Outline study of political economy

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Preface

This volume is designed to meet the wants of younger students, and those who have not had long disciphne in severer studies. The fault with many of our elementary books on Political Economy has been, that they are condensations, rather than simpUfications, of the subject. In such a study as this, where the great value lies in the illustrations, it is not easy to present the principles briefly, and at the same time to exhibit clearly their practical application. Yet this has been the special aim here, while at the same time great care has been taken to preserve the scientific form. Whether the writer has succeeded in accomplishing his purpose, it is for the public to determine. It is hoped, howeve?, that the increasingly large number of students in the home college, and the students in our academies and high schools, as well as the general reader, will find in this short treatise both an interesting and a valuable aid in the attainment of information on a subject always of universal importance, and never more so than at the present time.

The author has drawn largely upon the works of Henry C. Carey. In respect to the labor-question he is specially indebted to Professor Francis A. Walker's able treatises. The late Professor Jevons has furnished valuable aid on the Instrument of Exchange. Other writers are cited as occasion has demanded.

Contents

INTRODUCTORY CHAPTER.

DEFINITIONS AND PRELIMINARY STATEMENTS.

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Chapter I. Productive Agencies

1. Production defined and illustrated. Two great agencies, nature and man. Man furnishes labor. Nature supplies (i) materials, (2) forces. — 2. Labor defined; consists in effecting changes 9

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Chapter II. Application Of Labor To Production

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1. Application of labor, direct and indirect. Direct labor of three kinds, — transformation, transmutation, and transportation. — 2. Indirect application : more obvious. Five kinds :

1. Preparation of material; 2. Manufacture of implements; 3. Providing sustenance ; 4. Furnishing clothing, shelter, etc. ; 5. Protecting the laborers. — 3. Among the less obvious forms of indirect labor are: i. Organizing, superintending, etc. ; 2. The rearing of children ; 3. Education ; 4. The professions; 5. Invention and discovery. — 4. Labor not the sole condition of wealth. Mind and character 14

-• CHAPTER III.

PRODUCTIVE AND UNPRODUCTIVE LABOR.

1. Disagreement among writers. — 2. Several kinds of effort generally allowed to be unproductive: i. Misdirected labor;

2. That of which the ultimate object is destructive ; 3. All purely speculative projects ; 4. That which is expended in ministering to vicious appetites 20

Chapter IV. Capital

1. Capital the fruit of abstinence, but not of abstinence alone. — 2. A capitalist not necessarily a rich man. Professor Bowen on the beginnings of capital. — 3. Relation of capital to wealth. — 4. Wealth which is not capital. — S. Fixed and circulating capital. — 6. Capital must be consumed. — 7. Nearly all wealth the result of recent production. — 8. Change of circulating into fixed capital. — 9. Effect of the invention of labor-saving machinery 23

Chapter V. Relations Of Capital And Labor

1. Generally that of mutual dependence. — 2. Capital furnishes conditions of labor. Doctrine of the limitation of labor by

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capital subject to a variety of modifications. Still true in general that a small amount of capital employs a small amount of labor. — 3. Effect of unproductive expenditure of the rich on the welfare of the poor 31

Chapter VI. Some Conditions Of Highest Production

1. Combination and division of labor. Association and individuality. — 2. Combination of two kinds, simple and complex. — 3. Diverse processes in a single trade. Vast increase of productive power thus effected. — 4. Direct benefits of division of labor. — 5. Limitations to division of labor. — 6. Some disadvantages 34

CHAPTER VII. CONDITIONS OF HIGHEST PRODUCTION, Continued

1. Diversification of industry. This diversification as far as possible in each community. — 2. Diverse tastes and aptitudes to be met, otherwise much productive force lost. — 3. Freedom of labor and commerce. This freedom to be real, and not merely theoretical. The largest liberty always under some restrictions. — 4. General education, a great productive power. — 5. Moral character an important condition 42

Chapter II. The Law Of Exchange

1. Value for Value. Reference to the nature of value. — 2. Conditions modifying the law. No general rise and fall of values. — 3. Supply and demand. Terms explained. The general principle as affecting value. — 4. Further limitation of these terms. — 5. How increase of supply by diminishing value increases demand. — 6. The principle modified in cases of limited production. — 7. The law still further modified by other circumstances _-

CONTENTS. xi

Chapter III. The Promotion Of Commerce

PAGE 1. Whatever tends to promote association aids commerce. — 2.

