The elements of political economy

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Preface

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The following work contains, in substance, the Lectures on Political Economy which have been delivered, for some years past, to the Senior Class in Brown University.

When the Author's attention was first directed to the Science of Political Economy, he was struck with the simplicity of its principles, the extent of its generalizations, and the readiness with which its facts seemed capable of being brought into natural and methodical arrangement. At the same time, it appeared to him that the works on this subject, in general use, while they presented its doctrines truly, yet did not present them in such order as would be most likely to render them serviceable either to the general student, or to the practical merchant. This defect, for the sake of his pupils, he endeavored to supply. What he thus at first prepared for them, he now offers to the public. In how far he has succeeded, it must be left for others to decide.

His object has been to write a book, which any one who chooses may understand. He has, therefore, labored to express the general principles in the plainest manner possible, and

IV PREFACE.

to illustrate them by cases with which every person is familiar. In doing this, he is aware that he may at times have become chargeable with repetition. Sometimes, the same case may have been introduced a second time, for the sake of illustrating a different principle. At other times, the same fact may belong equally to two different divisions of the subject. In this latter case, he has introduced it the second time instead of referring the reader to what has been said before, because he believes that readers rarely take the trouble to make use of a marginal reference.

The principles of Political Economy are so closely analogous to those of Moral Philosophy, that almost every question in the one, may be argued on grounds belonging to the other. He has not, however, thought it proper, in general, to intermingle them, but has argued economical questions on merely economical grounds. For this reason, he has omitted many considerations which are frequently introduced into discussions on this subject. For instance, on the question of protecting duties, it is frequently urged, that, if a contract have been made by the government with the manufacturer, that contract is morally binding. This, it will be perceived, is a question of Ethics, and is simply the question, whether men are or are not morally bound to fulfil their contracts. With this question, Political Economy has nothing to do. Its only business is, to decide whether a given contract were or were not ivlse. This is the only ques*-

PREFACE.

tion, therefore, treated of in the discussion of this subject in the following work.

It may possibly be urged that the Author, having had no experience in mercantile business, should have left this subject to be treated of, by practical men. To this he has only to reply, that principles belong to all men ; that there seemed very little hope that this subject would be undertaken by men engaged in active business ; and that he could not perceive why his doing, as well as he was able, a work which seemed to be necessary, should prevent any one else from doing it as much better as he saw fit.

It has been to the Author a source of regret, that the course of discussion in the following pages, has unavoidably led him over ground which has frequently been the arena of political controversy. In all such cases, he has endeavored to state what seemed to him to be the truth, without fear, favor, or affection. He is conscious to himself of no bias towards any party whatever, and he thinks that he who will read the whole work, will be convinced that he has been influenced by none. While he cherishes for his fellow citizens who are engaged in political warfare, every feeling of personal respect, he desires it to be believed that he entertains for party itself, whether political, ecclesiastical or social, the opinion which " befits him as an American, a Christian, and a gentleman." *

* Col. Hutchinson, when speaking in the British Parliament, respecting the part which he had taken in the King's death.

VI PREFACE.

It having become necessary to print a third edition of the Elements of Political Economy, the Author has revised the work with all the attention of which he was capable. He hopes that it will be found that he has improved it, by omitting in a few cases what was superfluous, by rendering more intelligible what was obscure, and by adding in several places such suggestions as have arisen from an observation of the commercial condition of our country within the last two or three years. The Author also hopes that the present edition will appear in a better dress and at a lower price than those which have preceded it ; and thus be more deserving of the attention of those instructors who have used it as a text-book.

In the hope that these pages will be found subservient to the best interests of science, and that they may be of some practical utility to his fellow citizens, the Author respectfully submits them to the judgment of the public.

Brown University, May 1, 1840.

C ONTENT

AND

PLAN OF THE WORK

Change of Aggregate form, .... 45

General Conclusions, ..... 46

SECTION II. The different forms of Human Industry

Industry of Discovery, ..... 51

" " Invention, ..... 52 Operative Industry, .... .52

Of the Products of these various forms of Human Industry, 54

The Product of the Operative Laborer, . . 54

" " Discoverer, ... 55

Part II

THE MODES BY WHICH THE PRODUCTIVENESS OF HUMAN INDUSTRY MAY BE INCREASED.

SECTION I.

The use of Natural Agents.

Of Natural Agents, ....

Of Tools and Machines,

Of Natural Agents which create Momentum,

Of Animate Agents, ....

Gunpowder, .....

Wind,

Gravitating power of water,

The advantages of Inanimate over Animate Agents,

Of the Natural Agents by which Momentum is applied

Uses of these Agents, ....

