the bills fail that gold is sent
for the relatively small balance. And even as regards this
balance, it may be met by sending securities or any readily
saleable export. If gold is thus sent, it augments the bank-
ing reserves of one country and so far diminishes those of
the other ; but in general there is no direct expansion and
contraction of the respective currencies, and still less is the
course of international trade determined by the rise and
fall of the general price levels in different countries in
response to these movements of gold. The shipment of
gold follows and does not determine the course of trade.
But gold may also be sent from one country to another for
banking requirements. If a country finds its banking
reserves getting low, it seeks to correct the exchanges by
raising its rate of discount. The movements of gold on
this account are of general importance only in exceptional
times.
THE FOREIGN EXCHANGES 355
Commercial countries are now so closel}'" connected that
we have to compare any one with the rest of the world.
Any stimulus to exports or imports, due to the movements
of gold, being diffused through such a wide area, is speedily
lost; and on the whole the differences between domestic
and foreign trade tend to become less and less except as
regards political influences and tariffs.^
1 The standard work on the foreign exchanges is that of Goschen. The
only drawback is that the illustrations are for the most part out of date.
This fault may be remedied by reference to Clare's ABC of the Foreign
Exchanges. For the effects of depreciations and for a critique of the
usual argument on the distribution of gold see Principles, Book III, Chap.
XXVI, and Money and Monetary Problems, essay on " Movements in Gen-
eral Prices," also Bankers'' Money., Chap. II.
CHAPTER XV
ADVANTAGES AND DISADVANTAGES OF FOREIGN TRADE
1. The Real Advantages of Foreign Trade. — The most
obvious advantages of foreign trade are those obtained by
the consumers of the respective countries. They obtain
goods that cannot be produced at home, as in the exchange
of the produce of the tropics for that of the temperate
zones. And things that can be produced at home are
obtained more cheaply and abundantly from foreign sources
of supply. The second of these advantages follows from
the theory of comparative cost.
Unless, then, it can be shown that the incomes of consum-
ers are adversely affected by foreign competition, and that
they fall more than in proportion to the full in the price of
commodities, there is a real gain to the consumers under
both heads. It is claimed for the theory of consumers' rent
(or surplus) that it measures this gain more accurately
than is possible by mere descriptive methods.
When we look to the incomes of consumers the most
obvious consideration is that they are for the most part the
earnings of producers. And here the principle is applied
that is fundamental in foreign trade, namely, that imports
must be paid for by exports. Accordingly, when a foreign
trade arises and displaces some commodity formerly pro-
duced at home, it is nrgued that if the trade is to continue,
the corresponding labour and capital displaced must be
356
FOREIGX TRADE 357
employed, in part at least, in making some export that will
1)6 taken by the foreigner in return for his export sent to
us. If the foreigner does not take our new export directly,
he must take payment from some country that will —
otherwise the fundamental axiom of foreign trade would be
contravened. It is also maintained that the rest of the capi-
tal and labour displaced from the home industry cannot in
general be sent abroad and will flow to the most advan-
tageous emploj^ment in the home country. Here the as-
sumption is that all the productive powers of a country can
find some kind of employment, if not in some things then
in " other things." This argument is popularly expressed
in relation to commercial treaties in the saying. Take care of
the imports, and the exports will take care of themselves.
If this natural course of trade is allowed free play, every
country will produce for itself and for other countries that
in which it has the greatest relative advantage (or least
disadvantage), and on the whole there will be a greater
return to the aggregate productive powers of the world, or
for the same return as before there will be a less expendi-
ture of labour and effort.
It is also maintained that the extension of territorial
division of labour and localisation of industries will, in
general, increase the aggregate productive powers still
more ; and the real increase of wealth or leisure, to be
divided between the various trading nations, will be so
much greater.
Furthermore, it is maintained that this extension of the
range of markets, at any rate in times of peace, tends to
steady both supply and demand, and thus to steady
prices, and this steadiness is further increased by the
358 ELEMENTS OF POLITICAL ECONOMY
development and inter-connection of the national credit
systems. Again, this reciprocity of interest in turn
strengthens the guarantees for peace and induces nations
to render mutual services of various kinds, as in railways,
postal and telegraphic communications, safeguards for
navigation and the like. This general increase of security
is shown in a marked manner if we compare mediaeval
with modern commerce.
There can be no doubt that these and similar advantages
have been obtained by the world at large through the
progress of international commerce. And in some cases,
especially in that of the United Kingdom, the national
progress has been increased to a wonderful degree by
the development of foreign trade, especially in the nine-
teenth century.
At the same time it is possible that some particular
nation under certain conditions may suffer whilst all the
world gains, just as a particular district in any one coun-
try may suffer whilst all the rest of the country benefits
by the transfer of labour and capital.
It may be useful to notice some of the possible dis-
advantages, from the national standpoint, that may arise
from the extension of foreign trade in general, or of
some particular branches.
2. Possible Disadvantages of Foreign Trade to a Particu-
lar Country. — Even from the consumers' point of view dis-
advantages may arise ; as when the greater interests of tlie
future are sacrificed to the lesser interests of the present.
Thus limited natural resources of various kinds may be
exploited rapidly and wastefully, so that a few years'
cheapness may be outweighed by many years' dearness.
FOREIGN TRADE 359
In technical language the law of diminishing return may
come into play sooner and more severely in consequence
of large exports, e.g. coal. A country that exports con-
tinuously large quantities of raw produce, e.g. corn, may
be said to export the land itself (Carey).
Again, it is generally admitted that the consumer is not
always the best judge of his own interests, as is shown in
the case of material commodities by laws against adultera-
tion and the like. It is quite possible that a cheap foreign
product may be less advantageous than the corresponding
dearer home product, and that it may be advantageous
to prohibit the importation of certain foreign goods {e.g.
spirits into certain new countries, opium into China, etc.).
From the producers' point of view theoretical exceptions
may be discovered to the universal benefits of foreign trade.
The assumption that labour and capital can always be
diverted from an industry that is ruined by foreign
competition to " something else," will obviously not hold
good of the capital and labour that are specialised to a
high degree. In every nation the principal trade is
between the towns and the country. Now it is quite
possible that the opening up of foreign markets may
seriously injure either the manufactures of the towns
or the agriculture of the country. Suppose that English
manufactures find a ready market abroad, and that
foreign food-stuffs find a ready market in England, so
that there is a great expansion of trade on both sides.
The balance of trade may be simply preserved by the
contraction of English agriculture, and the labour and
capital employed in agriculture can only be gradually
and partially diverted to manufactures. The manufac-
360 ELEMENTS OF POLITICAL ECONOMY
turing classes, it is true, benefit as consumers of food;
but from the producers' point of view, it may happen
that the depression in agriculture more than outweighs
the gains in manufacture. If there is a rapid transfer
of labour, the overcrowding of cities and the depopula-
tion of the country may deteriorate the general condi-
tions under which work is carried on, and intensify the
disutility of labour. It is notorious that the progress of
English manufactures after the industrial revolution was
accompanied by great social evils.
It may be recalled, in this connection, that one of the
cases that Adam Smith thought worthy of the delibera-
tion of governments, as regards the continuance of a
protective policy, was when the industry threatened by
the adoption of free trade gave employment to a large
number of labourers. In this case he said, " Humanity
dictates that the freedom of trade should only be re-
stored by slow gradations." This is, of course, a form
of the general argument of the rights of vested interests
of labour and can only be used with caution.
Again, if we take the case of a new country, it will
naturally turn its attention to the production of agricul-
tural products and raw material. Ikit this excessive
devotion to the extractive industries will so far check
manufactures and the growth of towns. It is possible
that in the end even agriculture may suffer because
there is no near market for its by-products. Most econ-
omists, including Adam Smith and Mill, have noticed
this argument in favour of protection to new countries.
On the other hand, it may be pointed out that there
is the danger of the creation of vested interest, and that
FOREIGN TRADE 361
the temporary protection begets all kinds of protection.
It is possible that, at the same time, both the manufac-
tures and tlie agriculture of an old country might suffer
from the competition of new and rising countries. Al-
though it is true that all trade is barter, and that com-
modities pay for commodities, it is also true that exchanges
are only effected by the intervention of money, not
necessarily as a medium of exchange, but as a measure
of values. It is extremely diflicult to adjust wages and
fixed charges to changes in prices due to foreign com-
petition. When it is said that foreign competition
renders some manufacture impossible, it is often only
true with the understanding that the old rates of re-
muneration are to be maintained. In the end no doubt
the fall in wages must take place if rendered necessary
by foreign competition, but the fall may be resisted so
long that the market is lost or only partially retained.
And in any case, there is the difficulty that the wages
in this particular trade must normally stand in a certain
relation to wages in general.
The idea on which Adam Smith so often insists, namely,
that the richer the neighbours of a country, so much the
better for that country, is not always and necessarily true.
In effect, the richer countries may compel the poorer to
become self-supporting. They may obtain their food and
raw material from distant and unexploited lands, and
make all their manufactures cheaper than the poorer
country. The injury that may be caused to a nation by
the opening up of some new trade route, or by the con-
version of a roundabout trade into a direct one, has been
exemplified in history by the transfer of commercial
362 ELEMENTS OF POLITICAL ECONOMY
supremacy from northern Italy to Holland, and from Hol-
land to Britain.
It is extremely difficult in foreign trade to estimate
accurately the advantages and disadvantages when we
have to compare, for example, the benefit of a fall in price
with the evil of the loss of employment. If a number
of people lose their regular employment, or are converted
from skilled to unskilled labourers, there may be little
real compensation in the fact that a far greater number
obtain some kinds of commodities a little cheaper. This
truth was well expressed by Mr. Gladstone when he
declared that the working classes would benefit more by
fiscal reforms, that extended the field of emplojanent, than
by such as reduced the prices of consumable commodities.
" It is a mistake to suppose that the best mode of giving
benefit to the labouring classes is simply to operate on
the articles consumed by them ; if you want to do them
the maximum of good, you should rather operate on the
articles which give them a maximum of employment."
It may be recalled that with Adam Smith the funda-
mental test applied as regards the relative advantages of
different modes of employing capital is the effect on the
employment of labour within the country. The proxi-
mate cause of any change in the direction of trade is a
change in the profit to be obtained. But maximum
profit is by no means synonymous with maximum national
advantage. Adam Smith made the difference abundantly
clear ; but in the attempt to make the popular argument
for free trade simple and dogmatic, his complex reason-
ings were forgotten. The most striking illustration of
the difference between pi;ofit and advantage is found in
FOREIGN TRADE 363
the central position of his attack on the monopoly of the
colonial trade ; the root cause of the evils of that monop-
oly in his view is to be found in the high rate of profit to
which it gives rise, directly in the colonial trade and
indirectly in all other trades.
The popular idea that so long as the capital gave equal
profits, it was a matter of indifference to the nation at
large to what employment it was directed, was not only
not approved of by Adam Smith, but was distinctly con-
troverted by hira. Thus, the most advantageous of all
the employments of capital was in agriculture, although
the profit was less than in the distant colonial trades
and in the carrying trade. Of all the employments of
capital, that in the carrying trade was the least advan-
tageous to the nation as a whole, because the real advan-
tages were obtained by other nations, whilst we only
obtained the profit or commission. On other grounds,
indeed, he approved of the encouragement given to that
trade by the Navigation Acts, but the chief reason as-
signed is that defence is of more importance than opu-
lence; that is, the Acts were approved of on political and
not on economic grounds.
A similar argument to that employed by Adam Smith
may be advanced by taking into account not only the
quantity of the employment, but also its quality. It is
to the advantage of a nation that its people should not
be simply hewers of wood and drawers of water, but
rather engaged in crafts that demand a high degree of
skill. This idea was recognised by the founders of the
mercantilist policy, and was developed in a remarkable
way by List (^National System of Political Economy^ ;
364 ELEMENTS OF rOLITICAL ECONOMY
but in recent times it was a favourite theme of Mr. Glad-
stone-
It would be easy to multiply examples of the pos-
sible disadvantages that a particular nation may suffer,
although the world may gain, from the development of
foreign trade in certain directions. It is even possible to
show that there are cases in which the world at large
might lose by the premature extension of foreign trade.
(See the ingenious argument of Sidgwick, Principles of
Political Economy^ Book III, Chap. V.)
How far the government of a country by duties or
bounties, by preferences or prohibitions, by commercial
treaties or retaliation, may contrive to minimise such
disadvantages, will depend partly, at any rate, on the
wisdom and on the powers of governments. It is one
thing to admit an evil ; it is quite another to provide a
remedy. The possible disadvantages of foreign trade may
be further increased by the fiscal action of foreign states
and by the action of foreign '-^ trusts." (See below. Book V,
on the economic functions of government.) ^
1 The literature on the subject of this chapter is voluminous. For an
account of the views of Adam Smith, see introductory essay by present
writer to Wealth of Nations (Nelson) ; Sidgwick, Principles of Political
Economy, Book II, Chap. Ill, and Book III, Chap. V ; List, National
System of Political Economy ; Patten, The Economic Basis of Protection ;
Bastable, International Ti-ade ; and also Commerce of Nations.
BOOK IV
ECONOMIC PROGEESS
CHAPTER I
THE NATURE AND MEASUREMENT OF ECONOMIC PROGRESS
1. Connection of Economic Progress with General Progress.
— Just as attempts have been made to reduce political
economy to a branch of a system of general sociology, so
also it has been maintained that economic progress can
only be understood as part of progress in general. The
progress of society includes, no doubt, many factors which
indirectly affect economic progress, e.g. religion, morality,
law, art, etc. ; but it is impossible to deduce the idea of
economic progress from the wider idea of social progress.
The idea of progress in general has always proved
elusive, and perhaps the most remarkable result of the
history of philosophy is that the idea of progress has in
general lagged behind the reality. Nations have progressed
without any idea of progress ; and the progress has been
very real, even in cases which we have been accustomed
to regard as typical examples of stagnation. It is asserted
by Professor Flint that in China there was as real progress
in the actual development of thought and history as in
Greece itself ; but, as in so many other eastern nations,
in place of any idea of progress there was only an idea of
cosmical and human cycles. Again, in the mediaeval
period in every department of human activity there was
very great progress, but there was no corresponding com-
prehensive idea. From the sixteenth century onward a
367
3G8 ELEMENTS OF POLITICAL ECONOMY
number of attempts were made to express the idea of
progress, sometimes derived from the perfections of God
and sometimes from tire perfectibility of man, but none
was accepted by thinkers as satisfactory.
In the hitter half of the nineteenth century, however,
the theory of evolution has been thought to give a formula
which can be applied to the universe in general, and every
part and process of it. It is impossible here to discuss,
even in outline, the general theory of evolution. But some
points may be noticed as bearing on economic progress.
It will be generally admitted that the theory or formula
of evolution is useful in providing a general terminology,
and in suggesting lines of inquiry, methods of classifica-
tion, and ideas of continuity; but so far its aid is only
formal, as in the case of logic and mathematics.
The general theory of evolution provides no easy substi-
tute for the examination of the particular evidence that
every science requires. It may be said, for example, that
constitutional history affords an excellent example of evo-
lution ; the formula can be applied in every detail, but it
will not enable the historian to dispense with the examina-
tion of a single document. And if we accept the ideas of
evolution in general, as applicable over a wide range of
very different phenomena, we must be careful not to mis-
take vague analogy for reasoning ; and we must beware
more than ever of the use of inappropriate conceptions,
which in all ages has been the greatest hindrance to real
scientific progress.
In particular, we cannot transfer directly the ideas of
biology to economics ; we may, indeed, use the terms
survival of the fittest^ reversions^ atavism^ differetitia-
THE naturp: of economic ruociiEss 309
tion, and so forth, without much danger, but we cannot
descend into the mysteries of protoplasm and the nature
of heredity in the lowest forms of life with any hope
of obtaining light on primitive economic structures.
The conclusion is that in dealing with economic progress
we must deal with economic ideas and with economic
facts.
With regard to the facts, it is necessary to go to the
researches of the economic historians ; but in dealing with
historical facts it is necessary to have certain guiding ideas.
2. The Nature of Economic Progress. — The simplest
idea involved in economic progress is increase in wealth.
In making quantitative estimates of national wealth, we
naturally adopt the monetary standard ; and the first pre-
caution is to make allowances for any changes in the value
of the standard. Such a change may have arisen, if we
are comparing distant periods, either through causes
affecting the standard itself, as in the change in the
meaning of the pound, or through any of the causes
affecting its value, such as are enumerated in the
quantity theory. (See above, Book III, Chap. VI.)
We must also consider the qualities of the things that
at different times are called by the same names, e.g. bread,
houses, cloth, etc.
Next to the increase of wealth we consider the growth
of population. " The most decisive mark of the prospeiity
of any country is the increase of the number of its inhab-
itants" (Adam Smith). Even in modern times for some
purposes this mark is of the first importance in national
progress. It implies greater power of defence, especially
with universal conscription, an increase of the combination
2b
370 ELEMENTS OF POLITICAL ECONOMY
and division of labour, and improvements in the means of
transport. In general, an actual increase of numbers shows
also that the positive checks (which are comprehensively
included under the term misery^ are not keeping down
the population, that there is no undue exercise of pru-
dential restraint, and that there is an increase in the con-
suming powers of the people or in their real wages.
On the other hand, in estimating progress in population,
the simple quantitative measurement is not enough: we
may have an increase in numbers with no corresponding
improvement in quality, and even with positive degrada-
tion. It is not possible, however, to obtain any simple
test of improvements in quality. The only plan seems
to be to take account of a number of separate factors.
A good example is given in that classic work, Porter's
Progress of the Nation^ which, although dealing essen-
tially with economic progress, describes the progress of
the nation in morals and manners, not from any ideal
or metaphysical standpoint, but by concrete reference to
sports, drinking, theatres, and by statistics of education,
crime, health, average life, etc.
Attempts have been made to obtain more precise modes
of estimating the progress of population, apart from mere
numbers. One of the oldest methods is to make a mone-
tary valuation of the people. The idea is exemplified in
ancient legal systems in which every person and every
part of him was appraised for the purposes of compen-
sation ; there was the tvergild for the life, and so much
less for particular limbs and feelings — an outrage such as
shaving the head in derision was more heavily fined than
the loss of a limb. At the present day damages for inju-
THE NATURE OF ECONOMIC PROGRESS 371
lies of this kind, material and sentimental, are constantly
estimated. We have only to extend the application of the
principle from individuals to the aggregate to obtain an
estimate of the money value of a whole population. In
making such a valuation we may, as in the case of material
capital, apply the ideas both of cost of produetion and of earrv-
ing capacity. It has often been observed that the rearing
and education of children involves a very real monetary
cost, and estimates have been made at different times of the
cost of production of the finished child. Roughly, we may
apply the maxim that the greater the cost the greater the
value. The prohibition of work to children under a certain
age increases the cost, but improves the quality. If the
education of children is paid for out of the rates and taxes,
the money cost is none the less real, and may well be
greater. As we ascend in the social scale, so much higher
becomes the cost of professional training, and we may take
account of the capital sunk in education just as much as
of that sunk in land.
But, as in material capital, so also in living capital, cost
alone does not determine value : we must take account also
of earning capacity. One of the best signs of material
progress is the increase in the numbers of the more highly
paid forms of labour compared with the lower. (See be-
low, Chap. V.) The wages of a nation may be arranged
in a series from the lowest unskilled labour up to the
highest professional skill. Population remaining the same,
progress may be estimated by the relative distribution in
the numbers of the classes. (A striking illustration is
afforded by Giffen's essays on the " Progress of the Work-
ing Classes.")
372 ELEMENTS OF POLITICAL ECONOMY
3. Progress and Utility. — It is clear, however, that
money estimates, whether of things or of people, can
only show the nature of the progress of the nation
very imperfectly. We must go behind the money cost
and the money earnings to the real cost and the real
earnings.
And first of all we may appl}^ the ideas of utility and
disutility. Under ordinary conditions we suppose that an
increase in the money wealth of an individual means to
him an increase of utilit}^ (or happiness), even supposing
that the individual is obliged to earn the money. We
suppose that the labour of acquisition will be carried to
the point at which the disutility of the work just balances
the utility of the gain. The same ideas may be applied to
a nation. It may be supposed that every increase in its
money wealth shows an increase in the aggregate utility
of that wealth. Here, however, it is still more important
to distinguish between total and marginal utility or, in the
older pliraseology, between riclies and value. (See Ricar-
do's Principles, Chap. XX.)
A rise in the aggregate money value of the houses may
mean improvements in size, convenience, sanitation, etc.
One of the best concrete signs of progress is the increase
in the number of rooms in a house and of the windows.
But sometimes a rise in money value may point to a
decrease in utility to the nation, e.g. exhaustion of natural
resources with greater value of the remainders, monopolies,
increase of taxation, checks on foreign trade, etc.
Conversely, a fall in price may point to an increase of
utility, e.g. the exploitation of new sources or improve-
ments in production. In fact, from the national standpoint
THE NATURE OF ECONOMIC PROGREbS 373
it seems best to regard an increase of cheapness as meaning
an increase of utility (the root idea in consumers' rent).
If the cheapness is due to better natural sources of supply,
or to more effective methods of production, this is no doubt
true ; but for the nation there is the danger of underestimat-
ing in some cases the real cost. It is sometimes best and
even necessary to leave out money. In the early years
of the factory system in England the increased cheapness of
the product was small compensation for the disutility of the
degraded labour of the children. Exchange often conceals
the real character of national production. It is true that
the makers of cheap goods by degraded labour provide
themselves with necessaries, and to them the utility of the
money earned is very great ; but from the national point of
view, if we compare the disutility involved in some kind
of work with the utility of the cheap product to the con-
sumers, there may be a large balance of disutility. We
must set producers' deficits against consumers'' surpluses.
This is illustrated in the most striking way in the old
systems of slave production. And in modern times it is
the basis of factory legislation and generally of the regu-
lation by law of the conditions of labour. And logically the
extension of the principle would lead up to the prohibition
of certain forms of cheap labour, even at the cost of an
extension of poor relief.
The general conclusion of this application of the ideas
of utility and disutility to progress is that the assistance
given by them is formal and suggestive rather than sub-
stantial and historical, exactly as in the case of the general
theory of evolution. Just as we must go behind the
money to the utilities and disutilities, so also we must go
374 ELEMENTS OF POLITICAL ECONOMY
behind these again to more definite mental and moral ele-
ments, such as those indicated above.
4. Progress in Production, Exchange, and Distribution. —
Economic progress may be considered from the standpoint
of the great departments, into which political economy is
divided for the purpose of exposition. Progress in pro-
ductive power, as shown by the increase of man's power
over nature, is so striking and so continuous that it needs
no illustration. We can trace from the earliest beginnings
the development of agriculture, mining, weaving, building,
etc.
Similarly of exchange, which logically is a part of pro-
duction. We discover the same continuity and progress
in the means of transport by land and sea and in the ex-
change of products by trade. Taking a broader view, one
of the greatest agencies of progress has been the commuta-
tion of payments in services and in produce into money
payments, the economic form of progress from status to
contract. The history of commutation is one of the prin-
cipal strands in the history of civilisation.
At present, however, it is perhaps more important to
notice that in some things progress has consisted more in
the complete or partial abolition of money payments and
in the restraint of freedom of contract. The principle of
equality before the law was only accepted with great diffi-
culty in the most progressive nations, and on the economic
side this means that justice is not to be bought or sold.
Even under present conditions, however, this ideal is only
imperfectly realised on account of the costs of legal advice.
The tendency of modern times has been to make a
large part of education a free gift, and the ideal of social-
THE NATURE OF ECONOMIC PROGRESS 375
ism is to extend the forms of wealth, both material and
immaterial, that are not to be subject to exchange.
In production and exchange in the last resort economic
progress consists to a great extent in the economy of means
to ends, the desirability of the various ends being supposed
to be given. Progress in distribution, however, only seems
intelligible when it is estimated according to some ethical
standard, and here the difficulty is that there is no general
agreement as to the ultimate test that ought to be applied.
Are we to say, for example, that the distribution is best
which leads to maximum happiness, or is more stress to be
laid on the idea of freedom or self-realisation ?
In this conflict of fundamental principles, it seems best,
for economic purposes, to stop short at those middle axioms
that are accepted by practically all systems of moral phi-
losophy that attempt to give precision to common sense,
thought, and practice. When we take a broad view, we
may hope to discover signs of progress in distribution that
will be generally admitted, just as we can discover also
signs of physical health that are generally accepted in
spite of the controversies that still rage on fundamental
principles in medicine.
What may be specially termed the economic principle of
distribution (as adopted in this work) may be reconciled
with any system of moral philosophy. As already indi-
cated in the second book, it is associated with or founded
on the organisation and conditions requisite or conducive
to production : economic distribution is that which tends
to secure maximum efficiency at the minimum real cost ; to
proportion reward to effort; to secure the fruits of the
productive agents to their creators and preservers ; to
376 ELEMENTS OF POLITICAL ECONOMY
extend the freedom of individuals, and to further the
development of contract. This economic principle cannot
be indicated in any simple proposition because it is ap-
plied in different ways and the difference becomes more
marked with the increasing complexity of the productive
organisation.
As in the case of other complex economic conceptions (e-g-
equality of taxation) it may be made more clear by a con-
sideration of the opposite. Negatively, then, the economic
principle as here understood is opposed to distribution by
force or by privilege or habit or unconscious routine, as
exemplified in successive systems of law and custom. All
that is involved in this general statement can only be
realised by the study of economic history. If we take a
rapid survey of the salient features of the distribution of
wealth in England at different periods, we observe through
the ages that the economic principle becomes more and
more the dominating purpose. In the Roman occupation
distribution rested on slavery and extortionate taxation ;
in the Saxon economy the possession of land gave the
command over labour; but from the Norman Conquest
throughout the medieeval period the force of this economic
principle reduced more and more the privileges of the
crown, the nobility, and the church ; it weakened the
power of the landholders over the serfs, and at the end of
the period it broke down the monopolies of gilds and
corpoi-ations. The destruction of privilege was not com-
plete, and al)uses destroyed in one form reappeared in
other forms. The great work of Adam Smith on the
negative side was to shatter the survivals of the old ideas
of distribution, and on the positive side to show the benefits
THE NATURE OF ECONOMIC PROGRESS 377
of the adoption of the economic principle. In modern
times, and notably in the nineteenth century, the ideal —
"to each the product of his own labour" — has been set
up by those who differ greatly as to its real meaning. But
this uncertainty of interpretation does not weaken, and
perhaps indeed strengthens its destructive power; it is
easy to see that some privilege or monopoly or institution
conflicts with this ideal, though there is a divergence of
view as to the best substitution. ^
1 The whole of Book IV is much more fully dealt with in the Principles
than was possible in this summary. Throughout this book it is necessary
to refer to economic history, and the student should not be content with
mere summaries. Cunningham's Groioth of English Industry and Com-
merce contains a mass of detail and has the advantage of being written
■without preconceived ideas ; Seebohm's English Village Community is an
admirable study of one most important side of economic progress ; Ash-
ley's Economic History should be read with Seebohm ; for general pur-
poses the third book of Adam Smith may be contrasted with the fourth
book of Mill, to the manifest advantage of the former ; the works of Loria,
especially the Economic Bases of the Social Constitution, though they
exaggerate the material side of history, are most suggestive and supple-
ment the ordinary view ; the best account of the idea of progress is in
Flint's Philosophy of History ; Pareto has carried to an extreme the
application of the theory of evolution and the analogies of biology ; of
German works the first volume of Wagner is best adapted for general
purposes. For the history of the theory of economic interpretation see
Seligman's Economic Interpretation of History.
CHAPTER II
PROGRESS IN MONEY AND PRICES
1. Progress and Money. — As already shown, one of
the most distinctive signs of economic progress is the
continuous extension of the use of money both for valua-
tion and for exchange. The principle of commutation,
however, can only operate by a corresponding develop-
ment of the mechanism of money, and of the monetary
functions. Indirectly the history of money throws great
light on other departments of economic progress. Even
in biology there is nothing more striking than the develop-
ment of the modern banking system from the primitive
forms of barter. The salient points in the history of
metallic money in England are summarised in this sec-
tion, as history without detail is only another form of
theory.
From 1066 to the great recoinage of silver in 1696
the real standard was silver, and except during the Tudor
debasement (1543-1552) the ancient fineness was undis-
turbed. The standard measure was the pound of silver
(which as explained before had taken the place of the
man slave), and it was coined always into 240 pennies.
At first, only foreign gold coins were used, but in the
middle of the thirteenth century, "an age of revolution
and new ideas all over the world," a native gold coinage
was adopted almost simultaneously by all the nations of
378
PROGRESS IN MONEY AND PRICES 379
Europe, and the king of England struck gold pennies ; but
the gold coinage was rather a sign than a reality till the
celebrated nohle of 1344. This beautiful coin was about
one-fifth heavier than our present sovereign. It is remark-
able how many events, apparently disconnected, combined
to emphasise the transition from the media3val to the
modern period. The sovereign was first coined by
Henry VII in 1489, and was about double the present
weight.
From the first issue of gold coins they were used as
equivalent to varying amounts of silver. A ratio was
generally fixed by royal proclamation ; and as the market
ratio was constantly differing from the legal ratio, there
were abundant illustrations of the fact that a double
standard is an alternating standard.
The difficulty in fixing the ratio was increased by the
progressive fall in the weight of the silver penny, and
the ratio was of course fixed only in reference to the ex-
change of coins — so many silver pennies for the gold
penny was the form of the first proclamation. The pro-
gressive fall in the weight of the silver penny may be
accounted for by the wear and tear of the coins, the de
facto fall in weight of the actual currency being recog-
nised by the king; the process of this natural degrada-
tion in weight was intensified by the use of worse foreign
coins, and after gold was used, there was the operation of
Gresham's law. As a result, the silver penny fell from
22|- grains at the Conquest to 7^ in the reign of Elizabeth.
In 1694 the silver coins in circulation had become so
clipped and worn that the guineas nominally worth only
208. were generally accepted for 30s.
380 ELEMENTS OF POLITICAL ECONOMY
In 1696 the silver coinage was restored at a cost of
over three millions sterling, and in a few years was dis-
placed from circulation by the overvalued gold coin.
The effect of this overvaluation was the adoption (even-
tually) of the gold standard (1816). The adoption by
England of the gold standard was the result of a series
of historical accidents as regards the particular year and
the particular weight of the sovereign. At the same time,
however, in the light of subsequent history, it may be said
to accord with the natural development of trade and
commerce. International bimetallism is theoretically
possible, and might have been advantageous if obtained
without disturbance ; but national bimetallism, as the
history of England shows, is unstable and inconvenient.
2. Progress and General Prices. — There are continuous
records for six centuries, both in England and in France,
thanks to the labours of Rogers and Vicomte d'Avenel,
respectively ; and a survey reveals that there are move-
ments in general prices, as well as great changes in par-
ticular relative prices.
With regard to general prices, it is evident from the
quantity theory of money in its extended form, Avhich
takes account of many other causes besides the actual
quantity of metallic money, that it is a matter of difficulty
to assign the true causes to the actual movements that
have taken place ; and there is also a preliminary diffi-
culty. Although from the Conquest downward, prices
have been expressed in England in terms of pounds, shil-
lings, and pence (X s. d. being the first letters of Uby-a,
solidus, denarius^, the pound being the standard unit, and
the shillings and pence definite submultiples, the metallic
PROCiliK.SS IN MONEY AND TUICKS 381
meaning of the pound itself and of the divisions of it has
changed (see last section). We find also that at differ-
ent times the actual currency has been different from the
legal weiglit of the time, and that sometimes the fact has
been recognised and sometimes not. It might, then, be
thought that the best plan would be simpl}' to reduce the
prices in all cases to the corresponding weights of silver,
so long as silver was the standard. Such a procedure,
however, implies that general prices move exactly in
response to changes in the weights of the standard coins.
But such an exact correspondence would only be effected
under the assumptions that the quantity of money was
increased exactly in proportion to the diminution in
weight, and that the quantity of the metallic money was
the only factor that need be taken into account. Such
a simple view of the movements in the value of money
would only be adequate under the simplest hypothetical
conditions. And it is indeed remarkable that Rogers, who
made most violent attacks on the abstract method, should
himself have used that method without the precautions that
are necessary. It is worth while making a brief reference
to the sigfniiicant facts. From 1260 to 1540 the weight of
the silver penny fell from 22| grains to 10|- grains ; that is
to say, a pound of silver at the latter date would have made
more than twice as many pennies as at the former (the silver
penny being the principal coin throughout). If, then,
general prices had moved in response to changes in the
weight of the penny, which was the standard coin, they
would, on the average, have more than doubled ; and if we
could take wheat as representative, wheat would so far
have more than doubled in price, having regard only to
382 ELEMENTS OF POLITICAL ECONOMY
the causes affecting prices in generaL But instead of any-
such upward movement, on the whole, prices were steady,
and wheat throughout oscillated about six shillings the
quarter. In order to make his prices square with the
simple theory which he tacitly assumes, Rogers supposes
that people actually made their bargains, not in currency,
but in weights of silver, and that the penny that is quoted
means an actual penny weight, according to the old stand-
ard. This opinion of Rogers has not been generally
indorsed, and, on the contrary, has been distinctly con-
troverted (^e.g. by Cunningham and Seebohm), and it is
only mentioned here to indicate the difficulty there is in
dealing with general prices.
The stability of prices through the mediaeval period is to
to be explained only on the supposition that there was, on the
whole, a comijensatory action of the varied causes at work.
The fall in the weight of the penny so far counteracted the
scarcity of silver as regards production from the mines ;
greater rapidity of circulation and improved markets so far
compensated the increased volume of trade, etc. ; but this
stability, which is too readily ascribed to custom, was liable to
be destroyed as soon as any one factor became of dominant
importance. Thus the issues of base money by Henry
VII I, and later the discoveries of silver, so increased the
quantity of money that prices rose to a permanently higher
level.
As regards the connection of movements in general
prices with economic progress, it does not appear that any
causal connection can be established. No doubt if the
rise in prices is due to a fluctuating depreciation or de-
basement of the standard, it so far is a hindrance to trade
PROGRESS IN MONEY AND PRICES 383
through the uncertainty imparted to contracts. But tak-
ing the great movements in the value of the standard, first
silver and then gold, it seems that the gradual break-up
of the mediaeval system was associated with a gradual
appreciation of the metal silver, although prices remained
comparatively stable as just explained; the transition
from the mediaeval to the modern period was associated
with a rise in prices (and a fall in the value of silver) ;
but it is clear that the influence of the rise in prices was
small relatively to such causes as the discovery of Amer-
ica, the Reformation, the break-up of feudalism, the
growth of manufactures, the invention of printing, etc.
