Some leading principles of political economy newly expounded

Preface

Though the following work is an attempt to recast some considerable portion of Political Economy, I should be sorry it were regarded as in any sense antagonistic in its attitude toward the science built up by the labors of Adam Smith, Malthus, Eicardo, and Mill. On the contrary, my hope is that it will — should its reasonings find acceptance- — strengthen, in some sensible degree, and add consistence to that fabric. As regards those assumptions respecting human character and the physical conditions of external nature which constitute the ultimate premises of economic science, the position I have taken is identical with that of the four great writers I have named ; and I have endeavored also to follow the method of combined deduction and verification by comparison with facts, which was theirs, and which is, as I believe, the only fruitful, or indeed possible method in economic inquiry. Nor do the final conclusions which I have reached differ very widely on any important points from those at which they had arrived. The points on which I have ventured to join issue with them are what, in Bacon's language, may be called the axioraata media of the science — those intermediate principles by means of which the detailed results are connected with the higher causes which produce them. If I have not deceived myself, there is in this portion of Political Economy, as at present generally received, no small proportion of faulty material ; and the present work may be regarded as an attempt, so far as it goes, to replace this element of weakness with matter better fitted to endure the strain of modern criticism.

The nature of the undertaking has brought me, much oftener than I could have wished, into collision, with more than one living writer for whose abilities and acquirementa I feel

2 PREFACE.

high respect, and with whose practical aims I not unfrequent- \y strongly sympathize ; and in particular I have been compelled in several parts of the book to express my strong dissent from some of the views of my fiiend Mr. W. T, Thornton. Mr. Thornton, in his work on "Labor," has contributed much, for which economists will be grateful, to the elucidation of the relations between labor and capital in this country; but he has also taken up certain theoretic positions which it seems to me are fundamentally erroneous. When my path has lain' across these, I have not hesitated to challenge them, using here the same freedom which Mr. Thornton has himself employed when criticising the views of preceding writers. I trust that I have also profited by the example he has set me of courtesy toward opponents.

Though the main purpose of the book is, as I have already intimated, to aid the improvement of economic theor}'-, I have nevertheless embraced every opportunity that offered of bringing theoretic doctrines into comparison with the facts presented by modern industry and commerce. I have in this way been led to examine the power and pretensions of Trades- Unions, the efficacy of Strikes, and other practical questions involved in the relations of labor and capital ; and, in the portion of the book devoted to International Trade, I have, with the same view, considered in some detail the present position of the external trade of the United States, as well as the system of Protection which, in defiance alike of theory and experience, that country has so strangely adopted,

I can not conclude these remarks without once again gratefully acknowledging my deep obligations to my friend Professor JSTesbitt, who has, both by supervision of the work while in progress, and by correction of the proofs as it passed through the press, very materially contributed to its now at length being brought to a close.

J. E. Cairnes.

Chapter I. Preliminary

Pasr

S 1. Meaning of Value 11

Value and price 12

"A sum of values " 12

When a chaujie in exchanging relations is described as a rise or fall of commodity A, rather than as a fall or rise of commodity B, what

is meant ? 13

§ 2. Three problems concerning Value 14

I. Conditions essential to the existence of value 14

II. Causes which determine " marlvet values " 14

III. Causes which determine " normal values " 14

I 3. Problem I.— Conditions essential to the existence of value 14

§ 4. Relation of value to utility.— Professor Jevons's theory examined 16

Chapter II. Supply And Demand

1 1. Fundamental truth in connection with Supply and Demand 22

§ 2. Analysis of the phenomena 23

Supply and Demand strictly analogous conceptions 25

Mr. Mill's criticism on this point unfounded 26

§3. Demand, as "quantity demanded," occasionally a convenient, but not

the proper sense of the term 27

§ 4. Supply and Demand, as aggregates, are strictly interdependent phenomena, and increase or diminish togetlier 30

§ 5. Similarly, Production and Consumption are interdependent phenomena. 31 This doctrine not irreconcilable with the existence of an idle rich class

who are consumers merely 33

Case of foreign residents engaged in no industry, but simply expending and consuming 35