Benefit of rapid and immediate exchange. — 3. Proximity of producer and consumer. Facilities of transportation. — 4. Variety of products 77

Chapter IV

1. Design of a protective tariff. Free trade. — 2. Arguments in favor of protection: i. Defence against unequal competition of older and richer societies ; 2. A steady and uniform market; 3. Tends to societary completeness; 4. Advantage to general interests other than those directly protected. Three advantages to agriculture; 5. Prevents degradation of labor 82

Chapter V. Arguments In Favor Of Free Trade

1. Positive arguments : i. Method of nature ; 2. Conserves and increases the productive power of labor; 3. The right of property implies freedom of exchange ; 4. All restriction on commerce between two nations injures the interests of both; 5. Freedom of commercial intercourse tends to peace and good-will between nations. — 2. Objections to the protective system: i. Violates the right of every man to do what he will with his own ; 2 Protective duties of the nature of a tax upon all other industries; 3. Diminishes exports; 4. Infant industries protected never come to maturity ; 5. If good between nations, why not between different parts of the same nation, as in the United States ? 6. Gives monopoly privileges. — 3. Comparative strength of arguments on both sides. Argument from fear of degradation of labor. — 4. Force of argument from success of free trade between parts of a large nation. — 5. Free trade as the " method of nature.'' — 6. Examination of the objection that protective duties are of the xii CONTENTS.

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nature of a tax. — 7. Do protective duties cause diminution

of exports? — 8. Brief summary of results 9°

Chapter VI. The Instrument Of Exchange

1. Money the means of enhancing the facility of association. — 2. Original exchange by barter. Its inconveniences. Trade a partial remedy 103

Chapter VII. The Precious Metals

X. Eight characteristics desirable in any substance used as a medium of exchange. These found to a considerable extent in gold and silver, though not all of them to the full extent sometimes claimed. — 2. Why these metals are used for this purpose. Coinage. — 3. Relation of government to money. Legal tender. — 4. Monetary standard. — 5. Relative value of gold and silver 105

Chapter VIII. Certain Doctrines Concerning Money Examined

1. Money not synonymous with wealth. — 2. Value of money in circulation only a small fraction of that of the commodities exchanged. — 3. Relation of the amount of money to general prices 112

Chapter IX. The Credit Element In The Instrument Of Exchange

1. Money only a minor proportion of the machinery of exchange. — 2. Early suggestion of credit. Book account. Transfer of credit. — 3. Definition of credit. — 4. Advantages of credit : 1. To capitalists ; . 2. To non-capitalists. — 5. What is loaned frequeiitly, not money, but other capital reckoned as money ,.,,,, u^

CONTENTS. XIU

Chapter X. Banks And Banking

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1. Nature and history of banks. — 2. Ojigin of banks. Banks of deposit. — 3. Banks in relation to credit. — 4. Abridgment of tlie use of money by bank-cliecks and drafts. — 5. The clearing-house. — 6. How commodities pay for commodities through the facilities afforded to credit by means of banks. — 7. Four kinds, or functions, of banks. Savings banks described. Their advantages. — 8. Banks of discount and loan. — 9. Banks of issue or circulation. — 10. Banks deal not so much in money as in debits and credits. Small proportion of money used in large banking-transactions 122

Chapter XI. Paper Currency Of The United States

1. National -bank system. — 2. Government notes, or "greenbacks." — 3. Advantages and disadvantages of a paper currency 133

Chapter I

GENERAL STATEMENT. 1. Definition and illustration. — 2. Difficulty of determining the just proportions of product to each producer. — 3. General division of subject : i. Wages ; 2. Profit ; 3. Interest ; 4. Rent; 5. Taxes 139

