The elements of political economy

Author's Preface

In this elementary treatise, designed as a manual of instruction, I deviate from time to time from the course commonly followed, because, in my view, the object of Political Economy is not that ordinarily indicated. What is of importance, as it seems to me, is the conduct of individuals and of states, with regard to the production and employment of wealth — that is to say, the moral and political side of our science. In manuals where everything has to be condensed into a few pages, writers often confine themselves to the definitions, and to the brief summary of a few general laws. Reduced to this, political economy presents little that is useful.

I have endeavoured to connect my subject closely with those of the other branches of study vi Author's Preface.

dealing with hurnau life; that is to say, with philosophy, moral science, the traditions of the past, history and geography. Geography describes the positions of nations, and history relates their annals. No advantage can be gained from the lessons which either offers without the aid of political economy. At the present day it is allowed that the most important part of history is that which traces the progress of humanity in comfort and liberty. To understand this advance from prehistoric barbarism to the prodigious development of wealth which marks our own epoch, a knowledge of economy is indispensable.

In order to show more clearly the close connection which exists between history and political economy, I have not hesitated to multiply quotations from established writers. To the enunciation of each principle I have added an example, a fact, a maxim, hoping that the volume thus enlarged might yet seem all the shorter, through the attention being better sustained.

Some chapters, such as those which deal with socialism, with credit, with commercial crises or

with population, will seem perhaps to treat the questions in greater detail than is needed in an elementary treatise. It should not, however, be forgotten that nowadays the young man, on leaving his school or college, finds himself at once beset with these important problems. The social question is the subject of every day discussion ; as to credit, we all resort to it ; crises threaten our property at every instant. The question of population is that on which the future of our country depends.

As citizens of a free country we need the training of men. From our earliest years the state claims our attention ; even in childhood political economy ought to make us see that freedom leads nations to prosperity, while despotism leads them to decay.

Need more be urged to prove the necessity of spreading economic knowledge ? The greater part of the evils from which societies suffer spring from their ignorance of this subject. National rivalries, restrictions on trade, wars of tariffs, improvidence of the labouring classes, antagonism between workmen and employers, over-speculation, illdirected charity, excessive and ill-assessed taxes.

viii AutJiors Preface.

unproductive expenditure on the part of nations or towns — are all so many causes of misery springing from economic errors.

Natural science, which, is so highly esteemed at the present day, shows man, like other animate beings, subservient to his individual interest. While maintaining that man, a free moral agent, may and ought to listen to the voice of duty, and sacrifice himself for his family, for his country and for mankind, one must recognise the fact that the habitual motive of his actions is the pursuit of what is useful to him. If this be so, is not the science indispensable which shows in what utility consists, and how men united in society may best attain it ?

TEANSLATOE'S PEEFACE.

This translatiou of M. de Laveleye's Les EUments de VEconomie Politique was undertaken in the hope that the work in its English dress might be useful to students as a supplement to some of the many handbooks already in existence. In English treatises political economy still retains its character of the "dismal science." In Les Elements the subject seemed humanised by a more liberal and broader treatment, and this is the reason of the present translation being offered to the reader.

As the difference in tone is thus the distinctive feature of M. de Laveleye's work, the fewest possible alterations have been made in this edition. A few quotations have been omitted, and here and there an Eoglish illustration substituted for

Translator's Preface.

a French one. It may be added that the whole of the translation has had the benefit of the author's revision.

Before the present translator began his task a few chapters of Book I. had been already Englished by Mr. G. L. Marriott, the author of the able version of M. de Laveleye's work on Primitive Property. The translator desires to acknowledge Mr. Marriott's kindness in handing him over his translation of these chapters when prevented by other engagements from continuing his version.

INTEODUCTORY NOTE.

