Political Economy as the name of a special science is the invention
of one Antoine de Montchrétien, who first employed the term about
the beginning of the seventeenth century. Not until the middle of the
eighteenth century, however, does the connotation of the word in
any way approach to modern usage. A perusal of the article on
Political Economy which appeared in the Grande Encyclopédie of
1755 will help us to appreciate the difference. That article was
contributed by no less a person than Jean Jacques Rousseau, but
its medley of politics and economics seems utterly strange to us.
Nowadays it is customary to regard the adjective “political” as
unnecessary, and an attempt is made to dispense with it by employing
the terms “economic science” or “social economics,” but this article
clearly proves that it was not always devoid of significance. It also
reveals the interesting fact that the science has always been chiefly
concerned with the business side of the State, especially with
the material welfare of the citizens—“with the fowl in the pot,”
as Henry IV put it. Even Smith never succeeded in getting quite
beyond this point of view, for he declares that “the object of the
political economy of every nation is to increase the riches and the
power of that country.”[5]
But the counsels given and the recipes offered for attaining
the desired end were as diverse as they were uncertain. One school,
known as the Mercantilist, believed that a State, like an individual,
must secure the maximum of silver and gold before it could become
wealthy. Happy indeed was a country like Spain that had discovered
a Peru, or Holland, which, in default of mines, could procure
gold from the foreigner in exchange for its spices. Foreign trade
really seemed a quite inexhaustible mine. Other writers, who were
socialists in fact though not in name—for that term is of later invention—thought
that happiness could only be found in a more equal
distribution of wealth, in the abolition or limitation of the rights of
private property, or in the creation of a new society on the basis
of a new social contract—in short, in the foundation of the Utopian
commonwealth.
It was at this juncture that Quesnay appeared. Quesnay was
a doctor by profession, who now, when on the verge of old age, had
turned his attention to the study of “rural economy”—the problem
of the land and the means of subsistence.[6] Boldly declaring that
the solution of the problem had always lain ready to hand, needing
neither inventing nor discovering, he further maintained that all
social relations into which men enter, far from being haphazard,
are, on the contrary, admirably regulated and controlled. To those
who took the trouble to think, the laws governing human associations
seemed almost self-evident, and the difficulties they involved
no greater than the difficulties presented by the laws of geometry.
So admirable were these laws in every respect that once they
were thoroughly known they were certain to command allegiance.
Dupont de Nemours cannot be said to have exaggerated when, in
referring to this doctrine, he spoke of it as “very novel indeed.”[7]
It is not too much to say that this marks the beginning of a new
science—the science of Political Economy. The age of forerunners
is past. Quesnay and his disciples must be considered the real
founders of the science. It is true that their direct descendants,
the French economists, very inconsiderately allowed the title to
pass to Adam Smith, but foreign economists have again restored
it to France, to remain in all probability definitely hers. But, as is
the case with most sciences, there is not very much to mark the date of
its birth or to determine the stock from which it sprang; all that
we can confidently say is that the Physiocrats were certainly the first
to grasp the conception of a unified science of society. In other words,
they were the first to realise that all social facts are linked together in
the bonds of inevitable laws, which individuals and Governments
would obey if they were once made known to them. It may, of course,
be pointed out that such a providential conception of economic laws
has little in common with the ordinary naturalistic or deterministic
standpoint of the science, and that several of the generalisations are
simply the product of their own imaginations. It must also be admitted
that Smith had far greater powers of observation, as well as a
superior gift of lucid exposition, and altogether made a more notable
contribution to the science. Still, it was the Physiocrats who constructed
the way along which Smith and the writers of the hundred
years which follow have all marched. Moreover, we know that but for
the death of Quesnay in 1774—two years before the publication of
the Wealth of Nations—Smith would have dedicated his masterpiece
to him.
The Physiocrats must also be credited with the foundation of
the earliest “school” of economists in the fullest sense of the
term. The entrance of this small group of men into the arena of
history is a most touching and significant spectacle. So complete
was the unanimity of doctrine among them that their very names
and even their personal characteristics are for ever enshrouded by
the anonymity of a collective name.[8]
Their publications follow each other pretty closely for a period
of twenty years, from 1756 to 1778.[9]
Turgot was the only literary person among them, but like his
confrères he was devoid of wit, though the age was noted for
its humorists. On the whole they were a sad and solemn sect,
and their curious habit of insisting upon logical consistency—as
if they were the sole depositaries of eternal truth—must often
have been very tiresome. They soon fell an easy prey to the
caustic sarcasm of Voltaire.[10] But despite all this they enjoyed
a great reputation among their more eminent contemporaries.
Statesmen, ambassadors, and a whole galaxy of royal personages,
including the Margrave of Baden, who attempted to apply their
doctrines in his own realm, the Grand Duke Leopold of Tuscany,
the Emperor Joseph II of Austria, Catherine, the famous Empress
of Russia, Stanislaus, King of Poland, and Gustavus III of Sweden,
were numbered among their auditors. Lastly, and most unexpectedly
of all, they were well received by the Court ladies at
Versailles. In a word, Physiocracy became the rage. All this may
seem strange to us, but there are several considerations which may
well be kept in view. The society of the period, raffiné and licentious
as it was, took the same delight in the “rural economy” of the Physiocrats
as it did in the pastorals of Trianon or Watteau. Perhaps it
gleaned some comfort from the thought of an unchangeable “natural
order,” just when the political and social edifice was giving way
beneath its feet. It may be that its curiosity was roused by that
terse saying which Quesnay wrote at the head of the Tableau
economique: “Pauvres paysans, pauvre royaume! Pauvre royaume,
pauvre roi!” or that it felt in those words the sough of a new breeze,
not very threatening as yet, but a forerunner of the coming storm.
An examination of the doctrine, or the essential principles as they
called them, must precede a consideration of the system or the proposed
application of those principles.
I: THE NATURAL ORDER
The essence of the Physiocratic system lay in their conception of
the “natural order.” L’Ordre naturel et essential des Societés politiques
is the title of Mercier de la Rivière’s book, and Dupont de Nemours
defined Physiocracy as “the science of the natural order.”
What are we to understand by these terms?
It is hardly necessary to say that the term “natural order” is
meant to emphasise the contrast between it and the artificial social
order voluntarily created upon the basis of a social contract.[11] But a
purely negative definition is open to many different interpretations.
In the first place, this “natural order” may be conceived as a
state of nature in opposition to a civilised state regarded as an
artificial creation. To discover what such a “natural order” really
was like man must have recourse to his origins.
Quotations from the Physiocrats in support of this view might
easily be cited.[12] This interpretation has the further distinction of
being in accord with the spirit of the age. The worship of the
“noble savage” was a feature of the end of the eighteenth century.
It pervades the literature of the period, and the cult which began with
the tales of Voltaire, Diderot, and Marmontel reappears in the
anarchist writers of to-day. As an interpretation of the Physiocratic
position, however, it must be unhesitatingly rejected, for no one bore
less resemblance to a savage than a Physiocrat. They all of them
lived highly respectable lives as magistrates, intendants, priests, and
royal physicians, and were completely captivated by ideas of orderliness,
authority, sovereignty, and property—none of them conceptions
compatible with a savage state. “Property, security, and liberty
constitutes the whole of the social order.”[13] They never acquiesced
in the view that mankind suffered loss in passing from the state
of nature into the social state; neither did they hold to Rousseau’s
belief that there was greater freedom in the natural state, although its
dangers were such that men were willing to sacrifice something in
order to be rid of them, but that nevertheless in entering upon the new
state something had been lost which could never be recovered.[14] All
this was a mere illusion in the opinion of the Physiocrats. Nothing
was lost, everything was to be gained, by passing from a state of nature
into the civilised state.
