Notes on political economy

Front matter

aass_h£Bi^

Book '^2>

NOTES

CHAPTER I.— Rent, ----... 19 II. — Wages and Profits, - 1 - - 39

III. — Machinery, - . _ . _ gg

IV. — Value and Price, - - - _ -63

VI — Exchange, - - . . , - 96

VII. — Commerce, - - - . - 103

VIII. — Taxation, - - - . _ 1^5

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Preface

THE great abilities which have been brought to the investigation of the laws relating to the production, distribution and consumpiion of wealth, would seem to render any thing further on the subject unnecessary. But we have seen system succeed to system both in the practice of statesmen and in the works of the most profound and inventive minds, and the theorists are not more reconciled among themselves as to the true principles of public wealth, than are those who direct the destinies of states. This fact proves that truth makes its way much more slowly in those sciences that depend for their improvement on the true import and proper application of ivords than in those wherein precision of language can be more completely attained. The moral stand in contrast to the mathematical and physical sciences m this respect. Political Econo7ny, of all subjects of analysis, seems peculiarly open to this disadvantage.

The spirit of system, it must be confessed, has also

been among the most powerful of those circumstances

which have caused endless disputes betiveen those in

whom the love of paradox and disputation has super- 1 ii PREFACE.

seded a regard for truth and affection for mankind. Tlie influence of paradox on the strongest minds is, indeed^ every way remarkable. We know that the sect of the Economists exerted no small power over the opinions of many of their most enlightened contemporaries. Their minds were captivated hy the novelty of an ingenious hypothesis — it has been long supplanted by others not less ingenious. In our day the love of novelty and refinement has given birth to one that is equally specious and captivating from the apparent simplicity of its results, or from the genendization it seems to offer of the complicated phenomena it professes to explain. It is however destined to perish in its turn. We allude to the theory of Mr. Ricardo as developed in his work ' On the Principles of Political Economy and Taxation.'^'' It is remarkable, in this instance also, that some of the most powerful ifitellects that were ever devoted to the investigation of such subjects have been seduced into admiration of this system, which exhibits in its developement specimens of rare analytical talents not only in the author, but his two principal supporters. It is only necessary to name the names of Mill and M'Culloch in England, to be convinced of this fact. They are destined to exterid the reputation of this theory by the clearness of their style, and their admirable powers of illustration,

A condensed view of this theory* has been lately presented to the American public by one of our public

* Originalli/ published as an article in the Edinburgh Supplement to the Encydopedia Britannica. Mr. M'Culloch, who has enriched this ivoric with 7nany valuahie dissertatio7is on the science of FoHtieal Economy ■, is ike author of this article.

PREFACE. iii

Professors. Mr. M'Vickar, of Columbia College, New- York, has edited this abridgment, and added to the text some valuable notes. Now it is the apprehension of the effect of that work (ivhich is as far as it goes well calculated for a popular manual) that has induced the author of the following sheets to publish the results of some investigations on the subject which were originally intended for his private use. They are given to the Press with every respect for the talents of Mr. Ricardo and those of his distinguished supporters. We are in fact well convinced that if the principles of this theory (ivhich are founded on circumstances completely contrasted to those that are peculiar to our own country) should be adopted as texts for lectures in our Colleges and Universities, it will greatly retard the progress of this important science among us.

In this country ive feel assured that the laws which regulate Profits, Wages and Rent can be more successfully investigated than in the old world. The mind is naturally prone to argue from the fact to the right,* and this tendency has shown itself in a remarkable manner, in all the systems framed by European Economists. True theory in investigations of this nature is founded on a comprehensive examination of phenomena as they are presented in a natural state of the social system. It is reasonable to suppose, therefore, that a country whose institutions and laws have done less to derange the natural order of things than where a vicious social organization has resulted either from military violence or a selfish

* This remark is made by Mr. Sat in the Introduction to his Treatise on Political Economy.

iv PREFACE.

policy i will present the fairest field for analysis and speculation into the causes of wealth. The results of such analysis should constitute the principles for the guidance of the statesmen of the new world. Systems framed by philosophers who have no influence in public affairs, generally perish with their authors ; those devised by what are called practical statesmen survive in the policy of countries long after the names of their framers have been forgotten or have been consigned to oblivion. The Economical theory led to some important changes of public policy to the benefit of the agriculture and internal trade of France ; but the theory being only partially true, soon perished. The Mercantile system, as it has been called, originating in the interested views of merchants and manufacturers, is likely long to influence the counsels of statesmen to the injury of the interests of mankind. Founded on the selfish and contracted principle, that the gain of one country in trade is the loss of some other, it is not only less just in its origin, but far less beneficent in its practical results than would have followed from the adoption of that of the Economists. It follows that we ought not to be implicitly guided by the results of investigations pursued by European writers into the sources of wealth without an examination of the circumstances on which their systems have been framed.