No APOLOGY is needed for introducing to American readers the work of so distinguished an author as Professor Layeleye. A large number of publications, coyering a remarkably wide range of subjects, have made his name familiar to the reading public of ciyilized countries. Professor Layeleye has been an actiye literary worker for forty years ; and in the course of his career he has thrown light on some of the most important problems of literature, history, and social science. In the field of literature, ho published, in his early years, an interesting book on the language and literature of Proyence ; and has written translations of the Nibelungen-lied and the Edda. In history, he has published a yolume on the Prankish Kings, and has made a number of contributions to the recent history of Germany, with especial

reference to the eyents of 1866. Chiefly historical,

xi xii Introductory Note.

but with, an important bearing on social and economic questions, is the well-known work on Primitive Property, which has been translated into English, and has done more, perhaps, than any other single work, to extend the reputation of its author. But it is in the field of social and economic science that his contributions to knowledge have been of most importance. He has published numerous books and articles on the forms of government in modern societies, on the relations of church and state, on several branches of international law, on education, on economic topics, and on the political questions of his own country and of foreign countries. Many of his publications appeared first in the columns of periodicals, notably in the Revue de Deux Mondes, to which he has been for many years an active contributor. In recent years he has also made contributions to English periodicals. The ease and grace of his style, and the clearness of his exposition, have brought his writings before a large circle of readers ; and their general soundness and impartiality have made them of great weight with competent judges. Professor Laveleye was born in 1822, and has been since 1864 professor of political economy at the University of Liege.

Introductory Note, xiii

On political economy the more important works of Professor Layeleye have been : an essay on the Eural Economy of Belgium (1863), and a similar essay on the Eural Economy of Holland (1864) ; the Money Market during the last fifty years (1865) ; the volume on Primitiye Property, already referred to (1874) ; Contemporary Socialism (1881) ; and the present Elements of Political Economy, published in Erench in 1882. A large number of articles in reyiews and periodicals, many of them of permanent importance, haye also appeared from his pen. Professor Layeleye's economic yiews are in strong sympathy with those who declare themselyes to have broken loose from what may be called the classic system, as built up in the works of Adam Smith, Malthus, Kicardo, and the younger Mill. At the same time, he by no means goes as far as those writers, chiefly German, who declare that the classic system is entirely superseded. His position is rather that of the more moderate German writers y/ho protest against the hard and fast lines of Eicardo's system, and especially against the dogmatic exposition of Eicardo's system which has been common with some of his followers ; but who neyertheless retain, with more or less qualixiv Introductory Note.

fication and explanation, the essential doctrines of the great English thinker. In the presentation of economic principles by these writers, the qualifications and explanations, which are undoubtedly necessary to the correct statement of the principles, sometimes OYcrshadow the latter, and detract from their incisiveness. This fault may perhaps be found with the present work. The edge may be said to be taken off the great principles by the qualifications and exceptions with which they are stated. But surely this method of presenting the subject is preferable to the bald, unqualified, and scientifically inexact statements which are common in many English elementary books. And, after all, the diyergence of this moderate school from the classic system is more in spirit than in substance. The spirit of the classic writers was, for instance, strongly against goyernment interference in industry. Professor Layeleye, like most German writers, and unlike most French writers, is not a decided adherent of the laissez faire principle. Especially in the relations of the state to the working classes, he has been willing to disregard that principle ; and his keen sympathy with these classes has sometimes perhaps carried him too far in his yiews of the

Introductory Note, xv

duty of the state, and of the possible results to be achieyed by legislation. Again, Professor Layeleye insists on a more concrete treatment of economic subjects than was common with Ricardo and his followers. He belieyes, as the reader will obserye from the chapter in this book on the method of inyestigation, that economic laws are to be ascertained by induction, — by obseryation of the facts presented by history, physical science, and statistics. Some results of this belief are to be found in the frequent historical references in the present yolume. Whateyer may be the difference of opinion among economists on the question of the proper method in their subject, no one will deny that this greater attention to the actual facts of the past and of the present is an adyantage.

On some questions of detail, and on some of the unsolyed problems of political economy, Professor Layeleye differs, ineyitably, from other writers ; and his opinions on such questions, though of weight, cannot be accepted as authoritatiye. But in an elementary work like the present, questions of this kind are but little touched on. Such a work must necessarily be occupied chiefly with a presentation of the great xvi Introductory Note,

principles of the science. On these, competent thinkers are agreed ; and the fundamental principles of the production and consumption of wealth, of its distribution into wages, interest, and rent, of population, of yalue and price, of money and credit, of international trade, and of taxation, as laid down in these elements, cannot be disputed.

