Principles of political economy

Introduction

American and "^nglish readers will welcome the translation of Professor Gide's book. It is neither a primer for beginners, nor 1 dissertation for the learned, but a guide-book for serious students who have mastered the economical alphabet, and are feeling their way to a judgment of their own on economical subjects. Its place in French economic literature is almost unique. It is helping m' uiy a young Frenchman to turn his attention to economic theory, and to study it in the light of the latest discussions. Professor Gide has Adam Smith's faculty of making his readers think for themselves, and accept no conclusion without following out the process that leads to it. He lays a just emphasis on the need of impartiality and freedom from prejudice. In a book written for real students of a subject, the truth should be told without reserve or fear of consequences.

Economists familiar with recent investigations (Continental, American, and English) of the doctrines of Value, Wages, Foreign Trade, etc., will not always agree with the views presented in this volume. Students will do well to supplement its somewhat scanty references to current economic Hterature by such a bibUography as that which is given by Professor E. B. Andrews in his Institutes of Economics (Boston, 1889).

It will be observed that the schools of modern economists are (in the beginning of the book) so classified that our author reiv INTRODUCTION.

mains outside of them. His position, however, is substantially

that of the First or "Classical School," if we substitute evolution

and social union ("solidarity") for finality and individualism.

Like the Classical School, he recognizes the need of Theory and

(to that end) of Abstraction ; and the theoretical work of the

Classical School is in great part the foundation of his own new

building.

Political Economy in the hands of Professor Gide is neither

dismal in its conclusions, nor dull in its deliberations. Though

these may be counted adventitious attractions, they will be keenly

appreciated by most of his readers. In point of style, our author

has few rivals, even in France.

JAMES BONAR.

Hampstead, London, 14th March, 1891.

Author's Preface To The Third [french] Edition

When the first edition of this work appeared in 1883, 1 refrained from prefixing any prefatory note, for I thought it wiser for the book to introduce itself to the pubhc. In the second edition I somewhat sharply replied to some severe criticisms which had been directed against the tendency of the treatise. In the preface to this new edition complaints are out of the question ; all that I can do is to thank the public for the favorable manner in which the book has been received both in France and abroad.

I have endeavored to acknowledge this kind reception by correcting and supplementing, to the best of my powers, the weak points and deficiencies which have been brought before my notice. However, there is a criticism of a general nature which has reached me from various quarters and has proceeded from friends as well as from adversaries ; to this I must devote a few words oi explanation unless I wish to incur the charge of neglecting it. The complaint is, that in treating each question I have set forth the various competing systems without expressing my own opinions in a sufficiently decided manner ; I am, therefore, charged with leaving students to wander in a state of unpleasant uncertainty, and with consequently failing to discharge in full measure the duties of a professor who is entrusted with the care of the minds of the young.

My reply is, that this book is not intended for scholars in primary schools or for use in secondary education. Nor is it addressed exclusively to students of the universities ; its object is also to reach practical men who wish to form for themselves an opinion on economic and social questions ; I repeat, men who wish to

V

VI AUTHOR S PREFACE TO THE THIRD EDITION.

form an opinion " for themselves," and are not content with receiving one ready-made from the teacher's Hps. My method may sometimes leave the reader in a state of hesitation and suspended, as it were, in a species of mental balancing which is wont to lull to sleep minds of a sluggish nature ; but I am confident that it will be profitable to those who are eager for the discovery of truth and do not wish to have opinions forced upon them. Further, I have not shrunk from pronouncing an outspoken judgment on all questions in which the truth seems to be beyond controversy ; in all cases in which doubt is possible, — a class of questions which unfortunately is far more extensive, — I have striven to maintain an equal balance, but, nevertheless, have not neglected to throw in that grain of sand which, for the keen observer's eye, is enough to turn the scale.

Perhaps I may also be allowed to remark, that the excess of impartiality for which I am taken to task has not been the characteristic feature of treatises on political economy which have been hitherto published in France. For several generations these books had been in the habit of presenting political economy in only one light, — the point of view of the " Liberal " school. There is, then, no reason to murmur if later treatises should break with a tradition which was beginning to assume the shape of a law, should restore their rightful place to doctrines which have heretofore been proscribed, and should give their due share of justice even to notions which do not command our assent ; for thus can be applied Shakespeare's admirable maxim, —

" There is some soul of goodness in things evil, Would men observingly distil it out."

— Henry V, act iv, scene i.

CHARLES GIDE.

AMERICAN INTRODUCTION.