In the second place, the term “natural order” might be taken
to mean that human societies are subject to natural laws such as
govern the physical world or exercise sway over animal or organic
life. From this standpoint the Physiocrats must be regarded as the
forerunners of the organic sociologists. Such interpretation seems
highly probable because Dr. Quesnay through his study of “animal
economy” (the title of one of his works) and the circulation of the
blood was already familiar with these ideas. Social and animal
economy, both, might well have appeared to him in much the same
light as branches of physiology. From physiology to Physiocracy
was not a very great step. At any rate, the Physiocrats succeeded
in giving prominence to the idea of the interdependence of all social
classes and of their final dependence upon nature. And this we
might almost say was a change tantamount to a transformation from
a moral to a natural science.[15]
Even this explanation seems to us insufficient. Dupont, in the
words which we have quoted in the footnote below, seems to imply that
the laws of the beehive and the ant-hill are imposed by common
consent and for mutual benefit. Animal society, so it seemed
to him, was founded upon social contract. But such a conception
of “law” is very far removed from the one usually adopted by the
natural sciences, by physicians and biologists, say. And, as a matter
of fact, the Physiocrats were anything but determinists. They
neither believed that the “natural order” imposed itself like gravitation
nor imagined that it could ever be realised in human society
as it is in the hive or the ant-hill. They saw that the latter were
well-ordered communities, while human society at its present stage
is disordered, because man is free whereas the animal is not.
What are we to make of this “natural order” then? The
“natural order,” so the Physiocrats maintained, is the order which
God has ordained for the happiness of mankind. It is the providential
order.[16] To understand it is our first duty—to bring our lives
into conformity with it is our next.
But can a knowledge of the “order” ever be acquired by men?
To this they reply that the distinctive mark of this “order” is its
obviousness. This word occurs on almost every page they wrote.[17]
Still, the self-evident must in some way be apprehended. The most
brilliant light can be seen only by the eye. By what organ can
this be sensed? By instinct, by conscience, or by reason? Will
a divine voice by means of a supernatural revelation show us the
way of truth, or will it be Nature’s hand that shall lead us in the
blessed path? The Physiocrats seem to have ignored this question,
for every one of them indifferently gives his own answer, regardless
of the fact that it may contradict another’s. Mercier de la Rivière
recalls the saying of St. John concerning the “Light which lighteth
every man that cometh into the world.” This may be taken to be
an internal light set by God in the heart of every man to enable him to
choose his path. Quesnay, so Dupont affirms, “must have seen
that man had only to examine himself to find within him an inarticulate
conception of these laws. In other words, introspection
clearly shows that men are unwittingly guided by an “inherent”
knowledge of Physiocracy.”[18] But, after all, it seems that this
intuitive perception is insufficient to reveal the full glory of the
order. For Quesnay declared that a knowledge of its laws must
be enforced upon men, and this afforded a raison d’être for an
educational system which was to be under the direct control of
the Government.
To sum up, we may say that the “natural order” was that
order which seemed obviously the best, not to any individual
whomsoever, but to rational, cultured, liberal-minded men like the
Physiocrats. It was not the product of the observation of external
facts; it was the revelation of a principle within. And this is one
reason why the Physiocrats showed such respect for property and
authority. It seemed to them that these formed the very basis
of the “natural order.”
It was just because the “natural order” was “supernatural,”
and so raised above the contingencies of everyday life, that it
seemed to them to be endowed with all the grandeur of the geometrical
order, with its double attributes of universality and immutability.
It remained the same for all times, and for all men. Its
fiat was “unique, eternal, invariable, and universal.” Divine in its
origin, it was universal in its scope, and its praises were sung in
litanies that might rival the Ave Maria.[19] Speaking of its universality,
Turgot writes as follows: “Whoever is unable to overlook
the accidental separation of political states one from another, or
to forget their diverse institutions, will never treat a question of
political economy satisfactorily.”[20] Referring to its immutability,
he adds: “It is not enough to know what is or what has been; we
must also know what ought to be. The rights of man are not
founded upon history: they are rooted in his nature.”
It looked as if this dogmatic optimism would dominate the whole
Classical school, especially the French writers, and that natural
law would usurp the functions of Providence. To-day it is everywhere
discredited, but when it first loomed above the horizon its
splendour dazzled all eyes. Hence the many laudatory remarks,
which to us seem hyperbolical, if not actually ridiculous.[21] But
it was no small thing to found a new science, to set up a new aim and
a fresh ideal, to lay down the framework which others were to fill in.
It was the practical results, however, that revealed the full
powers of the “natural order.” It so happened that the mass of
regulations which constituted the old régime fell to the ground
before its onslaughts almost immediately, and it all came about in
this fashion.
Knowledge of the “natural order” was not sufficient. Daily
life must also conform to the knowledge. Nothing could be easier
than this, for “if the order really were the most advantageous”[22]
every man could be trusted to find out for himself the best way of
attaining it without coercion of any kind.[23]
This psychological balance which every individual was supposed
to carry within himself, and which, as the basis of the Neo-Classical
school, is known as the Hedonistic principle, is admirably described
by Quesnay.[24] “To secure the greatest amount of pleasure with
the least possible outlay should be the aim of all economic effort.”
And this was what the “order” aimed at. “When every one does
this the natural order, instead of being endangered, will be all the
better assured.” It is of the very essence of that order that the
particular interest of the individual can never be separated from the
common interest of all, but this happens only under a free system.
“The movements of society are spontaneous and not artificial, and
the desire for joy which manifests itself in all its activities unwittingly
drives it towards the realisation of the ideal type of State.”[25]
This is laissez-faire pure and simple.[26]
These famous formulæ have been so often repeated and criticised
since that they appear somewhat trite to-day. But it is certain
that they were not so at the time. It is easy to laugh at their social
philosophy, to mock at its naïveté and simplicity, and to show that
such supposed harmony of interests between men does not exist, that
the interests of individuals do not always coincide with those of the
community, and that the private citizen is not always the best
judge even of his own interests. It was perhaps necessary that
the science should be born of such extreme optimism. No science
can be constructed without some amount of faith in a pre-established
order.
Moreover, laissez-faire does not of necessity mean that
nothing will be done. It is not a doctrine of passivity or fatalism.
There will be ample scope for individual effort, for it simply means
leaving an open field and securing fair play for everyone, free from
all fear lest his own interests should injure other people’s or in any
way prejudice those of the State. It is true that there will not be
much work for the Government, but the task of that body will by no
means be a light one, especially if it intends carrying out the Physiocratic
programme. This included upholding the rights of private
property and individual liberty by removing all artificial barriers,
and punishing all those who threatened the existence of any of these
rights; while, most important of all, there was the duty of giving
instruction in the laws of the “natural order.”
II: THE NET PRODUCT
Every social fact had a place within the “natural order” of the
Physiocrats. Such a wide generalisation would have entitled them
to be regarded as the founders of sociology rather than of economics.
But there was included one purely economic phenomenon
which attracted their attention at an early stage, and so completely
captivated their imaginations as to lead them on a false quest. This
was the predominant position which land occupied as an agent of
production—the most erroneous and at the same time the most
characteristic doctrine in the whole Physiocratic system.
Every productive undertaking of necessity involves certain
outgoings—a certain loss. In other words, some amount of wealth
is destroyed in the production of new wealth—an amount that
ought to be subtracted from the amount of new wealth produced.
This difference, measuring as it does the excess of the one over the
other, constitutes the net increase of wealth, known since the time
of the Physiocrats as the “net product.”
The Physiocrats believed that this “net product” was confined
to one class of production only, namely, agriculture. Here alone,
so it seemed to them, the wealth produced was greater than the
wealth consumed. Barring accidents, the labourer reaped more
than he consumed, even if we included in his consumption his maintenance
throughout a whole year, and not merely during the seasons
of harvest and tilth. It was because agricultural production had
this unique and marvellous power of yielding a “net product” that
economy was possible and civilisation a fact.[27] It was not true of
any other class of production, either of commerce or of transport,
where it was very evident that man’s labour produced nothing,
but merely replaced or transferred the products already produced.