§ 6. Supply and Demand, as related to particular commodities 36

In this sense not interdependent phenomena: either may increase or

diminish irrespective of the other 36

What is meapt by the equality or inequality of Supply and Demand?. . 37

§7, The supply of' a commodity tends to adapt itself to the demand at the

normal price 41

Chapter III. Normal Value

1 1. Nature of Normal Value 43

§ 2. Current theories, which confine normal value to exchanges governed by

cost of production, too narrow 45

Mr. Mill's docrine of Cost of Production 46

§ 3. Criticism of the received theory 48

§4. Examples of practical errors resulting from the received Tiew 54

4 CONTENTS.

Pagk

I 5. Statement of the theory of Cost of Production as governing normal value 57 Effective couipetitiou an indispensable condition in order to the action

of the ijriuciple of cost 58

Extent to which effective competition is actually realized in industrial

communities 60

Non-competing industrial groups 66

Compliciition of results 69

Nature of the law of " cost " 72

§ 6. Analysis and characterization of the constituents of "cost " 73

TThe labor element of " cost" 75

Relation of skill to "cost" and to "value" 76

Nature of " abstinence" 80

How far does " abstinence" stand in need of reward '? 81

The sacrifices involved in cost of production not necessarily under

gone by distinct persons 83

In computing cost of production, it is the average sacrifice that is to

be taken account of 85

§ 7. Normal value as determined by Reciprocal Demand 87

Nature of Reciprocal Demand as between nations and non-competing

industrial groups 91

Difference in the modes of action of Cost of Production and of Reciprocal Demand 93

Probable effect of improved popular education on Reciprocal Demand,

and, through Reciprocal Demand, on normal values, in this country. 95

Chapter IV. Makket Value

§ 1. Market Value, amenable to law 97

§ 2. Adam Smith's doctrine of Market Price 98

§ 3. Mr. Mill's doctrine 101

§ 4. Proposed theory of Market Price in wholesale markets 104

Play of forces in the market 106

" Proper market price " 107

Function of Speculators 109

Subordinate importance of the theory 110

§ 5. Prices in retail markets 113

Capital in retail trade excessive 114

Co-operative competition 115

Chapter V. On Some Derivative Laws Of Value

§ 1, Character of the industry of new communities 117

Action of the law of "diminishing productiveness" 118

§ 2. Course of price in meat and timber 119

§ 3. Course of price in the staple food 123

§ 4. Reciprocal movements in tillage and pasture 127

Effects on the progress of rent 127

§ 5. Course of price in accessory products 128

§6. Adam Smith's insight 130

% 7. Course of price in mineral products 131

§ 8. " " in manufactures 132

" " in coarse and refined manufactures 135

§ 9. Derivative laws in fluctuations of the market 135

510. Laws of fluctuation as affecting manufactures 137

^11. " " as affecting raw products 141

" " as affecting the staple food of a people 142

§ 12. Market fluctuations differ in intensity and in duration 145

In vegetable products more intense 144

In animal products of longer duration 144

Fish and game ^. 145

CONTENTS.

PAET IL— LABOR AND CAPITAL.

Chapter I. The Bate Op Wages

Paqr § 1. The problem of relative wages solved by the theory of value, but not that

of positive wages 149

§ 3. Reasons for treating apart labor and commodities as subjects of exchange value 150

§ 3. Are we justified in speaking of a "general" rate of wages? Mr. Longe's

objection considered 154

§ 4. Present state of the controversy 157

§ 5. The Wages-fund theory 159

§ 6. Positions taken by the disputants on either side 161

§ 7. Mr. Longe's doctrine that "the demand for commodities determines the

quantity of wealth spent in tlie wages of laborers " considered 163

§ 8. Exposition of the Wages-fund tlieory 167

Causes determining tlie amount of investment 168

Three leading constituents of capital — Fixed Capital, Raw Material, and Wages -fund. Causes determining the proportions in which they