Science is international ; it suffers when the natural relation between different countries is interrupted, and gains when the connection is resumed. The publication in America of a treatise on Economics written in France, and translated in England, means the re-establishment of an intellectual commerce that has been partly under an embargo. The orthodoxy of »iany French economists, and the impulse to enlist under new school or historical standards, which lately showed itself in America, had the effect of isolating these two countries from each other ; while between the American school and the EngUsh school of a few years ago, a similar though less complete separation had taken place. Between England and America an active interchange of thought has since been established.

In addition to the benefit to be derived from a closer scientific relation to France, there are specific gains to be expected from the use of Professor Gide's treatise by American students. Its progressive spirit will make it everywhere welcome, and its appreciative attitude toward the older schools of thought will, at the same time, make it everywhere useful. It carefully retains the best fruits of early work ; the " new departure " that it represents is one that does not break with the past. Its conspicuous quality is a wisdom that is not often combined with so much of brilliancy.

Mr. Jacobsen has been very successful in preserving in his translation the literary quality of the original work.

J. B. CLARK.

Northampton, Mass., March 20, 1891,

Chapter II. — Value

I. What is value ? 44

II. What is the cause of value ? 47

III. Critical examination of the various theories of value 54

IV. Variations in value 60

V. The effects produced on value by competition 64

VI. Whether competition is cheapness 68

Chapter III. — Price

I. How value is measured by exchange . , 'J2

II. On the choice of a common measure of values 74

III. What is price? 82

IV. Whether the measure of value be not an insoluble problem 84

V. Whether money should be reckoned as wealth 88

X TABLE OF CONTENTS.

Chapter II. — Labor

I. On the part played in production b^ labor 108

II. How labor produces Ill

III. What kinds of labor should be called productive? 113

IV. On pain as a factor of labor 118

V. On time as a factor of labor 121

Chapter III. — Capital

I. On the part played in production by capital 1 25

II. The meaning of the productivity of capital 127

III. The distinction between wealth which is capital and wealth which

is not 1 30

IV. The durability of fixed and of circulating capital 135

V. How capital is formed 138

Chapter III. — Exchange. page

I. On the part played in production by exchange 169

II. The advantages of exchange 172

III. On the means of facilitating exchange 1 74

IV. On the part played in production by traders 174

V. The disadvantages of the multiplication of traders.. 176

VI. Means of transport 1 79

VII. The breaking-up of barter into sale and purchase 182

Chapter IV. — Metallic Money. I. \\Tiy the precious metals have been chosen as the instrument of

exchange 186

II. The invention of coined money 188

III. The conditions to be fulfilled by all good money 190

IV. Gresham's lavi^ 194 the question of monometallism and bimetallism.

I. The necessity of taking several metals, and the resulting difficulties 198

II. How it is that bimetallist countries really have but one money. . . 202

III. Whether it is advisable to adopt the monometallist system 207

IV. Whether the respective yalue of the two metals could not be fixed

by an international understanding 211

Chapter V. — Paper Money

I. Whether metallic money can be replaced by paper money 214

II. Whether the creation of paper money is equivalent to a creation

of wealth 219

III. The dangers resulting from the use of paper money and the means

of preventing them 224

IV. How even paper money may be dispensed with 228

V. How the improvements in exchange bring us back to barter 233

VI. The decadence of the precious metals 234

Chapter VI. — International Trade

I. Why exaggerated importance is attached to foreign trade ....... 236

II. Why international trade always tends to take the shape of barter 237

III. What is meant by the balance of trade 241

IV. Wherein lie the advantages of international trade 246

Xii TABLE OF CONTENTS.

PAGE

V. Why the advantages of international trade should be measured

neither by the excess in imports nor by the excess in exports. . 248 VI. How it happens that international trade necessarily harms certain

interests 250

THE QUESTION OF FREE TRADE AND PROTECTION.

I. Why the question of free trade is a question 252

II. The protectionist system 256

III. Whether the dangers feared by the protectionist theory are real. . 260

IV. On the disadvantages of protective duties 264

V. Why the bounty system is preferable 269

VI. On some moderate forms of protection 270

Chapter VII. — Credit

I. Credit operations 272

II. Credit papers 275

III. Whether credit can create capital 277

IV. Banks 280

V. Deposits 281

VI. Discount 283

VII. On the issuing of bank notes 2S6

VIII. The differences between the bank note and paper money 290

IX. The rate of exchange 292

X. The raising of the rate of discount 299

XI. Some special forms of credit 303

THE QUESTION OF ivIONOPOLY OR OF LIBERTY OF BANKING.

