Principles of political economy

Front matter

Class Booki/r^

COPYRIGHT DEPOSE

PRINCIPLES OF ki

Chapter I. Labor

I. On the Part played by Labor in Production .... 71

II. How Labor Produces 73

III. The Evolution of Ideas concerning the Productivity of Labor . 75

IV. Pain as a Factor of Labor ........ 80

V. Time as a Factor of Labor 83

Motive Forces

The Illusions to which Machinery has given Rise Whether Machinery is Detrimental to the Working Classes

PAGE

96 103 110

CHAPTER III. CAPITAL The Two Concepts of Capital 116

The Distinction between Wealth which is Capital and Wealth

which is not Capital ........ 120

What is meant by the " Productivity " of Capital ? . . . 124

The Durability of Fixed and of Circulating Capital . . . 127

How Capital is formed . 129

Part II. The Methods Of Production- Chapter I. The Organization Of Production

I. The Stages of Industrial Evolution 132

II. How Production is regulated ....... 137

III. Crises 142

IV. Overproduction and the Law of Markets 147

V. Competition 151

CHAPTER II. ASSOCIATION

I. The Successive Forms of Association .156

II. The Association of Capital . . . . . . . .159

III. Large-scale Production ........ 161

IV. Is the Tendency toward Large-scale Production Inevitable and

Desirable? 166

CHAPTER III. THE DIVISION OF LABOR

I. The Successive Forms of the Division of Labor .... 173

II. The Conditions of the Division of Labor 176

III. The Advantages and Disadvantages of the Division of Labor . 178

Chapter I. Exchange

I. The History of Exchange .

II. Exchange Value

The Utility Theory The Cost Theory ....

III. How Value is measured by Exchange

184 186 189 193 196

CONTENTS xi

IV. The Advantages of Exchange

V. The Means of facilitating Exchange .

VI. History of the Part played by Merchants .

VII. The Means of Transportation

VIII. The Division of Barter into Sale and Purchase

CHAPTEE II. METALLIC MONEY

197 201 201 206 210

I. The History of Money ........ 213

II. Is Money a Superior Kind of Wealth ?..... 219

III. Disturbances caused by Fluctuations in the Value of Money . 223

IV. Whether Metallic Money will continue to decline in Value . 228 V. The Conditions which should be fulfilled by All Good Money . 232

VI. Gresham's Law .237

VII. The Necessity of employing Several Metals, and the Difficulties

which result therefrom 241

VIII. Why Bimetallist Countries really have but One Money . . 246

IX. Whether it is Advisable to adopt the Monometallic System . 250

Chapter III. Paper Money

I. Whether Metallic Money can be replaced by Paper Money . 258 II. Whether the Creation of Paper Money is equivalent to the

Creation of Wealth . 265

III. The Dangers resulting from the Use of Paper Money, and the

Way to prevent them .'.. = ... 269

IV. American Paper Money 273

V. How even Paper Money may be dispensed with . . . 280

VI. How Improvements in Exchange tend to bring us back to Barter 286

Chapter IV. International Trade

I. The Balance of Trade 291

II. How the Balance of Accounts is maintained .... 298

III. The Advantages of International Trade 301

IV. Why International Trade necessarily is detrimental to Some

V. The History of Protectionism ....... 310

VI. The Doctrine of Protection 318

VII. The Doctrine of Free Trade 331

VIII. The Relative Importance of Foreign and Domestic Commerce . 346

IX. Some Moderate Forms of Protection 350

X. Commercial Treaties ......... 353

Xll

CONTENTS

Chapter V. Credit Page

I. Credit is only an Extension of Exchange . 356

II. The History of Credit . .359

III. Can Credit create Capital ? 363

IV. The Function of Banks . . - . . . . . .367

V. Deposits . 368

VI. Discount 370

VII. The Issue of Bank Notes 375

VIII. Differences between Bank Notes and Paper Money . . . 378

IX. The Rate of Exchange 380

X. A Rise in the Rate of Discount 388

XI. Some Special Forms of Credit 393

§ 1. .Land Credit 393

§ 2. Agricultural Credit .395

§ 4. Building Associations ....... 397

XII. Free Banks . .399

XIII. The Organization of Banks .402

Chapter I. The Present System

I. How the Distribution of Wealth is effected .... 421

II. Why this System of Distribution does not seem Just . . 423

III. The Origin of the Right of Property 428

IV. The Evolution of the Right of Property with Regard to its Object 430 V. The Evolution of the Right of Property with Regard to its