SECTION II.

Of Division of Labor.

Principles on which the utility of Division of Labor depends,

SECTION II. Industry will be applied to Capital, as every man enjoys the

advantages of his Labor and Capital. As every man may gain all he can, . . . 114

As every man may use his own as he will, . . 119

SECTION II. General Doctrines of Exchange

Of the exchangeable value of Products, . . . 173

Exchange confers no new value, . . . 177

Conditions on which frequency of Exchange depends, . 181

Stagnation of Business, ..... 187

Effects of legislative enactments on Exchange, . 190

Internal Improvements, .... 193

Chapter Third

OF A CIRCULATION BY MEANS OF A PAPER CURRENCY. SECTION I.

Of the Nature of Banks in General.

Banks of Discount, or Loan, .... 247

Banks of Circulation, or Issue, .... 250

Of the sources of the profit of Banks, . . . 256

SECTION II.

Of the Utility of Banks.

As Institutions of Deposit, ..... 258 " " Loan, ..... 261

" " Circulation, .... 275

SECTION III.

Advantages and disadvantages of a Paper Circulation, . 278

SECTION IV.

Of the agency of Society, that is, Government, in respect to

a Paper Circulation, ..... 295

CONTENTS. XI

SECTION I. The General Principles of Wages

Of Simple Labor, ...... 309

Of Educated Labor, . . . . 309

Of the supply of Simple Labor, . . . . 316

Of the demand for Simple Labor, . . . 318

Labor in the Fine Arts, ..... 323

Section II

Of the Special Circumstances by which, irrespectively of Capital, the wages of labor are affected, . . . 329

Chapter Second. The Price Of Money, Or Interest

SECTION I.

Of the benefit of Capital to the Laborer, . . . 33^

SECTION II.

Of Risk and Convenience of Investment.

Of Convenience of Investment, . . . 342

Section III

Of the Rate of Interest, as affected by the use of Capital.

By the average profit of Capital, .... 344

" Ratio between Supply and demand, . . 345

" Freedom of Capital, ..... 348 te Usury Laws, ...... 351

Chapter Third. Of Public Consumption

SECTION I.

Of Taxes, or the manner in lohich the public expenditure is provided for.

Of direct and indirect Taxation, .... 416 Of the principle by which Taxation should be regulated, 419

SECTION II.

Of the purposes for which the Public Revenue is commonly expended.

Of the expenses of Civil Government, . . . 423

Expenses for Public Education, .... 425

" " Maintaining Religious Worship, . . 429

« " National Improvement, . . . 430

ft " Pauperism, ..... 431

Note ori the Precious Metals, .... 434

ELEMENTS

OF

POLITICAL ECONOMY.

POLITICAL ECONOMY.

INTRODUCTION.

DEFINITIONS, AND DIVISION OF THE SUBJECT.

1, Political Economy is the Science of Wealth. It is sometimes defined the Science of National Wealth. This definition seems not, however, sufficiently comprehensive ; inasmuch as, the laws which govern the creation of wealth are essentially the same, whether they are considered in respect to man as an individual, or to man as a society.

By Science, as the word is here used, we mean a systematic arrangement of the laws which God has established, so far as they have been discovered, of any department of human knowledge. It is obvious, upon the slightest reflection, that the Creator has subjected the accumulation of the blessings of this life to some determinate laws. Every one, for instance, knows that no man can grow rich, without industry and frugality. Political Economy, therefore, is a systematic arrangement of the laws by which, under our present constitution, the relations of man, whether individual or social, to the objects of his desire, are governed.

2. Wealth. It has been frequently remarked, that the universe around us is composed of objects suited to gratify our desire, and thus minister to our happiness. The capacity to gratify desire, is, therefore, the

16 OF VALUE.

first element that enters into our notion of wealth. But as the gratification of our desires, by means of an external object, almost always supposes some change effected in that object; and, as we could have no right to effect that change, unless that object were our own, another element, which enters into the notion of wealth, is the idea of possession. Hence, wealth may be defined any object, having the power of gratifying human desire, which is capable of being appropriated. He who possesses many of these objects in abundance, is termed rich. He who possesses few of them, is termed poor. He who possesses a large amount of money, is also called rich ; because, with money, he can generally procure whatever else of physical convenience he may desire.