Introduction

ALL theories of Political Economy that do not admit the agency of Nature concurrently with the labour and ingenuity of Man in the creation of value must necessarily lead to erroneous conclusions. When we speak of the agency of Nature in production, we mean to use the expression in its most comprehensive signification. The processes of fermentation and decomposition carried on beneath the surface of the earth, aid the labours of the husbandman as eflfectually as the wind, the water and the elasticity of steam do those of the mariner, or as fire and the various properties of the atmosphere do those of the manufacturer. The resources of chemistry and mechanical philosophy enable man hourly to multiply his enjoyments by enlarging his dominion over nature. Every new modification of matter that fits or prepares it for consumption, is a fresh instance of the improvement of either skill or science in their connexion with the arts that minister to our wants or our enjoyments. In this respect there is no difference between Agriculture, Commerce and Manufactures. A new manure that increases the productive powers of the soil consists merely in a better combination of the properties or elementary parts of matter, according to an improved understanding of the laws of nature or her agency in production. In this view the earth itself, independently of the manure employed upon it, is a powerful natural agent, which assists the labours of the cultivator equally with the air, the rain and the sun. The balance of profit or advantage between different employments depends on the admission of the principle that Nature concurs with Man in each of the arts of life, either conferring or giving additional value to objects of use and exchange. The Economists inferred that as Landlords throughout Europe derived a large share of the produce of the soil, in the form of rent, that rent constituted a net surplus, after the costs of cultivation were defrayed, peculiar to Agriculture. The conclusion was natural and easy from these premises, that this employment was more productive and profitable than either Commerce or Manufactures. The Economists went, however, further. Tliey insisted that Agriculture was the only profitable employment, thus allowing an influence to the productive powers of Nature in giving value to the produce of the land which is denied to her agency in the fashioning of that produce for the uses of society, and transporting it from where it is wanted less to where it is wanted more.

It is remarkable that Dr. Smith, after employing a large portion of his valuable work in refuting the theory of the Economists, should have arrived at nearly the same conclusion. He never could have given the preference to the cultivation of the land as the source of higher relative profit unless the agency of Nature in Commerce and Manufactures had been overlooked by him. The ingenious founder of the ne school has adopted an error the reverse of Dr. Smith's. Whilst the latter attributed nothing to the agency of Nature in Manufactures and Commerce, Mr. RiCARDO leads the mind, by his reasoning, to the irresistable inference that she does nothing for man, aided by his science and skill, in Agriculture. I'he system of the latter conducts us finally, therefore, to the conclusion that Commerce and Manufactures are more beneficial employments than the cultivanon of the land. It was natural in this system that labour should have had a disproportionate influence attributed to it in the formation of value. It is not quite so evident, however, why it should have been made the ow/?/ element, and, as a consequence, the regulator of value. There is no period of society in which capital does not constitute one of its ingredients. The materials of the weapons of the savage possess value in their rude state-, however small, and which do not cease to be a component part of the value which the weapon acquires after being fashioned for the purposes intended. Nor is it different after capital has been accumulated in every variety of form for the uses of civilized society. It is under all shapes, merely another name for those natural substances, which as soon as they are appropriated, and there is a demand for them, become of value, and receive an increase of value with every new modification they undergo from the combined action of labour and natural agents on them. The notion, therefore, that capital is nothing but accumulated labour, is as erroneous as the idea that labour is the sole element and only regulator of value ; or, that the agency of Nature does not add to value in exchange, which, in fact, is what Mr. Ricardo has positively asserted.* Natural agents in themselves possess only value in use ; they cannot be appropriated, but possession alone cannot confer exchangeable value on any object whatever. Natural agents possess the power of adding to value, and no more can be said of either labour or capital until there is a demand for them. Of what value would be the industry of man if the substances it is instrumental in modifying, with the assistance of Nature, for the purposes of society, could not be exchanged for other objects which have undergone a similar modification ? Of what value would land as well as labour be, if there was no market for the produce they created ? Natural agents,

" Priiielplos of Political Economy and Taxation, first American Edition, .•hap. ]P. p. 293.