Chapter II

WAGES: GENERAL VIEW. 1, Limitation of term. Wages, salary, fees, etc. — 2. Theory of a laboring-class. "Wages-fund." — 3. Objections to the phrase, "laboring-class." — 4. Minimum rate of wages . . . 144

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Chapter III. Wages As Affected By Various Circumstances

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1. Nominal and real wages. — 2. Conditions to be taken note of in estimating real value of wages. — 3. Wages also affected by character of the labor. — 4. Influence of the industrial system of a community as affecting wages 147

Chapter IV. High And Low Wages As Related To Dear And Cheap Labor

1. Labor dear or cheap according as there is a larger or smaller amount of product for a given amount of wages. — 2. Theory of necessary rate of wages as affecting prospect of improvement in condition of laborers. E. P. Smith's views . . . .150

Chapter V. "the Wages-fund.''

1. If the theory is correct, no improvement for the laborer except in the restriction of the population. — 2. Relation of wages to product. — 3. F. A. Walker's views. Wages not paid out of capital, but out of product 153

Chapter VI. Carey's Law Of The Increase Of Wages

1. As society advances, there is an increase of the laborers', and a decrease of the capitalists', proportion of the joint product of labor and capital ; while there is to both an increased amount. — 2. Illustration from the beginnings of capital with the savage. — 3. Axe of stone, of bronze, of iron, of steel. — 4. Corroborated by facts 156

Chapter VII. Remedies For Low Wages

1. Possibility of remedies. — 2. Can Government do any thing ? What it cannot and what it can do. — 3. " Strikes." Good

CONTENTS. XV

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and evil of them. ^4. "Trades-unions." Two objects of these. Economical and uneconomical measures. — 5. Co-operative association. Its methods. — 6. Difficulties in the way of it. Importance of the office of an employer. — 7. Copartnership of industry. Its method and advantages. Harmony with principles previously laid down. — 8. The wages of women i6o

Chapter VIII. Profits

1. Portion of product going to the employer. The latter not' necessarily a capitalist. ^-2. Economy of conceding to an employer a larger proportion of the product than to a common or even a skilled laborer. — 3. The risk and uncertainty of business an element to be considered in calculating the claim of profits. Profits not in conflict with wages. — 4. Patent and copy rights. Their significance and economy 170

Chapter IX. Interest

1. Extent of its signification. — 2. Rate of interest, on what it depends: i. Amount of money in circulation; z. Profits of business ; 3. Scarcity or uncertainty of capital ; 4. Facility of re-conversion of evidences of debt 174

Chapter X. Rent

1. Rent in this country as compared with the same in Europe. Relation to the value of land. — 2. Importance of land. — 3. What constitutes value in land? Doctrines of the British economists. H. C. Carey's views. — 4. Ricardo's theory of rent. — 5. Consequences of the theory. — 6. Influences which retard the operations of the law. — 7. The theory compared with facts of history. — 8. The fallacy in the theory. The

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most productive soils not Srst occupied — 9. True theory of value of land. The same as the value of other things. — 10. Rent or value of land affected by various minor considerations: i. Fertility; 2. Facility of cultivation; 3. Situation 17S

Chapter XI. " Taxation

1. Under the principle of division of labor, there must be some agency for the protection of the laborer. Government and its relation to production. — 2, Economy of taxation. — 3. Whether taxation should be according to property or revenue. — 4. Uniformity of taxation practically impossible and uneconomical. — 5. Direct and indirect taxation. — 6. Comparative merits of the two methods. — 7. Forms of direct taxation : i. Income-tax ; z. Assessment of total property. Faults of any system yet devised. — 8. Other methods proposed 188

Political Economy.

INTRODUCTORY CHAPTER.

DEFINTnONS AND PRELIMINARY STATEMENTS.

L Social Science treats of the natural laws which govern men in their relations to each other. Political economy is the application of that portion of these laws which pertain to the production and distribution of wealth.

2. It is important to understand what is meant by wealth. Writers differ greatly concerning its definition ; but they all agree, by implication at least, in making value an essential characteristic of the objects symbolized by this term. It will, then, be necessary, before going on to a final determination of the signification of wealth, to ascertain the meaning of value.