3. Of value, intrinsic and exchangeable. The particular quality in any substance, which renders it capable of gratifying human desire, is called its value. Thus, that quahty of fuel, which constitutes its value, is its power of generating heat, or of gratifying this desire in man. A particular substance may have the power of gratifying either one or several desires, and thus it may have either one or several values. Thus anthracite coal is at present known to have but one value, namely, that of generating heat. Bituminous coal possesses also another, as it is also used in the manufacture of gas for the purposes of illumination. Wood has several values, inasmuch as, besides being used for fuel, it may also be used for building, and for various purposes in the arts. Iron has as many forms of value, as there are uses to which it may be applied, in promoting the convenience of man.

The degree of the intrinsic value of any substance, depends upon the nature and the number of the desires which it can gratify. If the gratification of that desire to which it is subservient, be necessary to the existence or to the comfort of man, its value will be great. Such is the case with air, water, clothing, food, and fuel. If the gratification which

OF VALUE. 17

it affords can be easily dispensed with, its value will be small. Such is the case with articles of luxury, or the means of mere amusement. The inferiority of the value of this latter class, is evident from the fact, that, in seasons of scarcity, these are first relinquished. And again, the degree of the value of any substance, depends upon the number of desires which it can gratify. India Rubber, or Caoutchouc, a few years since, was used but for one purpose, that of rubbing out pencil marks. It is now used in the manufacture of shoes, and for several other very important purposes. The intensity of its value is, therefore, greatly increased.

We have thus far treated only of intrinsic value, or of the power which any particular substance possesses, of gratifying human desire.

If, however, we examine the various articles of value around us, we shall observe a very remarkable difference between them. Some of them may be made the means of procuring for us, by exchange, other objects of desire. Such, for instance, are gold, silver, iron, coal, wood, &c. He who possesses a large quantity of either of these, may, ordinarily, procure for himself, by exchange, any thing else that he needs. Others, on the contrary, and those of great intrinsic value, are destitute of this property. What has greater intrinsic value than air, the light of the sun, or water? Yet, we can get nothing in exchange for air or sun-light, and very rarely for water. And again; substances having an exchangeable value, do not possess that value, in proportion to their intrinsic value. Iron has a far greater intrinsic value than gold; yet, an ounce of gold has a far greater exchangeable value than an ounce of iron; that is, an ounce of gold will procure for us many more articles of convenience, in exchange. This latter property, or the power of procuring for us something else in exchange, is called exchangeable value.

If, now, we compare those substances which have 2* not, with those which have exchangeable value, we shall find them to differ in the following respects :

1. Those which have no exchangeable value, are every where abundant and inexhaustible. The supply of the others is limited in quantity or is limited in place. Air, and the light of the sun, are inexhaustible every where. Coal is in some places inexhaustible, but it is not so in others. Where it lies, for miles together, immediately upon the surface, and in beds of unknown thickness, it has no exchangeable value. Where it must be carried to any distance, to be brought to the consumer, it then acquires an exchangeable value.

2. The value of the first class of substances has received no addition from human labor, but derives whatever qualities it possesses, directly from the gift of God. The value of the other, has always received some addition, and, frequently, it is derived altogether from human labor. Neither air, nor the light of the sun, can receive any additional power of gratifying human desire, from any effort of man. On the contrary, all the most important values of iron, are derived from human skill. A lump of iron ore is as valueless as granite or sandstone. The peculiar properties of the metal, are the result of the processes through which it passes. When, however, a substance which ordinarily possesses only intrinsic value, is placed under such circumstances that human labor must be added to it in order to enable it to gratify desire, it then acquires exchangeable value. Thus water, which ordinarily, has no exchangeable value, is frequently sold by the gallon in cities, because it can be procured in purity only from a distance, and hence, before it can gratify the desire of particular individuals, it requires the labor of transportation to be added to it.

We see then, that every substance on earth may have, and, doubtless, it actually has, intrinsic value. If we then consider all those qualities which arc necessary to prepare a substance for the gratification of human desire to be intrinsic values, these may be divided, into two kinds; first, those which are imparted to the substance by the immediate act of God; and secondly, those that are imparted to it through the intermediate agency of man. The former, being the gift of God, are gratuitously received, and gratuitously parted with. The latter have cost human labor, and therefore cannot be obtained without an equivalent. Hence it is the latter alone, that enter into computation, in fixing exchangeable value. Thus the exchangeable value of iron and of gold, respectively, does not depend upon the uses to which these metals may be put, but upon the labor which must be employed in preparing them to gratify desire. But it is plain, that if a man expend labor in the creation of a value, this labor gives him a right to the exclusive possession of that value ; that is, supposing the original elements belonged to no one else. Now, as almost all the qualities which gratify human desire, can exist only by the exertion of this labor, it follows, that all such objects must have already become the exclusive possession of some human being. Hence, he who wishes to possess such objects, must either himself expend the labor necessary for producing them, or else he must procure them by voluntary concession, from some one who has already expended it. But he who has expended labor upon a substance, will never voluntarily surrender it up, either for nothing, or for that which he can obtain without labor. He who makes knives, will neither give them away, nor exchange them for air, or water, or sunlight. Hence, he who wants knives must either make them himself, or else he must offer the knife-maker, in exchange for them, some value which he himself has created. Hence, every man who desires the means of happiness, must labor to obtain them. And, as every man has his preference for some particular kind of labor; and as, moreover, every man can succeed better by confining his labor to one thing, than by devoting it to twenty things, every man is desirous of exchanging some portion of the value created by himself, for that created by others. So soon as this is the case with any one substance, it then has acquired exchangeable value : that is, just so soon as other men are willing to give me a value which they have created, for that which I have created, then the result of my labor has exchangeable value, and not before.