Attributes 432

VI. The Inequality of Wealth ' . . .437

VII. The Right to be Idle 444

VIII. The Right to Relief .447

Chapter II. The Socialistic Systems

I. Equal Sharing .

II. Communism .

III. Saint-Simonism and Inheritance

IV. Collectivism . .

V. Cooperation .

459 464

CONTENTS

XI 11

PART II. THE VARIOUS KINDS OF INCOME

CHAPTER I. WAGES

I. Definition of Wages

II. History of the Wage System

III. The Laws of Wages ....

§ 1. The Wages Fund Theory

§ 2. The Iron Law of Wages

§ 3. The Theories of the Productivity of Labor

IV. The Increase of Wages V. The Hours of Labor ....

VI. Trades Unions

§ 1. Strikes ..... § 2. Arbitration and Conciliation .

VII. Workingmen's Insurance .

VIII. The Future of the Wage System

PAGE

CHAPTER II. INTEREST

I. The Ownership of Capital .

II. The Legitimacy of Interest

III. History of Loans at Interest

IV. The Laws of Interest ....

V. Does the Rate of Interest tend to fall ?

553 556 563 568

Chapter III. The Rent Of Land

I. The Law of Rent

II. The Unearned Increment of Land

III. The Legitimacy of the Rent of Land

IV. The Evolution of Property in Land V. The Hire of Land

VI. Plans for nationalizing the Land

VII. The Subdivision of Property in Land

Book I. General Notions

I. The Object of Political Economy

The heavenly bodies, the earth that we inhabit, the elements that it contains, as well as the animals and plants that live on its surface, — in fact, all the things that constitute the material universe and all the phenomena that take place therein, — are the subjects of a distinct group of sciences known as the physical and the natural sciences. But in this vast world there are other subjects no less worthy of study, namely, men themselves, living in society ; in fact, they could not possibly live otherwise. The relations that unite men socially form the subject of a separate group of sciences, called the social sciences. As there are among men many kinds of social relations, — moral, legal, economic, political, religious, and, finally, linguistic relations which serve as a vehicle for all the others, — so there are many distinct social sciences, known as ethics, law, political economy, politics, the science of religions, and the science of languages. 1

It is true that the lines of demarcation among the social sciences, which all treat ultimately of man as a member of society, cannot be drawn so sharply as those that separate sciences having dissimilar subjects, such as geology, botany, and zoology. Hence the classification of social sciences will

1 We do not mention history in this list, because history has no distinct subject-matter of its own. Every social science, and even every natural science, has its history, which is the study of the same class of facts from the standpoint of their succession in time.

always be more or less artificial, made to facilitate study and to help overcome the limitations of our understanding rather than to indicate any natural separation of them. 1 Indeed, the frontiers of these sciences, especially of those most closely related to each other, — ethics, jurisprudence, and political economy, — will always be somewhat indefinite; some institutions, as, for example, property, inheritance, and the wage system, fall clearly within the scope of all three. This fortunate interdependence, moreover, is helpful to each of these sister sciences. We need only observe that the same subject may be studied from distinctly different points of view, and bear in mind the dissimilar standpoints of the moralist, the lawyer, and the economist. This is not difficult . To do our duty, to exercise our rights, to satisfy our wants, are three quite different aims of human activity ; and only the last of these is the proper subject of economic science. We may say, therefore, that political economy has to do with the relations of men living in society, so far as these relations tend to satisfy the wants of life and concern the efforts made to provide for all that is generally understood by material welfare. 2

At present there is a tendency to divide the science into two studies, pure political economy and social economics, which

1 Auguste Conite considered it irrational to separate the sciences that treat of human societies. He maintained that there should be hut one social science, covering all the aspects of social life, and to this science he gave the name "sociology," which has since become classical. He expressly condemned every effort to make political economy a distinct science. It is in one sense true that all social sciences partake of the unity of human nature, but in the light of good scientific methods we cannot gainsay the right to keep the above-named social sciences apart as distinct fields of study.

