Manual of political economy

Preface To The Fifth Edition

OINCE the publication of the last Edition a marked ^^ fall in the price of silver has taken place, and so many important consequences have been thereby produced, that I have thought it desirable to insert a new chapter on The Depreciation of Silver. The circumstances "which determine the value of gold and silver are so intimately connected with each other, that I have substituted a new chapter on The Recent Discoveries of Gold and Silver, in the place of the chapter in former editions, entitled The Recent Gold Discoveries.

The present Edition has been carefully revised throughout, and new illustrations have been introduced, where it was thought desirable.

Preface To The Fourth Edition

ALTHOUGH the general arrangement of this book ■^-^ remains unaltered, yet in preparing this Edition it has been found necessary to re-write considerable portions of many of the chapters. Some of the illustrations contained in the former editions are no longer apposite; others have been substituted in the place of these, for it is always desirable as far as possible to illustrate the principles of Political Economy by applying them to the discussion of passing events. New chapters have been added on the Nationalization of the Land, and on Local Taxation. In the last chapter of the volume an attempt has been made to solve the somewhat complicated economic question of tracing the incidence of local taxation when rates are imposed upon different kinds of property, such as land, houses, shops, manufactories, railways, gas

Preface to the Fourth, Edition

works, and water works. In the chapters on Socialism and the Nationalisation of the Land, reference is made to a new economic movenaent, which I have designated modern socialism. Between modern socialism and the socialism of earlier days, there is this characteristic difference, that whereas the latter sought to effect its objects by voluntary associations, the socialists of the present time make a direct appeal for State intervention. The recent marked rise in the price of coals is referred to as affording an illustration of the laws which determine the price of mineral produce; and in the chapter on Wages, I have directed attention to the very important fact that the unprecedented increase in wealth, which has taken place in England during the last quarter of a century, has not been accompanied by a corresponding improvement in the material condition of many classes of labourers. Since the last edition was published, the cooperative movement has so rapidly developed that it has been necessary entirely to re-write the chapter on Cooperation. Great stress has been laid on the important economic advantage which would result, if the entire people were brought under the influence of a comprehensive system of national education. Among the many circumstances which tend to perpetuate poverty, particular allusion is made to the encouragement given to improvidence by our Poor Law system and by the facility with which out-door relief is granted.

In preparing this edition I have derived the most valuable assistance from my wife, who in applying herself to the work has shown the greatest care and assiduity. I also have to thank her for having suggested many improvements, and she has also pointed out many defects which had previously escaped my notice.

Cameeidgb, February, 1874,

PEEFACE TO THE FIRST EDITION.

IT has been often remarked that Political Economy is more frequently talked about' than any other science, and that its principles are more frequently appealed to in the discussions of ordinary life. No science, however, is perhaps more imperfectly understood. Profound mathematicians, or accomplished geologists and botanists, are far more numerous than real masters of the principles of Political Economy. Such a fact is somewhat surprising, ■when it is remembered that Political Economy must be appealed to, in order properly to discuss almost any political, financial, or social question. Sometimes it has no doubt happened, that people have not become generally familiarised with a science, because its principles have not been clearly explained. But Political Economy has never wanted able expounders. Adam Smith wrote the first systematic treatise on the subject, and his work will long continue to be read as a masterpiece of clear exposition. Mr John Stuart Mill's treatise on 'The Principles of Political Economy' is perhaps the most remarkable work of that great author, and the book will be remembered as amongst the most enduring literary productions of the nineteenth century. It is therefore necessary for me to explain the object I have had in view in writing the present work.

The end I hope to attain, .1 may briefly state to be this. I think that all who take an interest in political and social questions, must desire to possess some knowledge of Political Economy. Mr Mill's treatise is so complete and so exhaustive, that many are afraid to encounter the labour and thought which are requisite to master it; perhaps, therefore, these may be induced to read an easier and much shorter work. I so well remember the great advantage which I derived from reading Mr Mill's book, that I would not publish my own work if I thought that it would viii Preface to the First Edition.

withdraw students from the perusal of a more complete treatise. I am, however, convinced that those who become acquainted with the first principles of Political Economy, will be so much struck with the attractiveness and importance of the science, that they will not relinquish its study.