Neither was it true of manufacture, where the artisan simply combined
or otherwise modified the raw material.[28]
It is true that such transfer or accretion of matter may increase
the value of the product, but only in proportion to the amount of
wealth which had to be consumed in order to produce it; because
the price of manual labour is always equal to the cost of the necessaries
consumed by the worker. All that we have in this case, however,
is a collection of superimposed values with some raw material
thrown into the bargain. But, as Mercier de la Rivière put it,
“addition is not multiplication.”[29]
Consequently, industry was voted sterile. This implied no
contempt for industry and commerce. “Far from being useless,
these are the arts that supply the luxuries as well as the necessaries
of life, and upon these mankind is dependent both for its preservation
and for its well-being.”[30] They are unproductive in the sense that
they produce no “extra” wealth.
It may be pointed out, on the other hand, that the “gains,” both
in industry and commerce, are far in excess of those of agriculture.
All this was immaterial to the Physiocrats, for “they were gained,
not produced.”[31] Such gains simply represented wealth transferred
from the agricultural to the industrial classes.[32] The agricultural
classes furnished the artisans not only with raw material, but also
with the necessaries of life. The artisans were simply the domestic
servants, or, to use Turgot’s phrase, the hirelings of the agriculturists.[33]
Strictly speaking, the latter could keep the whole net
product to themselves, but finding it more convenient they entrust
the making of their clothes, the erection of their houses, and the
production of their implements to the artisans, giving them a portion
of the net product as remuneration.[34] It is possible, of course,
that, like many servants in fine houses, the latter manage to make a
very good living at their masters’ expense.
The “sterile classes” in Physiocratic parlance simply signifies
those who draw their incomes second-hand. The Physiocrats had
the good sense to try to give an explanation of this unfortunate
term, which threatened to discredit their system altogether, and
which it seemed unfair to apply to a whole class that had done more
than any other towards enriching the nation.
It is a debatable point whether the Physiocrats attributed
this virtue of furnishing a net product solely to agriculture or whether
they intended it to apply to extractive industries, such as mining
and fishing. They seem to apply it in a general way to mines, but
the references are rare and not infrequently contradictory. We can
understand their hesitating, for, on the one hand, mines undoubtedly
give us new wealth in the form of raw materials, just as the land or
sea does; on the other hand, the fruits of the earth and the treasures
of the deep are not so easily exhausted as mines. Turgot put it
excellently when he said, “The land produces fruit annually, but
a mine produces no fruit. The mine itself is the garnered fruit,”
and he concludes that mines, like industrial undertakings, give no
net product, that if any one had any claim to that product it would
be the owner of the soil, but that in any case the surplus would be
almost insignificant.[35]
This essential difference which the Physiocrats sought to establish
between agricultural and industrial production was at bottom
theological. The fruits of the earth are given by God, while the
products of the arts are wrought by man, who is powerless to create.[36]
The reply is obvious. God would still be creator if He decreed to
give us our clothes instead of our daily bread. And, although
man cannot create matter, but simply transform it, it is important
to remember that the cultivation of the soil, like the fashioning of
iron or wood, is merely a process of transformation. They failed to
grasp the truth which Lavoisier was to demonstrate so clearly,
namely, that in nature nothing is ever created and nothing lost.
A grain of corn sown in a field obtains the materials for the ear
from the soil and atmosphere, transmuting them to suit its own
purpose, just as the baker, out of that same corn, combined with
water, salt, and yeast, will make bread.
But they were sufficiently clear-sighted to see that all natural
products, including even corn, were influenced by the varying
condition of the markets, and that if prices fell very low the net
product disappeared altogether. In view of such facts can it still
be said that the earth produces real value or that its produce differs
in any essential respects from the products of industry?
The Physiocrats possibly thought that the bon prix—i.e. the
price which yielded a surplus over and above cost of production—was
a normal effect of the “natural order.” Whenever the price
fell to the level of the cost of production it was a sure sign that the
“order” had been destroyed. Under these circumstances there
was nothing remarkable in the disappearance of the net product.
This is doubtless the significance of Quesnay’s enigmatic saying:
“Abundance and cheapness are not wealth, scarcity and dearness
are misery, abundance and dearness are opulence.”[37]
But if the bon prix simply measures the difference between
the value of the product and its cost of production, then it is not
more common in agriculture than in other modes of production.
Nor does it extend over a longer period in the one case than in the
other, provided competition be operative in both cases; on the contrary,
it will become manifest in the one case as easily as in the
other, especially if there be any scarcity. It remains to be seen
then whether monopoly values are more prevalent in agricultural
production than in industrial. In a very general way, seeing that
there is only a limited quantity of land, we may answer in the
affirmative, and admit a certain degree of validity in the Physiocratic
theory. But the establishment of protective rights and the
occurrence of agricultural crises clearly prove that competition also
has some influence upon the amount of that revenue.
The net product was just an illusion. The essence of production
is not the creation of matter, but simply the accretion of value.
But it is not difficult to appreciate the nature of the illusion if we
recall the circumstances, and try to visualise the kind of society
with which the Physiocrats were acquainted. One section of the
community, consisting solely of nobility and clergy, lived upon the
rents which the land yielded. Their luxurious lives would have
been impossible if the earth did not yield something over and above
the amount consumed by the peasant. It is curious that the Physiocrats,
while they regarded the artisans as nothing better than
servants who depended for their very existence upon the agriculturists,
failed to recognise the equally complete dependence of the
worthless proprietor upon his tenants. If there had existed
instead a class of business men living in ease and luxury, and
drawing their dividends, it is quite possible that the Physiocrats
would have concluded that there was a net product in industrial
enterprise.
So deeply rooted was this idea of nature, or God operating through
nature, as the only source of value that we find traces of it even in
Adam Smith. Not until we come to Ricardo do we have a definite
contradiction of it. With Ricardo, rent, the income derived from
land, instead of being regarded as a blessing of nature—the Alma
Parens—which was bound to grow as the “natural order” extended
its sway, is simply looked upon as the inevitable result of the limited
extent and growing sterility of the land. No longer is it a free gift
of God to men, but a pre-imposed tax which the consumer has to
pay the proprietor. No longer is it the net product; henceforth
it is known as rent.
As to the epithet “sterile,” which was applied to every kind of
work other than agriculture, we shall find that it has been superseded,
and that the attribute “productive” has been successively applied to
every class of work—first to industry, then to commerce, and finally
to the liberal professions. Even if it were true that industrial undertakings
only yield the equivalent of the value consumed, that is
not enough to justify the epithet “sterile,” unless, as Adam Smith
wittily remarks, we are by analogy to consider every marriage
sterile which does not result in the birth of more than two children.
To invoke the distinction between addition and multiplication is
useless, because arithmetic teaches us that multiplication is simply
an abridged method of adding.
It seems very curious that that kind of wealth which appeared
to the Physiocrats to be the most legitimate and the most superior
kind should be just the one that owed nothing to labour, and which
later on, under the name of rent, seems the most difficult to justify.
But we must not conclude that the Physiocratic theory of the
net product possessed no scientific value.
It was a challenge to the economic doctrines of the time, especially
Mercantilism. The Mercantilists thought that the only way to
increase wealth was to exploit neighbours and colonists, but they
failed to see that commerce and agriculture afforded equally satisfactory
methods. Nor must we forget the Physiocrats’ influence upon
practical politics. Sully, the French minister, betrays evidence of
their influence when he remarks that the only two sources of national
wealth are land and labour. Let us also remember that, despite
some glaring mistakes, agriculture has never lost the pre-eminence
which they gave it, and that the recent revival of agricultural
Protection is directly traceable to their influence. They were
always staunch Free Traders themselves, but we can hardly blame
them for not being sufficiently sanguine to expect such whole-hearted
acceptance of their views as to anticipate some of the more
curious developments of their doctrines. It is almost certain that
if they were living to-day they would not be found supporting the
Protectionist movement. At least this is the opinion of M. Oncken,
the economist, who has made the most thorough study of their
ideas.[38]
Although the Physiocratic distinction between agriculture and
industry was largely imaginary, it is nevertheless true that agriculture
does possess certain special features, such as the power of engendering
the forces of life, whether vegetable or animal. This mysterious
force, which under the term “nature” was only very dimly understood
by the Physiocrats, and still is too often confused with
the physico-chemical forces, does really possess some characteristics
which help us to differentiate between agriculture and industry.