combine 170

Mode in which tlie supply of labor affects the amount of the Wages-fund 173

§ 9. Law of the growth of of the Wages-fund 174

Social consequences 177

§ 10. Industrial crises — effects on the Wages-fund 178

§ 11. Mi\ Thornton's objections to the Wages-fund doctrine considered 180

Chapter II. Demand For Commodities

5 1. Two conditions of Demand for Commodities 189

1. Where, aggregate expenditure remaining the same, a change takes

place in the direction of demand 189

3. Where aggregate expenditure, and therefore the aggregate demand

for commodities, undergoes increase 189

§ 3. Action on the Wages-fund of changes in the direction of the demand for

commodities 190

Where competition is effective 190

Where competition is not effective 191

International effects produced by changes in the direction of demand. 193 § 3. Action on tlie Wages-fund of an increase in the aggregate demand for

commodities 194

§ 4. Summary of results 199

§ 5. Wages and prices 300

Incomplete theories 301

§ 6. Statement of tlie relation between wages and prices 203

Corresponding movements 304

§ 7. I. Case of an increase in wages from a growth of capital more rapid tlian

of population, while the productiveness of industry remains unaltered 305 § 8. II. Case of an increase of wages due to improved industrial processes, or

to an extension of trade 206

§ 9. III. Case of an increase of wages due to an enlarged supply of money 307

Principle connecting wages and prices 309

§ 10. Monetary paradox 310

6 CONTENTS.

Chapter III

TKADES-UNIONISM. — NO. I.

Pagb

§ 1. Question of the limitation of the Wages-fund fundamental in Trades- Union controversy , 214

§ 2. Economic limits of the Wages-fund 215

Law of the teudency of profits to a minimum 216

Bearing of this on the question of limitation 217

§ 3. The character of the limitation not such as to exclude Trades-Union action 219

Proper province for this action 224

Practical utility of strilves depends upon the ability of leaders to discriminate states of the market 225

How far is this ability likely to be acquired 226

§ 4. The foregoing conclusions applicable to countries in which profits are

above the minimum ; for example, the United States 230

§ 5. Recent advance in wages, how far due to Trades-Union action 231

§ 6. Power of capitalists by combination to control the labor market 233

§ 7. Relation of wages to profits 235

Mr. Brassey's doctrine as to the uniform cost of labor examined 238

Chapter IV

TRADES-UNIONISM. — NO. II.

§ 1. Three methods by which Trades-Unions may operate on the rate of wages 242

§ 2. Their mode of acting on the supply of labor 243

Efiectual for its immediate purpose; but incapable of being made a means for the social advancement of laborers 244

§ 3. Mode of acting on the rate of wages by " making work " 249

Theoretical grounds of this mode of action plausible, but fallacious. . . 249

Mr. Thornton's view stated and examined 249

Notion that work and wages are convertible expressions 254

Practical refutation 255

Notion that the quantity of work to be done at any given time is fixed 2.56

Social work indefinite 2.57

True and only limit to the employment of labor 257

§ 4. Examples of Trades-Union rules for " making work " 258

Analysis and characterization of such rules 260

Principle of this policy not confined to Trades-Unions 261

Chapter V. Practical Deductions From The Foregoing Principles

§ 1. Socialistic objections to distribution determined by economic principles. 263