I have not attempted to discuss all the principles of Political Economy in full detail; but I believe no important branch of the subject has been omitted; and I therefore think that the principles which are explained in the present work will enable the reader to obtain a tolerably complete view of the whole science. In order to show how intimately Political Economy is connected with the practical questions of life, I have devoted a separate chapter to some subjects of great present interest; such, for instance, as Cooperative Societies — Strikes and Trades'- Unions — and The Effects of the Recent Gold Discoveries. For the convenience of the ordinary reader, and especially for those who may use the book to prepare themselves for examinations, I have prefixed a very detailed summary of Contents, which may be regarded as an analysis of the work.

I cannot conclude these prefatory remarks without acknowledging the kind assistance which I have derived from those who have verified my statistical facts; but I have especially to thank my friend, Mr Leslie Stephen, Fellow of Trinity Hall. He has given me many most important suggestions, and has carefully revised the work : the accurate and complete knowledge which he possesses of the science makes his revision peculiarly valuable.

The labour of writing these pages would have been much greater, if I had not been fortunate enough to have a most patient and excellent amanuensis in the youth who is to me so faithful an attendant.

Book I. Production Op Wealth

Chaptee I. Introductory Remarks.

In an introductory chapter it is better to give a general description of Political Economy, rather than to attempt an accurate definition of the science — Political Economy investigates the laws which regulate the production, the distribution, and the exchange of wealth — Popular prejudice considers that Political Economy is hardhearted and selfish — This fallacy explained and refuted — Any commodity which has an exchangeable value is wealth — The civilization of a country determines to what extent its natural resources can be classed as wealth — ^Fallacies now known as the Mercantile System explained pages 3 — 9

Chapter II. The Requisites of Production

The production of wealth has three requisites : land, labour, and capital — Capital defined to be wealth which is saved, and applied to the future production of wealth 10 — ii

Chapter III. Labour as an Agent of Production

The simplest commodity cannot be made available for consumption without the application of many different kinds of labour — All labour does not contribute to the production of wealth — Hence labour is classed as productive and unproductive — Labour is productive when it either directly or indirectly embodies utilities in material objects — The most useful labour may be sometimes unproductive — As an example, a railway may be partly made and never opened — Labour which is unproductive may yet be very useful — Mr Mill's definition of productive labour would make the labour of the schoolmaster to be unproductive, and this may be obviated by a wider definition — Consumption also may be either productive or unproductive 12 — 16

Chapter IV. Of Capital

It is sometimes fallaciously supposed that capital consists of money, to the exclusion of any other kind of wealth — The entire capital of the country can never be simultaneously employed — A most useful commodity, such as wheat, need not necessarily be employed as oapitaJr-

Contents.

An individual cannot increase the capital of the country by spending wealth upon his own enjoyments — A demand for commodities is not a demand for labour— hence, the man who saves, and not the spendthrift, is the labourer's best friend— The science of Political Economy often only affirms tendencies, and therefore the results deduced from its principles do not always come into immediate operation — It is fallacious to suppose that there can be a glut of- capital, and that consequently, without the unproductive expenditure of the rich, the poor coTjld not be adequately employed — Wealth can only perform the functions of capital by being wholly or partially consumed— Foregoing principles illustrated by examples— The rapidity with which a country recovers from a devastating war explained— The consequences of raising revenue by loans investigated— The effects of loans and taxation compared, with especial reference to England and India- The distinction between circulating and fixed capital— The former is consumed by a single use, the latter may continue to perform its functions for a long period; food which feeds labourers is circulating capital ; whereas fixed capital consists of machinery, buildings, raUroarls, &e.— The conversion of circulating into fixed capital may temporarily injure the labourers, and may in certain cases permanently injure some classes of labourers.