In the nineteenth century in England we have progress
in some directions coincident with retrogression in others,
the progress being on the whole less marked in the depre-
ciation of the first years of the century than in the appre-
ciation of the second quarter; whilst that of the third
quarter with its high level of prices is less than that of
the fourth with its low level. The balance of progress
on the whole, during the century, is remarkable ; but it is
doubtful if it can be definitely ascribed even in part either
to appreciation or depreciation considered by itself. And
such a result coincides with what might be expected on
theoretical grounds.
3. Progress and Relative Prices. — "From the high or
low price of some sorts of goods in proportion to that of
others in any country at any time we can infer with a
degree of probability that approaches almost to certainty,
that it was rich or poor, that the greater part of its lands
were improved or unimproved, and that it was in a more
or less barbarous state, or in a more or less civilised one "
384 ELEMENTS OF POLITICAL ECONOMY
{Wealth of Nations, Book I, Chap. XI). Adam Smith him-
self gives some remarkable illustrations of tlie truth of this
dictum, and with the greater abundance of material now-
available and the greater prominence given to economic
elements in general history, this mode of estimating and
illustrating progress ought to become much more fruitful.
The history of relative prices shows the complexity of
economic conditions even in j)eriods which we are accus-
tomed to regard as primitive ; it shows also that there is
much more movement in prices than we are accustomed
to associate with the supposed customary prices of the
mediaeval period. Even a glance through the volumes
of Rogers is instructive on these two points. We find
in the history of prices, in some cases, a remarkable fixity
of ratios of values over long periods in spite of great oscil-
lations, owing to temporary variations in demand and sup-
ply. Thus, for example, the average price of wheat from
1260 to 1400 was 5s. 10|c?. per quarter, and that of
barley 4s. 3|(7. per quarter, a ratio of about 100 to 73 ; but
wheat fluctuated between the limits roughly of 15s. and
3s., and barley between 13s. and 2s., and the ratios varied
between 100 to 88 and 100 to 55 in different years. The
great rise in general prices from 1540 to 1582 did not
disturb appreciably the ratio, but from that period there
were remarkable changes down to the present time, the
ratio having fallen to 100 to 54 in the seventeenth and
eighteenth centuries, and risen to 100 to 100 at the end of
the nineteenth.
The liistory of relative prices is also the history, to a
great extent, of the principle of substitution. We have
a remarkable series of substitutions, both as regards con-
PROGRESS IN MONEY AND PRICES 885
sumption and production. Even as regards the primary-
wants, where habit is strongest, there is a tendency to sub-
stitute the cheaper for the more expensive modes of satis-
faction, e.g. in food, drink, clothes, fuel, etc., although for
a long time, custom or fashion or ignorance may retard
the process. In luxuries, in which fashion often rather
favours novelties, the effect of cheapness is still more
marked.
One or two other examples may be given from the history
of relative prices in England. From 1260 to 1400, weight
for weight, beef was twice as valuable as wheat ; in the last
years of the nineteenth century it was about six times as
valuable. With oscillations the rise in the value of meat
has been continuous. The explanation depends partly
on the conditions affecting consumption ; the increase in
the wealth of the people generally has increased the
demand for beef, especially of recent years. But in the
early periods beef was relatively cheap, partly because it
was impossible to keep much stock through the winter
in the absence of roots, etc., so that for a time there was
relative abundance, and after that time there were no
sales. Again, as regards production, wheat was very
costly, the yield being only six to eight bushels per acre,
that is, not a quarter of the present yield. The high
price of candles and the low price of leather are con-
nected by the fact that the cattle were lean and the
mortality (and yield of skins) was high. There was
also a demand for candles for church offerings which had
a very real meaning at a time when artificial light was so
dear. One of the greatest benefits of recent years has
been the introduction of cheap mineral oil. The substitu-
2c
386 ELEMENTS OF POLITICAL ECONOMY
tion of cotton for wool, of coal for charcoal, of transport
by canals for transport by road, and then of transport by
railways for canals, are all examples of substitution that
were proximately associated with movements in relative
prices.^
iThis chapter is greatly abbreviated from Book IV, Chaps. Ill- VI
inclusive in the Principles. The History of Agriculture and Prices, by
Thorold Rogers, which has just been completed by the addition of two sup-
plementary volumes, is a storehouse of facts, but it must be used with
caution. Tooke and Newmarch's History of Prices and Porter's Progress
of the Nation give materials for the first half of the nineteenth century.
See also L. L. Price's Money and its Relations to Prices.
CHAPTER III
KENT AND PROGRESS
1. Rent as a Measure of Progress. — It was a favourite
doctrine with the economists of the seventeenth century
(^e.g. Petty) that a high rent was the best sign of pros-
perity, and that a rise in rent was a national benefit and
a fall in rent an evil. From this standpoint it seemed
easy to infer that whatever raised rents was beneficial,
and whatever lowered rents was the reverse. In the middle
of the eighteenth century the author of the Memoirs of
Wool^ even now a valuable work of reference, takes it for
granted that a fall in rent is a national calamity. Accord-
ingly he thinks that the policy of prohibiting the export
of wool was to be condemned, because it lowered the price,
and in that way lowered rents. " As the landed interest is
the most considerable national interest, so that of pasture
ground is the most considerable of the landed, and wool
the principal article for the support of both." Rents
came to be regarded as the principal source of the demand
for commodities ; if rents fell, the landlord could not pay
the shopkeeper, the shopkeeper could not pay the whole-
sale merchant, the merchant could not pay the manu-
facturer, "by which means the mischief circulates," and
one deficiency extends itself to an inconceivable length
and produces many.
387
388 ELEMENTS OF POLITICAL ECONOMY
The bounty on corn was intended primarily to raise
rents, and protection to the landed interest remained
one of the chief objects of English commercial policy
until the repeal of the Corn Laws. From that time,
largely owing to the influence of Mill, the increase of
rent came to be regarded popularly as an evil, although
the natural and necessary concomitant of industrial prog-
ress under present conditions, an opinion which was
pushed to its logical extreme in Henry George's Progress
and Poverty. In this work we have the exact opposite of
the old seventeenth-century doctrine. The landlords absorb
by their rents the wealth wliich ought to go to the poor ;
thus rent is the cause of poverty ; the landlords gain
and " the mischief circulates."
The truth is that, as already shown (Book II, Chap. X),
the terra rent covers several totally distinct conceptions,
and a rise in rent may or not be a sign of progress accord-
ing to its nature and causes.
2. Progress and Urban Rents. — It may be shown by
reference to economic history that a rise in the rental of land,
even in and near a large city, is by no means inevitable or
continuous, although under certain conditions the rise may
be enormous. At first the value of suburban land depends
on agricultural conditions, and the subsequent increase in
value is explained by the limitation of the supply acces-
sible for building, the rise in demand, and the failure of
substitutes or alternatives. The principal element in the
rent in this case is the scarcity of the land. This scarcity
is sometimes mistaken for or at any rate misnamed mo-
nopoly. There may be, on the average, some degree of
monopoly, that is, the individual landowners have as
KENT AND PROGRESS 389
regards the lessees of the kind a commanding position in
making a bargain ; but there is no effective combination,
and, on the other hand, there is effective competition.
It is possible that in the near future there may be some
fall in ground rents in the cities of old and fully peopled
countries. The natural scarcity of the land from the point
of view of accessibility may be counteracted in two ways :
first by raising the height of the buildings with modern
appliances of lifts, etc. (the " sky-scrapers " of America),
and secondly, by the improvement in the means of trans-
port and of access. Even now one of the chief causes of
overcrowding and of high rents in the cities is simply the
prejudice of the working classes and the nature of their
amusements. In time, however, the better accommodation
at the outskirts and the lower rents must have an effect
on the rents of the centre. The middle classes have long
since migrated to the suburbs. The same causes apply,
though in a less degree, to business premises. In this case,
as a rule, the high rent does not mean a deduction from
profits, but an equalisation of opportunities of profit.
3. Progress and Agricultural Rents. — In tracing the
progress of agricultural rents from the earliest times we
must remember that rents were for a long period paid in ser-
vices and in produce. If we were to place a value on these
labour and produce rents, we should find that the farther
we go back, the more onerous they were. This is the cen-
tral idea in Mr. Seebohm's great argument. In the old
manorial system, which had been fully developed in Saxon
times, the owner of the land was in effect the owner of the
labour stationed on it ; if a manor was sold or bequeathed,
the serfs went with the land just as at a later date the
390 ELEMENTS OF POLITICAL ECONOMY
" souls " on the Russian estate. Each landowner had the
most effective of all monopolies as against his tenants ; he
could take everything beyond what was necessary to keep
up the supply of his living capital. Even in the reign of
Edward I the writer of a landlord's vade mecum directs
that inquiry should be made as regards the villein tenants
" to what amount they can be tallaged without reducing
them to poverty and ruin." The first great result of
economic progress as regards rents of this kind was their
diminution. The second great result, closely associated
with the first, was their commutation into money pay-
ments. The commutation, on the whole, proved to be
in favour of the tenant, as the landlords found to their
chagrin after the Black Death ; the attempt to bring back
the old powers of the landlord was one of the causes of the
peasant revolt, and when this attempt failed the landlords
found their remedy in enclosures and sheep farms. In this
latter case they strained the letter of the law and over-
rode the customs that had grown up in favour of the
tenants. The relation of the landlord to the tenant was
still that of the economic superior, even in the seventeenth
century, and complaints are common of the injury to
agriculture through the want of security to the tenant.
Rogers, indeed, asserts that at this time in England some-
thing very like the Irish cottier system prevailed, in which
the landlord takes all except a minimum of necessaries
left to the tenant. In the eighteenth century the most
noticeable feature is the progress of true competition rents.
Those who rent land and farm with the new improvements
can pay higher rents out of a real surplus than the old-
fashioned cultivators can pay out of their whole earnings.
RENT AND PROGRESS 391
During the period of the great war the owners of land were
in a favourable position, owing to the great rise in prices
partly due to protection but much more to a series of bad
seasons. With the repeal of the Corn Laws and the improve-
ment of the laws affecting the relations of landlord and
tenant, the end of the nineteenth century has witnessed the
full effects of competition in the widest sense on agricul-
tural rents. The landowner has been deprived by law of
the remnants of his legal superiority in making bargains,
and of his economic superiority by free trade and the great
improvements in the means of transport. In the main, the
agricultural rental of England is now paid out of the sur-
plus profits earned by the particular portions concerned.
The development of transport and foreign trade has in
effect made land "free " : in the sense that the elements of
monopoly or the rights of private taxation which the land-
owners enjoyed for centuries have been destroyed, rent is
paid only for superior natural advantages, and such a pay-
ment inflicts no real burden on the payer. It is well
known that under purely economic influences the agricul-
tural rentals of England have fallen as much as the rents
in Ireland have been lowered by judicial intervention. In
some cases, indeed, the economic rent has become negative,
and the owner of the land, in order to obtain part of
the profit-rent for his buildings, drains, etc., has been
obliged to surrender more than the rent formerly ob-
tained for the original and indestructible powers of the
soil.
4. The Effects of Improvements on Agricultural Rents.
— In considering the effects of improvements on rent,
owing to the complexity of the subject, it is necessary to
392 ELEMENTS OF POLITICAL ECONOMY
adopt, in the first place, the deductive or abstract method.
Accordingly, the theory of economic rent, as given in the
second book, will be taken for granted, together with the
assumptions as regards an isolated country, etc., requisite
to make it true. The improvements must be supposed
to be general, and we have to take first the immediate
effects. The improvements may be of different kinds.
The principal effect of improvements in transport is the
substitution of superior land for land inferior in produc-
tive power. The improvements so far counteract infe-
riority of situation. Thus the margin recedes, produce-
rents fall, and rents measured in money fall still more.
Similarly, also, the improvements in transport will enable
the better lands to be cultivated to a higher pitch, and
the marginal cost on all lands will diminish with the fall
in the expense of obtaining materials and of marketing
the produce. And thus again rents fall. Auj improve-
ments that enable the same amount of produce to be
raised from less land Qe.g. improved rotation of crops), or
that enable the same amount of land to raise the same
supply at less marginal cost, have the same effects, namely,
a fall in money rents. There are certain difficulties in
working out the effects of improvements on rents which
can only be surmounted by the aid of mathematics (see
Marshall, Principles, Book VI, Chap. IX, note on Ricardo's
theory of rent), but the general effect may be made clear
by one consideration of a general character. Suppose
iliat owing to improvements less capital is required on
each portion of land to obtain the same produce, and sup-
pose that the rate of profit remains the same. Since
economic rent is the sum of the differential profits, if in
RENT AND PROGRESS 393
each case there is less capital, in each case also there is
less profits, and the sum of the differences is less.
It is generally argued, as by Ricardo, that although the
immediate effect is to lower rents, the ultimate effect of
improvements will be to raise rents. The reason given
is that there will be an increase of population which will
again push out the margin so that in the end rents will
rise beyond their former level. It is to be observed, liow-
ever, that the increase of population is by no means so
certain as was once supposed, and in old countries the
growth of their population seems unlikely to counteract
to any extent the improvements in transport as regards
the great food staples. There may, however, be some
compensating effects to the owners of the land by the
use of the land for other purposes, which will be encour-
aged by the increase in the general wealth of the nation.
Thus land becomes more valuable for its sporting rights,
and for special forms of produce that will not bear the
expense of transport or will suffer in quality.
The effects of agricultural improvements on rents, as
worked out on the pure theory with an isolated country,
generally seem paradoxical and somewhat unreal, even
with the most careful explanation. It is, then, worth
pointing out that we can obtain an exact illustration
and, indeed, a confirmation of the theory if we consider the
effects of changes in the seasons. A series of good seasons
is exactly equivalent to a series of general improvements in
production. The effect is still more noticeable if we take
a period of good seasons after a period of lean years. It
may be remarked that the popular idea that nineteen years
(a complete cycle of the moon) is sufficient to give an
394 ELEMENTS OF POLITICAL ECONOMY
average of seasons is fallacious, and probably at least a
hundred years would be required. Before the repeal of
the Corn Laws, England was practically dependent on its
own food supplies, and the determining factor in the price
of corn was the course of the seasons. It was a matter of
common knowledge that with a series of good years rents
fell. From 1715 to 1765 there was a marked exemption
of seasons of scarcity as compared with the fifty years
before. As a consequence, provisions were cheap and
abundant, and the general condition of the people was
greatly improved. But we read at the same time of
great agricultural distress which really meant a fall in
rents. Indeed, many of the pamphlets of the time, in
accordance with the ideas then dominant, tried to show
that this fall in rents was a national calamity, "since
the flourishing condition of the landed interest supports
all trade." Exactly the opposite was witnessed in the
great war.^
1 This chapter is much abbreviated from Principles, Book IV, Chap. V.
For the historical treatment, see Cunningliam, Growth of English Indns-
try and Commerce ; Ashley, Economic History ; Seebohm, English Vil-
lage Community ; and for the later periods, Porter's Progress of the
Nation and Tooke's History of Prices. For the theory, Marshall, Princi-
ples, Book VI, Chap. IX ; and for a simpler statement, "Walker, Land and
its Bent.
CHAPTER IV
PROGRESS AND PROFITS
1. General View. — A beginning may be made of this
chapter as of the last by a brief reference to the growth
of opinion. Mill arrives at the following conclusion as
the result of his long investigation (by the abstract
method) of the effects of progress on rents, wages, and
profits : " The economical progress of a society con-
stituted of landlords, capitalists, and labourers tends to
the progressive enrichment of the landlord class, while
the cost of the labourers' subsistence tends on the whole
to increase, and profits to fall." It is allowed that for a
time agricultural improvements may counteract the two
last effects, and check the rise in rent ; but it is supposed
that the natural growth of population will soon transfer
all the benefits to the landlords alone. How false this
view is, as applied to agricultural rents, has been shown
in the last chapter ; and it needs no showing, if we look
to modern conditions, that as compared with the owners
of agricultural land it is the capitalists who have been
enriched many times over. Even the owners of land in
large cities cannot boast of such fortunes as the fortunes
of modern trade. But, as already shown, the term profits
is complex and covers very different forms of income that
vary with different causes. The tendency of profits to a
895
396 • ELEMENTS OF POLITICAL ECONOMY
minimum can only be retained as the title of a chapter of
economic analysis.
It is difficult to form any adequate idea of the general
rate of profits at different periods if the term is taken in
an extended sense ; but there is one important element
in profits, namely, interest to which the historical method
may be applied with some hope of success. " And the
progress of loan-interest may lead us to form some
notion of the progress of profit" (Adam Smith).
2. Progress and Loan-interest. — In modern economic
theory we are accustomed to separate pure interest from
interest combined with other elements, e.g. insurance
against risk and wages for the trouble of managing in-
vestments, etc. We suppose that, given perfect security
and negotiability, the rate of interest is uniform through
the whole of a country and the whole range of invest-
ments. We say nothing of the nature of the security or
the method of realisation of the principal or the interest.
This conception of pure interest corresponds in the
modern world to an important economic fact. This fact
is, however, the result of a long process of evolution.
The farther we go back the less do we find examples
of pure interest or of uniformity of rates. We find
rather all kinds of insecurity and all degrees of mo-
nopoly. The history of interest or usury is closely con-
nected with the law of debt; the primitive form of
security offered for a loan was the freedom of the
borrower and that of his family. It is remarkable that
with the lessening of the penalties for the non-payment
of interest, on the whole the security for the payment has
greatly increased. Also with the abandonment of the
PROGRESS AND PROFITS 397
severe penalties against usury, the abuses of usury have
diminished. Probably one of the greatest gains of the
nature of consumers' rents is the gain indicated by the
fact that borrowers under modern conditions pay not
in proportion to their needs, but at the market rate.
The exceptions shown by recent abuses only prove the
rule.
Another point to notice in the contrast of ancient and
modern conditions is that the farther we go back the
more were loans contracted in cases of necessity in times
of famine or war. In the course of industrial progress,
loans have been made more and more for productive
purposes, and with similar security the same rate is
charged for whatever object the loan is obtained. Even
in ancient times, however, we have instances of loans for
trading purposes, as in the case of Athens in connection
with shipping.
As a consequence of the equalisation of interest in its
various forms, on the whole its burden has decreased ;
there has been a levelling down and not up, as is only
natural from the substitution of competition for mo-
nopoly. The development of the law of bankruptcy,
and more recently of the principle of limited liability,
has rendered lenders more cautious, and a check is im-
posed on the waste of capital. The increasing impor-
tance attached to public credit has given greater security
for public loans.
The fall in the rate of interest from the early times in
which high interest meant bad security, and the exploita-
tion of necessity by monopoly, was no doubt a sign of
progress ; but it is doubtful once a certain stage has been
898 ELEMENTS OF POLITICAL ECONOJ^IY
reached, whether a further fall in the rate of interest is
a consequence or a sign of progress.
Loan-interest, as already explained, is also in sympathy
with profit-interest, and there may be a rise in interest on
account of the greater openings for industrial enterprise.
In the reign of George II the net yield in the return
to investments in the British funds was about the same
as at present, namely, 2| per cent. In 1776, the year of
the publication of the Wealth of Nations, the rate of
interest in Scotland on first-class mortgages was the
same as at the end of the nineteenth century, namely,
3 per cent, and the present (1903) rate is I per cent
higher. But it is plain that both England and Scotland
have advanced on all the lines of economic progress since
the eighteenth century.
3. Progress and General Profits. — When we pass from
the comparatively simple case of interest, it becomes still
more difficult to discover any necessary connection be-
tween the rate of general profits and the rate of economic
progress. Although, as in the case of wages, it is also
useful for some purposes to use the conception of a gen-
eral rate of profits, and to quote this rate as a percentage
of the capital, it must be remembered that profit per cent
per annum is only a mode of estimating the actual profit
derived from the turnover of the capital. (See Marshall's
Principles, Book VI, Chap. VIII.) The capital value of
any business, at any particular moment of time is the sum
total of its assets less its liabilities, and the differences
between any two dates is the gross profit over the period.
How much of this gross profit is put down as interest or
as insurance {e.g. as in the creation of a reserve fund), or
PROGRESS AND PROFITS 399
as wages of management, will depend on the custom of the
trade, and for the purposes of theory there is, besides, the
conception of quasi-Tent.
The connection between profits and prices is not only-
fundamental in practice, but in a very true sense is also
fundamental in theory. Changes in the general levels of
prices, or in the exchange value of money, apart from the
disturbances to which they give rise in the period of tran-
sition, do not affect profits, as Mill so laboriously explains.
But in the course of progress, profits depend more and
more on exchanges, and exchanges are expressed in terms
of prices.
When once a society has passed from a natural to a
money economy, the monetary valuation of capital (and
thus also that of profits) is no longer a secondary, or acci-
dental, but a primary quality.
What Mill calls the incident of exchange becomes in
fact an essential part of the substance of capital. This
historical fact had been thoroughly grasped by Adam
Smith in regard to circulating capital. Circulating capi-
tal is that which affords a revenue by changing hands.
The revenue or profit arises solely from a continuous oscil-
lation of exchanges between money and goods, goods and
money. The capital continues its existence by retaining
its money valuation; anything beyond is profit and
may be lopped off as revenue ; anything below so far
shortens its life, unless the defect is made up from future
profit.
With fixed capital, "which yields a revenue without
changing masters " at fii-st sight, this character of ex-
change seems excluded from Adam Smith's conception.
400 ELEMENTS OF POLITICAL ECONOMY
Thus to take his example of seed corn : " Though it goes
backward and forward between the ground and the gran-
ary, it never changes masters, and therefore does not prop-
erly circulate. The farmer makes his profit not by its
sale, but by its increase."
It is easy to show, however, that even in agriculture the
money valuation is essential to fixed capital. Recently
many English farmers went on growing wheat with fall-
ing prices ; but though the seed was returned sevenfold
as before, the profit became less and the capital dwindled.
Similarly as regards buildings, machinery, and the like :
they may be kept in good repair, and worn-out parts may
be continuously replaced ; but whether or not this part of
capital has suffered real depreciation, depends also on the
competition of other agents of production affecting the
prices, and also on the sales of the product. Machinery
that can only make unsaleable goods has logically lost its
value as capital as effectually as if it had been corrupted
by rust or destroyed by rioters.^
1 It is worth noting that Adam Smith's position on fixed capital is still
that which is applied in the Income Tax assessments and in the Companies
Acts. The theory in both Company and Income Tax law seems to be that
fixed capital has not to be replaced before profits are arrived at. The only
notable exception is that aia allowance may be made in Income Tax returns
for the wear and tear of machinery and plant during the year ; none,
however, may be made for depreciation of value.
According to the Companies Acts profits are the excess of earnings over
disbursements without any deduction for loss of capital.
As regards economic theory, however, it may be pointed out that the
Income Tax law is full of anomalies and inconsistencies ; and in practice,
if a shareholder in a company receives larger dividends from "wasting"
subjects, he must, to keep his capital intact, himself set aside a sum for
depreciation.
PROGRESS AND PROFITS 401
4. The Tendency of Profits to a Minimum. — " To
popular apprehension," says Mill (^Principles^ Book II.
Chap. XVI, Sec. 6), " it seems as if the profits of business
depended upon prices ; " and later on in dealing with the ten-
dency of profits to a minimum (^Principles, Book IV, Chap.
IV, Sec. 1) he controverts Adam Smith's argument on the
inter-connection of profits and prices. But as is so often the
case with Mill's paradoxes, Adam Smith and popular opinion
express a great truth which Mill conceals with refinements
of language. Profit, argues Mill, arises not from the inci-
dent of exchange, but from the productive power of labour.
But under a monetary economy all profits depend upon
differences in relative prices, and the number of prices of
sufficient magnitude to affect the margin of profits in any
particular business is very great. The price of the labour
directly employed is not always of predominant importance.
Since, moreover, all prices depend upon demand as well as
on suppl}^ any account of profit which refers only to the
productive power of labour omits the principal and most
difficult parts of the problem. Even from the point of
view of production in the narrowest sense of the term, the
exposition is incomplete : capital in this sense has also pro-
ductive power; machinery may be substituted for labour
and may be auxiliary to labour ; and if wages are ascribed
to the productive power of labour, profits may with equal
justice be assigned to the productive power of capital.
Productive power, however, with the widest interpreta-
tion, cannot extend beyond supply, and both wages and
profits in societies resting on exchange must depend
equally on demand.
Money wages and profits are both cases of relative
2d
402 ELEMENTS OF POLITICAL ECONOMY
prices. Considered from this point of view, there is, in-
deed, one sense in which the tendency of profits to fall
with the progress of society may be affirmed as a general
proposition — and that is in the sense plainly indicated by
Adam Smith. So far as profits depend on buying to sell
again, the increase of competition tends to diminish the
differences between the buying and selling prices. In gen-
eral, competition prices are lower than monopoly prices.
This argument applies also to the difference between the
price of labour and the sale of its product ; the profits of
interchange fall as the difference diminishes, and either
the labourer or the consumer must reap the benefit. If,
then, as is the case in modern industrial societies, the great
body of labourers is the same as the great body of con-
sumers, we may say that real wages rise at the expense of
profits.
As already explained, however, profits is complex, and
a large part is itself wages. It is quite possible that the
wages of management per unit of time may rise continu-
ously compared with other kinds of time wages, whilst
profits on the turnover of capital are continuously dimin-
ished. Men more often become millionnaires by handling
large capitals with small differences than by handling
small capitals with large differences.
The wages of management of large capitals is per unit
of tiyne by far the highest of all wages. So high, indeed,
is the reward that the term wages seems altogether inap-
plicable in many cases, and quasi-VGint is more suggestive
of the fabulous riches involved.
Similarly as regards the third element in gross profits,
namely, insurance against risk. In the course of progress
PROGRESS AND PROFITS 403
the sphere of insurance extends, and so far the element
of risk is extruded from gross profits. The mediaeval
ship-owner had to take the risk of all kinds of perils,
the insurance against which is now as much a part of
cost as the safety valves in the boiler or the water-tight
compartments.
But the maxim still holds good that the greater the risk
to the individual, the greater the profit. The organisation
of modern markets affords the possibility of immense gains,
provided the speculator risks everything. Risk of this
kind, however, is the risk of speculation, and obviously
does not admit of insurance.
But speculation may mean anything, from reckless, igno-
rant gambling, in which one man's gain is another man's
loss, to far-seeing calculations of the course of progress in
all its departments. Speculation of this second kind some-
times deserves to rank with the highest efforts of practical
genius, for without it such efforts never gain an opportu-
nity for realisation. Occasionally, however, even bona fide
and well-founded speculation obtains an extravagant reward
as the result of good fortune ; but such occasional rewards
encourage the highest forms of enterprise, and fortune can
only be seized in industry or in war by daring. " What a
force it is ! It alone imparts courage. It is the feeling
that fortune is with us that gives us the hardihood to dare.
Not to dare is to do nothing of moment, and one never
dares except in the confidence that fortune will favour us "
(Napoleon). It is, however, useless to attempt to strike
an average in cases of this kind.
On the whole, the conclusion is that if the expression,
general rate of profits is still retained in its widest sig-
404 ELEMENTS OF POLITICAL ECONOMY
nificance, the effects of progress on this general rate must
be said to be indeterminate.^
1 See Principles, Book IV, Chap. VI. In this summary the historical mat-
ter has been omitted, but the last section has been reproduced almost in
full. The critical note on the connection between prices and profits has
been omitted.
On the history of loan-interest, see Ashley's Economic History, Vol. I,
Part 2, and Cunningham's Usury ; on the general theory, Smart's trans-
lation of Boehm-Bawerk on Capital and Interest; Marshall, Principles,
Book VL
CHAPTER V
PROGRESS AND WAGES
1. Progress and the Price of Labour. — In considering
the effects of progress on wages, wages may in the first
place be regarded as the price of labour. The price of
labour is of course only one element in the well-being
of labour; but it is a very important element, and changes
in the price of labour are associated with the principal
features of economic progress. As already explained, the
price of labour may be quoted, broadly speaking, in two
ways, namely, per unit of work done or per unit of time.
The two methods are closely connected, as it is always
understood that so much must be done in the day's work,
and that any piece of work must be done within certain
limits of time. For historical purposes the unit taken
is in most cases the day, and rates of piece-work can in
the common forms of labour be reduced to this standard.
The rate per day is, however, a fallacious test of earnings
unless allowances are made for regularity of employment
(and conversely). In estimating real wages there are as
explained above (Book II, Chap. VI) other elements to
be taken account of besides the money earned and what
the money will purchase. But a comparison of money
earnings with the chief articles of workmen's budgets
must generally be the foundation of estimates of varia-
tions in real wages.
405
406 ELEMENTS OF POLITICAL ECONOMY
Exception, however, must be made to the common prac-
tice of taking as representative of Jabour only the lowest
or most badly paid forms of labour. Such estimates are
no doubt both interesting and important. But if real wages
are interpreted in terms of pecks of wheat, and labour is
interpreted to mean the lowest class of agricultural
labour, such estimates cover only a small part of the
field of economic progress.
Estimated in this way the progress of the working
classes has been by no means continuous — taking for
example the history of English labour during the last
six centuries — and there might even appear to be some
justification for the idea that the golden age of English
labour was in the fifteenth century. But in estimating
the economic progress of the labouring classes, perhaps
the most important point of all to determine is the
increasing differentiation of labour, and the increase
proportionately in the higher grades as compared with
the lowest.
This differentiation of labour is well shown by the varia-
tions in prices for different forms of labour. If we allow for
the differences in the net advantages of the employments, it
is the difference in the money wages which is the determin-
ing force in the distribution of labour in the different occu-
pations. A new industry in order to attract labour must
offer higher wages, and in the course of progress the
changes in the occupations of the people may be accounted
for by the cumulative effects of differences in the rates
of remuneration which they offer.
It is probable that in the fourteenth century in England
and Wales the number of males employed in agriculture
PROGRESS AND WAGES 407
was no greater than the number so employed at present.
But whilst in the former period the great bulk of the
working population was dependent on agriculture, and
women worked nearly as much as men, at present of the
total number of male workers less than 12 per cent are
in agriculture, and practically no women, thus leaving
the bulk of the people employed in other industries.
For centuries there has been a constant stream of labour
flowing from the country to the towns, and the present
diversity in English industries may be partly accounted
for by differences in wages in the mediasval period.
The result of a general survey of agricultural and arti-
san wages is that the latter have always exceeded the
former. In England, up to the end of the eighteenth
century (downward from the thirteenth), the wages of
the carpenter were in general 50 per cent higher; and
during the nineteenth century they have become 100
per cent higher than those of the agricultural labourer.
About the middle of the seventeenth century the wages
of common unskilled labour in the towns began to
exceed those of agriculture. It has often been observed
that the wages in agriculture are highest in the neighbour-
hood of mining and manufacturing districts ; and in gen-
eral, wages in London have been higher than in the
provincial towns in which the connection with agricul-
ture is much closer. We find in these facts a proximate
cause of the growth of the towns at the expense of the
country, and of London and the larger cities at the
expense of the towns. Labour tends to flow where
the reward is highest.
The same facts as regards wages and occupations
408 ELEMENTS OF POLITICAL ECONOMY
also illustrate the difference between the statical and
dynamical action of economic forces. In spite of the
continuous migration of labour from the country to the
town, the balance of money wages is still largely in favour
of the town, nor can the difference be explained by the
greater attractiveness of the country life ; to the labourers
themselves, now as ever, the pleasures and the freedom of
the town seem greater than those of the country. These
broad historical facts also show in a very realistic manner
the nature of economic laws and tendencies ; the tendency
only indicates the direction of a movement in the absence
of disturbing causes ; it does not imply that even in the
course of centuries a certain definite result will be attained.
The tendency to the equalisation of the net advantages
of different employments to equally efficient labour only
indicates the resultant action of certain economic forces ;
it does not mean that in a long enough period such an
equalisation will be attained.
Similar reasoning may be employed in dealing with the
wages and the occupations of women and children. But
in both cases a new factor is introduced : progress here
may be estimated to a great extent by the contraction in
the field of employment. It has been a gain to the nation
at large, as well as to those most directly concerned, that
women have been excluded by law from work in mines,
etc., and by natural economic forces almost as effec-
tively from agriculture. In the employments equally well
adapted for women, progress has consisted in raising the
rates of wages nearly to an equality with those of men
for the same degrees of efficiency. When large numbers
of women were employed in the same industries as men,
PROGRESS AND WAGES 409
the tendency was for the men to gain the advantage in
industrial competition ; they were superior in physical
strength and still more so in moral coercion. Thus
women were gradually excluded from the more gainful
occupations, and by the force of habit they came to be
considered unwomanly. Until recently, though half the
people in the world are females, there was still a prejudice
against lady doctors ; and though women are often litigants,
they are rarely lawyers, even if the law permits. The
exclusion of women from certain occupations increased
the supply and thus lowered the wages in employments
to which they were admitted. In recent years, however,
the great natural economic forces have been working in
favour of women. The growing wealth of the people has
enabled a larger proportion of women to devote themselves
to the duties of family life, and the lessened competition
for the gainful employments has so far raised wages.
The employment of children, both as regards the amount
of work and the kind of occupations, is one of the best
signs of economic progress. Since 1891, in the United
Kingdom, the employment of children under ten has been
prohibited in most gainful occupations, and the employ-
ment of children of less tender years has been strictly
regulated. In 1891 more than 80 per cent of the children
of the United Kingdom under fifteen years of age were
" unoccupied," which in most cases means that they were
still being educated. The evils of the employment of
children in the factories after the industrial revolution
are now as well known and as heartily condemned as the
horrors of the slave trade ; but it is not so well known that
in former times the employment of children in agriculture
410 ELEMENTS OF POLITICAL ECONOMY
and in the domestic industries was associated with grave
abuses.
In a general view of economic progress the terms labour
and wages ought to be taken in the widest sense ; and
account ought to be taken of the labour and the pay of
those employed in the various professions and in the
higher departments of industry. Here the chief point to
notice is not only the rise in the average, but the enormous
wages of the most successful. We observe the analogy with
the differences in the relative prices of saleable "things."
With the increase in wealth, scarcity values of all kinds
may attain extravagant heights. The highest of all wages
are the wages of management, if the term is extended so
as to cover all the gross profit that is not set aside as pure
interest and insurance.
2. The Relations of Labour and Capital. — Progress may
also be considered from the point of view of the relations
of labour and capital. This is a very large subject and
can only be properly treated by detailed economic history.
Here it must suffice to indicate that certain popular ideas
on the subject are not well founded. It is often supposed
that it is only in modern times, since the introduction of
machinery on a large scale in all its forms, that capital has
become stronger than labour, and that under simpler con-
ditions labour was more independent and obtained a greater
proportionate share in the combined product of labour and
capital. The falsity of this view may be shown by a very
simple consideration. In the pre-machinery age the greater
part of the people were employed in agriculture, and the
farther we go back the greater was the proportion. But
as already shown, agricultural wages were always relatively
PROGRESS AND WAGES * 411
low. And if we look to the relations of labour and capital
in this dominant industry, the relative superiority of capital
was far greater than in modern large industries. Even
after the effective abolition of serfdom the agricultural
labourer was oppressed by the weight of custom and of
law. In the reign of Elizabeth it was enacted that all
single persons between twelve and sixty not having a
visible livelihood " are compellable by the justices to go
out to service in husbandry." The laws of settlement
were almost as eifective as villeinage in keeping the
villagers to their own village ; and as Adam Smith said
of his own time, there was scarce a man of forty who had
not suffered from this ill-contrived law.
