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diff --git a/12004-0.txt b/12004-0.txt new file mode 100644 index 0000000..46a2e1a --- /dev/null +++ b/12004-0.txt @@ -0,0 +1,4877 @@ +*** START OF THE PROJECT GUTENBERG EBOOK 12004 *** + +ESSAYS ON SOME UNSETTLED QUESTIONS OF POLITICAL ECONOMY + +by + +JOHN STUART MILL + + +1844 + + + + +PREFACE. + + +Of these Essays, which were written in 1829 and 1830, the fifth alone +has been previously printed. The other four have hitherto remained in +manuscript, because, during the temporary suspension of public interest +in the species of discussion to which they belong, there was no +inducement to their publication. + +They are now published (with a few merely verbal alterations) under the +impression, that the controversies excited by Colonel Torrens' _Budget_ +have again called the attention of political economists to the +discussions of the abstract science: and from the additional +consideration, that the first paper relates expressly to the point upon +which the question at issue between Colonel Torrens and his antagonists +has principally turned. + +From that paper it will be seen that opinions identical in principle +with those promulgated by Colonel Torrens (there would probably be +considerable difference as to the extent of their practical application) +have been held by the writer for more than fifteen years: although he +cannot claim to himself the original conception, but only the +elaboration, of the fundamental doctrine of the Essay. + +A prejudice appears to exist in many quarters against the theory in +question, on the supposition of its being opposed to one of the most +valuable results of modern political philosophy, the doctrine of Freedom +of Trade between nation and nation. The opinions now laid before the +reader are presented as corollaries necessarily following from the +principles upon which Free Trade itself rests. The writer has also been +careful to point out, that from these opinions no justification can be +derived for any _protecting_ duty, or other preference given to domestic +over foreign industry. But in regard to those duties on foreign +commodities which do not operate as protection, but are maintained +solely for revenue, and which do not touch either the necessaries of +life or the materials and instruments of production, it is his opinion +that any relaxation of such duties, beyond what may be required by the +interest of the revenue itself, should in general be made contingent +upon the adoption of some corresponding degree of freedom of trade with +this country, by the nation from which the commodities are imported. + + + + +CONTENTS. + + +ESSAY I. + +Of the Laws of Interchange between Nations; and the Distribution of the +Gains of Commerce among the Countries of the Commercial World + +ESSAY II. + +Of the Influence of Consumption upon Production + +ESSAY III. + +On the Words Productive and Unproductive + +ESSAY IV. + +On Profits, and Interest + +ESSAY V. + +On the Definition of Political Economy; and on the Method of +Investigation proper to it + + + + +ESSAY I. + +OF THE LAWS OF INTERCHANGE BETWEEN NATIONS; AND THE DISTRIBUTION OF THE +GAINS OF COMMERCE AMONG THE COUNTRIES OF THE COMMERCIAL WORLD. + + +Of the truths with which political economy has been enriched by Mr. +Ricardo, none has contributed more to give to that branch of knowledge +the comparatively precise and scientific character which it at present +bears, than the more accurate analysis which he performed of the nature +of the advantage which nations derive from a mutual interchange of their +productions. Previously to his time, the benefits of foreign trade were +deemed, even by the most philosophical enquirers, to consist in +affording a vent for surplus produce, or in enabling a portion of the +national capital to replace itself with a profit. The futility of the +theory implied in these and similar phrases, was an obvious consequence +from the speculations of writers even anterior to Mr. Ricardo. But it +was he who first, in the chapter on Foreign Trade, of his immortal +_Principles of Political Economy and Taxation_, substituted for the +former vague and unscientific, if not positively false, conceptions with +regard to the advantage of trade, a philosophical exposition which +explains, with strict precision, the nature of that advantage, and +affords an accurate measure of its amount. + +He shewed, that the advantage of an interchange of commodities between +nations consists simply and solely in this, that it enables each to +obtain, with a given amount of labour and capital, a greater quantity of +all commodities taken together. This it accomplishes by enabling each, +with a quantity of one commodity which has cost it so much labour and +capital, to purchase a quantity of another commodity which, if produced +at home, would have required labour and capital to a greater amount. +To render the importation of an article more advantageous than its +production, it is not necessary that the foreign country should be able +to produce it with less labour and capital than ourselves. We may even +have a positive advantage in its production: but, if we are so far +favoured by circumstances as to have a still greater positive advantage +in the production of some other article which is in demand in the +foreign country, we may be able to obtain a greater return to our labour +and capital by employing none of it in producing the article in which +our advantage is least, but devoting it all to the production of that in +which our advantage is greatest, and giving this to the foreign country +in exchange for the other. It is not a difference in the _absolute_ cost +of production, which determines the interchange, but a difference in the +_comparative_ cost. It may be to our advantage to procure iron from +Sweden in exchange for cottons, even although the mines of England as +well as her manufactories should be more productive than those of +Sweden; for if we have an advantage of one-half in cottons, and only an +advantage of a quarter in iron, and could sell our cottons to Sweden at +the price which Sweden must pay for them if she produced them herself, +we should obtain our iron with an advantage of one-half, as well as our +cottons. We may often, by trading with foreigners, obtain their +commodities at a smaller expense of labour and capital than they cost +to the foreigners themselves. The bargain is still advantageous to the +foreigner, because the commodity which he receives in exchange, though +it has cost us less, would have cost him more. As often as a country +possesses two commodities, one of which it can produce with less labour, +comparatively to what it would cost in a foreign country, than the +other; so often it is the interest of the country to export the first +mentioned commodity and to import the second; even though it might be +able to produce both the one and the other at a less expense of labour +than the foreign country can produce them, but not less in the same +degree; or might be unable to produce either except at a greater +expense, but not greater in the same degree. + +On the contrary, if it produces both commodities with greater facility, +or both with greater difficulty, and greater in exactly the same degree, +there will be no motive to interchange. + +"If the cloth and the corn, each of which required 100 days' labour in +Poland, required each 150 days' labour in England; it would follow, that +the cloth of 150 days' labour in England, if sent to Poland, would be +equal to the cloth of 100 days' labour in Poland: if exchanged for corn, +therefore, it would exchange for the corn of only 100 days' labour. But +the corn of 100 days' labour in Poland, was supposed to be the same +quantity with that of 150 days' labour in England. With 150 days' labour +in cloth, therefore, England would only get as much corn in Poland as +she could raise with 150 days' labour at home; and she would, in +importing it, have the cost of carriage besides. In these circumstances +no exchange would take place. + +"If, on the other hand, while the cloth produced with 100 days' labour +in Poland was produced with 150 days' labour in England, the corn which +was produced in Poland with 100 days' labour could not be produced in +England with less than 200 days' labour; an adequate motive to exchange +would immediately arise. With a quantity of cloth which England produced +with 150 days' labour, she would be able to purchase as much corn in +Poland as was there produced with 100 days' labour; but the quantity, +which was there produced with 100 days' labour, would be as great as the +quantity produced in England with 200 days' labour. + +"The power of Poland would be reciprocal. With a quantity of corn which +cost her 100 days' labour, equal to the quantity produced in England by +200 days' labour, she could in the supposed case purchase in England the +produce of 200 days' labour in cloth." But "the produce of 150 days' +labour in England in the article of cloth would be equal to the produce +of 100 days' labour in Poland [1]." + +The remainder of what Mr. Ricardo has done for the philosophical +exposition of the principles of foreign trade, is to shew, that the +truth of the propositions now recapitulated is not affected by the +introduction of money as a medium of exchange; the precious metals +always tending to distribute themselves in such a manner throughout the +commercial world, that every country shall import all that it would have +imported, and export all that it would have exported, if exchanges had +taken place, as in the example above supposed, by barter. + +To this branch of the subject we shall, in the sequel of this essay, +return. At present it will be more convenient that we should continue to +suppose, that exchanges take place by the direct trucking of one +commodity against another. + +It is established, that the advantage which two countries derive from +trading with each other, results from the more advantageous employment +which thence arises, of the labour and capital--for shortness let us say +the labour--of both jointly. The circumstances are such, that if each +country confines itself to the production of one commodity, there is a +greater total return to the labour of both together; and this increase +of produce forms the whole of what the two countries taken together gain +by the trade. + +It is the purpose of the present essay to inquire, in what proportion +the increase of produce, arising from the saving of labour, is divided +between the two countries. + +This question was not entered into by Mr. Ricardo, whose attention was +engrossed by far more important questions, and who, having a science to +create, had not time, or room, to occupy himself with much more than the +leading principles. When he had done enough to enable any one who came +after him, and who took the necessary pains, to do all the rest, he was +satisfied. He very rarely followed out the principles of the science +into the ramifications of their consequences. But we believe that to no +one, who has thoroughly entered into the spirit of his discoveries, will +even the minutiae of the science offer any difficulty but that which is +constituted by the necessity of patience and circumspection in tracing +principles to their results. + +Mr. Ricardo, while intending to go no further into the question of the +advantage of foreign trade than to show what it consisted of, and under +what circumstances it arose, unguardedly expressed himself as if each of +the two countries making the exchange separately gained the whole of the +difference between the comparative costs of the two commodities in one +country and in the other. But, the whole gain of both countries +together, consisting in the saving of labour; and the saving of labour +being exactly equal to the difference between the costs, in the two +countries, of the one commodity as compared with the other; the two +countries taken together gain no more than this difference: and if +either country gains the whole of it, the other country derives no +advantage from the trade. + +Suppose, for example, that 10 yards of broad cloth cost in England as +much labour as 15 yards of linen, and in Germany as much as 20. If +England sends 10 yards of broad cloth to Germany, and is able to +exchange them for linen according to the German cost of production, she +will get 20 yards of linen, with a quantity of labour with which she +could not have produced more than 15; and will gain, therefore, 5 yards +on every 15, or 33-1/3 per cent. But in this case Germany would obtain +only 10 yards of cloth for 20 of linen. Now, 10 yards of cloth cost +exactly the same quantity of labour in Germany as 20 of linen; Germany, +therefore, derives no advantage from the trade, more than she would +possess if it did not exist. + +So, on the other hand, if Germany sends 15 yards of linen to England, +and finding the relative value of the two articles in that country +determined by the English costs of production, is enabled to purchase +with 35 yards of linen 10 yards of cloth; Germany now gains 5 yards, +just as England did before,--for with 15 yards of linen she purchases 10 +yards of cloth, when to produce these 10 yards she must have employed as +much labour as would have enabled her to produce 20 yards of linen. But +in this case England would gain nothing: she would only obtain, for her +10 yards of cloth, 15 yards of linen, which is exactly the comparative +cost at which she could have produced them. + +This, which was not an error, but a mere oversight of Mr. Ricardo, +arising from his having left the question of the division of the +advantage entirely unnoticed, was first corrected in the third edition +of Mr. Mill's _Elements of Political Economy_. It can hardly, however, +be said that Mr. Mill has prosecuted the inquiry any further; which, +indeed, would have been quite as inconsistent with the nature of his +plan as of Mr. Ricardo's. + +1. When the trade is established between the two countries, the two +commodities will exchange for each other at the same rate of interchange +in both countries--bating the cost of carriage, of which, for the present, +it will be more convenient to omit the consideration. Supposing, therefore, +for the sake of argument, that the carriage of the commodities from one +country to another could be effected without labour and without cost, no +sooner would the trade be opened than, it is self-evident, the value of +the two commodities, estimated in each other, would come to a level in +both countries. + +If we knew what this level would be, we should know in what proportion +the two countries would share the advantage of the trade. + +When each country produced both commodities for itself, 10 yards of +broad cloth exchanged for 15 yards of linen in England, and for 20 in +Germany. They will now exchange for the same number of yards of linen in +both. For what number? If for 15 yards, England will be just as she was, +and Germany will gain all. If for 20 yards, Germany will be as before, +and England will derive the whole of the benefit. If for any number +intermediate between 15 and 20, the advantage will be shared between the +two countries. If, for example, 10 yards of cloth exchange for 18 of +linen, England will gain an advantage of 3 yards on every 15, Germany +will save 2 out of every 20. + +The problem is, what are the causes which determine the proportion in +which the cloth of England and the linen of Germany will exchange for +each other? + +This, therefore, is a question concerning exchangeable value. There must +be something which determines how much of one commodity another +commodity will purchase; and there is no reason to suppose that the law +of exchangeable value is more difficult of ascertainment in this case +than in other cases. + +The law, however, cannot be precisely the same as in the common cases. +When two articles are produced in the immediate vicinity of one another, +so that, without expatriating himself, or moving to a distance, a +capitalist has the choice of producing one or the other, the quantities +of the two articles which will exchange for each other will be, on the +average, those which are produced by equal quantities of labour. But +this cannot be applied to the case where the two articles are produced +in two different countries; because men do not usually leave their +country, or even send their capital abroad, for the sake of those small +differences of profit which are sufficient to determine their choice of +a business, or of an investment, in their own country and neighbourhood. + +The principle, that value is proportional to cost of production, being +consequently inapplicable, we must revert to a principle anterior to +that of cost of production, and from which this last flows as a +consequence,--namely, the principle of demand and supply. + +In order to apply this principle, with any advantage, to the solution of +the question which now occupies us, the principle itself, and the idea +attached to the term demand, must be conceived with a precision, which +the loose manner in which the words are used generally prevents. + +It is well known that the quantity of any commodity which can be +disposed of, varies with the price. The higher the price, the fewer will +be the purchasers, and the smaller the quantity sold. The lower the +price, the greater will in general be the number of purchasers, and the +greater the quantity disposed of. This is true of almost all commodities +whatever: though of some commodities, to diminish the consumption in any +given degree would require a much greater rise of price than of others. + +Whatever be the commodity--the supply in any market being given, there +is some price at which the whole of the supply exactly will find +purchasers, and no more. That, whatever it be, is the price at which, by +the effect of competition, the commodity will be sold. If the price be +higher, the whole of the supply will not be disposed of, and the +sellers, by their competition, will bring down the price. If the price +be lower, there will be found purchasers for a larger supply, and the +competition of these purchasers will raise the price. + +This, then, is what we mean, when we say that price, or exchangeable +value, depends on demand and supply. We should express the principle +more accurately, if we were to say, the price so regulates itself that +the demand shall be exactly sufficient to carry off the supply. + +Let us now apply the principle of demand and supply, thus understood, to +the interchange of broadcloth and linen between England and Germany. + +As exchangeable value in this case, as in every other, is proverbially +fluctuating, it does not matter what we suppose it to be when we begin; +we shall soon see whether there be any fixed point about which it +oscillates--which it has a tendency always to approach to, and to remain +at. + +Let us suppose, then, that by the effect of what Adam Smith calls the +higgling of the market, 10 yards of cloth, in both countries, exchange +for 17 yards of linen. + +The demand for a commodity, that is, the quantity of it which can find a +purchaser, varies, as we have before remarked, according to the price. +In Germany, the price of 10 yards of cloth is now 17 yards of linen; or +whatever quantity of money is equivalent in Germany to 17 yards of +linen. Now, that being the price, there is some particular number of +yards of cloth, which will be in demand, or will find purchasers, at +that price. There is some given quantity of cloth, more than which could +not be disposed of at that price,--less than which, at that price, would +not fully satisfy the demand. Let us suppose this quantity to be, 1000 +times 10 yards. + +Let us now turn our attention to England. There, the price of 17 yards +of linen is 10 yards of cloth, or whatever quantity of money is +equivalent in England to 10 yards of cloth. There is some particular +number of yards of linen, which, at that price, will exactly satisfy the +demand, and no more. Let us suppose that this number is 1000 times 17 +yards. + +As 17 yards of linen are to 30 yards of cloth, so are 1000 times 17 +yards to 1000 times 10 yards. At the existing exchangeable value, the +linen which England requires, will exactly pay for the quantity of cloth +which, on the same terms of interchange, Germany requires. The demand on +each side is precisely sufficient to carry off the supply on the other. +The conditions required by the principle of demand and supply are +fulfilled, and the two commodities will continue to be interchanged, as +we supposed them to be, in the ratio of 17 yards of linen for 10 yards +of cloth. + +But our supposition might have been different. Suppose that, at the +assumed rate of interchange, England had been disposed to consume no +greater quantity of linen than 800 times 17 yards; it is evident that, +at the rate supposed, this would not have sufficed to pay for the 1000 +times 10 yards of cloth, which we have supposed Germany to require at +the assumed value. Germany would be able to procure no more than 800 +times 10 yards, at that price. To procure the remaining 200, which she +would have no means of doing but by bidding higher for them, she would +offer more than 17 yards of linen in exchange for 10 yards of cloth; let +us suppose her to offer 18. At that price, perhaps, England would be +inclined to purchase a greater quantity of linen. She could consume, +possibly, at that price, 900 times 18 yards. On the other hand, cloth +having risen in price, the demand of Germany for it would, probably, +have diminished. If, instead of 1000 times 10 yards, she is now +contented with 900 times ten yards, these will exactly pay for the 900 +times 18 yards of linen which England is willing to take at the altered +price: the demand on each side will again exactly suffice to take off +the corresponding supply; and 10 yards for 18 will be the rate at which, +in both countries, cloth will exchange for linen. + +The converse of all this would have happened if instead of 800 times 17 +yards, we had supposed that England, at the rate of 10 for 17, would +have taken 1200 times 17 yards of linen. In this case, it is England +whose demand is not fully supplied; it is England who, by bidding for +more linen, will alter the rate of interchange to her own disadvantage; +and 10 yards of cloth will fall, in both countries, below the value of +17 yards of linen. By this fall of cloth, or what is the same thing, +this rise of linen, the demand of Germany for cloth will increase, and +the demand of England for linen will diminish, till the rate of +interchange has so adjusted itself that the cloth and the linen will +exactly pay for another; and when once this point is attained, values +will remain as they are. + +It may be considered, therefore, as established, that when two countries +trade together in two commodities, the exchangeable value of these +commodities relatively to each other will adjust itself to the +inclinations and circumstances of the consumers on both sides, in such +manner that the quantities required by each country, of the article +which it imports from its neighbour, shall be exactly sufficient to pay +for one another. As the inclinations and circumstances of consumers +cannot be reduced to any rule, so neither can the proportions in which +the two commodities will be interchanged. We know that the limits within +which the variation is confined are the ratio between their costs of +production in the one country, and the ratio between their costs of +production in the other. Ten yards of cloth cannot exchange for more +than 20 yards of linen, nor for less than 15. But they may exchange for +any intermediate number. The ratios, therefore, in which the advantage +of the trade may be divided between the two nations, are various. The +circumstances on which the proportionate share of each country more +remotely depends, admit only of a very general indication. + +It is even possible to conceive an extreme case, in which the whole of +the advantage resulting from the interchange would be reaped by one +party, the other country gaining nothing at all. There is no absurdity +in the hypothesis, that of some given commodity a certain quantity is +all that is wanted at any price, and that when that quantity is +obtained, no fall in the exchangeable value would induce other consumers +to come forward, or those who are already supplied to take more. Let us +suppose that this is the case in Germany with cloth. Before her trade +with England commenced, when 10 yards of cloth cost her as much labour +as 20 yards of linen, she nevertheless consumed as much cloth as she +wanted under any circumstances, and if she could obtain it at the rate +of 10 yards of cloth for 15 of linen, she would not consume more. Let +this fixed quantity be 1000 times 10 yards. At the rate, however, of 10 +for 20, England would want more linen than would be equivalent to this +quantity of cloth. She would consequently offer a higher value for +linen; or, what is the same thing, she would offer her cloth at a +cheaper rate. But as by no lowering of the value could she prevail on +Germany to take a greater quantity of cloth, there would be no limit to +the rise of linen, or fall of cloth, until the demand of England for +linen was reduced by the rise of its value, to the quantity which one +thousand times ten yards of cloth would purchase. It might be, that to +produce this diminution of the demand, a less fall would not suffice, +than one which would make 10 yards of cloth exchange for 15 of linen. +Germany would then gain the whole of the advantage, and England would be +exactly as she was before the trade commenced. It would be for the +interest, however, of Germany herself, to keep her linen a little below +the value at which it could be produced in England, in order to keep +herself from being supplanted by the home producer. England, therefore, +would always benefit in some degree by the existence of the trade, +though it might be in a very trifling one. + +But in general there will not be this extreme inequality in the degree +in which the demand in the two countries varies with variations in the +price. The advantage will probably be divided equally, oftener than in +any one unequal ratio that can be named; though the division will be +much oftener, on the whole, unequal than equal. + +2. We shall now examine whether the same law of interchange, which we +have shown to apply upon the supposition of barter, holds good after the +introduction of money. Mr. Ricardo found that his more general +proposition stood this test; and as the proposition which we have just +demonstrated is only a further developement of his principle, we shall +probably find that it suffers a little, by a mere change in the mode +(for it is no more) in which one commodity is exchanged against another. + +We may at first make whatever supposition we will with respect to the +value of money. Let us suppose, therefore, that before the opening of +the trade, the price of cloth is the same in both countries, namely, six +shillings per yard [2]. As 10 yards of cloth were supposed to exchange in +England for 5 yards of linen, in Germany for 20, we must suppose that +linen is sold in England at four shillings per yard, in Germany at +three. Cost of carriage and importer's profit are left as before, out of +consideration. + +In this state of prices, cloth, it is evident, cannot yet be exported +from England into Germany. But linen can be imported from Germany into +England. It will be so, and, in the first instance, the linen will be +paid for in money. + +The efflux of money from England, and its influx into Germany, will +raise money prices in the latter country, and lower them in the former. +Linen will rise in Germany above three shillings per yard, and cloth +above six shillings. Linen in England being imported from Germany, will +(since cost of carriage is not reckoned) sink to the same price as in +that country, while cloth will fall below six shillings. As soon as the +price of cloth is lower in England than in Germany, it will begin to be +exported, and the price of cloth in Germany will fall to what it is in +England. As long As the cloth exported does not suffice to pay for the +linen imported, money will continue to flow from England into Germany, +and prices generally will continue to fall in England, and rise in +Germany. By the fall, however, of cloth in England, cloth will fall in +Germany also, and the demand for it will increase. By the rise of linen +in Germany, linen must rise in England also, and the demand for it will +diminish. Although the increased exportation of cloth takes place at a +lower price, and the diminished importation of linen at a higher, yet +the total money value of the exportation would probably increase, that +of the importation diminish. As cloth fell in price and linen rose, +there would be some particular price of both articles at-which the cloth +exported, and the linen imported, would exactly pay for each other. At +this point prices would remain, because money would then cease to move +out of England into Germany. What this point might be, would entirely +depend upon the circumstances and inclinations of the purchasers on both +sides. If the fall of cloth did not much increase the demand for it in +Germany, and the rise of linen did not diminish very rapidly the demand +for it in England, much money must pass before the equilibrium is +restored; cloth would fall very much, and linen would rise, until +England, perhaps, had to pay nearly as much for it as when she produced +it for herself. But if, on the contrary, the fall of cloth caused a very +rapid increase of the demand for it in Germany, and the rise of linen in +Germany reduced very rapidly the demand in England from what it was +under the influence of the first cheapness produced by the opening of +the trade; the cloth would very soon suffice to pay for the linen, +little money would pass between the two countries, and England would +derive a large portion of the benefit of the trade. We have thus arrived +at precisely the same conclusion, in supposing the employment of money, +which we found to hold under the supposition of barter. + +In what shape the benefit accrues to the two nations from the trade, is +clear enough. Germany, before the commencement of the trade, paid six +shillings per yard for broad-cloth. She now obtains it at a lower price. +This, however, is not the whole of her advantage. As the money prices of +all her other commodities have risen, the money incomes of all her +producers have increased. This is no advantage to them in buying from +each other; because the price of what they buy has risen in the same +ratio with their means of paying for it: but it is an advantage to them +in buying any thing which has not risen; and still more, any thing which +has fallen. They therefore benefit as consumers of cloth, not merely to +the extent to which cloth has fallen, but also to the extent to which +other prices have risen. Suppose that this is one-tenth. The same +proportion of their money incomes as before, will suffice to supply +their other wants, and the remainder, being increased one-tenth in +amount, will enable them to purchase one-tenth more cloth than before, +even though cloth had not fallen. But it has fallen: so that they are +doubly gainers. If they do not choose to increase their consumption of +cloth, this does not prevent them from being gainers. They purchase the +same quantity with less money, and have more to expend upon their other +wants. + +In England, on the contrary, general money-prices have fallen. Linen, +however, has fallen more than the rest; having been lowered in price, by +importation from a country where it was cheaper, whereas the others have +fallen only from the consequent efflux of money. Notwithstanding, +therefore, the general fall of money-prices, the English producers will +be exactly as they were in all other respects, while they will gain as +purchasers of linen. + +The greater the efflux of money required to restore the equilibrium, the +greater will be the gain of Germany; both by the fall of cloth, and by +the rise of her general prices. The less the efflux of money requisite, +the greater will be the gain of England; because the price of linen will +continue lower, and her general prices will not be reduced so much. It +must not, however, be imagined that high money-prices are a good, and +low money-prices an evil, in themselves. But the higher the general +money-prices in any country, the greater will be that country's means +of purchasing those commodities which, being imported from abroad, are +independent of the causes which keep prices high at home. + +3. We have hitherto supposed the carriage to be performed without labour +or expense. If we abandon this supposition, we must correct the +statement of the case in a slight degree. The prices of the two articles +will no longer, when the trade is opened, be the same in both countries, +nor will the articles exchange for one another at the same rate in both. +Ten yards of cloth will purchase in Germany a quantity of linen greater +than in England by a per-centage equal to the entire cost of conveyance +both of the cloth to Germany and of the linen to England. The +money-price of linen will be higher in England than in Germany, by the +cost of carriage of the linen. The money-price of cloth will be higher +in Germany than in England, by the cost of carriage of the cloth. + +The expense of the carriage is evidently a deduction _pro tanto_ from +the saving of labour produced by the establishment of the trade. The two +countries together, therefore, have their gains by the trade diminished, +by the amount of the cost of carriage of both commodities. But here the +question arises, which of the two countries bears this deduction, or in +what proportion it is divided between them. + +At the first inspection it would appear that each country bears its own +cost of carriage, that is, that each country pays the carriage of the +commodity which it imports. Upon this supposition, each country would +gain whatever share of the joint saving of labour would otherwise fall +to its lot, _minus_ the cost of bringing from the other country the +commodity which it imports. This solution is rendered plausible by the +circumstance just now mentioned, that the price of the commodity will be +higher in the country which imports it, than in the country which +exports it, by the amount of the cost of carriage. If linen is sold in +England at a higher price than in Germany, by a per-centage equal to the +cost of carriage of the linen, it appears obvious that England pays for +the carriage of the linen, and Germany, by parity of reason, for that of +the cloth. + +But if we apply to these questions the principles already explained, we +shall see that this is not by any means a universal law: the fact may +correspond with it, or it may not. + +For suppose that the prices have adjusted themselves, no matter how, and +that the imports and exports balance one another, each commodity, of +course, being dearer by the cost of carriage, in the country which +imports than in that which exports it: and suppose now that the cost of +carriage, both of the one and of the other, were suddenly and +miraculously annihilated, and that the commodities could pass from +country to country without expense. If each country bore its own cost of +carriage before, each country will save its own cost of carriage now. +Cloth, in Germany, will in that case fall exactly to what it is in +England; linen in England, to what it is in Germany. + +Now this fall of price, supposing it to happen, will probably affect the +demand on both sides; and it will either affect it alike in both +countries, or it will affect it unequally. It will affect it alike, if +the fall of price does not affect the demand at all, or if it affects it +equally in both countries. If either of these results should take place, +the cloth and the linen would continue to balance each other as before: +no money would pass from one country to the other; prices in both would +continue at the point to which they had fallen, and each country would +exactly save the cost of carriage on the commodity which it imports from +the other. + +But the result might be, that the fall of price might not have an effect +exactly equal, on the demand in the two countries. Suppose, for +instance, that the fall of cloth in Germany owing to the saving of the +cost of carriage, did not increase the demand for cloth in Germany; but +that the fall of linen in England from a like cause, did increase the +demand for linen in England. The linen imported would be more than could +be paid for by the