PAGES 17 — 45

Chapter V. On the Productive Power of the Three Requisites of Production

Political Economy would embrace a great number of sciences, if it investigated all the causes upon which depend the productiveness of land, labour, and capital. Hence a definition of Political Economy is required, in order that some limit may be placed upon the scope of the science — The most fertile land may be unproductive of wealth — The chief causes which determine the productiveness of labour— The fallacy of estimating the productiveness of capital by the profits realised — All questions relating to profits concern the distribution and not the production of wealth— Division of labour makes labour far more productive— This proved by Adam Smith's illustration with regard to pin-making — He thinks that division of labour increases its productiveness, for the three following reasons: ist. The dexterity of the workman is increased; 2nd. Time is saved if the workman does not pass from one employment to another ; 3rd. When industry is divided into special processes, suitable machinery is more likely to be invented and applied — The first of these three causes produces the principal effect — Many writers think that Adam Smith attributes too much importance to the second cause — The application of machinery often enforces a certain division of labour — Mr Babbage has shown that Adam Smith has not pointed out that labour is economised when divided, since each workman can be solely employed upon the work for which he is best qualified — The dema,nd for a commodity determines the extent to which division of labour can be carried — The combination or cooperation of labour is essential to its efficiency — Mr Wakefield has classified the cooperation of labour as simple and complex — The first occurs when several workmen combine to do the same thing — The second when one industry is assisted by another — Mr Wakefield explained the mischief of permitting a young colony to be occupied by scattered settlements: the growth of the town popu-

Contents. xi lation ought always to be encouraged — Mr Wakefield's theory of colonization corroborated by the effects of the gold discoveries in Australia — There cannot be cooperation between different industries, unless the means of communication are good — Division of labour is an instance of the complex cooperation of labour pages 46 — 64

Chapter VI. Production on a Large and on a Small Scale

The advantage of producing on a large scale becomes greater as the use of machinery is extended — This is exemplified at the present time in the increasing size of our manufactories and warehouses — The extent of the demand must influence the scale of produetion^The advantages and disadvantages of the joint-stock principle — Joint-stock companies are very beneficial to a country — Farming on a large and on a small scale compared — The increased use of machinery in agriculture makes farming on a large scale more advantageous — Why smaU farming is beneficial in certain special cases, such as dairy farming 65 — 72

Chapter VII. On the Laws which determine the Increase of Production

If we suppose the agents of production to be in their most efiSoient state, then the production of wealth cannot be increased, unless either land, labour, or capital, is increased — In the absence of agricultural improvements, more land is not brought into cultivation, unless the value of agricultural produce is increased; this proposition is the basis of Eicardo's Theory of Eent — In Political Economy, the fertility or productiveness of land varies inversely with the amount of labour and capital which is required to make its produce available for consumption — As the population of the country increases, less fertile land has to be cultivated, and therefore agricultural produce has a tendency to become more expensive, as population advances — England exemplifies the practical importance of employing the word ' tendency ' when enunciating a proposition in Political Economy, since the rise in the price of wheat, which would accompany the present increase in her population, has been counteracted, partly by agricultural improvements, but principally by foreign importations of corn, consequent on Eree Trade — ^A rise in wages usually accompanies an increased demand for labour; this rise in wages creates an increased supply of labour by discouraging emigration, and by encouraging marriages amongst the poor — Meat and dairy produce must rise in price as the population of a country increases, because these commodities, unlike corn, are difficult and expensive to import from a distance 73 — 82

Chapter VIII. On the Increase of Capital

An increase of capital implies an increased saving — Two principal motives induce saving: ist, a prudent foresight with regard to the future ; 2nd, a desire t6 make wealth by an advantageous investment — The first motive operates with regard to the bulk of the capital accumulated; but upon the second motive depend the fluctuations in the xii Contents.

