The elements of economics

Front matter

»iiSiiiii i^a^

J?

m n^iwi fin

Preface

Every one of the Great Sciences, in the course of its history, has undergone a complete transformation from the mode in which it was conceived by its founders : and there is also a stage at which it becomes necessary to introduce more powerful and refined methods of investigation, more comprehensive forms of expression, and more minute and exact observation.

A great transformation is now going on in the Science of Political Economy, or Economics, as it may more aptly be termed. Up to the present time there have been two great schools of Economists, each of which has done great, glorious, and immortal services to mankind. But making simple acknowledgment of the priceless services done by the two preceding schools, the fact is that the Political Economy of Adam Smith, Ricardo, and Mill is now exhausted — 'it is a caput mortuum from which no further good can be extracted : it is wholly incapable of grasping the great Economic problems of the present day — Credit, Banking, and the Foreign Exchanges. In fact, this school of Economists has abandoned all these questions in hopeless despair.

Highly as we may esteem the great Economists of this and other countries, it is essential to remember the character of Economic contests up to the present time. They viii Preface

have been almost wholly Destructive. The first Economists found the public mind and the administration infected with an immense mass of rooted prejudices, errors, and abuses. Their first efforts were to sweep these away — to beat down and abolish false doctrines of various kinds ; to extirpate bad and mischievous laws interfering with wages, with prices, and the commercial intercourse of nations ; to establish, in fact, freedom of Commerce or Exchange ; and in so far as this, Economists of all schools are agreed.

But while Economists of all schools are agreed on what was the Destructive -^otCvya. of their science, when we come to the Constructive or Positive Science this agreement is at an end. Nothing can be more astonishing or lamentable than the difference of doctrines, and the antagonism of Economists on almost every point in the science, so as to create a widely spread impression that there is no such intelligible science at all as Economics.

Many, indeed, suppose that the establishment of Free Trade is the end-all and the be-all of Political Economy. But nothing can be more erroneous. The destruction of Protection was only the first-fruits of the struggles of the infant science — like Hercules strangling the serpent in his cradle — and not its consummation. In fact it only clears the ground, and removes obstructions, from the creation of the Positive Science. During the heat, the turmoil, and the dust of the battle to establish a great practical principle, there is no time to attend to the niceties of language, and the exact expressions of science. But now that the great victory is won, and men can sit down in a calm, inquiring spirit, the time has come for a complete, deliberate, and systematic re-survey of the whole science. And, as a matter of fact, there is at the present moment throughout Europe

Preface ix

and America a general reaction and uprising against the school of Political Economy which was founded by Adam Smith and has closed with John Stuart Mill.

Fully admitting the admirable services they have done in time past, their total want of scientific arrangement, their complete ignorance of practical business, their glaring inconsistencies and self-contradictions, and their incapacity to deal with those Economic problems which are of the deepest practical importance at the present day, have produced a general revolt against them. And the most advanced Economists in Europe and America have declared their adhesion to a far wider and more comprehensive system of Economics, which has given the solution of those questions of Credit, Banking, and the Foreign Exchanges which were abandoned as hopeless by the second school ; and by the acknowledgment of all men of business has finally set at rest that terrible Currency Question which has agitated and convulsed this country for three-quarters of a century.

Economic Science is the profoundest and most complicated branch of human knowledge ; and requires a greater variety of knowledge than any other —

(i) It deals with Property of every description ; and in all its forms : consequently a profound knowledge of the Laws of Property, and especially of Mercantile Law, is absolutely indispensable to enable a person to perceive and 'recognise the existence of the various Quantities with which the science deals.

(2) It deals with all the Exchanges of Property : and consequently a thorough and profound knowledge of Commerce in all its branches is necessary to understand the great mechanism of Exchanges.

X Preface

(3) A profound knowledge of Mathematics and Physical Science, and of the methods and principles by- which the various Physical Sciences have been constructed, is necessary to enable a person to express the Laws which govern the varying relations of Economic Quantities in strict harmony and analogy with the Laws of the other Physical Sciences.

Every science is greater than any of its cultivators. Astronomy is greater than Hipparchus, than Ptolemy, than Copernicus, than Kepler, greater even than Newton himself. So Economics is greater than Turgot, than Quesnay, than Smith, than Ricardo, than Mill. To every one who has done good service let us pay rational respect, but not abject idolatry. He who studies Philosophy must be a freeman in mind. No one, however eminent, is now permitted to be a despot in science, and chain up the human intellect, or arrest the progress of thought

Economics is the noblest and the grandest creation of the human intellect. It is the crown and the glory of the Baconian Philosophy. No one can thoroughly realise the awful sublimity of the genius of Bacon until he studies Economics : because it is the literal realisation of Jiis matchless discovery that the same principles of Mathematical and Physical Science which govern the phenomena of nature equally govern the practical business of life.