2 Formerly it was customary to say (and it is often said to-day) that political economy is the "science of wealth." But this definition has the disadvantage of turning attention away from the real subject of economics, which is man and his wants, and concentrating it on exterior objects which are only means for the satisfaction of human wants. This is not a mere question of words, for the erroneous point of view has exposed many economists to the justifiable reproach of reasoning as though man were made for wealth, and not wealth for man.

NATUKAL LAWS 3

differ less in their content than in the manner of approaching the subjects they both treat.

On the one hand, pure political economy (sometimes called abstract economics or simply economics) is supposed to investigate those relations that arise naturally among men living together, just as though we were studying the relations among material lifeless bodies of any kind — what Montesquieu called "the necessary relations which result from the nature of things." It does not undertake to pass judgment on these relations from either the moral or the practical standpoint, but attempts simply to explain what these relations are. In this respect it may be said to resemble any natural or exact science, since it endeavors to explain matters just as they happen to be, without questioning their desirability or undesirability.

On the other hand, social economics is supposed to study chiefly the voluntary relations which men have established among themselves in the form of social organizations, written laws, customs, or other institutions having for their object the improvement of social conditions. It purposes to investigate and devise means by which better conditions may be attained. Hence it is more closely allied to the moral sciences-. 1

II. Whether there are Natural Laws in Political Economy

When we grant to any branch of human knowledge the name of science, our object is not the simple bestowal of an honorary title. We mean that the facts with which it deals are connected by certain necessary relations which have been discovered, and which are called laws.

1 The division here made must not be mistaken for that which distinguishes theoretical from applied or practical economics. Political economy always comprises a practical part which takes up the best means of utilizing the natural laws discovered by the science ; i.e. such means as banks, railroads, monetary and commercial systems, taxes, etc. Social- economics, on the other hand, since it seeks to determine what ought to be, i.e. the relations which should in justice prevail among men, always embraces a theoretical part.

In some domains the regularity of occurrences is so obvious as to attract the attention even of persons least accustomed to scientific speculation. A mere glance at the firmament is enough to show the regular nightly progress of the stars, the monthly succession of the phases of the moon, and the annual journey of the sun through the constellations. In the most remote days of history, shepherds watching their flocks and sailors steering their vessels discovered the periodicity of these movements, and thus paved the way for a true science, the oldest of all sciences, — astronomy.

The changes that take place in the constitution of inorganic matter and organic bodies are not so simple as this, and the uniformity of their coexistence and succession is not so easy to comprehend. Many centuries, therefore, had to elapse before the human mind, bewildered by the complexity of things, succeeded in laying hold of the guiding thread, in finding law and regularity in these phenomena as well, and thus in establishing the sciences of physics, chemistry, and biology. Little by little the idea of a permanent regularity of phenomena has penetrated all domains of human knowledge, even those which at first seemed destined to remain forever closed to it. Even the winds and waves, which, from time immemorial, poets have made the emblem of inconstancy and capriciousness, have been brought under the sway of universal law. The great laws which govern currents of air and of water have been discovered, and , now form the basis of meteorology. Even the chances of wagers, the probable combinations of numbers in a throw of dice, have been subjected to calculation. Hazard itself may henceforward be said to have its laws.

The time was of course bound to come when the great idea of a natural order of things, after having step by step successfully invaded all other fields of knowledge, should at last penetrate the domain of social facts. The honor of having first recognized and proclaimed the existence of a " natural

NATURAL LAWS 5

government " of society is due, as we shall see, to Montesquieu and the Physiocrats.