Again, even in tlie towns it is false to suppose that every
worker was an independent master as soon as he ceased to
be an apprentice ; the gilds only included the aristocracy
of labour, and the misery of the labouring poor in the towns
was probably greater in proportion the farther we go back.
Under the system of large industry and labour hired for
wages there cannot be intimate personal relations ; but
there is no reason, in the nature of things, why there
should not be good feeling and general interest in the
success of the business. And experience shows that, as
a rule, the more successful the business the better the
relations of labour and capital. Mill supposed that the
relations of master and workmen would be gradually
superseded by partnership in one of two forms ; namely,
either profit-sharing or cooperation ; but his forecast has
been singularly untrue. Taking production in the popular
and narrow sense of the term, as it was taken by JNIill in
this forecast, it may be said that the proportion conducted
412 ELEMENTS OF POLITICAL ECONOMY
on the lines of these industrial partnerships is so small as
to be hardly worth considering. On the other hand, the
opposing combinations of labour and capital, the trade
unions and the associations of employers, have grown
greatly in strength. It seems as if improvements in the
relations of capital and labour are to be looked for partly
in the development of arbitration and conciliation, and
partly in legislation as regards the conditions of employ-
ment on the side of sanitation, etc.
Finally, it may be pointed out that no extension of the
principle of association or combination to labour can dis-
place altogether the principle of individual competition.
There must always be industrial competition between the
different processes in manufacture. The system of large
industries does not mean that there are uniform rates of
wages in each of these industries, or that in each a species
of wages fund is equally distributed : there are in manu-
factures thousands of different rates, and they are deter-
mined in the last resort by competition and " the principle
of substitution." ^
1 Frincij^les, Book IV, Chap. VII, gives a good deal of historical mat-
ter condensed from the works of Rogers, Vicomte d'Avenel, Cunning-
ham, etc.; for the early periods, Eden's State of the Poor is the standard
work ; for the nineteenth century the works of Mr. and Mrs. Webb on
Trade Unions and Industrial Democracy are full and valuable on the in-
dustries with which they deal, but should be supplemented by special
works, e.g. the oflBcial reports on Agricultural Wages by Mr. Wilson
Fox ; the v?ages of domestic servants by Miss Collet ; see also Bowley,
Wages in the United Kingdom in the Nineteenth Century ; Palgrave, Dic-
tionary of Political Economy, Art, "Wages"; Mayo Smith, Statistics
and Economics.
BOOK V
THE ECONOMIC FUNCTIONS OF
GOVERNMENT
CHAPTER I
ECONOJVnC FUNCTIONS OF GOVERNMENT
1. The Principle of Natural Liberty, Laisser-faire, or
" Minimum Interference." — Contrary to the popular view,
Adam Smith did not set up the system of minimum inter-
ference as an economic ideal, and still less as the most
general political ideal. At the very outset of his prelimi-
nary presentment of the " obvious and simple system of
natural liberty," he introduces a most important qualify-
ing clause. Every man is, indeed, on this system left
perfectly free to pursue his own interest in his own way,
but, mark the qualification, only "as long as he does not
violate the laws of justice." Thus the freedom of compe-
tition of the industry and capital of individuals is always
subject to the limitations of these avowedly higher laws of
natural justice. And again, according to the system of
natural liberty, the sovereign has — it is true — only three
duties to attend to, but they are duties of the greatest im-
portance, viz. protection against other states ; the protec-
tion of every member of the society from the injustice or
oppression of every other member of it ; and, finally, the
duty of erecting and maintaining certain public works and
institutions which it can never be the interest of any indi-
vidual, or small number of individuals, to erect and main-
tain. Thus, according to the actual teaching of Adam
Smith, if competition leads to injustice or oppression, the
415
41 G ELEMENTS OF POLITICAL ECONOMY
State ought to intervene ; and if self-interest is inadequate
to provide various institutions for the satisfaction of social
needs, the State ought to provide for their erection and
maintenance.
2. The Principle of Maximum Utility. — The system of
maximum utility is a deduction from the general system
of utilitarianism. On this view the art of political econ-
omy has for its object, briefly stated, the attainment of the
maximum utilit}^ of which the society is capable by means
of wealth. Accordingl}^ the government may interfere
with the freedom of individuals in production if it can in-
crease the aggregate of wealth ; and it may interfere with
their freedom in distribution if on the whole a greater
amount of utility accrues to the members of the society.
The prima facie ground, says Sidgwick, for the interfer-
ence of government with the distribution of produce is the
great and ever increasing inequalities in income to which
the individualistic organisation leads. The common sense
of mankind, he asserts, holds these inequalities to be objec-
tionable for reasons stated explicitly in two propositions
laid down by Bentham.
These propositions are (1) that an increase of wealth is,
speaking broadly and generally, productive of an increase
of happiness to its possessor; and (2) that the resulting
increase of happiness is not simply proportional to the
increase of wealth, but stands in a continually decreasing
ratio to it.
T\\Q first of these propositions may easily be reduced to
a truism by those who identify utility with happiness ;
and the second proposition is simply a statement of the law
of diminishing utility which has already been so fully
ECONOMIC FUNCTIONS OF GOVERNMENT 417
illustrated ; a shilling to the man that is fasting would
mean more happiness than to the man that is full.
The conclusion that is drawn from these innocent propo-
sitions is said to be obvious. " From the two propositions
taken together the obvious conclusion is that the more
any society approximates to equality in the distribution of
wealth amongst its members, the greater, on the whole, is
the aggregate of satisfaction which the society in question
derives from the wealth that it possesses."
It would appear to follow that the State ought to use its
power to correct the inequalities that spring from the
selfishness of individuals, and to look to the maximum
happiness of the whole society. And this indeed is the
argument of those who advocate communism or socialism.
But this simple solution fails even on utilitarian grounds.
If the food and other produce to be distributed fell like
manna from heaven, equality or inequality of distribution
would not affect the supply of the food or of the mouths to
eat it. It is not so, however, with economic utilities. Eco-
nomic utilities are in general the result of labour and sacri-
fice, and in their case equality of distribution would, as
Sidgwick shows, at the same time diminish the dividend
and increase the divisor, and in the end the diminished
quotient might give less than the aggregate happiness
insured by the present system.
The inference drawn from the two Benthamite proposi-
tions is only legitimate under certain conditions, viz.
" that the total amount of produce to be divided, and the
number of persons among whom it is to be divided, re-
mains unaffected by the change in distribution." And a
third condition is added to the effect that the change has
2e
418 ELEMENTS OF POLITICAL ECONOMY
no tendency to diminish the happiness of the community
so far as it is derived from other sources than the increase
of Avealth, such, for example, as " culture," and the virtues
which are fostered by the strivings of individuals under
unequal conditions.
3. Summary of the Benefits and Defects of Individual-
ism. — It is universally recognised that in consumption
freedom is beneficial, and must, at any rate, be the general
rule. It is true, to take the prominent examples, that there
are laws against adulteration and laws regulating the con-
sumption of liquor ; but the whole of these laws affect the
aggregate mass of consumption to a relatively small extent.
As regards production, freedom of enterprise and free-
dom in the selection of processes is still the rule, and qua
production is recognised as beneficial. Every industry is
constantly changing and the initiative is taken by individ-
uals, and the survival of the fittest in productive processes
is achieved by competition. Even when commercial com-
petition is restrained by a trust, industrial competition sur-
vives within the ring. But when production is regarded,
not from the point of view of the products, but from that
of the personality of the producers, the case is by no means
so simple. It is true that effective competition tends to
increase the efficiency of labour, and one of the factors in
efficiency is improvement in the conditions of work. On
the whole, however, competition acts very imperfectly in
securing the best conditions of production as affecting the
health and morals of the workers, and regulation by the
State has been extensively adopted with success.
As regards the distribution of the national wealth, the
tendency of competition — if effective as regards the
ECONOMIC FUNCTIONS OF GOVERNMENT 419
mobility of the productive agents and the organisation of
markets — is to proportion reward to the net value of the
service rendered to the society. And in many cases in-
equalities of reward in this sense would be remedied by
more effective competition. In fact, the main factor in the
progress of distribution has been the substitution of free-
dom of contract for privilege and delegated or permitted
authority. There are, however, many cases in which the
conditions essential to freedom of contract do not prevail,
and there are others in which freedom of contract passes
into freedom of coercion.
Such is especially the case with associations which are
instituted on a voluntary or contractual basis. Such as-
sociations easily attain powers which, relatively to individ-
uals, give them an overpowering position ; and a combina-
tion of associations may have similar power compared to any
one. There are further relations assumed by associations
towards the public which could never arise with individuals.
One man is as nothing against the whole people ; but one
company, still more one gigantic trust, may revive in a
new form the old right of private taxation. The predatory
and parasitic tendencies of combinations are far stronger
than those of individuals, just as a mob is more cruel than
the average of its members. And altogether apart from
abuses, the civil relations of associations to third parties
are extremely complex. Accordingly, a large part of
mercantile law is occupied with various economic combina-
tions, e.g. partnerships, companies, unions, and associa-
tions, and with further development, further extension
of the law may be necessary.
Thus when we take a dispassionate survey of individual-
420 ELEMENTS OF POLITICAL ECONOMY
ism, considered as the basis of modern industrial societies,
we find it is open to criticism both in principle and in detail.
The two supports of the system are freedom and self-
interest. But freedom is freedom under the law, and self-
interest includes interest in others and in the State. Thus
freedom is not merely absence of restraint or the negation
of government. On the contrary, it may be said that the
highest form of government is that which secures the
highest form of liberty.
And self-interest may be so interpreted as to mean that
higher self, which in every man is supposed to sit in
judgement on the doings of his imperfect and misguided
self. And again reason may counsel the suppression, by
the power of law, of various forms of lower self-interest.
And in each of the great economic departments we
find that abuses and failures may arise from unregu-
lated individualism. In consumption, in production, and
in distribution there are cases which seem prima facie to
call for remedies on the part of the State.
4. The Methods of Legal Interference. — The methods of
governmental interference may be divided into two great
groups. First, the government may regulate the actions of
individuals by providing and enforcing a system oi positive
laio ; and secondly, the government may itself perform cer-
tain econc.mic functions.
Under the jirst group we observe : (a) the govern-
ment may bring certain kinds of economic abuses —
whether of omission or commission — under \hQ penal law,
and inflict punishments of various degrees of intensity
upon the offender.
The simplicity of the method of regulation through the
ECONOMIC FUNCTIONS OF GOVERNMENT 42]
criminal law has always made it attractive to legislators
and reformers. This method, however, is subject in prac-
tice to very effective limitations. Just as the letter of
the law varies with the ideas of its fraraers, so also does
the enforcement vary with the ideas of its administrators.
The greatest agency in the mitigation of criminal statutes
in England has undoubtedly been the refusal of juries to
convict, and of judges to inflict the penalties ; the juries
have turned a blind eye to the evidence, and the judges
have given them the appearance of reason by legal fic-
tions. It follows that the limits to the power of govern-
mental action by the method of criminal legislation are
found in the actual moral sense of the community ; the
ultimate sanction of the criminal law as regulating eco-
nomic actions is found in public opinion. Thus, even as
regards the obvious and simple system of coercion, the
tendencies of the opposing system of natural liberty have
to be considered.
(b) The government, without going the length of
prohibiting or penalising certain actions, may refuse to
enforce the corresponding agreements or promises of per-
formance. In some cases this refusal rests on the legal
incapacity of the persons to make the agreement binding.
The development of mercantile law is a good illustra-
tion of differences in legal capacity. At first merchants
were a special class having special privileges and subject
to special duties, and the mercantile law so far as it ex-
isted was administered in special courts {e.g. the Staple
and Piepoudre); in the second period the mercantile law
consisted of a body of customs which must be proved as
facts, and were binding only upon the special class of mer-
422 ELEMENTS OF POLITICAL ECONOMY
chants ; in the third period these customs were incorpo-
rated in the general law and made binding on all, whether
merchants or not (Smith's Mercantile Law^.
It may be observed that the tendency of legislation in
progressive societies has been to abolish the special rights
and duties of special classes as regards making and en-
forcing contracts.
(c) The government may make certain requirements
of form essential to the enforcement of certain contracts.
The contrast between ancient and modern conceptions of
contracts as giving rights of action is remarkable and
instructive. " According to the modern conception of
contract, all agreements which satisfy certain conditions
of a general kind are valid contracts and may be sued
upon in the absence of any special legislation forbidding
particular contracts to be made, or denying validity to
them unless made with particular forms " (Pollock).
Ancient law, on the other hand, regards only formal con-
tracts. "The fundamental assumption of ancient law
(when it has got so far as to recognise contract at all) is
that the validity of a contract depends, not upon the sub-
stance of the transaction, but upon its form. The rule is
that formal contracts only can be sued upon ; the want of
any part of the formalities is fatal ; the fulfilment of them
is conclusive" (Maine).
No better instance could be given of the extension of
the liberty of individuals or the diminution of the sphere
of state control. In modern times the enforcement of
particular forms is generally either for the purposes of
revenue, as in the stamp duties, or of registration — the
ultimate object being not restriction, but publicity. The
ECONOMIC FUNCTIONS OF GOVERNMENT 423
form as such is of no importance ; the decisive consideration
is the intention of the parties, or the intention of the State.
(c?) The government may, however, make compulsory
in contracts certain require7ne7its, not only of form but of
substance. In no contract^ whether dealing with land or
any other subject-matter, do the parties express in extenso
all the rights and obligations involved. Certain provi-
sions are held to be applied by the law, general or special.
It may be observed, however, that save in specially ex-
cepted cases persons are at liberty to contract themselves
out of the particular obligations imposed (otherwise) by
statute. And a law which admits of "contracting out"
generally remains a counsel of perfection, or at best pro-
vides a legal interpretation in case of need.
The cases, however, in which evasion of this kind is not
permitted, are in modern States both numerous and impor-
tant. In the contracts in use in most great industries —
in agriculture, mining, manufactures, fisheries, railways,
navigation — the legislature has made certain clauses
compulsory, and has prohibited the insertion of others.
This method of interference also has its limitations.
If the government attempts too much, having regard to
the ideas, customs, or prejudices of the times, either
by way of compulsion or prohibition, the law is either
evaded by the parties affected or nullified by its admin-
istrators.
5. The Methods of Governmental Action. — («) The
government may itself assume the position of a monopolist
as regards certain industries or economic services. This
case differs from that first noticed, namely, regulation by
penalties, in that government not only prohibits others.
424 ELEMENTS OF POLITICAL ECONOMY
but itself performs. The freedom of the individual is
equally restricted, but the government takes away the
real burden of restriction by itself satisfying the economic
w^ant. Thus the post-office has a monopoly of letter-carry-
ing, but most people look on this monopoly as advanta-
geous. Again, the government prohibits private coinage,
and again also confers a benefit by the prohibition.
The assumption of monopolies by governments (with
the exceptions noted), and still more the delegation of such
powers by patents to individuals, has in the course of time
been greatly diminished.
(6) The government may undertake certain kinds of
husmess, but at the same time allow private enterprise to
compete, as, for example, in providing for religious services,
or for the conveyance of parcels. In this case — that of
governmental management side by side with private enter-
prise — the only element of compulsion consists in the co-
ercive levying by taxation (as in church tithes) of the funds
required for carrying on the business, and when the busi-
ness can be made to pay its own expenses (as with the
parcel post) even this element of coercion vanishes. In
forming an estimate of cost, however, it is important to
take into account all the indirect expenses and supple-
mentary charges.
((?) The government may intervene simply to carry out
the wishes of the parties concerned (as, for example, in
providing official arbitration). A great part of the law of
every State is intended simply to provide, or enforce, set-
tled rules, e.g. the rule of the road on land or sea. What
the rule is, is often a matter of indifference, provided only
it is fixed and known.
ECONOMIC FUNCTIONS OF GOVERNMENT 425
The principle of the hiw of inheritance (when freedom
of bequest is allowed) is in case of intestacy to carry out
the supposed wishes of the deceased.
The laws of bankruptcy are in some respects similar
to the laws of compulsory inheritance. The bankrupt
is so far civilly dead, and the State lays down the rules
for distribution of his estate amongst the creditors. If it
be supposed that the creditors wish for a just distribution,
the State only carries out their wishes.
(c?) The government may provide for the erection and
maintenance of various public ivories and institutions, for
the provision of which private enterprise is unequal. This
is the case which was dealt with very fully by Adam
Smith, and in our own time is being pushed to an extreme
by socialists. It is a very large case, especially in the guise
of municipal trading and poor relief. The limitations to
governmental and municipal work of this kind are found
partly in the limits to taxation or other sources of revenue,
— if the works and institutions are not self-supporting, —
and partly in the limits to public expenditure which must
conform to certain general principles. (See Chapter VIII.)
Before considering the degree and nature of the limits
imposed by public finance, it is necessary to notice briefly
certain limitations of a general character, which are appli-
cable to all kinds of governmental control.
6. General Limitations to Governmental Interference. —
With the best intentions, governments may ruin their leg-
islation by ignorance and their administration by feeble-
ness. The government, even of the most democratic
states, must be formed of persons who are themselves liable
to errors of judgement and errors of passion. And to a
426 ELEMENTS OF POLITICAL ECOXOMY
considerable extent they are supposed to carry out the
mandate of their electors. The electors are open to all
kinds of persuasion, as well as to the persuasion of justice
and reason. In the most advanced democracies, laws are
still made and unmade in the interests of powerful classes,
and sometimes against the interests of considerable minori-
ties. Officials are still appointed for all sorts of reasons
apart from merit and efficiency, and are removed, or not
removed, on a similar diversity of excuses. The one and
sufficient explanation of these shortcomings is, that gov-
ernment is carried on by men, and all men are imperfect.
Governmental interference is always in danger of one
horn of a dilemma. If the individual official is left free to
exercise his own judgement, there is the danger of caprice
or jobbery, or simple foolishness ; if his freedom is cur-
tailed, he must act by routine, and routine is not adapted
to the ever changing conditions of modern societies.
Another limitation in lawmaking is found in the endur-
ance of the laws. Laws are now generally held to con-
tinue in force until they are definitely repealed. Thus, a
law passed under popular excitement caused by temporary
circumstances may become a nuisance before it has well
got into operation. If the endurance of laws has its ad-
vantages — if every generation of reformers can only hope
to provide the necessary marginal increments — it has its
disadvantages, especially in progressive societies.
If a law is passed, or the government otherwise interferes
in favour of one set of persons, it must be prepared by the
principle of formal justice or uniformity to extend simi-
lar action to all similar cases. As far as the letter of the
law permits the courts will make the extension ; and justice
ECONOMIC FUNCTIONS OF GOVERNMENT 427
goes beyond the letter of the law. Hence the danger of
creating precedents. The most effective limit to public
expenditure and to the assumption of new duties by tlie
State, is the knowledge on the part of the government
that the}' must be prepared to apply the same principle to
all similar cases.
Every increase ^»^ the power of government and every
extension of governmental interference increases the pas-
sibility of abuses. Appointments may be given or with-
drawn, not on account of fitness or incapacity, but for
services to a political party. Power granted for one pur-
pose may be misdirected to other purposes in the interest
of the dominant political class ; for even with the most
effective representative systems the cabinet has very great
power. There may be wasteful expenditure under the
influence of popular sentiment ; the machinery of govern-
ment may be overburdened with work, and with the nicest
adjustment of delegated authority some central control is
always necessary. The self-interest of officials may be
opposed to the interests of the public, and reward by hon-
ours and promotion depends for its effectiveness on the
wisdom of selection.
The authoritative prohibition of any course of conduct
so far involves a limitation of freedom, and it may well
happen that there will be no corresponding extension of
freedom in other directions. On the principle of utility,
the loss of freedom may too readily be held to be compen-
sated by a gain of happiness in something else and by
somebody else. But the loss of freedom tends to starve
the development of character, and in the words of jNIill,
unless the conscience of the individual goes freely with the
428 ELEMENTS OF TOLITICAL ECONOMY
legal restraint, it partakes either in a great or in a small
degree of the degradation of slavery.
It is sometimes supposed that a government of the
people by the people or their representatives is altogether
different from a despotism ; and that under what is called
a free government every individual must be free. This
vague language will not bear analysis,^ and the idea which
it is supposed to express has been forcibly exposed by
Mill. "It is no less important in a democratic than in
any other government that all tendency on the part of
public authorities to stretch their interference and assume
a power of any sort that can readily be dispensed with
should be regarded with unremitting jealousy. Perhaps
this is even more important in a democracy than in any
other form of political society ; because where public
opinion is sovereign, an individual who is oppressed by
the sovereign does not, as in most other states of things,
find a rival power to which he can appeal for relief or at
all events for sympathy." And again : " In some coun-
tries the dream of the people is for not being tyrannised
over, but in others it is merely for an equal chance to
everybody of tyrannising. Unhappily, this last state of
the desires is fully as natural to mankind as the former,
and in many of the conditions even of civilised humanity
is far more largely exemplified." ^
1 "That the condition of a slave is better under an arbitrary than
under a free government is, I believe, supported by the history of all ages
and nations." — Adam Smith, p. 264.
2 This chapter is greatly abbreviated from Rook V, Chaps. I-IV, in the
Principles. See Sidgwick, Political Economy, Book III ; Elements of
Politics, Chap. IV ; Mill, Political Economy, Book V, Chap. XI ; Wealth of
Motions, Book V ; Bosanquet, Philosophical Theory of the State, Chap.VI.
CHAPTER II
CHARACTER AND DEFINITION OF TAXATION
1. The General Characteristics of Taxation. — (a) The
principles of taxation are well adapted for the application
of the historical method. Instead of deriving the modern
conception of taxation from the modern conception of
sovereignty, we may trace the historical evolution of the
principal characteristics. As in other cases, the conti-
nuity and variety of English economic history may be
trusted to furnish evidence of the principal stages. The
most general feature of taxation, that marks it off plainly
from other payments (in money, kind, or services), is
that the payment is coynpulsory. A tax is an exaction
levied by superior force ; it is not the result of charity,
persuasion, request, or contract, although these names and
sometimes the ideas which they stand for have been used
to disguise or modify the original compulsion.
Too much is made of the names assumed by early forms
of taxes — the "gentle terms" donuni and auxilium.
There were, indeed, at times a few " gifts " in answer to
the "prayers" of the king; but the prayers were in gen-
eral of the quihus non contradici order, and the gifts were
like the "precarious" services of servile tenants, or tlie
boon works at the prayer of the lord (^ad precem^, which
Seebohm regards as the most distinctive mark of
subjection.
The most noteworthy characteristic of mediaaval taxes
429
430 ELEMENTS OF POLITICAL ECONOMY
is that, levied first as proportionate and variable rates,
they became fixed and customary — as in the case of the
tenths and fifteenths, which came to mean a certain aggre-
gate sum.
The principal modifications in this element of compul-
sion are found in the gradual transfer of the compelling
right to the House of Commons, and it may truly be said
that the more effective the representation so much the
more effective became the compulsion.
(5) The compulsion of taxation is, however, really
modified when evasion is wholly or partially possible.
That a tax that can be evaded will be evaded may be illus-
trated to the extent of an inductive proof. The evasion
may, as Professor Seligman remarks, be illegitimate, as in
smuggling or false declarations of income, or legitimate,
as when the taxed commodity or process or service is
avoided. Evasion in the first case is met by various pen-
alties and preventions, and for scientific purposes an
evaded tax of this kind is no tax.
Evasion of the second kind, however, is not so complete.
It is sometimes said that a tax upon commodities is vol-
untary, because the consumers may refrain from con-
sumption or resort to other things. Leaving aside the
impracticable remedy of the taxation of all possible sub-
stitutes, taxes of this kind have always an element of
compulsion. It is true that a man may escape the to-
bacco duty by not smoking (as, indeed, he may escape the
income tax by not earning sufficient income), but his
natural or acquired inclination to smoke is (as shown
by the revenue) sufficient to outweigh the pleasure of
evasion.
CHARACTER AND DEFINITION OF TAXATION 431
The legitimate evasion of taxes on productive processes
in some cases leads to improvements and inventions, but
in general the necessities of fiscal supervision by stereo-
typing old methods prevent natural progress. The neces-
sity of taxation is only the stepmother of invention.
(c) The objects for which taxes are imposed are coex-
tensive with the objects of public expenditure.
In the course of progress we find that special taxation
for special purposes has given way to general taxation
for general purposes. The method of assigning particular
revenues for particular expenses (e.g. the aids for making
the king's son a knight, or marrying his eldest daughter)
has generally fallen into decay, although it still survives
in local taxation, and there are occasional reversions to
this older method. Even in local taxation, however, it
has come to be recognised that special rates for special
services are, in many ways, uneconomical (e.g. separate
rates for schools, poor, roads, police, etc.).
(f?) Payments, however, may be made to government
which are only partially of the nature of taxes. Such,
for example, are the prices paid by the consumers of com-
modities sold by the State, and fees for services rendered.
If the State has a monopoly and fixes prices or fees above
what would be the case with natural competition, the
extra price or fee is of the nature of a tax. If the State
competes with other agencies and charges only competi-
tive rates, this element of direct taxation vanishes. If,
as is often the case, the State charges less than cost price
(including supplementary costs), the deficit must be met
by other taxes, and itself is of the nature of a bounty on
consumption.
432 ELEMENTS OF POLITICAL ECONOMY
(e) In modern times the revenues of the State that
imitate most nearly voluntary contributions for the public
services are those derived from public loans. To meet
extraordinary expenditure (as in war) a loan is contracted,
and subscription to the loan is voluntary. The element
of compulsion, however, is only transferred from the pres-
ent to the future taxpayer. Interest and principal can
only be paid out of future taxes.
(/) Taxes are nominally imposed upon various forms
of wealth in the widest sense, but all taxation is really
imposed on persotis. This proposition is derivative from
the general conception of wealth. One of the essential
marks of wealth is appropriation, and taxation is a pro-
cess of transferring wealth from private individuals to the
state. Every public tax diminishes so far the wealth of
private individuals. It is of course true that in most cases
there is some set-off to the disutility of taxation in the
utility of the government, and the utility may exceed the
disutility even to the particular payer. Occasionally,
also, the imposition of a tax may indirectly benefit certain
persons, as in the typical case of protective duties.
It is, however, in a general survey, best to look on tax-
ation as involving in itself a contribution on the part of
persons on the compulsion of the State, and to consider
separately the benefits of public expenditure, and also the
economic, constitutional, and other limitations imposed on
the exercise of this compelling power.
Professor Bastable's definition of taxation sums up in
a convenient form the principal results of the foregoing
analyses, " A tax is a compulsory contribution of the
wealth of a person, or body of persons, for the services of
CHARACTER AND DEFINITION OF TAXATION 433
the public powers.'''' If the State is already the owner of
all the forms of wealth that it requires, no taxation is nec-
essary ; if it requires more wealth, it must make it (indus-
trial domain), or take it (taxation).
It may be observed that what is first imposed as a tax
tends to become in some cases a form of state ownership.
A land tax regarded as perpetual becomes a rent charge
owned by the State. Thus the expression that an old tax
is no tax really means, in this case, that taxation has been
merged in state ownership. The real incidence of the
original tax is upon the original owner ; at the imposition
of the tax the value of his property is diminished by the
capital value of the tax.
2p
CHAPTER III
THE CANONS OF TAXATION
1. Adam Smith's Canons of Taxation : First, Equality. —
The treatment of the general principles of taxation may-
well begin with a critical analysis of Adam Smith's cele-
brated canons. The first canon, Equality of Taxation^
stated in full, is found to contain the germs of several dis-
tinct theories of what constitutes equal or just or equitable
taxation.
" The subjects of every State ought to contribute toward
the support of its government, as nearly as possible in
proportion to their respective abilities, that is, in propor-
tion to the revenue which they respectively enjoy under
the protection of the State. The expense of government
to the individuals of a great nation is like the expense of
management to the joint tenants of a great estate, who
are all obliged to contribute in proportion to their respec-
tive interests in the estate. In the observation or neglect
of this maxim consists what is called the equality or ine-
quality of taxation. Every tax, it must be observed once
for all, which falls finally upon one only of the three sorts of
revenue above mentioned (viz. rent, wages, profits) is
necessarily unequal so far as it does not affect the other
two. In the following examination of different taxes I
shall seldom take much further notice of this sort of ine-
quality, but shall in most cases confine my observations to
434
THE CANONS OF TAXATION 435
that inequality which is exercised by a particular tax fall-
ing unequally upon that particular sort of private revenue
which is affected by it."
To begin Avith, the use of the phrase "the subjects
ought " implies that it is the duty of the subject to con-
tribute, and the right of the sovereign to impose, taxes.
Thus the right of taxation may be derived directly from
the. conception of sovereignty — which brings to view the
compulsory character of the contribution.
This doctrine of sovereignty as the basis of taxation
finds important illustrations in history. Taxes have been
imposed, not for the value of the real revenue they may
bring in, nor from any idea of public advantage, nor even
for the private advantage of the monarch or other persons
in authority, but simply to show to the subjects the right
of the sovereign. It was the determination to insist on
this barren and malignant sovereign right which led to
the retention by the British government of the threepence
per pound duty on tea, " that figment of a tax, that pep-
percorn rent," and of the stamp duties that never paid the
cost of collection — " shearing the wolf " — that lost the
British the American colonies.
It is not often, however, especially in modern times,
that the pure and simple doctrine of sovereignty is con-
sidered sufficient authority for taxation. The Americans
(and on their side were some of the greatest of English
statesmen) opposed to this absolute doctrine the great
constitutional rule, that taxation ought to be coincident
with representation — that only those who shared in the
power should be called on to bear the burdens of government,
a position heartily approved of by Adam Smith, and made
436 ELEMENTS OF POLITICAL ECONOMY
by him the basis of his great scheme of imperial federa-
tion.
The whole course of constitutional history is marked
by the struggle of the payers of taxes for the control
of taxation. And taking a general view, it may be said
that the burden of taxation tends to fall most lightly on
those who have the greatest political power.
The doctrine of sovereignty as the basis of taxation,
logically carried out, results in the maxim that a govern-
ment should impose such taxes as are " most easily as-
sessed and collected" (McCulloch). Just as a general
looks to the efficiency of his army as a whole, and is j)re-
pared to sacrifice any portion if necessar}^, so it may be
said that the State should not regard the particular inter-
ests of individuals, but rather consider the power of the
State as a whole and what is most conducive to that
power. In times of national peril, when the political
existence of the State is concerned, this view seems to
meet with general acquiescence. But in ordinary times
in the modern State, such a complete sacrifice of the in-
dividual is never contemplated, and the sovereign power
in taxation is supposed, even on McCuUoch's view, to be
used in the way " most conducive to the public interests."
And since one of the primary public needs is the equitable
treatment of individuals, we advance from the general
proposition that the subjects ought to contribute to the
support of the government, to the important qualification,
that they should do so " as nearly as possible in proportion to
their respective abilities^ Adam Smith goes on to explain,
that the measure of abilities, in his view, is the revenue en-
joyed under the protection of the State, and thus the nat-
THE CAXONS OF TAXATION 437
ural result of his first canon is that taxation should be
proportionate to revenue. But this simple interpretation
has not always been accepted.
2. Equality of Sacrifice.^ — The critical examination of
the term abilities discloses two very different bases of
taxation, wliich may be described provisionally as subjec-
tive and objective, according as stress is laid on the iticon-
venience or disutility/ involved in the payment of taxes on
the one side, or, on the other, on the ability or faculty of
the taxpayer as indicated by his property or income. The
development of the subjective basis of taxation leads to
the principle of equality of sacrifice. " Equality of taxa-
tion," says Mill, " as a maxim of politics, means apportion-
ing the contribution of each person toward the expenses
of government, so that he shall feel neither more nor less
inconvenience from his share of the payment than every
other person experiences from his." Mill points out that
this standard, like other standards of perfection, cannot be
completely realised, but it is put forward as the principal
ground of various practical modifications of systems of
taxation.
In the first place it may be urged that if taxation in the
case of A leads to a sacrifice of " necessaries," whilst in
that of B the sacrifice is only of " superfluities " or " luxu-
ries," the burden of A is infinitely greater. And since we
can never establish equality between the infinite and the
^Cf. Edgeworth, " Pure Taxation," Part III, Economic Journal, De-
cember, 1897, for a very able and learned discussion of the sacrifice theory
of taxation on utilitarian principles. He prefers to state the ideal as
" minimum " sacrifice instead of equal, and this statement seems the more
logical on the pure utilitarian theory. On grounds of formal justice the
equality of sacrifice may be preferred.
438 ELEMENTS OF POLITICAL ECONOMY
finite, it follows as a practical maxim that the necessary
minimum of income must be exempt altogether.
This principle of a free minimum income has been par-
tially applied in the United Kingdom : firsts in the aboli-
tion of most taxes on such necessaries as food, clothing,
fuel ; and secondly, in the exemption from direct taxes of
incomes below a certain minimum and also of savings in
the shape of insurance. But as regards indirect taxation
in general, it may be said that a considerable part of the
revenue from stimulants (alcohol, tobacco, and tea) is de-
rived from persons whose incomes are below what is gen-
erally considered a reasonable minimum for the standard
of comfort ; and the same thing is true of some forms of
direct taxes, e.g. various local rates.
And however plausible the doctrine of a free minimum
income may appear, it is always limited by the great prac-
tical rule that taxes must be productive.
The principle of equality of sacrifice is also advanced
in support of graduated, or progressive, taxation. And at
first sight — having regard to the law of diminishing utility
— equality of sacrifice seems necessarily to lead to progres-
sion. We may suppose that the more money any person
has (whether as capital or income) the less is the utility
to him of successive increments, and therefore the less the
disutilities of decrements caused by taxation. It seems to
follow that a greater amount should be taken from the rela-
tively rich, and that a merely equal percentage would not
involve equal real sacrifice.
It is, however, one thing to admit that equal percent-
ages do not involve equal real sacrifices, and quite another
to formulate any rational scheme of progression merely on
THE CANONS OF TAXATION 439
the theory of utility and disutility. " The economic cal-
culus is not at present competent to deal with such com-
parisons (e.g. the real sacrifices involved in the taxation
of different incomes). The weightiest difficulty that the
theoretical advocates of progression have to meet is the
essentially subjective nature of their standard. The trans-
lation into an objective rule of taxation can only be ac-
complislied by the aid of assumptions as to the relations
of enjoyment in different classes that must contain a large
element of conjecture. The modern developments of the
theory of utility fail to supply any definite practical basis
on which to frame a scale of progression " (Bastable).