cloth exported: the difference must be paid in money: +the change in the distribution of the precious metals between the two +countries would lower the price of cloth in England, (and consequently +in Germany), while it would raise the price of linen in Germany, (and +consequently in England). Germany, therefore, by the annihilation of +cost of carriage, would save in price more than the cost of carriage of +the cloth; England would save less in price than the cost of carriage of +the linen. But if by the miraculous annihilation of cost of carriage, +England would not _save_ the whole of the carriage of her imports, it +follows that England did not previously _pay_ the whole of that cost of +carriage. + +Thus, the division of the cost of trade, and the division of the +advantage of trade, are governed by precisely the same principles; and +the only general proposition which can be affirmed respecting the cost +is, that it is _pro tanto_ a deduction from the advantage. It cannot +even be maintained that the cost is shared in the same proportion as the +advantage is; because the increase of the demand for a commodity as its +price falls, is not governed by any fixed law. Suppose, for instance, +that the advantage happened to be divided equally: this must be because +the greater cheapness arising from the establishment of the trade, +either did not affect the demand at all, or affected it in an equal +proportion on both sides. Now, because such is the effect of the degree +of increased cheapness resulting from importation burthened with cost of +carriage, it would not follow that the still greater degree of +cheapness, produced by the additional saving of the cost of carriage +itself, would also affect the demand of both countries in precisely an +equal degree. But we cannot be said to bear an expense, which, if saved, +would be saved to somebody else, and not to us. Two countries may have +equal shares of the clear benefit of the trade, while, if the cost of +carriage were saved, they would divide that saving unequally. If so, +they divide the gross gain in one unequal ratio, the cost in another +unequal ratio, though their shares of the cost being deducted from their +shares of the gain leave equal remainders. + +4. The question naturally suggests itself, whether any country, by its +own legislative policy, can engross to itself a larger share of the +benefits of foreign commerce, than would fall to it in the natural or +spontaneous course of trade. + +The answer is, it can. By taxing exports, for instance, we may, under +certain circumstances, produce a division of the advantage of the trade +more favourable to ourselves. In some cases, we may draw into our +coffers, at the expense of foreigners, not only the whole tax, but more +than the tax: in other cases, we should gain exactly the tax,--in +others, less than the tax. In this last case, a part of the tax is borne +by ourselves: possibly the whole, possibly even, as we shall show, more +than the whole. + +Suppose that England taxes her export of cloth: the tax not being +supposed high enough to induce Germany to produce cloth for herself. The +price at which cloth can be sold in Germany is augmented by the tax. +This will probably diminish the quantity consumed. It may diminish it so +much, that even at the increased price, there will not be required so +great a money value as before. It may diminish it in such a ratio, that +the money value of the quantity consumed will be exactly the same as +before. Or it may not diminish it at all, or so little, that, in +consequence of the higher price, a greater money value will be purchased +than before. In this last case, England will gain, at the expense of +Germany, not only the whole amount of the duty, but more. For the money +value of her exports to Germany being increased, while her imports +remain the same, money will flow into England from Germany. The price of +cloth will rise in England, and consequently in Germany; but the price +of linen will fall in Germany, and consequently in England, We shall +export less cloth, and import more linen, till the equilibrium is +restored. It thus appears, what is at first sight somewhat remarkable, +that, by taxing her exports, England would, under some conceivable +circumstances, not only gain from her foreign customers the whole amount +of the tax, but would also get her imports cheaper. She would get them +cheaper in two ways,--for she would obtain them for less money, and +would have more money to purchase them with. Germany, on the other hand, +would suffer doubly: she would have to pay for her cloth a price +increased not only by the duty, but by the influx of money into England, +while the same change in the distribution of the circulating medium +would leave her less money to purchase it with. + +This, however, is only one of three possible cases. If, after the +imposition of the duty, Germany requires so diminished a quantity of +cloth, that its total money value is exactly the same as before, the +balance of trade will be undisturbed; England will gain the duty, +Germany will lose it, and nothing more. If, again, the imposition of the +duty occasions such a falling off in the demand, that Germany requires a +less pecuniary value than before, our exports will no longer pay for our +imports, money must pass from England into Germany, and Germany's share +of the advantage of the trade will be increased. By the change in the +distribution of money, cloth will fall in England; and therefore it +will, of course, fall in Germany. Thus Germany will not pay the whole of +the tax. From the same cause, linen will rise in Germany, and +consequently in England. When this alteration of prices has so adjusted +the demand, that the cloth and the linen again pay for one another, the +result is, that Germany has paid only a part of the tax, and the +remainder of what has been received into our treasury has come +indirectly out of the pockets of our own consumers of linen, who pay a +higher price for that imported commodity, in consequence of the tax on +our exports, which at the same time they, in consequence of the efflux +of money and consequent fall of prices, have smaller money incomes +wherewith to pay for the linen at that advanced price. + +It is not an impossible supposition that, by taxing our exports, we +might not only gain nothing from the foreigner, the tax being paid out +of our own pockets, but might even compel our own people to pay a second +tax to the foreigner. Suppose, as before, that the demand of Germany for +cloth falls off so much on the imposition of the duty, that she requires +a smaller money value than before, but that the case is so different +with linen in England, that when the price rises the demand either does +not fall off at all, or so little that the money value required is +greater than before. The first effect of laying on the duty is, as +before, that the cloth exported will no longer pay for the linen +imported. Money will, therefore, flow out of England into Germany. One +effect is to raise the price of linen in Germany, and, consequently, in +England. But this, by the supposition, instead of stopping the efflux of +money, only makes it greater, because the higher the price, the greater +the money value of the linen consumed. The balance, therefore, can only +be restored by the other effect, which is going on at the same time, +namely, the fall of cloth in the English, and, consequently, in the +German market. Even when cloth has fallen so low that its price with the +duty is only equal to what its price without the duty was at first, it +is not a necessary consequence that the fall will stop; for the same +amount of exportation as before will not now suffice to pay the +increased money value of the imports; and although the German consumers +have now not only cloth at the old price, but likewise increased money +incomes, it is not certain that they will be inclined to employ the +increase of their incomes in increasing their purchases of cloth. The +price of cloth, therefore, must perhaps fall, to restore the +equilibrium, more than the whole amount of the duty; Germany may be +enabled to import cloth at a lower price when it is taxed, than when it +was untaxed: and this gain she will acquire at the expense of the +English consumers of linen, who, in addition, will be the real payers of +the whole of what is received at their own custom-house under the name +of duties on the export of cloth. + +Such are the extremely various effects which may result to ourselves, +and to our customers, from the imposition of taxes on our exports [3]: +and the determining circumstances are of a nature so imperfectly +ascertainable, that it must be almost impossible to decide with any +certainty, even after the tax has been imposed, whether we have been +gainers by it or losers. It is certain, however, that whatever we gain, +is lost by somebody else, and there is the expense of the collection +besides: if international morality, therefore, were rightly understood +and acted upon, such taxes, as being contrary to the universal weal, +would not exist. Moreover, the imposition of such a tax frequently will, +and always may, expose a country to lose this branch of its trade +altogether, or to carry it on with diminished advantage, in consequence +of the competition of untaxed exporters from other countries, or of the +domestic producers in the country to which it exports. Even on the most +selfish principles, therefore, the benefit of such a tax is always +extremely precarious. + +5. We have had an example of a tax on exports, that is, on foreigners, +falling in part on ourselves. We shall, therefore, not be surprised if +we find a tax on imports, that is, on ourselves, partly falling upon +foreigners. + +Instead of taxing the cloth which we export, suppose that we tax the +linen which we import. The duty which we are now supposing must not be +what is termed a protecting duty, that is, a duty sufficiently high to +induce us to produce the article at home. If it had this effect, it +would destroy entirely the trade both in cloth and in linen, and both +countries would lose the whole of the advantage which they previously +gained by exchanging those commodities with one another. We suppose a +duty which might diminish the consumption of the article, but which +would not prevent us from continuing to import, as before, whatever +linen we did consume. + +The equilibrium of trade would be disturbed if the imposition of the tax +diminished in the slightest degree the quantity of linen consumed. For, +as the tax is levied at our own custom-house, the German exporter only +receives the same price as formerly, though the English consumer pays a +higher one. If, therefore, there be any diminution of the quantity +bought, although a larger sum of money may be actually laid out in the +article, a smaller one will be due from England to Germany: this sum +will no longer be an equivalent for the sum due from Germany to England +for cloth, the balance therefore must be paid in money. Prices will fall +in Germany, and rise in England; linen will fall in the German market; +cloth will rise in the English. The Germans will pay higher price for +cloth, and will have smaller money incomes to buy it with; while the +English will obtain linen cheaper, that is, its price will exceed what +it previously was by less than the amount of the duty, while their means +of purchasing it will be increased by the increase of their money +incomes. + +If the imposition of the tax does not diminish the demand, it will leave +the trade exactly as it was before. We shall import as much, and export +as much; the whole of the tax will be paid out of our own pockets. + +But the imposition of a tax on a commodity, almost always diminishes the +demand more or less; and it can never, or scarcely ever increase the +demand. It may, therefore, be laid down as a principle, that a tax on +imported commodities, when it really operates as a tax, and not as a +prohibition, either total or partial, almost always falls in part upon +the foreigners who consume our goods: and that this is a mode in which a +nation may be almost sure of appropriating to itself, at the expense of +foreigners, a larger share than would otherwise belong to it of the +increase in the general productiveness of the labour and capital of the +world, which results from the interchange of commodities among nations. + +It is scarcely necessary to observe, that no such advantage can result +from the duty, if it operate as a protecting duty; if it induce the +country which imposes it, to produce for herself that which she would +otherwise have imported. The saving of labour--the increase in the +general productiveness of the capital of the world--which is the effect +of commerce, and which a non-protecting duty would enable the country +imposing it to engross, could not be engrossed by a protecting duty, +because such a duty prevents any such increased production from +existing. + +With a view to practical legislation, therefore, duties on importation +may be divided into two classes: those which have the effect of +encouraging some particular branch of domestic industry, and those which +have not. + +The former are purely mischievous, both to the country imposing them, +and to those with whom it trades. They prevent a saving of labour and +capital, which, if permitted to be made, would be divided in some +proportion or other between the importing country and the countries +which buy what that country does or might export. + +The other class of duties are those which do not encourage one mode of +procuring an article at the expense of another, but allow interchange to +take place just as if the duty did not exist--and to produce the saving +of labour which constitutes the motive to international as to all other +commerce. Of this kind, are duties on the importation of any commodity +which could not by any possibility be produced at home; and duties not +sufficiently high to counterbalance the difference of expense between +the production of the article at home, and its importation. Of the money +which is brought into the treasury of any country by taxes of this last +description, a part only is paid by the people of that country; the +remainder by the foreign consumers of their goods. + +Nevertheless, this latter kind of taxes are in principle as ineligible +as the former, although not precisely on the same ground. A protecting +duty can never be a cause of gain, but always and necessarily of loss, +to the country imposing it, just so far as it is efficacious to its end. +A non-protecting duty on the contrary would, in most cases, be a source +of gain to the country imposing it, in so far as throwing part of the +weight of its taxes upon other people is a gain; but it would be a means +of gain which it could seldom be advisable to adopt, being so easily +counteracted by a precisely similar proceeding on the other side. + +If England, in the case already supposed, sought to obtain for herself +more than her natural share of the advantage of the trade with Germany, +by imposing a duty upon cloth, Germany would only have to impose a duty +upon linen, sufficient to diminish the demand for that article about as +much as the demand for cloth had been diminished in England by the tax. +Things would then be as before, and each country would pay its own tax. +Unless, indeed, the sum of the two duties exceeded the entire advantage +of the trade; for in that case the trade, and its advantage, would cease +entirely. + +There would be no advantage, therefore, in imposing duties of this kind, +with a view to gain by them, in the manner which has been pointed out. +But so long as any other kind of taxes on commodities are retained, as a +source of revenue, these may often be as unobjectionable as the rest. It +is evident, moreover, that considerations of reciprocity, which are +quite unessential when the matter in debate is a protecting duty, are of +material importance when the repeal of duties of this other description +is discussed. A country cannot be expected to renounce the power of +taxing foreigners, unless foreigners will in return practise towards +itself the same forbearance. The only mode in which a country can save +itself from being a loser by the duties imposed by other countries on +its commodities, is to impose corresponding duties on theirs. Only it +must take care that these duties be not so high as to exceed all that +remains of the advantage of the trade, and put an end to importation +altogether; causing the article to be either produced at home, or +imported from another and a dearer market. + +It is not necessary to apply the principles which we have stated to the +case of bounties on exportation or importation. The application is easy, +and the conclusions present nothing of particular interest or +importance. + +6. Any cause which alters the exports or imports from one country into +another, alters the division of the advantage of interchange between +those two countries. Suppose the discovery of a new process, by which +some article of export, or some article not previously exported, can be +produced so cheap as to occasion a great demand for it in other +countries. This of course produces a great influx of money from other +countries, and lowers the prices of all articles imported from them, +until the increase of importation produced by this cause has restored +the equilibrium. Thus, the country which acquires a new article of +export gets its imports cheaper. This is not a case of mere alteration +in the division of the advantage; it is a new advantage created by the +discovery. + +But suppose that the invention, to which the nation is indebted for this +increase of the return to its industry, comes into use also in the other +country, and that the process is one which can be as perfectly and as +cheaply performed in the one country as in the other. The new +exportation will cease; trade will revert to its old channels, the money +which flowed in will again flow out, and the country which invented the +process will lose that increase of its gain by trade, which it had +derived from the discovery. + +Now the exportation of machinery comes within the case which we have +just described. + +If the fact be, that by allowing to foreigners a participation in our +machinery, we enable them to produce any of our leading articles of +export, at a lower money price than we can sell those articles, it is +certain that unless we possess as great an advantage in the production +of the machinery itself as we have in the production of other articles +by means of machinery, the permitting of its exportation would alter to +our disadvantage the division of the benefit of trade. Our exports being +diminished, we should have to pay a balance in money. This would raise, +in foreign countries, the price of everything which we import from +thence: while our incomes, being reduced in money value, would render +us less able to buy those articles even if they had not risen. The +equilibrium of exports and imports would only be restored, when either +some of the latter became so dear that we could produce them cheaper at +home, or some articles not previously exported became exportable from +the fall of prices. In the one case, we lose the benefit of importation +altogether, and are obliged to produce at home, at a greater cost. In +the other case, we continue to import, but pay dearer for our imports. + +Notwithstanding what has now been observed, restrictions on the +exportation of machinery are not, in our opinion, justifiable, either on +the score of international morality or of sound policy. It is evidently +the common interest of all nations that each of them should abstain from +every measure by which the aggregate wealth of the commercial world +would be diminished, although of this smaller sum total it might thereby +be enabled to attract to itself a larger share. And the time will +certainly come when nations in general will feel the importance of this +rule, and will so direct their approbation and disapprobation as to +enforce observance of it. Moreover, a country possessing machines should +consider that if a similar advantage were extended to other countries, +they would employ it above all in the production of those articles, in +which they had already the greatest natural advantages; and if the +former country would be a loser by their improvements in the production +of articles which it sells, it would gain by their improvements in those +which it buys. The exportation of machinery may, however, be a proper +subject for adjustment with other nations, on the principle of +reciprocity. Until, by the common consent of nations, all restrictions +upon trade are done away, a nation cannot be required to abolish those +from which she derives a real advantage, without stipulating for an +equivalent. + +7. The case which we have just examined, is an example in how remarkable +a manner every cause which materially influences exports, operates upon +the prices of imports. According to the ancient theory of the balance of +trade, and to the associations of the generality of what are termed +practical men to this day, the sole benefit derived from commerce +consists in the exports, and imports are rather an evil than otherwise. +Political economists, seeing the folly of these views, and clearly +perceiving that the advantage of commerce consists and must consist +solely of the imports, have occasionally suffered themselves to employ +language evincing inattention to the fact, that exports, though +unimportant in themselves, are important by their influence on imports. +So real and extensive is this influence, that every new market which is +opened for any of our goods, and every increase in the demand for our +commodities in foreign countries, enables us to supply ourselves with +foreign commodities at a smaller cost. + +Let us revert to our earliest and simplest example, but which displays +the real law of interchange more luminously than any formula into which +money enters; the case of simple barter. We showed, that if at the rate +of 10 yards of cloth for 17 of linen, the demand of Germany amounted to +1000 times 10 yards of cloth, the two nations will trade together at +that rate of interchange, provided that the linen required in England be +exactly 1000 times 17 yards, neither more nor less. For the cloth and +the linen will then exactly pay for one another, and nobody on either +side will be obliged to offer what he has to sell at a lower rate, in +order to procure what he wants to buy. + +Now if the increase of wealth and population in Germany should greatly +increase the demand in that country for cloth, the demand for linen in +England not increasing in the same ratio,--if, for instance, Germany +became willing, at the above rate, to take 1500 times 10 yards; is it +not evident, that to induce England to take in exchange for this the +only article which Germany by supposition has to give, the latter must +offer it at a rate more advantageous to England--at 18, or perhaps 19 +yards, for 10 of cloth? So that the division of the advantage becomes +more and more favourable to a country, in proportion as the demand for +its commodities increases in foreign countries. + +It is not even necessary that the country which takes its goods, should +supply it with any commodity whatever. Suppose that a country should be +opened to our merchants, disposed to buy from us in abundance, but which +can sell to us scarcely anything, as every commodity which it affords +could be got cheaper by us from some other quarter. Nevertheless, our +trade with this country will enable us to obtain from all other +countries their commodities at a lower price. At the first opening of +this commerce of mere exportation, we must have received in payment a +large quantity of money; for which our customer will have been +indemnified by other countries, in exchange for her commodities. Prices +must consequently be lower in all other countries, and higher with us, +than before the opening of the new branch of trade; and we therefore +obtain the commodities of other countries at a less cost, both as we pay +less money for them, and as that money is lower in value. + +8. Another obvious application of the same principle will enable us to +explain, and to bring within the dominion of strict science, the +rivality of one exporting nation and another, or what is called, in the +language of the mercantile system, _underselling_: a subject which +political economists have taken little trouble to elucidate, from the +habit before alluded to of disregarding almost entirely, in their purely +scientific inquiries, those circumstances which affect the trade of a +country by operating immediately upon the exports. + +Let us revert to our old example, and to our old figures. Suppose that +the trade between England and Germany in cloth and linen is established, +and that the rate of interchange is 10 yards of cloth for 17 of linen. +Now suppose that there arises in another country, in Flanders, for +example, a linen manufacture; and that the same causes, the working of +which in England and Germany has made 10 yards exchange for 17, would in +England and Flanders, putting Germany out of the question, have made the +rate of interchange 10 for 18. It is evident that Germany also must give +18 yards of linen for 10 of cloth, and so carry on the trade with a +diminished share of the advantage, or lose it altogether. If the play of +demand in England and Flanders had made the rate of interchange not 10 +for 18 but 10 for 21, (10 to 20 being in Germany the comparative cost of +production,) it is evident that Germany could not have maintained the +competition, and would have lost, not part of her share of the +advantage, but all advantage, and the trade itself. + +It would be no answer to say, that Germany could probably still have +found the means of importing cloth from England, by exporting something +else. If she had purchased cloth with anything else, she would have +purchased it dearer: as is proved by the fact, that having free choice, +she found it most advantageous to purchase it with linen. When she could +get 10 yards of cloth for 17 of linen, that was the mode in which she +could get it with least labour. Being pressed by competition, she gave +successively 17, 18, 18; but rather than give 19 yards of linen, she +perhaps would prefer to give, as costing her rather less labour, 10 +yards of silk, (which we will suppose to be the quantity which in +England will purchase 10 yards of cloth.) It is obvious that, although +Germany has found the means of supplying herself with cloth, by +exporting a different article from that in which she was undersold, yet +the advantage of the trade between her and England is now shared in a +proportion much less favourable to Germany. + +There is no difficulty in showing that the same series of consequences +takes place in exactly the same manner through the agency of money. The +trade in cloth and linen between England and Germany being supposed to +exist as before, Flanders produces linen at a lower price than that at +which Germany has hitherto afforded it. The exportation from Germany is +suspended; and Germany, continuing to import cloth, pays for it in +money. By so doing she lowers her own prices, and raises those in +England: she has to pay more money for cloth, and to pay it in a +currency of higher value. She thus suffers more and more as a consumer +of cloth, until by the fall of her prices she can either afford to sell +linen as cheap as Flanders, or to export some other commodity which she +could not export before. In either case, her trade resumes its course, +but with diminished advantage on her side. [4] + +It is in the mode just described, that those countries which formerly +supplied Europe with manufactures, but which owed their power of doing +so not to any natural and permanent advantages, but to their more +advanced state of civilization as compared with other countries, have +lost their pre-eminence as other countries successively attained an +equal degree of civilization. Lombardy and Flanders, in the middle ages, +produced some descriptions of clothing and ornament for all Europe: +Holland, at a much later period, supplied ships, and almost all articles +which came in ships, to most other parts of the world. All these +countries have probably at this moment a much larger amount of capital +than ever they had, but having been undersold by other countries, they +have lost by far the greater part of the share which they had engrossed +to themselves of the benefit which the world derives from commerce; and +their capital yields to them in consequence a smaller proportional +return. We are aware that other causes have contributed to the same +effect, but we cannot doubt that this is a principal one. + +As much as is really true of the great returns alleged to have been made +to capital during the last war, must have arisen from a similar cause. +Our exclusive command of the sea excluded from the market all by whom we +should have been undersold. + +The adoption by France, Russia, the Netherlands, and the United States, +of a more severely restrictive commercial policy, subsequently to 1815, +has done great injury undoubtedly to those countries; for the duties +which they have established are intended to be, and really are, of the +class termed _protecting_; that is to say, such as force the production +of commodities by more costly processes at home, instead of suffering +them to be imported from abroad. But these duties, though chiefly +injurious to the countries imposing them, have also been highly +injurious to England. By diminishing her exportation, or preventing it +from increasing as it would otherwise have done, they have kept up the +prices of all imported commodities in England, above what those prices +would have fallen to if trade had been left free. + +By another obvious application of the same reasoning, it will be seen, +that there is a real foundation for the notion, that a country may be +benefited by receiving from another country the concession of what used +to be termed commercial advantages, or by restraining its colonies from +purchasing goods of any country except itself. In the figured +illustration last used (p. 34) [not available, M.D.], it is evident, +that if England had been bound by a treaty with Germany to buy linen +exclusively from her, Germany would have retained the trade which we +supposed her to lose, and would have continued to purchase cloth at a +comparatively cheap rate from England, instead of producing it by a more +costly process at home. Suppose that England had been a colony of +Germany, and we see that by compelling colonies to deal at her shop, she +may obtain a real advantage, though of a nature which we may hazard the +assertion that the founders of our colonial policy little dreamt of. + +Such an advantage, however, being gained at the expense of another +country, is, at the least, simply equivalent to a tax, or tribute. Now, +if a country has just grounds, or deems superiority of power a +sufficient ground, for exacting a tribute from another country, the most +direct mode is the best. First, because it is the most intelligible, and +has least of trick or disguise. Secondly, because it allows the people +of the country paying the tribute, to raise the money in whatever way +they consider least oppressive to themselves. Thirdly, because the +indirect mode of taxing a country, by restrictions on its commerce, +disturbs the distribution of industry most advantageous to the world at +large, and occasions a greater loss to the restricted country, and to +the other countries with which that country would have traded, than gain +to the country in whose favour the restrictions are imposed. And lastly, +because a country never could obtain such privileges from an independent +nation, and has seldom been so undisguised an oppressor as to demand +them even from its colonies, without subjecting itself to restrictions +in some degree equivalent, for the benefit of those whom it has thus +taxed. Each country, therefore, usually pays tribute to the other; and +to produce this fruitless reciprocity of exaction, the industry and +trade of both countries are diverted from the most advantageous +channels, and the return to the labour and capital of both is +diminished, in pure loss. + +9. The same principles which have led to the above conclusions, also +suggest a remark of some importance with respect to the probable effect +of a change from a restricted to a comparatively free trade. + +There is no doubt that our prohibiting the importation of a particular +article, which, but for the prohibition, would have been imported, +enables us to obtain our other imports at smaller cost. The article for +which we have the greatest demand, and for which our demand is most +increased by cheapness, is that which we should naturally import +preferably to any other; now of this article we should import the +quantity necessary to pay for our exports, on terms of interchange less +advantageous to us than in the case of any other commodity. If our +legislature prohibits this commodity, the other country will be obliged +to offer any other article on easier terms, in order to force a +sufficient demand for it to be an equivalent to what she purchases from +us. + +The steps of the process, money being used, would be these:--We prohibit +the importation of linen. The exportation of cloth continues, but is +paid for in money. Our prices rise, those in Germany fall, until silk, +or some other article, can be imported from Germany cheaper than it can +be produced at home, and in sufficient abundance to balance the export +of cloth. Thus by sacrificing the cheapness of one commodity, we gain +the cheapness of another: but we sacrifice a greater cheapness to gain a +less, and we sacrifice cheapness in the article which we most want, and +would import by preference, while our compensation is cheapness in an +article which we either could produce more advantageously at home, or +which we have so little desire for, that it requires a species of bounty +on the article to create a demand. + +Restrictions on importation do, however, tend to keep down the value and +price of our remaining imports, and to keep up the nominal or money +prices of all our other commodities, by retaining a greater quantity of +money in the country than would otherwise be there. From this it +obviously follows, that if the restrictions were removed, we should have +to pay rather more for some of the articles which we now import, while +those which we are now prevented from importing would cost us more than +might be inferred from their _present_ price in the foreign market. And +general prices would fall; to the benefit of those who have fixed sums +to receive; to the disadvantage of those who have fixed sums to pay; and +giving rise, as a general fall of prices always does, to an appearance, +though a temporary and fallacious one, of general distress. [5] + +It is right to observe that the measures of the British Legislature +which have been falsely characterised as measures of free trade, must, +from their extremely insignificant extent, have produced far too little +effect in increasing our importation, to have actually led, in any +degree worth mentioning, to the results specified above. + +It is of greater importance to take notice, that these effects may be +entirely obviated, if foreign countries can be prevailed upon +simultaneously to relax their restrictive systems, so as to create an +immediate increase of demand for our exports at the present prices. It +is true that exports and imports must, in the end, balance one another, +and if we increase our imports, our exports will of necessity increase +too. But it is a forced increase, produced by an efflux of money and +fall of prices; and this fall of prices being permanent, although it +would be no evil at all in a country where credit is unknown, it may be +a very serious one where large classes of persons, and the nation +itself, are under engagements to pay fixed sums of money of large +amount. + +10. The only remaining application of the principle set forth in this +essay, which we think it of importance to notice specially, is the +effect produced upon a country by the annual payment of a tribute or +subsidy to a foreign power, or by the annual remittance of rents to +absentee landlords, or of any other kind of income to its absent owners. +Remittances to absentees are often very incorrectly likened in their +general character to the payment of a tribute; from which they differ in +this very material circumstance, that tribute, if not paid to a foreign +country, is not paid at all, whereas rents are paid to the landlord, and +consumed by him, even if he resides at home. The two kinds of payment, +however, have a perfect resemblance to each other in such parts of their +effects as we are about to point out. + +The tribute, subsidy, or remittance, is always in goods; for, unless the +country possesses mines of the precious metals, and numbers those metals +among its regular articles of export, it cannot go on, year after year, +parting with them, and never receiving them back. When a nation has +regular payments to make in a foreign country, for which it is not to +receive any return, its exports must annually exceed its imports by the +amount of the payments which it is bound so to make. In order to force a +demand for its exports greater than its imports will suffice to pay for, +it must offer them at a rate of interchange more favourable to the +foreign country, and less so to itself, than if it had no payments to +make beyond the value of its imports. It therefore carries on the trade +with less advantage, in consequence of the obligations to which it is +subject towards persons resident in foreign countries. + +The steps of the process are these. The exports and imports being in +equilibrium, suppose a treaty to be concluded, by which the country +binds itself to pay in tribute to another country, a certain sum +annually. It makes, perhaps, the first payment by a remittance of money. +This lowers prices in the paying country, and raises them in the +receiving one: the exports of the tributary country increase, its +imports diminish. When the efflux of money has altered prices in the +requisite degree, the exports exceed the imports annually, by the amount +of the tribute; and the latter, being added to the sum of the payments +due, restores the balance of payments between the two countries. The +result to the tributary country is a diminution of her share in the +advantage of foreign trade. She pays dearer for her imports, in two +ways, because she pays more money, and because that money is of higher +value, the money incomes of her inhabitants being of smaller amount. + +Thus the imposition of a tribute is a double burthen to the country +paying it, and a double gain to that which receives it. The tributary +country pays to the other, first, the tax, whatever be its amount, and +next, something more, which the one country loses in the increased cost +of its imports, the other gains in the diminished cost of its own. + +Absenteeism, moreover, though not burthensome in the former of these +ways, since the money is paid whether the receiver be an absentee or +not, is yet disadvantageous in the second of the two modes which have +been mentioned. Ireland pays dearer for her imports in consequence of +her absentees; a circumstance which the assailants of Mr. M'Culloch, +whether political economists or not, have not, we believe, hitherto +thought of producing against him. + +11. If the question be now asked, which of the countries of the world +gains most by foreign commerce, the following will be the answer. + +If by gain be meant advantage, in the most enlarged sense, that country +will generally gain the most, which stands most in need of foreign +commodities. + +But if by gain be meant saving of labour and capital in obtaining the +commodities which the country desires to have, whatever they may be; the +country will gain, not in proportion to its own need of foreign +articles, but to the need which foreigners have of the articles which +itself produces. + +Let us take, as an illustration of our meaning, the case of France and +England. Those two nations, in consequence of the restrictions with +which they have loaded their commercial intercourse, carry on so little +trade with each other, as may almost, regard being had to the wealth and +population of the two countries, be called none at all. If these fetters +were at once taken off, which of the two countries would be the greatest +gainer? England without doubt. There would instantly arise in France an +immense demand for the cottons, woollens, and iron of England; while +wines, brandies, and silks, the staple articles of France, are less +likely to come into general demand here, nor would the consumption of +such productions, it is probable, be so rapidly increased by the fall of +price. The fall would probably be very great before France could obtain +a vent in England for so much of her exports as would suffice to pay for +the probable amount of her imports. There would be a considerable flow +of the precious metals out of France into England. The English consumer +of French wine would not merely save the amount of the duty which that +wine now pays, but would find the wine itself falling-in prime cost, +while his means of purchasing it would be increased by the augmentation +of his own money income. The French consumer of English cottons, on the +contrary, would not long continue to be able to purchase them at the +price they now sell for in England. He would gain less, as the English +would gain more, than might appear from a mere comparison between the +present prices of commodities in the two countries. + +Various consequences would flow from opening the trade between France +and England, which are not expected, either by the friends or by the +opponents of the present restrictive system. The wine-growers of France, +who imagine that free trade would relieve their distress by raising the +price of their wine, might not improbably find that price actually +lowered. On the other hand, our silk manufacturers would be surprised if +they were told that the free admission of our cottons and hardware into +the French market, would endanger _their_ branch of manufacture: yet +such might very possibly be the effect. France, it is likely, could most +advantageously pay us in silks for a portion of the large amount of +cottons and hardware which we should sell to her; and though our silk +manufacturers may now be able to compete advantageously, in some +branches of the manufacture, with their French rivals, it by no means +follows that they could do so when the efflux of money from France, and +its influx into England, had lowered the price of silk goods in the +French market, and increased all the expenses of production here. + +On the whole, England probably, of all the countries of Europe, draws to +herself the largest share of the gains of international commerce: +because her exportable articles are in universal demand, and are of such +a kind that the demand increases rapidly as the price falls. Countries +which export food, have the former advantage, but not the latter. But +our own colonies, and the countries which supply us with the materials +of our manufactures, maintain a hard struggle with us for an equal share +of the advantages of their trade; for _their_ exports are also of a kind +for which there exists a most extensive demand here, and a demand +capable of almost indefinite extension by a fall of price. Contrary, +therefore, to common opinion, it is probable that our trade with the +colonies, and with the countries which send us the raw materials of our +national industry, is not more but less advantageous to us, in +proportion to its extent, than our trade with the continent of Europe. +We mean in respect to the mere amount of the return to the labour and +capital of the country; considered abstractedly from the usefulness or +agreeableness of the particular articles on which the receivers may +choose to expend it. + + +NOTES: + +[1] _Elements of Political Economy_, by James Mill, Esq., 3rd +edit., pp. 120-1. + +[2] The figures used are of course arbitrary, having no +reference to any existing prices. + +[3] We have not deemed it necessary to enter minutely into all +the circumstances which might modify the results mentioned in the text. +For example, let us revert to the first case, that in which the demand +for cloth in Germany is so little affected by the rise of price in +consequence of the tax, that the quantity bought exceeds in pecuniary +value what it was before. As the German consumers lay out more money in +cloth, they have less to lay out in other things; other money prices +will fall; among the rest that of linen; and this may so increase the +demand for linen in England as to restore the equilibrium of exports and +imports without any passage of money. But England's treasury will still +gain from Germany the whole of the tax, and the English people will buy +their linen cheaper besides. Again, in the opposite case, where the tax +so diminishes the demand, that a smaller pecuniary value is required +than before. The German consumers have, therefore, more to expend in +other things; these, and among the rest linen, will rise; and this may +so diminish the demand for linen in England, as to restore the +equilibrium without the transmission of money. But the effect, as +respects the division of the advantage, is still as stated in the text. + +[4] The world at large, sellers and buyers taken together, is +always a gainer by underselling. If, in the case supposed, England were +compelled by a commercial treaty to exclude the linen of Flanders from +her market, the total wealth of the world, if affected at all, would be +diminished. + +For, what is the cause which enables Flanders to undersell Germany? That +Flanders, if she had the trade, would exchange linen for cloth at a rate +of interchange more advantageous to England. And why can Flanders do so? +It must be either because Flanders can produce the article with a less +comparative quantity of labour than Germany, and therefore the total +advantage to be divided between the two countries is greater in the case +of Flanders than of Germany; or else because, though the total advantage +is not greater, Flanders obtains a less share of it, her demand for +cloth being greater, at the same rate of interchange, than that of +Germany. In the former case, to exclude Flemish linen from England would +be to prevent the world at large from making a greater saving of labour +instead of a less. In the latter, the exclusion would be inefficacious +for the only end it could be intended for, viz., the benefit of Germany, +unless Flemish money were excluded from England as well as Flemish +linen. For Flanders would buy English cloth, paying for it in money, +until the fall of her prices enabled her to pay for it with something +else: and the ultimate result would be that, by the rise of prices in +England, Germany must pay a higher price for her cloth, and so lose a +part of the advantage in spite of the treaty; while England would pay +for German linen the same price indeed, but as the money incomes of her +own people would be increased, the same money price would imply a +smaller sacrifice. + +[5] This last possible effect of a sudden introduction of free +trade, was pointed out in an able article on the Silk question, in a +work of too short duration, the _Parliamentary Review_. + + + + +ESSAY II. + +OF THE INFLUENCE OF CONSUMPTION ON PRODUCTION. + + +Before the appearance of those great writers whose discoveries have +given to political economy its present comparatively scientific +character, the ideas universally entertained both by theorists and by +practical men, on the causes of national wealth, were grounded upon +certain general views, which almost all who have given any considerable +attention to the subject now justly hold to be completely erroneous. + +Among the mistakes which were most pernicious in their direct +consequences, and tended in the greatest degree to prevent a just +conception of the objects of the science, or of the test to be applied +to the solution of the questions which it presents, was the immense +importance attached to consumption. The great end of legislation in +matters of national wealth, according to the prevalent opinion, was to +create consumers. A great and rapid consumption was what the producers, +of all classes and denominations, wanted, to enrich themselves and the +country. This object, under the varying names of an extensive demand, a +brisk circulation, a great expenditure of money, and sometimes _totidem +verbis_ a large consumption, was conceived to be the great condition of +prosperity. + +It is not necessary, in the present state of the science, to contest +this doctrine in the most flagrantly absurd of its forms or of its +applications. The utility of a large government expenditure, for the +purpose of encouraging industry, is no longer maintained. Taxes are not +now esteemed to be "like the dews of heaven, which return again in +prolific showers." It is no longer supposed that you benefit the +producer by taking his money, provided you give it to him again in +exchange for his goods. There is nothing which impresses a person of +reflection with a stronger sense of the shallowness of the political +reasonings of the last two centuries, than the general reception so long +given to a doctrine which, if it proves anything, proves that the more +you take from the pockets of the people to spend on your own pleasures, +the richer they grow; that the man who steals money out of a shop, +provided he expends it all again at the same shop, is a benefactor to +the tradesman whom he robs, and that the same operation, repeated +sufficiently often, would make the tradesman's fortune. + +In opposition to these palpable absurdities, it was triumphantly +established by political economists, that consumption never needs +encouragement. All which is produced is already consumed, either for the +purpose of reproduction or of enjoyment. The person who saves his income +is no less a consumer than he who spends it: he consumes it in a +different way; it supplies food and clothing to be consumed, tools and +materials to be used, by productive labourers. Consumption, therefore, +already takes place to the greatest extent which the amount of +production admits of; but, of the two kinds of consumption, reproductive +and unproductive, the former alone adds to the national wealth, the +latter impairs it. What is consumed for mere enjoyment, is gone; what is +consumed for reproduction, leaves commodities of equal value, commonly +with the addition of a profit. The usual effect of the attempts of +government to encourage consumption, is merely to prevent saving; that +is, to promote unproductive consumption at the expense of reproductive, +and diminish the national wealth by the very means which were intended +to increase it. + +What a country wants to make it richer, is never consumption, but +production. Where there is the latter, we may be sure that there is no +want of the former. To produce, implies that the producer desires to +consume; why else should he give himself useless labour? He may not wish +to consume what he himself produces, but his motive for producing and +selling is the desire to buy. Therefore, if the producers generally +produce and sell more and more, they certainly also buy more and more. +Each may not want more of what he himself produces, but each wants more +of what some other produces; and, by producing what the other wants, +hopes to obtain what the other produces. There will never, therefore, be +a greater quantity produced, of commodities in general, than there are +consumers for. But there may be, and always are, abundance of persons +who have the inclination to become consumers of some commodity, but are +unable to satisfy their wish, because they have not the means of +producing either that, or anything to give in exchange for it. The +legislator, therefore, needs not give himself any concern about +consumption. There will always be consumption for everything which can +be produced, until the wants of all who possess the means of producing +are completely satisfied, and then production will not increase any +farther. The legislator has to look solely to two points: that no +obstacle shall exist to prevent those who have the means of producing, +from employing those means as they find most for their interest; and +that those who have not at present the means of producing, to the extent +of their desire to consume, shall have every facility afforded to their +acquiring the means, that, becoming producers, they may be enabled to +consume. + +These general principles are now well understood by almost all who +profess to have studied the subject, and are disputed by few except +those who ostentatiously proclaim their contempt for such studies. We +touch upon the question, not in the hope of rendering these fundamental +truths clearer than they already are, but to perform a task, so useful +and needful, that it is to be wished it were oftener deemed part of the +business of those who direct their assaults against ancient prejudices, +--that of seeing that no scattered particles of important truth are +buried and lost in the ruins of exploded error. Every prejudice, which +has long and extensively prevailed among the educated and intelligent, +must certainly be borne out by some strong appearance of evidence; and +when it is found that the evidence does not prove the received +conclusion, it is of the highest importance to see what it does prove. +If this be thought not worth inquiring into, an error conformable to +appearances is often merely exchanged for an error contrary to +appearances; while, even if the result be truth, it is paradoxical +truth, and will have difficulty in obtaining credence while the false +appearances remain. + +Let us therefore inquire into the nature of the appearances, which gave +rise to the belief that a great demand, a brisk circulation, a rapid +consumption (three equivalent expressions), are a cause of national +prosperity. + +If every man produced for himself, or with his capital employed others +to produce, everything which he required, customers and their wants +would be a matter of profound indifference to him. He would be rich, if +he had produced and stored up a large supply of the articles which he +was likely to require; and poor, if he had stored up none at all, or not +enough to last until he could produce more. + +The case, however, is different after the separation of employments. In +civilized society, a single producer confines himself to the production +of one commodity, or a small number of commodities; and his affluence +depends, not solely upon the quantity of his commodity which he has +produced and laid in store, but upon his success in finding purchasers +for that commodity. + +It is true, therefore, of every particular producer or dealer, that +a great demand, a brisk circulation, a rapid consumption, of the +commodities which he sells at his shop or produces in his manufactory, +is important to him. The dealer whose shop is crowded with customers, +who can dispose of a product almost the very moment it is completed, +makes large profits, while his next neighbour, with an equal capital +but fewer customers, gains comparatively little. + +It was natural that, in this case, as in a hundred others, the analogy +of an individual should be unduly applied to a nation: as it has been +concluded that a nation generally gains in wealth by the conquest of a +province, because an individual frequently does so by the acquisition of +an estate; and as, because an individual estimates his riches by the +quantity of money which he can command, it was long deemed an excellent +contrivance for enriching a country, to heap up artificially the +greatest possible quantity of the precious metals within it. + +Let us examine, then, more closely than has usually been done, the case +from which the misleading analogy is drawn. Let us ascertain to what +extent the two cases actually resemble; what is the explanation of the +false appearance, and the real nature of the phenomenon which, being +seen indistinctly, has led to a false conclusion. + + * * * * * + +We shall propose for examination a very simple case, but the explanation +of which will suffice to clear up all other cases which fall within the +same principle. Suppose that a number of foreigners with large incomes +arrive in a country, and there expend those incomes: will this operation +be beneficial, as respects the national wealth, to the country which +receives these immigrants? Yes, say many political economists, if they +save any part of their incomes, and employ them reproductively; because +then an addition is made to the national capital, and the produce is a +clear increase of the national wealth. But if the foreigner expends all +his income unproductively, it is no benefit to the country, say they, +and for the following reason. + +If the foreigner had his income remitted to him in bread and beef, coats +and shoes, and all the other articles which he was desirous to consume, +it would not be pretended that his eating, drinking, and wearing them, +on our shores rather than on his own, could be of any advantage to us in +point of wealth. Now, the case is not different if his income is +remitted to him in some one commodity, as, for instance, in money. For +whatever takes place afterwards, with a view to the supply of his wants, +is a mere exchange of equivalents; and it is impossible that a person +should ever be enriched by merely receiving an equal value in exchange +for an equal value. + +When it is said that the purchases of the foreign consumer give +employment to capital which would otherwise yield no profit to its +owner, the same political economists reject this proposition as +involving the fallacy of what has been called a "general glut." They +say, that the capital, which any person has chosen to produce and to +accumulate, can always find employment, since the fact that he has +accumulated it proves that he had an unsatisfied desire; and if he +cannot find anything to produce for the wants of other consumers, he can +for his own. + +It is impossible to contest these propositions as thus stated. But there +is one consideration which clearly shews, that there is something more +in the matter than is here taken into the account; and this is, that the +above reasoning tends distinctly to prove, that it does a tradesman no +good to go into his shop and buy his goods. How can he be enriched? it +might be asked. He merely receives a certain value in money, for an +equivalent value in goods. Neither does this give employment to his +capital; for there never exists more capital than can find employment, +and if one person does not buy his goods another will; or if nobody +does, there is over-production in that business, he can remove his +capital, and find employment for it in another trade. + +Every one sees the fallacy of this reasoning as applied to individual +producers. Every one knows that as applied to them it has not even the +semblance of plausibility; that the wealth of a producer does in a great +measure depend upon the number of his customers, and that in general +every additional purchaser does really add to his profits. If the +reasoning, which would be so absurd if applied to individuals, be +applicable to nations, the principle on which it rests must require much +explanation and elucidation. + +Let us endeavour to analyse with precision the real nature of the +advantage which a producer derives from an addition to the number of his +customers. + +For this purpose, it is necessary that we should premise a single +observation on the meaning of the word capital. It is usually defined, +the food, clothing, and other articles set aside for the consumption of +the labourer, together with the materials and instruments of production. +This definition appears to us peculiarly liable to misapprehension; and +much vagueness and some narrow views have, we conceive, occasionally +resulted from its being interpreted with too mechanical an adherence to +the literal meaning of the words. + +The capital, whether of an individual or of a nation, consists, we +apprehend, of all matters possessing exchangeable value, which the +individual or the nation has in his or in its possession for the purpose +of reproduction, and not for the purpose of the owner's unproductive +enjoyment. All unsold goods, therefore, constitute a part of the +national capital, and of the capital of the producer or dealer to whom +they belong. It is true that tools, materials, and the articles on which +the labourer is supported, are the only articles which are directly +subservient to production: and if I have a capital consisting of money, +or of goods in a warehouse, I can only employ them as means of +production in so far as they are capable of being exchanged for the +articles which conduce directly to that end. But the food, machinery, +&c, which will ultimately be purchased with the goods in my warehouse, +may at this moment not be in the country, may not be even in existence. +If, after having sold the goods, I hire labourers with the money, and +set them to work, I am surely employing capital, though the corn, which +in the form of bread those labourers may buy with the money, may be now +in warehouse at Dantzic, or perhaps not yet above ground. + +Whatever, therefore, is destined to be employed reproductively, either +in its existing shape, or indirectly by a previous (or even subsequent) +exchange, is capital. Suppose that I have laid out all the money I +possess in wages and tools, and that the article I produce is just +completed: in the interval which elapses before I can sell the article, +realize the proceeds, and lay them out again in wages and tools, will it +be said that I have no capital? Certainly not: I have the same capital +as before, perhaps a greater, but it is locked up, as the expression is, +and not disposable. + +When we have thus seen accurately what really constitutes capital, it +becomes obvious, that of the capital of a country, there is at all times +a very large proportion lying idle. The annual produce of a country is +never any thing approaching in magnitude to what it might be if all the +resources devoted to reproduction, if all the capital, in short, of the +country, were in full employment. + +If every commodity on an average remained unsold for a length of time +equal to that required for its production, it is obvious that, at any +one time, no more than half the productive capital of the country would +be really performing the functions of capital. The two halves would +relieve one another, like the semichori in a Greek tragedy; or rather +the half which was in employment would be a fluctuating portion, +composed of varying parts; but the result would be, that each producer +would be able to produce every year only half as large a supply of +commodities, as he could produce if he were sure of selling them the +moment the production was completed. + +This, or something like it, is however the habitual state, at every +instant, of a very large proportion of all the capitalists in the world. + +The number of producers, or dealers, who turn over their capital, as the +expression is, in the shortest possible time, is very small. There are +few who have so rapid a sale for their wares, that all the goods which +their own capital, or the capital which they can borrow, enables them to +supply, are carried off as fast as they can be supplied. The majority +have not an _extent of business_, at all adequate to the amount of the +capital they dispose of. It is true that, in the communities in which +industry and commerce are practised with greatest success, the +contrivances of banking enable the possessor of a larger capital than he +can employ in his own business, to employ it productively and derive a +revenue from it notwithstanding. Yet even then, there is, of necessity, +a great quantity of capital which remains fixed in the shape of +implements, machinery, buildings, &c, whether it is only half employed, +or in complete employment: and every dealer keeps a stock in trade, to +be ready for a possible sudden demand, though he probably may not be +able to dispose of it for an indefinite period. + +This perpetual non-employment of a large proportion of capital, is the +price we pay for the division of labour. The purchase is worth what it +costs; but the price is considerable. + +Of the importance of the fact which has just been noticed there are +three signal proofs. One is, the large sum often given for the goodwill +of a particular business. Another is, the large rent which is paid for +shops in certain situations, near a great thoroughfare for example, +which have no advantage except that the occupier may expect a larger +body of customers, and be enabled to turn over his capital more quickly. +Another is, that in many trades, there are some dealers who sell +articles of an equal quality at a lower price than other dealers. Of +course, this is not a voluntary sacrifice of profits: they expect by the +consequent overflow of customers to turn over their capital more +quickly, and to be gainers by keeping the whole of their capital in more +constant employment, though on any given operation their gains are less. + +The reasoning cited in the earlier part of this paper, to show the +uselessness of a mere purchaser or customer, for enriching a nation or +an individual, applies only to the case of dealers who have already as +much business as their capital admits of, and as rapid a sale for their +commodities as is possible. To such dealers an additional purchaser is +really of no use; for, if they are sure of selling all their commodities +the moment those commodities are on sale, it is of no consequence whether +they sell them to one person or to another. But it is questionable +whether there be any dealers in whose case this hypothesis is exactly +verified; and to the great majority it is not applicable at all. An +additional customer, to most dealers, is equivalent to an increase of +their productive capital. He enables them to convert a portion of their +capital which was lying idle (and which could never have become +productive in their hands until a customer was found) into wages and +instruments of production; and if we suppose that the commodity, unless +bought by him, would not have found a purchaser for a year after, then +all which a capital of that value can enable men to produce during a +year, is clear gain--gain to the dealer, or producer, and to the +labourers whom he will employ, and thus (if no one sustains any +corresponding loss) gain to the nation. The aggregate produce of the +country for the succeeding year is, therefore, increased; not by the +mere exchange, but by calling into activity a portion of the national +capital, which, had it not been for the exchange, would have remained +for some time longer unemployed. + +Thus there are actually at all times producers and dealers, of all, or +nearly all classes, whose capital is lying partially idle, because they +have not found the means of fulfilling the condition which the division +of labour renders indispensable to the full employment of capital,--viz., +that of exchanging their products with each other. If these persons +could find one another out, they could mutually relieve each other from +this disadvantage. Any two shopkeepers, in insufficient employment, who +agreed to deal at each other's shops so long as they could there +purchase articles of as good a quality as elsewhere, and at as low a +price, would render the nation a service. It may be said that they must +previously have dealt, to the same amount, with some other dealers; but +this is erroneous, since they could only have obtained the means of +purchasing by being previously enabled to sell. By their compact, each +would gain a customer, who would call his capital into fuller employment; +each therefore would obtain an increased produce; and they would thus be +enabled to become better customers to each other than they could be to +third parties. + +It is obvious that every dealer who has not business sufficient fully to +employ his capital (which is the case with all dealers when they commence +business, and with many to the end of their lives), is in this +predicament simply for want of some one with whom to exchange his +commodities; and as there are such persons to about the same degree +probably in all trades, it is evident that if these persons sought one +another out, they have their remedy in their own hands, and by each +other's assistance might bring their capital into more full employment. + +We are now qualified to define the exact nature of the benefit which a +producer or dealer derives from the acquisition of a new customer. It is +as follows:-- + +1. If any part of his own capital was locked up in the form of unsold +goods, producing (for a longer period or a shorter) nothing at all; +a portion of this is called into greater activity, and becomes more +constantly productive. But to this we must add some further advantages. + +2. If the additional demand exceeds what can be supplied by setting at +liberty the capital which exists in the state of unsold goods; and if +the dealer has additional resources, which were productively invested +(in the public funds, for instance), but not in his own trade; he is +enabled to obtain, on a portion of these, not mere interest, but profit, +and so to gain that difference between the rate of profit and the rate +of interest, which may be considered as "wages of superintendance." + +3. If all the dealer's capital is employed in his own trade, and no part +of it locked up as unsold goods, the new demand affords him additional +encouragement to save, by enabling his savings to yield him not merely +interest, but profit; and if he does not choose to save (or until he +shall have saved), it enables him to carry on an additional business +with borrowed capital, and so gain the difference between interest and +profit, or, in other words, to receive wages of superintendance on a +larger amount of capital. + +This, it will be found, is a complete account of all the gains which a +dealer in any commodity can derive from an accession to the number of +those who deal with him: and it is evident to every one, that these +advantages are real and important, and that they are the cause which +induces a dealer of any kind to desire an increase of his business. + +It follows from these premises, that the arrival of a new unproductive +consumer (living on his own means) in any place, be that place a +village, a town, or an entire country, is beneficial to that place, if +it causes to any of the dealers of the place any of the advantages above +enumerated, without withdrawing an equal advantage of the same kind from +any other dealer of the same place. + +This accordingly is the test by which we must try all such questions, +and by which the propriety of the analogical argument, from dealing with +a tradesman to dealing with a nation, must be decided. + +Let us take, for instance, as our example, Paris, which is much +frequented by strangers from various parts of the world, who, as +sojourners there, live unproductively upon their means. Let us consider +whether the presence of these persons is beneficial, in an _industrial_ +point of view, to Paris. + +We exclude from the consideration that portion of the strangers' incomes +which they pay to natives as direct remuneration for service, or labour +of any description. This is obviously beneficial to the country. An +increase in the funds expended in employing labour, whether that labour +be productive or unproductive, tends equally to raise wages. The +condition of the whole labouring class is, so far, benefited. It is true +that the labourers thus employed by sojourners are probably, in part or +altogether, withdrawn from productive employment. But this is far from +being an evil; for either the situation of the labouring classes is +improved, which is far more than an equivalent for a diminution in mere +production, or the rise of wages acts as a stimulus to population, and +then the number of productive labourers becomes as great as before. + +To this we may add, that what the sojourners pay as wages of labour or +service (whether constant or casual), though expended unproductively by +the first possessor, may, when it passes into the hands of the receivers, +be by them saved, and invested in a productive employment. If so, a direct +addition is made to the national capital. + +All this is obvious, and is sufficiently allowed by political economists; +who have invariably set apart the gains of all persons coming under the +class of domestic servants, as real advantages arising to a place from +the residence there of an increased number of unproductive consumers. + +We have only to examine whether the purchases of commodities by these +unproductive consumers, confer the same kind of benefit upon the +village, town, or nation, which is bestowed upon a particular tradesman +by dealing at his shop. + +Now it is obvious that the sojourners, on their