Some doubtful points are necessarily touched on ; and it may be well to point out cases in which the propositions advanced in this yolume are to be accepted with qualification. The wages question is still one of the disputed fields of political economy. Professor Laveleye's explanation of the causes that goyern the rate of wages, which is the one usually giyen in German treatises of the present time, is doubtless true as far as it goes ; but it hardly giyes a complete solution of that difficult problem.

Professor Layeleye, it is well known, has been an earnest adyocate of international bi-metallism ; and in connection with that question he states, probably too strongly, the objections against a single gold standard, and the reasons in fayor of a double standard.

It has already been said that the strong humanitarian spirit of our author sometimes carries him too

Introductory Note, xvii

far ; an instance may be found in the somewliat sweeping statement, on page 96, that it is the duty of the public to indemnify workmen who are thrown out of employment by the introduction of machinery. Again, the connection between the abundance or scarcity of money, and the rate of interest, is perhaps t^ too broadly stated on page 197. But these statements, and others in which economic critics may find flaws, turn yery largely on questions of degree or of emphasis, on which there is a natural divergence of oj)inions, and on which, moreoyer. Professor Layeleye does not stand alone. In the main, the principles laid down are those accepted by all economists of weight. The clearness and attractiyeness of the author's style make his presentation of them especially valuable for those who wish to obtain an elementary knowledge of political economy.

In the supplementary chapter some of the questions which are of great practical importance at the present time in the United States are taken up, and a brief statement is made of the economic principles which apply to them. On practical questions, difference of opinion is inevitable ; and there may be those who will object to some of the conclusions reached in this xviii Introductory Note.

chapter, especially in regard to the subject of money. The writer has endeavoured to state only such conclusions as are warranted by reason and experience.

F. W. Taussig.

Book I. Preliminary Remarks

CHAPTEE, I.

PAGE

The Meaning of Economic Science 1

§ 1. Definition and object of Political Economy .... 1 § 2. What Political Economy is not . 3

Chapter II

The Connection between Political Economy and other Moral and Political Sciences • 5

§ 1. Connection between Political Economy and Philosophy or Religion 5

§ 2. Connection between Political Economy and Ethics . 7 § 3. Connection between Political Economy and Law . 9 § 4. Connection between Political Economy and Politics 10 § 5. Connection between Political Economy and International Law H

§ 6. Connection between Political Economy and History 12 § 7. Connection between Political Economy, Geography

and Statistics 1^

§ 8. Laws of Nature in Political Economy 15

XX Contents.

CHAPTEE III.

PAGE

"Wealth 16

§ 1. The meaning of 'Wealth or Eiches 16

§ 2. Wants 18

§ 3. False Wants and False Weiilth 20

CHAPTEE IV.

Value 23

§ 1. The meaning of Value 23

§ 2. Value in Use and Value in Exchange 26

CHAPTEE V.

The Method of Investigation 27

CHAPTEE VI.

Division of Political Economy 29

BOOK 11.

TEE FACTORS OF PRODUCTION AND PRODUCTIVE LABOUR.

CHAPTEE r.

The Peodtjction of Wealth 30

§ 1. Definition of Production 30

§ 2. The three Factors of Production 31

CHAPTEE II.

Natuee • • ^2

Contents

XXI

Chapter III. Page

Labour 33

§ 1. Definition of Labour 33

§ 2. Productiveness of Lalsour 36

§ 3. Responsibility 37

§ 4. Influence of Nature on the Productiveness of Labour 39

§ 5. Influence of Race 41

§ 6. Influence of Philosophic and Religious Doctrines . 43

§ 7. Influence of the Moral Sentiments 49

§ 8. Influence of Justice 52

§ 9. Civil Laws, especially those as to Property, in

their Relation to the Productiveness of Labour . 55 § 10. Influence of Systems of Inheritance on the Productiveness of Labour 56

§ 11. Influence of Systems of Tenure 57

§ 12. Influence of Systems of Rewarding Labour .... 59

§ 13. Influence of Systems of Government 60

§ 14. Influence of Democracy 63

§ 15. Influence of Liberty 64

§ 16. Influence of Association and Co-operation .... QQ

§ 17. Influence of the Division of Labour ...... 67

§ 18. Influence of Science applied to Manufacture ... 74

§ 19. Influence of Instruction and Education 77

§ 20. Obstacles opposed by Ignorance to the Productiveness of Labour ••••• 79

CHAPTER IV. Gross Product, Net Product, and the Cost of Production 82

CHAPTER y.