The opinion of Professor Seligman to the same effect
is also worthy of citation, especially as on other general
grounds he is inclined to support the principle of progres-
sion. " The imposition of equal sacrifices on all taxpayers
must always remain an ideal impossible of actual reali-
sation. Sacrifice denotes something psychical, something
psychological. A tax takes away commodities which are
something material, something tangible. The sacrifice
occasioned by a tax is only one factor in the problem,
and may be a minor factor."
It is alleged that a tax on income ought to vary accord-
ing to the source of the income — that, in particular, in-
comes from realised wealth, e.g. land, should be taxed at
a higher rate than incomes from talent, and professional
and business capacity — or more generally, that terminable
incomes should be taxed at a lower rate than perpetual in-
comes. In its practical form this discrimination is justi-
fied on the particular ground that the professional man
is obliged to put aside, by way of insurance for himself
440 ELEMENTS OF POLITICAL ECONOMY
or his family, a larger proportion of his terminable income.
Thus there is a smaller free income from which to pay the
tax, and consequently a greater sacrifice. It may be ob-
served that in the English income tax exemptions on the
ground of insurance were reintroduced by Mr. Gladstone
in 1853, and have since been continued.
The exemption of a part of the income saved for insur-
ance shows very well the difficulties of discrimination.
This exemption discriminates between forms of invest-
ing savings in favour of one ; if a man invests part of
his income in higher education for his children, or in
buying his house or farm by instalments, or in any of
the multitude of other indirect modes of providing for
the objects of insurance, he has logically an equal claim
to exemption, but practically he obtains none.
3. The Faculty Theory of Taxation. — The development
on the objective side of Adam Smith's position, that the
subjects ought to contribute in proportion to their abilities,
leads to the faadty theory. " The faculty theory of taxa-
tion is very old. The word faculty is the usual one in
Latin and French for tax laws, and is the general term
employed in all the early American laws. For a long
time, however, the best practical test of faculty was sup-
posed to be general property. Thus all through the Mid-
dle Ages, when local taxes were levied at all, they were
assessed on general property, on the principle juxta bono-
rum facultatem, or pro bonorum facilitate " (Seligman).
In England the word ability is first used in a general
statute in the Elizabethan poor law, — " according to the
ability of the parish," — ability being interpreted to mean
property. Later on, from meaning property, ability or
THE CANONS OF TAXATION 441
faculty came to mean income, and Adam Smith explains
abilities to mean revenues.
The great merit of the faculty theory is that it substi-
tutes an objective for a subjective standard. It does not
look to the feelings of the taxpayer, but to the money
value of his taxable capacity. The State takes more from
the rich, not because they will feel it less in proportion,
but because they have more to give.
But although the faculty standard is objective, it does
not follow that it is simple, and what is the proper meas-
ure of faculty is still a subject of dispute both in theory
and in practice. Historically the rule of simple propor-
tion has been generally adopted. But it is worth observ-
ing that this rule was first of all insisted on in order that
the property of various privileged classes should not be
exempt. That subjects should contribute in proportion
to their revenues was directed against the privileges of
the nobility, clergy, and other favoured classes.
In course of time, however, the method of simple pro-
portion has been attacked with reference to both extremes
of the social scale.
In the first place it has been maintained that the mini-
mum of subsistence ought to be exempted, not as before,
on account of the infinite sacrifice involved, but on purely
economic grounds.
Taxation which diminishes the general efficiency of
labour diminishes the whole faculty of the State, and is
thereby on the simple faculty theory suicidal.
A similar argument may be applied to capital and
profits. Taxation which prevents productive capital from
being restored and renewed also so far tends to diminish
442 ELEMENTS OF POLITICAL ECONOMY
the general faculty of the owners or employers of capital.
Accordingly, it has been maintained that on the faculty
theory taxation should only be imposed on the net profits
of gross incomes and on the net value of property. That
taxation ought, as far as possible, to leave unimpaired the
productive powers of the society — including land as well
as labour and capital — may be regarded as logically im-
plied in the faculty theory, and is practically one of the
most important rules of finance.
But it does not follow that the general rule is best ap-
plied by being insisted on in every particular case. To
exempt from taxation a certain minimum rate of profits
would mean that more must be taken from the higher
rates, and thus a premium would be placed on inefficiency,
and a check imposed on enterprise.
The progressive system may be supported on the faculty
theory on the ground that " the facility of increasing pro-
duction often grows in more than arithmetical proportion.
The rich man may be said to be subject in some sense
to the law of increasing returns" (Seligman). Money
makes money.
On the whole, it seems that on the faculty theory a
moderate rate of progression might be advantageous as
regards income, as it has proved to be as regards succes-
sion duties. "It is not very unreasonable," says Adam
Smith, " that the rich should contribute to the public
expense not only in proportion to their revenues, but
something more than in that proportion."
4. Taxation of Unearned Increments. — The application,
however, of the simple method of proportion to income or
property may be further modified on the faculty theory.
THE CANONS OF TAXATION 443
We may consider (as before on the sacrifice basis) not
only the amounts of the wealth, but the sources of such
wealth. From the -national point of view, the best system
on the faculty theory is that which least impairs the pro-
ductive powers of the society. Heavy taxation has been
proved over and over again to be the greatest check to
industrial development. But there is a large class of
incomes which, compared with ordinary profits and wages,
may be classed as " unearned," and it may be argued that
taxation of these incomes does not impose a corresponding
check on industry. " Both ground rents and the ordinary
rent of land," says Adam Smith, " are a species of revenue
which the owner in many cases enjoys without any care or
attention of his own; though a part of this revenue be
taken from him in order to defray the expenses of the
State, no discouragement will thereby be given to any sort
of industry. The annual produce of the land and labour of
the society, the real wealth and revenue of the great body
of the people, might be the same after such a tax as before.
Ground rents and the ordinary rent of land are, therefore,
perhaps, the species of revenue which can best bear to
have a peculiar tax imposed upon them. Ground rents
seem, in this respect, a more proper subject of peculiar
taxation than even the ordinary rent of land. The ordi-
nary rent of land is in many cases owing, partly at least,
to the attention and good management of the landlord.
A very heavy tax might discourage too much this atten-
tion and good management. Ground rents, so far as they
exceed the ordinary rent of land, are altogether owing to
the good government of the sovereign, which, by protect-
ing the industry either of the whole people or of the
444 ELExMENTS OF POLITICAL ECONOMY
inhabitants of some particular place, enables them to pay-
so much more than its real value for the ground which
they build their houses upon. Nothing can be more
reasonable than that a fund which owes its existence to
the good government of the State should be taxed pecul-
iarly, or should contribute something more than the greater
part of other funds toward the support of that govern-
ment." Later on, Adam Smith applies the principle still
further, and argues that the gains of monopolists, when-
ever they can be come at, are certainly, of all subjects, the
most proper for taxation. A similar argument may be
applied to " conjunctur " profits, and those portions of
quasi-YQxvis that may be classed as " unearned."
5. The Benefit or Social Dividend Theory of Taxation. —
According to this theory, taxes ought to be considered as
payments for valuable services rendered by the State to
individuals. The essence of this doctrine may be found
in Adam Smith's reference to the revenues which are
enjoyed under the protection of the State, and in his com-
parison of the individuals of a great nation to the joint
tenants of a great estate. It is easy to show, as Mill does,
that if protection is taken in its narrowest signification,
as a matter of fact the poor need more protection than
the rich, and as a consequence, that the protection theory
would lead to regressive taxation. But Adam Smith's
own application of the theory, already noted, to the case
of ground rents and monopolies, shows that such a narrow
interpretation is not justifiable, and has, certainly, never
been appealed to in practice. The theory in its wider
meaning implies that the State is a partner in all indi-
vidual undertakings by providing, not only for security,
THE CAXONS OF TAXATTOX 445
but for many other elements necessary and advantageous
to their development. And as one of the members of
every industrial partnership the State is entitled to a
share in the profits. If, however, the theory, even in this
extended form, is advanced as the only just basis of taxa-
tion, and if taxes are to be levied only and exactly in
proportion to the benefits received, the foundation is
obviously too narrow.
But the theory has a particular application in those
cases in which the services rendered by the State and the
benefits accruing to individuals are easily discovered and
estimated, and it is of special importance in local finance.
The terms fees and prices are, however, better adapted
to the payments made for special services rendered
by the State, and the principles are considered more prop-
erly in connection with state expenditure and munici-
pal trading. It is misleading to attempt to connect the
payment of taxes by individuals with their supposed share
in the general benefits of government ; it is better rather
to emphasise the distinction between " fees " paid for par-
ticular services and taxes levied for general purposes
(Seligman).
6. The Social Function of Taxation. — The benefit theory
of taxation is closely allied wdth another theory, according
to which the kinds and amounts of revenues derived from
taxation should be adjusted according to their social and
political effects. It is no doubt true that in all cases the
indirect consequences of taxation are important, and in
some cases the provision of revenue may be considered as
of secondary importance. Protective duties, for example,
so far as purely protective, are non-productive of revenue.
446 ELEMENTS OF POLITICAL ECONOMY
In the same way, the heavy duties on stimulants are often
justified, not because (in fact) they yield a large revenue,
but because (in theory) they check consumption.
Another of the social aims supposed to be specially
adapted for attainment by taxation is the more equal dis-
tribution of the national wealth. Mill's peculiar proposals
regarding the laws of bequest and inheritance were mainly
justified by him on this ground, and in effect his proposal
logically leads to succession duties, carried to the extreme
limits imposed by the conditions affecting accumulation
and evasion.
It is not necessary to revert to the general consideration
of the communistic ideal. It may suffice here to observe
that the same end may be promoted b}^ the adjustment of
expenditure, and it would seem better economy to aim
directly at improving the condition of the poorer classes
than to attempt to make the poor less poor, simply by
making the rich less rich. Heavy progressive duties which
lopped away all incomes above a certain amount would
soon become unproductive, whilst a wealthy nation, by
general taxes, may provide for an increasing number of
social needs.
On the general question the summary of Professor
Bastable seems temperate and well founded. "The re-
sults of financial experience are of some value in respect
to the use of taxation for other than fiscal purposes. The
taxing power has often been employed to encourage indus-
try, to improve taste, to benefit health, or to elevate
morals ; but in none of these applications has tlie desired
success been obtained. There is, therefore, a presumption
against its use in remedying the inequalities of wealth.
THE CANONS OF TAXATION 447
Its definite and universally recognised function is the
supply of adequate funds for the public services. To mix
up with one very important object another different, and
perhaps incompatible one, is to run the risk of failing in
both. ... If the socialistic regime is the goal to be aimed
at, there are more direct and more effective modes open
than the manipulation of taxation."
There are, in brief, the multitudinous methods of legal
enactment and of public expenditure.
7. The Principle of Formal Justice. — Finally, whatever
basis of taxation be adopted, the principle oi formal justice
noticed in the conclusion of Adam Smith's first canon
must be considered. If it is just — for any of the reasons
usually assigned — to tax A, it is just to tax B under pre-
cisely similar circumstances. Thus stated, the principle
seems purely abstract and as empty as any other pure
form of thought. On the analog}^, however, of the prin-
ciple of equality before the law and similar political prin-
ciples, it is easy to give it a material content. For
fiscal purposes we may substitute the term practically —
for precisely — similar. Thus, the possible extension of
a tax to all similar cases (or conversely, the remission)
may sufiice to destroy the prima facie reasonableness of
extension (or remission). We shall see later that the
same principle is of vital importance in the correlative
department of expenditure, and as we have already seen,
it is one of the general limitations to governmental action.
8. Adam Smith's Other Canons of Taxation. — The three
remaining canons of Adam Smith give more particular
rules for the attainment of equality and productivity in
the whole tax system by reference to the methods employed
448 ELEMENTS OF POLITICAL ECONOMY
in the imposition and collection of particular taxes. They
are, for the most part, comparatively simple and require
but little explanation, although the course of history and
the present actual condition of different nations show-
that they are only carried into effect with considerable
difficulty.
The second — the canon of certainty — lays down that,
" The time of payment, the manner of payment, the quan-
tity to be paid, ought to be clear and plain to the con-
tributor and to every other person.'' The positive elements
in this maxim bring out the importance of definiteness and
publicity. On the negative side it is aimed against the
arbitrary exactions of the sovereign power and the jobbery
and abuses of its officials. Apart from the general social
and political evils connected with the exercise of arbitrary
power, uncertainty of taxation involves an economic waste.
Ad valorem duties on imports are open to the objection
that the importer is never certain in what grade his com-
modity will be classed for taxation. The method of
declaration which applies to a large part of the returns
to the British income tax fails in publicity, and the failure
in publicity leads to irregularity and uncertainty.
The tldrd — the canon of convenience — enjoins that,
" Every tax ought to be levied at the time and in the
manner in which it is most likely to be convenient for
the contributor to pay it." It is justified, not only on
the general grounds of good government, but also on the
special economic ground of the greater productiveness of
taxes which satisfy this condition. It is found possible to
raise a considerable revenue by taxes on commodities, the
payments of which are made by the consumers in insensible
THE CANOXS OF TAXATION 449
portions, when it would be impossible to collect the same
amount by direct taxation at comparatively long intervals.
The fourth — the canon of economy — has for its governing
principle that, " Every tax ought so to be contrived as both
to take out and to keep out of the pockets of the people as
little as possible over and above what it brings into the
public treasury of the State." Taxes may break this rule
by requiring a large number of ofhcials for their collection,
by involving restraints on trade and production, by en-
couraging evasion, or by causing unnecessary vexation,
for " though vexation is not strictly speaking expense,
it is certainly equivalent to the expense at which a man
would be willing to redeem himself from it."
9. Other Rules of Taxation. — To these general canons
of Adam Smith the following may be added, most of which
are implied in different passages of his treatment of taxa-
tion, but have been expanded more fully and emphasised
by subsequent writers, (a) A given amount of revenue
is as a rule more conveniently raised, both from the point
of view of the government and its subjects, from a small
number of very productive taxes than from a larger num-
ber with smaller returns per unit. This was one of the
principal reforms advocated by Adam Smith with reference
to the British customs duties, and was carried into effect
by Sir Robert Peel and his successors. The inextricable
confusion of the customs duties levied before these re-
forms, and the unproductive character of most of them,
can only be realised by reference to the details of the his-
tory of taxation. It is thought, however, by some finan-
ciers of the first rank that this concentration has been
carried too far in the United Kingdom, and that the bur-
2g
460 ELEMENTS OF POLITICAL ECONOMY
den of indirect taxation would be less felt if spread over a
larger number of commodities. The process of simplifica-
tion and concentration has also been partially applied to
the direct taxes, imperial and local.
(b) A good system of taxation ought to provide for a
self-acting increase in the revenue in proportion as wealth
and population and the consequent demands of govern-
mental expenditure increase. Thus a land tax of a fixed
amount per acre is in general much less advantageous
than a proportionate amount of rental. The income tax
and taxes on stimulants have the advantage of showing an
increasing return with increasing wealth and numbers.
(c) Those taxes are best which yield a steady calculable
return. The calculations of the estimates for the Budget
in the United Kingdom are now made with extraordinary
exactness. The reason for this rule is found in the
advantage of adjusting normal expenditure to normal
revenue.
{d) Those taxes are to be preferred which in case of
need can be most conveniently increased in amount with-
out involving new machinery or increased expenditure in
collection, e.g. the income tax in fact, and in theory the
tax on beer.
(g) At the same time, in the progress of society it may
be expedient to abandon old sources of revenue and to
adopt new methods under the new conditions, notwith-
standing the disadvantages which ceteris paribus attach to
all changes in taxation.
Finally, it may be observed that if, as is almost inevi-
table, there is, as regards any proposed tax, a conflict of
advantages and disadvantages as tested by the canons and
THE CANONS OF TAXATION 451
rules of taxation, the less important rule must be surren-
dered, the importance being judged according to circum-
stances. Adam Smith, for example, states emphaticallj'-
that the experience of all nations shows that a very con-
siderable degree of inequality is not near so great an evil
as a small degree of uncertainty. Again, productiveness
covers a multitude of sins, and as Professor Bastable re-
marks, " The successful administration of the State is the
final object, and therefore convenience or even equity may
have to yield to productiveness."
It is also important to point out explicitly that all the
rules must be applied to a system of taxation as a whole.
There are, of course, some taxes which would be bad in
any conceivable system of taxation ; but, in most cases, a
criticism of a particular tax is of little value unless con-
sideration is also given to the other taxes with which it is
combined.
In considering the effects of the system of taxation and
of its component parts, it is always necessary to take into
account the real incidence. It is of no avail to set up an
ideal standard of equality, if the actual methods adopted,
though nominally and ostensibly in accordance with the
standard, lead to inequality. No part of the theory or
practice of taxation has given rise to so much controversy
as the real incidence of various particular taxes. The
" shifting " of taxes may lead not only to inequalities, but
to injurious effects on the productive powers of the society
as a whole. ^
1 Abbreviated from Principles, Book V, Chaps. VI- VIII. See Bas-
table, Puhlic Finance, 3d ed., 1903 — the standard work in English;
Seligman, Progressive Taxation and Essays in Taxation ; Plehn, Public
Finance — a most useful text-book ; Cohn, Science of Finance.
CHAPTER IV
INCIDENCE OF TAXATION
1. Direct and Indirect Taxes. — One of the oldest and
most important divisions of taxes is into " direct " and
" indirect." A direct tax is defined by Mill — and this is
the definition generally accepted — as a tax demanded from
the very persons who it is intended or desired should pay
it. An indirect tax is demanded from one person in the
expectation and intention that he should be able to transfer
it to another. Even as regards direct taxation, it may
well happen that, although the person who first pays the
tax is the person who bears the burden in the sense
intended by the government, yet indirectly, in ways not
contemplated by the government, part of the original
burden and part also of the additional burden incident-
ally created may be shifted to others.
Suppose, for example, that the State imposes a tax upon
houses, and that it divides the amount payable in definite
proportions between the owner and the occupier, and duly
collects these proportions from each separately. Here we
have apparently the simplest examples of direct taxation
possible.
But an examination of the incidence of tlie liouse tax
shows that under certain conditions part (or even the
wliole) of the nominal payment of the occupier may be
452
INCIDENCE OF TAXATION 453
shifted to the owner — that is to say, in consequence of
the tax the occupier may pay so much less rent, whilst
under other conditions, part (or even the whole) of the
nominal payment of the owner may be shifted to the occu-
pier by a rise in rent. And apart from this redistribution
of the house tax itself between owner and occupier, there
may be indirect effects upon agricultural rents and upon
particular classes of profits.
Again, nothing could appear more direct and simple
than the incidence of succession duties ; the former owner of
the property is dead, and the State takes a part to itself.
But if it is known that after death the State will take a
large share, a stimulus is at once given to evasion, e.g.
through the checks to accumulation, the encouragement
of consumption, and gifts inter vivos. It is thus possible
that heavy succession duties might prejudicially affect the
wages of labour. And there can be no doubt that histori-
cally, in countries that are burdened with excessive taxes,
apart from the share supposed to fall on labour, there is
an additional burden due to the contraction of enterprise
and accumulation.
If, however, in the case of taxes nominally direct, we
have to penetrate beyond the seen to the unseen, still more
necessary is the study of real incidence in the case of taxes
ostensibly indirect. It may happen first that the intention
of the government that the tax should be shifted from the
original payer is not realised at all or only partially ; sec-
ondly, it may happen that the part that is shifted is shifted
in a way not contemplated ; and thirdly, there are all the
after effects and indirect consequences as in the case of
direct taxation.
454 ELEMENTS OF POLITICAL ECONOMY
It may also happen that the imposition of a tax, whether
direct or indirect, will not only impose a burden, intended
or not intended, but may incidentally create an advantage
and confer a benefit, sometimes intended, sometimes not.
Just as pauperism is attracted by high expenditure, so
capitalism is attracted by low taxation, and thus heavy
taxation in one district gives an advantage to other dis-
tricts lightly taxed. Protective duties are intended to
protect, but other taxes may create monopolies not origi-
nally intended.
It is clear, however, that, whatever meaning or meanings
be given to equality of taxation, we must always refer to
the ultimate real incidence with all its burdens, direct and
indirect.
In every problem of incidence, for the complete solu-
tion, two questions must be answered: first, who ulti-
mately pays the tax received by the State ; secondly, who
bears the burdens or enjoys the advantages incidentally
created. In the discussion of the general principles we
are mainly concerned with the first question, the inci-
dental burdens and advantages being subject to variations
according to the nature of the j)articular tax.
2. The Incidence of Taxation as determined by Law
and Custom. — The general problem of incidence is a prob-
lem of distribution, and for the solution we must refer
back to the general principles already examined. And it
must be observed that just as distribution cannot be en-
tirely reduced to exchange, so neither can the incidence
of taxation be considered merely as an application of the
theory of value.
The power to shift the payment of a tax or to recoup
INCIDENCE OF TAXATION 455
the payment from another source depends, in the first
place, upon the influence of law and custom in the widest
sense of the terms. This influence may be so great that
there is no possibility of shifting the tax otherwise than as
directed by the rules laid down by the State or submitted
to under the customs of the society, though even in this
case there are indirect consequences, both in the way of
burden and of advantage.
The influence of law and custom may be best observed
in societies in which exchange is not yet of fundamental
importance, as, for example, in those under the dominance
of feudalism or village communities.
We find in the development of the incidence of taxation
an illustration of the universal progress from status to
contract. At first, the force of law and custom directs
the transference of the tax to its most minute ramifica-
tions ; gradually this compelling power is limited to the
collection of the tax from the original payers, they in their
turn transferring the whole or part of the burden, accord-
ing to the principles of contract and exchange.
3. Incidence of Taxation as determined by Contract and
Exchange. — In modern times the State levies certain
taxes, — on persons directly, or indirectly through com-
modities, — but the taxed persons may be able to shift
the burden according to various economic conditions.
The ultimate incidence is no longer altogether deter-
mined by the compulsion of law and custom, and the
rapacity of the collectors, but partly by the voluntary
actions of individuals.
When a tax is imposed on any person (with no legal
power of transfer), he is naturally led to reconsider his
456 ELEMENTS OF POLITICAL ECONOMY
whole economic position, so that he may make the burden
a minimum on the whole. The possibility of compulsory
legal transference being now excluded, he can only get
rid of his burden (wholly or partially) by a change in his
bargains — and it takes two at least to make a bargain.
It is quite clear that the mere fact of the imposition of
a tax will not in general be sufficient reason for the origi-
nal taxpayer to ask and receive an indemnity from others.
If we take the terms seller and buyer in the widest sense,
— as applied to the purchase and sale of land, labour,
and capital, either absolutely or for certain uses, for cer-
tain times, under certain conditions, — we may suppose
that the State extracts from the seller a certain part of
his price, or imposes on the buyer an official charge for
the privilege of being allowed to buy.
4. The Immediate Effects on Price of a Tax. — The
immediate effect of a tax on the buyer (the conditions
of supply remaining the same) will be a fall in price (as
paid to the seller). But the extent of the fall is indeter-
minate. Before the price has fallen to the full amount of
the tax, the withdrawal of supply in response will create
a new equilibrium. If the tax is imposed on the seller
(the demand remaining the same), the immediate effect
is to raise the price paid by the buyer. But again the
extent of the rise is indeterminate, because before the
price has risen to the full extent of the tax, the check to
demand will produce a new equilibrium. It makes no
difference theoretically whether the tax is taken in the
first place from the buyer or the seller; the ultimate
incidence depends on the shifting, and the shifting on the
elasticity of demand and supply. The general principle
INCIDENCE OF TAXATION 457
is that the tax inflicts more loss on either party the less
the elasticity of that party's demand or supply, other
things (including the other party's elasticity) being the
same.
If the buyers are taxed in the first place, they demand
so much less, how much less depending on the elasticity
of their demand ; and the competition of sellers reduces
the original price — the degree of the fall again depend-
ing on the elasticity of their supply. If the rise in price
would decrease greatly the quantity demanded (a very
elastic demand), and a similar fall in price would have
very little effect on the quantity offered (a very inelastic
supply), the greater part of the tax will fall on the seller.
If the sellers are taxed in the first place, they will so far
offer less, and the competition of unsatisfied demand will
tend to raise the price ; and again the new price will
depend on the elasticity of demand and supply.
In general, however, except in the extreme or limiting
cases, the seller will always receive something less and
the buyer will pay something more than the original
price, the distribution of the burden being dependent
on the relative elasticities. And in general, also, the
effect of the tax will be to diminish the amount bought
and sold.
In the limiting case of perfect non-elasticity of demand,
if the buyer is determined to have so much quand meme,
the whole of the tax would fall on the buyer ; and simi-
larly, if there is perfect non-elasticity of supply, and the
seller must sell quand meme, the whole of the tax would
fall on the seller. If both demand and supply are per-
fectly non-elastic, the distribution is indeterminate. If
458 ELEMENTS OF POLITICAL ECONOMY
both are perfectly elastic, that is, if the smallest addi-
tion to the price will kill demand, or smallest subtraction
kill supply, the tax kills the market, and there is no
incidence because the tax cannot be collected.
5. Ulterior Effects of Taxation on Prices. — It must be
borne in mind that in the preceding section only the imme-
diate effects on markets prices have been considered.
The ulterior effects on prices will depend on the various
conditions affecting production or supply, with the reaction
on demand.
These conditions can only be stated in extremely gen-
eral terms if they are to be applicable to production (or
supply) in the widest sense, including the production of
labour and of capital, and also of the adaptation of land
and natural agents for productive purposes.
Amongst such general conditions — which have to be
taken account of in the determination of the incidence of
particular taxes — are: (a) The influence of competition
and monopoly respectively, which again depend for their
efficiency or purity on a variety of causes, e.g. the mobility
of labour and capital and of land (in the sense of adapta-
tion to different uses or transference to different owners),
and the power of voluntary or state-aided combination.
(h) We have to consider whether the thing produced fol-
lows the law of increasing, decreasing, or constant return
— whether the available supply is forthcoming at a uni-
form cost or at different costs, (c) We must take into
account the method adopted in taxation, whether the tax
is ad valorem or specific, proportionate or graduated,
whether imposed directly on the final product or at prior
stages, (d) We must consider whether the tax is gen-
INCIDENCE OF TAXATION
459
era! or particular, or equal or unequal, and how far it
affects substitutes or correlated articles.
The general nature of these conditions and of the sub-
jects covered by taxation shows that the general principles
of the ultimate incidence of taxation must be considered
in reference to the various classes of taxes, and it will be
found that these conditions are of varying importance
and operate in different combinations in different cases.
The theory of the incidence of taxation involves, indeed,
an application of all the economic principles, theories,
tendencies, and disturbances already examined. ^
1 The more difficult parts of Principles, Book V, Chap. X, are here
omitted. See Seligman, Incidence of Taxation; Edge worth, "Pure
Taxation" in Economic Journal.
Note
The effects of the immediate incidence of a tax can be best expressed
by the use of curves. The supply curve, SS', expresses the general law of
market supply, i.e. that in any market the quantity offered tends to rise
-with every rise, and to fall with every fall in price. DB' is the demand
curve.
Y D
460 ELEMENTS OF POLITICAL ECONOMY
If the buyer pays the tax aE, Eh will be the price received by the
seller; if the seller pays the tax (receiving ah from the buyer), his net
receipt is still Eh, and at this price Oh will be offered, and at the price
ah, Oh will also be demanded. Therefore Oh is the quantity demanded
and offered at the net price to the seller of Eh, and at the gross price to
the buyer of ah. And the result is the same whether the buyer or the
seller pays the whole of the tax in the first place.
The price ah exceeds the price AH by na, and the price Eh is less
than the price AH by En, and na plus En equals the tax. It will be seen
that if DD' becomes more elastic, the proportionate rise in price above
the original is less, and in the extreme case the whole tax falls on the seller.
Conversely, demand remaining the same, and elasticity of supply in-
creasing, there is a greater rise in price to the buyer.
If the tax is collected in any definite proportion, indicated by q, from
both buyer and seller, the result is also the same. The seller pays Eq to
the state and the buyer qa ; but the seller, as before, receives Eh net,
and the buyer pays ha gross, namely, qa to the state and hq to the seller.
If the buyer sought to retain qE, at the price ah minus qE, more would be
demanded than Oh, and at the price Eh minus Eq less would be offered.
Thus Oh is the equilibrium quantity, hE the seller's net receipt, and
ah the buyer's gross payment in any case.
But the rise of ah above AH and the fall of Eh below AH will depend
on the elasticity of the two curves, DD' and SS'.
Oh is obviously less than OH; ha is greater than AH, and Eh less than
AH, except in the limiting cases when DD' or *S'*S'' become horizontal or
vertical straight lines.
By way of further explanation, it may be added that the 88' curve
shows how much is offered in response to certain prices ; if, by a tax, so
much is extracted from each of these prices, the whole supply curve is
raised. Conversely of DD'. If the buyer must pay so much more per
unit, the whole demand curve is lowered.
The effect of a tax which is paid by the buyer is equivalent to a fall in
demand. The desire to possess (relatively to other things), and other
conditions remaining the same, the buyer will pay the same total price as
before ; therefore, if part goes as a tax, he offers so much less to the seller
in every case.
Similarly, if the tax is taken from the sellers, they will sell for the
same set of net prices as before ; that is equivalent to a rise in supply. A
higher price is needed to extract the same supply.
CHAPTER V
TAXES ON RENT AND LAND
1. Taxes on Pure Economic Rent: Agricultural Land.
— Economic rent (pure) of agricultural land is generally
mingled in practice with other forms of revenue due
to capital or labour, and not merely to the natural quali-
ties of the soil. But for theoretical purposes we may
assume that the economic rent may be isolated from these
other elements. In the normal case the produce-rent will
depend on the excess above that of the margin, and the
money rent will depend on the amount of produce and the
price per unit which is determined by the marginal cost
of production. Thus economic rent is a surplus which
depends upon natural conditions that may vary to any
extent, and on price, which is independent of rent.
We may further assume for a first approximation that
there are separate owners of the various portions of land,
that the owners are not in combination, and that the lands
are let by competition every year on an accurate estimate
of the produce-surplus and its price.
And, also, we may assume that there is only one kind of
produce, or that the land can be let only for one purpose.
In measuring the economic rent we do not take units of
land, but units of productive power (labour and capital)
applied to different qualities of land. The rent arises
461
462 ELEMENTS OF POLITICAL ECONOMY
from the different return to the same amount of power
applied under different natural conditions.
With these various assumptions it is quite clear that a
tax on economic rent cannot be shifted by landowners.
It cannot be transferred to the consumer of the produce,
owing to the competition of the marginal land that pays
no rent and therefore no tax, nor to the farmer, since
competition leaves him only ordinary profits.
The amount of each particular rental depends upon
units of surplus produced (varying to any extent according
to the superior natural conditions), and on the marginal
price, which is independent of these superior conditions.
And, accordingly, a tax that strikes the surplus only,
remains where it first falls.
Even if the tax is very unequal, and is such that after
payment superior land yields a lower net return than
inferior land, there is no readjustment of the burden.
The same reasoning applies if we consider all the land
to be of the same quality, and the surpluses that consti-
tute rent to arise from the different returns to successive
doses of capital, or if, as is usual, we find the extensive
and intensive application of the law of diminishing returns
conjoined.
Also in the case of simple scarcity-rent where, though
lands and costs are uniform, there is a marginal rent (or
differential profit over ordinary employments of capital),
the tax lies where it falls.
Generally, under the conditions laid down, a tax on eco-
nomic rent cannot be shifted by the owner of the land ;
and if levied in the first place on the occupier, he can
retain it from his rent, the mobility of capital acting as
TAXES ON RENT AND LAND 463
effectively as if he were empowered to make the transfer
by the law of the land.
2. Taxes on Economic Rent : Building Land. — Similar
reasoning may be applied mutatis mutandis to the case of
building land.
To begin with the simplest case : let it be supposed that
the land is only of use for building, that the same amount
of capital is applied to each site, that there is perfect mobil-
ity of capital, and that the economic rent varies solely with
advantage of situation. Under these conditions it is clear
that a tax on economic rent falls entirely on the land-
owners. The builders are immune because their capital
can be applied to other purposes, and the occupiers escape
because the land cannot be used otherwise, and already the
landowners have obtained the best results by competition.
The result is the same if we suppose that the buildings
are extended in height until the marginal storey is reached.
To vaiy the conditions, assume next, that some of the
land, e.g. the suburban land, can be used for agriculture.
The agricultural rental will depend on the conditions
affecting agriculture generally, and the peculiarities of the
land ; so that we may say that the agricultural rent is
independent of the urban conditions. If, then, a tax is
imposed on building, but not on agricultural, rental, the
tax on ground rent on the margin will obviously fall on
the occupier. Land will not be devoted to building unless
it gives at least the agricultural rent plus the tax.
A house-rent tax is imposed on the building rent and
ground rent conjoined. If the building rent is regarded
as determined by the ordinary rate of profit, and the oc-
cupier's demand is inelastic, a tax on the total house rent
4G4 ELEMENTS OF POLITICAL ECONOMY
levied from the occupier must fall iu the first place on the
occupier. But on the same assumptions he cannot transfer
any part to the landowner. If, however, the demand is
elastic, and as before the building rent constant, part of the
tax will be thrown on the landlord ; but the amount will
depend on the elasticity of demand. And the transference
can only take place, of course, on the assumption that the
contracts for the hire of the land are subject to constant
renewals on any change of circumstances.
It follows, then, that in general a tax on ground rents, if
intended to strike the landlord, should be levied directly,
and not left to be shifted by the occupier on the renewal
of his lease. And the longer the lease, still more necessary
is it to levy the two portions independently.
There is, however, always the practical difficulty of de-
termining how much of the total house rent is to be
ascribed to the ground, and how much to the building,
when we are considering buildings erected under different
conditions. There is, besides, in business premises, the
value of the good-will, and in ordinary residences the
value of the tenant right as shown by the general condi-
tion and amenity.
Still the fact remains that during the lease any new tax
levied from the occupier cannot be shifted, and on the expiry
of the lease may not be shifted in the proportion intended.
Any tax intended to strike " land values," which really
strikes the occupiers of houses, has important ulterior
effects. As regards dwelling-houses, it may lead to over-
crowding and may check improvements, and as regards
businesses, it may check their development or in some
cases may fall on the consumers of the articles supplied.
TAXES OX RENT AXD LAND 465
Oil the other hand, a special tax on land suitable for
building which is being held up for the rise in value, and
in the meantime is only rated at its agricultural or un-
built value, would tend to throw the land sooner into the
hands of the builders, and so far in the meantime general
house rents would fall. But the ulterior effects might be
that lands would be used for inferior buildings which it
would be expensive to remove later on, so that ultimately
the lands would not be so well occupied and would yield
lower rents and also lower taxes, and besides would have
buildings not so well adapted for the use of the tenants.