3. As this is, in some respects, the most important word in political economy, it is desirable to get a clear apprehension of what it implies. Value is a relative term, having reference to the quantity of one commodity which may be equitably exchanged for a given quantity of another. Thus a bushel of wheat may be given for two bushels of oats, or a cord of wood for twenty yards of cotton cloth. But, in every instance of relationship, there must be some ground of the relation. The determination of this is essential to an adequate definition.

4. The chief element in the value of any thing, and that which constitutes its original standard, is the cost of its production ; and by cost, we mean the labor involved. Labor may be defined as the voluntary effort put forth by man to secure some desired object. But when we say that value is estimated by the amount of labor necessary to produce an article, some care is required lest the statement mislead. It is not the amount of labor actually expended in the production which measures the value. A yard of cotton cloth made a hundred years ago involved the labor, perhaps, of several days ; but its value, if now in the market, would be less than that of the same commodity of the present day, which involves the labor of not a tenth part as much time. It is, then, the labor which would be required to reproduce or replace an article, which determines its value.

5. But when we speak of labor as the principal ground of the relation which we denominate value, it is not labor in the form of immediate exertion alone that is meant. A large part of the labor which creates value is implied in the existence of tools and implements, and other contrivances. These constitute capital. This has sometimes been called " pre-existent labor." It will be sufficient for our present purpose to define it as the result of previous labor, employed ifl further production.

The design of all labor is to secure objects for the gratification of desire. Now, this gratification may be immediate, or it may be postponed for the sake of some greater gratification. In other words, the objects secured by labor may be consumed at once, or they may be wholly or partly reserved for use in securing other objects. All that is tlius

DEFINITIONS. 3

reserved is of the nature of capital. It is the result of labor ; but the point to be observed is, that its existence is due, not to labor alone, but to abstinence as well. We thus arrive at a modified form of our statement concerning value ; namely, that it is estimated by the amount of sacrifice involved in the production of a commodity ; and that this sacrifice is of two kinds, — exertion and abstinence.

6. But there is another essential characteristic of value, which involves a further modification of our definition ; this is utility. It has sometimes been confounded with value, and some writers speak of it as value in use. But it is clearly a distinct element. It may be defined as comprising all those qualities in objects which make them desirable. It will be readily seen that there are some things which have the greatest utility, and at the same time have little or no value : they are such objects as cost nothing ; that is, such as involve no labor in their production. Thus air and sunshine, and, to a great extent, water, ordinarily cost nothing ; and yet they are of the highest utility. It is often the case, that the utility of articles is almost inversely as their value. Iron is of very small value as compared with gold, and gold is of equally small utility as compared with iron. That utiUty is essential to value, is evident from the fact that no one would make any sacrifice for an object which would gratify no desire. Yet the prominence of this element in the determination of value varies widely : sometimes it is paramount, at other times its influence is so feeble as to be scarcely perceptible. When a man buys a barrel of flour, he expects, under ordinary circumstances, to pay a price somewhere nearly corresponding to the cost of its production. The utility, though maintaining an essential influence, is not palpably considered. But suppose some extraordinary conditions, by means of which there is not more than flour enough in the market to supply one-third of the demand, and that no more can be had for several weeks, or perhaps months. Those who have plenty of means will offer prices which are far out of proportion to the cost of production, and which will be measured almost wholly by the intensity of desire for the article. A man of means will pay several times the natural value of the commodity, rather than let his family suffer. It is obvious, that, in such a case, utility, and not labor, becomes the paramount element in the determination of value.

7. But it is, after all, doubtful if utility is a radical element in the measurement of value. It unquestionably has much to do in its temporary modification, through various disturbing influences operating upon the market. But it can hardly be regarded as in any proper sense a standard by which to estimate value.