Capital 83

§ 1. Different Kinds of Capital 83

§ 2. The Formation of Capital 87

§ 3. Machines 89 xxii Contents.

PAGE

§ 4. Does Machinery Diminish the Employment and

Wages of Workmen ? 93

§ 5. How Machinery may Compel Workmen to change

their Occupation 95

§ 6. How Machinery increases the Employment of

Workmen 96

Chapter VI

The Establishment of an Equilibrium between Production AND Consumption 98

CHAPTER VII. Classification of Useful Occupations 100

'' CHAPTER VIII.

Occupations which have to do with Men 101

CHAPTER IX. Occupations Concerned with Things 103

§ 1. Extractive Industries 103

§ 2. Agriculture 105

§ 3. The Progress of Agriculture 107

§ 4. Large and Small Farming 110

§*5. Manufacturing Industries Ill

§ 6. Necessary Conditions of Industries on a Large Scale 115

§ 7. Industries of Transport 116

§ 8. Should Roads be made, and Means of Transport

provided from Public Funds ? 118

§ 9. Commerce 119

CHAPTER V. Wages 1^

§ 1. Systems of Remuneration 141

§ 2. The Iron Law 143

§ 3. Causes of Different Rates of Wages .' 144

§ 4. Low Wages not a Cause of Cheap Work 146

§ 5. The Wages Fund I47

§ 6. Is there a Natural or Normal Wage ? 148

§ 7. The Causes which Fix the Rate of Wages .... 149

§ 8. Flas the Condition of the Working Classes improved ? 152

XXIY

Contents.

CHAPTEK YI.

PAGE

Means of Improving the Condition of Wage Earners , 153

§1. Charity 154

§ 2. Communism 154

§ 3. Nihilism 156

' § 4. Anarchy 157

§5. Collectivism and the Organisation of Labour . . . 158

§ 6. Co-operative Societies 159

§ 7. Emigration . 160

§8. Corporations and Trades Unions 160

§ 9. Coalitions and Strikes 161

§ 10. Increase of Capital and Diffusion of Property . . 163 § 11. The Eelation between the Rise of Wages and

the Increase of Population 164

CHAPTER VIII. Profit 169

§ 1. Meaning and Reason of Profit 169

§ 2. Is the Rate of Interest in Inverse Proportion to the

Rate of Wages ? 170

§3. Profit Tends to Diminish 171

CHAPTER IX. The Reward of Capital 171

§ 1. What Interest is 171

§ 2. Interest Tends to Diminish 173

§ 3. The Lawfulness of Interest, and the Laws Against

usury 175

§ 4. The Influence of the Abundance or Scarcity of

Money on the Rate of Interest 179

Contents. xxv

Part Ii.— The Circulation Of Wealth. Chapter I. Page

Exchange 180

§ 1. Barter 180

§ 2. Employment of Money : Sale and Purchase ... *181 § 3. Influence of Exchange on Prosperity 183

CHAPTER II.

Sale and Purchase 184

§ 2. Supply and Demand, and the Cost of Production . 185

§ 3. The Just Price 187

§ 4. Usefulness of Fairs and Exchanges 188

CHAPTER III.

Money 189

§ 1. Kature and Function of Money 189

§ 2. Different Kinds of Money 191

§3. Value of Money 193

§ 4. Is the Abundance of Money an Advantage ? . . . 195

§5. Monetary Systems 197

§ 6. Monometallism and Bimetallism 202

§ 7. The Laws of Gresham and Newton 203

§ 8. The Maintenance of Monetary Systems 204

CHAPTER IV.

Credit . 205

§ 1. "What Credit is 205

§ 2. The Advantages and Effects of Credit 206

§3. The Drawbacks of Credit 210

§ 4. The Instruments of Credit 211

§ 6. Fre3 Creation of Note-issuing Banks 222

I xxvi Contents.

CHAPTER V. -

PAGE

MoNETAKY, Commercial, and Industrial Crises .... 223

§ 1. Nature of Crises 223

§ 2. Periodical Recurrence of Crises 223

§ 3. Characteristics of Crises 224

' § 4. Causes of Commercial and Monetary Crises .... 227

§ 5. Means of Preventing and Remedying Crises . . . 228

§ 6. Industrial Crises 229

§ 7. Speculative Crises or Crashes 229

CHAPTER VI.