3. Taxation of Land Values : Practical Conclusions. —
The preceding sections indicate the principal theoretical
difficulties in connection with the incidence of taxes on
land, and by varying the hypotheses, and by making dif-
ferent combinations, many different cases might be pre-
sented. Enough, however, has been brought forward to
justify some important practical conclusions regarding
the proposal to tax "land values."
(a) Any tax intended to strike pure economic rent
should be taken directly from the owners of that rent.
The shifting by the occupier is uncertain, and the uncer-
tainty causes inequality. The partial evasion by the oc-
cupier (i.e. legitimate evasion), as by taking inferior
accommodation, or by charging higher rates to the custom-
ers of his business, is productive of economic loss that may
far more than neutralise any gain of revenue to the State
or the municipality.
(h} It follows also that if these inconveniences are not
to ensue, the amount of the true economic rent must
be accurately determined, and the ownership definitely
466 ELEMENTS OF POLITICAL ECONOMY
traced. Both of these problems present great practical
difficulties. True economic rent is in practice nearly
always combined with other forms of revenue. The rent
that is paid for agricultural land is partly, and very often
largely, simply interest on the various forms of capital
sunk in and about the land. This interest is, in general,
calculated at a low rate. Any exceptional taxation on
" economic rent " that actually struck profit-rent, would
check agricultural improvement, and lead to the deteriora-
tions of land already improved (Adam Smith).
Again, as regards the ground rents of urban lands, al-
though the pure economic rent seems, at first sight, more
easily ascertained, it is, as a matter of fact, very difficult
to determine accurately, and there must be a considerable
margin of doubt. If houses were tents or tabernacles
that could be easily shifted, and required no connections
with systems of roads, water, lighting, drainage, etc., the
economic rent of a " stance " would be simple enough.
But the more complicated the building and its connec-
tions, and the more it is adapted for special purposes,
so much the more difficult is it to separate the pure eco-
nomic rent of the ground from other elements included
in the gross rental.
Further, even when the amount of the pure economic
rent has been determined, there is still the difficulty of
discovering the true owner, that is to say, for the purposes
of this exceptional taxation. The " true " owner from the
point of view of those who advocate this particular penalty
is in the position of the " original thief " of stolen goods.
Just as a purchaser in market overt is not held to be lia-
ble to restore the goods, so neither should the person who
TAXES ON RENT AND LAND 467
has paid the full value for land to the original thief be
liable to restore the land (or its value) to the original
owner — the community. But in old countries the origi-
nal thief has long ago been lost sight of — he cannot be
tracked through the maze of contracts.
It is said, however, that apart from this original sup-
pression of free land, there is a continuous exploitation
by private owners of the increasing revenues really due
to the growth of the State, or more precisely to the envi-
ronment of the land. This is, no doubt, perfectly true
in progressive societies under certain conditions — though
not necessarily and universally true as is shown by the
great fall in the rental of some agricultural lands in Eng-
land in recent years, and in the decaying parts of some
towns and cities. But supposing that this unearned —
this continually "becoming" increment — could be sepa-
rated, it would still be difficult to tax the true owner or
the actual exploiter. If the exceptional tax were im-
posed on the sales of lands, it would check the transfer of
lands, and a corresponding tax carried over to the lands
not sold would be difficult to estimate accurately. If the
tax were imposed on new leases, it would give a relative
advantage to the old lessees; and if they were taxed
accordingly, there is again the difficulty of estimation.
((?) The proposal to tax land values — in the sense of
" unearned increments " — is simple only in appearance.
It is not only difficult to distinguish in rentals between
unearned and earned, and between the respective owners
of these portions, but it is difficult to know when the ap-
plication of the principle is to stop, and the fear of creat-
ing precedents is one of the greatest and most salutary
468 ELEMENTS OF POLITICAL ECONOMY
checks on governmental interference. It lias already
been explained that there are large unearned elements in
every species of revenue. But there can be no question
that any attempt to seize them as they arise would cramp
the general activity of the society, and to seize them after
they have been suffered to accumulate would be an ex post
facto policy which would quite as effectively encourage the
others not to make any such gains.
It is, of course, assumed in this argument that the seiz-
ure is complete and differential, for such additions to prop-
erty and income are of course subject to general taxation
of an ordinary kind. There can be no question that the
attempt generally to differentiate between earned and un-
earned income would logically end in socialism, and would
destroy the efficiency of the present system.
(c^) And thus we again reach the position that, if the
ultimate aim is socialism or any approximation thereto, it
is better to try to attain the end, not indirectly by excep-
tional taxation, but directly by more general methods.
And still more is this the case if the reforms contemplated
are not so subversive of the present system as to be fairly
called socialistic. There are many positive abuses con-
nected with the private ownership of land, and there are
many defects resulting from a want of land for public pur-
poses. But these abuses and defects cannot be counterbal-
anced or obviated merely by the absorption of unearned
increments.
By the theory of English law it is said that the owner
of the L'uid can prosecute for trespass those who sail above
it in a balloon, although hap})ily his remedy would consist
only in the damages proved to result. But very few people
TAXES ON RENT AND LAND 469
know anything of the hiw of trespass, and the threat of the
utmost rigour of the law placarded on multitudes of notice-
boards throughout this country is a ridiculous exploitation
of the law-abiding habits of the community.
The provision of open spaces in crowded neighbourhoods
is now considered so important that great expense is in-
curred in widening streets and making gardens in the older
parts of towns and cities ; and yet we find that such cities
and towns are continually extended into purely agricul-
tural land without any adequate reservation of space for
light and air in the dwellings, convenience of communica-
tion, or facilities of recreation. Instead of attempting to
obtain the unearned increment from new, crowded dwell-
ings, it would be far better from every social standpoint
to extend the area of building, not by taxing vacant build-
ing lands, but by compelling all new building land to con-
tribute a share toward providing for the perpetual vacancy
of sufficient land for public purposes. As it is, a town is
extended as if the inhabitants intended to fortify it with a
wall able to resist modern artillery, and as if the means
of communication Avere restricted to muddy mediicval
roads.
That a part of newly occupied land should be reserved
for public purposes is a custom of the highest antiquity.
Mr. Seebohm, in his classical work on the Englisli village
community, was unable to account for the origin of little
odds and ends of unused land which have from time im-
memorial been called " no man's land," or " any one's land,"
or "Jack's land." ]\[r. Gomme,^ however, has suggested
1 The facts cited are taken from Mr. Gomme's Village Community,
pp. 114, 115.
470 ELEMENTS OF POLITICAL ECONOMY
that an explanation may be found in a Scottish custom.^
Clootie's croft or the gudeman's field consisted of a small
portion of the best laud, set apart by the inhabitants of
most Scottish villages as a propitiatory gift to the devil, on
which property they never ventured to intrude. It was
dedicated to the devil's service alone, being left untilled
and uncropped, and it was reckoned highly dangerous to
break up by tillage such pieces of ground. ^
1 Quoted from Henderson's Folklore of Xorthern Counties, p. 278.
2 Of. Book V, Chap. XI, of Principles, and The Final Report of the
Boyal Comniissio7i on Local Taxation.
CHAPTER VI
TAXES ON CONSUMABLE COMMODITIES
1. Methods of Taxing Commodities. — Under modern
conditions, taxes on consumable commodities are levied in
three ways : (a) directly on the consumer, e.g. licenses to
use certain things ; (J) indirectly through the inland pro-
ducer, e.g. excise duties ; (c) indirectly through the ex-
porter or the importer — customs duties. The term
consumable commodities must be taken in a large sense,
e.g. qua the dog tax, the owner is the consumer of
the commodity dog, and by analogy the employer is the
consumer of his liveried servants (and not the converse).
(a) Of taxes that are imposed primarily on the con-
sumer the most important in modern times is the house
tax, if the occupier is regarded as the consumer of that
commodity.
Other direct taxes on consumption may be described as
licenses on use. Such licenses are of very ancient origin.
Under present conditions direct taxation of the con-
sumer is not considered a convenient source of revenue
except to some extent for local purposes. The great
objection to such taxes is that they are inconvenient to
the taxpayer, and unproductive to the revenue. In the
United Kingdom the annual average (on carriages, dogs,
guns, etc.) from this source is now only X 1,360,000.
471
472 ELEMENTS OF POLITICAL ECONOMY
Some of these licenses, however, are retained partly for
police purposes.
(J) The present excise duties — levied on the inland
producer — may be connected historically with direct con-
sumption taxes. In England, for a long period, the
monarch lived of his own, but he also took directly much
consumable wealth in the course of his journeys through
the country. The royal court travelled like a host of
locusts. The next step in advance was the development
of the right of purveyance or preemption. The king paid
for his commodities, but he did so at prices fixed by his
own officers and wdth tallies that were not always hon-
oured on presentation. In the literal signification these
exactions were excises.
Excise duties may also be traced to another source.
The king possessed large feudal rights in the shape of
market dues and tolls, and the transition from exactions
of this kind to taxes on sales was natural and in most
countries was accomplished very early.
The crown also enjoyed certain prerogatives for the
regulation of trade. Many fines were imposed and licenses
granted in matters affecting trade and merchandise.
From regulation to taxation the transition also seemed
easy and natural until the revolt of the American colonies
shattered the survivals of this mediceval prerogative.
(c) The customs duties — levied on exports to and on im-
ports from foreign countries — are of very ancient origin.
The term customs, or its Latin equivalent consuetu-
dines, was at first applied to all kinds of customary
payments, including inter alia various kinds of ecclesias-
tical dues. Customs duties in the modern sense may be
TAXES ON CONSUMABLE COMMODITIES 473
traced like excise duties to different sources. Tolls were
levied by the king at the ports ; and licenses were granted
conferring exemptions and privileges.
The history of the British customs and excise duties
in the nineteenth century, when they had become a fear-
fully tangled growth, is the best possible commentary on
the principles of taxation laid down by Adam Smith and
developed by his successors. There is not one of the
great canons which we are accustomed to take for granted
which was not transgressed in every conceivable applica-
tion before the conclusion of the great French war (1815).
A parliamentary report of 1829 showed that £6,000,000
was raised by taxes on the raw materials of manufacture,
— the worst of all methods, because advanced by the pro-
ducer at the first stage, — whilst, 2^^''' contra, protective
duties were levied on every manufacture whatever — on
those not specially enumerated 20 per cent, and in some
cases 75 per cent. Agriculture was protected still more — •
there were not only corn laws but animal laws (the duty on
an ass being 10s. and on a horse £1), whilst the importation
of animals used as food was absolutely prohibited. By the
customs tariff of 1842, 262 articles of raw materials of
manufacture yielded about £2,000,000, and 200 finished
manufactures yielded less than £500,000 ; and taking a
general view we find that there M'ere 704 articles which
altogether yielded a little over £1,000,000.
The excise duties give corresponding results: many
were unproductive and many were prolific in evil results
{e.g. taxes on bricks, glass, paper, soap).
The period of reform began practically in 1842 under
Sir Robert Peel. In that year he reimposed the income
474 ELEMENTS OF POLITICAL ECONOMY
tax, whicli enabled him to abolish or reduce many of the
most injurious customs duties, e.g. duties on raw material.
In 1845 the income tax was renewed for three years to
effect further reforms, and 430 articles were taken off the
tariff and other reductions were made. In 1846 the Corn
Laws were repealed, and animal food (alive or dead) was
admitted free, and many other customs duties (as also the
excise on glass) were abolished. The same policy was
continued under Lord John Russell, the Navigation Act
being repealed in 1850. In 1853 Mr. Gladstone became
Chancellor of the Exchequer, and 123 articles were set free
from customs and 133 reduced. The Crimean War
checked the progress of reform, but the final result was the
reduction of the tariff to such a degree of simplicity that
practically only four articles — spirits, tea, tobacco, wine —
were retained for revenue, the rest of the tariff being
either to support excise duties or to prevent substitution.
2. The Incidence of Taxes on Commodities. — The inci-
dence of taxes on commodities furnishes a good illustration
of the general principles already examined.^ If the tax is
imposed directly on the consumer, it so far tends to check
his demand. This check to demand so far will cause a
contraction of supply when equilibrium is restored. The
extent of the contraction will depend partly on the
elasticity of demand,^ which again depends on various
factors (e.g. the possibility of substitution) and partly on
the conditions of suppl3^ The ultimate effect on price
will vary according as the commodity follows the law of
increasing, diminishing, or constant return, and according
1 See above, Book V, Chap. IV.
2 Ibid. Book III, Chap. II, Sec. 1.
TAXES ON COXSUMABLE COMMODITIES 475
as it is produced under free competition or under a com-
plete or partial monopoly.
If the tax is imposed in the first place on the producer
or the dealer, he will endeavour to shift it to the consumer,
and whether he can do so or not depends upon similar con-
ditions. In fact, theoretically, it is a matter of indifference
from whom the tax is collected in the first place, and
practically the method of collection is generally only of
importance as regards the real burden on the first impo-
sition of the tax.
In general, the price will rise to the consumer more than
in proportion to the tax, because the supervision necessary
for the tax will prevent various economies and improve-
ments ; the rise in price will check demand and contract
supply, and there will thus be a further check to econo-
mies and improvements ; a large capital may be required
to advance the tax, and this advantage to large capitals
restricts competition and increases the power of monopoly
and combination. The truth in these positions is abun-
dantly illustrated in the history of British finance.
At the same time, however, the exceptions are of interest
theoretically. If the commodity follows the law of dimin-
ishing return, the tax will cause a recession of the margin,
and the marginal cost being less apart from the tax the
price will so far rise less than by the amount of the tax.
If, however, the commodity follows the law of increasing
return, the price will rise through the contraction of supply
more than in proportion to the tax. If there is a monopoly,
in general the price will not rise to the full extent of the
tax, and in certain cases it may not rise at all, the whole
tax falling on the monopolist.
476 ELEMENTS OF POLITICAL ECONOMY
It is to be observed that the producer may, in
certain cases, be able to shift part of the tax to wages,
as the contraction of supply will lower the demand for
labour.
Ultimatel}^ however, the relative net advantages of the
kinds of labour involved must be restored, although if
there has been a monopoly element in the wages the loss
will not be recovered.
In all cases of internal taxation it is, of course, assumed
that corresponding customs duties are levied on similar
commodities and possible substitutes.
The determination of the incidence of import duties de-
pends on the theory of foreign trade, and, in my opinion, is
best worked out in terms of prices. Suppose that a heavy
import duty is suddenly imposed, the foreign producer will
not send the product to the taxing country, if other free
markets are open, unless the importer pays the tax. The
payment of the tax will, however, check the demand, and
there will be a consequent reaction on production. If the
taxing country has been taking a large part of the foreign
supply (a partial buyers' monopoly), the foreigner may be
compelled to bear part of the tax to lessen his loss ; and if
the commodity is more or less of a producers' monopoly, or
is produced according to diminishing return, the price to
the taxing country will never rise to the full extent of
the tax. If, on the other hand, the demand of the tax-
ing country is relatively small, if supply can be readily
adjusted, and if other free markets are predominant, the
whole of the tax Avill fall on the consumer, and the price
may rise more than by the amount of the tax, owing to
the indirect influences already noticed. Most commonly
TAXES OX CONSUMABLE COMMODITIES 477
the tax falls (with the surcharges) on the consumer, and
it seldom happens that the conditions arc such that it
will strike the particular foreign producer seriously. He
will seek other employment for his capital or other mar-
kets for his produce. It must be remembered also that
the case of a monopoly is much more rare than may ap-
pear at first sight. It does not follow that, because one
country only produces a certain commodity, it is therefore
sold at a monopoly price. In order that this may be done,
there must be perfect combination amongst all the pro-
ducers, as appears to be the ideal of modern trusts. But
under modern conditions there are very few important
commodities, if any (having regard to effective substi-
tutes), which are confined to any one country, and a com-
bination between producers of different countries is still
more difficult to obtain.
The case of diminishing return is also practically of still
less importance. If, for example, Britain imposed a tax
on wheat, it is doubtful if any part of it would fall on the
foreign producer.
When equilibrium is restored after the imposition of
the tax, it is plain that the price in the taxing country
will differ from the price in the producing country by the
amount of the tax (and its charges) and the cost of car-
riage. In general, the price will be determined by the
conditions of supply and demand in the country of ori-
gin, and the taxing country as a rule has only a minor
influence, relatively to the whole commercial world,
upon the demand.
The ulterior effects consequent on the disturbance of
international trade and the necessary readjustments will
478 ELEMENTS OF POLITICAL ECONOMY
also, in general, be unfavourable to the country imposing
the tax. The diminution of imports will check exports
either directly or indirectly, since imports are paid for by
exports. It is true that the productive power formerly
employed in making these exports may be used to make
commodities for the home market, and at the same time
also the taxation of the foreign products may lead to an
increased demand for the products of home labour. This,
indeed, is the foundation of one part of the theory of pro-
tection. And it is clear that if before the duty the pro-
ductive power of the country had been most advantageously
distributed, the redistribution consequent on the duty
must involve some loss. In brief, any import duty so far
restricts the aggregate of foreign trade, and in general
such a contraction is disadvantageous, although there are
exceptions.
An import duty to be effective for revenue purposes
must be supported by corresponding excise duties on the
commodity and its substitutes. Similarly the commodity
must be taxed, whatever its use. Thus it is said that the
new import duty on sugar will also fall on blacking into
which molasses enters, and to some extent also it will
fall on beer and ham.
The imposition of an export duty on coal by the British
government in 1901 has given a special interest to the
general theory of such duties. The popular idea is that
because a tax on an import falls on the home consumer,
therefore a tax on an export will fall on the foreign con-
sumer. But this argument omits two essential considera-
tions. The export duty is not and cannot be supported
by corresponding excise duties in the foreign country, and,
TAXES ON CONSUMABLE COMMODITIES 479
secondly, the foreign country, instead of being a limited
area, consists of the whole commercial world.
If export duties fell wholly or mainly on the foreign
country, it would surely be to the economic interest of all
nations to adopt export duties, but in modern states they
are insignificant compared with import duties.
The complete abolition of duties on exports would
hardly affect the finances of the European states, whilst
anything that disturbed the revenue from imports would
be the cause of grave concern to nearly all nations.
The mercantilists imposed specially heavy duties on
certain exports, e.g. on the raw materials of manufacture
and on the instruments of production. These duties, how-
ever, were intended to check exportation rather than to
yield revenue ; and in the extreme case, which was very
common, they were intentionally prohibitive. The idea
was to preserve peculiar national advantages for the home
producer, and in some cases to cheapen important com-
modities to the home consumer. The case of revenue
export duties is quite different. As regards the incidence
on the first imposition, the trader will ask the foreign
consignee to pay the duty, but whether the foreigner will
consent to do so, in whole or in part, depends on the possi-
bility of his obtaining substitutes and on the intensity of
his demand. With the extension and development of
commerce and the advance of the practical sciences bearing
on industry, the possibility of finding substitutes is vastly
increased and the intensity of demand is proportionately
lessened. If, however, the foreigner can obtain his sup-
ply from other sources, plainly he will not pay the tax.
Accordingly the producers of the export (including the
480 ELEMENTS OF POLITICAL ECONOMY
whole series engaged in completing the act of production
by delivery into the hands of the foreign consumer) must
pay the tax, or the trade must cease or be greatly dimin-
ished.
If the taxed commodity comes under the rare category
of national monopoly, it is possible that the whole of the
tax may fall on the foreign consumer. The term mo-
nopoly, as in the case of import duties, again requires
a careful interpretation. Even supposing that only one
country, (say) England, produces a particular commodity,
(say) smokeless coal, that is a "necessary" to other
nations, it will not command a monopoly price unless all
the producers make" an effective combination. ^
And, moreover, if there were such an effective combi-
nation which had secured a monopoly price, the export
duty would fall wholly, or to a great extent, on the mo-
nopolists. If the trade would bear a higher price and
yield a greater return, why did the traders not impose the
tax for their own benefit ?
If, however, the producers of the so-called monopoly had
been competing with one another, then it is quite possible
that the imposition of the export duty may cause a rise
to the foreign consumer, and if his demand is highly
inelastic, or he must get his supply quand meme, he will
pay practically the whole of the tax.
In this case there would be no check to the export
trade, and accordingly no secondary disturbance of the
home trade.
3. Rules for Taxes on Consumable Commodities. — The
general canons of taxation liave been applied to frame
1 See above as regards import duties.
TAXES OX COXSUMABLE COMMODITIES 481
special rules for taxes on commodities. Only such taxes
should' be imposed as will yield a considerable revenue, or,
in other words, the taxes ought to be productive.
The canon of equality enjoins that, if possible, taxes
should be ad valorem and not specific.
The canon of certainty enjoins that the tariff should be
clear to all concerned. One great difficulty in ad valorem
duties is the uncertainty as regards tests of quality.
The canon of convenience finds its chief illustration in
taxes on commodities. A large i-evenue may be raised
from commodities when the limits of productiveness by
direct taxation have long been left behind. Mill gives as
his second rule that when possible the tax should be levied
directly from the consumer. On the ground of economy
this is perhaps theoretically justifiable, but it breaks down
as regards convenience. It is much more convenient to the
authorities and to the taxpayers to levy excise and cus-
toms duties than to attempt to collect the taxes directly
from consumers.
The canon of economy also finds frequent illustration
— both positive and negative — in taxes on commodities.
Such taxes are more costly than appears at first sight.
The official statements of the cost of collection of such
taxes cannot include the indirect cost through the re-
straints imposed upon trade.^
4. Direct and Indirect Taxes Compared. — In spite of the
evils that are associated with indirect taxation, and are only
partially prevented by fiscal improvements, it has been found
necessary by all the great nations of modern times to retain
1 Cf. Cliffe Leslie's Essay on FinanrAal Heform, Cobden Club Essays
(1871-1872).
482 ELEMENTS OF POLITICAL ECONOMY
customs and excise duties as an important part of the tax
system. In England, Russia, and France the excises and
customs yield about half the national revenues. In Ger-
many the imperial legislation regulates the customs and
excises on salt, tobacco, spirituous liquors, beer, and sugar,
and with three exceptions the constituent States do not
tax these things. In the United States the federal gov-
ernment draws most of its revenue from excises and cus-
toms in nearly equal proportion. In comparing direct
and indirect taxes both must be considered as parts of
the whole tax system. The chief merit in either case
is that the one remedies the defects of the other. Both
are simply methods of taking wealth from private per-
sons for public purposes. In favour of direct taxes it
is argued that the contributors know exactly what they
are paying, and accordingly, under a system of represen-
tative government, it is supposed that they will exercise
a judicious check on expenditure. On this ground it is
a matter for regret that in Britain the limit of exemption
from the income tax has been placed so high. On the
other hand, however, it is maintained that direct taxa-
tion of incomes below a certain minimum involves dis-
proportionate sacrifice, and the mode of payment causes
a still greater loss. Direct taxes cannot be collected
piecemeal. It was found in Germany that in the case
of smaller incomes direct taxes were paid by selling
and pawning the furniture — an evil which still pre-
vails in spite of the rise in the limit of exemption. Ex-
cept on their first imposition, the amount of indirect
taxes is not known by the taxpayers. An old tax is
no tax in many senses — inter alia it seems to form
TAXES ON CONSUMABLE COMMODITIES 483
part of the natural or cost price. How many of the
consumers of spirits and tobacco have any idea of the
portion of the cost that depends on taxation? This
concealment of the burden, though it may be conven-
ient to the taxpayer, is likely to promote extravagance
on the part of the government. Direct taxation in
many forms is liable to the frauds incident on self-as-
sessment or other modes of evasion. The British In-
come Tax has furnished startling examples, and the
American property tax is still more notorious. On the
other hand, taxation of commodities is a direct encour-
agement to adulteration and to smuggling.^
1 Frinciples, Chap. XIII, aud works cited above.
CHAPTER VII
FREE TRADE AND PROTECTIOlSr
1. Meaning of Free Trade. — Free trade is sometimes
used in a loose popular sense as equivalent to laisser faire
or non-interference ; but historically it refers to a particular
policy as regards international or foreign trade. In this
sense its principal characteristics are absence of differential
duties and of artificial encouragements such as bounties by
which the home producer would be favoured as compared
with the foreigner in the same industry. The essence of
free trade is equality and uniformity in the financial treat-
ment of home, colonial, and foreign produce of the same
kind. Thus taxes on commodities for revenue purposes
only, although they are of foreign origin exclusively (^e.g.
tea), are not held to infringe the rule, nor are duties on
imports, provided there are corresponding excise duties on
similar products. Similarly, absolute jDrohibition of im-
ports, if equivalent penalties are imposed on the home
production, does not offend against the principle of free
trade (<?.^. immoral books or prints). The principal prac-
tical difficulty arises in the interpretation of "substitutes"
and " similars." It is not easy to find a fair common
measure for home and foreign articles that differ in
quality. Thus with wines, beer, and spirits the alcoholic
test alone is obviously unfair; and a simple ad valorem
tax is also inequitable, because the effect on demand will
484
FREE TRADE AND PROTECTION 485
vary in different cases. In a sense, indeed, any taxation
of foreign goods which cannot be produced at liome (e.c/.
tropical produce) gives an artificial encouragement to
home industries. If tea and coffee are taxed, the use of
aerated waters and home-made wines may be encouraged.
The case of drawbacks presents similar difficulties. If
the drawback is exactly the equivalent of the duty, it
simply restores trade to the state of freedom ; but if it
exceeds the original tax, it degenerates into a bounty, and,
indeed, most bounties on exports are disguised in the form
of drawbacks.
2. Free Trade and the Consumer. — If the question be
regarded solely from the point of view of the consumer,
it is easy to establish the general case in favour of free
trade. With freedom of competition no foreign com-
modity would be imported unless it could be sold at least
as cheaply as when produced at home, and in general it
may be said the foreign article would only gain an entrance
by being offered at a lower rate. Thus to discourage
importation by taxes would be to raise prices. Free
imports encourage cheapness and abundance. It may
also be argued that free exports give the greatest encour-
agement to free imports, whilst bounties on exports by
lessening the supply at home raise prices to the home
consumer and lower them to the foreigner.
On the whole, if the consumer only is considered, and
the indirect effects on production are left out of account,
free trade is generally advantageous, and the exceptions
though of theoretical interest are of relatively small im-
portance.
It may be objected, however, that all cheapness is rela-
486 ELEMENTS OF POLITICAL ECONOMY
tive to the means of purchase, that is, to incomes of the
consumers, and that in the last resort incomes depend
upon production in the large sense of the term,
3. The Protection of Home Industries : General View. —
At first sight it seems plausible to assert that if foreign
products are wholly or partially excluded from the home
markets, there must be so much more employment for
home labour and capital, and thus an increase of wages
and profits. The refutation of this fallacy in its crude
form is one of the greatest triumphs of the political
economy which the successors of Adam Smith rendered
simple and popular. The main positions in the refutation
are indeed derived from Adam Smith. Bastiat's petition
of the candle-makers against the sun, praying for the
closure of windows in order that the production of arti-
ficial light (and all the subsidiary industries) might be
encouraged, was probably suggested by Adam Smith's
illustration that wine could be made from grapes grown
in Scotland.
Again, the argument that industry is limited by capital,
and that a government cannot directly augment capital,
and, consequently, at the best can only determine the
direction and not the volume of industry, is also taken
directly from Adam Smith. Protection on this view
may increase employment in any favoured industry, but
it can only do so by withdrawing productive power from
other industries in which the country has a greater natural
advantage. The great maxim of free traders that imports
must be paid for by exports amounts to saying that if
foreign labour is encouraged by the free admission of
foreign goods, home industries must be equally encour-
FREE TRADE AND PROTECTION 487
aged because goods to an equal value must be exported
to pay for these goods. Conversely, protection by pre-
venting imports must discourage exports. In any case,
also, the very object of protective duties is to raise the
prices of the protected products in the home markets,
and accordingly the consumers so far suffer and they
have less to spend on "other things." Not only do the
labourers lose as consumers, but protection to some
industries leads to a lessened demand for the products
of other industries, and "the mischief circulates."
There is no doubt that these elementary arguments
embody important practical truths which, as history
proves, are liable to be overlooked. At the same time,
hovp-ever, the case for free trade has been greatly weak-
ened by neglecting to make clear the assumptions implied
and the qualifications to which they give rise.
4. The Assumptions of the General Argument for Free
Trade. — In the first place, it is assumed that labour and
capital can be turned without loss or difficulty from a
decaying into a thriving industry, and that if any home
product is displaced by foreign competition, "something
else" can be made immediately with the displaced pro-
ductive power. But it may be objected that every
industry requires a certain amount of specialised capital
and peculiar skill and training. There is so much force
in this objection that Adam Smith himself pointed out
that freedom of trade should only be restored by slow
gradations if the employment of labour would be endan-
gered. And, conversel}'-, it may be argued that " tempo-
rary " protective duties should be enforced when an old
industry is suddenly attacked by foreign competition.
488 ELEMENTS OF POLITICAL ECONOMY
The difficulty of the transference of capital, however, is
likely to be exaggerated, and the argument for vested
interests may be turned round. One great practical
objection to " temporary " protective duties — for what-
ever reason granted — is the danger of creating vested
interests which cannot be disturbed without some kind
of compensation.
Secondly^ the popular general argument assumes that
the capital and labour of a country must remain within
its own borders. This position again is in the main so
true that it is taken as the basis of the theory of inter-
national trade. But the appeal to history also shows that
industries may migrate, not only from place to place
within a country, but also from country to country.
Thus, foreign bounties might destroy some important
home industry which, even after the removal of the
bounties, the country might never recover. More gen-
erally a free-trade country placed in the midst of a group
of protectionist countries is liable to disturbances and
attacks which may vitally injure its industries. The
case of " trusts " is at present the most important. Pro-
tected in the home market, they can sell there at monop-
oly prices ; and abroad they can sell below cost.
TJiirdly^ the maxim that imports are paid for by exports
may be reversed. No doubt all trade is reciprocal, but it
may be said that unless a country's exports are sent by the
best route to the best market, they cannot purchase so great
a quantity of imports, and we may more reasonably regard
the export trade as active and the import trade as passive
than the converse. If, for example, to take an extreme
case, other nations or an important combination effectually
FREE TRADE AND PROTECTION 489
excluded English exports from their markets, England
would be unable to pay for her imports, and imports
must cease.
Practically, no doubt, the foreign countries concerned
could not afford to lose the English market for their goods
if the closure were applied suddenly and extensively, but
the danger lies in the cumulative effects of foreign pro-
tective duties, and the gradual exclusion of Englisli goods
from foreign markets. The natural remedy would appear
to be found in commercial treaties on a reciprocity basis ;
but the great difficulty for the free-trade country is that
it has no particular advantages to offer in exchange.
FourtJtl//, the general argument assumes that so long
as the capital of a country can be employed with equal
profit, the method of application is a matter of indiffer-
ence. Not only was this position not approved of by
Adam Smith, but it was distinctively controverted by him.^
Adam Smith used as his principal test of the advantages
of employing capital, not the rate of profit to be obtained,
but the amount of labour employed in the home country,
and the benefit derived from the direct consumption of
the capital.
Fifthly^ the popular argument, tliat if protection is
good for one country against another, it must also be good
for one district, town, etc., against others in the same
country, which is supposed to be a reductio ad ahsurdum
of protection, is, in reality, quite irrelevant and generally
fallacious. From the national point of view, the migra-
tion of industries within its borders is a matter of indiffer-
ence, or rather, is, in general, a national gain. Thus the
1 See above, Book III, Chap. XV.
490 ELEMENTS OF POLITICAL ECONOMY
abandonment of the mediseval protectionist system in
which every town protected itself against all others, and
insisted on its " ancient customs," was accompanied by a
great expansion of industrial power; but, at the same
time, while some places waxed, others waned. And,
although this parochial protectionism has disappeared, the
commercial rivalry of nations is as strong as ever, and the
land would fare ill from which the capital and labour
migrated, though the rest of the world might gain. There
is not only the possibility of a " something else," but of
a " somewhere else " to be considered ; and herein lies the
danger of organised attacks by foreign competitors.
The popular argument that the natural employment of
productive powers, which, at the time, is most profitable,
is also both immediately and ultimately the most advan-
tageous to a nation, also breaks down theoretically when
applied to particular cases.
5. Theoretical Exceptions to Free Trade. ^ — The prin-
cipal theoretical exceptions to free trade may be deduced
from the possible disadvantages of foreign trade to a
particular country, which was considered in connection
with the general theory of foreign trade (Book III,
Chap. XV). At this stage, where we are rather con-
cerned with the advisability of giving practical effect to
the theory, a simple enumeration of the important cases
must suffice.
It is said,^rsi, that every nation should retain for the
benefit of its own people any peculiar natural resources,
^ Special cases for the application of protection would perhaps be
a better title for this section. Compare Bastable's International Trade,
Chap. IX.
FREE TRADE AND PROTECTION 491
and if possible any inventions and artificial means of jDro-
duction. It is impossible, however, as regards the remote
future, to tell whether the peculiar value attached to
natural resources will continue, whilst the immediate
injury to trade is obvious. Just as sea-coal displaced
charcoal, so water power and electricity may displace
steam ; and as regards the export of machinery, prohi-
bition is useless when things can be imitated, and the
limitation of export would check development.
A second exception to free trade has been urged on the
ground of national independence. Adam Smith apparently
approved of the principle of the Navigation Acts, although
it is generally forgotten that when dealing with colonial
policy he strongly condemns all the regulations and ma-
chinery by which this principle was carried out. And as
a matter of fact this was the first part of the mercantile
sj'stem to be severely attacked. This argument of national
independence was chiefly relied on by the opponents of the
repeal of the Corn Laws, but it now needs no showing
that Britain has gained far more in military strength
through the growth of wealth and population than she
has lost by the contraction of corn-growing.
Again, the inter-dependence of nations is mutual, and
the best guarantee for peace is the extension of commerce.
A third exception to free trade is especially applied to
new countries. It is argued that protection is necessary
to promote manufactures and the growth of towns, and
that such development is necessary even for the encourage-
ment of agriculture, e.g. wheat and frozen meat may be
exported, but not all the by-products of agriculture, and
in any case there is a loss in the cost of carriage. That
492 ELEMENTS OF POLITICAL ECOXOMY
the commerce of the towns causes the greatest improve-
ments in the country, and the nearer the consumer is
brought to the producer the better, are favourite positions
of Adam Smith.
It may be answered, however, that temporary protection
is impossible owing to the creation of vested interests,
that new countries especially require capital, which is
repelled and diminished b}^ protection, and that the artifi-
cial forcing of new industries is not advantageous in the
long run. Professor Taussig has shown by a detailed
account of the development of the cotton, woollen, and
iron manufactures in the first part of the nineteenth
century in the United States that, though all the condi-
tions were favourable to the protection of young indus-
tries, little if anything was gained.