arrival, confer the +benefit in question upon some dealers, who did not enjoy it before. They +purchase their food, and many other articles, from the dealers in the +place. They, therefore, call the capital of some dealers, which was +locked up in unsold goods, into more active employment. They encourage +them to save, and enable them to receive wages of superintendance upon a +larger amount of capital. These effects being undeniable, the question +is, whether the presence of the sojourners deprives any others of the +Paris dealers of a similar advantage. + +It will be seen that it does; and nothing will then remain but a +comparison of the amounts. + +It is obvious to all who reflect (and was shown in the paper which +precedes this) that the remittances to persons who expend their incomes +in foreign countries are, after a slight passage of the precious metals, +defrayed in commodities: and that the result commonly is, an increase of +exports and a diminution of imports, until the latter fall short of the +former by the amount of the remittances. + +The arrival, therefore, of the strangers (say from England), while it +creates at Paris a market for commodities equivalent in value to their +funds, displaces in the market other commodities to an equal value. To +the extent of the increase of exports from England into France in the +way of remittance, it introduces additional commodities which, by their +cheapness, displace others formerly produced in that country. To the +extent of the diminution of imports into England from France, +commodities which existed or which were habitually produced in that +country are deprived of a market, or can only find one at a price not +sufficient to defray the cost. + +It must, therefore, be a matter of mere accident, if by arriving in a +place, the new unproductive consumer causes any net advantage to its +industry, of the kind which we are now examining. Not to mention that +this, like any other change in the channels of trade, may render useless +a portion of fixed capital, and so far injure the national wealth. + +A distinction, however, must here be made. + +The place to which the new unproductive consumers have come, may be a +town or village, as well as a country. If a town or village, it may +either be or not be a place having an export trade. + +If the place had no previous trade except with the immediate +neighbourhood, there are no exports and imports, by the new arrangement +of which, the remittance can be made. There is no capital, formerly +employed in manufacturing for the foreign market, which is now brought +into less full employment. + +Yet the remittance evidently is still made in commodities, but in this +case without displacing any which were produced before. To shew this, it +is necessary to make the following remarks. + +The reason why towns exist, is that _ceteris paribus_ it is convenient, +in order to save cost of carriage, that the production of commodities +should take place as far as practicable in the immediate vicinity of the +consumer. Capital finds its way so easily from town to country and from +country to town, that the amount of capital in the town will be regulated +wholly by the amount which can be employed there more conveniently than +elsewhere. Consequently the capital of a place will be such as is +sufficient + +1st. To produce all commodities which from local circumstances can be +produced there at less cost than elsewhere: and if this be the case to +any great extent, it will be an exporting town. When we say _produced_, +we may add, or _stored_. + +2nd. To produce and retail the commodities which are consumed by the +inhabitants of the town, and the place of whose production is in other +respects a matter of indifference. To the inhabitants of the town must +be added such dwellers in the adjoining country, as are nearer to that +place than to any other equally well furnished market. + +Now, if new unproductive consumers resort to the place, it is clear that +for the latter of these two purposes, more capital will be required than +before. Consequently, if less is not required for the former purpose, +more capital will establish itself at the place. + +Until this additional capital has arrived, the producers and dealers +already on the spot will enjoy great advantages. Every particle of their +own capital will be called into the most active employment. What their +capital does not enable them to supply, will be got from others at a +distance, who cannot supply it on such favourable terms; consequently +they will be in the predicament of possessing a partial monopoly +--receiving for every thing a price regulated by a higher cost of +production than they are compelled to pay. They also, being in possession +of the market, will be enabled to make a large portion of the new capital +pass through their hands, and thus to earn wages of superintendance upon +it. + +If, indeed, the place from whence the strangers came, previously traded +with that where they have taken up their abode, the effect of their +arrival is, that the exports of the town will diminish, and that it will +be supplied from abroad with something which it previously produced at +home. In this way an amount of capital will be set free equal to that +required, and there will be no increase on the whole. The removal of the +court from London to Birmingham would not necessarily, though it would +probably [6], increase the amount of capital in the latter place. The +afflux of money to Birmingham, and its efflux from London, would render +it cheaper to make some articles in London for Birmingham consumption; +and to make others in London for home consumption, which were formerly +brought from Birmingham. + +But instead of Birmingham, an exporting town, suppose a village, or a +town which only produced and retailed for itself and its immediate +vicinity. The remittances must come thither in the shape of money; and +though the money would not remain, but would be sent away in exchange +for commodities, it would, however, first pass through the hands of the +producers and dealers in the place, and would by them be exported in +exchange for the articles which they require--viz. the materials, tools, +and subsistence necessary for the increased production now required of +them, and articles of foreign luxury for their own increased unproductive +consumption. These articles would not displace any formerly made in the +place, but on the contrary, would forward the production of more. + +Hence we may consider the following propositions as established: + +1. The expenditure of absentees (the case of domestic servants excepted,) +is not necessarily any loss to the _country_ which they leave, or gain to +the _country_ which they resort to (save in the manner shown in Essay I.): +for almost every _country_ habitually exports and imports to a much +greater value than the incomes of its absentees, or of the foreign +sojourners within it. + +2. But sojourners often do much good to the _town_ or village which they +resort to, and absentees harm to that which they leave. The capital of +the petty tradesman in a small town near an absentee's estate, is +deprived of the market for which it is conveniently situated, and must +resort to another to which other capitals lie nearer, and where it is +consequently outbid, and gains less; obtaining only the same price, with +greater expenses. But this evil would be equally occasioned, if, instead +of going abroad, the absentee had removed to his own capital city. + +If the tradesman could, in the latter case, remove to the metropolis, or +in the former, employ himself in producing increased exports, or in +producing for home consumption articles now no longer imported, each in +the place most convenient for that operation; he would not be a loser, +though the place which he was obliged to leave might be said to lose. + +Paris undoubtedly gains much by the sojourn of foreigners, while the +counteracting loss by diminution of exports from France is suffered by +the great trading and manufacturing towns, Rouen, Bordeaux, Lyons, &c, +which also suffer the principal part of the loss by importation of +articles previously produced at home. The capital thus set free, finds +its most convenient seat to be Paris, since the business to which it +must turn is the production of articles to be unproductively consumed by +the sojourners. + +The great trading towns of France would undoubtedly be more flourishing, +if France were not frequented by foreigners. + +Rome and Naples are perhaps purely benefited by the foreigners +sojourning there: for they have so little external trade, that their +case may resemble that of the village in our hypothesis. + +Absenteeism, therefore, (except as shown in the first Essay,) is a +local, not a national evil; and the resort of foreigners, in so far as +they purchase for unproductive consumption, is not, in any commercial +country, a national, though it may be a local good. + +From the considerations which we have now adduced, it is obvious what +is meant by such phrases as a _brisk demand_, and a rapid circulation. +There is a brisk demand and a rapid circulation, when goods, generally +speaking, are sold as fast as they can be produced. There is slackness, +on the contrary, and stagnation, when goods, which have been produced, +remain for a long time unsold. In the former case, the capital which has +been locked up in production is disengaged as soon as the production is +completed; and can be immediately employed in further production. In the +latter case, a large portion of the productive capital of the country is +lying in temporary inactivity. + +From what has been already said, it is obvious that periods of "brisk +demand" are also the periods of greatest production: the national +capital is never called into full employment but at those periods. This, +however, is no reason for desiring such times; it is not desirable that +the whole capital of the country should be in full employment. For, the +calculations of producers and traders being of necessity imperfect, +there are always some commodities which are more or less in excess, as +there are always some which are in deficiency. If, therefore, the whole +truth were known, there would always be some classes of producers +contracting, not extending, their operations. If _all_ are endeavouring +to extend them, it is a certain proof that some general delusion is +afloat. The commonest cause of such delusion is some general, or very +extensive, rise of prices (whether caused by speculation or by the +currency) which persuades all dealers that they are growing rich. And +hence, an increase of production really takes place during the progress +of depreciation, as long as the existence of depreciation is not +suspected; and it is this which gives to the fallacies of the currency +school, principally represented by Mr. Attwood, all the little +plausibility they possess. But when the delusion vanishes and the truth +is disclosed, those whose commodities are relatively in excess must +diminish their production or be ruined: and if during the high prices +they have built mills and erected machinery, they will be likely to +repent at leisure. + +In the present state of the commercial world, mercantile transactions +being carried on upon an immense scale, but the remote causes of +fluctuations in prices being very little understood, so that +unreasonable hopes and unreasonable fears alternately rule with +tyrannical sway over the minds of a majority of the mercantile public; +general eagerness to buy and general reluctance to buy, succeed one +another in a manner more or less marked, at brief intervals. Except +during short periods of transition, there is almost always either great +briskness of business or great stagnation; either the principal +producers of almost all the leading articles of industry have as many +orders as they can possibly execute, or the dealers in almost all +commodities have their warehouses full of unsold goods. + +In this last ease, it is commonly said that there is a general +superabundance; and as those economists who have contested the +possibility of general superabundance, would none of them deny the +possibility or even the frequent occurrence of the phenomenon which we +have just noticed, it would seem incumbent on them to show, that the +expression to which they object is not applicable to a state of things +in which all or most commodities remain unsold, in the same sense in +which there is said to be a superabundance of any one commodity when it +remains in the warehouses of dealers for want of a market. + +This is merely a question of naming, but an important one, as it seems +to us that much apparent difference of opinion has been produced by a +mere difference in the mode of describing the same facts, and that +persons who at bottom were perfectly agreed, have considered each other +as guilty of gross error, and sometimes oven misrepresentation, on this +subject. + +In order to afford the explanations, with which it is necessary to take +the doctrine of the impossibility of an excess of all commodities, we +must advert for a moment to the argument by which this impossibility is +commonly maintained. + +There can never, it is said, be a want of buyers for all commodities; +because whoever offers a commodity for sale, desires to obtain a +commodity in exchange for it, and is therefore a buyer by the mere fact +of his being a seller. The sellers and the buyers, for all commodities +taken together, must, by the metaphysical necessity of the case, be an +exact equipoise to each other; and if there be more sellers than buyers +of one thing, there must be more buyers than sellers for another. + +This argument is evidently founded on the supposition of a state of +barter; and, on that supposition, it is perfectly incontestable. When +two persons perform an act of barter, each of them is at once a seller +and a buyer. He cannot sell without buying. Unless he chooses to buy +some other person's commodity, he does not sell his own. + +If, however, we suppose that money is used, these propositions cease to +be exactly true. It must be admitted that no person desires money for +its own sake, (unless some very rare cases of misers be an exception,) +and that he who sells his commodity, receiving money in exchange, does +so with the intention of buying with that same money some other commodity. +Interchange by means of money is therefore, as has been often observed, +ultimately nothing but barter. But there is this difference--that in the +case of barter, the selling and the buying are simultaneously confounded +in one operation; you sell what you have, and buy what you want, by one +indivisible act, and you cannot do the one without doing the other. Now +the effect of the employment of money, and even the utility of it, is, +that it enables this one act of interchange to be divided into two +separate acts or operations; one of which may be performed now, and the +other a year hence, or whenever it shall be most convenient. Although he +who sells, really sells only to buy, he needs not buy at the same moment +when he sells; and he does not therefore necessarily add to the +_immediate_ demand for one commodity when he adds to the supply of +another. The buying and selling being now separated, it may very well +occur, that there may be, at some given time, a very general inclination +to sell with as little delay as possible, accompanied with an equally +general inclination to defer all purchases as long as possible. This is +always actually the case, in those periods which are described as +periods of general excess. And no one, after sufficient explanation, +will contest the possibility of general excess, in this sense of the +word. The state of things which we have just described, and which is of +no uncommon occurrence, amounts to it. + +For when there is a general anxiety to sell, and a general +disinclination to buy, commodities of all kinds remain for a long time +unsold, and those which find an immediate market, do so at a very low +price. If it be said that when all commodities fall in price, the fall +is of no consequence, since mere money price is not material while the +relative value of all commodities remains the same, we answer that this +would be true if the low prices were to last for ever. But as it is +certain that prices will rise again sooner or later, the person who is +obliged by necessity to sell his commodity at a low money price is +really a sufferer, the money he receives sinking shortly to its ordinary +value. Every person, therefore, delays selling if he can, keeping his +capital unproductive in the mean time, and sustaining the consequent +loss of interest. There is stagnation to those who are not obliged to +sell, and distress to those who are. + +It is true that this state can be only temporary, and must even be +succeeded by a reaction of corresponding violence, since those who have +sold without buying will certainly buy at last, and there will then be +more buyers than sellers. But although the general over-supply is of +necessity only temporary, this is no more than may be said of every +partial over-supply. An overstocked state of the market is always +temporary, and is generally followed by a more than common briskness of +demand. + +In order to render the argument for the impossibility of an excess of +all commodities applicable to the case in which a circulating medium is +employed, money must itself be considered as a commodity. It must, +undoubtedly, be admitted that there cannot be an excess of all other +commodities, and an excess of money at the same time. + +But those who have, at periods such as we have described, affirmed that +there was an excess of all commodities, never pretended that money was +one of these commodities; they held that there was not an excess, but +a deficiency of the circulating medium. What they called a general +superabundance, was not a superabundance of commodities relatively to +commodities, but a superabundance of all commodities relatively to +money. What it amounted to was, that persons in general, at that +particular time, from a general expectation of being called upon to meet +sudden demands, liked better to possess money than any other commodity. +Money, consequently, was in request, and all other commodities were in +comparative disrepute. In extreme cases, money is collected in masses, +and hoarded; in the milder cases, people merely defer parting with their +money, or coming under any new engagements to part with it. But the +result is, that all commodities fall in price, or become unsaleable. +When this happens to one single commodity, there is said to be a +superabundance of that commodity; and if that be a proper expression, +there would seem to be in the nature of the case no particular +impropriety in saying that there is a superabundance of all or most +commodities, when all or most of them are in this same predicament. + +It is, however, of the utmost importance to observe that excess of all +commodities, in the only sense in which it is possible, means only a +temporary fall in their value relatively to money. To suppose that the +markets for all commodities could, in any other sense than this, be +overstocked, involves the absurdity that commodities may fall in value +relatively to themselves; or that, of two commodities, each can fall +relatively to the other, A becoming equivalent to B-_x_, and B to A-_x_, +at the same time. And it is, perhaps, a sufficient reason for not using +phrases of this description, that they suggest the idea of excessive +production. A want of market for one article may arise from excessive +production of that article; but when commodities in general become +unsaleable, it is from a very different cause; there cannot be excessive +production of commodities in general. + +The argument against the possibility of general over-production is quite +conclusive, so far as it applies to the doctrine that a country may +accumulate capital too fast; that produce in general may, by increasing +faster than the demand for it, reduce all producers to distress. This +proposition, strange to say, was almost a received doctrine as lately as +thirty years ago; and the merit of those who have exploded it is much +greater than might be inferred from the extreme obviousness of its +absurdity when it is stated in its native simplicity. It is true that if +all the wants of all the inhabitants of a country were fully satisfied, +no further capital could find useful employment; but, in that case, none +would be accumulated. So long as there remain any persons not possessed, +we do not say of subsistence, but of the most refined luxuries, and who +would work to possess them, there is employment for capital; and if the +commodities which these persons want are not produced and placed at +their disposal, it can only be because capital does not exist, disposable +for the purpose of employing, if not any other labourers, those very +labourers themselves, in producing the articles for their own consumption. +Nothing can be more chimerical than the fear that the accumulation of +capital should produce poverty and not wealth, or that it will ever take +place too fast for its own end. Nothing is more true than that it is +produce which constitutes the market for produce, and that every increase +of production, if distributed without miscalculation among all kinds of +produce in the proportion which private interest would dictate, creates, +or rather constitutes, its own demand. + +This is the truth which the deniers of general over-production have +seized and enforced; nor is it pretended that anything has been added +to it, or subtracted from it, in the present disquisition. But it is +thought that those who receive the doctrine accompanied with the +explanations which we have given, will understand, more clearly than +before, what is, and what is not, implied in it; and will see that, when +properly understood, it in no way contradicts those obvious facts which +are universally known and admitted to be not only of possible, but of +actual and even frequent occurrence. The doctrine in question only +appears a paradox, because it has usually been so expressed as +apparently to contradict these well-known facts; which, however, were +equally well known to the authors of the doctrine, who, therefore, can +only have adopted from inadvertence any form of expression which could +to a candid person appear inconsistent with it. The essentials of the +doctrine are preserved when it is allowed that there cannot be permanent +excess of production, or of accumulation; though it be at the same time +admitted, that as there may be a temporary excess of any one article +considered separately, so may there of commodities generally, not in +consequence of over-production, but of a want of commercial confidence. + + +NOTE: + +[6] Probably; because most articles of an ornamental description being +still required from the same makers, these makers, with their capital, +would probably follow their customers, Besides, from place to place +within the same country, most persons will lather change their +habitation than their employment. But the moving on this score would be +reciprocal. + + + + +ESSAY III. + +ON THE WORDS PRODUCTIVE AND UNPRODUCTIVE. + + +It would probably be difficult to point out any two words, respecting +the proper use of which political economists have been more divided, +than they have been concerning the two words _productive_ and +_unproductive_; whether considered as applied to _labour_, to +_consumption_, or to _expenditure_. + +Although this is a question solely of nomenclature, it is one of +sufficient importance to be worth another attempt to settle it +satisfactorily. For, although writers on political economy have not +agreed in the ideas which they were accustomed to annex to these terms, +the terms have generally been employed to denote ideas of very great +importance, and it is impossible that some vagueness should not have +been thrown upon the ideas themselves by looseness in the use of the +words by which they are habitually designated. Further, so long as the +pedantic objection to the introduction of new technical terms continues, +accurate thinkers on moral and political subjects are limited to a very +scanty vocabulary for the expression of their ideas. It therefore is of +great importance that the words with which mankind are familiar, should +be turned to the greatest possible advantage as instruments of thought; +that one word should not be used as the sign of an idea which is already +sufficiently expressed by another word; and that words which are +required to denote ideas of great importance, should not be usurped for +the expression of such as are comparatively insignificant. + +The phrases _productive labour_, and _productive consumption_, have been +employed by some writers on political economy with very great latitude. +They have considered, and classed, as productive labour and productive +consumption, all labour which serves any _useful_ purpose--all +consumption which is not _waste_. Mr. M'Culloch has asserted, _totidem +verbis_, that the labour of Madame Pasta was as well entitled to be +called productive labour as that of a cotton spinner. + +Employed in this sense, the words _productive_ and _unproductive_ are +superfluous, since the words _useful_ and _agreeable_ on the one hand, +_useless_ and _worthless_ on the other, are quite sufficient to express +all the ideas to which the words _productive_ and _unproductive_ are +here applied. + +This use of the terms, therefore, is subversive of the ends of language. + +Those writers who have employed the words in a more limited sense, have +usually understood by productive or unproductive labour, labour which is +productive of wealth, or unproductive of wealth. But what is wealth? And +here the words productive and unproductive have been affected with +additional ambiguities, corresponding to the different extension which +different writers have given to the term wealth. + +Some have given the name of wealth to _all things_ which tend to the use +or enjoyment of mankind, and which possess exchangeable value. This last +clause is added to exclude air, the light of the sun, and any other +things which can be obtained in unlimited quantity without labour or +sacrifice; together with all such things as, though produced by labour, +are not held in sufficient general estimation to command any price in +the market. + +But when this definition came to be explained, many persons were +disposed to interpret "_all things_ which tend to the use or enjoyment +of man," as implying only all _material_ things. _Immaterial_ products +they refused to consider as wealth; and labour or expenditure which +yielded nothing but immaterial products, they characterised as +unproductive labour and unproductive expenditure. + +To this it was, or might have been, answered, that according to this +classification, a carpenter's labour at his trade is productive labour, +but the same individual's labour in learning his trade was unproductive +labour. Yet it is obvious that, on both occasions, his labour tended +exclusively to what is allowed to be production: the one was equally +indispensable with the other, to the ultimate result. Further, if we +adopted the above definition, we should be obliged to say that a nation +whose artisans were twice as skilful as those of another nation, was +not, _ceteris paribus_, more wealthy; although it is evident that every +one of the results of wealth, and everything for the sake of which +wealth is desired, would be possessed by the former country in a higher +degree than by the latter. + +Every classification according to which a basket of cherries, gathered +and eaten the next minute, are called wealth, while that title is denied +to the acquired skill of those who are acknowledged to be productive +labourers, is a purely arbitrary division, and does not conduce to the +ends for which classification and nomenclature are designed. + +In order to get over all difficulties, some political economists seem +disposed to make the terms express a distinction sufficiently definite +indeed, but more completely arbitrary, and having less foundation in +nature, than any of the former. They will not allow to any labour or to +any expenditure the name of productive, unless the produce which it +yields returns into the hands of the very person who made the outlay. +Hedging and ditching they term productive labour, though those +operations conduce to production only indirectly, by protecting the +produce from destruction; but the necessary expenses incurred by a +government for the protection of property are, they insist upon it, +consumed unproductively: though, as has been well pointed out by Mr. +M'Culloch, these expenses, in their relation to the national wealth, are +exactly analogous to the wages of a hedger or a ditcher. The only +difference is, that the farmer, who pays for the hedging and ditching, +is the person to whom the consequent increase of production accrues, +while the government, which is at the expense of police officers and +courts of justice, does not, as a necessary consequence, get back into +its own coffers the increase of the national wealth resulting from the +security of property. + +It would be endless to point out the oddities and incongruities which +result from this classification. Whether we take the words wealth and +production in the largest, or in the most restricted sense in which they +have ever yet been employed, nobody will dispute that roads, bridges, +and canals, contribute in an eminent degree, and in a very direct +manner, to the increase of production and wealth. The labour and +pecuniary resources employed in their construction would, according to +the above theory, be considered productive, if every occupier of land +were compelled by law to construct so much of the road, or canal, as +passes through his own farm. If, instead of this, the government makes +the road, and throws it open to the public toll-free, the labour and +expenditure would be, on the above system, clearly unproductive. But if +the government, or an association of individuals, made the road, and +imposed a toll to defray the expense, we do not see how these writers +could refuse to the outlay the title of productive expenditure. It would +follow, that the very same labour and expense, if given gratuitously, +must be called unproductive, which, if a charge had been made for it, +would have been called productive. + +When these consequences of the purely arbitrary classification to which +we allude have been pointed out and complained of, the only answer which +we have ever seen made to the objection is, that the line of demarcation +must be drawn somewhere, and that in every classification there are +intermediate cases, which might have been included, with almost equal +propriety, either in the one class or in the other. + +This answer appears to us to indicate the want of a sufficiently +accurate and discriminating perception, what is the kind of inaccuracy +which generally cannot be avoided in a classification, and what is that +other kind of inaccuracy, from which it always may be, and should be, +exempt. + +The classes themselves may be, mentally speaking, perfectly definite, +though it may not always be easy to say to which of them a particular +object belongs. When it is uncertain in which of two classes an object +should be placed, if the classification be properly made, and properly +expressed, the uncertainty can turn only upon a matter of fact. It is +uncertain to which class the object belongs, because it is doubtful +whether it possesses in a greater degree the characteristics of the one +class or those of the other. But the characteristics themselves may be +defined and distinguished with the nicest exactness, and always ought to +be so. Especially ought they in a case like the present, because here it +is only the distinction between the ideas which is of any importance. +That we should be able with ease to portion out all employments between +the two classes, does not happen to be of any particular consequence. + +It is frequently said that classification is a mere affair of +convenience. This assertion is true in one sense, but not if its meaning +be, that the most proper classification is that in which it is easiest +to say whether an object belongs to one class or to the other. The use +of classification is, to fix attention upon the distinctions which exist +among things; and that is the best classification, which is founded upon +the most important distinctions, whatever be the facilities which it may +afford of ticketing and arranging the different objects which exist in +nature. In fixing, therefore, the meaning of the words productive and +unproductive, we ought to endeavour to render them significative of the +most important distinctions which, without too glaring a violation of +received usage, they can be made to express. + +We ought further, when we are restricted to the employment of old words, +to endeavour as far as possible that it shall not be necessary to +struggle against the old associations with those words. We should, if +possible, give the words such a meaning, that the propositions in which +people are accustomed to use them, shall as far as possible still be +true; and that the feelings habitually excited by them, shall be such as +the things to which we mean to appropriate them ought to excite. + +We shall endeavour to unite these conditions in the result of the +following enquiry. + +In whatever manner political economists may have settled the definition +of productive and unproductive labour or consumption, the consequences +which they have drawn from the definition are nearly the same. In +proportion to the amount of the productive labour and consumption of +a country, the country, they all allow, is enriched: in proportion to +the amount of the unproductive labour and consumption, the country is +impoverished. Productive expenditure they are accustomed to view as +a gain; unproductive expenditure, however useful, as a sacrifice. +Unproductive expenditure of what was destined to be expended +productively, they always characterise as a squandering of resources, +and call it profusion and prodigality. The productive expenditure of +that which might, without encroaching upon capital, be expended +unproductively, is called saving, economy, frugality. Want, misery, and +starvation, are described as the lot of a nation which annually employs +less and less of its labour and resources in production; growing comfort +and opulence as the result of an annual increase in the quantity of +wealth so employed. + +Let us then examine what qualities in expenditure, and in the employment +of labour, are those from which all the consequences above mentioned +really flow. + +The end to which all labour and all expenditure are directed, is +twofold. Sometimes it is _enjoyment_ immediately; the fulfilment of +those desires, the gratification of which is wished for on its own +account. Whenever labour or expense is not incurred _immediately_ for +the sake of enjoyment, and is yet not absolutely wasted, it must be +incurred for the purpose of enjoyment _indirectly_ or mediately; by +either repairing and perpetuating, or adding, to the _permanent sources_ +of enjoyment. + +Sources of enjoyment may be accumulated and stored up; enjoyment itself +cannot. The wealth of a country consists of the sum total of the +permanent sources of enjoyment, whether material or immaterial, contained +in it: and labour or expenditure which tends to augment or to keep up +these permanent sources, should, we conceive, be termed productive. + +Labour which is employed for the purpose of directly affording +enjoyment, such as the labour of a performer on a musical instrument, we +term unproductive labour. Whatever is consumed by such a performer, we +consider as unproductively consumed: the accumulated total of the +sources of enjoyment which the nation possesses, is diminished by the +amount of what he has consumed: whereas, if it had been given to him in +exchange for his services in producing food or clothing, the total of +the permanent sources of enjoyment in the country might have been not +diminished but increased. + +The performer on the musical instrument then is, so far as respects that +act, not a productive, but an unproductive labourer. But what shall we +say of the workman who made the musical instrument? He, most persons +would say, is a productive labourer; and with reason; because the +musical instrument is a permanent source of enjoyment, which does not +begin and end with the enjoying, and therefore admits of being +accumulated. + +But the _skill_ of the musician is a permanent source of enjoyment, as +well as the instrument which he plays upon: and although skill is not a +material object, but a quality of an object, viz., of the hands and mind +of the performer; nevertheless skill possesses exchangeable value, is +acquired by labour and capital, and is capable of being stored and +accumulated. Skill, therefore, must be considered as wealth; and the +labour and funds employed in acquiring skill in anything tending to the +advantage or pleasure of mankind, must be considered to be productively +employed and expended. + +The skill of a productive labourer is analogous to the machinery he +works with: neither of them is enjoyment, nor conduces directly to it, +but both conduce indirectly to it, and both in the same way. If a +spinning-jenny be wealth, the spinner's skill is also wealth. If the +mechanic who made the spinning-jenny laboured productively, the spinner +also laboured productively when he was learning his trade: and what they +both consumed was consumed productively, that is to say, its consumption +did not tend to diminish, but to increase the sum of the permanent +sources of enjoyment in the country, by effecting a new creation of +those sources, more than equal to the amount of the consumption. + +The skill of a tailor, and the implements he employs, contribute in the +same way to the convenience of him who wears the coat, namely, a remote +way: it is the coat itself which contributes immediately. The skill of +Madame Pasta, and the building and decorations which aid the effect of +her performance, contribute in the same way to the enjoyment of the +audience, namely, an immediate way, without any intermediate +instrumentality. The building and decorations are consumed +unproductively, and Madame Pasta labours and consumes unproductively; +for the building is used and worn out, and Madame Pasta performs, +immediately for the spectators' enjoyment, and without leaving, as a +consequence of the performance, any permanent result possessing +exchangeable value: consequently the epithet unproductive must be +equally applied to the gradual wearing out of the bricks and mortar, the +nightly consumption of the more perishable "properties" of the theatre, +the labour of Madame Pasta in acting, and of the orchestra in playing. +But notwithstanding this, the architect who built the theatre was a +productive labourer; so were the producers of the perishable articles; +so were those who constructed the musical instruments; and so, we must +be permitted to add, were those who instructed the musicians, and all +persons who, by the instructions which they may have given to Madame +Pasta, contributed to the formation of her talent. All these persons +contributed to the enjoyment of the audience in the same way, and that +a remote way, viz., by the production of a _permanent source of +enjoyment_. + +The difference between this case, and the case of the cotton spinner +already adverted to, is this. The spinning-jenny, and the skill of the +cotton spinner, are not only the result of productive labour, but are +themselves productively consumed. The musical instrument and the skill +of the musician are equally the result of productive labour, but are +themselves unproductively consumed. + +Let us now consider what kinds of labour, and of consumption or +expenditure, will be classed as productive, and what as unproductive, +according to this rule. + +The following are always productive: + +Labour and expenditure, of which the direct object or effect is the +creation of some material product useful or agreeable to mankind. + +Labour and expenditure, of which the direct effect and object are, to +endow human or other animated beings with faculties or qualities useful +or agreeable to mankind, and possessing exchangeable value. + +Labour and expenditure, which without having for their direct object the +creation of any useful material product or bodily or mental faculty or +quality, yet tend indirectly to promote one or other of those ends, and +are exerted or incurred solely for that purpose. + +The following are partly productive and partly unproductive, and cannot +with propriety be ranged decidedly with either class: + +Labour or expenditure which does indeed create, or promote the creation +of, some useful material product or bodily or mental faculty or quality, +but which is not incurred or exerted for that sole end; having also for +another, and perhaps its principal end, enjoyment, or the promotion of +enjoyment. + +Such are the labour of the judge, the legislator, the police-officer, +the soldier; and the expenditure incurred for their support. These +functionaries protect and secure mankind in the exclusive possession of +such material products or acquired faculties as belong to them; and by +the security which they so confer, they indirectly increase production +in a degree far more than equivalent to the expense which is necessary +for their maintenance. But this is not the only purpose for which they +exist; they protect mankind, not merely in the possession of their +permanent resources, but also in their actual enjoyments; and so far, +although highly useful, they cannot, conformably to the distinction +which we have attempted to lay down, be considered productive labourers. + +Such, also, are the labour and the wages of domestic servants. Such +persons are entertained mainly as subservient to mere enjoyment; but +most of them occasionally, and some habitually, render services which +must be considered as of a productive nature; such as that of cookery, +the last stage in the manufacture of food; or gardening, a branch of +agriculture. + +The following are wholly unproductive: + +Labour exerted, and expenditure incurred, directly and exclusively for +the purpose of enjoyment, and not calling into existence anything, +whether substance or quality, but such as begins and perishes in the +enjoyment. + +Labour exerted and expenditure incurred uselessly, or in pure waste, and +yielding neither direct enjoyment nor permanent sources of enjoyment. + +It may be objected, that expenditure incurred even for pure enjoyment +promotes production indirectly, by inciting to exertion. Thus the view +of the splendour of a rich establishment is supposed by some writers to +produce upon the mind of an indigent spectator an earnest desire of +enjoying the same luxuries, and a consequent purpose of working with +vigour and diligence, and saving from his earnings, thus increasing the +productive capital of the country. + +It is true that mankind are, for the most part, excited to productive +industry solely by the desire of subsequently consuming the result of +their labour and accumulation. The consumption called unproductive, +viz., that of which the direct result is enjoyment, is in reality the +end, to which production is only the means; and a desire for the end, +is what alone impels any one to have recourse to the means. + +But, notwithstanding this, it is of the greatest importance to mark the +distinction between the labour and the consumption which have enjoyment +for their immediate end, and the labour and the consumption of which the +immediate end is reproduction. Though the sight of the former may still +further stimulate that desire for the enjoyments afforded by wealth, +which the mere knowledge, without the immediate view, would suffice to +excite (and without dwelling on the consideration that if the example +of a large expenditure excites one individual to accumulation, it +encourages two to prodigal expense); still, if we look only to the +effects which are intended, or to those which immediately follow from +the consumption, and whose connexion with it can be distinctly traced, +it evidently renders a country poorer in the permanent sources of +enjoyment; while reproductive consumption leaves the country richer in +these same sources. Besides, if what is spent for mere pleasure promotes +indirectly the increase of wealth, it can only be by inducing others +_not_ to expend on mere pleasure. + +Before quitting the subject, one more observation should be added. It +must not be supposed that what is expended upon unproductive labourers +is necessarily, the whole of it, unproductively consumed. The +unproductive labourers may save part of their wages, and invest them in +a productive employment. + +It is not unusual to speak of what is paid in wages to a labourer as +being thereby _consumed_, as if all profit and loss to the nation were +to be seen in the capitalist's account-book. What is paid for productive +labour is said to be productively consumed; what is paid for +unproductive labour is said to be consumed unproductively. It would be +proper to say, not that it is productively or unproductively _consumed_, +but productively or unproductively _expended_; otherwise, we shall be +obliged to say that it is consumed twice over; the first time +unproductively, perhaps, and the second, it may be, productively. + +To pronounce in which way the wages of the labourer are consumed, we +must follow them into the labourer's own hands. As much as is necessary +to keep the productive labourer in perfect health and fitness for his +employment, may be said to be consumed productively. To this should be +added what he expends in rearing children to the age at which they +become capable of productive industry. If the state of the market for +labour be such as to afford him more, this he may either save, or, as +the common expression is, he may spend it. If he saves any portion, this +(unless it be merely hoarded) he intends to employ productively, and it +will be productively consumed. If he spends it, the consumption is for +enjoyment immediately, and is therefore unproductive. + +This suggests another correction in the established language. Political +economists generally define the "net produce" to be that portion of the +gross annual produce of a country which remains after replacing the +capital annually consumed. This, as they proceed to explain, consists of +profits and rent; wages being included in the other portion of the gross +produce, that which goes to replace capital. After this definition, they +usually proceed to tell us that the net produce, and that alone, +constitutes the fund from which a nation can accumulate, and add to its +capital, as also that which it can, without retrograding in wealth, +expend unproductively, or for enjoyment. Now, it is impossible that both +the above propositions can be true. If the net produce is that which +remains after replacing capital, then net produce is not the only fund +out of which accumulation may be made: for accumulation may be made from +wages; this is in all countries one of the great sources, and in countries +like America perhaps the greatest source of accumulation. If, on the other +hand, it is desirable to reserve the name of net produce to denote the +fund available for accumulation or for unproductive consumption, we must +define net produce differently. The definition which appears the best +adapted to render the ordinary doctrines relating to net produce true, +would be this: + +The net produce of a country is whatever is annually produced beyond +what is necessary for maintaining the stock of materials and implements +unimpaired, for keeping all productive labourers alive and in condition +for work, and for just keeping up their numbers without increase. What +is required for these purposes, or, in other words, for keeping up the +productive resources of the country, cannot be diverted from its +destination without rendering the nation as a whole poorer. But all +which is produced beyond this, whether it be in the hands of the +labourer, of the capitalist, or of any of the numerous varieties of +rent-owners, may be taken for immediate enjoyment, without prejudice to +the productive resources of the community; and whatever part of it is +not so taken, constitutes a clear addition to the national capital, or +to the permanent sources of enjoyment. + + + + +ESSAY IV. + +ON PROFITS, AND INTEREST. + + +The profits of stock are the surplus which remains to the capitalist +after replacing his capital: and the ratio which that surplus bears to +the capital itself, is the _rate_ of profit. + +This being the definition of profits, it might seem natural to adopt, as +a sufficient theory in regard to the rate of profit, that it depends +upon the productive power of capital. Some countries are favoured beyond +others, either by nature or art, in the means of production. If the +powers of the soil, or of machinery, enable capital to produce what is +necessary for replacing itself, and twenty per cent more, profits will +be twenty per cent; and so on. + +This, accordingly, is a popular mode of speaking on the subject of +profits; but it has only the semblance, not the reality, of an +explanation. The "productive power of capital," though a common, and, +for some purposes, a convenient expression, is a delusive one. Capital, +strictly speaking, has no productive power. The only productive power is +that of labour; assisted, no doubt, by tools, and acting upon materials. +That portion of capital which consists of tools and materials, may be +said, perhaps, without any great impropriety, to have a productive +power, because they contribute, along with labour, to the accomplishment +of production. But that portion of capital which consists of wages, has +no productive power of its own. Wages have no productive power; they are +the price of a productive power. Wages do not contribute, along with +labour, to the production of commodities, no more than the price of +tools contributes along with the tools themselves. If labour could be +had without purchase, wages might be dispensed with. That portion of +capital which is expended in the wages of labour, is only the means by +which the capitalist procures to himself, in the way of purchase, the +use of that labour in which the power of production really resides. + +The proper view of capital is, that anything whatever, which a person +possesses, constitutes his capital, provided he is able, and intends, +to employ it, not in consumption for the purpose of enjoyment, but in +possessing himself of the means of production, with the intention of +employing those means productively. Now the means of production are +labour, implements, and materials. The only productive power which +anywhere exists, is the productive power of labour, implements, and +materials. + +We need not, on this account, altogether proscribe the expression, +"productive power of capital;" but we should carefully note, that it can +only mean the quantity of real productive power which the capitalist, +by means of his capital, can command. This may change, though the +productive power of labour remains the same. Wages, for example, may +rise; and then, although all the circumstances of production remain +exactly as they were before, the same capital will yield a less return, +because it will set in motion a less quantity of productive labour. + +We may, therefore, consider the capital of a producer as measured by the +means which he has of possessing himself of the different essentials of +production: namely, labour, and the various articles which labour +requires as materials, or of which it avails itself as aids. + +The ratio between the price which he has to pay for these means of +production, and the produce which they enable him to raise, is the +_rate_ of his _profit_. If he must give for labour and tools four-fifths +of what they will produce, the remaining fifth will constitute his +profit, and will give him a rate of one in four, or twenty-five per +cent, on his outlay. + +It is necessary here to remark, what cannot indeed by any possibility be +misunderstood, but might possibly be overlooked in cases where attention +to it is indispensable, viz., that we are speaking now of the _rate_ of +profit, not the gross profit. If the capital of the country is very +great, a profit of only five per cent upon it may be much more ample, +may support a much larger number of capitalists and their families in +much greater affluence, than a profit of twenty-five per cent on the +comparatively small capital of a poor country. The _gross_ profit of a +country is the actual amount of necessaries, conveniences, and luxuries, +which are divided among its capitalists: but whether this be large or +small, the rate of profit may be just the same. The rate of profit is +the proportion which the profit bears to the capital; which the surplus +produce after replacing the outlay, bears to the outlay. In short, if we +compare the _price paid_ for labour and tools with what that labour and +those tools will _produce_, from this ratio we may calculate the rate of +profit. + +As the gross profit may be very different though the rate of profit be +the same; so also may the absolute price paid for labour and tools be +very different, and yet the proportion between the price paid and the +produce obtained may be just the same. For greater clearness, let us +omit, for the present, the consideration of tools, materials, &c, and +conceive production as the result solely of labour. In a certain +country, let us suppose, the wages of each labourer are one quarter of +wheat per year, and 100 men can produce, in one year, 120 quarters. Here +the price paid for labour is to the produce of that labour as 100 to +120, and profits are 20 per cent. Suppose now that, in another country, +wages are just double what they are in the country before supposed; +namely, two quarters of wheat per year, for each labourer. But suppose, +likewise, that the productive power of labour is double what it is in +the first country; that by the greater fertility of the soil, 100 men +can produce 240 quarters, instead of 120 as before. Here it is obvious, +that the real price paid for labour is twice as great in the one country +as in the other; but the produce being also twice as great, the ratio +between the price of labour and the produce of labour is still exactly +the same: an outlay of 200 quarters gives a return of 240 quarters, and +profits, as before, are 20 per cent. + +Profits, then (meaning not gross profits, but the rate of profit), +depend (not upon the price of labour, tools, and materials--but) upon +the ratio between the price of labour, tools, and materials, and the +produce of them: upon the proportionate share of the produce of industry +which it is necessary to offer, in order to purchase that industry and +the means of setting it in motion. + + * * * * * + +We have hitherto spoken of tools, buildings, and materials, as +essentials of production, co-ordinate with labour, and equally +indispensable with it. This is true; but it is also true that tools, +buildings, and materials, are themselves the produce of labour; and that +the only cause (cases of monopoly excepted) of their having any value, +is the labour which is required for their production. + +If tools, buildings, and materials were the spontaneous gifts of nature, +requiring no labour either in order to produce or to appropriate them; +and if they were thus bestowed upon mankind in indefinite quantity, and +without the possibility of being monopolized; they would still be as +useful, as indispensable as they now are; but since they could, like air +and the light of the sun, be obtained without cost or sacrifice, they +would form no part of the expenses of production, and no portion of the +produce would be required to be set aside in order to replace the outlay +made for these purposes. The whole produce, therefore, after replacing +the wages of labour, would be clear profit to the capitalist. + +Labour alone is the primary means of production; "the original +purchase-money which has been paid for everything." Tools and materials, +like other things, have originally cost nothing but labour; and have a +value in the market only because wages have been paid for them. The +labour employed in making the tools and materials being added to the +labour afterwards employed in working up the materials by aid of the +tools, the sum total gives the whole of the labour employed in the +production of the completed commodity. In the ultimate analysis, +therefore, labour appears to be the only essential of production. To +replace capital, is to replace nothing but the wages of the labour +employed. Consequently, the whole of the surplus, after replacing wages, +is profits. From this it seems to follow, that the ratio between the +wages of labour and the produce of that labour gives the rate of profit. +And thus we arrive at Mr. Ricardo's principle, that profits depend upon +wages; rising as wages fall, and falling as wages rise. + +To protect this proposition (the most perfect form in which the law of +profits seems to have been yet exhibited) against misapprehension, one +or two explanatory remarks are required. + +If by wages, be meant what constitutes the real affluence of the +labourer, the _quantity_ of produce which he receives in exchange for +his labour; the proposition that profits vary inversely as wages, will +be obviously false. The rate of profit (as has been already observed and +exemplified) does not depend upon the price of labour, but upon the +proportion between the price of labour and the produce of it. If the +produce of labour is large, the price of labour may also be large +without any diminution of the rate of profit: and, in fact, the rate of +profit is highest in those countries (as, for instance, North America) +where the labourer is most largely remunerated. For the wages of labour, +though so large, bear a less proportion to the abundant _produce_ of +labour, there than elsewhere. + +But this does not affect the truth of Mr. Ricardo's principle as he +himself understood it; because an increase of the labourer's real +comforts was not considered by him as a rise of wages. In his language +wages were only said to rise, when they rose not in mere quantity but in +_value_. To the labourer himself (he would have said) the _quantity_ of +his remuneration is the important circumstance: but its _value_ is the +only thing of importance to the person who purchases his labour. + +The rate of profits depends not upon absolute or real wages, but upon +the _value_ of wages. + +If, however, by value, Mr. Ricardo had meant _exchangeable_ value, his +proposition would still have been remote from the truth. Profits depend +no more upon the exchangeable value of the labourer's remuneration, than +upon its quantity. The truth is, that by the exchangeable value is meant +the quantity of commodities which the labourer can purchase with his +wages; so that when we say the exchangeable value of wages, we say their +quantity, under another name. + +Mr. Ricardo, however, did not use the word value in the sense of +exchangeable value. + +Occasionally, in his writings, he could not avoid using the word as +other people use it, to denote value in exchange. But he more frequently +employed it in a sense peculiar to himself, to denote cost of +production; in other words, the _quantity of labour_ required to produce +the article; that being his criterion of cost of production. Thus, if a +hat could be made with ten days' labour in France and with five days' +labour in England, he said that the value of a hat was double in France +of what it was in England. If a quarter of corn could be produced a +century ago with half as much labour as is necessary at present, Mr. +Ricardo said that the value of a quarter of corn had doubled. + +Mr. Ricardo, therefore, would not have said that wages had risen, +because a labourer could obtain two pecks of flour instead of one, for a +day's labour; but if last year he received, for a day's labour, +something which required eight hours' labour to produce it, and this +year something which requires nine hours, then Mr. Ricardo would say +that wages had risen. A rise of wages, with Mr. Ricardo, meant an +increase in the cost of production of wages; an increase in the number +of hours' labour which go to produce the wages of a day's labour; an +increase in the _proportion_ of the fruits of labour which the labourer +receives for his own share; an increase in the ratio between the wages +of his labour and the produce of it. This is the theory: the reasoning, +of which it is the result, has been given in the preceding paragraphs. + +Some of Mr. Ricardo's followers, or more properly, of those who have +adopted in most particulars the views of political economy which his +genius was the first to open up, have given explanations of Mr. +Ricardo's doctrine to nearly the same effect as the above, but in rather +different terms. They have said that profits depend not on _absolute_, +but on _proportional_ wages: which they expounded to mean the proportion +which the labourers _en masse_ receive of the total produce of the +country. + +It seems, however, to be rather an unusual and inconvenient use of +language to speak of anything as depending upon the wages of labour, and +then to explain that by wages of labour you do not mean the wages of an +individual labourer, but of all the labourers in the country +collectively. Mankind will never agree to call anything a rise of wages, +except a rise of the wages of individual labourers, and it is therefore +preferable to employ language tending to fix attention upon the wages of +the individual. The wages, however, on which profits are said to depend, +are undoubtedly _proportional_ wages, namely, the proportional wages of +one labourer: that is, the ratio between the wages of one labourer, and +(not the whole produce of the country, but) the amount of what one +labourer can produce; the amount of that portion of the collective +produce of the industry of the country, which may be considered as +corresponding to the labour of one single labourer. Proportional wages, +thus understood, may be concisely termed the cost of production of +wages; or, more concisely still, the cost of wages, meaning their cost +in the "original purchase money," labour. + +We have now arrived at a distinct conception of Mr. Ricardo's theory of +profits in its most perfect state. And this theory we conceive to be the +basis of the true theory of profits. All that remains to do is to clear +it from certain difficulties which still surround it, and which, though +in a greater degree apparent than real, are not to be put aside as +wholly imaginary. + +Though it is true that tools, materials, and buildings (it is to be +wished that there were some compact designation for all these essentials +of production taken together,) are themselves the produce of labour, and +are only on that account to be ranked among the expenses of production; +yet the _whole_ of their value is not resolvable into the wages of the +labourers by whom they were produced. The wages of those labourers were +paid by a capitalist, and that capitalist must have the same profit upon +his advances as any other capitalist; when, therefore, he sells the +tools or materials, he must receive from the purchaser not only the +reimbursement of the wages he has paid, but also as much more as will +afford him the ordinary rate of profit. And when the producer, after +buying the tools and employing them in his own occupation, comes to +estimate his gains, he must set aside a portion of the produce to +replace not only the wages paid both by himself and by the tool-maker, +but also the profits of the tool-maker, advanced by himself out of his +own capital. + +It is not correct, therefore, to state that all which the capitalist +retains after replacing wages forms his profit. It is true the whole +return to capital is either wages or profits; but profits do not compose +merely the surplus after replacing the outlay; they also enter into the +outlay itself. Capital is expended partly in paying or reimbursing +wages, and partly in paying the profits of other capitalists, whose +concurrence was necessary in order to bring together the means of +production. + +If any contrivance, therefore, were devised by which that part of the +outlay which consists of previous profits could be either wholly or +partially dispensed with, it is evident that more would remain as the +profit of the immediate producer; while, as the quantity of _labour_ +necessary to produce a given quantity of the commodity would be +unaltered, as well as the quantity of produce paid for that labour, it +seems that the ratio between the price of labour and its produce would +be the same as before; that the cost of production of wages would be the +same, proportional wages the same, and yet profits different. + +To illustrate this by a simple instance, let it be supposed that +one-third of the produce is sufficient to replace the wages of the +labourers who have been immediately instrumental in the production; that +another third is necessary to replace the materials used and the fixed +capital worn out in the process; while the remaining third is clear +gain, being a profit of 50 per cent. Suppose, for example, that 60 +agricultural labourers, receiving 60 quarters of corn for their wages, +consume fixed capital and seed amounting to the value of 60 quarters +more, and that the result of their operations is a produce of 180 +quarters. When we analyse the price of the seed and tools into its +elements, we find that they must have been the produce of the labour of +40 men: for the wages of those 40, together with profit at the rate +previously supposed (50 per cent) make up 60 quarters. The produce, +therefore, consisting of 180 quarters is the result of the labour +altogether of 100 men: namely, the 60 first mentioned, and the 40 by +whose labour the fixed capital and the seed were produced. + +Let us now suppose, by way of an extreme case, that some contrivance is +discovered, whereby the purposes to which the second third of the +produce had been devoted, may be dispensed with altogether: that some +means are invented by which the same amount of produce may be procured +without the assistance of any fixed capital, or the consumption of any +seed or material sufficiently valuable to be worth calculating. Let us, +however, suppose that this cannot be done without taking on a number of +additional labourers, equal to those required for producing the seed and +fixed capital; so that the saving shall be only in the profits of the +previous capitalists. Let us, in conformity with this supposition, +assume that in dispensing with the fixed capital and seed, value 60 +quarters, it is necessary to take on 40 additional labourers, receiving +a quarter of corn each, as before. + +The rate of profit has evidently risen. It has increased from 50 per +cent to 60 per cent. A return of 180 quarters could not before be +obtained but by an outlay of 120 quarters; it can now be obtained by an +outlay of no more than 100. + +Here, therefore, is an undeniable rise of profits. Have wages, in the +sense above attached to them, fallen or not? It would seem not. + +The produce (180 quarters) is still the result of the same quantity of +labour as before, namely, the labour of 100 men. A quarter of corn, +therefore, is still, as before, the produce of 10/18 of a man's labour +for a year. Each labourer receives, as before, one quarter of corn; +each, therefore, receives the produce of 10\18 of a year's labour of one +man, that is, the same cost of production; each receives 10/18 of the +produce of his own labour, that is, the same proportional wages; and the +labourers collectively still receive the same proportion, namely 10/18, +of the whole produce. + +The conclusion, then, cannot be resisted, that Mr. Ricardo's theory is +defective: that the rate of profits does _not_ exclusively depend upon +the value of wages, in his sense, namely, the quantity of labour of +which the wages of a labourer are the produce; that it does _not_ +exclusively depend upon proportional wages, that is, upon the proportion +which the labourers collectively receive of the whole produce, or the +ratio which the wages of an individual labourer bear to the produce of +his individual labour. + +Those political economists, therefore, who have always dissented from +Mr. Ricardo's doctrine, or who, having at first admitted, ended by +discarding it, were so far in the right; but they committed a serious +error in this, that, with the usual one-sidedness of disputants, they +knew no medium between admitting absolutely and dismissing entirely; +and saw no other course than utterly to reject what it would have been +sufficient to modify. + +It is remarkable how very slight a modification will suffice to render +Mr. Ricardo's doctrine completely true. It is even doubtful whether he +himself, if called upon to adapt his expressions to this peculiar case, +would not have so explained his doctrine as to render it entirely +unobjectionable. + +It is perfectly true, that, in the example already made use of, a rise +of profits takes place, while wages, considered in respect to the +quantity of labour of which they are the produce, have not varied at +all. But though wages are still the produce of the same _quantity of +labour_ as before, the _cost of production_ of wages has nevertheless +fallen; for into cost of production there enters another element besides +labour. + +We have already remarked (and the very example out of which the +difficulty arose presupposes it) that the cost of production of an +article consists generally of two parts,--the _wages_ of the labour +employed, and the _profits_ of those who, in any antecedent stage of +the production, have advanced any portion of those wages. An article, +therefore, may be the produce of the same quantity of labour as before, +and yet, if any portion of the profits which the last producer has to +make good to previous producers can be economized, the cost of +production of the article is diminished. + +Now, in our example, a diminution of this sort is supposed to have taken +place in the cost of production of corn. The production of that article +has become less costly, in the ratio of six to five. A quantity of corn, +the means of producing which could not previously have been secured but +at an expense of 120 quarters, can now be produced by means which 100 +quarters are sufficient to purchase. + +But the labourer is supposed to receive the same quantity of corn as +before. He receives one quarter. The cost of production of wages has, +therefore, fallen one-sixth. A quarter of corn, which is the +remuneration of a single labourer, is indeed the produce of the same +quantity of labour as before; but its cost of production is nevertheless +diminished. It is now the produce of 10/18 of a man's labour, and +nothing else; whereas formerly it required for its production the +conjunction of that quantity of labour with an expenditure, in the form +of reimbursement of profit, amounting to one-fifth more. + +If the cost of production of wages had remained the same as before, +profits could not have risen. Each labourer received one quarter of +corn; but one quarter of corn at that time was the result of the same +cost of production, as 1 1/5 quarter now. In order, therefore, that each +labourer should receive the same cost of production, each must now +receive one quarter of corn, _plus_ one-fifth. The labour of 100 men +could not be purchased at this price for less than 120 quarters; and the +produce, 180 quarters, would yield only 50 per cent, as first supposed [7]. + +It is, therefore, strictly true, that the rate of profits varies +inversely as the cost of production of wages. Profits cannot rise, +unless the cost of production of wages falls exactly as much; nor fall, +unless it rises. + +The proof of this position has been stated in figures, and in a +particular case: we shall now state it in general terms, and for all +cases. + +We have supposed, for simplicity, that wages are paid in the finished +commodity. The agricultural labourers, in our example, were paid in +corn, and if we had called them weavers, we should have supposed them to +be paid in cloth. This supposition is allowable, for it is obviously of +no consequence, in a question of value, or cost of production, what +precise article we assume as the medium of exchange. The supposition +has, besides, the recommendation of being conformable to the most +ordinary state of the facts; for it is by the sale of his own finished +article that each capitalist obtains the means of hiring labourers to +renew the production; which is virtually the same thing as if, instead +of selling the article for money and giving the money to his labourers, +he gave the article itself to the labourers, and they sold it for their +daily bread. + +Assuming, therefore, that the labourer is paid in the very article he +produces, it is evident that, when any saving of expense takes place in +the