The degree of the exchangeable value of any one substance, depends chiefly upon the amount of labor and of skill necessary to create that value. No one would exchange what has cost him two days' labor, for that which has cost another man of the same skill, but one day's labor; because, rather than make such an exchange, he would create this second value for himself. Thus, if a hundred pounds of fish could be procured by a day's labor, and only twenty-five pounds of venison ; men would exchange, not pound for pound, but labor for labor : that is, at the rate of four pounds of fish for one pound of venison. The amount of labor expended in the creation of a value, is commonly denominated its cost. This is always the standard by which, for long periods, the degree of exchangeable value may be estimated.

When, however, we here speak of labor, we speak of it as simple labor ; that is, without taking into consideration the degree of skill which may be combined with it, or the other circumstances which may conspire to create variation in its value. These are to be considered hereafter. We suppose, in the remarks above, that, in all cases, labor of the same kind is to be compared together.

I have said above, that cost forms the standard by which the degree of exchangeable value for long periods is to be estimated. Temporary circumstances may create a variation from this standard; and may, for a short time, elevate this value above, or depress it below, the cost. These, however, can continue to operate but for a short period; the tendency of exchangeable value is always to gravitate towards cost. The causes of this variation, we will now briefly illustrate :

1. Suppose, that by the use of better tools, or from any other cause, the supply of fish became more abundant, so that a man could, by one day's labor, procure two hundred instead of one hundred pounds. The hunter would not then be Avilling to exchange as before, since he would now rather catch his fish for himself. He would demand eight pounds of fish for one pound of venison : that is, the exchangeable value of fish would fall ; or, in other words, it could not procure as much venison in exchange, as it did before. But as, in consequence of this reduction in price, there would be an increased demand for fish ; that is, more persons would want it, and they would also want a larger quantity than before, the fisherman would not be obliged to exchange at half the former rate, but would be able to exchange at a rate somewhat above it ; say, perhaps, six or seven pounds for a pound of venison. Thus, both parties would be gainers. The fisherman would procure more venison ; the hunter more fish, by a day's labor. Thus, a benefit to one, is a benefit to all. And thus we see, that, other things being equal, the greater the supply of any article, the less is its exchangeable value ; that is, the less amount of other things, can it procure in exchange.

2. Supposing the labor necesssry for taking fish to be doubled ; so that, by the labor of a day, no more than fifty pounds could be procured. The fisherman, then, would not sell, as at first, four pounds of the fish for one pound of venison ; he would rather hunt his venison for himself. He would offer but two pounds for a pound of venison. But as, at this rate, the number of his customers would be greatly diminished ; and as every person would use less fish than before, he would find it difficult thus to dispose of the results of his labor, and would be obliged to offer it on more favorable terms, say two and a half, or three pounds, for a pound of venison : thus, with a day's labor, he would procure less venison, and the hunter less fish. That is, the evil would be shared between them; and thus, an injury to one, is an injury to all. Thus, other things being equal, the less the supply the greater is the exchangeable value.

3. Suppose the labor necessary for procuring fish remain the same, but that, from some cause, twice as many persons desired fish as before. Suppose that every person desired five pounds, but that, there was only enough to supply half the population with this quantity. Then there would arise a competition among the buyers, and he who obtained this quantity must obtain it by overbidding his neighbor. Thus, fish would command a larger amount of venison in exchange than before ; that is, the exchangeable value of fish would rise, and it would continue at this point, until the demand decreased, or, until a sufficient number of men devoted themselves to fishing, to furnish enough to reduce it to its mean exchangeable value. Thus, the greater the demand, the greater the exchangeable value.