amount of this capital — In Political Economy, as in Mathematics, the causes -which produce fluctuations and disturbances often create phenomena which are independent of causes more constant in their effects — Each class of society has a recognised standard of living; if, therefore, the commodities of ordinary use are cheapened, a greater amount of capital will be saved — A large portion of the capital saved in England is invested in foreign countries ; consequently, by checking the amount sent abroad, an amount which is practically imlimited may be obtained for any eligible home investment — ^Different consequences produced by the raising of loans in countries which do not export capital — This illustrated by the effect in France by the loans raised in France in consequence of the Franco-German war — The eoonomical condition of England and India contrasted; the former requires cheap food; the latter, capital — How India may be economically benefited by England's rule — The West Indies neither want land nor capital, but are deficient in labour — The objection to the Coolie traffic — The striking feature of America's economical condition is the comparative dearness of labour, and the comparative cheapness of land — Why high farming is not remunerative in America — Commerce between England and America must be especially beneficial to both countries.

PAGES 83 — 94

Book II. Distribution

Chaptee I. Private Property and Socialism.

The distribution of wealth implies the existence of rights of property, and the rights of property cannot be maintained without law — Property has not the same rights in one age or country as in another ; for instance, the privilege of entailing property may exist in one age, but not in' another — Men may determine according to what laws wealth should be distributed, but from any particular method of distribution certain consequences must inevitably follow, and it pertains to Pohtical Economy to investigate these consequences in each particular case— If private property is permitted, there must ensue great inequalities in wealth ; this fact has suggested socialism — ■ Socialism, therefore, as far as possible, limits the rights of private property — 'The impracticability of socialism in the present state of mankind explained — The two schemes of socialism which have received the greatest attention are those of St Simon and Fourier — These two schemes explained, and their impracticability pointed out — The scheme of Fourier is the most skilfully designed— The schemes of Fourier, St Simon, and Eobert Owen, were voluntary in their charaoter^ — Cooperation is one of the most favourable results of these schemes — The influence of the State is sometimes used to enforce a, form of socialism upon the country, e.g. the Poor Law — Compulsory socialism is open to objections that do not apply to voluntary socialism — Free education and the nationalisation of the land would be cases of compulsory socialism ..^...97 — 1.07

Contents. xiil

Chapter II. The Classes among whom Wealth is distributed.

Wealth is distributed between rent, wages, and profits : these three shares represent respectively the value of the services rendered to the production of wealth by land, labour, and capital — In England, rent, wages, and profits are generally received by distinct individuals, termed landlords, labourers, and employers — Two of the portions or even the three portions into which wealth is distributed, may belong to one individual ; this illustrated by the case of a peasant-proprietor — • The laws which regulate the distribution of manufactured produce are similar to those which apply to agricultural produce — The distribution of wealth is regulated either by competition or custom ; as a nation advances, custom shows a greater tendency to succumb to competition — ^Labourers cannot be injured by competition pages io8 — 114

Chapter III. Rents as determined hy Competition.

Origin of Rent — Statement and proof of Ricardo's theory of Rent — Dr Whewell's objections to this theory — How rents are affected by various circumstances, such as the following: a reduction in the average rate of profit ; the introduction of improved implements ; a rise in agricultural wages — In what sense the interest of the landlord is opposed to that of the farmer and labourer — Rents are raised more by an increase of population than by any other cause — The profit arising from capital spent in improving land, is rent — The drainage companies — Rent is not an element in the cost of producing food 115 — 130

Chapter IV. On Wages.

Wages are determined by a ratio between capital and population — The meaning of the expression that wages are regulated by demand and supply — The great increase which has taken place in the production of wealth in late years, has not been accompanied by a corresponding improvement in the condition of many of the labouring classes — Mr Brassey, in his book Work and Wages, shows that the wages of some labourers have not increased at all during the last 20 years ; therefore, considering the increase in the cost of living, the real remuneration of their labour is diminished — This fact is to be attributed to three causes, viz. the increase of population, the extended use of laboursaving machinery, and the export of capital — Malthus's Essay on Population affirms that checks on population are positive and preventive— The five causes which, according to Adam Smith, produce different rates of wages in different trades — An explanation of the different rates of wages prevailing in different localities — How wages are affected by good or bad trade — When a branch of industry is depressed a great injury is often done to the labourers, by inducing them, through aims and parochial relief, to remain in the locality — Striking example of this afforded by the Lancashire cotton famine 131 — 156 xiv Contents.