production of that article, if the labourer still receives the same +cost of production as before, he must receive an increased quantity, in +the very same ratio in which the productive power of capital has been +increased. But, if so, the outlay of the capitalist will bear exactly +the same proportion to the return as it did before; and profits will not +rise. + +The variations, therefore, in the rate of profits, and those in the cost +of production of wages, go hand in hand, and are inseparable. Mr. +Ricardo's principle, that profits cannot rise unless wages fall, is +strictly true, if by low wages be meant not merely wages which are the +produce of a smaller quantity of labour, but wages which are produced at +less cost, reckoning labour and previous profits together. But the +interpretation which some economists have put upon Mr. Ricardo's +doctrine, when they explain it to mean that profits depend upon the +proportion which the labourers collectively receive of the aggregate +produce, will not hold at all; for that, in our first example, remained +the same, and yet profits rose. + +The only expression of the law of profits, which seems to be correct, +is, that they depend upon the cost of production of wages. This must be +received as the ultimate principle. + +From this may be deduced all the corollaries which Mr. Ricardo and +others have drawn from his theory of profits as expounded by himself. +The cost of production of the wages of one labourer for a year, is the +result of two concurrent elements or factors,--viz., 1st, the quantity +of commodities which the state of the labour market affords to him; +2ndly, the cost of production of each of those commodities. It follows, +that the rate of profits can never rise but in conjunction with one or +other of two changes,--1st, a diminished remuneration of the labourer; +or, 2ndly, an improvement in production, or an extension of commerce, by +which any of the articles habitually consumed by the labourer may be +obtained at smaller cost. (If the improvement be in any article which is +not consumed by the labourer, it merely lowers the price of that article, +and thereby benefits capitalists and all other people so far as they are +consumers of that particular article, and may be said to increase gross +profit, but not the rate of profit.) + +So, on the other hand, the rate of profit cannot fall, unless +concurrently with one of two events: 1st, an improvement in the +labourer's condition; or, 2ndly, an increased difficulty of producing +or importing some article which the labourer habitually consumes. The +progress of population and cultivation has a tendency to lower profits +through the latter of these two channels, owing to the well known law +of the application of capital to land, that a double capital does not +_caeteris paribus_ yield a double produce. There is, therefore, a +tendency in the rate of profits to fall with the progress of society. +But there is also an antagonist tendency of profits to rise, by the +successive introduction of improvements in agriculture, and in the +production of those manufactured articles which the labourers consume. +Supposing, therefore, that the actual comforts of the labourer remain +the same, profits will fall or rise, according as population, or +improvements in the production of food and other necessaries, advance +fastest. + +The rate of profits, therefore, tends to _fall_ from the following +causes:--1. An increase of capital beyond population, producing +increased competition for labour; 2. An increase of population, +occasioning a demand for an increased quantity of food, which must be +produced at a greater cost. The rate of profits tends to _rise_ from +the following causes:--1. An increase of population beyond capital, +producing increased competition for employment; 2. Improvements +producing increased cheapness of necessaries, and other articles +habitually consumed by the labourer. + + * * * * * + +The circumstances which regulate the rate of interest have usually been +treated, even by professed writers on political economy, in a vague, +loose, and unscientific manner. It has, however, been felt that there is +some connexion between the rate of interest and the rate of profit; that +(to use the words of Adam Smith) much will be given for money, when much +can be made of it. It has been felt, also, that the fluctuations in the +market-rate of interest from day to day, are determined, like other +matters of bargain and sale, by demand and supply. It has, therefore, +been considered as an established principle, that the rate of interest +varies from day to day according to the quantity of capital offered or +called for on loan; but conforms on the average of years to a standard +determined by the rate of profits, and bearing some proportion to that +rate--but a proportion which few attempts have been made to define. + +In consequence of these views, it has been customary to judge of the +general rate of profits at any time or place, by the rate of interest at +that time and place: it being supposed that the rate of interest, though +liable to temporary fluctuations, can never vary for any long period of +time unless profits vary; a notion which appears to us to be erroneous. + +It was observed by Adam Smith, that profits may be considered as divided +into two parts, of which one may properly be considered as the +remuneration for the use of the capital itself, the other as the reward +of the labour of superintending its employment; and that the former of +these will correspond with the rate of interest. The producer who +borrows capital to employ it in his business, will consent to pay, for +the use of it, all that remains of the profits he can make by it, after +reserving what he considers reasonable remuneration for the trouble and +risk which he incurs by borrowing and employing it. + +This remark is just; but it seems necessary to give greater precision to +the ideas which it involves. + +The difference between the profit which can be made by the use of +capital, and the interest which will be paid for it, is rightly +characterized as wages of superintendance. But to infer from this that +it is regulated by entirely the same principles as other wages, would be +to push the analogy too far. It is wages, but wages paid by a commission +upon the capital employed. If the general rate of profit is 10 per cent, +and the rate of interest 5 per cent, the wages of superintendance will +be 5 per cent; and though one borrower employ a capital of 100,000_l_., +another no more than 100_l_., the labour of both will be rewarded with +the same per centage, though, in the one ease, this symbol will +represent an income of 5_l_., in the other case, of 5000_l_. Yet it +cannot be pretended that the labour of the two borrowers differs in this +proportion. The rule, therefore, that equal quantities of labour of +equal hardness and skill are equally remunerated, does not hold of this +kind of labour. The wages of any other labour are here an inapplicable +criterion. + +The wages of superintendance are distinguished from ordinary wages by +another peculiarity, that they are not paid in advance out of capital, +like the wages of all other labourers, but merge in the profit, and are +not realized until the production is completed. This takes them entirely +out of the ordinary law of wages. The wages of labourers who are paid in +advance, are regulated by the number of competitors compared with the +amount of capital; the labourers can consume no more than what has been +previously accumulated. But there is no such limit to the remuneration +of a kind of labour which is not paid for out of wealth previously +accumulated, but out of that produce which it is itself employed in +calling into existence. + +When these circumstances are duly weighed, it will be perceived, that +although profit may be correctly analyzed into interest and wages of +superintendance, we ought not to lay it down as the law of interest, +that it is profits _minus_ the wages of superintendance. Of the two +expressions, it would be decidedly the more correct, that the wages of +superintendance are regulated by the rate of interest, or are equal to +profits _minus_ interest. In strict, propriety, neither expression would +be allowable. Interest, and the wages of superintendance, can scarcely +be said to depend upon one another. They are to one another in the same +relation as wages and profits are. They are like two buckets in a well: +when one rises, the other descends, but neither of the two motions is +the cause of the other; both are simultaneous effects of the same cause, +the turning of the windlass. + + * * * * * + +There are among the capitalists of every country a considerable number +who are habitually, and almost necessarily, lenders; to whom scarcely +any difference between what they could receive for their money and what +could be made by it, would be an equivalent for incurring the risk and +labour of carrying on business. In this predicament is the property of +widows and orphans; of many public bodies; of charitable institutions; +most property which is vested in trustees; and the property of a great +number of persons unused to business, and who have a distaste for it, +or whose other occupations prevent their engaging in it. How large a +proportion of the property lent to the nation comes under this +description, has been pointed out in Mr. Tooke's _Considerations on the +State of the Currency._ + +There is another large class, consisting of bankers, bill-brokers, and +others, who are money-lenders by profession; who enter into that +profession with the intention of making such gains as it will yield +them, and who would not be induced to change their business by any but +a very strong pecuniary inducement. + +There is, therefore, a large class of persons who are habitually +lenders. On the other hand, all persons in business may be considered +as habitually borrowers. Except in times of stagnation, they are all +desirous of extending their business beyond their own capital, and are +never desirous of lending any portion of their capital except for very +short periods, during which they cannot advantageously invest it in +their own trade. + +There is, in short, a productive class, and there is, besides, a class +technically styled the monied class, who live upon the interest of their +capital, without engaging personally in the work of production. + +The class of borrowers may be considered as unlimited. There is no +quantity of capital that could be offered to be lent, which the +productive classes would not be willing to borrow, at any rate of +interest which would afford them the slightest excess of profit above a +bare equivalent for the additional risk, incurred by that transaction, +of the evils attendant on insolvency. The only assignable limit to the +inclination to borrow, is the power of giving security: the producers +would find it difficult to borrow more than an amount equal to their own +capital. If more than half the capital of the country were in the hands +of persons who preferred lending it to engaging personally in business, +and if the surplus were greater than could be invested in loans to +Government, or in mortgages upon the property of unproductive consumers; +the competition of lenders would force down the rate of interest very +low. A certain portion of the monied class would be obliged either to +sacrifice their predilections by engaging in business, or to lend on +inferior security; and they would accordingly accept, where they could +obtain good security, an abatement of interest equivalent to the +difference of risk. + +This is an extreme case. Let us put an extreme case of a contrary kind. +Suppose that the wealthy people of any country, not relishing an idle +life, and having a strong taste for gainful labour, were generally +indisposed to accept of a smaller income in order to be relieved from +the labour and anxiety of business. Every producer in flourishing +circumstances would be eager to borrow, and few willing to lend. Under +these circumstances the rate of interest would differ very little from +the rate of profit. The trouble of managing a business is not +proportionally increased by an increase of the magnitude of the +business; and a very small surplus profit above the rate of interest, +would therefore be a sufficient inducement to capitalists to borrow. + +We may even conceive a people whose habits were such, that in order to +induce them to lend, it might be necessary to offer them a rate of +interest fully equal to the ordinary rate of profit. In that case, of +course, the productive classes would scarcely ever borrow. But +government, and the unproductive classes, who do not borrow in order to +make a profit by the loan, but from the pressure of a real or supposed +necessity, might still be ready to borrow at this high rate. + +Although the inclination to borrow has no _fixed_ or _necessary_ limit +except the power of giving security, yet it always, in point of fact, +stops short of this; from the uncertainty of the prospects of any +individual producer, which generally indisposes him to involve himself +to the full extent of his means of payment. There is never any permanent +want of market for things in general; but there may be so for the +commodity which any one individual is producing; and even if there is a +demand for the commodity, people may not buy it of him but of some other. +There are, consequently, never more than a portion of the producers, the +state of whose business encourages them to add to their capital by +borrowing; and even these are disposed to borrow only as much as they +see an _immediate_ prospect of profitably employing. There is, therefore, +a practical limit to the demands of borrowers at any given instant; and +when these demands are all satisfied, any additional capital offered on +loan can find an investment only by a reduction of the rate of interest. + +The amount of borrowers being given, (and by the amount of borrowers is +here meant the aggregate sum which people are willing to borrow at some +given rate,) the rate of interest will depend upon the quantity of +capital owned by people who are unwilling or unable to engage in trade. +The circumstances which determine this, are, on the one hand, the degree +in which a taste for business, or an aversion to it, happens to be +prevalent among the classes possessed of property; and on the other +hand, the amount of the annual accumulation from the earnings of labour. +Those who accumulate from their wages, fees, or salaries, have, of +course, (speaking generally) no means of investing their savings except +by lending them to others: their occupations prevent them from personally +superintending any employment. + +Upon these circumstances, then, the rate of interest depends, the amount +of borrowers being given. And the counter-proposition equally holds, +that, the above circumstances being given, the rate of interest depends +upon the amount of borrowers. + +Suppose, for example, that when the rate of interest has adjusted itself +to the existing state of the circumstances which affect the disposition +to borrow and to lend, a war breaks out, which induces government, for +a series of years, to borrow annually a large sum of money. During the +whole of this period, the rate of interest will remain considerably +above what it was before, and what it will be afterwards. + +Before the commencement of the supposed war, all persons who were +disposed to lend at the then rate of interest, had found borrowers, and +their capital was invested. This may be assumed; for if any capital had +been seeking for a borrower at the existing rate of interest, and unable +to find one, its owner would have offered it at a rate slightly below +the existing rate. He would, for instance, have bought into the funds, +at a slight advance of price; and thus set at liberty the capital of +some fundholder, who, the funds yielding a lower interest, would have +been obliged to accept a lower interest from individuals. + +Since, then, all who were willing to lend their capital at the market +rate, have already lent it, Government will not be able to borrow unless +by offering higher interest. Though, with the existing habits of the +possessors of disposable capital, an increased number cannot be found +who are willing to lend at the existing rate, there are doubtless some +who will be induced to lend by the temptation of a higher rate. The same +temptation will also induce some persons to invest, in the purchase of +the new stock, what they would otherwise have expended unproductively in +increasing their establishments, or productively, in improving their +estates. The rate of interest will rise just sufficiently to call forth +an increase of lenders to the amount required. + +This we apprehend to be the cause why the rate of interest in this +country was so high as it is well known to have been during the last +war. It is, therefore, by no means to be inferred, as some have done, +that the general rate of profits was unusually high during the same +period, because interest was so. Supposing the rate of profits to have +been precisely the same during the war, as before or after it, the rate +of interest would nevertheless have risen, from the causes and in the +manner above described. + +The practical use of the preceding investigation is, to moderate the +confidence with which inferences are frequently drawn with respect to +the rate of profit from evidence regarding the rate of interest; and to +shew that although the rate of profit is one of the elements which +combine to determine the rate of interest, the latter is also acted upon +by causes peculiar to itself, and may either rise or fall, both +temporarily and permanently, while the general rate of profits remains +unchanged. + + * * * * * + +The introduction of banks, which perform the function of lenders and +loan-brokers, with or without that of issuers of paper-money, produces +some further anomalies in the rate of interest, which have not, so far +as we are aware, been hitherto brought within the pale of exact science. + +If bankers were merely a class of middlemen between the lender and the +borrower; if they merely received deposits of capital from those who had +it lying unemployed in their hands, and lent this, together with their +own capital, to the productive classes, receiving interest for it, and +paying interest in their turn to those who had placed capital in their +hands; the effect of the operations of banking on the rate of interest +would be to lower it in some slight degree. The banker receives and +collects together sums of money much too small, when taken individually, +to render it worth while for the owners to look out for an investment, +but which in the aggregate form a considerable amount. This amount may +be considered a clear addition to the productive capital of the country; +at least, to the capital in activity at any moment. And as this addition +to the capital accrues wholly to that part of it which is not employed +by the owners, but lent to other producers, the natural effect is a +diminution of the rate of interest. + +The banker, to the extent of his own private capital, (the expenses of +his business being first paid,) is a lender at interest. But, being +subject to risk and trouble fully equal to that which belongs to most +other employments, he cannot be satisfied with the mere interest even +of his whole capital: he must have the ordinary profits of stock, or he +will not engage in the business: the state of banking must be such as to +hold out to him the prospect of adding, to the interest of what remains +of his own capital after paying the expenses of his business, interest +upon capital deposited with him, in sufficient amount to make up, after +paying the expenses, the ordinary profit which could be derived from his +own capital in any productive employment. This will be accomplished in +one of two ways. + +1. If the circumstances of society are such as to furnish a ready +investment of disposable capital; (as for instance in London, where the +public funds and other securities, of undoubted stability, and affording +great advantages for receiving the interest without trouble and +realizing the principal without difficulty when required, tempt all +persons who have sums of importance lying idle, to invest them on their +own account without the intervention of any middleman;) the deposits +with bankers consist chiefly of small sums likely to be wanted in a very +short period for current expenses, and the interest on which would +seldom be worth the trouble of calculating it. Bankers, therefore, do +not allow any interest on their deposits. After paying the expenses of +their business, all the rest of the interest they receive is clear gain. +But as the circumstances of banking, as of all other modes of employing +capital, will on the average be such as to afford to a person entering +into the business a prospect of realizing the ordinary, and no more than +the ordinary, profits upon his own capital; the gains of each banker by +the investment of his deposits, will not on the average exceed what is +necessary to make up his gains on his own capital to the ordinary rate. +It is, of course, competition, which brings about this limitation. +Whether competition operates by lowering the rate of interest, or by +dividing the business among a larger number, it is difficult to decide. +Probably it operates in both ways; but it is by no means impossible that +it may operate in the latter way alone: just as an increase in the +number of physicians does not lower the fees, though it diminishes an +average competitor's chance of obtaining them. + +It is not impossible that the disposition of the lenders might be such, +that they would cease to lend rather than acquiesce in any reduction of +the rate of interest. If so, the arrival of a new lender, in the person +of a banker of deposit, would not lower the rate of interest in any +considerable degree. A slight fall would take place, and with that +exception things would be as before, except that the capital in the +hands of the banker would have put itself into the place of an equal +portion of capital belonging to other lenders, who would themselves have +engaged in business (e.g., by subscribing to some joint-stock company, +or entering into commandite). Bankers' profits would then be limited to +the ordinary rate chiefly by the division of the business among many +banks, so that each on the average would receive no more interest on his +deposits than would suffice to make up the interest on his own capital +to the ordinary rate of profit after paying all expenses. + +2. But if the circumstances of society render it difficult and +inconvenient for persons who wish to live upon the interest of their +money, to seek an investment for themselves, the bankers become agents +for this specific purpose: large as well as small sums are deposited +with them, and they allow interest to their customers. Such is the +practice of the Scotch banks, and of most of the country banks in +England. Their customers, not living at any of the great seats of money +transactions, prefer entrusting their capital to somebody on the spot, +whom they know, and in whom they confide. He invests their money on the +best terms he can, and pays to them such interest as he can afford to +give; retaining a compensation for his own risk and trouble. This +compensation is fixed by the competition of the market. The rate of +interest is no further lowered by this operation, than inasmuch as it +brings together the lender and the borrower in a safe and expeditious +manner. The lender incurs less risk, and a larger proportion, therefore, +of the holders of capital are willing to be lenders. + +When a banker, in addition to his other functions, is also an issuer of +paper money, he gains an advantage similar to that which the London +bankers derive from their deposits. To the extent to which he can put +forth his notes, he has so much the more to lend, without himself having +to pay any interest for it. + +If the paper is convertible, it cannot get into circulation permanently +without displacing specie, which goes abroad and brings back an +equivalent value. To the extent of this value, there is an increase of +the capital of the country; and the increase accrues solely to that part +of the capital which is employed in loans. + +If the paper is inconvertible, and instead of displacing specie +depreciates the currency, the banker by issuing it levies a tax on every +person who has money in his hands or due to him. He thus appropriates to +himself a portion of the capital of other people, and a portion of their +revenue. The capital might have been intended to be lent, or it might +have been intended to be employed by the owner: such part of it as was +intended to be employed by the owner now changes its destination, and is +lent. The revenue was either intended to be accumulated, in which case +it had already become capital, or it was intended to be spent: in this +last case, revenue is converted into capital: and thus, strange as it +may appear, the depreciation of the currency, when effected in this way, +operates to a certain extent as a forced accumulation. This, indeed, is +no palliation of its iniquity. Though A might have spent his property +unproductively, B ought not to be permitted to rob him of it because B +will expend it on productive labour. + +In any supposable case, however, the issue of paper money by bankers +increases the proportion of the whole capital of the country which is +destined to be lent. The rate of interest must therefore fall, until +some of the lenders give over lending, or until the increase of +borrowers absorbs the whole. + +But a fall of the rate of interest, sufficient to enable the money +market to absorb the whole of the paper-loans, may not be sufficient to +reduce the profits of a lender who lends what costs him nothing, to the +ordinary rate of profit upon his capital. Here, therefore, competition +will operate chiefly by dividing the business. The notes of each bank +will be confined within so narrow a district, or will divide the supply +of a district with so many other banks, that on the average each will +receive no larger amount of interest on his notes than will make up the +interest on his own capital to the ordinary rate of profit. + +Even in this way, however, the competition has the effect, to a certain +limited extent, of lowering the rate of interest; for the power of +bankers to receive interest on more than their capital attracts a +greater amount of capital into the banking business than would otherwise +flow into it; and this greater capital being all lent, interest will +fall in consequence. + + +NOTE: + +[7] It would be easy to go over in the same manner any other case. For +instance, we may suppose, that, instead of dispensing with the _whole_ +of the fixed capital, material, &c, and taking on labourers in equal +number to those by whom these were produced, _half_ only of the fixed +capital and material is dispensed with; so that, instead of 60 labourers +and a fixed capital worth 6O quarters of corn, we have 80 labourers and +a fixed capital worth 30. The numerical statement of this case is more +intricate than that in the text, but the result is not different. + + + + + +ESSAY V. + +ON THE DEFINITION OF POLITICAL ECONOMY; AND ON THE METHOD OF +INVESTIGATION PROPER TO IT. + + +It might be imagined, on a superficial view of the nature and objects of +definition, that the definition of a science would occupy the same place +in the chronological which it commonly does in the didactic order. As a +treatise on any science usually commences with an attempt to express, in +a brief formula, what the science is, and wherein it differs from other +sciences, so, it might be supposed, did the framing of such a formula +naturally precede the successful cultivation of the science. + +This, however, is far from having been the case. The definition of a +science has almost invariably not preceded, but followed, the creation +of the science itself. Like the wall of a city, it has usually been +erected, not to be a receptacle for such edifices as might afterwards +spring up, but to circumscribe an aggregation already in existence. +Mankind did not measure out the ground for intellectual cultivation +before they began to plant it; they did not divide the field of human +investigation into regular compartments first, and then begin to collect +truths for the purpose of being therein deposited; they proceeded in a +less systematic manner. As discoveries were gathered in, either one by +one, or in groups resulting from the continued prosecution of some +uniform course of inquiry, the truths which were successively brought +into store cohered and became agglomerated according to their individual +affinities. Without any intentional classification, the facts classed +themselves. They became associated in the mind, according to their +general and obvious resemblances; and the aggregates thus formed, having +to be frequently spoken of as aggregates, came to be denoted by a common +name. Any body of truths which had thus acquired a collective +denomination, was called a _science_. It was long before this fortuitous +classification was felt not to be sufficiently precise. It was in a more +advanced stage of the progress of knowledge that mankind became sensible +of the advantage of ascertaining whether the facts which they had thus +grouped together were distinguished from all other facts by any common +properties, and what these were. The first attempts to answer this +question were commonly very unskilful, and the consequent definitions +extremely imperfect. + +And, in truth, there is scarcely any investigation in the whole body of +a science requiring so high a degree of analysis and abstraction, as the +inquiry, what the science itself is; in other words, what are the +properties common to all the truths composing it, and distinguishing +them from all other truths. Many persons, accordingly, who are +profoundly conversant with the details of a science, would be very much +at a loss to supply such a definition of the science itself as should +not be liable to well-grounded logical objections. From this remark, we +cannot except the authors of elementary scientific treatises. The +definitions which those works furnish of the sciences, for the most part +either do not fit them--some being too wide, some too narrow--or do not +go deep enough into them, but define a science by its accidents, not its +essentials; by some one of its properties which may, indeed, serve the +purpose of a distinguishing mark, but which is of too little importance +to have ever of itself led mankind to give the science a name and rank +as a separate object of study. + +The definition of a science must, indeed, be placed among that class of +truths which Dugald Stewart had in view, when he observed that the first +principles of all sciences belong to the philosophy of the human mind. +The observation is just; and the first principles of all sciences, +including the definitions of them, have consequently participated +hitherto in the vagueness and uncertainty which has pervaded that most +difficult and unsettled of all branches of knowledge. If we open any +book, even of mathematics or natural philosophy, it is impossible not to +be struck with the mistiness of what we find represented as preliminary +and fundamental notions, and the very insufficient manner in which the +propositions which are palmed upon us as first principles seem to be +made out, contrasted with the lucidity of the explanations and the +conclusiveness of the proofs as soon as the writer enters upon the +details of his subject. Whence comes this anomaly? Why is the admitted +certainty of the results of those sciences in no way prejudiced by the +want of solidity in their premises? How happens it that a firm +superstructure has been erected upon an unstable foundation? The +solution of the paradox _is_, that what are called first principles, +are, in truth, _last_ principles. Instead of being the fixed point from +whence the chain of proof which supports all the rest of the science +hangs suspended, they are themselves the remotest link of the chain. +Though presented as if all other truths were to be deduced from them, +they are the truths which are last arrived at; the result of the last +stage of generalization, or of the last and subtlest process of +analysis, to which the particular truths of the science can be +subjected; those particular truths having previously been ascertained +by the evidence proper to their own nature. + +Like other sciences, Political Economy has remained destitute of a +definition framed on strictly logical principles, or even of, what is +more easily to be had, a definition exactly co-extensive with the thing +defined. This has not, perhaps, caused the real bounds of the science to +be, in this country at least, practically mistaken or overpassed; but +it has occasioned--perhaps we should rather say it is connected with +--indefinite, and often erroneous, conceptions of the mode in which the +science should be studied. + +We proceed to verify these assertions by an examination of the most +generally received definitions of the science. + +1. First, as to the vulgar notion of the nature and object of Political +Economy, we shall not be wide of the mark if we state it to be something +to this effect:--That Political Economy is a science which teaches, or +professes to teach, in what manner a nation may be made rich. This +notion of what constitutes the science, is in some degree countenanced +by the title and arrangement which Adam Smith gave to his invaluable +work. A systematic treatise on Political Economy, he chose to call an +_Inquiry into the Nature and Causes of the Wealth of Nations_; and the +topics are introduced in an order suitable to that view of the purpose +of his book. + +With respect to the definition in question, if definition it can be +called which is not found in any set form of words, but left to be +arrived at by a process of abstraction from a hundred current modes of +speaking on the subject; it seems liable to the conclusive objection, +that it confounds the essentially distinct, though closely connected, +ideas of _science_ and _art_. These two ideas differ from one another as +the understanding differs from the will, or as the indicative mood in +grammar differs from the imperative. The one deals in facts, the other +in precepts. Science is a collection of _truths_; art, a body of +_rules_, or directions for conduct. The language of science is, This is, +or, This is not; This does, or does not, happen. The language of art is, +Do this; Avoid that. Science takes cognizance of a _phenomenon_, and +endeavours to discover its _law_; art proposes to itself an _end_, and +looks out for _means_ to effect it. + +If, therefore, Political Economy be a science, it cannot be a collection +of practical rules; though, unless it be altogether a useless science, +practical rules must be capable of being founded upon it. The science of +mechanics, a branch of natural philosophy, lays down the laws of motion, +and the properties of what are called the mechanical powers. The art of +practical mechanics teaches how we may avail ourselves of those laws and +properties, to increase our command over external nature. An art would +not be an art, unless it were founded upon a scientific knowledge of the +properties of the subject-matter: without this, it would not be +philosophy, but empiricism; [Greek: empeiria,] not [Greek: technae,] in +Plato's sense. Rules, therefore, for making a nation increase in wealth, +are not a science, but they are the results of science. Political +Economy does not of itself instruct how to make a nation rich; but +whoever would be qualified to judge of the means of making a nation +rich, must first be a political economist. + +2. The definition most generally received among instructed persons, and +laid down in the commencement of most of the professed treatises on the +subject, is to the following effect:--That Political Economy informs us +of the laws which regulate the production, distribution, and consumption +of wealth. To this definition is frequently appended a familiar +illustration. Political Economy, it is said, is to the state, what +domestic economy is to the family. + +This definition is free from the fault which we pointed out in the +former one. It distinctly takes notice that Political Economy is a +science and not an art; that it is conversant with laws of nature, +not with maxims of conduct, and teaches us how things take place of +themselves, not in what