4. Suppose, that, while the labor of taking fish continued as before, the number of purchasers was from any cause diminished, so that, while there was fish enough caught to supply every person with five pounds, only half the population wanted any. In this case, as a large residue would at the close of every day, be left on the fisherman's hands, there would be a competition among the sellers ; and each one would be desirous of disposing of his stock at a diminished price, rather than lose it altogether. Hence, he would offer to exchange it for a less amount of venison than before; that is, the exchangeable value offish would fall. It would remain at this point, until, either the demand arose to its natural rate; or a sufficient number of persons turned their attention to some other occupation, to reduce the supply to a level with the demand. That is, the supply being the same, the less the demand, the less the exchangeable value.

It is the operation of these principles that keeps the supply of any article throughout the world always equal to the demand: and, it is surprising to observe, with what accuracy this effect is produced. In the largest cities, there is always just enough butcher's meat and vegetables, and clothing, to supply the wants of the inhabitants, and no more. The moment the price of an article falls below cost, it ceases to be produced, until the price rises. As soon as it rises above ordinary profit, capital and labor are directed to it, and it is produced in sufficient quantity to meet the unusual demand. Thus, also, we see why the high price of any article is commonly followed by a low price of the same article, and the contrary. When the price of any article is low, men leave off this kind of production in too great numbers, and henee follows a comparative scarcity of the product which they furnish. When the price is high, men rush, in too great numbers, into this sort of production, and hence arises a temporary glut, and a depreciation of its exchangeable value.

Again: It will be seen that this variation in the exchangeable value of any article, is dependent greatly on its perishableness. An article which is not liable to be destroyed by keeping, will neither fall so rapidly, nor so low, by either a diminution of demand, or an increase of supply, as one which is, in its nature, rapidly perishable. Thus, iron may be kept for years, without decay; and hence, its exchangeable value cannot greatly vary, from increase of supply or decrease of demand : that is, it is an article not liable to great or sudden fluctuation. On the contrary, fish, fruits, and articles of this nature, very often, in the course of a few days, vary one or two hundred per cent.

Another source of variation in the exchangeable value of products, is the time necessary for their production. When any amount of a commodity may be produced on demand, its rise of price will not keep pace with the diminished supply; because^ every one will know that, by waiting, he can be provided with it at a reasonable price. Thus, a small rise of price in a manufactured article, when the material is abundant, will cause the quantity produced to be greatly increased; hence, the rise is never excessive. But when a long time is necessary for the production of an article, and it is an article of prime necessity, the rise of price is frequently great.

And again : It will be seen, that, so far as the seller and the buyer are concerned, these variations balance each other. When products rise on the merchant's hands, he charges an additional price : when they fall, he is obliged, frequently, to sell at a reduced profit, or even to sell below cost. The gain, in one case, makes up for the loss in the other. Hence, as no one sympathizes with the merchant, when he sells at a loss, no one should complain, when he sells, for a short time, at more than an ordinary gain.

If, now, we sum up what has been said, we shall come to the following general conclusions:

1. Cost; that is, labor bestowed; is the foundation of exchangeable value, and from this, it can never, for long periods, materially vary : that is, an article can always be had for what it costs to produce it; including in this, the ordinary profit to the producer. Notwithstanding this, there will, however, arise various fluctuations, depending upon the following circumstances :

Other things, then, being equal —

2. The greater the supply, the less the exchangeable value.

3. The less the supply, the greater the exchangeable value.

4. The greater the demand, the greater the exchangeable value.

5. The less the demand, the less the exchangeable value.

6. And, in general, cost being fixed, exchangeable value is inversely as the supply, and directly as the demand.

OF PRODUCTION. 25

7. Or, still more generally, at any particular time, exchangeable value will be as the cost, plus the effect produced by the variation in supply and demand.

Hence, wealth consists of all objects which have an exchangeable value.

Exchangeable value is slightly distinguishable from price. The first, is the power which any object possesses of procuring for us any object whatever. The second, price, is the power that it has to procure for us one particular object ; that is, money.

Of Production. From what has been said, it is easy to explain the nature of Production. It is the act by which we confer a particular value upon any object whatever, or by which we give to any object its adaptedness to gratify desire. We can neither create nor annihilate any thing. All that we can do, is, to modify what already exists. When we so modify any thing, that it is capable of gratifying a desire which before it was not capable of gratifying, our so doing is called production.

The modifications which objects need, in order to render them capable of gratifying desire, are various. Sometimes the elements of the substance, sometimes its form, and sometimes its place, require to be changed. Whenever human industry accomplishes any of these results, it is called production ; the person who exerts this agency is called a producer ; and the substance itself, on which this agency is exerted, is called a product.