At some moments agriculture seems inferior because its returns are
limited by the exigencies of time and place; but more often superior
because agriculture alone can produce the necessaries of life. This
is no insignificant fact; but we are trenching on the difficult problems
connected with the name of Malthus.
III: THE CIRCULATION OF WEALTH
The Physiocrats were the first to attempt a synthesis of distribution.
They were anxious to know—and it was surely a praiseworthy
ambition—how wealth passed from one class in society to another,
why it always followed the same routes, whose meanderings they
were successful in unravelling, and how this continual circulation,
as Turgot said, “constituted the very life of the body politic, just as
the circulation of the blood did of the physical.”
A scholar like Quesnay, the author of the work on animal
economy[39] and a diligent student of Harvey’s new discovery, was
precisely the man to carry the biological idea over into the realm
of sociology. He made use of the idea in his Tableau économique,
which is simply a graphic representation of the way in which the
circulation of wealth takes place. The appearance of this table caused
an enthusiasm among his contemporaries that is almost incredible,[40]
although Professor Hector Denis declares that he is almost ready
to share in Mirabeau’s admiration.[41]
We know by this time that this circulation is much more complicated
than the Physiocrats believed, but it is still worth while
to give an outline of their conception.[42]
Quesnay distinguishes three social classes:
1. A productive class consisting entirely of agriculturists—perhaps
also of fishermen and miners.
2. A proprietary class, including not only landed proprietors,
but also any who have the slightest title to sovereignty of any kind—a
survival of feudalism, where the two ideas of sovereignty and
property are always linked together.
3. A sterile class, consisting of merchants and manufacturers,
together with domestic servants and members of the liberal
professions.
The first class, being the only productive class, must supply all
that flow of wealth whose course we are now to follow. Let us suppose,
then—the figures are Quesnay’s and seem sufficiently near the
facts—that the value of the total wealth produced equals 5 milliard
francs. Of this 5 milliards 2 milliards are necessary for the upkeep
of the members of this class and its oxen during harvest and sowing.
This portion does not circulate. It simply remains where it was
produced. The produce representing the remaining 3 milliards is sold.
But agricultural products alone do not suffice for the upkeep of Class 1.
Manufactured goods, clothes, and boots also are required, and these are
got from the industrial classes, for which a milliard francs is given.
There remain just 2 milliards, which go to the landowners and the
Government in rents and taxes. By and by we shall see how they
attempted to justify this apparent parasitism.
Let us pass on to consider the propertied class. It manages
to live upon the 2 milliards which it receives by way of rents, and
it lives well. Its food it must obtain from the agricultural class
(unless, of course, the rents are paid in kind), and for this it possibly
pays a milliard francs. It also requires manufactured goods, which
it must get from the sterile class, and for which it pays another
milliard francs. This completes their account.
As to the sterile class, it produces nothing, and so, unlike the
preceding class, it can only get its necessaries second-hand from the
productive class. These may be got in two ways: a milliard from
the agricultural class in payment for manufactured goods and
another milliard from the landed proprietors. The latter milliard
being one of the two which the landed proprietors got from the agriculturists,
has in this way described the complete circle.
The 2 milliards obtained as salaries by the sterile class are
employed in buying the necessaries of life and the raw material
of industry. And since it is only the productive class that can
procure these necessaries and raw materials, this 2 milliards passes
into the hands of the agriculturists. The 2 milliards, in short,
return to their starting-point. Adding the milliard already paid
by the landed proprietors to the 2 milliards’ worth of products
unsold, the total of 5 milliards is replaced in the hands of the productive
class, and so the process goes on indefinitely.[43]
This résumé gives but a very imperfect idea of the vast complexities
and difficulties involved in tracing the growth of revenues—an
evolution which the Physiocrats followed with the enthusiasm
of children. They imagined that it was all very real.[44] The
rediscovery of their millions intoxicated them, but, like many of the
mathematical economists of to-day, they forgot that at the end of
their calculations they only had what they had assumed at the
beginning. It is very evident that the table proves nothing as to
the essential point in their system, namely, whether there really
exist a productive and a sterile class.[45]
The most interesting thing in the Physiocratic scheme of distribution
is not the particular demonstration which they gave of it, but
the emphasis which they laid upon the fact of the circulation of
wealth taking place in accordance with certain laws, and the way in
which the revenue of each class was determined by this circulation.
The singular position which the proprietors hold in this tripartite
division of society is one of the most curious features of the
system.
Anyone examining the table in a non-Physiocratic fashion,
but simply viewing it in the modern spirit, must at once feel surprised
and disappointed to find that the class which enjoys two-fifths of
the national revenue does nothing in return for it. We should
not have been surprised if such glaring parasitism had given to
the work of the Physiocrats a distinctly socialistic tone. But they
were quite impervious to all such ideas. They never appreciated
the weakness of the landowners’ position, and they always treated
them with the greatest reverence. The epithet “sterile” is applied,
not to them, but to manufacturers and artisans! Property is the
foundation-stone of the “natural order.” The proprietors have been
entrusted with the task of supplying the staff of life, and are endued
with a kind of priestly sacredness. It is from their hands that all of
us receive the elements of nutrition. It is a “divine” institution—the
word is there.[46] Such idolatry needs some explanation.
One might have expected—even from their own point of view—that
the premier position would have been given to the class which
they termed productive, i.e. to the cultivators of the soil, who were
mostly farmers and métayers. The land was not of their making, it
is true. They had simply received it from the proprietors. This
latter class takes precedence because God has willed that it should
be the first dispenser of all wealth.[47]
There is no need to insist on this strange aberration which led
them to look for the creator of the land and its products, not amid
the cultivators of the soil, but among the idlers.[48] Such was the
logical conclusion of their argument. We must also remember that
the Physiocrats failed to realise the inherent dignity of all true
labour simply because it was not the creator of wealth. This
applied both to the agricultural labourer and the industrial worker,
and though the former alone was considered productive it was
because he was working in co-operation with nature. It was nature
that produced the wealth and not the worker.
Something must also be attributed to their environment. Knowing
only feudal society, with its economic and political activities governed
and directed by idle proprietors, they suffered from an illusion as
to the necessity for landed property similar to that which led
Aristotle to defend the institution of slavery.[49]
Although they failed to foresee the criticisms that would be
levelled against the institution of private property, they were very
assiduous—especially the Abbé Baudeau—in seeking an explanation
of its origin and a justification of its existence. The reasons which
they advanced are more worthy of quotation than almost any
argument that has since been employed by conservative economists.
The most solid argument, in their opinion—at least the one that
was most frequently used—is that these proprietors are either the
men who cleared and drained the land or else their rightful descendants.
They have incurred or they are incurring expenditure in clearing
the land, enclosing it and building upon it—what the Physiocrats
call the avances foncières.[50] They never get their revenues through
some one else as the manufacturers do, and they are anything but
parasites. Their portion is optimo jure, in virtue of a right prior and
superior even to that of the cultivators, for although the cultivators
help to make the product, the proprietors help to make the land.
The three social classes of the Physiocratic scheme may be likened
to three persons who get their water from the same well. It is
drawn from the well by members of the productive class in bucketfuls,
which are passed on to the proprietors, but the latter class
gives nothing in return for it, for the well is of their making. At a
respectable distance comes the sterile class, obliged to buy water in
exchange for its labour.[51]
The Physiocrats failed to notice the contradiction involved in
this. If the revenue which the proprietor draws represents the
remuneration for his outlay and the return for his expenditure it is
no longer a gift of nature, and the net product vanishes, for, by
definition, it represented what was left of the gross product after
paying all initial expenses—the excess over cost of production. If we
accept this explanation of the facts there is no longer any surplus
to dispose of. It is as capitalists pure and simple and not as the
representatives of God that proprietors obtain their rents.