A fourth exception is the celebrated case of retaliation.
This has been generally approved, provided the object is
to compel the foreigner to take off objectionable duties.
The practical objection, however, is that retaliation is
likely to provoke further retaliation rather than reci-
procity.
A ffth exception to free trade is found in the alleged
necessity of protecting highly paid labour against the
pauper labour of foreign countries. It may be replied
that high wages do not make dear labour, and that they
promote efficienc}^; and if pi'otection is necessary to keep
up the rate of wages, the higher wages are a tax upon the
consumers of the article produced, and in general the
higher nominal wages are gained at the expense of a fall
in real wages. Still, theoretically, this exception is valid
under certain conditions, and cheapness to the consumer
FREE TRADE AND TROTECTION 493
may be of less importance than the well-being of the
producer.
A number of exceptions to free trade are to a great
extent political and social, and only partially economic
in the narrower sense. This is partly true of the cases
already noticed, and in other cases is still more marked.
Sometimes the object of interference is to injure other
nations, as the Navigation Acts were mainly directed
against the Dutch ; and sometimes conversely to concili-
ate by conceding advantages, as in the case of the great
French Commercial Treaty of 18G0. The exclusion of
certain foreign products is sometimes justified with the
view of improving the quality of home labour. No nation
would be content to remain as a hewer of wood and
grower of corn, and the higher the forms of industry in
which the workers are engaged so much the better for
the nation as a whole. The great argument of Frederick
List is that protection is necessary for social development.
It is assumed that if foreign wares of the higher class
are excluded, they will be produced at home by native
artists and craftsmen. It is, however, at least as proba-
ble that the absence of foreign competition would clieck
development, and that the best way to promote the higher
forms of industry is not by the simple process of exclu-
sion, but rather by improvements in the education of the
people.
The natural result of free trade is to stimulate compe-
tition, invention, and variety of enterprise, whilst the
natural result of protection is to establish routine
methods.
Finally, there are certain exceptional conditions under
494 ELEMENTS OF POLITICAL ECONOMY
which it is theoretically possible by the judicious manipu-
lation of duties to extract a certain amount of revenue
from the foreigner. Such cases occur when the country
in question has either a buyer's or a seller's monopoly ; in
the former case it may gain by import, and in the latter
by export, duties. Technically, duties of this kind in-
fringe the general maxims of free trade, and practically
they are of little importance, and, so far as practicable,
are likely to lead to retaliation and to foster national
animosity.
On the whole, then, it appears that, at any rate in the
case of highly developed nations, although there are many
cases "worthy of deliberation," there are very few worthy
of adoption. And this view is strengthened by the nega-
tive argument in favour of free trade and by the appeal to
experience.
6. The Negative Argument for Free Trade. — It is one
thing to allow that provided a government were perfectly
wise and perfectly powerful — in brief, a deus ex machina
worked by perpetual motion — it might impose such taxes
at its frontiers as would not only yield a revenue in some
cases, but in others would assist in directing the labour
and capital of the country into the most advantageous
channels ; but it is quite another thing to admit that any
government is capable of managing the affairs of a great
nation in this way. Those who quote Adam Smith for
his theoretical exceptions, forget that he always laid
most stress on the negative side of his argument ; that is
to say, on the weakness and incapacity of governments.
His final opinion is that the statesman who should attempt
to direct private people in what manner they ought to
FREE TRADE AND PROTECTION 496
employ their capital, is guilty of dangerous folly and pre-
sumption. This opinion is confirmed and illustrated by
the appeal to history elaborated in the fourth book of the
Wealth of Nations. And, if here and there a few frag-
ments of the old policy have been rescued from the general
wreckage by the labours of subsequent writers, the cumu-
lative effect of the argument has hardly been weakened.
Nor has it been much affected by the history of the nine-
teenth century, if in the interpretation the fallacy of post
hoc ergo propter hoc is avoided. In the United Kingdom
there can be little question that the rapid industrial devel-
opment that has occurred was only possible through free
trade. And, as regards the United States, it must be re-
membered that the immense area over which internal free
trade prevailed was amply sufficient to secure most of the
benefits of free competition. Similarly, the recent experi-
ence of German trade is associated with the Zoll-Verein
over a wide area.
In conclusion, one other aspect of the negative argu-
ment may be emphasised. As regards most countries, the
total foreign trade is a minor part of the whole trade.
Even in the United Kingdom there are at present fewer
persons employed in all the textile trades than in agricul-
ture. The aggregate value of the receipts of the railways
of the United Kingdom is about equal in amount to the
total value of yarns and textile fabrics exported, which
again is about one-third of the total exports.
And not only is the foreign trade only a minor part of
the aggregate trade of most nations, but the utmost effect
of artificial restraints and encouragements is relatively
still less. Protective duties and bounties, at the best,
496 ELEMENTS OF POLITICAL ECONOMY
can only direct the employment of a comparatively small
amount of the labour and capital of a country ; the greater
part will be employed according to the natural and ac-
quired advantages of the country relatively to those of
other countries. " The tariff system of a country is but
one of many factors entering into its general prosperity "
(Taussig).^
1 Principles, Chap. XIV ; List, National System of Political Economy ;
Wealth of Nations, Book IV ; Sidgwick, Political Economy, Book III,
Chap. V; Taussig, Tariff History of the United States ; Patten, Economic
Basis of Protection ; Bastable, Theory of International Trade, also Com-
merce of Nations ; Gladstone, Financial Statements ; Buxton, Finance
and Politics ; Dowell, History of Taxation, Vol. II ; Morley, Life of
Cohden; Arraitage Smith, The Free Trade Movement ; Farrer and Giffen,
The State in its Belation to Trade.
CHAPTER VIII
PRINCIPLES OF PUBLIC EXPENDITURE
1. Nature of Public Expenditure. — " The question of
expenditure," says Professor Bastable, " is just as much a
financial problem as that of revenue. Neither in theory
nor in practice is it advisable to separate them com-
pletely." The opinion of Mr. Gladstone is still more
emphatic, "Good finance consists more in the spending
than in the collecting of revenue."
Public expenditure is limited by public revenue, and
the greater part of revenue (under actual conditions) is
limited by the productiveness of taxes, by the consent
of the taxpayers, by the indirect effects on the productive
powers of the country, and various other economic and
political facts, which together place an insuperable barrier
to the indefinite expansion of taxation.
The objects of public expenditure, on the other hand,
are many in number, and in no case is it possible to reach
the satiety point. There is thus a perennial struggle
between conflicting claims, e.g. the navy and army, edu-
cation, poor relief, sanitation, etc., and it is difficult to
decide on the best method of distribution.
Under a system of popular government (with expendi-
ture constantly increasing) a reference to principles is
more than ever necessary. There are also questions of
fundamental importance regarding the best methods of
2 K 497
498 ELEMENTS OF POLITICAL ECONOMY
expenditure, and we ought to consider (as in taxation)
the indirect as well as the direct effects. And indeed
the treatment of taxation may in almost every particular
be made the basis of a similar treatment of expenditure.
Just as taxation is compulsory, from the point of view
of the sovereign power, so also from the same point of
view public expenditure may be said to be arbitrary. If,
however, we trace the historical development of taxation
and expenditure, we find that just as the compulsion of
the former has been modified by the representation of
the taxpayers, so also the control of expenditure in the
interests of the public has been substituted for the
arbitrary caprice of the sovereign power. The principle
of no expenditure without the consent of the representa-
tives was, however, only converted into a maxim of finance
long after its analogue in taxation had been accepted ; and
the principle of appropriation of supplies was not definitely
established till after the Revolution of 1689.
Again, the ancient rule in England, that all proposals
for expenditure must come from the crown, which had its
origin in the mediaeval conception of sovereign power,
has been developed into the modern constitutional doctrine
that the ministry is responsible for the estimates submitted
in the Budget. Thus, although the representatives of the
people may throw out a government for the expenditure
it proposes, they cannot directly substitute other schemes.
The furthering of the people's well-being was long re-
garded only as a means to the ends of the State. ''L'Stat
c'est moi'" and '•'• pauvre royaume pauvre roV are concrete
expressions of the same idea.
The same process of development may be seen with
PRINCIPLES OF PUBLIC EXPENDITURE 499
regard to tlie management of the industrial domain of
the State and of royalties and similar sources of revenue.
The old idea was that, as in the case of private estates,
the property of the crown should be managed so as to
yield a maximum net revenue. The modern idea is that
the production of net revenue is altogether of secondary
importance. The post-office and, since the fall in silver,
the mint, both produce in England a net revenue, but the
yield of revenue ought to be considered as purely inci-
dental if not accidental. The present tendency in local
finance to look to municipal trading for the relief of rates
seems, from the point of view of history, regressive rather
than progressive.
2. Classification of Public Expenditure. — It might, per-
haps, be thought of the nature of a truism to assert that
public expenditure ought to be for public purposes ; but
in expenditure as in taxation the quid jjro quo principle is
sometimes applied.
It is better to take separately the two distinct ideas that
are blended in this principle; namely, the idea of benefit
and the idea of payment made. As regards benefit alone,
all kinds of public expenditure must be held to confer a
common benefit or to satisfy a public want as their essen-
tial justification, although they also — all of them — in-
cidentally confer special benefits on individuals or classes
or localities. Thus defence ostensibly is for the common
benefit only ; but as a matter of history most wars have
been undertaken in the defence of particular places or
classes or even individuals. Poor relief is ostensibly for
the benefit of the particular individuals concerned ; but as
a matter of public policy it confers common benefits in the
500 ELEMENTS OF POLITICAL ECONOMY
prevention of crime and in the satisfaction of the sense
of justice or of charity. Free education manifestly con-
fers special benefits both on the particular children and
their particular parents ; but, again, the common benefit
is very great. Finally, as regards the expenditure, which
is said to confer only a special benefit on mdividuals, it
may be said that the final cause of all progress in public
expenditure has been the abolition of this class. From
being the greatest, it has become the least in importance.
Public expenditure which does not confer some common
benefit or answer some public purpose, ought not to exist
in the modern State. One of the greatest financial re-
forms has been the substitution of the principle of common
benefit for the benefit of particular " interests."
Even if the particular individuals benefited pay the
whole cost of the undertaking, and, to take a still stronger
case, even if they pay so much as to give a profit, public
management is not justified unless it can be shown that
some public interest is subserved.
The payment for the benefit conferred ought not to
be considered from the point of view of the individual.
The penny that is paid for sending a letter to New Zea-
land does not in any sense represent the benefit to the
particular individuals directly interested.
The basis of classification from this standpoint ought
to be the whole amount of revenue obtained by the State
in return for the services rendered. On this basis public
expenditure may be classified as follows : —
Flrd^ expenditure without any direct return by way of
revenue, e.g. poor relief; or in extreme cases even with
indirect loss, e.g. expenditure on war.
PRINCIPLES OF PUBLIC EXPENDITURE 501
Secondly^ expenditure without direct return, but with
indirect benefit to the revenue, e.g. for education, it being
supposed that eventually the educated are better tax-
payers or cause less expense as paupers or criminals.
Thirdly., expenditure with partial direct return, e.g. edu-
cation for which fees are received, subsidised railways that
pay part of their expense.
Fourthly., expenditure that obtains a full return or in
extreme cases yields a profit in addition, e.g. the post-
office, gas-works, and generally state industries.
3. Analogies from Taxation. — Other characteristics of
taxation suggest corresponding analogies in expenditure.
Corresponding, for example, to the illegitimate evasion of
taxes we have the illegitimate appropriation of public
funds — an enormous evil in former times ; whilst to
the legitimate evasion of taxes by the process of substi-
tution may be likened the claims for doles and subven-
tions from the treasury or the evasion of the duty of self-
support.
All taxes, it has been seen, fall on persons, although
nominally imposed on things or transactions. The natural
correlative might appear, on first inspection, to be that all
public expenditure benefits particular persons. Such an
inversion, however, is not in conformity with the general
characteristics already described. It would rather appear
that in public expenditure the benefit to the individual is
not the primary consideration. The State must rather be
held to spend public money for public objects, and the
nature of these objects is determined partly by history and
tradition, partly by various political, religious, social, or
moral ideas and ideals.
502 ELEMENTS OF POLITICAL ECONOMY
On the strict analogy of the definition of taxation the
definition of public expenditure may be formulated : —
Public expenditure is the distribution by the sovereign
power of the revenues of the State for the service of the
public powers.
4. The Principles of Expenditure. — In considering the
principles of public expenditure we may take as a guide
the corresponding principles of taxation. There is then
much need to emphasise the position that just as demand
and supply, consumption and production, exports and im-
ports, are correlative and inter-dependent, so also are public
revenue and public expenditure.
The simple doctrine of sovereignty as the basis of tax-
ation finds its analogue in expenditure in the position that
the State spends its revenues according to the dictates of
the sovereign power. The further question, however, at
once arises, What should determine the dictates of the
sovereign power ? The general answer, as in the case of
taxation, is that the money should be used in the manner
most conducive to the public interest. It took many
centuries to convert this saying from a paradox into a
truism.
It may also be argued, pursuing the former line of in-
quiry, that one great public interest is justice, and that
the analogue to equality of sacrifice in taxation is equality
of benefit in expenditure. But even as regards taxation, it
has been shown that equality of sacrifice, considered as the
ultimate basis or test, is open to serious objections, and
these objections are far stronger when applied to the con-
verse case of equality of benefit in expenditure. The
greater part of public expenditure is for public objects in
PRINCIPLES OF PUBLIC EXPENDITURE 603
which no attempt can be made to distribute the benefit
amongst individuals, e.g. the cost of defence.
The ideal of minimum sacrifice, or disutility, seems much
better adapted than equality of sacrifice for conversion
into a maxim of expenditure. The natural analogue, it
may be said, to minimum disutility in taxation, is maximum,
utility in expenditure. And although the application of
the conception is rather formal than material, it may be of
service as a regulative idea and as a destroyer of fallacies,
especially when expressed with reference to total and
marginal utilities. There is no more popular fallacy than
to suppose that because some kinds of public expenditure
are classed as necessary, therefore they must always rank
before those which are only classed as optional. Although
the utilitarian calculus cannot be applied very far, the
distinction between total and final utility may often indi-
cate the necessity of checking extravagance in one direc-
tion and beginning expenditure in another. A minimum
amount of defence or protection may have assigned to it
an infinite utility, but the utility rapidly diminishes, and
necessity passes into luxury or display. The ideal of public
expenditure on the utilitarian principle would be attained
when the public utility of the marginal expenditure in
each case is equal.
The most popular application of the utility theory is
in favour of increasing the expenditure on the poor and
needy. Logically, however, the principle may be applied
in favour of diminishing public expenditure on the rich
or less needy. From this point of view the idea of mak-
ing old age pensions universal is absurd; to the poor in
very deed, and to the deserving poor in particular, the
504 ELEMENTS OF POLITICAL ECONOMY
utility of a moderate pension would be very great ; but to
those already provided for by children or friends the pen-
sion would be a bad substitute for natural charity.
On the same principle tliere is no reason why education
should be free in all cases because in the public interest
it is made free in some.
The maxim that the State should not do for people
what they can do for themselves, may also be supported
on the principle under consideration. It may well happen
that state aid, which is very useful in extreme cases of
poverty, becomes less and less useful as we ascend in the
social scale, and finally becomes harmful or mischievous.
The application of the facultij theory to expenditure
gives as the first result that the standard must be objec-
tive, not subjective. Such an objective standard is pro-
vided in the constitutional rule that the money voted by
the popular assembly is appropriated, and can only be
applied, to certain specified kinds of expenditure. The
taxes that are levied according to faculty are expended
according to public requirements, which admit of a defi-
nite, concrete statement. The apportionment amongst these
public requirements is determined by the representative
government, which again represents various ideas and
various interests.
The social and political effects of public expenditure
are generally of even greater importance than in the
converse case of taxation. The primary object of taxation
is to raise revenue ; the social effects are indirect and sec-
ondary. But the very object of public expenditure is to
attain certain social and political ends. The correspond-
ing analogue, however, to this aspect of taxation, seems
PRINCIPLES OF PUBLIC EXPENDITURE 605
rather to be that in expenditure also there may be indirect
and secondary effects which sometimes are considered of
more importance than the primary or ostensible object.
The ulterior effects may altogether exceed in benefit the
immediate results, as in the claim made for free education.
On the whole, it may be said that in public expenditure
(as in taxation) great care should be taken to avoid in-
direct evils, and the hopes placed on indirect benefits
should not be exaggerated. These, no doubt, are formal
counsels, but they are none the less useful guides for the
arrangement of facts; and the reference to history shows
their vital importance, — witness the indirect effects of
public expenditure on the church, the poor, and the privi-
leged classes.
The principle of formal justice may also be applied to
expenditure. If public money is spent on any public
object, it should be spent on other objects that are practi-
cally similar. The Kantian imperative, " Act on a maxim
which thou canst will to be law universal," is certainly the
golden rule for the exchequer. It must be observed, how-
ever, that special benefit may be conferred on one class or
area or industry, without infringing this maxim, if thereby
the public would benefit — whilst in other cases apparently
similar this would not be the case. The actual expen-
diture of public money for defence no doubt benefits cer-
tain districts, e.g. naval ports and military centres, and it
benefits, also, certain industries ; but such particular bene-
fit is only secondary and conditional. The real object
ought to be efficiency in case of war, and not false charity
in time of peace.
The great use of the rule is negative : never act on a
506 ELEMENTS OF POLITICAL ECONOMY
principle that cannot be extended, e.g. do not give to the
Irish cottar what you will not give to the Scottish crofter.
It may, however, be admitted that sometimes the State
should revert to the mediaeval device of making experi-
ments, limited in various ways in time and place.
Much of the public expenditure for local purposes is
provided by local taxation. If the benefit, e.g. a public
garden, is purely local, the poorer localities, on this prin-
ciple, have no claim on the central government or on
richer areas for assistance in providing the benefit; but
conversely, if the expense is to fulfil a public duty, e.g.
compulsory education, such a claim holds good and is
generally recognised.
Public expenditure ought to be definite and certain., and
open to public criticism. The appeal to history is decisive,
both as to the reality and the importance of this rule. The
secrecy in respect to public revenue and expenditure that
was formerly so noticeable, and which has been expelled by
the growth of constitutional government, had extremely
injurious effeclo. On the one hand, prodigality and injus-
tice often escaped notice ; while on the other hand, fair and
legitimate taxation and expense were, through ignorance,
frequently regarded as grievances. Publicity and respon-
sibility have been shown by a lengthened experience to
be necessary conditions for an efficient administration of
finance. The efficiency of the machinery depends in the
last resort on the practical wisdom and the incorruptibility
(direct and indirect) of the individuals who represent the
people.
In practice, also, publicity involves an independent and
searching audit. " Of all expedients for the preservation
PRINCIPLES OF PUBLIC EXPENDITURE 507
of public property, it is the most simple, ready, and self-
acting."
The canon of convenience may be best illustrated from
the opposite. The local finance of England afforded a
striking example, until the recent reforms, of the incon-
venience of a multitude of boards spending money for
different objects. " The truth is, we have a chaos as
regards authorities, a chaos as regards rates, and a worse
chaos than all as regards areas" (Mr. Goschen in 1871).
One great difficulty in the control of expenditure is to
reconcile the necessary routine of official practice with the
convenience of the public. This difficulty is most serious
and noticeable in times of war or other public strain, al-
though at all times the inconvenience associated with red
tape is proverbial.
In general, however, the canon of convenience, in the
larger sense of the term, may be brought under the canon
of economy.
Magnum parsimonia est vectigal ought to be applied in
every budget ; parsimony in one direction may avoid tax-
ation in another. The usual practical rules by which
economy, in this narrow sense, is attained must, however,
be widely extended with the development of the term
economy.
Economy in the means is the natural corollary of equity
in the objects of expenditure. The aim ought to be to
attain these objects in the most effective manner. Any-
thing that is paid by government beyond what is requisite
for efficiency is inequitable ; it benefits one class, or rather
a few members of one class, at the expense of the public.
It is true, no doubt, that there is room in state expendi-
508 ELEMENTS OF POLITICAL ECONOMY
ture also for the economy of high wages, and even in the
purchase of materials the dearest may be the cheapest with
governments as with individuals ; but high wages are only
economical in proportion to efficiency, and high prices in
proportion to quality. At the present time there is a re-
crudescence of an old fallacy : that the government ought
to set the example of paying high wages — from the low-
est to the highest appointments. The idea seems to be
that the chief factor in the determination of wages ought
to be the benevolence of the employer, and that as the
government obtains its funds without any real cost, its
benevolence should be so much the greater. Neither sup-
position will bear analysis.
Similarly, as regards the purchase of commodities, it is
sometimes thought that the government ought to give
more than private people. Economically it ought to give
less. It buys in larger quantities, its payments are cer-
tain, and its custom is valuable as an advertisement. And
if in a case of need or of monopoly the State has a right
to modify prices in the public interest, so it may also
modify them in the interest of its own administration of
public affairs.
The principle of economy may sometimes be applied di-
rectly as a check on state enterprise. All unproductive
expenditure involves taxation, and all productive expen-
diture that is to pay its cost must either be a monopoly
which so far involves taxation, or it must be conducted
like any other business. If private enterprise or volun-
tary association is sufficient to meet any public want, the
government, whether central or local, should generally let
it alone. The chance of profit is balanced by the chance
PRINCIPLES OF PUBLIC EXPENDITURE 509
of loss, and the simple plan of taxation is preferable to
speculation for profit as a method of providing public
funds.
A number of subordinate or derivative rules of expendi-
ture may be derived from the clue afforded by taxation.
Government expenditure should be directed to a com-
paratively small number of great objects, and not to a
multitude of small affairs. A driblet here and there is
sure to offend against the canons of equity and economy.
Grants in aid tend to be given in response to popular
clamour or as rewards for political services, and so far
take the place of the ancient pensions and direct bribery
of the representatives of the people. It is sometimes said
government should do a certain thing because the expense
is trifling. A trifling expense, on the contrary, shows, as
a rule, that it is no fit matter for governmental action.
Trifling expenses ought to be met from the small change
of charity, not from the millions of public revenue ; if
necessary, they should be the occasion not of appeals to
government, but to persons.
A good system of expenditure should as far as possible
be self-regulating ; it should expand (and contract) with
the public requirements. With growing wealth and popu-
lation it is necessary to provide for increasing expenditure,
and the various departments should be so constituted as to
admit of natural expansion. At the present time this rule
ought to be specially applicable in the provision for the
naval and military services. Again, contraction of ex-
penditure according to lessened requirements in certain
branches is necessary both for economy and substitution.
The expenditure also, in the various departments, ought to
510 ELEMENTS OF POLITICAL ECONOMY
be accurately estimated. In practice, the normal expendi-
ture should be met from normal revenue. Supplementary
votes and extraordinary demands should be avoided as far
as possible — otherwise the control of Parliament becomes
nominal. It is bad policy if Parliament is only made to
sanction expenditure already accomplished.
In the progress of society, moreover, it is necessary to
incur new modes of expenditure. No provision of machin-
ery to meet old wants will suffice for the satisfaction of
new demands. In many cases, however, the expense ought
to be met not by increased taxation, but by substitution.
With increase of wealth the increasing demands for educa-
tion ought to be partially met, at any rate, by diminished
demands from the poor ; as the education rate rises, the
poor rate ought to fall.
Finally, in case of a conflict of rules, if a compromise is
impossible, the guidance of the stronger must be accepted.
It may be said, for example, of expenditure, with still more
force than of taxation, that a considerable degree of in-
equality is preferable to a small degree of uncertainty ;
inequality only affects the private interests of particular
persons, whilst uncertainty vitiates the whole system of
public administration. 1
^Principles, Chaps. XV, XVI; Bastable, Public Finance ; Wealth of
Nations, Book V; Plehn, Public Finance.
CHAPTER IX
COLONIES AND DEPENDENCIES
1. Early History of British Colonies and Dependencies. —
As in the case of other European nations, most of the
British colonies were founded, and most of the dependen-
cies acquired, under the influence of political ideas and
ideals that would no longer be tolerated. Take first the
case of colonies. It might naturally be supposed that the
pressure of population and of capital at home gave a stimu-
lus to colonisation, as in the case of the old Greek cities.
It was, however, not the overflow of well-being, but of
disorder and injustice in Europe which peopled and culti-
vated America. 1 Religious persecution and political in-
tolerance drove out Puritans, Quakers, Catholics, and Jews
to make new settlements. Later on, the transportation of
criminals relieved the prisons of the home country and pro-
vided the colonial plantations with labour. The colonial
labour market was further replenished by kidnapping and
so-called apprenticeship, and by the importation and rear-
ing of slaves.
As the colonies grew in wealth, the mother country
paid them more attention. The most obvious device to
obtain a large share of that wealth for itself was to pre-
vent it going to other countries, and an elaborate system
was devised for the monopoly of the colonial trade. " The
1 See Wealth of Nations, Book TV, Chap. VII.
511
612 ELEMENTS OF POLITICAL ECONOMY
maintenance of the monopoly," said Adam Smith, just
before the revolt of the American colonies, " has hitherto
been the principal, or more properly, perhaps, the sole end
and purpose of the dominion which Great Britain assumes
over her colonies."
At the very time when Adam Smith was writing it
occurred to some of the most foolish and ignorant of our
rulers that it would be an excellent thing to impose taxes
on the colonies for imperial purposes ; and by the famous
duties on tea they succeeded in raising about <£300 and
in losing the American colonies.
It might naturally be supposed that this sharp lesson
would have established, immediately and forever, the prin-
ciple of non-interference in colonial affairs. But the con-
trary was the case. The colonies, however popular their
institutions, were really governed by British ministers from
Downing Street. In crown colonies this power was ex-
ercised directly ; in the free colonies it was exercised
indirectly, through the governors and their councils. Self-
government was there in theory, but in practice the
governors ruled according to orders from England, and
were, in general, able by devious means to command the
consent of the local legislators.^ Very often the inter-
ference was more direct. Acts affecting only the internal
affairs of the colonies were disallowed by ministers at
home. The public lands were considered the property of
the crown, and often obnoxious grants were made. Even
religious institutions and endowments were regulated from
home. One of the greatest abuses was patronage. Infants
in the cradle were endowed with colonial appointments,
1 Cf. Erskine May, Vol. Ill, p. 100.
COLONIES AXI) DEPENDENCIES 513
to be executed through life by convenient deputies. Ex-
travagant fees and salaries were granted by England,
raised by tlie colonies, and spent in England. Politicians
who consented to exile themselves to the colonies were,
in general, those who were wholly unfit for employment
at home.
It is not surprising that the first years of the reign
of Victoria were marked by a rebellion in Canada.
The wonder is that Britain contrived to retain her
dominion.
The retention of dominion, indeed, was effected through
the abandonment of the powers of irritation and abuse.
To Canada, over fifty years ago, and to other free colonies,
as they obtained sufficient importance, the principle of
responsible government was conceded. It is beyond the
sphere of economics to describe the nature and effects of
these political concessions or recognitions. Suffice it to
say, that the general result is that a colonial constitution
has become " the image and reflection of parliamentary
government in England." And just as the crown in
Britain has gained in popularity what it has lost in
nominal power, through the transference of the supreme
authority to the representatives of the people, so also the
mother country, by accepting to the full the principles of
local self-government, has strengthened, and in many
cases has created, the far more real bonds of affection.
With regard to the dependencies, of which India may
be taken as the most marvellous example which the world
has ever seen, for a long period they also were given over
to patronage and plunder and to all the methods of ex-
ploitation invented by unfettered companies. But with
2 L
514 ELEMENTS OF POLITICAL ECONOMY
the transfer of the powers and territories of the old East
India Company to the crown came the recognition that
the primary duty of the British government was to
promote the large human interests of the millions of
India, and not the narrow, pecuniary interests of a few
British adventurers — great spirits though many of them
were.
Thus it would appear that the extraordinary growth
of affection on the part of the " possessions " toward the
" possessor " during the reign of Victoria is to be ascribed
mainly not to the conscious efforts of statesmen to carry
out their ideas of " tightening the ties " of connection,
but to the fortunate failures of such attempts ; it is
to be ascribed, not to the strengthening, but to the
relaxing, of the powers of the central, or imperial,
government.
This relaxation is seen especially in the abandonment of
the remains of the old system of commercial monopoly.
The recent denunciation of the commercial treaties with
Belgium and Germany, and the grant to the colonies of
essentially coordinate power in making such treaties, may
be taken as the final step in the transition from monopoly
to freedom. "The mother country^ claims to be included
on the ' most favoured nation ' footing- : the colonies
cannot discriminate against a foreign state to which the
mother country has by treaty granted the ' most favoured
nation ' clause ; no colony, by direct or indirect negotia-
tion, is to obtain an advantage at the expense of any other
part of the empire, and should it obtain any concession
1 See the historical survey in Professor J. Davidson's Commercial Fed-
eration and Colonial Trade Policy, Chap. II.
COLONIES AXD DEPEXDEXCIES 515
by way of preference from a foreign country the imperial
government would endeavour to obtain similar privileges
for the rest of the empire. These restrictions seem to con-
stitute a minimum of empire, and weak as they are they
are only retained by consent."
2. The Profit and Loss to the Mother Country of Colonies
and Dependencies. — If now, in the light of this broad
historical survey, we inquire what is the balance of profit
and loss to Great Britain of this immense empire of colo-
nies and dependencies, the answer at first sight does not
appear to be very satisfactory, and the popular opinion
that " something ought to be done " toward closer union
seems plausible.
One after another the possible advantages of empire
seem to have been abandoned or to have fallen short of
realisation. Consider the question of revenue and ex-
penditure. The great source of expense is found in the
navy and army. The larger part of the expense is in-
curred, not for the defence of Great Britain and Ireland,
but for the empire ; and though India and the colonies
may be called on to meet part of the expenditure for local
defence, they contribute practically nothing to the expenses
of the imperial government. Again, take the interest on
the national debt. This debt is almost entirely due to
wars for the maintenance and extension of empire, and
not simply for the defence of the home country ; but the
United Kingdom alone pays the interest and bears the
burden.
It is true that the recent war has revealed a surprising
depth of filial affection on the part of the colonies and of
India, and the former have contributed men and the latter
516 ELEMENTS OF POLITICAL ECONOMY
horses and material ; but per contra the war itself with its
enormous expense was a war, in the first place, in the inter-
ests of certain colonies, and not in the interests of the
mother country, that is to say, if interest is to be meas-
ured by pecuniary gain.^
3. Trade and the Flag. — It may perhaps be thought
that though we lose directly by the expense of our fleets
and armies, we gain far more indirectly through the ex-
tension of our trade. In dealing with this argument two
distinct questions must be carefully separated. In the
first place, it is undoubtedly true that this country de-
pends for the necessaries of existence — for food and raw
materials of manufacture — upon supplies drawn from
abroad; and it follows, as was admitted by Cobden, that
we ought to keep the supremacy of the sea. But in the
second place it is by no means so true that this extension
of foreign trade has been due mainly to the extension of
empire, and that this extension of empire has increased
the security of our foreign trade. A few significant facts
will show that if, to some extent, trade follows the flag,
to a much greater extent trade pays no regard to flags.
Our aggregate trade with foreign countries (including
exports of British produce and imports) is nearly three
times as great as with our colonies and dependencies ;
1 " You will find that every war, great or small, during the reign of
Victoria, in which we have been engaged, has had at bottom a colonial
interest, the interest, that is to say, either of a colony or of a great de-
pendency like India. That is absolutely true, and is likely to remain true
to the end of the chapter. If we had no empire, there is no doubt that
our military and naval resources would not require to be maintained at
anything like the present level." Mr. Chamberlain, as Colonial Secretary,
at the conference of colonial premiers in London in 1897. See Beport of
Proceedings, p. 7 (C— 8696).
COLONIES AND DEPEXDEXCIES 617
our imports from the United States are greater than the
wliole of tlie imports from all the British dominions.^
Nor can it be said that our trade is more secure owing
to this vast and unwieldy extension of empire. Probably,
indeed, the reverse is the case ; the United Kingdom, as
such, would be stronger with a concentration of empire in
places specially adapted for the maintenance of a sea power.
The other commercial advantages which are supposed
to follow from the possession of colonies also become
much attenuated when tested by facts. The surplus
capital and the surplus labour of this country flow at
least as readily to the United States as to any of our
colonies. From 1853 to 1898 the total emigration of
persons of British or Irish origin was 8,549,569, of whom
5,690,712 went to the United States. The makers of
modern empires have lost the Roman art of deportation :
the Romans would have subdued the Transvaal with the
mountain tribes of India, and civilised India by turning the
stream of Irish emigrants from America. But though
we have imitated the Romans unconsciously perhaps, but
effectively, in the art of amalgamation, — by sparing the
weak and warring down the proud, by encouraging also
tribal wars, and, generally, by making the Briton a
modern Roman citizen, any accidents to whom must be
compensated in territory, — we have, perforce, abandoned
this simple method of deportation. The colonies long
1 In 1898 — a normal year — the aggregate trade (imports and exports
of British produce) with foreign countries was £520,877,107 ; with Brit-
ish possessions, £182,660,716. In 1898 the imports from the United
States were £126,062,155, and from all British possessions, £99,433,995.
The total imports were £485,035,583, that is to say, the imports from
British possessions were about one-fifth of the whole.
518 ELEMENTS OF POLITICAL ECONOMY
since refused to take our criminals, and they are now
drawing the line at our paupers and Asiatics. In brief,
our foreign trade and the migration of labour and capital
are determined mainly by economic, and not by political,
considerations. Labour follows wages ; capital follows
profits ; and neither follows the flag. It is of course
possible that if a foreign power acquired India, it would,
by prohibitive duties, exclude British goods ; but esti-
mated merely by profit and loss, India does not pay the
British taxpayer either directly or indirectly.
4. Imperial Federation. — The only " thorough " scheme
for imperial federation ever propounded is that given by
Adam Smith in the concluding chapter of the Wealth of
Natioiis. It is, probably, far too thorough for acceptance
by the feebler folk of to-day. His scheme was based on
imperial taxation throughout the empire, and representa-
tion in proportion to taxation. He contemplated the pos-
sibility of the transfer of the seat of political power across
the Atlantic in little more than a century ; and but for the
political accidents which occurred as he wrote, the present
United States would have been the strongest part of the
British empire, both in wealth and population, that is,
so far as the English-speaking races are concerned. If,
however, the education and political emancipation of the
" black man " had advanced in India as in America, and
the franchise were not tempered by property qualifications,
India would be sending a majority of representatives to
the Imperial Parliament ; and the logical outcome of
Adam Smith's scheme would be that the representatives
of the United Kingdom would form less than 10 per cent
of the whole.