and natural substances, which take the name of capital, are, therefore, as much as labour among the elements of value, and every system of Political Economy that omits either of these constituents must be imperfect. Mr. RicARDO, thus setting out from the principle, that labour is the sole element and regulator of value, and taking for granted that the level of profit between Agriculture and other employments is still maintained, notwithstanding the increase of expense in raising raw produce, was bound to conclude, assuming population at the same time to augment, that there was a proportional advance in the price of the products of the land, which made an addition to Rent, Such a system leads to theoretical results, precisely similar to what occurs in fact, from laws which confer advantages on some classes of society to the injury of other classes. Thus, when labour is made the sole constituent and regulator of value, it is impossible to avoid the conclusion that, as a greater quantity of it, or which is the same thing, an increased sum in wages, is made necessary to an augmentation of raw produce, which leads, finally, to an advance of rent, the balance of advantage must be on the side of Agriculture compared with other employments. Rent will, on such a system, be higher than it ought naturally to be, and every addition made to it, must be at the expense of the other classes of society. Now, exactly the same result is produced when some advantage is given by law^ to one portion of the community at the expense tf)

of some other portion, which must destroy the equality of benefit between different employments.

On this theory it is then assumed, that profits will continue on a level, on the supposition that a given quantity of capital employed in Agriculture necessarily yields a smellier return of produce, or its value, than the same quanthy if employed in either Commerce or Manufactures, or, what is equivalent to this assertion, that, from a Law of Nature^ raw products are raised at a greater comparative expense than is necessary to fabricate manufactured produce. The rate of Agricultural profit must, then, on this system, regulate the , rate of profit in both Commerce and Manufactures. But it is impossible, if this doctrine be admitted with all its consequences, to avoid the following results : —

First, That Agriculture, including the amount which the Landlord is supposed on this system to receive, is the most beneficial of all employments.

Secondly, That Rent must absorb the gains of the Capitalist, beyond a certain amount, as fast as they are made ; and thus limit the increase of both wages and profits; and

Thirdly, That population must come to a stop, and capital cease to accumulate at no very distant period.

It is impossible, however, to admit that profits will continue on a level, on the supposition that raw produce is, from the nature of things, raised at a comparatively greater expense than that which is manufactured, ivhilst the population at the same time increases.

If we suppose population to come to a stop, profits will fall to a level ; but if the condition of an increase of population be an additional expense in raising food to support it, without a proportionate return in its quantity, the level of profit between different employments is necessarily destroyed. There will, on such a supposition, be a lower rate of profit in Agriculture than in Commerce and Manufactures. This is however precisely the same result as that to which the mercantile system in fact led. It encouraged by law, Manufactures and Commerce to the injury of Agriculture, and by the inequality of profit between the two former employments and the latter, prevented the formation of capital on the land. The new theory would seem therefore to be the revival in part of thai system in another form.

Mr. RicARDO, pursuing this new theory to one of its more immediate results, has been induced to say, that as raw produce is raised with increased difficulty, and the food of the labourer rises, more must be expended on wages, and that this increase of wages is a deduction from profit.* The same principle has compelled him to assert, also, that there is no advantage to a state from a large population,! for if wages encroach on profits as the necessity increases of cultivating inferior soils, or, if what is gained by the labourer is lost to the capitalist, and vice versa, the labouring classes can

* Principles of Political Economy and Taxation, chap. 5, p. 86 t Idem, chap. 24, pp. 374, 375.

contribute nothing to the real wealth of society — they merely replace the necessary expenses of their maintenance. On such a supposition, the support of a large population, if a smaller will produce as great a value in amount, must be at the expense of the net revenue of all other classes except labourers, and the aggregate riches of society will remain without either increase or diminution. But in thus assuming that the labouring classes do not reproduce a greater value than they consume, the radical error of the Economists, which vitiated their whole system, is revived.* Or taking for granted that there is the same amount of productive power with a smaller as with a larger number of producers, it f(jllows that production is not co-extensive with consumption, and the natural balance between them is thence destroyed.

It is from the same principle that saving in expenditure is made identical in its effects with an increase of productive power on the riches of society,! thus confounding the increase of individual with that of general wealth.

It flows from the same principle that capital is said by Mr. Ricardo to augment as well from increased revenue as diminished expenditure, J meaning by increased revenue, not that addition to profit derived from enlarged powers of production, but that which is gained from the rise in the price of one or more commodities,

• The Economists made an exception, however, with regard to Agricultural labours.

t Principles of Political Economy and Taxation, chap. 6, p. 111. t Idem. chap. 6; pp. 110. 111.

which must be attended by a proportionate fall in others, thus again neglecting to distinguish a partial from a general increase of wealth, or making the benefit of one class of society to the correspondent injury of some other, the criterion of a general augmentation of rirhes. What is this but alleging that that which is true under some circumstances only, is true under all, making price and value in exchange identical at all times, when, in fact, they are so only when some derangement has occurred in the due proportion between demand and supply. Thus if they are examined, in almost every one of the series of deductions drawn by Mr. Kicardo, will be seen the influence of the principle that labour is the sole constituent and regulator of value.