Must we really believe that although these outlays afford some
explanation of the existence of private property they supply no
means of measuring or of limiting its extent? Is there no connection
between these outlays and the revenues which landed proprietors
draw?
Or must we distinguish between the two portions of the revenue—the
one, indispensable, representing the reimbursement of the
original outlay, and in every respect comparable to the revenue of
the farmer, and the other, being a true surplus, constituting the
net product? How can they justify the appropriation of the
latter?
There is another argument held in reserve, namely, that based
upon social utility. They point out that the cultivation of land
would cease and the one source of all wealth would become barren
if the pioneer were not allowed to reap the fruits of his labour.
The new argument is a contradiction of the old. In the former
case land was appropriated because it had been cultivated. In the
present case land must be appropriated before it can be cultivated.
In the former labour is treated as the efficient cause, in the latter
as the final cause of production.
Finally, the Physiocrats believed that landed proprietorship was
simply the direct outcome of “personal property,” or of the right
of every man to provide for his own sustenance. This right includes
the right of personal estate, which in turn involves the right of landed
property. These three kinds of property are so closely connected
that in reality they form one unit, and no one of the three can be
detached without involving the destruction of the other two.[52]
They were full of veneration for property of every description—not
merely for landed property. “The safety of private property
is the real basis of the economic order of society,” says Quesnay.[53]
Mercier de la Rivière writes: “Property may be regarded as a
tree of which social institutions are branches growing out of the
trunk.”[54] We shall encounter this cult of property even during
the terrible days of the French Revolution and the Reign of Terror.
When all respect for human life was quite lost there still remained
this respect for property.
The defence of private property was already well-nigh complete.[55]
But if they were strong in their defence of the institution they did not
fail to impose upon it some onerous duties—which counterbalanced
its eminent dignity. Of course, every proprietor should always be
guided by reason and be mannerly in his behaviour, and he should
never allow mere authority to become the rule of life.[56] Their duties
are as follows:
1. They must continue without fail to bring lands into cultivation,
i.e. they must continue the avances foncières.[57]
2. They must dispose of the wealth which the nation has produced
in such a way as to further the general interest; this is their
task as the stewards of society.[58]
3. They must aim during their leisure at giving to society all
those gratuitous services which they can render, and which society
so sorely needs.
4. They must bear the whole burden of taxation.
5. Above all they must protect their tenants, the agriculturists,
and be very careful not to demand more than the net product.
The Physiocrats never go the length of advising them to give to their
tenants a portion of the net product, but they impress upon them the
importance of giving them the equivalent of their annual expenditure
and of dealing liberally with them. It does not seem much, but it
must have been something in those days. “I say it boldly,” writes
Baudeau, “cursed be every proprietor, every sovereign and emperor
that puts all the burden upon the peasant, and the land, which
gives all of us our sustenance. Show them that the lot of the
worthy individuals who employ their own funds or who depend
upon those of others is to none of us a matter of complete indifference,
that whoever hurts or degrades, attacks or robs them is the cruellest
enemy of society, and that he who ennobles them, furthers their
well-being, comfort, or leisure increases their output of wealth,
which after all is the one source of income for every class in society.”[59]
Such generous words, which were none too common at the time,
release the Physiocrats from the taunt of showing too great a favour
to the proprietors. In return for such privileges as they gave them
they demanded an amount of social service far beyond anything that
was customary at the time.
So far we have considered only the Physiocratic theory. But the
Physiocratic influence can be much more clearly traced if we turn to
applied economics and examine their treatment of such questions as
the regulation of industry, the functions of the State, and the problems
of taxation.[60]
I: TRADE
All exchange, the Physiocrats thought, was unproductive, for
by definition it implies a transfer of equal values. If each party
only receives the exact equivalent of what it gives there is no wealth
produced. It may happen, however, that the parties to the exchange
are of unequal strength, and the one may grow rich at the expense
of the other.[61] In giving a bottle of wine in exchange for a loaf of
bread there is a double displacement of wealth, which evidently
affords a fuller satisfaction of wants in both cases, but there is no
wealth created, for the objects so exchanged are of equal value.
To-day the reasoning would be quite different. The present-day
economist would argue as follows: “If I exchange my wine for
your bread, that is a proof that my hunger is greater than my
thirst, but that you are more thirsty than hungry. Consequently
the wine has increased in utility in passing from my hands into
yours, and the bread, likewise, in passing from your hands into
mine, and this double increase of utility constitutes a real increase
of wealth.” Such reasoning would have appeared absurd to the
Physiocrats, who conceived of wealth as something material, and
they could never have understood how the creation of a purely
subjective attribute like utility could ever be considered productive.
We have already had occasion to remark that industry and
commerce were considered unproductive. This was a most significant
fact, so far as commerce was concerned, because all the
theories that held the field under Mercantilism, notably the doctrine
that foreign commerce afforded the only possible means of increasing
a country’s wealth, immediately assumed a dwindling importance.
For the Mercantilists the prototype of the State was a rich merchant
of Amsterdam. For the Physiocrats it was John Bull.
And foreign trade, like domestic, produced no real wealth:
the only result was a possible gain, and one man’s gain is another
man’s loss. “Every commercial nation flatters itself upon its
growing wealth as the outcome of foreign trade. This is a truly
astonishing phenomenon, for they all believe that they are growing rich
and gaining from one another. It must be admitted that this gain,
as they call it, is a most remarkable thing, for they all gain and none
loses.”[62] A country must, of course, obtain from foreigners the
goods which it cannot itself produce in exchange for those it cannot
itself consume. Foreign trade is quite indispensable, but Mercier
de la Rivière thinks that it is a necessary evil[63] (he underlines the
word). Quesnay contents himself with referring to it merely as
a pis aller.[64] He thought that the only really useful exchange is one
in which agricultural products pass directly from producers to consumers,
for without this the products would be useless and would
simply perish in the producer’s hands. But that kind of exchange
which consists in buying products in order to resell them—trafficking,
or a commercial transaction, as we call it—is sheer waste, for the
wealth instead of growing larger becomes less, because a portion of
it is absorbed by the traffickers themselves.[65] We meet with the
same idea in Carey. Mercier de la Rivière ingeniously compares
such traders to mirrors, arranged in such a way that they reflect
a number of things at the same time, all in different positions.
“Like mirrors, too, the traders seem to multiply commodities, but
they only deceive the superficial.”[66]
That may be; but, admitting a contempt for commerce, what
conclusions do they draw from it? Shall they prohibit it, or regulate
it, or shall they just let it take its own course? Any one of these
conclusions would follow from their premises. If commerce be as
useless as they tried to make out, the first solution would be the
best. But it was the third that they were inclined to adopt, and we
must see why.
It seems quite evident that the Physiocrats would have condemned
both the Mercantile and the Colbertian systems. Both of these
aimed at securing a favourable balance of trade—an aim which
the Physiocrats considered illusory, if not actually immoral. But
if they thought all trade was useless it is not easy to understand their
enthusiasm for Free Trade. Those economists who nowadays favour
Free Trade support it in the belief that it is of immense benefit to
every country wherein it is practised, and that the more it is
developed the richer will the exchanging countries become. But
such was not the Physiocratic doctrine. It is a noteworthy fact that
they are to be regarded as the founders of Free Trade, not because
of any desire to favour trade as such, but because their attitude
towards it was one of disdainful laissez-faire. They were not,
perhaps, altogether free from the belief that laissez-faire would lead
to the disappearance of commerce altogether. They were Free
Traders primarily because they desired the freedom of domestic
trade, and we must not lose sight of those extraordinary regulations
which completely fettered its movements at this time.[67]
The “natural order” also implied that each one would be free to
buy or sell wherever he chose, within or without the country. It
recognised no frontiers,[68] for only through “liberty” could the
“good price” be secured. The “good price” meant the highest
price and not the lowest, dearth and not cheapness. “Free
competition with foreign merchants can alone secure the best
possible price, and only the highest price will enable us to increase
our stock of wealth and to maintain our population by agriculture.”[69]
This is the language of agriculturists rather than of Free Traders.