Time's noblest offspring is its last.

Contents

OP

THE, FIRST VOLUME

Chapter I On The Rise Of Inductive Science In Modern Times Section Tagk

1. Fall of the Empire of the West and Renovation of the

Population of Italy 3

2. Renewal of Intellectual Energy and Rise of the Arts . . ^4

3. Revival of Jurisprudence 5

4. Rise of the Scholastic Philosophy 5

5. The Realists and the Nominalists 7

6. The Arabian Philosophy 8

7. Jewish Dialectic Philosophy 9

8. The first Scholastics 9

9. The Scholastic Philosophy 10

10. Reaction against the Scholastic Philosophy — Rise of In-

ductive Science 12

11. Leonardo da Vinci >,....,. 14

12. Telesio 14

13. Campanella 15

14. Cesalpino ... 15

15. Inductive Science the product of the sixteenth century , 16

16. Bacon 16

17. J. B. Say maintains that Political Economy is an Inductive xii Contents of the First Volume

SECTION . ''^'''

1 8. Mill maintains that Political Economy is an Inductive

Science 2°

19. Mill maintains that Political Economy is an <i priori Science 22

Chapter II On The Nature And Formation Of A Physical Science

1. Nature of a Physical Science 24

2. On the Fonnation of General Conceptions and General

3. All Science is founded on General Conceptions and General

4. Requisites of a General Conception 29

5. Economics as a Physical Science 3°

6. Wealth of diverse kinds . . . . . ■ • 3'

7. On the Formation of Axioms or General Laws ... 32

8. The Law of Continuity 33

Chapter III Meaning Of The Word Wealth In Ancient Times

1. Aristotle's Definition of Wealth 36

2. Distinct kinds of things virhich can be bought and sold . . 36

3. Dialogue called the Eryxias to show that Labour is Wealth 37

4. There" is no' such thing as Absolute Wealth . ■ • 39

5. Doctrine of Roman and Greek Law that Rights are Wealth 39

6. In Greek taw !^ights are included under xf^l"""! Hty^'h

7. True IScien'tific Instinct of tlie Ancients .... 42

8. Economfcs is a Physical Science . . . . . . 43

9. Fundamental Principles of the Law of Continuity . . 43

Chapter IV

ON THE RISE OF ECONOMICAL JDEAg IN. MODERN TIMES

1. Oresme and Copernicus on the Coinage . . . . 46

2. On the Mercantile System and the Balance of Trade . . 47

3. Money held to be the only Wealth 47

4. Doctrine of the Balance of Trade , . ■ . . 49

Contents of the First Volume xiii

Chapter V

RISE OF TllE FIRST SCHOOL OF ECONOMISTS, CALLED THE PHYSIOCRATES, IN FRANCE

1. Rise of the' Sect of the Economists in France . . . 52

2. Meknin^ of th6 term Political Economy .... 53

3. Outline of the Physiocrate Doctrine 55

4. Meaning of the expression ' Production, Distribution, and

Consumption of Wealth ' 58

Physiocrate meaning of Wealth — Value in Use and Value

in Exchange 58

J). The ' Production, Distribution, and Consumption of Wealth ' meant the Commerce or Exchange of the Material Products of the Earth, and those only . . .61

6. The Physiocrate Doctrine of Money 63

7. The Physiocrates maintained that in an Exchange neither

8. The Physiocrate Doctrine of Productive Labour and of

Sterile or Unproductive Labour 66

9. The Physibcrat^s excluded" Labbur and Credit from the

title of WeUth . ' 67

10. Defedts of the Physiocrate Doctrine 68

11. Re4ction'agairist the' Physiocrates : : . . . 69

12. The Physiocrates founded a New Order of Sciences . . 70

13. Alleged fault of the Physiocrates ..... 71

14. The Physiocrates enlarged the sphere of Philosophy , . 71

15. Merits of the Physiocrates '. . . ■ . .72

Chapter VI

REACTION AGAINST TH^ PHYSIOCRATJES. RISE OF

THE SECOND SCHOOL OF ECONOMISTS

Reaction against the Physiocrates

Adam Smith .......

On Smith's Definition of Wealth .

Smith classes Human Abilities as Wealth .

Smith admits Rights to be Wealth

Fundamental Defects of Smith's Definition of Wealth

j. B. Say'sDefiiiition of Wealth .