§ 2. Maxims of distributive justice 263

" To each according to his wants " 264

" To each according to his works " 264

"To each according to his sacrifice" 264

§ 3. Examination of their applicability to actual problems 266

§ 4. Distribution of wealth under the action of economic laws, how far co-

, incident with the principles of abstract justice 268

§ 5. Our present system of industry defensible on utilitarian grounds 270

Need of a large accumulated capital 271

Failure of socialist schemes to provide for this 272

§ 6. Prospects offered to the laboring classes under the present regime of

industry 273

Productiveness of industry, how related to profits and wages 275

Coincidence of a slight increase in the rates of wages and profits with

a greatly increased productiveness of general industry explained 277

The phenomenon, in what way related to rent 279

Discouraging result of this aspect of the case 280

CONTENTS. 7

Page § 7. No considerable improvemeut in the laboicr's condition possible while

he remains a mere recipient of wages 3^

Recognition of this truth by socialistic writers; but their expedients

for meeting the difficulty indefensible 285

§ 8. Practical problem : To attain the socialistic end by means compatible

with existing institutions T 287

Difficulties moral and intellectual, not physical 287

§ 9. Co-operation offers the sole escape from a hopeless position 289

Present prospects of co-operation 290

§ 10. An objection answered 291

Chapter I. Doctrine Of Compakative Cost

§ 1. Are there grounds for a separate theory oi International trade? 297

Rationale of trade in general 298

Special province of International trade 300

Impediments to the movement of capital and labor between nations. . . 302

§ 2. Character and relative importance of such impediments 305

§ 3. Development of the doctrine of comparative cost of production 307

"Comparative cost" to be understood as measured by the sacritices

uudergone, not by the wages and profits received, by producers 310

Costs compared are the respective costs in each country of the exchanged commodities, not the costs of the same commodity in the

exchanging countries 312

Examples of the practical working of the principle in the trade of the

world 312

Verification of abstract theory in tlie occurrences following the gold

discoveries 315

Trade between New York and Barbados 316

Character of a large portion of International trade obscured by erroneous conceptions of cost 317

Chapter II. International Trade In Its Relation To The Rate Of Wages

§ 1. Theory of International trade as expounded by Ricardo and Mill, not invulnerable 319

The proximate conditions of trade are prices, not cost 319

"Every transaction in commerce is an independent transaction " 320

Reply from Ricardo's stand-point 321

Criticism of this reply 322

§ 2. Proposed modification of the theory of International trade 323

§ 3. Prevalent opinion as to the connection between wages and International

trade 334

In conflict with the received economic doctrine as expounded by Ricardo 325

Grounds of the popular view, superficial and untenable 336

§ 4. Illustrative examples showing the effijcts of partial movements in wages

on International trade 337

Sugar cultivation in Queensland 329

Effects on the external trade of England of a fall of wages in some lead"

ing branch of manufacture, discussed 330

§ 5. Nature of the connection between general wages and foreign trade 334

Illustration offered by Australian experience 335

Hypothetical illustration sliowing the nature of the connection as it

would be developed in given circumstances in England 337

General wages and foreign trade connected as co-ordinate effects of a common cause 339

8 CONTEXTS.

Chapter III. International Values

Pagr

§ 1. Statement of the problem 343

§ 2. Doctrine of international values as set forth in the received text-books, not reconcilable with that of Cost of Production, to be found in the

same authorities 343

But reconcilable with the view of cost here contended for 344

§ 3. Practical criterion showing the relation of exchange value to cost 345

Application of this criterion to the circumstances of the leading commercial countries 347

§ 4. Functions respectively of Reciprocal Demand and of Cost of Production

in relation to International values 34S

Varieties of industrial monopoly in International trade — strict and

qualified, one-sided and reciprocal 349

§ 5. Conditions of commercial equilibrium 353

§ 6. Effects of international lending and borrowing on the commercial equilibrium .• 359

§ 7. The foregoing principles illustrated by the course of the United States

external trade since 1860 364

§ 8. Present state and immediate prospects of that trade 367

Chapter IV. Free-trade And Protection

§ 1. Present state of the controversy 375

§ 2. Protection, an outgrowth of the Balance of Trade system 376

Either system, consistently carried out, ftital to International trade. . . . 377

§ 3. M. Alby's statement of the protectionist theory 379

Criticism of M. Alby's statement 380

§4. Practical issue taken in the United States — the cost of production of

commodities 383

The criterion proves too much 383

And, rightly understood, refutes the protectionist argument 384

§ 5. Alleged inability of the United States to compete with the cheap labor

of Europe examined ". 386

§ 6. Examination ofa ten years' experiment of Protection in the United States 388

Difficulty of interpreting an industrial experiment 388

Complication of results only to be imravcled by the deductive method 389

Mr. Wells's contributions to the investigation 391

Lesson of the experiment i 395

J 7. Political argument in favor of Protection, as itivoring variety in industry 395

Unfounded in the domain of " extractive industry" 397

And not better founded in that of manufactures 399

Demoralizing effects of a protective regime 403

Chapter V. On Some Minor Topics

§ 1. Nature of a country's interest in the scale of its general prices 407

Maxim that "gold is of the same value all the world over" examined. 408 A nation is interested not in having its prices high, but in having its gold cheap 410

§ 3. Attempts to measure the gain on foreign trade 415

The problem insoluble '. . 4i,s

SOME LEADING PRINCIPLES

POLITICAL ECONOMY,

FA^RT I.