COLONIES AND DEPENDENCIES 519
If federation of this " thorough " kind does not seem
possible, any reversion to the old methods of monopoly of
trade and preferential duties seems equally unlikely to
increase the economic advantages of empire to the mother
country.
The method of estimating the advantages and privileges
of empire in terms of money is, however, altogether
inapplicable and fallacious. If Britain had parted with
all the territory that did not " pay," she would not have
retained in her empire a single colony or dependency, and
even Ireland would have been cast adrift; and if the
British colonies had forsaken their allegiance because
they had no share in the British Parliament, equally, also,
the empire would have disappeared. The empire has
grown in strength because liberty and natural affection
have been allowed to displace narrow economic interests.
Consider the question of defence. Every year of peace
and control strengthens the affection to the empire of the
colonies, and makes it more and more impossible for any
other power to take our inheritance. And in case the
independence of the mother country were threatened, the
resources of the whole empire would form a last reserve,
all the stronger because it rested not on formal treaties or
fixed contributions or shares in control, but upon gratitude
and affection. Consider even the question of commerce.
It is easy to say that free trade within the empire is desir-
able, and it is to be hoped that in the course of time this
ideal will be realised. But this country would not gain
if this ideal must be purchased by sacrificing a trade of
threefold magnitude with foreign countries, by creating all
kinds of local jealousies throughout the empire, and by
520
ELEMENTS OF POLITICAL ECONOMY
interfering with systems of taxation which the people who
bear the taxes regard as beneficial or, at any rate, satis-
factory.
Instead of seeking to " tighten ties," the ideal should be
to enlarge the sympathies ; and instead of trying to barter
government for revenues, the people of this country should
endeavour more and more to govern by consent.^
1 This chapter is abbreviated from Principles, Book V, Chap. XIX — the
greater part of the more controversial matter being omitted. See Wealth
of Nations, Book IV, Chap. VII ; Davidson, Commercial Federation and
Colonial Trade Policy ; Chiozza, i^'ree Trade and the Zoll-Verein ; Bas-
table, Commerce of Nations, Chaps. X, XVII. The article on "Colonies,"
in Palgrave's Dictionary, gives a useful bibliography and r6sum6. See
also Lewis, Government of Dependencies (ed. Lucas), Introd., pp. xliv-
Ixii, and Chaps. VI-IX. Caldecott, English Colonisation and Empire,
Chaps. VII, Vlll.
INDEX
Ability as basis of taxation, 434,
i'M seq.
Abstinence, 81, 84, profits as reward
for, 174.
Abstract method, 13 seg'., 29, 68 seq.,
234 seq., 2(11-8, 27:3-6, 327, 329 seq.,
353 ; Rogers's treatment of, 381, 392,
395.
Accumulation : influence on natural
conditions, (i, 87 seq.; the effect of
contracts, 138 ; trade unions may
restrict, 192.
Adjustment : (a) of supply to de-
mand, 225 ; (6) of relative prices
to relative values, 215, 281 seq.,
324.
Advantages : of cheapness, 28, 372-3 ;
of division of labour, 48-9 ; of
localisation, 51-2 ; of production on
a large scale, 56 ; of joint-stock
companies, 60 ; relative, of large
and small farming, 64 ; of exchange,
212 ; of foreign trade, 356-8 ; relative,
of different employments of capital,
362-3, 489.
Agents of production, 11-2, 34 seq.
Agricultural : labourers, immigra-
tion into towns, 54-5 ; land, private
property, 112 seq.; employment,
proportion of population, 406-8,
410-11.
Agriculture : law of diminishing re-
turn in, 68 seq. ; law of increasing
return in, 74.
Alternating standard and bimetal-
lism, 285.
America : discovery of, 383 ; how
peopled, 502.
Amsterdam, Bank of, 293-4, 295.
Analytic method, 13, 120, 122.
Anarchism, 124.
Anderson and Macpherson, 14.
Annual supply of gold, its influence
on prices, 2.56, 265-8.
Appreciation of gold, 9, 256 ; and the
rate of interest, 325 ; and economic
progress, 382-3.
Apprenticeship, statute of, 140, 186.
Appropriation : emphasised in distribu-
tion, 22, 95, 96 ; mark of wealth, 21-
2 ; as economic production, 33 ; of
public funds, illegitimate, 501.
A priori method, 13.
Arbitration in industrial disputes, 198.
Ardour of work, 62, 64.
Aristotle, 177.
Arts, use of gold in, 264.
Ashley, W. J., 377 N, 394 n.
Association : the principle of, 170, 412 ;
defects of freedom of, 419.
Athens, trading loans in, 397.
Austin, 98.
Authority in distribution, 126, 132.
Auxiliary capital, 48, 49, 85, 87, jK).
Avenel, Vicomte d' : Ilistoire Econo-
mique, 14, 151, 395, 412 n.
Average i'. normal value, 231-2 ;
averages, 26, 152, 171.
Bagehot, W., 283 n, 303 n, 306, 307,
308, 326 N.
Balance of international indebted-
ness, 340 seq.
Bank Charter Act (1844), 288, 292-3,
297, 300-2, 308.
Banking: its functions, 292, (a) issue
of notes (see Bank-notes) ; (6) de-
posit and discount, 292, 304-8 ; strik-
ing development of, 374; Scottish,
note issue essential, 296 ; notes more
stable in value than coins, 294, and
preferred to gold, 294-5 ; connection
of branches and note issues, 297.
Banking principle v. currency prin-
ciple, 299-302.
Bank "money," 252,292, 304; limits
to its creation, 205-ti; interest on,
316 seq.
521
522
INDEX
Bank-notes, 252; as tokens, 297; may
be a better medium and standard
than coin, 293-5; as currency, re-
quire special regulation, 296-8;
minimum denomination, 298-9;
overissue, is it possible ? 299-302 ;
methods of regulation, 302.
Bank of Amsterdam : see Amsterdam.
Bank of England: the "restriction,"
249; accepts gold coins by weight
only, 270 ; its two departments, 292-
3; founded (1694), 295; its early
notes, 296 ; regulation of note issues,
292, 297; holds ultimate reserve,
306-8.
Bank of Genoa, 165-6.
Bank (Imperial) of Germany, 302.
Bank rate : see Discount, Rate of.
Bank reserves: money as a store of
value for, 257 ; internal and foreign
drains, 279-81, 308, 310; manage-
ment of, 306-8; and crises, 308, 310.
"Bank restriction" (1797-1823), 249,
276, 308.
Bankruptcy law : as illustrating right
of expropriation, 115, 116 ; and gov-
ernmental action, 425.
Barter: exchange as, 216; simplest
case, 217; gives place to a money
economy, 253; and prices, 264;
theory of foreign trade in terms of,
332 seq.; all trade barter, 361.
Bastable, C. F., 327, 339 N, 364 n, 432,
439 ; 446-7, 451, 496 N, 497, 510 N.
Bastiat, 486.
Benefit theory: (1) of taxation, 444-5
(cf . 431) ; (2) of public expenditure,
499-500.
Bentham on security, 116, 416.
Bequest, 9(5, 97, 100, 103, 106-11, 127.
Bills of exchange, 252, 293, 328, 344,
348, 349, 354.
Bimetallism, 256; rated and unrated
in England, 259-60; recent break-
down, 260 ; essential conditions, 284 ;
can the fixed ratio be maintained in
one country? 284-5; under interna-
tional agreement (compensatory
action)? 285-8; difficulties of in-
ternational, 288-90 ; advantages
claimed for, 291; present position,
291.
Black Death (1349), 66, 155, 390.
Boehm-Bawerk, E.von, 45 n, 92 n, 326 n,
404 N.
Bonar, Dr. J., 82 n.
" Bonus " system, 197.
Bosanquet, B., 428 n.
Bounties: on production, 50; on ex-
port, 484, 485.
Bowley, A. L., 18n, 152, 171, 219n.
Brentano, L., 186, 198 n.
British : customs and excise in the
nineteenth century, 473-4; income
tax, 482, 483; colonies and depend-
encies, 511-20.
Budget : family or workmen's, 147,
150, 405 ; national, ministry respon-
sible for, 498.
Building sites, law of dim. ret. applied
to, 73.
Burke, E., 119 N.
Buxton, S.,496n.
Buyers' monopoly, 170, 494.
Cairnes, J. E., 226*.
Canada, responsible government
granted, 553.
Capital, 10; a requisite of production,
12, 34 ; analysis of conception, 41-4,
83; Mill's four propositions, 44-5,
83; auxiliary, 48,49; mental, ift.;
concentration of, 56-61, 128, 129, 138 ;
and large farms, 64; and size of
farms, 65; growth of, 83-92; and
economic basis of private property,
102-3; exijloitation of labour by,
127 seq.; difficulty of collective
ownership, 130 seq. ; distribution
of, 137-8 ; harmonies and conflicts of
labour and, 185-98, 410-2; rate of
interest on loanable, 311 seq.; living,
371 ; exchange essential to, 399 (see
also Interest) .
Carey, 359.
Certainty: in interpretation of con-
tracts, 104, 255; in taxation, 448; in
public expenditure, 406, 510.
Chamberlain, J., 516 n.
Chance, its judgments popular, 131,
132.
Charles I "borrows" from the Mint,
295.
Charles II shuts the Exchequer, 295.
Cheapness and utility, 372-3.
Checks to population, 80 seq.
INDEX
523
Children : bequest limited in favour of ,
110-1; labour of, 134; degraded
labour of, 317.
China, 259, 308, 358, 3G7.
Chiozza, L. G., 520 n.
Church, medicBval, and freedom of
bequest, 108.
Circulating capital, 44, 89, 318.
Clare, G., 303 n, 317, 319, 326 N, 355 n.
Clark, J. B., 105 n.
Classification of labour, 48, 56, 64.
Climate a constituent in national pro-
duction, 15, 36.
Clootie's croft, in Scotland, 470.
Cobden, R., 516.
Cohn, G., 451 n.
Coinage : definition and attributes
of coin, 258-9 ; systems of metallic,
259-60 ; and Gresham's law, 269-71 ;
token, 259, 271-2 ; under bimetal-
lism, 286; history of English, 378-
80.
Collective bargaining, 140.
Collectivism, 124 seq.
Collet, Miss, 412 N.
Colonies and dependencies, 511 seq.
Combination : of labour, 39, 47 seq. ;
simple and complex, 49; combina-
tions, 159, 160, 161 ; ti-ade unions and,
187, 412, 419.
Commercial (1) crises: and note
issues, 301-2 ; and suspension of Bank
Act, 308 ; definition, 309 ; causes, 309-
10 ; (2) supremacy, 37 ; (3) treaties,
489, 493, 514.
Communication, means of; improve-
ments in, 71.
Communism, 132.
Commutation of services and pay-
ments in kind into money, 253, 254,
374, 378, 390.
Companies, joint-stock, 59-61.
Comparative : (1) method, 18; (2) cost,
theory of, 332 seq., 356, 357.
Compensation ; for expropriation,
105, lOfi-9 ; for improvements, 114.
Compensatory action : (1) of the
double standard, 286-8, 290 ; (2) of
causes affecting mediaeval prices,
382.
Competition : as stimulus to produc-
tion, 103, 104 ; in letting land, 114 ;
socialism would displace, 126 ; and
distribution , 136, 138-9 ; and wages —
its implications, 159; trade miions
and, 187 ; in mediaival and modern
markets, 217-8 ; and determination
of value, 225 seq.; v. monopoly,
232 seq., 246, 248 seq.; industrial
and commercial, 328 seq.; and inter-
est, .397 ; diminishes profits of inter-
change, 402 ; prices v. monopoly
prices, 402 ; in production, 412, 418;
in distribution, 418-9; stimulated by
free trade, 493.
Concentration : of industry, 56-61 ; of
capital, 129, 138.
Conceptions : economic, continuity in,
11, 24, 141-2 ; inappropriate, 368.
Conciliation, industrial, methods of,
196 seq.
Conflict of interests between labour
and capital, 185-98.
Constant return, 76, 77.
Consumers' rent, 26-9, 356, 373, 397.
Consumption. 22, 2'dseq.; productive
and unproductive, 39, 45, 314-5; im-
mediate, 43, 44 ; difficulties of
socialism, 130-1 ; influence of custom,
141 ; benefits of freedom, 418 ;
taxes on, 471-83.
Consumption-capital, 35, 42-3, 84, 85,
89-90, 138.
Continuity: see Conceptions.
Contract : movement fi'om status to,
96, 127, 211 ; freedom of, as basis of
property, 103-4 ; hostility of social-
ists to, 126-7 ; security essential, 51,
104 ; certainty in interpretation,
255 ; progress and freedom of, 374-5 ;
enforcement of, a function of govern-
ment, 421-23 ; and incidence of taxa-
tion, 454, 455 seq.
Convertibility of bank-notes, what it
implies, 300.
Cooijeration, simple and complex, 49;
in farming, 64; not socialism, 124;
in trade and production, 197.
Corn as standard of value, 215.
Corn Laws, repeal of, 388, 394, 474.
" Correcting " the exchanges, 354.
Cossa, L., 18 N.
Cost of labour, 38, 134, 185.
Cost of production, 85, 86 ; rent in rela-
tion to, 200 seq., 241-3; and quasi-
rent, 243-5; in relation to value,
524
INDEX
231-40; of persons, as a measure
of progress, 371, 372 ; real cost aud
cheapness, 373.
Cottier rents in Ireland, 390.
Counteracting causes: to large scale
production, 57-9; to law of dim.
ret., 71-3; to concentration of capi-
tal, 129-30, 138.
Cournot, A., 245, 327.
Craft gilds, 52, 186-7.
Credit: its extension increases wealth,
86-7 ; effect on general prices, 266,
278 seq. ; gold basis limits inflation,
279-82, 302, 305; and rate of dis-
count, 317; and foreign exchanges,
349 (see also Bank Money).
Criminal law as method of govern-
ment interference, 420-1.
Crisis : see Commercial crises.
Crofters, Scottish, 63.
Cimningham, W., 2, 55 N, 377 N, 382,
394 N, 404 N, 412 N.
Currency principle, 299, 301-2 (cf.
Bank Charter Act).
Currency, systems of metallic, 259-60,
269 (see also Banking, Coinage).
Curves, their use in economics, 24, 45.
Custom and law, 96; as determining
distribution of (a) agents of produc-
tion, 136-9, (6) incomes, 140-1, 376;
influence on wages, 159, 161, 163 ; and
rents, 388-91 ; and incidence of taxa-
tion, 454-5.
Customs duties: origin of, 472; Brit^
ish, in the nineteenth century, 472-4.
Darwin and Malthus, 79.
Davidson, J., 165 n, 514n, 520n.
Debasement of currency, 255.
Debt : law of, 396 ; public, 515.
Deductive method, 14, 68 seq., 234-8,
261-8, 273-6, 327, 329 seq., 391-3.
Deferred payments, standard for,
2.54 seq.
Definitions : use of, in economics, 8-10 ;
rules for, 10-13, 122.
Degradation of labour, 6, 55, 134, 195.
Demand: utility the root of, 22; for
commodities, is it demand for hibour?
44, 84-5; consumption governs, 140;
effects of increase of, 50, 76; as
directing industry and growth of
capital, 84; socialism in relation to.
126-30; and production in large
scale, 130 ; law of, 220-2 ; elasticity,
189, 221-2 ; direct, joint, and derived,
170, 222 ; changes in, 170, 222-4, 244,
249; effect on price, («) immediate,
227,230; (6) ulterior, 228; and mo-
nopoly, 245 seq.; and overproduc-
tion, 216-7.
Demand and supply : of labour in dif-
ferent employments, 167 ; of capital,
175; reciprocal, 216; in a market —
analysis, 217-9; equation of, 225565.;
and normal value, 231, 239; as deter-
mining value of gold, 256, 266, 283 ;
of loanable capital, 312-6; of loan-
able "money," 317-20; dependence
of profits on, 401.
Deposit and discount, banks of: see
Banking.
Depreciation : of the standard, 255 ; of
coinage, 259; of inconvertible paper,
213, 263, 273-6 ; evils of, 276-7 ; and
the rate of interest, 324-5; and the
exchanges, 350; indirect effects on
foreign trade, 277 n, 351-2 ; in weight
of coins, 379; does it imply deprecia-
tion in value ? 380-82.
Dictionary of Political Economrj: see
Palgrave.
Difficulty of attainment and value,
219.
Diminishing : (1) return, law of, 6, 68-
74, 76-7, 91 ; in relation to value, 228,
239; in case of gold, 265; and inter-
national values, 337 ; and incidence
of taxes, 474-6, 477 ; (2) utility, law
of, 25, 26, 27.
Disadvantages of division of labour,
52-5.
Discount, rate of: bank and market
rates, 320; causes affecting; 316-20;
differences from interest, 316, 320;
their reciprocal action, 321-2; bank
rate and the exchanges, 348-9.
Disintegration of family a feature of
economic progress, 107-8.
Distribution : appropriation important
in, 22, 95 ; value and, 22 ; population
and, 80; and growth of capital, 84,
88 ; popular and economic senses, 95 ;
problems in, 95-6; and exchange,
9f)-7, 211 ; influenced by laws of in-
heritance and bequest, 106 ; socialis-
INDEX
525
tic schemes, 120 se^".; their difficulty,
132 ; quantitative, of property, 1:3(5-9 ;
of income, 139 seg.,' three problems,
141 ; progress in, 375-7 ; benefits and
defects of freedom of, 418; the inci-
dence of taxation a problem of, 454.
Disutility, 23, 25, 27, 37-9, 46 ; economic
progress in terms of, 372-4 ; of taxa-
tion, 437 seq., 437 N.
Division of labour, 47-55; meaning of,
47 ; involves division of capital, 47,
48, 49 ; advantages, 48, 74-5 ; limited
by extent of market, 50, 211, 357;
disadvantages, 52-5.
Documentary reserve, 300, 302.
Do well, S., 49()N.
Dunbar, C. F., 303n.
Durability of gold, as affecting its
value, 25(), 258, 2(56 seq.
Duration of power to labour, 39.
Dynamical forms of laws of diminish-
ing and increasing return, 71-3, 75.
Earning capacity, as measure of prog-
ress, 371.
Earnings, annual v. wages, 191, 194;
partly quasi-vent, 140 ; opportunities
for extra, 147.
Economic: basis of private property,
100-5, 112 seq.; conceptions, 11, 24;
principle of distribution, 375; his-
tory, 2, 7, 139; ideas, distinguished
from legal and ethical, 106 ; litera-
ture, 1-3; laws, 15-7, 140, 408;
methods, 13-5; rent, 10, 199-207,
241-3, 391-2 ; studies, difficulties of,
17-8 ; theories, history of, 2-3, 32, 35 ;
utilities, 32-4, 117, 13*9, 142.
Economics, need of specialisation,
4-5,7.
Economies, interna? and ex^er^a?, 51-2,
57, 74.
Economy : of high wages, 39, 102, 196 ;
as a canon of taxation, 449; and ex-
penditure, 507-9.
Eden, Sir F. M., 14, 412 n.
Edgeworth, F. Y., 31 n, 327, 339 N,
459 N.
Education : cost as an element in
quantity of labour, 38; as affect-
ing efficiency, 39, 40; free, is it
socialistic? 125; cost as measuring
progress, 371.
Efficiency : (a) of labour, 36, 39-40, 45,
56, 85-6; affected by distribution,
88; and quantity of labour, 148; and
a minimum wage, 194-5, 19<5; and
competition, 418; and expenditure,
.507-8; (&) of money, 264.
Elasticity: of demand and supply,
221-2, 225, 229; and incidence of
taxes, 45(5-9.
Elizabeth, 379, 411.
Ely, R. T., 135 N.
Emphasis, adjustment of, 148.
Empire : the burden of, 515 ; its rela-
tion to trade, 516-8 ; its real advan-
tages, 520.
Employment, regularity of, 146, 167.
Enclosures, 63, 121.
Encyclopxdia Britannica, 240 n.
Endowments, limits to freedom of
bequest, 110.
Engel's law, 147.
England : material progress, 26 ; prog-
ress of cities, 55; landlord and ten-
ant system, 114; reform as regards
property, 121; distribution of land,
137; wages in, 151-2; early factory
system, 373 ; progress in distribu-
tion, 376; monetary history, 378-80;
history of prices, 380 seq.; progress
and agricultural rents, 389-91 ; and
interest, 394; and occupations and
wages, 396-8; of expenditure, 498;
colonial policy, 511 seq.
English: silver coinage before 1796,
269; gold coinage before 1891, 270.
Entrepreneur, the, 193.
Environment, as affecting quantity o£
labour, 38.
Equality : of taxation, 13, 434-47 ; be-
fore the law, 374 ; of public expendi-
ture, 502.
Equation : see Demand and supply.
Etahm hoiteux, 284 (cf. 260).
Ethics and political economy, 7, 18,
106, 109.
Evasion of taxes, 430, 446, 453, 465, 501.
Evolution: socialist doctrine, 128;
economic progress and the theory
of, 368, 377 N.
Exchange: value important in, 22; a
kind of production, 33, 95, 374; con-
nection with division of labour, 50;
and distribution, 96-7 ; socialism
526
INDEX
would abolish, 126 ; relation to pro-
duction and distribution, 211 ; real
advantage, 212 ; as barter, 216-7 ;
Book III, passim, 373 ; progress in,
374-5 ; and profits, 399 (see also
Contract).
Exchange value : see Value.
Exchanges: see Foreign exchanges.
Excise duties: history in England,
472 ; British, in nineteenth century,
473 ; incidence of, 474-6.
Expectation, 117-8.
Expenditure, public: adjustment for
social ends, 446-7 (cf. 304-5) ; its
character, comparison with taxa-
tion, 497 seq.; principles of, 502-10.
Expenses of production, 193, 201, 233
seq., 240 N.
Exploitation of labour, 127 seq.
Export, new, its effect on foreign
trade, 353.
Exports: pay for imports, 340 seq.;
"invisible," 342-3, 354, .356-7; inci-
dence of duties on, 478-80.
Expropriation, the right of, 114-5;
compensation for, 116-9.
Extent of market, division of labour
limited by, 50-1.
F's, the three, 115.
Factor of production, conditions for a
rise in price, 188-9.
Factory acts : are they socialistic ? 125,
133 ; socialists promoted, 134.
Factory system and evils of division
of labour, 53, 373.
Faculty theory : of taxation, 437, 440-
2 ; of expenditure, 504.
Family, the ancient unit of society,
107.
Family budgets, 147, 150.
Farming, large and small, 62-67.
Federation, imperial, 518-20.
Feudalism, 120, 121, 383.
Field, J. D., 144 N.
Fifteenth century in England, 406.
Final utility, 23, 24 seq., 27 (see also
Marginal).
Finance, public : see Expenditure, Tax-
ation.
Fixed capital, 44, 90, 138, .399, 400 N.
Fixed ratio: see Bimetallism.
Flint, R., 122, 135 N, 367, 377 N.
Food supply and eflficiency, 39; and
population 79 seq.
Foreign : (1) coins, in England, 259,
378, 379 ; (2) drain of gold, its effect
on general prices, 279.
Foreign exchanges, 327, 340-55; ele-
ments of international indebtedness,
340-43 ; media of settlement, 343-5;
real par v. mint or nominal par, 340,
345; rise and fall, 346; gold points,
346; favourable and unfavourable,
347-8 ; and the bank rate, 348 ; state
of credit, 349; arbitrage, 349; state
of currencies, 350.
Foreign trade : fallacious measure of
advantage, 9-10 ; and division of
labour, 50; reciprocal demand in,
216; its proximate cause, difference
in price, 282; the theory, 327-39;
comparative immobility of labour
and capital, 328-32 ; effects of (1)
depreciation and appreciation of the
currency, 351-2; (2) changes in bal-
ance of trade, (a) new export, 353-4
(6) tribute, ih. ; theory of compara-
tive cost, 332-6; theory of interna-
tional values, 336 seq.; money in
international trade, 338-9; modify-
ing influences, 337-8; real advan-
tages, 356-8 ; possible disadvantages,
to a particular country, 358-64 (cf.
490-4) ; has made agricultural land
free, 391.
Formal justice: see Justice.
Fourier, 121, 124, 158.
Fox, Wilson, 412 n.
Foxwell, H. S., 105 n, 124, 135 n.
France, 2; population, 16, 78; growth
of small industries, 58; speculative
manias, 59 ; peasant proprietors,
64-5, 66; distribution of land, 137;
wages in, 151, 153 ; limitation of
overvalued silver, 260 ; banking
and note issues, 297 ; commercial
treaty with, 493.
Freedom : and efificiency of labour,
40 ; V. organisation, 130-3 ; its es-
sence, 420 ; limited by government
interference, 427-8.
Free trade : and division of labour,
48 ; in early markets, 217 ; a prob-
lem in foreign trade, 327 ; lessens
economic superiority of landlord,
1
INDEX
527
391 ; V. protection, 484-96 ; meaning
of, 484 ; as eiYecting, (a) the con-
sumer, 485 ; (b) home industries, 480 ;
assumptions of the arf:;ument for,
487-90; theoretical exceptions to,
490-94 (cf. 358-64); negative argu-
ment for, 494-6.
French Revohition, 123.
Functions of government : see Govern-
ment.
" Futures," dealings in, 218.
Gairdner, Dr. Charles, 304.
General : (1) prices, movements in,
213, 216; (a) causes, 255-6, 261-83;
(h) measurement, 213-4, 256-7; and
relative prices, 150, 215; progress
and, 380-83; (2) profits, 183-4;
(3) wages, 149-65.
Geographical position of country, 36-7.
Geological character of country, 36.
George II, 398.
George, Henry, 388.
Germany, 2; restraint of speculation,
218; gold standard, 286, 289, 308;
taxation, 482 ; ZoU-Verein, 495.
Giffen, Sir R., 43, 92 n, 327 n, 371.
Gift inter vivos, 111, 453.
Gilbart, J. W., 303n.
Gilds : see Craft Gilds.
Gilmann, 189 n.
Gladstone, W. E., Ill, 362, 440, 474,
496 N, 497.
Godwin, 98, 124.
Gold : appreciation of, 9 ; price and
value, 213, 265, 281; sole standard in
England, 260, 380; its origin, 285,
289; causes determining its value,
255-6, 261-83 ; cost and value, 265-8;
and silver — relative values, 267-8,
284-5; value of, in terms of demand
and supply, 256, 266, 283 ; and silver
prices, interaction, 283 n; distribu-
tion throughout world, 339, 354-5;
currency in England— history, 378-
80.
Goldsmiths' notes, 295.
Gomme, G. L.,469.
Gonner, E. C. K., 135 n.
Goschen, G. J., 290, 347, 355 n, 507.
Government: (1) economic functions,
415-8 ; (2) interference, socialism
and, 126, 130-3; methods, 420; («) of
legal enactment, 420-23 ; (b) of gov-
ernmental action, 42;i-5 ; limitations,
420, 423, 425-8; (3) expenses and
revenues, 429-509 (see Expenditure,
Taxation).
Grain rents, 215, 254.
Grants in aid, 509.
Graphs : see Curves.
Great Britain: see United Kingdom.
Gresham's law, 15-6, 269-71, 274, 285,
380.
Gross, Dr., 192 n.
Ground rents, 315 ; taxation of, 442-4.
Gudeman's field, in Scotland, 470.
Habit may counteract Gresham's
law, 270.
Hadley, A. T., 76 N, 164, 173 N, 184 n,
198 N, 207 N.
Harmony of interests of labourer and
employer, 185, 196.
Henderson, 470 N.
Henry VIII, 382.
Higgling of the market, 225,
Higgs, H., 45 N.
Historical method, 3, 18, 99, 120, 128-
30, 292 seg., 305 se^., 429.
History, economic, 51, 120, 1.38.
Hoarding, 84, 257, 200, 264, 290.
Hobson, J. A., 55 n, 61 n, 173 n, 251 n.
Holland, 293.
Holyoake, G. J., 135 n, 198 n.
House rent, incidence of taxes on, 452.
Human element in economics, 134.
Hypothetical method, 13, 14, 15, 69,
261 seq.
Ideals, conflict of, 133, 136 ; benefits
of socialist, 134.
Immaterial: production, 33-4, 50;
localisation of, 52 ; on a large scale,
56, 57; capital, W; wealth, 132.
Immigration : to the towns, 547 ; to
new countries, bounties on, 74.
Immobility, comparative, of labour
and capital between nations, 328-32.
Imperial federation, 518-20.
Imports, their payment by exports,
216, .3:«, 339, 340, ;U2, 356-7, 488.
Improvements in production, distribu-
tion of effects, 194 (see also Rent).
Improver, should owner be? 113.
Incidence of taxes : see Taxation.
528
INDEX
Income: and capital, 43, 83; distribu-
tion of, 96, 139 seq. ; taxation and
free minimum, 437-8.
Income tax: British assessments, 88;
law, 400 n; its history and fiscal
reform, 473-4.
Inconvertible notes: as money, 255;
low denomination, 298; depreci-
ation, 213, 249, 255, 262; as illus-
trating quantity theory, 27."5-(5.
Increasing return, law of, 74 seq. ; re-
lation to value, 228-9, 239; in case
of monopoly, 247; and international
values, 337-8; and taxation, 442,
474-5.
Increments: marginal, 74; unearned,
10, 119 N, 442-4, 467-8.
Index numbers, 213, 214, 216, 219, 257.
India : village communities, 112 ; sil-
ver currency, 260 ; monetary strin-
gency, 290; British government,
513-4, 518.
Indirect taxes, 452, 453 seq.
Individual : sometimes useful to begin
with, 6-7 ; transition to group or
nation, 25-6.
Individualism: socialism and, 123
seq. ; and inequalities in income,
416; its benefits and defects, 418-20.
Inductive method, 14, 15, 16, 56, 58, 80.
Industrial : revolution, the, 56, 75, 1S(] ;
partnership, 124, 197; domain of the
state, 433.
Industry: localisation of, 51-2; con-
centration of, 56-9, 129-30.
Inequalities: in distribution of wealth,
127 seg., 138 ; in income, 416 (see also
Taxation).
Inflation of prices: see Credit.
Inheritance and bequest, 96, 104, 106-9,
126, 137.
Lisurance against risk, 193, 396, 398,
402-3; income tax exemptions on
ground of, 4.38, 440.
Intensity of labour, 38.
Intensive and extensive cultivation,
68 seq.
Interaction of gold and silver prices,
283 N.
Interdependence of production, distri-
bution, and exchange, 141.
Interest: capital as yielding, 41;
effects on accumulation, 88-9, 90;
received on all kinds of capital,
113; pure, 193; loan and profit,
175-8, 193 ; on " money " and on capi-
tal, 311-2; causes affecting rate on
loanable capital, 312-6 ; more steady
than discount, and why, 316, 320-4;
connection with exchange value of
money, 324-5 ; progress and rate of,
396-8.
Interests : see Conflict, Harmony.
International: bimetallism, 285 seq.;
indebtedness, 259, 340-3; trade and
values — pure theory, 327-39.
Intestacy, 108 seq.
Intrinsic value, 212.
Invention : through division of labour,
49 ; taxation and, 431.
Investment, facilities for, 88, 313 seq.
" Invisible exports," 342.
Ireland: cooperative farming, 64 ; ju-
dicial rents, 96; Mill influenced by,
113 ; distribution of land, 137 ; wages
(1848-51), 156.
" Iron Law " of wages, 127-9.
Italy, 2 ; finance banks, 295.
"Jack's land," 469.
Japan, 308.
Jevons, S., 29 N, 45n, 258, 260, 293, 302,
303 N, 326 N.
Johnston, Dr., on primogeniture, 111.
Joint: demand, 222; cost, 239.
Joint-stock: companies, 59-61 ; banks,
298.
Judicial, rents and wages, 56.
Jurisprudence : Adam Smith's treat-
ment of, 3; a social science, 6; and
economics, 18.
Justice: not to be bought or sold,
374 ; the principle of formal, a limita-
tion to governmental action, 447 ;
in public expenditure, 447, 505-6.
Kantian, imperative, 505.
Kay, Joseph, 67 n.
Keynes, Dr., 18 N.
Kind of produce, and scale of farming,
66.
Labour: and capital 9, and prices,
10; economic use of term, 11; is it
essential to wealth ? 21-2 ; as agent
of production, 11, 34, 37-40; (1)
INDEX
529
subjective, elements of "quantity
of labour," 37-9, 45-«; disutility
exaggerated, i;52; ('_>) objective,
causes afifecting efficiency, 3!M0;
division of, 47-55; economy of, 48,
56, 64; wide interpretation, 40, 1130,
141, 149; condition of and size of
farms, 66; as basis of private
property, 100-2; exploitation of,
127 ; distribution of ownership, 138-
9; manual and professional, 149,
185; and capital, harmonies and
confiiets of, 185-98; as standard of
value, 214; in relation to disutility,
372-4; progress and prices of dif-
ferent kinds, 405-110, increasing
differentiation, 406; migration from
country to town, 406-8; relations of
capital and, 410-12.
Lai s^er-f aire, 134-5.
Land: as agent of production, 11-12,
34, 35-7 ; advantages of large farms
as regards, 64; private property in,
112-4, 118; distribution of, 137;
taxes on rent of, 461 seq.; owner-
ship, reform of abuses, 468-70.
Land and stock lease, 66.
Land laws, economic effects, ^, f)7.
Landlord and tenant system, its ad-
vantages, 113-4; his advantages in
bargaining, 388-91.
Land values, taxation of, 464-9.
Latin Union, 286 (cf. 260).
Law: (1) of constant return, 76, 77;
(2) of diminishing return, 65, 68-74,
474-6, 477 ; (3) of diminishing utility,
25, 26, 27; (4) of increasing return,
74 seq., 442, 474-5; (5) of substitu-
tion, 55, 90, 160, 238, 384-6, 412, 474,
501,509-10; (6) Engel's, 147; Gres-
ham's 1&-6, 269-71, 274, 285.
Law and custom, influence of, in dis-
tribution, 137-41 ; on wages, 159,
161-2, 163; on interest, 314; on rent,
385^91, and incidence of taxation,
454-5.
Law, John, 279, 292, 293, 309.
Law of settlement, 411.
Laws of production and distribution,
97 seq.
Lease, land and stock, 66.
Legal : aspects of inheritance and be-
quest, 106; enactment, methods of,
2m
420-23; fictions, and administration
of criminal law, 421; ratio of gold
and silver, 284 seq.; tender, 259-60,
272, 284.
Leroy Beaulieu, 58-9, 78.
Leslie, ClifTe, 481 n.
Lewis, Sir G. C.,520n.
Liabilitj-, limited, the principle of, 60,
397.
Liberty : see Freedom, Natural liberty.
Licences, in trade, 472-473.
Limitation (1) of issues, principle of,
271, 272, 275; (2) of supply of
labour, 189.
Limited liability, 60, 397.