manner it is advisable for us to shape them, +in order to attain some particular end. + +But though the definition is, with regard to this particular point, +unobjectionable, so much can scarcely be said for the accompanying +illustration; which rather sends back the mind to the current loose +notion of Political Economy already disposed of. Political Economy is +really, and is stated in the definition to be, a science: but domestic +economy, so far as it is capable of being reduced to principles, is an +art. It consists of rules, or maxims of prudence, for keeping the family +regularly supplied with what its wants require, and securing, with any +given amount of means, the greatest possible quantity of physical +comfort and enjoyment. Undoubtedly the beneficial _result_, the great +practical _application_ of Political Economy, would be to accomplish +for a nation something like what the most perfect domestic economy +accomplishes for a single household: but supposing this purpose +realised, there would be the same difference between the rules by which +it might be effected, and Political Economy, which there is between the +art of gunnery and the theory of projectiles, or between the rules of +mathematical land-surveying and the science of trigonometry. + +The definition, though not liable to the same objection as the +illustration which is annexed to it, is itself far from unexceptionable. +To neither of them, considered as standing at the head of a treatise, +have we much to object. At a very early stage in the study of the +science, anything more accurate would be useless, and therefore +pedantic. In a merely initiatory definition, scientific precision is not +required: the object is, to insinuate into the learner's mind, it is +scarcely material by what means, some general preconception of what are +the uses of the pursuit, and what the series of topics through which he +is about to travel. As a mere anticipation or _ébauche_ of a definition, +intended to indicate to a learner as much as he is able to understand +before he begins, of the nature of what is about to be taught to him, +we do not quarrel with the received formula. But if it claims to be +admitted as that complete _definitio_ or boundary-line, which results +from a thorough exploring of the whole extent of the subject, and is +intended to mark the exact place of Political Economy among the +sciences, its pretension cannot be allowed. + +"The science of the laws which regulate the production, distribution, +and consumption of wealth." The term wealth is surrounded by a haze of +floating and vapoury associations, which will let nothing that is seen +through them be shewn distinctly. Let us supply its place by a +periphrasis. Wealth is defined, all objects useful or agreeable to +mankind, except such as can be obtained in indefinite quantity without +labour. Instead of all objects, some authorities say, all material +objects: the distinction is of no moment for the present purpose. + +To confine ourselves to production: If the laws of the production of all +objects, or even of all material objects, which are useful or agreeable +to mankind, were comprised in Political Economy, it would be difficult +to say where the science would end: at the least, all or nearly all +physical knowledge would be included in it. Corn and cattle are material +objects, in a high degree useful to mankind. The laws of the production +of the one include the principles of agriculture; the production of the +other is the subject of the art of cattle-breeding, which, in so far as +really an art, must be built upon the science of physiology. The laws of +the production of manufactured articles involve the whole of chemistry +and the whole of mechanics. The laws of the production of the wealth +which is extracted from the bowels of the earth, cannot be set forth +without taking in a large part of geology. + +When a definition so manifestly surpasses in extent what it professes to +define, we must suppose that it is not meant to be interpreted literally, +though the limitations with which it is to be understood are not stated. + +Perhaps it will be said, that Political Economy is conversant with such +only of the laws of the production of wealth as are applicable to _all_ +kinds of wealth: those which relate to the details of particular trades +or employments forming the subject of other and totally distinct +sciences. + +If, however, there were no more in the distinction between Political +Economy and physical science than this, the distinction, we may venture +to affirm, would never have been made. No similar division exists in any +other department of knowledge. We do not break up zoology or mineralogy +into two parts; one treating of the properties common to all animals, or +to all minerals; another conversant with the properties peculiar to each +particular species of animals or minerals. The reason is obvious; there +is no distinction _in kind_ between the general laws of animal or of +mineral nature and the peculiar properties of particular species. There +is as close an analogy between the general laws and the particular ones, +as there is between one of the general laws and another: most commonly, +indeed, the particular laws are but the complex result of a plurality of +general laws modifying each other. A separation, therefore, between the +general laws and the particular ones, merely because the former are +general and the latter particular, would run counter both to the +strongest motives of convenience and to the natural tendencies of the +mind. If the case is different with the laws of the production of +wealth, it must be because, in this case, the general laws differ in +kind from the particular ones. But if so, the difference in kind is the +radical distinction, and we should find out what that is, and found our +definition upon it. + +But, further, the recognised boundaries which separate the field of +Political Economy from that of physical science, by no means correspond +with the distinction between the truths which concern all kinds of +wealth and those which relate only to some kinds. The three laws of +motion, and the law of gravitation, are common, as far as human +observation has yet extended, to all matter; and these, therefore, as +being among the laws of the production of all wealth, should form part +of Political Economy. There are hardly any of the processes of industry +which do not partly depend upon the properties of the lever; but it +would be a strange classification which included those properties among +the truths of Political Economy. Again, the latter science has many +inquiries altogether as special, and relating as exclusively to +particular sorts of material objects, as any of the branches of physical +science. The investigation of some of the circumstances which regulate +the price of corn, has as little to do with the laws common to the +production of all wealth, as any part of the knowledge of the +agriculturist. The inquiry into the rent of mines or fisheries, or into +the value of the precious metals, elicits truths which have immediate +reference to the production solely of a peculiar kind of wealth; yet +these are admitted to be correctly placed in the science of Political +Economy. + +The real distinction between Political Economy and physical science must +be sought in something deeper than the nature of the subject-matter; +which, indeed, is for the most part common to both. Political Economy, +and the scientific grounds of all the useful arts, have in truth one and +the same subject-matter; namely, the objects which conduce to man's +convenience and enjoyment: but they are, nevertheless, perfectly +distinct branches of knowledge. + +3. If we contemplate the whole field of human knowledge, attained or +attainable, we find that it separates itself obviously, and as it were +spontaneously, into two divisions, which stand so strikingly in +opposition and contradistinction to one another, that in all +classifications of our knowledge they have been kept apart. These are, +_physical_ science, and _moral_ or psychological science. The difference +between these two departments of our knowledge does not reside in the +subject-matter with which they are conversant: for although, of the +simplest and most elementary parts of each, it may be said, with an +approach to truth, that they are concerned with different subject- +matters--namely, the one with the human mind, the other with all things +whatever except the mind; this distinction does not hold between the +higher regions of the two. Take the science of politics, for instance, +or that of law: who will say that these are physical sciences? and yet +is it not obvious that they are conversant fully as much with matter as +with mind? Take, again, the theory of music, of painting, of any other +of the fine arts, and who will venture to pronounce that the facts they +are conversant with belong either wholly to the class of matter, or +wholly to that of mind? + +The following seems to be the _rationale_ of the distinction between +physical and moral science. + +In all the intercourse of man with nature, whether we consider him as +acting upon it, or as receiving impressions from it, the effect or +phenomenon depends upon causes of two kinds: the properties of the +object acting, and those of the object acted upon. Everything which can +possibly happen in which man and external things, are jointly concerned, +results from the joint operation of a law or laws of matter, and a law +or laws of the human mind. Thus the production of corn by human labour +is the result of a law of mind, and many laws of matter. The laws of +matter are those properties of the soil and of vegetable life which +cause the seed to germinate in the ground, and those properties of the +human body which render food necessary to its support. The law of mind +is, that man desires to possess subsistence, and consequently wills the +necessary means of procuring it. + +Laws of mind and laws of matter are so dissimilar in their nature, that +it would be contrary to all principles of rational arrangement to mix +them up as part of the same study. In all scientific methods, therefore, +they are placed apart. Any compound effect or phenomenon which depends +both on the properties of matter and on those of mind, may thus become +the subject of two completely distinct sciences, or branches of science; +one, treating of the phenomenon in so far as it depends upon the laws of +matter only; the other treating of it in so far as it depends upon the +laws of mind. + +The physical sciences are those which treat of the laws of matter, and +of all complex phenomena in so far as dependent upon the laws of matter. +The mental or moral sciences are those which treat of the laws of mind, +and of all complex phenomena in so far as dependent upon the laws of +mind. + +Most of the moral sciences presuppose physical science; but few of the +physical sciences presuppose moral science. The reason is obvious. There +are many phenomena (an earthquake, for example, or the motions of the +planets) which depend upon the laws of matter exclusively; and have +nothing whatever to do with the laws of mind. Many, therefore, of the +physical sciences may be treated of without any reference to mind, and +as if the mind existed as a recipient of knowledge only, not as a cause +producing effects. But there are no phenomena which depend exclusively +upon the laws of mind; even the phenomena of the mind itself being +partially dependent upon the physiological laws of the body. All the +mental sciences, therefore, not excepting the pure science of mind, must +take account of a great variety of physical truths; and (as physical +science is commonly and very properly studied first) may be said to +presuppose them, taking up the complex phenomena where physical science +leaves them. + +Now this, it will be found, is a precise statement of the relation in +which Political Economy stands to the various sciences which are +tributary to the arts of production. + +The laws of the production of the objects which constitute wealth, are +the subject-matter both of Political Economy and of almost all the +physical sciences. Such, however, of those laws as are purely laws of +matter, belong to physical science, and to that exclusively. Such of +them as are laws of the human mind, and no others, belong to Political +Economy, which finally sums up the result of both combined. + +Political Economy, therefore, presupposes all the physical sciences; it +takes for granted all such of the truths of those sciences as are +concerned in the production of the objects demanded by the wants of +mankind; or at least it takes for granted that the physical part of the +process takes place somehow. It then inquires what are the phenomena of +_mind_ which are concerned in the production and distribution [8] of +those same objects; it borrows from the pure science of mind the laws of +those phenomena, and inquires what effects follow from these mental +laws, acting in concurrence with those physical one. [9] + +From the above considerations the following seems to come out as the +correct and complete definition of Political Economy:--"The science +which treats of the production and distribution of wealth, so far as +they depend upon the laws of human nature." Or thus--science relating to +the moral or psychological laws of the production and distribution of +wealth." + +For popular use this definition is amply sufficient, but it still falls +short of the complete accuracy required for the purposes of the +philosopher. Political Economy does not treat of the production and +distribution of wealth in all states of mankind, but only in what is +termed the social state; nor so far as they depend upon the laws of +human nature, but only so far as they depend upon a certain portion of +those laws. This, at least, is the view which must be taken of Political +Economy, if we mean it to find any place in an encyclopedical division +of the field of science. On any other view, it either is not science at +all, or it is several sciences. This will appear clearly, if, on the one +hand, we take a general survey of the moral sciences, with a view to +assign the exact place of Political Economy among them; while, on the +other, we consider attentively the nature of the methods or processes by +which the truths which are the object of those sciences are arrived at. + +Man, who, considered as a being having a moral or mental nature, is the +subject-matter of all the moral sciences, may, with reference to that +part of his nature, form the subject of philosophical inquiry under +several distinct hypotheses. We may inquire what belongs to man +considered individually, and as if no human being existed besides +himself; we may next consider him as coming into contact with other +individuals; and finally, as living in a state of _society_, that is, +forming part of a body or aggregation of human beings, systematically +co-operating for common purposes. Of this last state, political +government, or subjection to a common superior, is an ordinary +ingredient, but forms no necessary part of the conception, and, with +respect to our present purpose, needs not be further adverted to. + +Those laws or properties of human nature which appertain to man as a +mere individual, and do not presuppose, as a necessary condition, the +existence of other individuals (except, perhaps, as mere instruments or +means), form a part of the subject of pure mental philosophy. They +comprise all the laws of the mere intellect, and those of the purely +self-regarding desires. + +Those laws of human nature which relate to the feelings called forth in +a human being by other individual human or intelligent beings, as such; +namely, the _affections_, the _conscience_, or feeling of duty, and the +love of _approbation_; and to the conduct of man, so far as it depends +upon, or has relation to, these parts of his nature--form the subject of +another portion of pure mental philosophy, namely, that portion of it on +which _morals_, or _ethics_, are founded. For morality itself is not a +science, but an art; not truths, but rules. The truths on which the +rules are founded are drawn (as is the case in all arts) from a variety +of sciences; but the principal of them, and those which are most nearly +peculiar to this particular art, belong to a branch of the science of +mind. + +Finally, there are certain principles of human nature which are +peculiarly connected with the ideas and feelings generated in man by +living in a state of _society_, that is, by forming part of a union or +aggregation of human beings for a common purpose or purposes. Few, +indeed, of the elementary laws of the human mind are peculiar to this +state, almost all being called into action in the two other states. But +those simple laws of human nature, operating in that wider field, give +rise to results of a sufficiently universal character, and even (when +compared with the still more complex phenomena of which they are the +determining causes) sufficiently simple, to admit of being called, +though in a somewhat looser sense, _laws_ of society, or laws of human +nature in the social state. These laws, or general truths, form the +subject of a branch of science which may be aptly designated from the +title of _social economy_; somewhat less happily by that of _speculative +politics_, or the _science_ of politics, as contradistinguished from the +art. This science stands in the same relation to the social, as anatomy +and physiology to the physical body. It shows by what principles of his +nature man is induced to enter into a state of society; how this feature +in his position acts upon his interests and feelings, and through them +upon his conduct; how the association tends progressively to become +closer, and the co-operation extends itself to more and more purposes; +what those purposes are, and what the varieties of means most generally +adopted for furthering them; what are the various relations which +establish themselves among human beings as the ordinary consequence of +the social union; what those which are different in different states of +society; in what historical order those states tend to succeed one +another; and what are the effects of each upon the conduct and character +of man. + +This branch of science, whether we prefer to call it social economy, +speculative politics, or the natural history of society, presupposes the +whole science of the nature of the individual mind; since all the laws +of which the latter science takes cognizance are brought into play in a +state of society, and the truths of the social science are but +statements of the manner in which those simple laws take effect in +complicated circumstances. Pure mental philosophy, therefore, is an +essential part, or preliminary, of political philosophy. The science of +social economy embraces every part of man's nature, in so far as +influencing the conduct or condition of man in society; and therefore +may it be termed speculative politics, as being the scientific +foundation of practical politics, or the art of government, of which the +art of legislation is a part. [10] + +It is to _this_ important division of the field of science that one of +the writers who have most correctly conceived and copiously illustrated +its nature and limits,--we mean M. Say,--has chosen to give the name +Political Economy. And, indeed, this large extension of the +signification of that term is countenanced by its etymology. But the +words "political economy" have long ceased to have so large a meaning. +Every writer is entitled to use the words which are his tools in the +manner which he judges most conducive to the general purposes of the +exposition of truth; but he exercises this discretion under liability to +criticism: and M. Say seems to have done in this instance, what should +never be done without strong reasons; to have altered the meaning of a +name which was appropriated to a particular purpose (and for which, +therefore, a substitute must be provided), in order to transfer it to an +object for which it was easy to find a more characteristic denomination. + +What is now commonly understood by the term "Political Economy" is not +the science of speculative politics, but a branch of that science. It +does not treat of the whole of man's nature as modified by the social +state, nor of the whole conduct of man in society. It is concerned with +him solely as a being who desires to possess wealth, and who is capable +of judging of the comparative efficacy of means for obtaining that end. +It predicts only such of the phenomena of the social state as take place +in consequence of the pursuit of wealth. It makes entire abstraction of +every other human passion or motive; except those which may be regarded +as perpetually antagonizing principles to the desire of wealth, namely, +aversion to labour, and desire of the present enjoyment of costly +indulgences. These it takes, to a certain extent, into its calculations, +because these do not merely, like other desires, occasionally conflict +with the pursuit of wealth, but accompany it always as a drag, or +impediment, and are therefore inseparably mixed up in the consideration +of it. Political Economy considers mankind as occupied solely in +acquiring and consuming wealth; and aims at showing what is the course +of action into which mankind, living in a state of society, would be +impelled, if that motive, except in the degree in which it is checked by +the two perpetual counter-motives above adverted to, were absolute ruler +of all their actions. Under the influence of this desire, it shows +mankind accumulating wealth, and employing that wealth in the production +of other wealth; sanctioning by mutual agreement the institution of +property; establishing laws to prevent individuals from encroaching upon +the property of others by force or fraud; adopting various contrivances +for increasing the productiveness of their labour; settling the division +of the produce by agreement, under the influence of competition +(competition itself being governed by certain laws, which laws are +therefore the ultimate regulators of the division of the produce); and +employing certain expedients (as money, credit, &c.) to facilitate the +distribution. All these operations, though many of them are really the +result of a plurality of motives, are considered by Political Economy as +flowing solely from the desire of wealth. The science then proceeds to +investigate the laws which govern these several operations, under the +supposition that man is a being who is determined, by the necessity of +his nature, to prefer a greater portion of wealth to a smaller in all +cases, without any other exception than that constituted by the two +counter-motives already specified. Not that any political economist was +ever so absurd as to suppose that mankind are really thus constituted, +but because this is the mode in which science must necessarily proceed. +When an effect depends upon a concurrence of causes, those causes must +be studied one at a time, and their laws separately investigated, if we +wish, through the causes, to obtain the power of either predicting or +controlling the effect; since the law of the effect is compounded of the +laws of all the causes which determine it. The law of the centripetal +and that of the tangential force must have been known before the motions +of the earth and planets could be explained, or many of them predicted. +The same is the case with the conduct of man in society. In order to +judge how he will act under the variety of desires and aversions which +are concurrently operating upon him, we must know how he would act under +the exclusive influence of each one in particular. There is, perhaps, no +action of a man's life in which he is neither under the immediate nor +under the remote influence of any impulse but the mere desire of wealth. +With respect to those parts of human conduct of which wealth is not even +the principal object, to these Political Economy does not pretend that +its conclusions are applicable. But there are also certain departments +of human affairs, in which the acquisition of wealth is the main and +acknowledged end. It is only of these that Political Economy takes +notice. The manner in which it necessarily proceeds is that of treating +the main and acknowledged end as if it were the sole end; which, of all +hypotheses equally simple, is the nearest to the truth. The political +economist inquires, what are the actions which would be produced by this +desire, if, within the departments in question, it were unimpeded by any +other. In this way a nearer approximation is obtained than would +otherwise be practicable, to the real order of human affairs in those +departments. This approximation is then to be corrected by making proper +allowance for the effects of any impulses of a different description, +which can be shown to interfere with the result in any particular case. +Only in a few of the most striking cases (such as the important one of +the principle of population) are these corrections interpolated into the +expositions of Political Economy itself; the strictness of purely +scientific arrangement being thereby somewhat departed from, for the +sake of practical utility. So far as it is known, or may be presumed, +that the conduct of mankind in the pursuit of wealth is under the +collateral influence of any other of the properties of our nature than +the desire of obtaining the greatest quantity of wealth with the least +labour and self-denial, the conclusions of Political Economy will so far +fail of being applicable to the explanation or prediction of real +events, until they are modified by a correct allowance for the degree of +influence exercised by the other cause. + +Political Economy, then, may be defined as follows; and the definition +seems to be complete:-- + +"The science which traces the laws of such of the phenomena of society +as arise from the combined operations of mankind for the production of +wealth, in so far as those phenomena are not modified by the pursuit of +any other object." + +But while this is a correct definition of Political Economy as a portion +of the field of science, the didactic writer on the subject will +naturally combine in his exposition, with the truths of the pure +science, as many of the practical modifications as will, in his +estimation, be most conducive to the usefulness of his work. + + * * * * * + +The above attempt to frame a stricter definition of the science than +what are commonly received as such, may be thought to be of little use; +or, at best, to be chiefly useful in a general survey and classification +of the sciences, rather than as conducing to the more successful pursuit +of the particular science in question. We think otherwise, and for this +reason; that, with the consideration of the definition of a science, is +inseparably connected that of the _philosophic method_ of the science; +the nature of the process by which its investigations are to be carried +on, its truths to be arrived at. + +Now, in whatever science there are systematic differences of opinion +--which is as much as to say, in all the moral or mental sciences, and +in Political Economy among the rest; in whatever science there exist, +among those who have attended to the subject, what are commonly called +differences of principle, as distinguished from differences of +matter-of-fact or detail,--the cause will be found to be, a difference +in their conceptions of the philosophic method of the science. The +parties who differ are guided, either knowingly or unconsciously, by +different views concerning the nature of the evidence appropriate to the +subject. They differ not solely in what they believe themselves to see, +but in the quarter whence they obtained the light by which they think +they see it. + +The most universal of the forms in which this difference of method is +accustomed to present itself, is the ancient feud between what is called +theory, and what is called practice or experience. There are, on social +and political questions, two kinds of reasoners: there is one portion +who term themselves practical men, and call the others theorists; a +title which the latter do not reject, though they by no means recognise +it as peculiar to them. The distinction between the two is a very broad +one, though it is one of which the language employed is a most incorrect +exponent. It has been again and again demonstrated, that those who are +accused of despising facts and disregarding experience build and profess +to build wholly upon facts and experience; while those who disavow +theory cannot make one step without theorizing. But, although both +classes of inquirers do nothing but theorize, and both of them consult +no other guide than experience, there is this difference between them, +and a most important difference it is: that those who are called +practical men require _specific_ experience, and argue wholly _upwards_ +from particular facts to a general conclusion; while those who are +called theorists aim at embracing a wider field of experience, and, +having argued upwards from particular facts to a general principle +including a much wider range than that of the question under discussion, +then argue _downwards_ from that general principle to a variety of +specific conclusions. + +Suppose, for example, that the question were, whether absolute kings +were likely to employ the powers of government for the welfare or for +the oppression of their subjects. The practicals would endeavour to +determine this question by a direct induction from the conduct of +particular despotic monarchs, as testified by history. The theorists +would refer the question to be decided by the test not solely of our +experience of kings, but of our experience of men. They would contend +that an observation of the tendencies which human nature has manifested +in the variety of situations in which human beings have been placed, and +especially observation of what passes in our own minds, warrants us in +inferring that a human being in the situation of a despotic king will +make a bad use of power; and that this conclusion would lose nothing of +its certainty even if absolute kings had never existed, or if history +furnished us with no information of the manner in which they had +conducted themselves. + +The first of these methods is a method of induction, merely; the last a +mixed method of induction and ratiocination. The first may be called the +method _à posteriori;_ the latter, the method _à priori_. We are aware +that this last expression is sometimes used to characterize a supposed +mode of philosophizing, which does not profess to be founded upon +experience at all. But we are not acquainted with any mode of +philosophizing, on political subjects at least, to which such a +description is fairly applicable. By the method _à posteriori_ we mean +that which requires, as the basis of its conclusions, not experience +merely, but specific experience. By the method _à priori_ we mean (what +has commonly been meant) reasoning from an assumed hypothesis; which is +not a practice confined to mathematics, but is of the essence of all +science which admits of general reasoning at all. To verify the +hypothesis itself _à posteriori_, that is, to examine whether the facts +of any actual case are in accordance with it, is no part of the business +of science at all, but of the _application_ of science. + +In the definition which we have attempted to frame of the science of +Political Economy, we have characterized it as essentially an _abstract_ +science, and its method as the method _à priori_. Such is undoubtedly +its character as it has been understood and taught by all its most +distinguished teachers. It reasons, and, as we contend, must necessarily +reason, from assumptions, not from facts. It is built upon hypotheses, +strictly analogous to those which, under the name of definitions, are +the foundation of the other abstract sciences. Geometry presupposes an +arbitrary definition of a line, "that which has length but not breadth." +Just in the same manner does Political Economy presuppose an arbitrary +definition of man, as a being who invariably does that by which he may +obtain the greatest amount of necessaries, conveniences, and luxuries, +with the smallest quantity of labour and physical self-denial with which +they can be obtained in the existing state of knowledge. It is true that +this definition of man is not formally prefixed to any work on Political +Economy, as the definition of a line is prefixed to Euclid's Elements; +and in proportion as by being so prefixed it would be less in danger of +being forgotten, we may see ground for regret that this is not done. It +is proper that what is assumed in every particular case, should once for +all be brought before the mind in its full extent, by being somewhere +formally stated as a general maxim. Now, no one who is conversant with +systematic treatises on Political Economy will question, that whenever a +political economist has shown that, by acting in a particular manner, a +labourer may obviously obtain higher wages, a capitalist larger profits, +or a landlord higher rent, he concludes, as a matter of course, that +they will certainly act in that manner. Political Economy, therefore, +reasons from _assumed_ premises--from premises which might be totally +without foundation in fact, and which are not pretended to be +universally in accordance with it. The conclusions of Political Economy, +consequently, like those of geometry, are only true, as the common +phrase is, _in the abstract_; that is, they are only true under certain +suppositions, in which none but general causes--causes common to the +_whole class_ of cases under consideration--are taken into the account. + +This ought not to be denied by the political economist. If he deny it, +then, and then only, he places himself in the wrong. The _à priori_ +method which is laid to his charge, as if his employment of it proved +his whole science to be worthless, is, as we shall presently show, the +only method by which truth can possibly be attained in any department of +the social science. All that is requisite is, that he be on his guard +not to ascribe to conclusions which are grounded upon an hypothesis a +different kind of certainty from that which really belongs to them. They +would be true without qualification, only in a case which is purely +imaginary. In proportion as the actual facts recede from the hypothesis, +he must allow a corresponding deviation from the strict letter of his +conclusion; otherwise it will be true only of things such as he has +arbitrarily supposed, not of such things as really exist. That which is +true in the abstract, is always true in the concrete with proper +_allowances_. When a certain cause really exists, and if left to itself +would infallibly produce a certain effect, that same effect, _modified_ +by all the other concurrent causes, will correctly correspond to the +result really produced. + +The conclusions of geometry are not strictly true of such lines, angles, +and figures, as human hands can construct. But no one, therefore, +contends that the conclusions of geometry are of no utility, or that it +would be better to shut up Euclid's Elements, and content ourselves with +"practice" and "experience." + +No mathematician ever thought that his definition of a line corresponded +to an actual line. As little did any political economist ever imagine +that real men had no object of desire but wealth, or none which would +not give way to the slightest motive of a pecuniary kind. But they were +justified in assuming this, for the purposes of their argument; because +they had to do only with those parts of human conduct which have +pecuniary advantage for their direct and principal object; and because, +as no two individual cases are exactly alike, no _general_ maxims could +ever be laid down unless _some_ of the circumstances of the particular +case were left out of consideration. + +But we go farther than to affirm that the method _à priori_ is a +legitimate mode of philosophical investigation in the moral sciences: we +contend that it is the only mode. We affirm that the method _à +posteriori_, or that of specific experience, is altogether inefficacious +in those sciences, as a means of arriving at any considerable body of +valuable truth; though it admits of being usefully applied in aid of the +method _à priori_, and even forms an indispensable supplement to it. + +There is a property common to almost all the moral sciences, and by +which they are distinguished from many of the physical; this is, that it +is seldom in our power to make