Free Trade and Protection 231

§ 1. Free Trade 231

§ 2. The Balance of Trade * . . 286

§ 3. The Oversight of Freetraders 238

§ 4. The System of Temporary Protection 239

§ 5. Reciprocity 240

§ 6. Commercial Treaties 241

CHAPTER IV. Taxation 264

§ 1. What is Taxation 264

§ 2. Rules as to the Imposition of Taxes 265

§ 3. Incidence of Taxation 268

§ 4. A Single Tax 269

§ 5. Direct and Indirect Taxation 269

§ 6. The Budget 270

SUPPLEMENTARY CHAPTER.

Economic Questions in the United States 275

§1. The Tariff and Wages 275

§ 2. The Present Phase of the Tariff Question 277

§ 3. The Internal Taxes 280

§ 4. The Money of the United States 280

§ 5. The Silver Question , 283 >

§ 6. American Shipping and the Navigation Laws ... 386

ELEMENTS OF POLITICAL ECONOMY.

Chapter I. The Meaning Of Economic Science

§ I. Definition and Object of Political Economy.

The term "political economy," first used by Aristotle in tbe second book of his (Econoniica, and then by Antoine de Montchretien, the author of a TraiU de VEconomie Politique, published at Rouen in 1615, comes from three Greek words : Oikos, house ; nomos, law ; and polis, city or state. It denotes, therefore, the law, or laws, which ought to direct the administration of property in the state, that is, in society. Such Wt in fact, the object of economic science.

B

Human beings have wants, and, wliea united in societies, observe customs or laws. To satisfy these wants, they have their intelKgence and their arms, which they employ in the production of useful objects. How should they be organised, or, in other terms, what laws should they adopt, in order to attain by their labour to the fullest and most rational satisfaction of their wants ? This is the problem of which political economy seeks the solution.

Political economy has to do with legislation. It seeks an ideal the same as moral science, law, or politics. Almost all the economical questions that come under discussion are questions of legislation — such as the reform of the laws relating to custom duties, of the land laws, of the laws on currency, of credit, of banking, companies, factory labour, railways, taxation, &c. The justice of these questions must be solved by the study of equity, their utility by the study of statistical and historical facts.

The father of political economy, Adam Smith, defined it perfectly when he said that it proposed two distinct objects : first, to put the people in the way of procuring for themselves an ample subsistence ; and, secondly, to furnish the state with a revenue sufficient for the public service.

The very name of Adam Smith's book. The Wealth of Nations, shows that the object is to determine what is conducive to the production of wealth, and what hinders such production. As has

Preliminary Remarhs.

been well said by Droz : " Political economy is a science whose object is to make comfort as general as possible." Bossuet, again, speaking of politics, said that " their true end is to make life easy and nations happy;" and such is also the aim of political economy.

The doctor ought to know the human body, to diagnose its ailments and prescribe remedies for them, as well as the course of life which will preserve health. This is precisely what the economist has to do for society. He must know minutely the mechanism of the social body, must point out those laws and customs which bring misery upon it, and describe the system most favourable to the creation of comfort by means of labour.

"'"^Political economy may therefore be defined as " the science which determines what laws men ought to adopt in order that they may, with the least possible exertion, procure the greatest abundance of things useful for the satisfaction of their wants; may distribute them justly, and consume them rationally."

§ 2. What Political Economy is not.

Political economy is commonly defined as "the science which describes the methods of production, distribution, and consumption of wealth." This definition is altogether inaccurate. The modes of producing wealth are described in industrial manuals or treatises on agriculture ; the mode of its distribu-

b2 tion is the subject of statistics; the account of its consumption the history of the daily life of the various nations.

Political economy is not an exact science, for it is concerned with the wants of man, which constantly vary, and with his actions, which are free. Neither strict definitions nor methods of mathematical deduction are applicable to it.

Political economy is not a physical science, for it does not deal with commodities considered in themselves, i.e., as material objects, but with the laws that assist the production of these commodities ; and these laws are relations of the moral order.