J. S. Mill on the Definition of Wealth

73 74 75 76 77 79 81 82 xiv Contents of the First Volume

SECTION PACK

9. Self-contradictions of Mill on Wealth 86

10. Defect of the Second School of Economists ... 87

1 1 . Irremediable Confusion in the Science caused by the Second

School of Economists 89

12. Confiision of Smith on Value 90

13. The same continued ..... ... 92

14. Confusion of Ricardo on Value ...... 94

15. Absurd Consequences of Ricardo's Docti ine . . ■ ■ 95

16. On the Self-contradiction of Say and Mill on Credit . . 96

17. On the Self-contradiction of J. B. Say on Credit . . . 97

18. Say's Self-contradiction on Credit ..... 99

19. Self-contradiction of J. S. Mill on Credit . . . . loi

20. Erroneous Conceptions on Credit 103

21. On the Fundamental Objection to the Smith- Ricardo-Mill

System of Economics ....... 104

22. Ricardo and Mill's System contrary to the Fundamental

Principles of Natural Philosophy ..... 105

23. Mill's doctrine of Foreign Trade a violation of the Law of

24. Continuation of same 1 10

25. Continuation of same ill

26. Self-contraSiction of Smith on Rent 112

Chapter VII Rise Of The Third School Of Economists

1. Coni\Wa.c's \ior\i Le Commerce el le Gouvemement . . 117

2. Smith's work substantially the same ..... 121

3. Whately defines Political Economy as the Science of Ex-

changes 122

4. Ricardo's idea the same . . . . . . . 123

6. Arthur Latham Perry 124

7. M. Rouher adopts the Author's system . . . .124

8. General characteristics ofthe Three Schools of Economists 126

9. Examples to show the Superiority of the Definition adopted

by the Third School 128

10. Economics is a Physical Science 1 29

11. On the Best Name for the Science 131

Contents of the First Volume

XV

CHAPTER I ON THE FUNDAMENTAL CONCEPTIONS OF ECONOMICS by and SECTION

1. Definition of Economics .....

2. Definition of Wealth

3. The Three Species of Economic Quantities

4. Varieties of Incorporeal Property ....

5. The Three Species of Economic Quantities symbolised

Money, Labour, and Credit .....

6. Commerce or Economics consists of six distinct kinds of

Exchange .......

7. On the meaning of the word Property

8. Property in English means a Right and not a Thing

9. On Right of Property.and Right of Possession .

10. What Property comprehends ....

11. On the meaning of Persona and Res in Roman Law .

12. Meaning of /?^j

13. On several words in English Law which mean Rights

not Things

14. Jurisprudence is the Science of Rights .

15. Economics is the Science which treats of the Exchanges of

Rights

16. All Exchanges are of Rights against Rights .

17. On the Application of the Positive and Negative Signs to

Property

18. Property, is of Inverse Qualities .

19. On the Classification of Property

20. Totalityof Transferable Property ....

21. Examination of the Arguments alleged against admitting

Immaterial and Incorporeal Elements into Economics

22. Fallacy of the Lucretian Philosophy .

23 . Distinction between Jura in Rem or in Re and Jura ad Rem

or in Personam^ ......