Yet there are many who hesitate to put the social sciences on a level in this respect with the physical sciences. It seems to them that there is between these two classes of sciences an insurmountable barrier, and that the latter belong to the realm of inexorable Necessity, while the former belong to the realm of Liberty. They believe that the physical sciences have to do with matters that cannot help taking place, while the social sciences are concerned with things that may or may not take place, according as we choose. In the physical sciences, the savant can always foresee exactly what fact will succeed or accompany another given fact. Thus the astronomer can announce a thousand years in advance the exact minute when an eclipse will take place. The chemist combining two substances in a crucible knows just what compound will result and what its properties will be. The same power enables the geologist to enumerate the various strata that will be encountered in piercing a tunnel or in sinking a mine-shaft. But, it is asked, can the economist, the historian, and the statesman tell us anything in advance concerning social and political events ? Is it not true that, at the most, they can but venture conjectures which are as often as not discredited by actual occurrences? Prophecy or prevision may sometimes be possible to the intuitive mind of a genius, but in the social sciences scientific prediction is impossible.

The above argument is based on a twofold error, regarding the meaning of the expressions " natural law " and " free will." We are in the habit of representing natural law figuratively as an inflexible, unchangeable power, commanding unconditional obedience. But natural law is really nothing more than the expression of certain relations which arise spontaneously among things or among men. These relations may, to be sure, be called necessary ones, but only when certain foregoing conditions are fulfilled. Atoms of hydrogen and oxygen do not necessarily produce water ; but if one atom of oxygen is placed in contact with two of hydrogen under certain conditions of temperature, pressure, etc., they will form water. Similarly, men are not obliged to buy and sell, but if a man disposed to sell meets a man disposed to buy, and if their offers are mutually acceptable^ they will necessarily make a transaction at a price which may be determined ; and this transaction will be none the less a free contract.

Free will is commonly understood to mean the power to do just as one pleases, without cause or reason. To act without an appreciable cause, however, is, as a little reflection will show, precisely what a madman does. The conduct of every reasonable man is determined by motives, and there are always sufficient causes, known or unknown, for his actions. 1

Even those practical people who most vehemently deny that economists can foretell happenings in the economic world constantly employ the art of prevision in the ordinary course of their lives, and in the management of their everyday affairs. Every one who speculates — and who is there that does not speculate to some extent — resorts to prediction after his own fashion. The financier who purchases shares in a railroad company foresees, or thinks he foresees, the progressive increase of traffic along a certain line ; and the high price he pays for these shares indicates (whether he wills or not) his firm confidence in the permanency and validity of an economic law. It is evident, however, that everybody

1 Renouvier, in his " Classification des Systemes Philosophiques, 1 ' has called attention to the fact that even if the conduct of men were the result of accident, pure and simple, rational prevision and prophecy could readily take place within the limits we have indicated, because the mathematical doctrine of probabilities enables us to foretell, for instance, how often a given number will come out in a game of roulette. How much more ought it to be possible, therefore, to foretell the conduct of rational beings ! If we had to do with men infinitely wise, it is probable that the prevision of human conduct would become as infallible as the prescience of the movements of heavenly bodies.

THE FORMATION OF ECONOMIC SCIENCE 7

who travels, or sends goods by this railroad, does so only because he chooses to do so, i.e. because he wills to do so.

Without doubt, economic prophecies are often shown to be false by subsequent events. 1 But if our previsions in political economy are uncertain, and do not penetrate far into the future, the reason for this must not be sought in the play of free will, but simply in our ignorance of the causes at work, — just as in meteorology, for instance. Every thinking man is sure that wind, rain, hail, and storms are not the result of mere chance ; he does not for a moment doubt that they are governed by natural laws. Yet previsions in this domain are by no means more accurate than in the domain of economics. A commercial crisis can be foretold a much longer time in advance than the coming of a cyclone ; the trips of a railroad train between two cities are certainly less variable than the tides of streams, despite the fact that the former are regulated by man, and the latter determined by the forces of nature.