Nor yet is political economy a branch of the natural history of man, for it does not inquire how he arrives at producing what he consumes, but what the institutions are which allow of his doing this to the best advantage.

Again, it is not, as is so often asserted, " the science of labour." Descartes' idea of this latter science is this : " There is a practical science, by means of which, understanding the nature of force and the action of fire, water, air, the stars, the heavens, and all the bodies which surround us as clearly as we understand the various crafts of our artisans, we might in the same manner put these agents to all the uses for which they are adapted, and so make ourselves masters and owners of nature.*'

The science of labour is technology. Political economy has quite another object. It seeks to dis-

Preliminary Remarhs.

cover the laws, whether moral, religious, political, civil, or commercial, which are most favourable to the efficiency of labour. It does not teach us how to cultivate the soil, or to work mines, or to make bread. All this is strictly the science of labour.

Chapter II

THE CONNECTION BETWEEN POLITICAL ECONOMY AND OTHER MORAL AND POLITIC^AL SCIENCES.

Political economy is one branch of the group of sciences, the object of which is the study of human societies, and which are known in the present day by the name of Sociology.

§ I. Connection between Political Economy and Philosophy or Religion.

Political economy, regarding man as pursuing the useful, is subordinate to the sciences which regard man as pursuing the good and the true, that is to say, to religion or philosophy. These discuss what are the nature and destiny of man, and the use individuals or societies make of their time and of their property depends on the idea which they form of man's destiny. The doctrines which see in man nothing but a body, and in life nothing but an existence of a few moments, stolen from nothingness, will plunge societies into the exclusive pursuit of enjoyment. Asceticism, on the other hand, for which the body is only a source of sin, and life only a probation, will wish to suppress the satisfaction of the most essential wants, and will urge the individual to annihilate himself in the deserts of the Thebaid, on the pillar of the Stylite, or, in India, in the aspiration after the Nirvana.

Avoiding both these excesses, true philosophy teaches us that man ought to seek the full development of all his faculties : those of the mind first, because the intellectual life is the most essential, but those of the body as well, because it is the instrument of the soul. This object is indicated in the well known maxim of antiquity : Mens sana in corpore sano {Juvenal, Sat. xv., 1. 356). Hence it follows that while seeking the useful, which is its peculiar object, political economy should never forget that material wealth is a means and not an end — the condition of moral and intellectual progress, not the end of life. On the one hand one must not listen to asceticism which sacrifices the body, nor, on the other, to Sybaritism, which sacrifices everything to the body.

The economist should learn from the philosopher what are . the motives of human action, so as to regulate the order of society in such manner that men should be constantly induced to employ their time and their strength to the greatest use. The science of the motives which determine the will

Preliminary Remarhs.

ought accordingly to serve as basis for the science of the laws which govern the production of wealth.

§ 2. Connection between Political Economy and Ethics.

The connection between ethics and political economy is close.

"Ethics," says an eminent French philosopher, Francois Huet, " is the science of moral perfection and worth, just as economy is the science of material comfort and value." Ethics, in fact, determines what are our duties in relation to God, to our neighbours and to ourselves ; and these ideas of our duties ought to govern all the actions of economic life.

Ethics enjoins moderation in our needs, energy and conscientiousness in our work, fidelity to our engagements, thrift and prudence in the use of our income, and regard for justice in our relations with one another. There is not one of these laws that is not an essential rule in economy. Energy in labour insures abundant production; respect for justice, a fair distribution ; respect for engagements, abundant credit; the spirit of thrift leads to the creation of capital, and the moderation of desires to a good use of time and property.

In the ethical code you find the true root of economic laws. The good, the end of ethics, and the useful, the end of political economy, without being confounded, are inseparable; for the pursuit of the good is always favourable^ to the production of the useful. Hutcheson, the father of Scotch philosophy, inserted in his course of moral philosophy (1729-1747) some lessons on Economics. Adam Smith's book, The Wealth of Nations, regarded as the gospel of political economy, was only a fragment of a larger work treating of the Moral Sentime^its. In his treatise on ideology Destutt de Tracy discusses political economy as an application of the theory of will.

Political economy, in its turn, is, as Droz has said, the best aid to ethics, for it shows the advantages which result from the practice of virtue, and the evils which are the inevitable consequence of vice.