It is the natural result of thinking about agricultural problems,
and especially about the question of raising corn; and since Free
Trade at this time gave rise to no fears on the score of importation,
free exchange meant free exportation. Oncken points out that the
commercial régime which the Physiocrats advocated was identical
with that in operation in England about this time, where in case
of over-abundance exportation was encouraged in order to keep
up the price, and in case of dearth importation was permitted in
order to ensure a steady supply and to prevent the price rising
too much.[70]
In a word, Free Trade meant for the Physiocrats the total abolition
of all those measures which found so much favour with the Mercantilists,
and which aimed at preventing exportation to places outside
the country and checking the growth of free intercourse within
it.[71] Narrow as their conception of Free Trade at first was, it was not
long in growing out of the straitened circumstances which gave it
birth, and it developed gradually into the Free Trade doctrine as we
know it, which Walras expressed as follows: “Free competition
secures for every one the maximum final utility, or, what comes to
the same thing, gives the maximum satisfaction.” We no longer
admit that international trade is a mere pis aller. But all the arguments
which have been used in its defence on the Free Trade side were
first formulated by the Physiocrats. We shall refer to a few of
them.
The fallacy lurking behind the “balance of trade” theory is
exposed with great neatness by Mercier de la Rivière. “I will
drown the clamour of all your blind and stupid policies. Suppose
that I gave you all the money which circulates among the nations
with whom you trade. Imagine it all in your possession. What
would you do with it?” He goes on to show how not a single
foreign country will any longer be able to buy, and consequently
all exportation will cease. The result of this excessive dearness
will be that buying from foreign countries will be resorted to, and
this will result in the exportation of metallic currency, which will
soon readjust matters.[72]
The contention that import duties are paid by the foreigner
is also refuted. Nothing will be sold by the foreigner at a lower
price than that which other nations would be willing to give him.
An import duty on such goods will increase the real price, which the
foreigner will demand, and this import duty will be paid by those
who buy the goods.[73]
There is also a refutation of the policy known as reciprocity.
“A nation levies an import duty upon the goods of another nation,
but it forgets that in trying to injure the selling nation it is really
checking the possible consumption of its own goods. This indirect
effect, of course, is inevitable, but can nothing be done to remedy
this by means of reprisals? England levies a heavy duty on French
wines, thereby reducing its debit account with France very considerably,
but more French wine will not be bought if a tax is also
placed upon the goods which England exports to France. Do
you think that the prejudice which England has taken against
France can be remedied in this way?”
We have multiplied instances, for during the whole of the hundred
years which have since elapsed has anyone deduced better arguments?
These theories immediately received legal sanction in the edicts
of 1763 and 1766 establishing free trade in corn, first within
the country and then without, but some very serious restrictions
were still retained. Unfortunately Nature proved very ungrateful to
her friends. For four or five years she ran riot with a series of bad
harvests, for which, as we may well imagine, the Physiocratic régime
and its inspirers were held responsible. Despite the protests of the
Physiocrats, this liberal act was repealed in 1770. It was re-established
by Turgot in 1774, and again repealed by Necker in 1777—a
variety of fortune that betokens a fickleness of public opinion.
This new piece of legislation, and, indeed, the whole Physiocratic
theory, was subjected to severe criticism by an abbot of the name
of Galiani. Galiani was a Neapolitan monsignor residing at the
French court. At the age of twenty-four he had written a remarkable
work in Italian dealing with money, and in 1770, written in splendid
French, appeared his Dialogues sur le Commerce des Blés. It was
an immediate success, and it won the unqualified approval of
Voltaire, who was possibly attracted more by the style than by the
profundity of thought. Galiani was not exactly opposed to laissez-faire.
“Liberty,” he wrote, “stands in no need of defence so long
as it is at all possible. Whenever we can we ought to be on the side
of liberty.”[74] But he is opposed to general systems and against
complete self-surrender into the hands of Nature. “Nature,”
says he, “is too vast to be concerned about our petty trifles.”[75]
He shares the realistic or historical views of the writers of to-day,
and thinks that before applying the principles of political economy
some account should be taken of time, place, and circumstances.
“The state of which the Physiocrats speak—what is it? Where
is it to be found.”[76]
Along with Galiani we must mention the great financier Necker,
who in a bulky volume entitled La Législation et le Commerce des
Grains (1775) advocates opportunistic views almost identical in
character with those of Galiani, and who, as Minister of State
(1776-81 and 1788-90), put an end to free trade in corn.
In monetary matters, especially on the question of interest, the
Physiocrats were willing to recognize an exception to their principle
of non-intervention. Mirabeau thought that whenever a real increase
of wealth resulted from the use of capital, as in agriculture,
the payment of interest was only just. It was simply a sign or
symbol of the net product. But in trade matters he thought it
best to limit if not to prohibit it altogether. It often proved very
harmful, and frequently was nothing better than a tax levied by
order of “the corrosive landowners.” Quesnay could not justify it
except in those cases where it yielded a net product, but he was
content simply to suggest a limitation of it. The Physiocrats are at
least logical. If capital sunk in industrial and commercial undertakings
yields no income it is evident that the interest must be taken
from the borrower’s pocket, and they condemned it just as they
condemned taxing the industrial and commercial classes.
Turgot[77] is the only one of them who frankly justifies taking
interest. The reason that he gives is not the usual Physiocratic
argument, but rather that the owner of capital may either invest it
in the land or undertake some other productive work—capital being
the indispensable basis of all enterprise[78]—and that, consequently, the
capital will never be given to anyone who will offer less than what
might have been made out of it did the owner himself employ it.
This argument implies that every undertaking is essentially a productive
one, and indeed one of the traits which distinguishes Turgot
from the other Physiocrats is the fact that he did not think that
industry and commerce were entirely unproductive.
II: THE FUNCTIONS OF THE STATE
Seeing that the Physiocrats believed that human society was pervaded
by the principle of “natural order,” which required no adventitious
aid from any written law, and since Nature’s voice, without any
artificial restraint, was sufficient guide for mankind, it might have been
expected that the trend of Physiocracy would have been toward
the negation of all legislation, of all authority—in a word, toward the
subversion of the State.
It is certain that the Physiocrats wished to reduce legislative
activity to a minimum, and they expressed the belief—which has
often been repeated since by every advocate of laissez-faire—that
the most useful work any legislative body can do is to abolish
useless laws.[79] If any new laws are required they ought simply to be
copies of the unwritten laws of Nature. Neither men nor Governments
can make laws, for they have not the necessary ability. Every
law should be an expression of that Divine wisdom which rules
the universe. Hence the true title of lawgiver, not law-maker.[80]
It is in this connexion that we meet with those anecdotes—some
of more than doubtful authenticity it is true—that have
gathered round their names. Of these the best known is that which
tells of Mercier de la Rivière’s visit to St. Petersburg, and his
laconic reply to Catherine the Great. He had been invited there
to advise the Empress about a new constitution for the country.
After dilating upon the great difficulties of the undertaking and the
responsibilities it involved, he gave it as his opinion that the best way
of achieving her object was just to let things take their course.
Whereupon the Empress promptly wished him good-bye.
But it would be a great mistake to think of the Physiocrats as
anarchists. What they wanted to see was the minimum of legislation
with a maximum of authority. The two things are by no means incompatible.
The liberal policy of limitation and control would have
found scant favour with them. Their ideal was neither democratic
self-government, as we have it in the Greek republics, nor a parliamentary
régime such as we find in England. Both were detested.[81]
On the other hand, great respect was shown for the social hierarchy,
and they were strong in their condemnation of every doctrine that
aimed at attacking either the throne or the nobility. What they
desired was to have sovereign authority in the guise of a hereditary
monarchy. In short, what they really wanted—and they were not
frightened by the name—was despotism.[82]
“The sovereign authority should be one, and supreme above
all individual or private enterprise. The object of sovereignty
is to secure obedience, to defend every just right, on the one
hand, and to secure personal security on the other. A government
that is based upon the idea of a balance of power is useless.”[83]
This should help us to realise the distance separating the Physiocrats
from the Montesquieuian idea of the distribution of the sovereign
authority, and from the other idea of local or regional control.