24. Property held in Contract of two kinds

25. On Property or Rights as Goods and Chattels

26. Definition of Value

I. a

PAGE

140 141

143 144 144

151 153

1 54 154 155 159

160 163 xvi Contents of the First Volume

PAGE

SECTION

27. On Money and Credit ...:.••■ 169

28. Necessity for Money '71

29. Aristotle, the Physiocrates, Bishop Berkeley, Smith, Thorn-

ton, Bastiat, Mill, and Jurists have seen the true Nature ofMoney '73

30. Different substances used as Money . . • ■ • 176

31. Gold and Silver the best Materials for Money . . . 177

32. Nature of Credit 178

33. Distinction between Money and Credit . . . i8i

34. On Barter, Sale, Exchange,. and Circulation . . . 182

35. On Exchange 183

36. Meaning of Circulating Medium . . . . . 184

37. Meaning of Currency 184

38. Currency as a Name for a class of Economic Quantities . 186

39. Different Forms of Currency ... ... 187

40. On Price, Interest, and Discount . . . . . 188

41. On the Channel of Circulation . ...... 19°

42. On Securities for Money and Convertible Securities . . I93

43. On Production and Consumption : and Supply and Demand 194

44. Three different Classes of Producers . . . . . 196

45. On Consumption . , 197

46. Meaning of the Expression ' Production and Consumption ' 200

47. On Supply and Demand . . . . . . . 201

48. On Productive Labour 203

49. On Cost of Production 203

50. On Profit and Rate of Profit 204

51. On Capital . 204

52. There is no such thing as Absolute Capital 208

53. Capital may increase in Two Ways 209

54. On Fixed and Floating or Circulating Capital . . . 210

55. On t^ie Conversion of Floating into Fixed Capital . . 213

56. On Rent and Hire 214

57. Every Sum ofMoney is Equivalent to the Sum of the Present

Values of an Infinite Series of Future Payments . .216

58. The Quantity of Money in any country bears no necessary

relation to the Quantity of other Goods in it : nor to their price 216

59. On Paymsnt, Discharge, and Satisfaction . . . .218

61. Summary of Definitions .,,.,,, 220

Contents of the Pirst Volume xvii

Chapter II The Theory Of Value

Preliminary Remarks

1. Meaning of the Theory of Value 223

2. The complete Theory of Value 223

Section I

. Definition of Value . 224

2. Redprocal Demand is the Origin and Cause of Value . . 224

3. Any Economic Quantity may have Value in tenns of any

other 227

4. Value is a Ratio or an Equation 228

5. There may be a General Rise of Prices, but not of Values . 229

6. On the Error of the Expression Intrinsic Value . . . 230

7. Distinction between Diminution in Value and Depreciation 233

8. A Standard of Value is Impossible : but there may be a

Measure of Value 235

Section II On The Origin, Source, Or Cause Of Value

9. Inductive Method of Inquiry 239

10. Example of Baconian Induction 240

11. Examination of the Doctrine that Labour is the Cause of,

and Necessary to, Value 241

12. Continuation of same 242

13. Continuation of same 242

14. If Labour is the Cause of Value, what is the Cause of the

Value of Labour? 247

15. Value of Incorporeal Property 247

16. Labour is not the Form or the Cause of, nor Necessary to,

Value 248

17. Materiality not Necessary to Value 249

18. Durability not Necessary to Value . . . . . 249

19. On Utility in its Relation to Value 250

20. Demand is the Sole Cause of Value 252

21. Value only exists in the Humaii Mind . . . 254 xviii Contents oftlie First Volume

Section III

ON THE GENERAL LAW OF VALUE : OR THE GENERAL EQUATION OF ECONOMICS

SECTION I'AGE

22. There can be only One General Law of Value . . . 256

23. Lord Lauderdale's Law of Value ..... 257

24. I'his the General Equation of Economics . . . . 258

Chapter III The Theory Of The Coinage

1. Prices expressed in Money and Credit .... 261

2. Meaning of Bullion 261

3. Crown Gold 262

4. Meaning of Coins 262

5. Relation of Coin to Bullion 262

6. Origin of Coining 264

7. Meaning of Mint Price of Gold and Silver .... 265

8. Not an Economic Error to fix the Mint Price of Bullion . . 266

9. Meaning of Market Price of Gold and Silver . . . 267

10. To determine Cause of Change in Value of Gold and Silver

11. On Gresham's Law of the Coinage 270

12. What is a Pound? 272

13. How Gold became the Standard Coinage of England . . 274

14. The Silver Coinage 275

CHAPTER IV THE THEORY OF CREDIT Preliminary Remarks

1. Importance of the Theory of Credit 276

2. The Juridical Theory of Credit developed by the Roman

Lawyers . 278

3. On the Roman Bankers ....... 279

4. The Roman Bankers invented Bills of Exchange . . . 282

5. On Transferable Documents of Debt 283

Contents of the First Volume xix

Section I On The Nature Of Credit

1. Personal Qualities are Wealth 285

2. Mercantile Character is Personal Capital . . . .287

3. On the Creation of Obligations 287

4. Opinion of Jurists on the Case of the Debtor in an Obli-

gation 289

5. On the Three Ambiguities in the Theory of Credit . . 291

First Ambiguity: A. Debt is not Money owed by the Debtor, but the Personal Duty to Pay Money.