Mr. Malthus, in his last work entitled " Principles of Political Economy," sets out from the identical principle of Rent from which Mr. Ricardo has deduced this series of results, and arrives nearly at the same ultimate conclusion, but by a different process. He also omits all consideration of the influence of skill and science in turning the powers of Nature to a more productive account in Agriculture, or, in other words, in augmenting the quantity of raw produce with a proportionally smaller expense ; and he infers a fall of profit also, but from a totally different cause to that assigned by Mr. Ricardo for this effect. It is the increase of capital and not difficulty of production to which Mr. Malthus attributes the fall of profit. It was natural, on the supposition that the competition of capitalists reduces the rate of profit, that Mr. Mal- THUS should dread the too rapid accumulation of capital, more especially from the effects he had witnessed for the last forty years in Great Britain of an increase in the powers of production apparently too great for consumption. Dr. Smith, the author of this principle, that competition influences the rate of profit, did not draw any such inference from it ; for the increase in his day of productive power was much more gradual ; whilst Mr. Ricardo, by allowing more than full effect to the opposite principle, seems to have had an apprehension that finally it would become too strong for the principle of im|)rovement. Thus it has happened that economy in expenditure, or rather the privation of enjoyment, is made necessary to the accumulation of wealth in the system of Mr. Ricardo, whilst Mr. Malthus is the advocate of expenditure, and seems afraid that production will so far outrun consumption that the world will have more wealth that it can well employ. It is for this reason that a body of unproductive consumers is said by him to be necessary to a state.*

^ How could Mr, Malthus contend, as he has done, in his last work, for the necessity of unproductive consumers to maintain the balance between produce and consumption, when the eflect of every increase of unproductive consumption is to destroy such balance How could he say that the augmentation of wealth rests upon the proper distribution of produce, and at the same time contend that such augmentation also depends on maintaining a body of unproductive consumers ? effects absolutely incompatible. The discussions whicli

Thus, however widely they may diverge in their conclusions, are the two leading Economists of the age agreed in the primary principle of the new theory of Rent, to wit, that the necessity of resorting to inferior soils to raise the additional food to support an increasing population, is attended with an augmentation of expense without a proportionate return in the quantity of agricultural produce. We have endeavoured to show that this principle is deduced from overlooking the effect of science and skill in procuring the more effectual co-operation of Nature in Agriculture as in Commerce and Manufactures.

It is true that the cultivation of soils naturally very inferior may be forced, and the additional produce raised at such an increased expense as by augmenting its price must elevate Rent ; but this is not necessarily followed by a less return compared with the expendi-

have, in fact, taken place as to the proper limit to individual expenditure and accumulation, can never lead to any practical result, if they have not been Idle. The self interest of individuals fixes the limit here as in every other case where the arrangements of society do not interfere to disturb the regular action of this principle and weaken its natural influence. These arrangements give sometimes too great a stimulus to the wish or propensity to spend in individuals, and by generating habits of extravagance, which sometimes endure for a considerable period, destroy the natural balance between production in the gross and expenditure. If Economists would confine themselves to an inquiry into the causes which produce this disturbance, they would confer a greater value on their labours in this branch of the science, than by discussingthe question in the abstract, whether accumulation or expenditure contributes most to the increase of the wealth of society. Among those circumstances which give too great a stimulus to individual consumption, it will be found} perhaps, that the paper system has been the most efficient and nnivoTsal ture. An unusual stimulus applied to the land, combined with restrictions on the foreign trade in corn, may produce effects very similar on Rent to what follows in a more natural and wholesome state of things. It therefore does not result that in any instance of a resort to naturally inferior soils, to support an additional population, the increased lood can be obtained in no other way than by an increased expenditure without a proportionate return. But in the regular progress of wealth and population there is always room for the employment of fresh capital on the land with increasing profit, because with every addition to the quantity and consequent fall of the price of produce, whether rude or manufactured, the demand for it is extended. The increased return is the fund which pays not only increased profit, but increased w ages.