Value and utility are often found in the inverse ratio of each other ; that is, as value increases, utility diminishes, and vice versa. But it is not correct to say that this is always the case. If it were, infinitude of value would imply zero of utihty. But, as we have seen, an object destitute of utility can have no value. Mr. Carey's description of the two is, that " the utility of things is the measure of man's power over nature ; " while value is " the measure of nature's power over man," or of " the resistance which nature makes to man." These statements, while not altogether adequate as definitions, imply profound philosophical truths.

This, then, I would present as a proper and final definition of value : Man's estimate of the amount of sacrifice requisite to the attainment of a desired object.

8. We may now return to the subject of wealth. If we regard wealth as comprising all things that have value, we shall not be far out of the way. But at this point we meet a

DEFINITIONS. 5

conflict of opinions among economists. Many, and perhaps a majority, of writers limit the term to material things. They make no account, in this respect, of those mental and moral acquisitions which constitute so large a proportion of the means of enjoyment and prosperity to humanity. The maker of a violin is in possession of an article which is to him a portion of wealth. But the skill and talent of Paganini, or Ole Bull, or any inferior musician who can so use the instrument as to gratify the popular taste, are not, on that account, reckoned by these writers as of any value in an economical sense ; nor do these abilities constitute any part of the wealth of the community. Yet without this competence residing in some person, the violin could have no value. The same may be said concerning the abilities of various other classes who have acquired power to minister to the gratification of human desires. These are conditioned on labor, just as any kind of wealth is ; and their utilities are not only just as real as those of material objects, but they are vastly more extensive. Without them, there would be no wealth worthy the name.

These considerations lead to the following definition : Wealth comprises all those useful things and qualities, the attainment of which involves sacrifice on the part of man. As value implies a certain degree of resistance to man on the part of nature, so wealth implies in man a certain degree of power over nature. Hence Mr. Carey's statement, that wealth is "the power to command the always gratuitous services of nature." When man is at his weakest, socially or individually, nature does nothing for him. Every infant, if dependent on nature alone, would inevitably perish. In the infancy of society, it is only by the most strenuous exertion that a precarious subsistence is secured. But, with every increment of power in man, nature multiplies her services.

They are not bought, but freely given,, and given as soon as man is able to command them. In the most advanced civilization, the forces of nature have become so subservient to man, that, in thousands of cases, one can accomplish what a score, or sometimes even a hundred, could not formerly have done. It is this increase of power, more than that of material commodities, which constitutes the real wealth of the world.

9. It is easy to see, from what has already been said, that the proper subject of political economy is man. The laws pertaining to the underlying science are found in the character of man, — his tastes, his desires, the motives influencing him, and the limitations to which he is subject. The results arrived at are, his happiness and prosperity, his freedom, and his mastery over nature. This view differs from that entertained by many writers. With them it is regarded as the science of material wealth, and man is . treated only as an important incident. Yet social science, of which political economy is an art, if it exist at all, is a science of man, and not of his accidents or appurtenances.

10. The word economy is from a Greek compound, and is nearly equivalent to our Saxon word husbandry. It has reference to the prudent management, by a householder, of his means, so as to secure the largest possible advantage for himself and his family. It is hardly necessary to remark, that economy is not the same as parsimony or frugality. It does not consist in mere abstinence for the sake of saving. It is rather- a wise use of means and forces, so as to make them productive of the largest desired results.

Political economy, as the name implies, has reference to man in society, and not as an individual. One of man's greatest needs — perhaps his very greatest — is that of association. The solitary individual is only a minute constituent

DEFINITIONS. 7

of man, in man's relation to the great purposes of life. Separated from his fellows, he would be, even in his individual capacity, but a small fraction of what he is when associated with them. No man is complete in himself Each individual must be supplemented by others, generally by many others, and find a large part of his own competence in this association. Each has something that another lacks, and we are made to be sources of mutual supply to our several wants.

But not only is association essential to man, but individuality is equally essential. A superficial thinker might regard these two characteristics as antagonistic. The fact is so far otherwise, that each of them is actually dependent on the other. No man would associate with another unless the one had something which the other wanted. But for this, there would be no commerce. Two hatters making the same kind of hats would neither of them have any thing which the other would want. Men of the same mental habits and requirements could not benefit one another. Men must differ, or they will not associate ; and the greater the difference, the greater the association.