I. On monopoly or competition in the issuing of notes 309

II. As to liberty or regulation in the issuing of notes 313

Chapter I. — Insufficiency in Production

I. The increase of population; the laws of Malthus 320

II. On the limitation of production in agriculture, and the law of

decreasing returns 323

III. On the limitation of production in other industries 328

IV. How limitation of production affects prices 330

TABLE OF CONTENTS. XIU

PAGE

Chapter I. — Expenditure

I. What should be our conception of expenditure? 361

II. How it happens that expenditure regulates but does not feed

III. The real aims of expenditure 366

IV. Luxury 369

V. The expenditure of foreigners 373

VI. The means of reducing expenditure 376

Chapter III. — The Rights of Property

I. The origin of the rights of property 430

II. What are the attributes of the rights of property? 431

III. Over what things should the right of property extend? 438

IV. The historical evolution of landed property 445

V. The legitimacy of landed property 451

VI. The law of ground rent ........." 4^5

VII. The nationalization of the land 461

VIII. The organization of landed property 464

Chapter III. — The Wages-earner

I. The contract of wages 489

II. The laws which regulate the rate of wages 492

TABLE OF CONTENTS. XV

PAGE

III. The rise in wages 503

IV. Whether there are any means of improving the condition of the

wages-earners 5°^

V. Strikes 509

VI. State interference 512

VII. Co-operation 5^9

Chapter IV. — The Man who Lives on his Income

I. The right to be idle 526

II. The rent of land 529

III. House-rent 532

IV. Interest 535

V. Does the rate of interest tend to fall? 539

Chapter V. — The Indigent

I. The right to relief 543

II. The organization of public relief. 547

HI. Is pauperism on the increase? 55^

Appendix. — The Public Finances of France.

I. Public expenditure 554

II. The public revenue 559

III. The public debt 570

PRINCIPLES OF POLITICAL ECONOMY.

GENERAL NOTIONS.

I. THE OBJECT OF POLITICAL ECONOMY.

It may appear strange, at the beginning of a treatise on political economy which is perhaps the hundredth which has been written on the subject, to declare that a precise definition of political economy has still to be found.

Such, however, is the truth ; and after all, there is nothing very surprising about it. No science can be clearly defined until it has been finished and till the neighboring sciences are so also. Now, such is not the case with the science which is occupying our attention ; on the contrary, like the other social sciences, it is a science in process of formation. Just as in a still unexplored land, the traveller cannot mark out on the map the exact frontiers of each district, but must confine himself to indicating more or less approximately the great dividing lines which he perceives or guesses at, so here, too, we must be contented with pointing out as accurately as we can the domain of political economy, without venturing to mark it off very clearly from the territory of the other social sciences.

Without, then, seeking at present a precision that would be useless, we may say, in harmony with most writers, that political economy is the science of wealth. Although the word " wealth " of itself greatly needs definition, yet it sharply suggests to the mind the e^ential facts with which our science deals, and therefore frees us from a recourse to long circumlocutions ; still we must not be led astray by the circumstance that political economy deals with wealth, that is to say, with things, res, nor be tempted thereby to class it among the natural sciences which study bodies. Wealth, as we shall see, is created by the needs of men living in society, and consequently the study of wealth is nothing but the study of " man " under one of his most characteristic aspects.

Three questions have always occupied the thoughts of men : "How can wealth be produced? " *' What use should be made of it?" "In what manner should it be divided?" The several answers to each of these questions constitute one of the great divisions of political economy ; .viz., production, consumption, and distribution. In works on political economy, almost without exception, a fourth division is added, viz., circulation ; but we must confess that we have never been able to understand what the term answered and referred to. For the circulation of wealth, i.e. the transferring of commodities from hand to hand, is, as will be seen, nothing but a consequence and a form of division of labor. It is therefore irrational to detach this section from the department of production in order to make it into a distinct branch. The fact that wealth may be transferred from hand to hand is a circumstance which is valueless in itself, and its only worth lies in the measure in which it contributes to social production.

It is clear that the three questions which constitute the pith of political economy are essentially practical ones, and it seems to follow that the science whose object it is to supply an answer to these questions should itself be of a practical nature ; in other words, be an art rather than a science. Indeed, it was under this aspect as an art, or say a practical study pursuing a definite aim, namely, national prosperity, that political economy was always regarded by the ancients. This, too, is shown by the etymology of the word (oikos = the house, vo/ao? = government, ttoAis = the city), and Adam Smith, the father of the science, adhered to this definition.

But the human mind, which is always curious to learn the reason of things, has gone on to ask a further question : " What is Wealth?" But this differs from the three earher questions by possessing a purely speculative character; its object is to determine the causes which render wealth desirable, to discover the necessary relations between different kinds of wealth ; in other words, to formulate the laws of value and of price. To the answering of this branch of questions we purpose to devote a fourth division ; but to comply with the necessities of logic this must be our first part, and should be regarded as the purely theoretical side of political economy.