Limits: (1) to production, 68 seq., 91;
(2) to growth of capital, 85 seq.
Limping standard, 260, 284.
List, F., 34, 364, 365 N, 493, 496 N.
Loan interest : see Interest.
Loanable capital : see Capital.
Localisation of industry, 51-2, 57, 76,
357.
Local taxation: special rates uneco-
nomical, 431 ; in Middle Ages, 440;
the "benefit" theory applicable,
445; municipal trading for relief of
rates regressive, 499; and the prin-
ciple of foi'mal justice, 506.
Locke, John, 100.
Macaulay, 255.
McCullock, J. R., 1, 436.
Machinery : division of labour and,
48; effects of, on wages, 172-3.
Macpherson, Annals of Commerce, 14.
Macrosty, H. W., 61 n", 135 n.
Maine, SirH. S.,99,105n, 107, 111 N,422.
Maitland : see Pollock and Maitland.
Malagrowther, Sir Malachi (Sir Wal-
ter Scott), 298.
Malthers, 16, 78-82, 91, 165 n.
Management : joint-stock, 59-60 ;
wages of, 153, 174, 175, 180-1, 191,
193, 396, 398, 402, 410.
Manorial system, 389-90.
Manufactures: production on large
and small scale, 57-01 ; law of in-
creasing return in, 75.
Marginal: cost, 72, 265; doses, 72; in-
crements, 74 ; labourer, 172 ; return,
71 ; utility, 23, 24 seq., 71, 170, 223,
372, 503.
530
INDEX
Market: extent of, limits division of
labour, 50-1, 130 ; equality of prices
in same, 226; value, 225 seq.
Markets, development and character-
istics of, 217-9.
Marshall, A., 29 n, 30, 31 n, 45 n, 55 n,
61 N, 67 N, 74, 87, 90, 92 N, 114 N, 149,
160, 161, 165 N, 221, 222, 225, 231, 238,
240 N, 243, 244, 245, 251 N, 392, 399,
403 N.
Marx, Karl, 124, 127, 135 n.
Materialisation of wealth, 6.
Mathematical method, 13 seq., 18.
Maximum utility, as an economic
ideal, 416-8.
Medieval : idea of progress, 367 ; prices
(relative), 384 seq. ; taxation, 472.
Medium of exchange, 11, 253, 264, 272,
293.
Menger, A., 105 n, 1.35 n.
Mental: capital, 49; evils of division
of labour, 53-5.
Mercantile: (1) law, development of,
421-22 ; (2) system, 479, 491.
Merchandise, currency as, 259.
Methods of political economy, 13-15
{see Comparative, Deductive, In-
ductive, Historical, Mathematical).
Middle Ages: break up of economic
system, 52; serfs of, 55 (see also
Mediaeval) .
Migration: from monopolistic towns,
53; from country to town, 406-8.
Mill, J. S. : what is wealth, 21, 22 ;
meaning of productive and unpro-
ductive, 32 ; circulating and fixed
capital, 44 ; four proiDositions on cap-
ital, 44-5, 83, 84 ; combination of
labour, 47, 64 ; law of diminishing
return, 69, 71, 72 ; dread of over-
population, 78, 91, 116 ; desire of
accumulation, 87 ; limits to produc-
tion, 91 ; laws of pi'oduction and
distribution,97-8, 99, 120 ; economic
bases of private property, 100 seq. ;
on inheritance, 109, 446 ; bequest,
107, 111 ; property in land, 112-3,
114 ; pretium affectionis, 116 ; pre-
scription, 118; socialism and dsprit
de corps, 131 ; authority in distri-
bution, 132, 144 N ; wages fund the-
ory, 1.54 spq., 165 n; supplementary
wages, 170 ; meaning of value, 213,
214 : equation of demand and sup-
ply, 225 ; same price in same
market, 226 ; identifies natural and
average value, 231, 240 n ; efficiency
of money, 263, 264; cost and value
of gold, 268 n; commercial crisis,
309, 310 N ; international values, 327,
336 ; new export, 353 ; his Book IV,
377 N ; increase of rent an evil, 388;
progress and distribution, 395; prof-
its and prices, 399, 400, 401 ; probable
future of labouring classes, 411-412 ;
democratic despotism, 428 ; equality
of taxation, 437 ; " protection " basis
of taxation, 444 ; direct and indirect
taxes, 452.
Minimum: (1) wages, 195; (2) profits,
how far they tend to a, 400se5. ; (3)
disutility as ideal of taxation, 437 N ;
and expenditure, 503.
Mint: par of exchange, 346; mint price
and value of gold, 213, 265; as
banker, 295.
Mobility: of capital, 313, 458,463; of
labour, 166 seq., 172, 328 seq., 458.
Monetary standard : comparative sta-
bility of value important, 254-7;
parallel standards, 259.
Money : 5, 10 ; of money market, 11 ;
provisional definition of, 12 ; as meas-
ure of values, 63, 212 seq., and of
growth of wealth, 84, 85; factor in
economic progress, 126-7, 138; and
real incomes, 143; variations in
purchasing power, 146 ; as medium
of exchange, 216-7; definition and
functions, 252-8; characteristics of
good metallic, 258 ; systems of metal-
lic, 251^)-60; causes determining its
value, 261-83; bank-notes as, 293
seq.; use of, in international trade,
332, 3.3(J, 338-9 ; of banks and money
market (see Bank " Money"); prog-
ress of wealth and population in
terms of, 3(59-71 ; in relation to meas-
urement in terms of utility and dis-
utility, 372-4; money economy and
progress (.see Commutation) ; history
of metallic, in England, 378-80.
Monopoly: of gilds, 52, 186: of colo-
nial trade, 88-9, 511-12, 514 ; of land,
114; and foreign trade, 327; note
issue and, 297; element in ground
INDEX
631
rents, 388-9; and agricultural rents,
389-91; in interest, 39<5, 397; and
trusts, 488; and combination, 4213-4;
governmental, 508; and incidence of
taxation, 454, 458, 475, 476-7, 480,
494; value, 5, 218, 232; principles
of, 245-51.
Monotony, of work, 53-4.
Moral: sciences include political
economy, 6; rules not economic
laws, 16-7 ; restraint, 80 seq. ;
grounds of prescription, 118.
Morley, John, 498 N.
Municipal trading, 425, 445, 499.
Napoleon, 403.
National: production, 35-7; income,
140; money and real, 142-4; divi-
dend, 173; debt, British, 295; advan-
tage V. individual profits, 362, 489 ;
independence, argument for protec-
tion, 491 ; resources, protection of
peculiar, 490 (cf . 358-9) .
Natural: liberty, 415, 418-20; re-
sources, limited, and foreign trade,
358-9, 490.
Nature as agent of production, 34,
35-7.
Navigation Acts : repealed (1850), 474 ;
Adam Smith on, 491; their object,
493.
" Necessaries " and '-' luxuries," taxa-
tion of, 437-8 (cf . 50.3) .
Negative : utility , 23 ; wages, 146 ; rent,
391.
Net: advantages of different employ-
ments, the tendency to equality,
166 seq., what it implies, 408; prod-
uct, 85 seq.
Newmarch, 234, 310 N.
Newton, Sir Isaac, 285.
Nihilism, 124.
Nineteenth century : tendency to large
scale production, 57 ; history of trade
unions, 186-7 ; British customs and
excise duties, 473-4.
Noble, the gold, 379.
" No man's land," 4*59.
Nominal : par, see Par ; wages, see
Wages.
Normal ratios of wages, 169, 235, 408;
prices, 228, 231, 234-40, 245.
Norman Conquest, 376, 379, 380.
Objective standpoints, 37, .39-40, 145,
147-9, 167, 174-5, 437, 440-41.
Old Age pensions, .503-4.
Old tax, no tax, 4.33.
One pound notes, in Scotland, 294,
296.
Open spaces in towns, 469.
Opinion, public: is it indefinitely
pliable ? 98, 120.
Organisation of industry, 35; social-
ism and, 125 seq.
Output, the policy of restricting, 190.
Overissue, of convertible notes, is it
possible ? 299-302.
Overpopulation, Mill's dread of, 78,
91, 116; danger of, under socialism,
132.
Overproduction, general, is it pos-
sible? 21(>-7.
Owen, Robert, 124.
Ownership : see Property, private.
Palgrave, R. H. I., 2, 303 N, 310 N,
318, 327n, 412n,520n.
Pantaleoni, M., 12, 31n.
Parallel standards, of gold and silver,
259, 284, 285.
Par of exchange, .345.
Pareto, V., 18 n, 31 n, 377n.
Partnership, industrial, 124.
Passy, M., 67 n.
Patronage, abuse of in colonial ap-
pointments, 512-3.
Patten, S. N., 365n, 496n.
Pauperism : is it the outcome of the
system of large capitals ? 128-9 (see
also Poor Laws) .
Pauper labour, argument for protec-
tion, 492.
Peasant properties, 62 seq., 243.
Peel, Sir R., 449, 473.
Penny : gold, 379 ; silver, 254, 379 ; and
general prices, S81-2.
Pensions, old age, 503-4.
Permanence, relative of capital, 43.
Persons: all taxation falls on, 432,
.501.
Physiocrats, 32, 35, 91.
Piece: wages, 148, 149; work, 101.
Piepoudre, court of, 421.
Pierson, N. G., 173n, 19Sn, 207n, 283n,
303 N, 310 N, .325 N, 356 N.
Plehn,C. C.,45lN, 510 N.
532
INDEX
Political economy: literature, 1-3;
relation to other sciences, 3-6 ; need
of specialisation, 3-5 ; scope and defi-
nition, 5-8 ; uses of and rules for defi-
nitions in, 8-13 ; methods of, 13-
15 ; laws of, 15-17.
Pollock : on contract, 422 ; and Mait-
land. History of English Law, 111 n.
Poor Laws (English), are they social-
istic? 125.
Poor relief, 423; as a class of public
expenditure, 499, 500, 510.
Population: principle of, 16, 78-82;
and economic progress, 369 seq.;
increase of, and rents, 393, 395.
Porter, Progress of the Nation, 370,
386 N, 391 N.
Post-office, yield of revenue incidental,
499, 501.
Pound, the silver, 252, 259, 378 (cf.
380-1) ; sterling, 255, 265.
Power: to labour, duration of, 39; to
save, 86.
Precious metals, most suitable as
metallic money, 256, 258; current
by weight, 259 ; former stability of
rates, 288.
Preferential duties, 511 seq., 519.
Premium: on gold, 274 seq., 350-52;
does it measure depreciation of
paper? 277 n; under bimetallism,
285, 289; on notes, 294.
Prescription : as basis of private prop-
erty, 104-5; none in iustitutious,
107; what constitutes, 118.
Pretium affectionis, 116.
Price, L. L., 198 N.
Price : and value, 212 iseq. ; of gold, 213.
Prices : general {see General prices) ;
course of, and wages, 146-7; general
and relative, 150, 341 ; interdepen-
dence of, in the world's markets,
281 seq.; steadied by extension of
markets, 357; progiessand general,
380-3; progress and relative, 383-6;
profits depend on differences in,
3(KM01 (cf. 282) ; of different kinds
of labour, progress and, 405-10;
effects of a tax on, 456-9.
Primogeniture, 109, 110.
Produce, kind of, and system of culti-
vation, 66.
Produce rents, 257, 388-9.
Produce theory of wages, 160 seq.
Producers' deficits, 373.
Production : laws of, 6 ; agents of, 11,
12, 34-5; labour as prerequisite of
wealth emphasised in, 22; meaning
of, 32-4 ; physical facts important in,
35-7; act of, when completed, 33-70;
and consumption, material and im-
material, 50, 52, 57; on large and
small scale, (a) in manufactures, 50,
56-61, 74-6, 130; (b) in agriculture,
62-7; socialistic organisation of,
126, 131 ; relation to exchange, 211 ;
cost of, and value, 231 seq. ; expenses
of, 233 seq., 240; disutility of, 372^ ;
benefits and drawbacks of freedom
of, 418.
Production-capital, 35, 42, 43, 44, 84,
138.
Productive and unproductive, 32, 35,
91.
Productive power : in international
trade, 331 seq.; progress in, 374,
375; profits and, 401.
Productiveness of taxation, 448, 449,
451.
Profit: interest, 175 seg., 313; rent, 40,
314.
Profit-sharing, 60, 101 ; not socialism,
124, 197.
Profits: influence of rate on size of
farms, 65 ; and growth of capital, 83;
theory of surplus profit, 127-8, 129;
blended with rent, 139-40; largest
part is wages, 140; part quasi-rent,
140; differences in, 142; analysis,
11, 174-82; the tendency to equal-
ity, 182-3, 238; the general rate,
183-4, 398 ; effects of combinations,
191-5; in relation to money cost,
233, 237 seq.; progress and, 395-
403 ; how far tendency to a mini-
mum, 395, 400-3; tendency to equal-
ity and incidence of taxes, 458, 4(33
seq., 474 seq.; v. national advan-
tages, 362, 489.
Progress: of society, from status to
contract, 96, 127, 374 ; dependent on
division of labour, 50; and immi-
gration to towns, 54-5, 62 ; and law
of diminishing return, 71-3, 75;
from inheritance to bequest, 107-8;
from blood relationship to iudi-
INDEX
533
vidual freedom, 107-8; money, the
chief factor in, 127, 374, 378; the
socialist view of, 128; lessens
fluctuations in prices, 146 ; economic,
in relation to general — need of
separate analysis, 367-1); its nature
and measurement, 369-77; its prin-
ciples not to be deduced from
general theory of evolution, 368-9;
of population, 369-70; money value
of the people as test of, 370-71 ; in
terms of utility and disutility,
372-4; in production, exchange, and
distribution, 374-7; and money, 374,
378-80; and general prices, 380-83;
and relative prices, 383-6, and rent,
387-94; and profits, 395-403; and
wages, 405-12 (see also Commuta-
tion) .
Progressive taxation : and equality of
sacrifice, 438-9; and faculty theory,
442,446.
Property, meaning and economic
foundations of, 95-6.
Proper tj^ private : economic definition,
90-100; economic bases of, 18, 96,
100-5, 112-3; is freedom of bequest
essential to the idea ? 107, 109;
inheritance not part of the idea, 107.
Protection: crude fallacies of, 9-10;
and production on large scale, 50;
mediseval, 51 ; modern, 52 ; as result-
ing from policy of restricting out-
put, 190; and monopoly, 246, 327;
possible effect of sudden abandon-
ment, 360; to young industries, 360;
prices and rents, 391 ; of peculiar
national advantages, 485; v. free
trade, 484-96.
Psychology, 6.
Public: opinion, is it indefinitely
pliable ? 98, 120 ; its despotic power,
428; spirit, socialists emphasise,
131, 135.
Purchasing power, general, 146, 256.
Purveyance and preemption, 472.
Qualifying adjectives, use of, 11.
Quantitative distribution, 96, 1.36 seq.
" Quantity of labour," 38-9, 45-6,
145-fi, 148, 185, 186; trade unions
and, 187.
Quantity theory, of money and prices,
261-83; abstract statement — in-
fluence of quantity, 261-2, 301;
illustrated by incontrovertible notes,
273-6; effects of, rapidity of circu-
lation, 263; volume of trade, 264;
barter, 264; non-monetary demand
for gold — for arts, etc., 264-5, 287;
hoarding, 264; cost of production,
265-8; credit, 278-81; Rogers mis-
interprets, 380-2.
Quasi-vent, use of term misleading,
172; in wages, 170; and wages of
management, 193-4 ; connection with
price, 239, 243-5, 391, 398, 402, 444,
Quesney, 32.
Quid pro quo : basis (1) of taxation,
444-5; (2) of expenditure, 499-500.
Race qualities, influence on efficiency,
39.
Rae, John, 135 N.
Railways, 57.
Rapidity of circulation of money, 263.
Rates : see Local taxation.
Ratio between gold and silver : causes
affecting, 267-8, 284-5; fixed under
bimetallism, 260, 284 scq.; relative
stability (1500-1873) , 288.
Real : cost of labour, 185 ; wages, 97,
140, 141, 185 ; national income, 142-4,
160; cost of production, 232-3; ad-
vantages of foreign trade, 356 seq.;
cost of production and cheapness,
372-3.
Reciprocal demand, 161, 337.
Reciprocity treaties, 492, 493.
Recoinage of 1696, 255, 269, 380.
Reformation, the, 383.
Regressive taxation, 444.
Relative: see Prices, Wages.
Rent: consumers', 26-29; economic,
10 ; development of theory, 35 ; gross
produce and, 63; judicial rents, 96;
produce rents, 140; labour rents, i6.;
and progress, the socialist view, 128;
profit-rent 140; ^uasi-rent, 140, 207,
243-5; differences in, 142; money
and produce, 143 ; and differences in
wages, 172; different meanings of
the term, 199 seq.; economic rent,
the theory of, 200-7 ; cases in which
rent may affect price, 239, 241-3,
251 n; buyers' monopoly — custom-
634
INDEX
ary rents, 231; progress and, 387-
94 ; as a measure of progress, 387-8;
urban ground rents, 388-9; agricul-
tural rents, 389-91; effects of im-
provements on, 391-3 (cf. 395) ;
effects of the season on, 393-4 ; in-
cidence of taxes on (1) agricultural
rent, 461-3; (2) ground rents, 463-9.
Representation and taxation, 435-6.
Representative : (1) commodities (see
Index numbers) ; (2) money, 266,
292, 293, 304 seq., 317.
Reserve : see Bank reserves.
Restriction of output, 190.
Retaliation, 492, 494.
Revenue capital, 41, 43, 138.
Revenue duties, and free trade, 484.
Ricardo : the "iron law" of wages,
127 seq.; economic rent, 199-200;
effects of improvement on rent, .392,
393; cost of production and value,
234 ; foreign trade, 341 ; value and
riches, 372.
Riches and value, 372.
Risk : indemnity for, 175, 178-80, 181-2 ;
in lending, 396; and profits, 402-3
(see also Insurance).
Rogers, Thorold, 14, 66, 151, 213, 234,
380 ; fall in weight of silver penny —
misapplication of quantity theory,
381-2; relative prices, 384, 386 n;
rents in England, 390, 412 n.
Roman distribution, 376 ; methods of
colonisation, 517.
Ruskin, John, 53.
Russia: property in land, 112; rouble
notes at a premium, 294 ; excise and
customs, 482.
Sacrifice, equality of, as basis of
taxation, 4-37-40 (cf. 502).
Saint Simon, 121.
Sauerbeck, index numbers, 216.
Saving, 43, 45, 84; what it implies,
83 seq. ; may be made from wages,
85 ; power and will to, 86-9.
Savings, taxation of, 439-40.
Scarcity, value, wages and, 171-2;
sent, "204, 243.
Schiiffle, A., 1.35 N.
Schloss, D. F., 148, 165 n.
Scotland: crofters' labour, 62; small
farms, 66; judicial rents iu, 96; dis-
tribution of land, 137 ; cottars' wages,
170 ; one-pound notes in, 294-5, 296 ;
rate of interest in, 398.
Scott, Sir W., as Sir Malachi Mala-
growther, 298.
Scottish banking : see Banking.
Seasons, as affecting rents, 391, 393-4.
Security : as affecting will to save, 87,
89; an economic basis of prescrip-
tion, 104-5; for investment of ten-
ants' capital in land, 114; and
compensation for expropriation, 116-
7, 118; attained under village com-
munities and feudalism, 120; and
foreign trade, 358; and interest,
396, 397.
Seebohm, F., 144n, 155, 377n, 382,
389, 394N, 429, 469.
Seigniorage under bimetallism, 284.
Self-interest, socialism and, 131 ; a
variable conception, 420.
Seligman, E. R. A., 135n, 430, 439,
440, 445, 451 N, 459 N.
Sellers' monopoly, 171 (see also Mo-
nopoly).
Serfdom: efficiency of labour under,
40 ; mediaeval, 55, 138 ; its most dis-
tinctive mark, 429.
Services, exchange of, 96 (see also
Commutation).
Settlement law, 168, 411.
Seventeenth century, rents in Eng-
land, .391.
"Shifting" of Taxes: see Taxation,
Incidence.
Shilling, the, its origin, 252, 254.
Sidgwick, H., 18 N, 100, 105 n, IIIn,
119 N, 139, 144 N, 165 N, 173 N, 184 N,
198n, 220, 364, 416, 417, 428n, 496 N.
Silver: coinage in medieeval England,
254, 259, 260 ; free coinage suspended
in Latin union and India, 260, 271,
284 ; now token money in England,
260, 271-2; sixteenth-century dis-
coveries, 262, 264; under bimetal-
lism, 284-285; present position of,
291 ; English pound and penny,
377-9, fall in weight of penny, 378,
.381.
Single tax, 35 (cf. Land Values, Ta.x-
ation of).
Situation: of country, 36; economic
rent from, 202.
INDEX
535
Sixteenth century, 262, 264.
Skill: division of labour and, 48;
capital as, 130.
Slavery, 33, 46; unfavourable to
growth of population, 81 ; and the
will to save, 87; and inefficiency,
101 ; expropriation of slaves, 115 ;
transition to free labour, 139; under
free government, 428 N.
Sliding scale, 157, 196.
Smart, W., 144 n, 219 n.
Smith, Adam, 3-4, 7 ; quantity of
labour, 38; intensity of labour, 38;
preparation for labour, 38 ; wide
meaning of "labour," 40; capital,
41; fixed and circulating capital,
44, 45 n; division of labour, 47, 48,
51 ; monotony of labour, 53 ; com-
merce of towns and improvement
of country, 64; joint-stock com-
panies, 59; improvements in com-
munications, 71 ; high profits and
monopoly of colonial trade, 88-9;
capital best secured in the land, 90;
weakness of the State, 99; bequest,
109; admits exceptions to natural
liberty, 125 (cf. 360) ; wages
partly profits, 140; wages, real, 145 ;
differences in wages, 166, 167, 170,
173 n; profits, 174; ambiguity of
"value," 211; real and nominal
price, 214 ; natural and market
price, 231; Bank of Amsterdam,
293^; immobility of labour, 331;
relation of exchanges to balance of
trade, 340; admits possible excei>
tions to free trade, 360 (cf. 125) ;
employments of capital, 362, 489;
population and prosperity, 369; his
influence on distribution, 376-7;
progress and relative prices, 383-4 ;
profits and interest, 396; circulating
and fixed capital, 399, 400 n ; profits
and prices, 401 ; laws of settlement,
411 ; natural liberty, 415 ; provision
of public works, 425; canons of
taxation, 434-49; equality of taxa-
tion, 434, 435 ; progressive taxation,
442; taxation of rent and ground
rent, 443-4; "protection" basis of
taxation, 444; formal justice, 447;
canons of certainty, convenience,
and economy, 447-9; concentration
of taxation, 449; inequality prefer-
able to uncertainty, 451, 510; taxa-
tion of profit-rent, 466 ; his canons
transgressed before 1815, 473 ; free
trade, 486, 487, 491, 492; his negative
argument for free trade, 494-5, 496 N ;
public expenditure, 510 n; what
peopled America, 511 ; monopoly of
colonial trade, 512; imperial feder-
ation, 518.
Smith, Armitage, 498 n.
Smith, John, Memoirs of Wool, 388.
Smith, J. W., Mercantile Law, 422.
Smith, R. Mayo, 412 n.
Social: science, political economy a,
6-7; evils of division of labour, 55;
dividend, theory of taxation, 444-5.
Socialism : relation of political econ-
omy to, 8; Mill on, 96-8; opposed
to freedom of contract, 104 ; v. indi-
vidualism, 120-35 ; in relation to
exchange, 375 ; and taxation, 44t)-
7 (cf . 503-5) ; of unearned incre-
ments, 468.
South Sea Bubble, 59, 309.
Sovereign, the gold, 252, 254; defini-
tion of, 255, 265; first coined (1489),
379.
Sovereignty, the conception of: its
application to the distribution of
wealth, 98-9, 111, 120 (cf. 132) ; and
right of expropriation, 115 ; as basis
of taxation, 429, 435-7; and of
public expenditure, 498, 502.
Specialisation : of skill, 48 seq
localities, 51.
Speculation, 129 ; in mediaeval
modern markets, 218, 403;
crises, 309-10.
Spencer, H., 128.
Standard for deferred payments, 254
seq., 294.
Staple, the, 423.
State : ownership and management of
land, 114; its weakness as regards
distribution, 122-3; its industrial
functions, 134-5 (.see also Govern-
ment).
Statical: form of laws of increasing
and diminishing returns, 68-71, 72,
74-5 ; conditions required for ideal
distribution, 408.
Statistics, 18, 26, 234.
of
and
and
536
INDEX
Status, movement from, to contract :
see Contract.
Steuart, Sir James, 304.
Subjective and objective standpoints:
i7i re labor, 37^0 ; in re wages, 145-
6, 147-8, 166-7; in re profits, 174-5;
bases of taxation, 437 seq., 440-1.
Subsidiary industries, 58.
Subsistence, means of, population
and, 79 seq.
Substitutes, as affecting demand, 189,
190, 223, 249.
Substitution, law of, 55, 90, 160, 238,
384-7, 412, 476, 501, 509-10.
Succession : laws and customs af-
fecting, 1.38; duties, 446, 453.
Superintendence, wages of, see Man-
agement, wages of.
Supplementary cost, 38.
Supply: law of, 224; elasticity of,
225; effects of changes in, on price,
225, 227, 228; and demand, equation
of, 225; excess of, 216-7 {see also
Demand and supply).
Surplus: debatable between labour
and capital, 192 ; profit, 127 seq.
Survival, of the fittest, through
competition, 418.
Sympathetic movements in prices,
281-3.
Tabular standard, 256-7.
Task wages, 148, 149.
Tate's Cambist, 343.
Taussig, F. W., 165 n, 492, 496.
Taxation: arbitrary and oppressive,
87, 115, 118-9; principal character-
istics (a) compulsion, 429-30, 432,
435; (6) evasion, 430-1; (c) objects
— progress from special to general,
431; (d) payments partially taxes —
prices, fees, 431 (cf. 445) ; (e) public
loans, 4.32; really imposed on per-
sons, 432 ; definition, 432 ; an old tax,
no tax, 433; Adam Smith's Canons,
434-49; I, equality, 4.34-47 ; {}) sover-
eigntij basis, 43.5-0: and representa-
tion, ib. (cf. 498, 511) ; abilities and
revenue, 436-7 ; subjective and objec-
tive standards, 437, 440-1 ; (2) equal-
ity of sacrifice, 437-40, 451, 502; (a)
free minimum income, 437-8; {b)
progressive taxation, 438-9; (c) tax
varying with source of income,
439-40; (3) faculty theory, 437, 440-
2; (a) rule of simple proportion,
441 ; (b) minimum free income, ib.;
exemption of minimum rate of
profits, 441-2 ; (c) progressive taxa-
tion, 442; (d) tax varying with
source of income — unearned incre-
ments, 442-4; (4) benefit theory,
444-5 (cf. 431) ; (5) social function
theory, 445-7 (cf. 504) ; (6) principle
of formal justice, 447 (cf . 505) ; II,
certainty, 448; III, convenience,
448-9; IV, economy, 449; other
rules, 449-51; Incidence, 451;
general principles of, 452-9; as
determined by (o) law and custom,
454; {b) contract and exchange,
455-9 ; of taxes on rent — pure
economic, on agricultural land,
461-3; on building land, house-rent,
"land values," 463-9; of taxes on
consumable commodities, 471-81 ;
methods, 471-3 ; British customs and
excise in the nineteenth century,
473-4; incidence of (a) internal
taxes, 474-6; {b) import duties,
476-8; (c) export duties, 478-80;
application of the general canons,
480-1 ; comparison of direct and
indirect taxes, 481-3 ; revenue duties
consistent with free trade, 484 ; com-
parison of public expenditure with,
497 seq.; preferable to speculation
for profit, 509.
Technical : terms, not to he multiplied,
13 ; training may be overrated, 39.
Telescopic faculty, 87.
" Things in general," 213 seq.
Thirteenth century, 378.
Time : an element in quantity of
labour, 38; division of labour and
economy of, 48-9; in relation to
law of diminishing return, 71;
wages, 148, 149; and exchange,
276.
Token money: leather in mediaeval
England, 259; silver and bronze in
England, 260; definition and princi-
ples of issue, 271-2.
Tolls, 470.
Tooke, IIi.itory of Prices, 14, 234,
310n,386n, 391N.
INDEX
537
Total utility, 23, 24 seq., 223, 372, 503
{see also Utility).
Towns, immigration to, 54-5, 62.
Trade: and the flag, 516-8 {see also
Free, Foreign, International).
Trade unions, 5, IS; their origin, 186;
nature and aims, 187-8; influence
on wages, 188-<)5, 412.
Transfer of values, money and, 2.57-8.
Transport: a species of production,
3."5; tendency to concentration, 57;
as affecting saving, 86 ; nineteenth-
century improvements, 12i); effect
of improvements on rent, 391, 392,
393.
Tribute, a, its effect on foreign trade
and distribution of gold, 353.
Trusts, 5, 50, 56, 57, 111, 170, 245, 246,
?rA, 418, 419, 488.
Tudor debasement of currency, 378.
Uncertainty : see Contract, Taxa-
tion.
Unearned increment : see Increments.
United Kingdom : joint-stock compa-
nies, 58-61 ; coiiperation in farm-
ing, 64; capital sunk in land, 90;
national income, 141; wages in
nineteenth century, 152 ; standard
of value, 254; banking transac-
tions, 278 ; gold reserve, 279 ; opposi-
tion to bimetallism, 288-90; money
market "money," 305; progress
and foreign trade, 358; relative
wages of women and men, 408-9;
employment of children, 409-10; free
minimum income principle in taxa-
tion, 438; concentration in taxa-
tion, 449; budget calculations, 4,'')0;
customs and excise in nineteenth
century, 473-4; free trade and mili-
tary strength, 489; and industrial
development, 495; foreign trade a
minor part of whole, 495 ; the bur-
den of empire, 515.
United States: cultivating owniership,
65; freedom of contract, 103; con-
stitution limits, right of expropria-
tion, 115; wages, 1.52-3; treasury
reports, 291; banking system, 302;
customs and excise, 482; protection
of young industries, 492 (cf. 488) ;
internal free trade, 495 ; emigra-
tion to, 517; a "might have been,"
518.
Unproductive: see Productive.
Urban ground rents : see Ground
Rents.
Usury, history of, 396.
Utilitarianism, 416-8 ; its ideal of pub-
lic expenditure, .503.
Utility: a mark of wealth, 6, 21-2,
and disutility, 22-3; relativity of,
23; consumption in terms of, 23-4;
total and marginal, 24-6, 45-6;
law of diminishing, 25; cannot be
measured in money, 26-9; present
and future, 83 srq. ; economic utili-
ties, 139; consumption and disre-
gard of real, 141; of labour, 146,
149; relation to value, 211-2 ; in re-
lation to demand and supply, 219,
223-4; of money material, 253, 264;
economic progress in terms of,
372-4 ; maximum, as economic ideal,
416-8; and taxation, 432; maximum,
as ideal, of public expenditure, 503.
Value: as prerequisite of wealth,
21-2 ; money value as measuring
growth of wealth, 83, 84-5 ; scarcity
value, 171-2; of labour, in relation
to produce, 173; ambiguity of the
term, 211; how related to utility,
211-2, 372-4; a relative term, 212
seq., 233; and price 212 seq.; and
price of gold, 213; as general pur-
chasing power, 213; no absolute
standard, 214; prerequisites of,
219; market and normal, 231 seq.;
cost as determining, 234 seq.; mo-
nopoly, 245-51; relative stability
essential to standard, 254-7; of
gold, causes determining, 261-83; of
money, economic and mercantile
senses, 324-5.
Values: relative prices adjusted to,
215 (cf. Adjustment) ; a general
rise or fall impossible, 215-6, 237;
monopoly, 232, 245 .^cq.; changes in
general wages, or profits may affect
relative, 237 ; relative, of gold and
silver, 267.
Variations in value of money, 146
{see also Quantity Theory).
Verbal explanations, 9.
538
INDEX
Yerney, Lady, 67 n.
Vested interests, protection and, 360,
487-8, 492.
Village communities, 18, 35, 47, 96,
112, 120, 131.
Voluntary associations, their power,
419.
Wages: economic use of term, 11;
economy of high, 39, 102, 196, 508;
relative and small farming, 67;
saving from, 85 ; real and nominal,
87, 140, 141, 145-7, 214, 401, 403,
405; the " iron law," 127-9; money
and real, during nineteenth century,
130; partly quasi-rent, 140; as de-
termined by law and custom, 140;
subjective and objective stand-
points ; (a) as real reward of a
quantity of labour, 145; (b) as pay-
ment for work done, 147-9; the
general rate — what the conception
implies, 149-53 ; causes determining
the general rate, 153 seq.; wages
fund theory, 154-60; produce
theory, 160-4 ; general relations to
profits and rents, 164-5 ; causes of
difference of wages ; (a) in different
employments, 166-71 ; (/*) of indi-
viduals, 171-2 ; effects of machinery
on, 172-3; regulation of, 186; in-
fluence of trade unions, 188-95;
rent, quasi-Tent and, 193; mini-
mum, 195; and prices, 196; an
element in money, cost of produc-
tion, 233, 235 seq.; can combina-
tions raise them at expense of
consumer ? 188-91 ; or of profits ?
191-5 ; effects of progress on rela-
tive, 405-10.
Wages Fund theory, 9, 45, 154-60.
Wages of management : see Manage-
ment.
Wagner, 377 N.
Walker, F. A., 142, 163, 165n, 184n,
207 N, 253, 260n, 277, 291 n, 303n,
394 N.
Walsh, CM., 219 N.
Wants, new, and new luxuries, coun-
teract tendency to concentration
of labour and capital, 58.
Wealth : economic conception of, 6, 8 ;
popular conception of, 21 ; economic
analysis, 21-2 ; jiroduction of ma-
terial, 33; and of personal, 33-4;
limits to increase of, 68 seq., 91-2;
national, money measurement of,
369 ; and taxation, 432.
Wealth of Nations : see Adam Smith.
Webb, Sidney and Beatrice, 61 n, 135 n,
165 N, 188, 198 N, 412 N.
Wer, in Saxon law, 370.
Wicksteed, P. H., 3lN.
Wieser, F. von, 29 n.
Will to save, 86, 87 seq.
Women's wages, 408-9.
Work, wages as the payment of,
147-9.
Workmen's budgets, 147,150, 214,405.
Yeomanry, displacement of, 137.
Young, Arthur, 63.
Young industries, temporary protec-
tion of , 491-2 (cf. 360-1).
Zoll-Verein, the German, 495.
Principles of Political Economy
By J. SHIELD NICHOLSON, M.A., D.Sc.
Professor of Political Economy in the University of Edinburgh, etc., etc.
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