VALUE.

Chapter I. Preliminary

§ 1. The sense proper to value in economic discussion may, I think, be said to be universally agreed upon bj economists, and I may, therefore, at once define it as expressing the ratio in which commodities in open market are exchanged against each other. This, as every one is aware, is not the only or perhaps the most common meaning borne by "value" in general discourse, and hence occurs a source of ambiguity which some writers have proposed to avoid by eliminating the term altogether from the nomenclature of Political Economy. Professor Jevons, for example, would substitute for "value" the expression of " ratio of exchange." Something, it is possible, might be gained in point of clearness by the substitution ; but, on the other hand, the term "value" has become far too deeply rooted in the ordinary modes of economic thought to be easily displaced; nor, for my part, do I think this extreme course needed ; for, though no doubt there is the danger — associated as the word is with other meanings, and more particularlj with the idea of "utility"— of sliding in argumentative discussion from the scientific into some other sense, this may, to a very great extent, if not entirely, be precluded by the simple contrivance of qualifying the term, in all doubtful contexts, with the prefix " exchange." " Exchange value " involves little departure from ordinary usage, and can hardly fail to remind the reader, where this is necessary, of the special and limited sense in which the word is employed.

Value expressing a ratio or proportion existing between the commodities exchanged, it follows, of course, as is explained in all treatises, that a general rise or a general fall of values is an impossibility, or, rather, a contradiction in terms. If A rise in relation to B, B must fall in relation to A, A and B can not both rise or both fall at the same time in relation to each other; and what is true of two commodities is true of any number, and of all commodities. But though commodities in general can not rise or fall simultaneously in relation to each other, they may rise or fall in relation to any selected one among the number; and if gold or silver be the one selected, commodities in general may rise or fall in relation to gold or silver. The value of other commodities in relation to a commodity thus selected is called "price." It is plain, then, that while a general rise or a general fall of values is a contradiction in terms, a general rise or a general fall of prices is a perfectly possible, as indeed it is a not uncommon, event.

At the same time, although "value" expresses a relation, I apprehend we may use without impropriety such expressions as "a sura of values," or "an increase or diminution in the aggregate amount of values." Where, e. g., the quantity of valuable things possessed by a community has been increased, the conditions of production remaining the same ; or where, the quantity remaining the same, the conditions of producing commodities have been so altered as to cause a given quantity to exchange for a larger quantity than before of commodities

"A SUM OF VALUES." 13

of which the conditions of production have remained constant — in either of these cases, it seems to me, we may not improperly say that the sum of values, or the aggregate amount of values, has increased in that community. The usage may be illustrated and justified by analogous expressions emploved with reference to power. Power, like value, expresses a relation; and a general increase of the power of individuals or of nations in relation to each other is, of course, an impossibility. But this does not prevent us from saying that the aggregate power of any given number of individuals or nations has increased; meaning thereby, not that their relative position has been altered, but that the elements which go to support power in them have been multiplied. We should thus say that the power of European nations has greatly increased within the last century. In a precisely similar sense we may speak — and it will often be convenient to speak — of an increase or diminution of aggregate values ; value being only another name for purchasing power.

One word more cf explanation may be given. If value expresses simply a relation, what is meant when the question is raised whether, in the case of two commodities of which the proportions in exchanging have undergone a change, the change is to be attributed to a fall in the value of the one, or to a rise in that of the other? Suppose, for example, we ask whether the advance in the price of butcher's meat is due to meat having risen or to money having fallen in value, what do we mean? Value expressing simply the relation of the commodities in exchange, the price being given, that relation is determined. Obviously there is a tacit reference to the causes on which value depends ; and the question really raised is not strictly as to the change in the exchange value of meat and money, but as to the cause or causes which have produced the change. If we believe that the change is traceable to a cause primarily affecting meat, we say that meat has risen, not that money has fallen, in value ; while in the opposite case, we should attribute the change to the reduced value of money.