On the other hand, it is only by association that the individual advances, and the highest development takes place. By such advancement and development, and by such only, the differences among men become great and numerous. In the lower grades of humanity, there is comparatively little difference between individuals ; and there, too, the association is very slight. It is only in an advanced civilization that a strongly marked individuality exists, and that there are those numerous differences which make the mutual dependence the greatest.

U. Having given this brief general view of the subject, and defined some of its principal terms, we may now proceed with an examination of the principles involved in it. The subject is divided into four great branches, as follows : —

I. Production, which treats of the creation of wealth. II. Consumption, which treats of the destruction of wealth, and the laws which govern it.

III. Exchange, which comprises the forms of commerce, or the transfer of commodities between diiferent parties.

IV. Distribution, which has reference to the apportionment of wealth among the parties who produce it.

Chapter I. Productive Agencies

1. Production consists in rendering the utilities of nature available to man. Some of these are furnished spontaneously, or without human effort. Others require only slight exertion. But generally, though the resources of nature are inexhaustible, and readily offer themselves under the proper conditions, these conditions must be furnished in the form of man's labor.

There are two great agencies which must co-operate in production, — nature and man. Man furnishes labor. This includes not only muscular exertion, but all the mental effort — the study, care, and anxiety — involved in securing objects of desire. Nature furnishes all the material upon which labor is to be exerted, and all the forces without which it would be ineffectual.

I. Nature supplies materials. In the simplest and most rudimentary style of human living, the desires of men are few, and easily satisfied. Fruits and nuts may be had for the gathering. Wild animals may furnish meat. There are caves and hollow trees which serve for shelter. Still some effort is requisite to secure the sustenance, and to render the shelter tenable. The animals must be hunted and slain, and their flesh prepared, although it be in the rudest manner. Fruits must be gathered, and the caves and cavities shaped and in some way adapted. As society is developed, and as improvements are made, there will be additional desires prompting to additional exertions ; and the material to which these are to be applied will be forthcoming in the forms of wood, minerals, the skins of beasts and their coverings, the soils of the earth and those things which spring out of them. These comprise an almost endless variety of materials to which industry may be applied.

2. But nature furnishes not only materials, but siho forces, to aid man in his productive efforts. The more obvious and palpable of these are gravitation, wind, explosive agencies J the expansive power of steam, magnetism, electricity, and the forces of vegetation. There are also numerous passive powers or properties of matter, which, when adopted by man, give him untold advantage. Such are the mechanical powers of the lever, inclined plane, and pulley, and those qualities of the metals which render them capable of taking an edge for cutting-purposes, as also malleability, ductility, and elasticity.

2. Labor has been defined as the voluntary effort put forth by man to secure objects of desire. We have seen that nature furnishes the material upon which labor is to be exerted, and the efficient forces through which production is effected. These materials and forces are supplied gratuitously. Nature is not parsimonious in this respect. The more we avail ourselves of her help, the more ready she is to help us ; and the greater the advantage we get over her, the more lavishly she bestows her gifts upon us.

Labor, then, consists not in creating things, but in moving them; that is, in effecting changes. It directs the natural forces to the service of man, and it is in this that production chiefly consists. It can move materials and objects into positions where these forces can act upon them with

PRODUCTIVE AGENCIES. 1 3

the desired effect. Thus an agricultural laborer can effect such changes in the soil as are requisite to the growth of corn, and he can place the seed in the ground ; but he cannot make the crop. It is as impossible for him to create a kernel of grain as to make a planet. Labor may move fuel to the fire-place, and may properly dispose it for ignition ; it may move a match, which by a previous motion has caught fire, to the prepared fuel : but the kindling flame, the heat and its effects in cooking food or transforming water into steam, are the results of energies and properties which man could never invent. It is nevertheless true, that, without the agency of labor by which the changes are made, none of these effects would follow. Nature does ten thousand things without the co-operation of man. She even furnishes innumerable utilities ; but by herself she is not a producer, she creates no value.