Chapter V. Profits.

Profits are composed of the three following elements : interest on capital; compensation for risk ; wages of superintendence — ^Each trade has a certain rate of profit peculiar to itself — This is termed the natural rate of profit — The profits realised in each trade constantly approximate to the natural rate — The causes which determine the general average rate of profit — In what sense Eioardo's proposition is true, that the rate of profit depends on wages — The rate of profit really depends upon the cost of labour — The high rate of profit prevailing in Australia explained — Cost of lahour is a function of the three following variables : the efficiency of labour ; the amount of wages estimated in produce ; and the cost at which this produce can be purchased — The effect of each of these three causes upon the rate of profit illustrated— Capitalists and labourers are both benefited by an increase of the efficiency of labour and by a diminution of the cost of the necessaries of life — The benefit to the labourer will only be temporary if an increase of population is stimulated — The influence exerted on profits and wages by the export of capital pages 157 — 180

Chapter VI. Peasant Proprietors.

Distinction between a peasant-proprietor and a small tenant-farmer — When land is rented, large farms, are more advantageous in England than small farms — Peasant proprietors of Flanders and Norway — The testimony of Arthur Young, Mr Thornton and others, concerning peasant-proprietors — The aggregation of land in England is promoted partly by artificial and partly by natural causes — The effects of the laws of primogeniture and entail considered, also the influence exerted by the costly system of conveyancing — The social effects of peasantproprietorship considered — The condition of our own agricultural labourers and that of the peasant proprietors of the Continent contrasted — Mr Jones's opinion refuted, that peasant-proprietors are imprudeut with regard to marriage — It is eiToneous to suppose that the advocates of the system of peasant properties desire the introduction of the French law of compulsory subdivision — The combined advantages resulting from large farming and peasant properties may be secured if land is owned and cultivated by associations of labourers — The recent emancipation of the serfs in Eussia will extend upon a vast scale the system of peasant properties — The land reforms, carried out in Prussia by Stein and Hardenberg, quoted to show the advantages Kussia may anticipate from the emancipation of her serfs 181 — 202

Chapter VII. Metayers and Cottiers, and the Economic aspects of Tenant-Bight.

Metayer and Cottier tenancy described — In the metayer tenure the rent paid is always a fixed portion of the produce, but not always one-halt — In Tuscany the metayer rent is two-thirds of the produce — The metayers who cultivate the most fertile land enjoy a beneficial interest —

Contents.

Fixed customs regulate the conditions of the metayer tenure, although these conditions vary in different countries — The contradictory opinions ■with regard to the effects of metayer tenure explained — Why metayer farming is bad in France and extremely good in Italy — The condition of Irish cottiers most deplorable — Cottier rents are regulated by the competition of population, and are therefore often so high as to be

merely nominal — The Irish tenure termed ' conacre ' explained The

Ulster tenant-right is e premium paid for the good-TOll of a farm by the incoming to the out-going tenant ; tenant-right is also often understood to mean compensation for unexhausted improvements — The Irish Land Bill of 1870 — Mr Howard's Tenant-right BiU for England explained. Such legislation is justified not on the ground that it protects the tenant, but that it promotes the general weUbeiug of the community by encouraging a better system of farming — The Ulster tenant-right had no legal sanction previous to 1870 — Tenant-right, when it represents compensation for unexhausted improvements, might with great advantage be established by law in all countries where the land is not generally cultivated by those who own it — Such a tenant-right would encourage farmers to devote more capital and energy to agriculture — Tenant-right in England can be supported by arguments Bimilaj to those which are urged in its favour in Irelaud..PAGES'203 — ^^o

Chapter VIII. National Education and other Remedies for Low Wages.