There is no mention of representation as a corollary of taxation.
This form of guarantee, which marks the beginnings of parliamentary
government, could have no real significance for the Physiocrats.
Taxation was just a right inherent in the conception of proprietary
sovereignty, a territorial revenue, which was in no way dependent
upon the people’s will.
It seems strange that such should be the opinion of a future
President of the Constituent Assembly. How can we explain this
apparent contradiction and such love of despotism among the
apostles of laissez-faire?
Despotism, in the eyes of the Physiocrats, had a peculiar significance
of its own. It was the work of freedom, not of bondage. It
did not signify the rule of the benevolent despot, prepared to make
men happy, even against their own will. It was just the sovereignty
of the “natural order”[84]—nothing more. Every reasonable person
felt himself bound to obey it, and realised that only through such
obedience could the truth be possibly known.
It is quite different from the despotism of the ancient maxim,
Sicut principi placuit legis habet vigorem.[85] They would never have
subscribed to the doctrine that the king’s word is law, but they
were equally energetic in rejecting the claim of the popular will.[86]
They are as far from modern democracy as they are from monarchical
absolutism.
This despotism was incarnate in the person of the sovereign or
king. But he is simply an organ for the transmission of those
higher laws which are given to him. They would compare him
with the leader of an orchestra, his sceptre being the baton that keeps
time. The conductor’s despotism is greater than the Tsar’s, for
every musician has to obey the movement of the hand, and that
immediately. But this is not tyranny, and whoever strikes a false
note in a spirit of revenge is not simply a revolter, but also an
idiot.
Sovereignty appealed to the Physiocrats in the guise of hereditary
monarchy, because of its associations with property under the
feudal régime, and since hereditary rights were connected with landed
property so must royalty be. The sovereign who best represents
the Physiocratic ideal is perhaps the Emperor of China.[87] As the
Son of Heaven he represents the “natural order,” which is also the
“divine order.” As an agricultural monarch he solemnly puts his
hand to the plough once a year. His people really govern themselves;
that is, he rules them according to custom and the practice
of sacred rites.[88]
In practice there will be nothing of great importance for the
despot to do. “As kings and governors you will find how easy it is
to exercise your sacred functions, which simply consist in not
interfering with the good that is already being done, and in punishing
those few persons who occasionally attack private property.”[89]
In short, the preservation of the “natural order” and the defending
of its basis—private property—against the attacks of the ignorant
and the sacrilegious is the first and most important duty of the
sovereign. “No order of any kind is possible in society unless the
right of possession is guaranteed to the members of that society
by the force of a sovereign authority.”[90]
Instruction is the second duty upon which the Physiocrats lay
special stress. “Universal education,” says Baudeau, “is the first
and only social tie.” Quesnay is specially anxious for instruction on
the “natural order,” and the means of becoming acquainted with it.
Further, the only guarantee against personal despotism lies in well-diffused
instruction and an educated public opinion. If public
opinion, as Quesnay said, is to lead, it should be enlightened.
Public works are also mentioned. A wise landlord has good
roads on his property, for good roads and canals improve it. These
represent a species of avances foncières, similar to those undertaken
by proprietors.
This is by no means all.[91] There are a number of duties recognised
as belonging to the State, of which every economist of the Liberal
school up to Bastiat and M. de Molinari approves.
We will add one other trait. Like the Liberal school, the Physiocrats
were whole-hearted “internationalists.” In this respect they
differ from their prototypes, the Chinese. They believed that all
class distinctions and all international barriers ought to be removed
in the interest of political development, as well as in that of scientific
study.[92] The peace advocates of to-day would do well to make the
acquaintance of their illustrious predecessors.
III: TAXATION
The bulk of the Physiocratic system is taken up with the exposition
of a theory of taxation, which really forms one of the most characteristic
portions of their work. Though inextricably bound up with
the theory of the net product and with the conception of landed
proprietorship, curiously enough, it has survived the rest of their
doctrine, and quite recently has been given a new lease of life.
In the table showing the distribution of the national income three
participators only are mentioned—the landed proprietor, the farmer,
and the artisan. But there is also a fourth—the Physiocratic
sovereign, who is none other than the State itself, and who thoroughly
deserves a share. This benevolent despot, whose duties we have
just mentioned, cannot be very exacting, for, having little to do, his
demands must be moderate. In addition to his double mission of
maintaining security and giving instruction, he must also contribute
towards increasing the productivity of the land by establishing public
works, making roads, etc.[93] Money is required for all this, and the
Physiocrats argued that taxes ought to be paid liberally,[94] and not
grudgingly, as is too often the case under a parliamentary régime.
Where is this money to come from?
The reply is obvious if we have grasped their system. The only
available fund is the net product, which is the only new wealth
that is really dispensable—the rest is necessarily absorbed in the
repayment of the advances made for the upkeep of the agricultural
and industrial classes. Were taxation to absorb a proportion of the
revenues that are devoted to production it would gradually drain
away the source of all wealth. So long as it only takes the surplus—the
true net product, which is a mere tributary of the main stream—no
harm will be done to future production.
All this is quite clear. But if taxation is to absorb the net
product the question arises as to who is to pay it. It is equally
evident that it can only be taken from those who already possess it,
namely, from the landed proprietors, who must bear the whole
burden of taxation. Just now we were amazed at the privileges which
the Physiocrats so light-heartedly granted them: this is the ransom,
and it is no light one. The next problem is how to assess this tax.
The Physiocrats were extremely loth to rob the gentry of their
incomes, and a number of pages in their writings are devoted to a
justification of their claims upon them. Not only were they willing to
leave them everything that was necessary to compensate them for the
outlay of capital and labour, but also all that might be required to
make the property thoroughly valuable and the position of the landowner
a most enviable one.[95] The preference shown for the landowner
is just the result of the social importance attributed to him by the
Physiocrats. “If some other class were preferable,” says Dupont de
Nemours, “people would turn their attention to that.” They
would no longer spend their capital in clearing or improving the
land. But if the possession of land be so desirable, is there not some
danger lest everybody should become a landlord and neglect the
other walks of life? The Physiocrats thought not, for, since Nature
has set a limit to the amount of land in existence, there must also
be a limit to the number of landowners.
A third of the net product, or, if we accept Baudeau’s figures,
six-twentieths, i.e. 30 per cent., was to be paid in taxes. Taking the
net product at 2 milliard francs, which is the figure given in the
Explication du Tableau économique, this gives us exactly 600 million
francs as the amount of the tax.[96]
The proprietors, who were then for the most part free from
taxation, felt that this was a very considerable contribution, and that
the Physiocrats demanded a heavy price for the high honour which
they had conferred upon them. Even to-day a tax of 30 per cent.
on the gross revenue of landlords would cause some consternation.
The Physiocrats anticipated this objection, and in reply brought
forward an argument which shows that they possessed exceptionally
keen economic insight. They argued that none would feel the
burden, seeing that no one was really paying it. Land would now be
bought at 70 per cent. of its former value, so that the 30 per cent.
nominally paid by the proprietor was in reality not paid by him
at all.[97] Land let at £10,000 would be valued at £200,000. But
with a tax of £3000 it is really only yielding £7000, and its value will
be £140,000. The buyer who pays this price, despite the fact that
he has paid a tax of £3000, will enjoy all the revenue to which he has
any claim, for he can only lay claim to what he has paid for, and he
did not pay for that portion of the revenue which is affected by the
tax. It is exactly as if he had only bought seven-tenths of the
land, the remaining three-tenths being the State’s. And if at some
later time this tax should be abolished, it would merely mean
making him a present of £3000 a year—the equivalent of a lump
sum of £60,000.[98]
The reasoning was excellent for those buying land after the tax
had been levied. It had, however, a much wider import than the
Physiocrats thought, for it might be applied not merely to taxes
on land, but also to taxes on capital. But this gave little consolation
to those who were to have the honour of inaugurating the new
régime, and the first task evidently was to convert them.[99]
The sovereign’s position in the main is like that of the landed
proprietors, which is in agreement with the Physiocratic conception
of sovereignty. The landed proprietors and the king in reality
form one class of fellow landowners, with the same rights, the same
duties, and the same revenues. Hence the sovereign’s interests
are completely bound up with those of his country.[100]
The Physiocrats attached the greatest practical importance to
their fiscal system, and were thoroughly convinced that the misery of
the people was due to the unequal distribution of the burden of taxation.