In most works on political economy, value is merely dealt with as a portion of exchange, but that presents it in a far too narrow light. The notion of value is really the basis of all political economy ; and not only exchange, but distribution, consumption, and production likewise become united, from a strictly scientific as well as from a practical point of view, when questions of value are discussed. It is logical, then, to give value a branch to itself, unless, indeed, we are willing to scatter it through all the other divisions. In fine, works on pure political economy are in reality nothing but treatises on value.

Political economy is not the only science which treats of the relations between men and things or of the relations of men inter se ; Law and Morals share in this study. These three great social sciences have the same object, at least for a part of their work ; though, no doubt, they view it under three different aspects. The economist is concerned merely with the wa^its of men, the lawyer with his rights, the moralist with his duties. But on questions of succession, property, credit, on the contract of loans and of wages, the lawyer and the economist are compelled to join hands, just as the economist and the moralist have to meet on the questions of luxury or poverty and many others. This is a happy meeting and is of great benefit to all three sciences. Our virtual separation of them follows less from the necessities of logic than from that weakness of human understanding which debars us from comprehending so vast a domain at one and the same glance. Still it is to be hoped that there may be a daily increase in their blending and joint study.

Years ago Auguste Comte laid down " that every study isolated from its various social elements was, from the very nature of the science, compelled to be essentially sterile, after the example of political economy.^'' For he conceived the idea, which constitutes his chief title to fame, of the regulation of all social phenomena by a separate science which he called sociology. All workers at sociology, whether they be of the school of Comte or of the school of Herbert Spencer, apply their main efforts to the formation of a huge synthesis of all the social sciences ; but the field is so vast that it is easy to miss the right roado

II. ON METHOD IN POLITICAL ECONOMY.

In scientific language the term " method " is used to mean the road that must be followed for the discovery of truth. Now there are several roads, and the question as to which road should be chosen has in recent years aroused a great controversy.

The classical school of economics, of which Ricardo is the most illustrious representative, used to employ the deductive method, — a method which starts from certain general principles that are regarded as indisputable, and proceeds thence by way of logical consequence to deduce an indefinite series of propositions. Geometry (or even theology) may be taken as the type of the sciences that employ the deductive method. Law students will readily recognize that Law itself, particularly Roman Law, employs the deductive method ; for the jurisconsult, starting from a few principles laid down by the Twelve Tables, or found in the jus gentium, proceeded to construct that huge monument of learning that we call the Pandects. In economic science the deductive school started from the principle (named hedonistic) " that man always desires to obtain the maximum of satisfaction with the minimum of pain," and thence deduced a series of propositions which still constitute the framework of economic science.

The new school rejects this mode of reasoning ; it asserts that in social science, and in the physical or natural sciences likewise, the inductive method is the only one to employ : this method starts from the observation of certain particular facts in order to rise to the height of general propositions ; for example, from the fact that all bodies fall, to the law of gravity. In economics this method will be shown in the individual and accumulated observation of all social facts as they are revealed to us, in their present state by means of statistics or by information supplied by travellers, in their past state by history. Thus we shall be able to slowly raise the edifice of economic science, which will then be the true science, not like that artificial science (so says the new school) which the deductive school constructed in cut and dried fashion.

Both of these methods are too absolute ; but truth is never reached by so perfectly straight a road. The real method of political economy proceeds by three stages :

First. By the obseri>ation of facts without any preconceived notion, even those which at first sight appear to be the most trivial.

Second. By the imagination of a general explanation which will enable us to establish mutual relations between certain groups of facts ; i.e. by the forming of an hypothesis.

Third. By the verificatio7i of the validity of this hypothesis, by seeking, by the aid of experiment if possible, at any rate by specially directed observations, to discover whether it exactly corresponds with the facts. ... Of course it is not necessary for the same men of science to make observations, form hypotheses, and verify them ; for the gifts of observation and of imagination are somewhat rarely combined in the same person.

The above has been the procedure adopted in all sciences. All those great laws which constitute the bases of modern sciences, beginning with Newton's Law of Gravity, are only verified hypotheses ; and we must add that the great theories which are the groundwork of scientific research, e.g. the existence of ether in physics, or the theory of evolution in natural science, are merely hypotheses which require verification. Proof of this may be found

6 PRINCIPLES OF POLITICAL ECONOMV.

in Claude Bernard's Introdiictioji a P Etude de la Mcdecine Experimeniale and in M. Naville's La Logiqiie de V HypotJiese.