III. The Formation of Economic Science

In a French book by Antoine de Montchretien, entitled, "Traicte de l'CEconomie Politique," the science of political economy in 1615 first received the name now applied to it. The word economy, or economics, was, however, already in use before that date, and one of the books of Xenophon even bears this word as a title. But for the ancients it meant what we may call domestic economics, or household economy (ol/co?, household, and voijlos, law or rule). The qualifying adjective, political, indicated that the science had to do, not with the economy of the household, but with that of the body

1 As an argument against the existence of natural laws in social matters, the fact is adduced that many things do not take place in the way foreseen. But what does this prove save our ignorance ? Think, on the other hand, how often things fail to happen as willed or desired ! Does not this demonstrate that there are stronger forces at work in the world than the will or desires of men ?

politic, or the nation. This new designation arose at a time when an important historical transformation was taking place : the establishment of the great modern states of Europe. To-day, as we have already said, the name social economics is often used in place of political economy ; and although the etymological meaning of these words is exactly the same, the* adjective political is preferable because, like economy, it is of Greek origin. At present, however, these terms have a different meaning, which we have already explained.

Some of the questions which are to-day called economic, have at all times attracted the attention of mankind, — such questions as money, commerce, and the means by which citizens and the state may grow wealthy. The mediaeval church fathers condemned luxury, the inequality of fortunes, and loans at interest. The authors of antiquity, Aristotle among others, carefully analyzed the nature of money, the separation of trades, and the methods of acquiring property. But they failed to perceive the bond that unites these different problems. They did not conceive the possibility of making these matters the object of a completely distinct science, and regarded them rather as the accomplishments of a philosopher than as the equipment of a scientist. Whatever was proposed regarding these matters was offered in the form of, good advice to sovereigns and individuals, not as the firm results of an established science.

The discovery of America gave the first impetus to the development of a true economic science in the course of the sixteenth and seventeenth centuries ; what had previously been mere incoordinate advice took the shape of a composite, coordinate, logical system of doctrines. Countries like France, Italy, and England, seeing with envious eyes how Spain was becoming wealthy by means of her mines in the New World, sought to discover how they too might procure gold and silver. This was precisely the title of a book published by an Italian, Antonio Serra, in 1613 (before that of Montchretien), viz., " A Brief Discourse on the Possible

THE FORMATION OF ECONOMIC SCIENCE 9

Means of causing Gold and Silver to abound in Kingdoms where there are no Mines." It was believed that this means consisted in the sale abroad of manufactured products ; and, with this purpose in view, efforts were made to develop foreign trade and home manufactures by an elaborate, complicated, and vexatious system of regulations to which the name mercantile system has generally been applied.

A strong reaction against these doctrines took place in the middle of the eighteenth century, especially in France. At this time the uppermost thought in the minds of people seemed to be a return to the " state of nature," and the repudiation of all artificial arrangements. All the literature of the eighteenth century is impregnated with this feeling. Its influence is manifest in the political science of the period, and in the writings of Rousseau and Montesquieu. Montesquieu's book on the " Spirit of Laws " begins with the immortal phrase, " Laws are the necessary relations resulting from the nature of things; " and in the preface of the same work he declares, " I have not drawn my principles from my prejudices, but from the nature of things."

It was then that economic science really began. In 1758, one of the physicians of the French king Louis XV, named Quesnay, published his " Tableau Economique." * A group of eminent men soon became his disciples and adopted the name of physiocrats 2 or economists. The physiocratic school introduced two new ideas in economic science, — ideas that

1 In 1755 Cantillon had published his " Essai sur la Nature du Commerce," written as early as 1725. This book has recently been brought to light again by English economists, and is by one of them designated as the first methodical treatise on political economy. The work, however, was generally unknown, and has exerted an influence on the development of the science only through the physiocrats, who were familiar with it, and borrowed much from its contents.

2 Physiocracy is composed of two Greek words meaning the "government of nature." One of the most illustrious disciples of this school, Turgot, not only laid down its principles in his remarkable writings, but actually applied them during his terms of office as intendant of Limoges and later as minister to Louis XVI of France ; he decreed the freedom of trade, the abolition were diametrically opposed to the mercantile system. These were : —

(1) The superiority of agriculture over commerce and industry. The physiocrats regarded only the soil as the source of wealth, because it alone gives a net product. The classes of society other than farmers are sterile classes.