experiments in them. In chemistry and +natural philosophy, we can not only observe what happens under all the +combinations of circumstances which nature brings together, but we may +also try an indefinite number of new combinations. This we can seldom do +in ethical, and scarcely ever in political science. We cannot try forms +of government and systems of national policy on a diminutive scale in +our laboratories, shaping our experiments as we think they may most +conduce to the advancement of knowledge. We therefore study nature under +circumstances of great disadvantage in these sciences; being confined to +the limited number of experiments which take place (if we may so speak) +of their own accord, without any preparation or management of ours; in +circumstances, moreover, of great complexity, and never perfectly known +to us; and with the far greater part of the processes concealed from our +observation. + +The consequence of this unavoidable defect in the materials of the +induction is, that we can rarely obtain what Bacon has quaintly, but not +unaptly, termed an _experimentum crucis_. + +In any science which admits of an unlimited range of arbitrary +experiments, an _experimentum crucis_ may always be obtained. Being able +to vary all the circumstances, we can always take effectual means of +ascertaining which of them are, and which are not, material. Call the +effect B, and let the question be whether the cause A in any way +contributes to it. We try an experiment in which all the surrounding +circumstances are altered, except A alone: if the effect B is +nevertheless produced, A is the cause of it. Or, instead of leaving A, +and changing the other circumstances, we leave all the other +circumstances and change A: if the effect B in that case does _not_ take +place, then again A is a necessary condition of its existence. Either of +these experiments, if accurately performed, is an _experimentum crucis_; +it converts the presumption we had before of the existence of a +connection between A and B into proof, by negativing every other +hypothesis which would account for the appearances. + +But this can seldom be done in the moral sciences, owing to the immense +multitude of the influencing circumstances, and our very scanty means of +varying the experiment. Even in operating upon an individual mind, which +is the case affording greatest room for experimenting, we cannot often +obtain a _crucial_ experiment. The effect, for example, of a particular +circumstance in education, upon the formation of character, may be tried +in a variety of cases, but we can hardly ever be certain that any two of +those cases differ in all their circumstances except the solitary one of +which we wish to estimate the influence. In how much greater a degree +must this difficulty exist in the affairs of states, where even the +_number_ of recorded experiments is so scanty in comparison with the +variety and multitude of the circumstances concerned in each. How, for +example, can we obtain a crucial experiment on the effect of a +restrictive commercial policy upon national wealth? We must find two +nations alike in every other respect, or at least possessed, in a degree +exactly equal, of everything which conduces to national opulence, and +adopting exactly the same policy in all their other affairs, but +differing in this only, that one of them adopts a system of commercial +restrictions, and the other adopts free trade. This would be a decisive +experiment, similar to those which we can almost always obtain in +experimental physics. Doubtless this would be the most conclusive +evidence of all if we could get it. But let any one consider how +infinitely numerous and various are the circumstances which either +directly or indirectly do or may influence the amount of the national +wealth, and then ask himself what are the probabilities that in the +longest revolution of ages two nations will be found, which agree, and +can be shown to agree, in all those circumstances except one? + +Since, therefore, it is vain to hope that truth can be arrived at, +either in Political Economy or in any other department of the social +science, while we look at the facts in the concrete, clothed in all the +complexity with which nature has surrounded them, and endeavour to +elicit a general law by a process of induction from a comparison of +details; there remains no other method than the _à priori_ one, or that +of "abstract speculation." + +Although sufficiently ample grounds are not afforded in the field of +politics, for a satisfactory induction by a comparison of the effects, +the causes may, in all cases, be made the subject of specific +experiment. These causes are, laws of human nature, and external +circumstances capable of exciting the human will to action. The desires +of man, and the nature of the conduct to which they prompt him, are +within the reach of our observation. We can also observe what are the +objects which excite those desires. The materials of this knowledge +every one can principally collect within himself; with reasonable +consideration of the differences, of which experience discloses to him +the existence, between himself and other people. Knowing therefore +accurately the properties of the substances concerned, we may reason +with as much certainty as in the most demonstrative parts of physics +from any assumed set of circumstances. This will be mere trifling if the +assumed circumstances bear no sort of resemblance to any real ones; but +if the assumption is correct as far as it goes, and differs from the +truth no otherwise than as a part differs from the whole, then the +conclusions which are correctly deduced from the assumption constitute +_abstract_ truth; and when completed by adding or subtracting the effect +of the non-calculated circumstances, they are true in the concrete, and +may be applied to practice. + +Of this character is the science of Political Economy in the writings of +its best teachers. To render it perfect as an abstract science, the +combinations of circumstances which it assumes, in order to trace their +effects, should embody all the circumstances that are common to all +cases whatever, and likewise all the circumstances that are common to +any important class of cases. The conclusions correctly deduced from +these assumptions, would be as true in the abstract as those of +mathematics; and would be as near an approximation as abstract truth can +ever be, to truth in the concrete. + +When the principles of Political Economy are to be applied to a +particular ease, then it is necessary to take into account all the +individual circumstances of that case; not only examining to which of +the sets of circumstances contemplated by the abstract science the +circumstances of the case in question correspond, but likewise what +other circumstances may exist in that case, which not being common to it +with any large and strongly-marked class of cases, have not fallen under +the cognizance of the science. These circumstances have been called +_disturbing causes_. And here only it is that an element of uncertainty +enters into the process--an uncertainty inherent in the nature of these +complex phenomena, and arising from the impossibility of being quite +sure that all the circumstances of the particular case are known to us +sufficiently in detail, and that our attention is not unduly diverted +from any of them. + +This constitutes the only uncertainty of Political Economy; and not of +it alone, but of the moral sciences in general. When the disturbing +causes are known, the allowance necessary to be made for them detracts +in no way from scientific precision, nor constitutes any deviation from +the _à priori_ method. The disturbing causes are not handed over to be +dealt with by mere conjecture. Like _friction_ in mechanics, to which +they have been often compared, they may at first have been considered +merely as a non-assignable deduction to be made by guess from the result +given by the general principles of science; but in time many of them are +brought within the pale of the abstract science itself, and their effect +is found to admit of as accurate an estimation as those more striking +effects which they modify. The disturbing causes have their laws, as the +causes which are thereby disturbed have theirs; and from the laws of the +disturbing causes, the nature and amount of the disturbance may be +predicted _à priori_, like the operation of the more general laws which +they are said to modify or disturb, but with which they might more +properly be said to be concurrent. The effect of the special causes is +then to be added to, or subtracted from, the effect of the general ones. + +These disturbing causes are sometimes circumstances which operate upon +human conduct through the same principle of human nature with which +Political Economy is conversant, namely, the desire of wealth, but which +are not general enough to be taken into account in the abstract science. +Of disturbances of this description every political economist can +produce many examples. In other instances the disturbing cause is some +other law of human nature. In the latter case it never can fall within +the province of Political Economy; it belongs to some other science; and +here the mere political economist, he who has studied no science but +Political Economy, if he attempt to apply his science to practice, will +fail. [11] + +As for the other kind of disturbing causes, namely those which operate +through the same law of human nature out of which the general principles +of the science arise, these might always be brought within the pale of +the abstract science if it were worth while; and when we make the +necessary allowances for them in practice, if we are doing anything but +guess, we are following out the method of the abstract science into +minuter details; inserting among its hypotheses a fresh and still more +complex combination of circumstances, and so adding _pro hác vice_ a +supplementary chapter or appendix, or at least a supplementary theorem, +to the abstract science. + +Having now shown that the method _à priori_ in Political Economy, and +in all the other branches of moral science, is the only certain or +scientific mode of investigation, and that the _à posteriori_ method, +or that of specific experience, as a means of arriving at truth, is +inapplicable to these subjects, we shall be able to show that the latter +method is notwithstanding of great value in the moral sciences; namely, +not as a means of discovering truth, but of verifying it, and reducing +to the lowest point that uncertainty before alluded to as arising from +the complexity of every particular case, and from the difficulty (not to +say impossibility) of our being assured _à priori_ that we have taken +into account all the material circumstances. + +If we could be quite certain that we knew all the facts of the +particular case, we could derive little additional advantage from +specific experience. The causes being given, we may know what will be +their effect, without an actual trial of every possible combination; +since the causes are human feelings, and outward circumstances fitted to +excite them: and, as these for the most part are, or at least might be, +familiar to us, we can more surely judge of their combined effect from +that familiarity, than from any evidence which can be elicited from the +complicated and entangled circumstances of an actual experiment. If the +knowledge what are the particular causes operating in any given instance +were revealed to us by infallible authority, then, if our abstract +science were perfect, we should become prophets. But the causes are not +so revealed: they are to be collected by observation; and observation in +circumstances of complexity is apt to be imperfect. Some of the causes +may lie beyond observation; many are apt to escape it, unless we are on +the look-out for them; and it is only the habit of long and accurate +observation which can give us so correct a preconception what causes we +are likely to find, as shall induce us to look for them in the right +quarter. But such is the nature of the human understanding, that the +very fact of attending with intensity to one part of a thing, has a +tendency to withdraw the attention from the other parts. We are +consequently in great danger of adverting to a portion only of the +causes which are actually at work. And if we are in this predicament, +the more accurate our deductions and the more certain our conclusions in +the abstract, (that is, making abstraction of all circumstances except +those which form part of the hypothesis,) the less we are likely to +suspect that we are in error: for no one can have looked closely into +the sources of fallacious thinking without being deeply conscious that +the coherence, and neat concatenation of our philosophical systems, is +more apt than we are commonly aware to pass with us as evidence of their +truth. + +We cannot, therefore, too carefully endeavour to verify our theory, by +comparing, in the particular cases to which we have access, the results +which it would have led us to predict, with the most trustworthy +accounts we can obtain of those which have been actually realized. The +discrepancy between our anticipations and the actual fact is often the +only circumstance which would have drawn our attention to some important +disturbing cause which we had overlooked. Nay, it often discloses to us +errors in thought, still more serious than the omission of what can with +any propriety be termed a disturbing cause. It often reveals to us that +the basis itself of our whole argument is insufficient; that the data, +from which we had reasoned, comprise only a part, and not always the +most important part, of the circumstances by which the result is really +determined. Such oversights are committed by very good reasoners, and +even by a still rarer class, that of good observers. It is a kind of +error to which those are peculiarly liable whose views are the largest +and most philosophical: for exactly in that ratio are their minds more +accustomed to dwell upon those laws, qualities, and tendencies, which +are common to large classes of cases, and which belong to all place and +all time; while it often happens that circumstances almost peculiar to +the particular case or era have a far greater share in governing that +one case. + +Although, therefore, a philosopher be convinced that no general truths +can be attained in the affairs of nations by the _à posteriori_ road, +it does not the less behove him, according to the measure of his +opportunities, to sift and scrutinize the details of every specific +experiment. Without this, he may be an excellent professor of abstract +science; for a person may be of great use who points out correctly what +effects will follow from certain combinations of possible circumstances, +in whatever tract of the extensive region of hypothetical cases those +combinations may be found. He stands in the same relation to the +legislator, as the mere geographer to the practical navigator; telling +him the latitude and longitude of all sorts of places, but not how to +find whereabouts he himself is sailing. If, however, he does no more +than this, he must rest contented to take no share in practical +politics; to have no opinion, or to hold it with extreme modesty, on +the applications which should be made of his doctrines to existing +circumstances. + +No one who attempts to lay down propositions for the guidance of +mankind, however perfect his scientific acquirements, can dispense with +a practical knowledge of the actual modes in which the affairs of the +world are carried on, and an extensive personal experience of the actual +ideas, feelings, and intellectual and moral tendencies of his own +country and of his own age. The true practical statesman is he who +combines this experience with a profound knowledge of abstract political +philosophy. Either acquirement, without the other, leaves him lame and +impotent if he is sensible of the deficiency; renders him obstinate and +presumptuous if, as is more probable, he is entirely unconscious of it. + +Such, then, are the respective offices and uses of the _à priori_ and +the _à posteriori_ methods--the method of abstract science, and that of +specific experiment--as well in Political Economy, as in all the other +branches of social philosophy. Truth compels us to express our +conviction that whether among those who have written on, these subjects, +or among those for whose use they wrote, few can be pointed out who have +allowed to each of these methods its just value, and systematically kept +each to its proper objects and functions. One of the peculiarities of +modern times, the separation of theory from practice--of the studies of +the closet, from the outward business of the world--has given a wrong +bias to the ideas and feelings both of the student and of the man of +business. Each undervalues that part of the materials of thought with +which he is not familiar. The one despises all comprehensive views, the +other neglects details. The one draws his notion of the universe from +the few objects with which his course of life has happened to render him +familiar; the other having got demonstration on his side, and forgetting +that it is only a demonstration _nisi_--a proof at all times liable to +be set aside by the addition of a single new fact to the hypothesis +--denies, instead of examining and sifting, the allegations which are +opposed to him. For this he has considerable excuse in the worthlessness +of the testimony on which the facts brought forward to invalidate the +conclusions of theory usually rest. In these complex matters, men see +with their preconceived opinions, not with their eyes: an interested or +a passionate man's statistics are of little worth; and a year seldom +passes without examples of the astounding falsehoods which large bodies +of respectable men will back each other in publishing to the world as +facts within their personal knowledge. It is not because a thing is +_asserted_ to be true, but because in its nature it _may_ be true, that +a sincere and patient inquirer will feel himself called upon to +investigate it. He will use the assertions of opponents not as evidence, +but indications leading to evidence; suggestions of the most proper +course for his own inquiries. + +But while the philosopher and the practical man bandy half-truths with +one another, we may seek far without finding one who, placed on a higher +eminence of thought, comprehends as a whole what they see only in +separate parts; who can make the anticipations of the philosopher guide +the observation of the practical man, and the specific experience of the +practical man warn the philosopher where something is to be added to his +theory. + +The most memorable example in modern times of a man who united the +spirit of philosophy with the pursuits of active life, and kept wholly +clear from the partialities and prejudices both of the student and of +the practical statesman, was Turgot; the wonder not only of his age, but +of history, for his astonishing combination of the most opposite, and, +judging from common experience, almost incompatible excellences. + +Though it is impossible to furnish any test by which a speculative +thinker, either in Political Economy or in any other branch of social +philosophy, may know that he is competent to judge of the application of +his principles to the existing condition of his own or any other country, +indications may be suggested by the absence of which he may well and +surely know that he is not competent. His knowledge must at least enable +him to explain and account for what _is_, or he is an insufficient judge +of what ought to be. If a political economist, for instance, finds +himself puzzled by any recent or present commercial phenomena; if there +is any mystery to him in the late or present state of the productive +industry of the country, which his knowledge of principle does not +enable him to unriddle; he may be sure that something is wanting to +render his system of opinions a safe guide in existing circumstances. +Either some of the facts which influence the situation of the country +and the course of events are not known to him; or, knowing them, he +knows not what ought to be their effects. In the latter case his system +is imperfect even as an abstract system; it does not enable him to trace +correctly all the consequences even of assumed premises. Though he +succeed in throwing doubts upon the reality of some of the phenomena +which he is required to explain, his task is not yet completed; even +then he is called upon to show how the belief, which he deems unfounded, +arose; and what is the real nature of the appearances which gave a +colour of probability to allegations which examination proves to be +untrue. + +When the speculative politician has gone through this labour--has gone +through it conscientiously, not with the desire of finding his system +complete, but of making it so--he may deem himself qualified to apply +his principles to the guidance of practice: but he must still continue +to exercise the same discipline upon every new combination of facts as +it arises; he must make a large allowance for the disturbing influence +of unforeseen causes, and must carefully watch the result of every +experiment, in order that any residuum of facts which his principles did +not lead him to expect, and do not enable him to explain, may become the +subject of a fresh analysis, and furnish the occasion for a consequent +enlargement or correction of his general views. + +The method of the practical philosopher consists, therefore, of two +processes; the one analytical, the other synthetical. He must _analyze_ +the existing state of society into its elements, not dropping and losing +any of them by the way. After referring to the experience of individual +man to learn the _law_ of each of these elements, that is, to learn what +are its natural effects, and how much of the effect follows from so much +of the cause when not counteracted by any other cause, there remains an +operation of _synthesis_; to put all these effects together, and, from +what they are separately, to collect what would be the effect of all the +causes acting at once. If these various operations could be correctly +performed, the result would be prophecy; but, as they can be performed +only with a certain approximation to correctness, mankind can never +predict with absolute certainty, but only with a less or greater degree +of probability; according as they are better or worse apprised what the +causes are,--have learnt with more or less accuracy from experience the +law to which each of those causes, when acting separately, conforms, +--and have summed up the aggregate effect more or less carefully. + +With all the precautions which have been indicated there will still be +some danger of falling into partial views; but we shall at least have +taken the best securities against it. All that we can do more, is to +endeavour to be impartial critics of our own theories, and to free +ourselves, as far as we are able, from that reluctance from which few +inquirers are altogether him to expect, and do not enable him to +explain, may become the subject of a fresh analysis, and furnish the +occasion for a consequent enlargement or correction of his general +views. + +The method of the practical philosopher consists, therefore, of two +processes; the one analytical, the other synthetical. He must _analyze_ +the existing state of society into its elements, not dropping and losing +any of them by the way. After referring to the experience of individual +man to learn the _law_ of each of these elements, that is, to learn what +are its natural effects, and how much of the effect follows from so much +of the cause when not counteracted by any other cause, there remains an +operation of _synthesis_; to put all these effects together, and, from +what they are separately, to collect what would be the effect of all the +causes acting at once. If these various operations could be correctly +performed, the result would be prophecy; but, as they can be performed +only with a certain approximation to correctness, mankind can never +predict with absolute certainty, but only with a less or greater degree +of probability; according as they are better or worse apprised what the +causes are,--have learnt with more or less accuracy from experience the +law to which each of those causes, when acting separately, conforms,--and +have summed up the aggregate effect more or less carefully. + +With all the precautions which have been indicated there will still be +some danger of falling into partial views; but we shall at least have +taken the best securities against it. All that we can do more, is to +endeavour to be impartial critics of our own theories, and to free +ourselves, as far as we are able, from that reluctance from which few +inquirers are altogether exempt, to admit the reality or relevancy of +any facts which they have not previously either taken into, or left a +place open for in, their systems. + +If indeed every phenomenon was generally the effect of no more than one +cause, a knowledge of the law of that cause would, unless there was a +logical error in our reasoning, enable us confidently to predict all the +circumstances of the phenomenon. We might then, if we had carefully +examined our premises and our reasoning, and found no flaw, venture to +disbelieve the testimony which might be brought to show that matters had +turned out differently from what we should have predicted. If the causes +of erroneous conclusions were always patent on the face of the +reasonings which lead to them, the human understanding would be a far +more trustworthy instrument than it is. But the narrowest examination of +the process itself will help us little towards discovering that we have +omitted part of the premises which we ought to have taken into our +reasoning. Effects are commonly determined by a _concurrence_ of causes. +If we have overlooked any one cause, we may reason justly from all the +others, and only be the further wrong. Our premises will be true, and +our reasoning correct, and yet the result of no value in the particular +case. There is, therefore, almost always room for a modest doubt as to +our practical conclusions. Against false premises and unsound reasoning, +a good mental discipline may effectually secure us; but against the +danger of _overlooking_ something, neither strength of understanding nor +intellectual cultivation can be more than a very imperfect protection. +A person may be warranted in feeling confident, that whatever he has +carefully contemplated with his mind's eye he has seen correctly; but no +one can be sure that there is not something in existence which he has +not seen at all. He can do no more than satisfy himself that he has seen +all that is visible to any other persons who have concerned themselves +with the subject. For this purpose he must endeavour to place himself at +their point of view, and strive earnestly to see the object as they see +it; nor give up the attempt until he has either added the appearance +which is floating before them to his own stock of realities, or made out +clearly that it is an optical deception. + + * * * * * + +The principles which we have now stated are by no means alien to common +apprehension: they are not absolutely hidden, perhaps, from any one, but +are commonly seen through a mist. We might have presented the latter +part of them in a phraseology in which they would have seemed the most +familiar of truisms: we might have cautioned inquirers against too +extensive _generalization_, and reminded them that there are _exceptions_ +to all rules. Such is the current language of those who distrust +comprehensive thinking, without having any clear notion why or where it +ought to be distrusted. We have avoided the use of these expressions +purposely, because we deem them superficial and inaccurate. The error, +when there is error, does _not_ arise from generalizing too extensively; +that is, from including too wide a range of particular cases in a single +proposition. Doubtless, a man often asserts of an entire class what is +only true of a part of it; but his error generally consists not in making +too wide an assertion, but in making the wrong _kind_ of assertion: he +predicated an actual result, when he should only have predicated a +_tendency_ to that result--a power acting with a certain intensity in that +direction. With regard to _exceptions_; in any tolerably ably advanced +science there is properly no such thing as an exception. What is thought +to be an exception to a principle is always some other and distinct +principle cutting into the former: some other force which impinges against +the first force, and deflects it from its direction. There are not a _law_ +and an _exception_ to that law--the law acting in ninety-nine cases, and +the exception in one. There are two laws, each possibly acting in the +whole hundred cases, and bringing about a common effect by their conjunct +operation. If the force which, being the less conspicuous of the two, is +called the disturbing force, prevails sufficiently over the other force +in some one case, to constitute that case what is commonly called an +exception, the same disturbing force probably acts as a modifying cause +in many other cases which no one will call exceptions. + +Thus if it were stated to be a law of nature, that all heavy bodies fall +to the ground, it would probably be said that the resistance of the +atmosphere, which prevents a balloon from falling, constitutes the +balloon an exception to that pretended law of nature. But the real law +is, that all heavy bodies _tend_ to fall; and to this there is no +exception, not even the sun and moon; for even they, as every astronomer +knows, tend towards the earth, with a force exactly equal to that with +which the earth tends towards them. The resistance of the atmosphere +might, in the particular case of the balloon, from a misapprehension of +what the law of gravitation is, be said to _prevail_ over the law; but +its disturbing effect is quite as real in every other case, since though +it does not prevent, it retards the fall of all bodies whatever. The +rule, and the so-called exception, do not divide the cases between them; +each of them is a comprehensive rule extending to all cases. To call one +of these concurrent principles an exception to the other, is +superficial, and contrary to the correct principles of nomenclature and +arrangement. An effect of precisely the same kind, and arising from the +same cause, ought not to be placed in two different categories, merely +as there does or does not exist another cause preponderating over it. + +It is only in art, as distinguished from science, that we can with +propriety speak of exceptions. Art, the immediate end of which is +practice, has nothing to do with causes, except as the means of bringing +about effects. However heterogeneous the causes, it carries the effects +of them all into one single reckoning, and according as the sum-total is +_plus_ or _minus_, according as it falls above or below a certain line, +Art says, Do this, or Abstain from doing it. The exception does not run +by insensible degrees into the rule, like what are called exceptions in +science. In a question of practice it frequently happens that a certain +thing is either fit to be done, or fit to be altogether abstained from, +there being no medium. If, in the majority of cases, it is fit to be +done, that is made the rule. When a case subsequently occurs in which +the thing ought not to be done, an entirely new leaf is turned over; the +rule is now done with, and dismissed: a new train of ideas is introduced, +between which and those involved in the rule there is a broad line of +demarcation; as broad and _tranchant_ as the difference between Ay and +No. Very possibly, between the last case which comes within the rule and +the first of the exception, there is only the difference of a shade: but +that shade probably makes the whole interval between acting in one way +and in a totally different one. We may, therefore, in talking of art, +unobjectionably speak of the _rule_ and the _exception_; meaning by the +rule, the cases in which there exists a preponderance, however slight, +of inducements for acting in a particular way; and by the exception, the +cases in which the preponderance is on the contrary side. + + +THE END. + + +NOTES: + +[8] We say, the _production_ and _distribution_, not, as is usual with +writers on this science, the production, distribution, and _consumption_. +For we contend that Political Economy, as conceived by those very +writers, has nothing to do with the consumption of wealth, further than +as the consideration of it is inseparable from that of production, or +from that of distribution. We know not of any _laws_ of the _consumption_ +of wealth as the subject of a distinct science: they can be no other +than the laws of human enjoyment. Political economists have never treated +of consumption on its own account, but always for the purpose of the +inquiry in what manner different kinds of consumption affect the production +and distribution of wealth. Under the head of Consumption, in professed +treatises on the science, the following are the subjects treated of: 1st, +The distinction between _productive_ and _unproductive_ consumption; 2nd, +The inquiry whether it is possible for _too much_ wealth to be _produced_, +and for too great a portion of what has been produced to be applied to the +purpose of further _production_; 3rd, The theory of taxation, that is to +say, the following two questions--by whom each particular tax is paid +(a question of _distribution_), and in what manner particular taxes affect +_production_. + +[9] The physical laws of the production of useful objects are all +equally presupposed by the science of Political Economy: most of them, +however, it presupposes in the gross, seeming to say nothing about them. +A few (such, for instance, as the decreasing ratio in which the produce +of the soil is increased by an increased application of labour) it is +obliged particularly to specify, and thus seems to borrow those truths +from the physical sciences to which they properly belong, and include +them among its own. + +[10] The _science_ of legislation is an incorrect and misleading +expression. Legislation is _making laws_. We do not talk of the +_science_ of _making_ anything. Even the _science of government_ would +be an objectionable expression, were it not that _government_ is often +loosely taken to signify, not the act of governing, but the state or +condition of _being governed_, or of living under a government. A +preferable expression would be, the science of _political society_; a +principal branch of the more extensive science of society, characterized +in the text. + +[11] One of the strongest reasons for drawing the line of separation +clearly and broadly between science and art is the following:--That the +principle of classification in science most conveniently follows the +classification of _causes_, while arts must necessarily be classified +according to the classification of the _effects_, the production of +which is their appropriate end. Now an effect, whether in physics or +morals, commonly depends upon a concurrence of causes, and it frequently +happens that several of these causes belong to different sciences. Thus +in the construction of engines upon the principles of the science of +_mechanics_, it is necessary to bear in mind the _chemical_ properties +of the material, such as its liability to oxydize; its electrical and +magnetic properties, and so forth. From this it follows that although +the necessary foundation of all art is science, that is, the knowledge +of the properties or laws of the objects upon which, and with which, the +art dons its work; it is not equally true that every art corresponds to +one particular science. Each art presupposes, not one science, but +science in general; or, at least, many distinct sciences. + + + +(Editor's note:) + +Essays on some Unsettled Questions of Political Economy + +These five essays represent Mill's earliest thoughts on economic matters +and were first composed in 1829 and 1830 before his reputation had been +established by the publication of _Logic_ in 1843. Their successful +reception no doubt hastened the composition of his comprehensive work +the _Principles of Political Economy_ (1848). + + + + + + + + + +End of the Project Gutenberg EBook of Essays on some unsettled Questions of +Political Economy, by John Stuart Mill + +*** END OF THE PROJECT GUTENBERG EBOOK 12004 *** |