§ 2. So much being premised as to the meaning and use of the term "value" in Political Economy, let us now endeavor to set before our minds as distinctly as may be the precise problems respecting value which the science proposes to solve. These are comprised under the following heads :

I, We may inquire as to the circumstances which confer on a commodity the power of commanding other things in exchange — in other words, as to the conditions essential to the existence of value.

II. We may inquire as to the circumstances on whicli depend the particular proportions in which commodities exchange; in other words, as to the conditions which determine value — an inquiry which resolves itself into two distinct issues. For, first, we may consider value as manifested in a given act of exchange, and inquire into the causes which determine it at a given time and place ; which is the problem of " market values." Or, secondly, we may regard value as the average proportion resulting from a series of exchanges numerous enough to allow of the neutralization of exceptional influences; and this is the problem of "normal values." The general problem of value, accordingly, embraces these three distinct inquiries: 1, as to the conditions essential to the existence of value; 2, as to the conditions determining market values; and, 3, as to the conditions determining normal values.

§ 3. The two latter inquiries will be the subject of future consideration; but we may at once endeavor to dispose of the first of the three problems. And here it is obvious that one of the circumstances essential to the existence of value is a capacity of satisfying some human desire. Plainly, if an ob-

RELATION OF VALUE TO UTILITY. 15

ject be unable to fulfill this condition, there can be no motive for seeking to obtain it, still less for parting with something we possess in exchange for it: such an object would, therefore, be incapable of exchange value. The capacity, therefore, of satisfying a desire — in other words, the possession of utility, is the first condition essential to the existence of value.

The mere circumstance, how.ever, that a commodity is capable of satisfying a human desire will not necessarily confer upon it the power of commanding other things in exchange. Human beings will not, in pursuit of the satisfaction of their desires, incur sacrifice — such a sacrifice, for example, as is implied in parting with something they possess — if the end can be attained without submitting to this condition; and therefore, in order that a commodity should have the power of commanding other commodities in exchange, not only must it be capable of satisfying a desire, it must also be unattainable except on the condition of undergoing a sacrifice of some sort. No one living in a healthy locality, for example, will give any thing in exchange for atmospheric air; nor, where water is abundant and also universally accessible, will water fetch a price. But if atmospheric air be required to supply a divingbell, or if water can only be had by going some distance to fetch it, water and atmospheric air will both acquire exchange value. It results, then, that the necessity of undergoing sacrifice of some kind as a condition of obtaining the commodity, or, let us say, "difficulty of attainment," must concur with utility in order to the existence of exchange value. And it is plain also that we must add, as a further condition, the possibility of transferring the possession of the articles which are the subject of the exchange.

These three circumstances then — utility, difficulty of attainment, and transferableness — are the conditions essential to the existence of value. Where they are combined in a commodity, that commodity has the power of commanding other things in exchange': where any one of them is absent, exchange value can have no place,

§ 4. This point being settled, it will be convenient here to enter so for into the larger problems of our subject as to discuss a question much debated some half- century ago, and which has lately been revived : Does utility alone give the law of exchange value? in other words, are commodities eX" changed for each other simply in proportion as they are useful? To put the question iu a concrete form — supposing gold and silver to exchange for each other in the proportion of 1 to 15 ; silver and copper to exchange in the proportion of 1 to 30; and copper and iron to exchange in the proportion of 1 to 3 ; are these ratios due to the fact that gold is fifteen times more useful than silver; that silver is thirty times more useful than copper; and that copper is three times more useful than iron ? Do the proportions of exchange invariably correspond to the relative utilities of those metals? And does this rule hold in all cases of exchange? Unsophisticated readers would, I should think, have no difficulty in answering this question in the negative; and, in truth, this is the sense in which it has in general been answered by political economists. Widely as writers have differed respecting the law governing value, they have generally at least agreed in the negative conclusion that it does not simply follow the utility of the commodity. In a passage which will be familiar to most readers, Adam Smith says: "The things which have the greatest value in use have frequently little or no value in exchange ; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water; but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use, but a very great quantity of other goods may frequently be had in exchange for it." To the