Is it not evident, unless this view be admitted, that a near limit, as we have before remarked, must be placed to the increase of both capital and population ? for if land of a still decreasing fertility, which lessens the proportional quantity of food produced, is successively taken into cultivation, as profits will be reduced with every step in this progress, the funds for the maintenance of labour must be diminished in proportion. The increase of population and consequent augmented demand for food are, therefore, evidently assumed in this theory. Its authors were compelled to raise up the additional population to give the in-

INTRODITCTION. 17

creased price of raw produce, as a motive to extend cultivation to inferior soils.

Thus we cannot but perceive that on every additional outlay the returns of capital laid out on the land must be augmented, if the skill and ingenuity of cultivators with the resources of science are sufficient to overcome the failing powers of the soil.* The proof that they are so is to be found in the augmentation of population whilst fresh capital is continually applied to the land. During the continuance of the last general war in Europe, the quantity of inferior land taken into cultivation in Great Britain was very great, and the effect on profits must have been disastrous, according to the new theory, unless it had been counteracted

* It is the constant end of improvements in the science and art of Agriculture to equalize the relative disadvantages of different soils and situations. The resources of Agricultural Chemistry have not yet afforded the principles by which this can be completely effected ; but who is able to say that a more perfect analysis may not instruct us in the mode by which the processes of Nature may be more completely imitated ? Who can place the limit to discovery and skill in this branch of Art any more than to improvements in Mechanical Philosophy and the application of its inventions, in other departments o industry, to the multiplication of the conveniences and enjoyments of life ? Can any one pronounce that fallows may not be superseded by, a more economical and less tedious method ? or that a more complete itnowledge of the Laws of Chemistry in their operation on soils, may not enable us so to combine the properties of matter, in the preparation of manures, as to save the necessity of alternate crops ? If this should be finally established, what a splendid triumph would be afforded to the science of Agriculture? In the application of the proper methods of irrigation and draining, according to the diversity of soils and situations, what a vast field is yet open to improvement ! Not to speak of the Machinery used on the land, that may enable the Agriculturist to increase the quantity of his produce at a much smaller comparative expense-

.3 by an opposite principle of superior efficacy. This principle was, of course, as we have already remarked, the improvements in Agriculture, which prevented the fall of profits. The population went on increasing, and was supported by a constantly increasing fund, to wit, constantly increasing revenue. But it is ne-- cessary to subject this new theory of Rent to a more detailed examination.

If OTES

ON

POLITICAL ECONOMY.

CHAPTER I.

RENT.

THE rent of land has been variously defined by Mr. RicARDO in different parts of his work on the Principles of Political Economy and Taxation. It is defined, first, to be " that portion of the produce of the earth, which is paid to the Landlord for the use of the original and indestructible powers of the soil."* Rent, according to this definition, is made to depend on natural fertility. But the definition given of Rent by Mr. Malthus, to wit, that " excess of price above the costs of production at which raw produce sells in the market," is sanctioned by Mr. RicARDO.f This definition is, however, essentially different from the other, and confounds that Rent " which is paid for the use of the original and indestructible powers of

* Principles of Political Economy and Taxation, chap. 2, p. 35. t Idem, chap. 29, p. 423.

20 notl:s on

the soil," with that paid in consequence of the ad- A'ance in (he price of raw |)rodiice from restrictions on the trade in corn, and the monopoly which in some conntries is connected with the possession of land.

The origin of rent is described in the following-'inanner by Mr. Ricardo. " It is then only becanse land is of dilfereiit qualities with respect to its productive powers, and because in the progress of population, land, of an inferior quality, or less advantageously situated, is called into cultivation, that Rent is ever paid for the use of it.-'* Kent is accounted for in this description from relative fertility. But relative fertility, in this theory, not only accounts for rent, or is meant to be descriptive of its origin.f but 'n$ j)ro~ grcs!^ and amount arc made to depend on the same

* Principles of Political Economy and Tarnation, chap 2, p, 38.

t Mr. M.\i.THUs deliues vent ns we have .stated above (vido Principles of Political Economy, considered with a % iow to tlioir practical application, chaji 3, p- 10i>) to be ■■•" the excess of price above the costs at which law produce sells in the market ;'' Init his reasoning^' on this subject mainly refer to the other definition "iven by Mr. Kjc.akoo, although not Jbrmally stated, to wit, the absoluU fertility of laud. Mi'. M.\i.Tnrs" staieineiit of the origin of rent is, however, less consistent than that given by JNlr. Hicariio. ns he accounts for it from both absolute and illative fertility. " The causes t,he observes, chap. 3. p. ilO^ of the excess of price of raw produce above the costs of production, may be stated to the three —