TLe average wages are determined by a ratio between capital and the number of the labouring population — If this ratio remains constant, wages cannot be increased, miless profits are diminished, or labour is made more efficient — Any advance in wages in a particular trade, which reduces the profits of that trade below the current rate, cannot be permanent— A law to regulate wages must either be mischievous or nugatory— ^Equally unsatisfactory results would ensue if the length of a, day's work were regulated by law — Associations of labourers when carrying on business on their own account have an opportunity of showing whether men who now suffer from excessive employment could do as much if they worked a smaller number of hours each day — The State cannot find work for all the unemployed, unless population is restrained by law — No remedy for low wages can exert any decided permanent influence unless it increases the efficiency of labour and improves the social and moral condition of the labourers — Hence it will be shown that National Education is not only the most effectual but also an essential remedy — Explanation of the way in which education directly increases the efficiency of labour — Education indirectly promotes industrial prosperity by diminishing the burdens of local taxation — ^Widespread ignorance indicates premature employment from which manifold evils result — Education promotes prudential habits — Until many of our labourers become more frugal an advance in wages will produce no permanent advantage because it stimulates an increase of population — Emigration may be a most efficient remedy for low wages — In the present condition of the people the relief which emigration gives to an overstocked labour market is frequently neutralised by an accompanying increase of population — xvi Contents.

The education of the people can only be secured by a compulsory eystem — The defects of the Education Act of 1870, so far as it deals with compulsion — The principle of the Factory Acts is that education is enforced on children who are at work ; there are much stronger reasons why it should be enforced upon children who are not at work — Compulsory education does not even temporarily injure those parents whose children are not at work — The difficulty suggested by the poverty of the parents considered, if compulsory education were enforced upon the children of agricultural labourers — This difficulty not so great as at first sight appears, because our worst-paid labourers only receive minimum wages — The difference between the ultimate effects of a poor-rate and an education rate explained- — The advantages resulting from the allotment system may in future greatly increase — The enclosure of commons has often inflicted great injury not only on the poor but also on the general public — These enclosures ought generally in future to be resisted — The test of the efficiency of any means of raising the condition of the poor is this : Will it tend to make the poor ultimately rely more upon self-help? pages 231 — 239

Chapter IX. Trades' -Unions and Strikes

An explanation of the functions of a trades' union — Trades' unions produce their greatest effect upon wages if they restrict the number of workmen employed in a trade — This is attempted to be done by limiting the number of apprentices — Such restrictions, if carried into effect, inflict great injustice on the labouring class ; they also raise the price of commodities, and may jeopardise the existence of an industry — As an example of this, the effects of the trades' unions at Birmingham and Sheffield may be quoted — Trades' unions not necessarily connected with strikes — Workmen have a right to combine and to join a strike if they use neither intimidation nor violence in support of their combination— The majority of intelligent artisans are in favour of trades' unions — Their effect on wages described — They could exert no influence on wages if the effect of competition were instantaneous — ^But competition acts slowly, and in some cases, as with the wages of some agricultural labourers, it is neutralised for an indefinitely long period — Wages are fixed in the same way as a bargain carried on by the buyer and seller of a commodity — ^In order to improve their position in adjusting this bargain, employers and employed form combinations with others of their class — They are thus placed in a position of equality — Bargaining imphes antagonism of interest— As long as wages ai-e fixed by a bargain, strikes wOl continue to occur, because in settling the terms of a bargain it must often happen that one party will refuse to accept the price offered by the other — Conciliation and arbitration are not effectual remedies for strikes, because they do not remove the antagonism of interest between employers and employed — This is effected by copartnerships — The principle of copartnership defined — Its benefits extend both to employers and employed — There are many collateral advantages connected with copartnership— It has been adopted with great success by M. Leolaire and others^— It is well suited to agriculture — The experiment of Lord George Manners at Newmarket — The progress of the movement wiU be greatly assisted by national education 2 40 — 2 5 5