6. Second Ambiguity • The word Debt means bpth the

Creditor's Right of Action and the Debtor's Duty to

Pay 293

7. Third Ambiguity : Double meaning of the words ' Lend, '

' Loan, ' and ' Borrow ' ; or the Distinction between

Mutuum and Commodatum . . , , . . 297

8. Distinction between Mutuum and Commodatum . . 298

9. Extract from Theophilus . , . ' . . . . 301

10. On an Erroneous Idea on the Nature of Credit . . . 303

1 1. Erroneous Ideas of Mathematicians on the Nature of Credit

or Debts . 305

12. Enor of Peacock 307

13. On the Application of the Theory of Algebraical Signs to

Economics 309

14. Quantities affected with Opposite Qualities . . • 31 1

15. Opposite Operations 311

16. Combination of the Signs of Affection and Operation . . 3ri

17. Examples of Algebraical Signs applied to Quantities . . 312

18. Example of Signs applied to Time 313

19. Other Examples of Signs applied to Quantities . . . 314

20. Examples of Signs applied to Operations . . . -315

21. The terms Positive and Negative used by Jurists to denote

Opposition 316

22. The Theory of the Value of Land 317

23. A Person exercising any profitable Business is an Economic

Quantity analogous to Land 317

24. If Money is Positive Capital, Credit is Negative Capital . 318

25. On Debts as Negative Quantities ..... 319

26. On Debts as Goods and Chattels 320

27. On the Distinction between a Debt and a Bailment, or

between a Mutuum and a Depositum . . . .321

XX Contents of the Pirst Volume

28. Distinction between Bank Notes, Bills of Exchange, and

other Instraments of Credit and Dock Warrants, Bills

of Lading, and other Documents of Title . . . . 322

29. Bills of Exchange always arise out of an Exchange, Bills

of Lading out of a Bailment . . . . . 324

30. On the Quantity of Credit compared to the Quantity of

Money 324

Section II On The Transfer Of Credit Or Debts

31. Origin of the Sale of Debts 327

32. On the Sale or Transfer of Debts in Roman Law . . . 328

33. The Praetorian Authority 329

34. Constitution of Alexander Severus making Debts trans-

ferable without the consent of the Debtor . . . . 332

35. Confirmed in the Basilica ■. . 333

36. Bills of Exchange transferable under this Law . . . 333

37. On the Sale of Debts in English Law and Equity . -334

38. Estates in Land made Saleable without the Consent of the

39. Novation allowed in English Common Law . . . 337

40. Mode of evading Common Law 337

41. Doctrines of English Law on the transfer of Ckoses-in-

Action 337

42. Debts made transferable by Law . . . . , . 339

43. Upon Instruments of Credit or Debt 339

44. Extension of Bills of Exchange in Modern Times . , . 341

45. Bills of Exchange in England 342

46. Promissory Notes used in London in the reign of Edward IV. 343

47. Technical Terms relating to Instruments of Credit. . . 344

Section III On The Extinction Of Obligations

48. On the Limits of Credit , . 350

49. On the Extinction of Obligations 352

50. On 'Release or Accepii/aii'on 353

51. The Release of a Debt is equivalent to the Donation or

Payment in Money 353

Contents of the First Volume xxi

52. A Release is a Donatipn 354

53. On Confusio in Roman Law 355

54. The Release of a Debt may extinguish an Obligation in

Two Ways 355

55. When + £,l<xi cancels — £,\oo, and when it does not . . 356

56. On Payment in Money 357

57. On Renewal and Transfer, or Novatio 358

58. On Delegatio 359

59. On Set-off or Compensation . . . . . . . 3^°

60. Compensation in Roman Law 360

6i. A Set-off in English Law 360

62. Examples of Set-Off or Compeijsatiofi ' . . . 361

63. Two Branches of the System of Credit 362

Chapter V On Commercial Credit

1. The Mechanism of Commercial Credit .... 364

2. On Credit based upon the simultaneous Transfer of Com-

modities 364

3. Traders who buy Commercial Debts 366

4. Credit used by Foreign Merchants 367

• 5. Exaggerated Ideas of the Security of Real Bills . . . 368

6. On Accommodation Bills .... ... 369

7. Distinction between Bills of Exchange and Bills of Lading . 371

8. On Credit created for the Formation of New Products . 373

CHAPTER VI THE THEORY OF BANKING Misconception on the meaning of Bank and Banker . . 375

On the meaning of Bank 375

Meaning of Bank in English . . .... 376

On the Meaning of Banker ....... 378

On the Currency Principle 380

On the Mechanism of Banking 383

On a Common Error respecting Deposits .... 386

In Banking Language a Deposit and an Issue are the same. 387

On the Method of Utilising Banking Credits . . . 388 xxii Contents of the First Volume

10. Operations by means of Cheques 388

11. Error of the Common Description of Banking . . . 389

12. On the Clearing House 390

13. On the Economical Effects of Banking 392

14. On the Caution necessary in applying Mathematics to

15. On Cash Credits 397

1 6. On Accommodation Bills . 403

17. Explanation of the Real Danger of Accommodation Bills . 405

18. On the Danger of Accommddation Paper to a Bank . . 407

19. On the Transformation of Temporary Credit into Permanent

Capital 409

zo. On Banks of Credit Foncier 41 1

21. Invented by Biiring 412

22. Not introduced into England 414

BOOK I HISTORY OF ECONOMICS