(2) The existence of a "natural and essential order of human societies " — these very words form the title of a book written by one of the physiocrats, Mercier de la Riviere — which we should learn to recognize, and to which we should strive to conform. They therefore declared that it is useless to devise laws, regulations, and systems, when all that we need do is to let things alone.

The first of these principles, although it brought al>out a fortunate reaction against the errors of the mercantile system, was partly erroneous, or at least exaggerated ; and the error or exaggeration led to the destruction of the new school. The second principle, on the other hand, served during nearly a century as the foundation of the whole edifice of political economy.. And it is true that facts in themselves cannot form the basis of a science unless we have discovered that they are bound together by relations of cause and effect, — that they form an " essential and natural order."

The publication in 1776 of " An Inquiry into the Nature and Causes of the Wealth of Nations " by a Scotch professor, Adam Smith, marks an era in the history of political economy. During nearly one hundred years this book has assured the unquestioned preeminence of the English school of economists. It procured for its author the title, not fully deserved, of " father of political economy."

Adam Smith rejects the first physiocratic principle and gives industry its legitimate place in the creation of wealth. But he confirms and develops most brilliantly the second

of interior duties and the tariff on wheat, and the liberty of labor (by abolishing trade corporations or guilds).

THE FORMATION OF ECONOMIC SCIENCE 11

tenet, i.e. the existence of natural economic laws, and the let-alone policy, at least as a rule of practical conduct. He was, moreover, much superior to the physiocrats in observing facts and in profiting by the lessons of history. His studies extended over nearly the whole field of economic science, which has scarcely been enlarged since his time.

Only a short while after Adam Smith, three economists came forward almost simultaneously with theories that have occupied the minds of men for half a century. Two of these economists were Englishmen. The first, Malthus, is the author of a celebrated theory concerning the increase of population, 1 which, although it concerned a matter of a somewhat special nature, was destined to have a great influence upon the whole science of economics. The second was Ricardo, 2 quite as celebrated because of his theory of the rent of land, but whose misuse of the abstract and purely deductive method of investigation later gave rise to a vigorous reaction. The third author of this group was a Frenchman, Jean Baptiste Say, 3 whose " Traite d'Economie

1 The Rev. Thomas R. Malthus first published his book anonymously in 1798 under the title, " An Essay on the Principle of Population as it affects the Future Improvement of Society." The Essay passed through six editions in the author's lifetime, and in each of them he introduced various additions and corrections. Although the last edition is dated 1826, that of 1817 is the last that was fully revised by the author, and presents the text substantially as it has since been reprinted. A cheap edition is published by Ward, Lock & Co. (1890). A good selection of chapters from the book is contained in the "Economic Classics" edited by Professor W. J. Ashley, and published by the Macmillan Co. The student of Malthusian theories should consult James Bonar's "Malthus and his Work" (London, 1885) and a keen criticism of the Malthusian theory of population by Dr. Frank Fetter, " Versuch einer Kritik der Malthus'chen Bevoelkerungslehre " (Jena, 1895).

2 David Ricardo's principal work is the " Principles of Political Economy and Taxation." The first edition appeared in 1817; the third, with many additions, in 1821. The best edition now in use is probably E. C. K. Gonner's, published in the " Bohn Library," London, 1891.

3 Say's book has been translated into English by C. R. Prinsep, who prepared a so-called "Fourth American Edition" in 1830 under the title "A

Politique," published in 1803, is remarkable for its clear style, its systematic arrangement and logical classification, rather than for depth of thought. Translated into all the languages of Europe, this book was the first truly popular treatise on political economy, and has served more or less frequently as a model for the innumerable well-known manuals of economics that have been written since then.

It was particularly Say's book that set forth clearly (with some exaggeration, but an exaggeration that was salutary at that formative period of the science) the prevailing conception of political economy as a natural, purely expository science. Adam Smith had defined economics as "proposing to enrich both the people and the sovereign," thus giving a practical aim and purpose to the study. But Say, amending this definition, writes, " I had rather say that the object of political economy is to make known the means by - which wealth is produced, distributed, and consumed," and he named his book accordingly. 1