As Stanley Jevons has observed in his Principles of Science, the method employed for obtaining the discovery of truth in the sciences is similar to that unconsciously made use of by those who try to find the meaning of those rebuses or ciphers to be met with on the back page of some illustrated papers. In order to guess what the meaning of this enigma may be, we imagine some meaning or other. Then we observe whether this really agrees with the figures or images before us ; if it does not, it is an hypothesis to be rejected. We then conceive another one, and so forth, until we obtain a more successful result, or lose courage altogether. We shall find nothing in facts unless we have previously in our minds an image or a forecast of the tnith.

The new school, then, is wholly in the right when it blames the classical school for its dogmatic attitude and for its tendency to believe that the principles, at which it has arrived by reasoning, are the exact expression of what is and of what ought to be. But this school, in its turn, commits no less serious an error in believing that the attentive observation of facts is of itself sufficient to establish the science of economics, and that we may therefore for the future dispense with any resort to abstraction, hypothesis, and the " let us suppose " so dear to the school of Ricardo and so obnoxious to the school now under mention.

/ The facts presented to us by nature are too numerous, too / complex, too interlaced ; and in economics especially, they form ^ too inextricable a labyrinth for us ever to be able to discover our whereabouts, unless reason or imagination comes to our aid and throws light upon the darkness and forms order out of the chaos. It is true enough that the generalizations of the classical school to which, too ambitiously, perhaps, has been given the name of "laws" (for instance, those associated with Ricardo and with Malthus), are for the most part only hypotheses to be verified or to be rejected. But, such as they are, they have rendered eminent service to the science of economics, and it would be ungrateful

GENERAL NOTIONS. . "J

to disown them, even though they may come to be regarded not as the framework of pohtical economy, but only as the scaffolding used during the construction of buildings, and destined to be taken down as soon as the work is completed. .

Latterly, however, a new deductive school has arisen, which, in spite of adhering faithfully to the reasoning method, and even pushing it to the extreme, as is shown by its preferring to employ mathematical language, has been wary enough not to be ensnared by its own speculations, as was the case with the former deductive school. This newer deductive school presents its abstractions purely as what they are ; that is to say, as hypotheses intended to illuminate facts and guide observation.

In his Elements d' Economic politique pure, M. Walras of Lausanne writes : '" Pure political economy is essentially the theory of the determination of prices under a hypothetical regulation of absolutely free competition." To this may be added a dictum of Signor Pantaleoni in his Principii di Economia pura : " Whether i the hedonistic and psychological hypothesis (that of the maximum 7 of pleasure with the minimum of effort), whence all economic truths are deduced, coincides or fails to coincide with the motives which actually determine men's actions, is a question which in nowise detracts from the accuracy of truths deduced therefrom."

In point of method there is one great difference between the economic and the natural sciences ; in economics it is very difficult and often impossible to employ experiment, and therefore hypotheses may remain in suspense for an indefinitely long period, for want of any suitable means of verification. The chemist, the physicist, and even the biologist, though the last experiences greater difficulties, can always place the fact which they wish to study under certain artificially determined conditions which they can vary at will.

For instance, in order to study the respiration of an animal, they can place it under the bell-jar of a pneumatic machine, and alter the pressure of the air according to their requirements. This power is never possible to the economist, even though he be joined by a lawgiver or an omnipotent despot. In social matters we are obliged to study facts as they are presented to us, without being able to isolate them from the web of connected facts in which they are implicated. We cannot put a country under a bell-jar; and even if we could, that would not be enough to enable us to draw any certain conclusions.

Let us suppose that in order to study the effects produced by free trade, we could take two countries, and subject one to an absolute regime of free trade, the other to a protectionist system ; and find, at the end of ten years, that the former had greatly increased in wealth, whereas the latter had become ruined. No doubt this would be valuable information for us to gain ; but still, even under the extraordinarily favorable, and moreover, altogether ' imaginary, circumstances that I have supposed, the experiment would not be a decisive one. For the various destinies of different countries can be explained by far other causes than differences in their commercial systems "^ to wit : differences in environment, in race, in legislation, in individual energy.

Take the two Australian colonies of New South Wales and of Victoria ; though both of them are of the same race and in the same environment, the first is free-trading, the second is protectionist. Although this experiment has already lasted for a long time, are we to think that the question of free trade has yet been solved? By no means ! Adhuc sub judice lis est.

Instead, therefore, of being able to make direct social experiments, we are obliged to wait for what chance may supply us with in certain particular circumstances, such as the application of a new method of legislation, the foundation of a socialist community, a pathological crisis in an existing society ; and even then this indirect mode of experimentation would but very rarely lead us to any definite conclusions.