They thought that this was the true source of injustice—in
short, that this was the social problem. To-day we ascribe misery to
unequal distribution of wealth rather than to any particular fiscal
system, and consequently the Physiocratic view seems to us somewhat
extreme. Still, it was perhaps not so difficult to justify, in view of
the frightful conditions of fiscal organisation under the old régime.
The objections which a single tax, levied only on the landed
interest, was bound to provoke were not unforeseen by the Physiocrats,
nor did they neglect to answer them.
To the objection that it was unjust to place the burden of taxation
upon the shoulders of a single class of the nation,[101] instead of distributing
it equally among all classes, the Physiocrats replied that
the statesman’s ideal was not equal taxation, but the complete
abolition of all taxation. This could only be achieved by taxing
the “net product.”
Suppose that we agree that the taxes should be paid by some
other class. The question then is to determine what class of the
community should be chosen.
Shall we say that the farmer must pay them? But after deducting
the “net product” what remains for the farmer is just the bare
equivalent of his original outlay. Consequently, if we take 600
millions from the farmers by way of taxation there will be so much
less capital for the land, resulting in a smaller gross product the
following year,[102] unless they agitate for a reduction of 600 millions in
their rents. If they succeed this will leave the proprietors in the
position of having paid over the 600 millions to the State. But
we must also reckon the losses and friction incurred in every deviation
from the “natural order.” Suppose we decide that the sterile
classes should pay the taxes. This class is ex hypothesi sterile—that
is, it produces the exact equivalent of what it consumes. To
take 600 millions from this class is tantamount to a reduction of
its consumption by 600 millions, or an equivalent limitation of its
purchases of raw material. The result would be a diminished
product in the future, unless the industrial classes succeeded in
increasing prices by an equivalent amount. Even in that case the
landed proprietors will have to bear the brunt of it: firstly, they
will have to reduce their own consumption, and secondly, their
tenants’, whose efficiency will thereby be impaired.[103]
This process of reasoning seems to imply that the revenues of
the agricultural and industrial classes are not squeezable because
they represent the indispensable minimum necessary for the
expenses of production. This seems to be an anticipation of the
notorious “iron law.” Turgot’s formula incisively stating this law,
but containing no attempt at a justification, is known to most people.[104]
Long before his day, however, it had been stated by Quesnay in
terms no less pronounced, though perhaps not so well known. “It
is useless to urge that wage-earners can pay the tax so levied upon
them, by restricting consumption and depriving themselves of
luxuries without thereby causing the burden to fall upon the classes
who pay the wages. The rate of wages, and consequently the
amount of comfort and luxury which wages can purchase, are fixed
at the irreducible minimum by the action of the competition which
prevails among them.” This is quite a characteristic trait.[105] The
author of the “natural order,” without any hesitation, admits that
the direct outcome of the establishment of that order would be to
reduce the life of the wage-earners to a level of bare subsistence.
It is also remarkable that in their study of the industrial classes
wages should have claimed the exclusive attention of the Physiocrats.
Profits even then were by no means unsqueezable, but curiously
enough they failed to realise this. Voltaire’s rich banker would
have proved embarrassing here. They would have had some
difficulty in showing how a reduction of his extravagance could
possibly have endangered production. But they might have replied
that since he had so little difficulty in squeezing the 400,000 livres
out of his fellow-citizens he would not experience much more trouble
in getting another 400,000 out of them and paying them over to the
State.
Another objection consists in the insufficiency of a single tax
to meet all the needs of the State. “In some States it is said that a
third, a half, or even three-fourths of the clear net revenue from
all sources of production is insufficient to meet the demands of the
Treasury, and consequently other forms of taxation are necessary.”[106]
In reply to this the Physiocrats would point out that the mere
application of their fiscal system would result in such an increase
in the net product that the yield from the tax would progressively
grow. We must also take account of the economies resulting from
the simplicity of the tax, and the almost complete absence of
expenses of collection. But the most interesting point of all is that
they thought the State should adapt its needs to meet its revenue,
and not vice versa. The great advantage of the Physiocratic impôt,
however, was that it was regulated by a natural norm, which gave
the amount of the net product. Without this, taxation becomes
arbitrary.[107] At bottom the system affords a barrier against the
autocracy of the sovereign—a barrier that is much more effective
than a parliamentary vote.
One of the disciples of Quesnay put the theory to the test of
practice. The Margrave of Baden had the advantage of being
a prince, and he proceeded to experiment on his own subjects. The
system was tried in three communes of his principality, but, like most
social experiments, failed. In two of the communes it was abandoned
at the end of four years. In a third, despite its evil effects, it was
prolonged until 1802. The increase in the land tax caused a veritable
slump in the value of property just when the remission of taxes upon
consumption was resulting in the rapid multiplication of wineshops
and beerhouses.[108] It is unnecessary to add that the failure of the
experiment did nothing to weaken the faith of the Margrave or his
fellow Physiocrats. An experiment on so small a scale could not
possibly be accepted as decisive. This is the usual retort of innovators
when social experiments prove failures, but we must recognise
the element of truth contained in their reply.
But if we wish to see the real results of the Physiocratic system
we must look beyond the private experiments of a prince. Elsewhere
the effects were much more far-reaching.
The fiscal aspect of the French Revolution owed its guiding
inspiration to their ideas. Out of a budget of 500 million francs the
Constituent Assembly decreed that about half of it—that is, 240
millions—should be got out of a tax levied upon land, equal to a tax
of 2400 million francs nowadays; and the greatest part of it was
to be raised by direct taxation.
Distrust of indirect taxation, and of all taxes on commodities,
is also a consequence of the Physiocratic system—a distrust that is
bound to grow as society becomes more democratic. Most of the
arguments in favour of direct taxation are to be found in the Physiocratic
writings. But the chief one employed nowadays—namely,
that indirect taxes often bear no proportion to the amount of the
revenue, but weigh heaviest upon those who have least, is not among
them. This concern about proportionality, which is merely another
word for justice, was quite foreign to their thoughts.[109]
At a later stage of this work it will be our duty to call attention
to the enthusiasm aroused by this old theory of an impôt unique as
advocated in the works of an eminent American economist,[110] who
renders homage to the Physiocrats for inspiring him with ideals
altogether opposed to those of the landed proprietors. And a similar
movement under the very same name—the single-tax system—is
still vigorous in the United States.
IV: RÉSUMÉ OF THE PHYSIOCRATIC DOCTRINE.
CRITICS AND DISSENTERS
A brief résumé of the contributions made to economic science by
the Physiocrats will help us to realise their great importance.
From the theoretical point of view we have:
1. The idea that every social phenomenon is subject to law,
and that the object of scientific study is to discover such laws.
2. The idea that personal interest if left to itself will discover
what is most advantageous for it, and that what is best for the
individual is also best for everybody. But this liberal doctrine
had many advocates before the Physiocrats.
3. The conception of free competition, resulting in the establishment
of the bon prix, which is the most advantageous price for
both parties, and implies the extinction of all usurious profit.
4. An imperfect but yet searching analysis of production, and
of the various divisions of capital. An excellent classification of
incomes and of the laws of their distribution.
5. A collection of arguments which have long since become
classic in favour of landed property.
From a practical point of view we have:
1. The freedom of labour.
2. Free trade within a country, and an impassionate appeal for
the freedom of foreign trade.
3. Limitation of the functions of the State.
4. A first-class demonstration of the superiority of direct taxation
over indirect.
It is unjust to reproach the Physiocrats, as is sometimes done,
with giving us nothing but social metaphysics. A little over-systemisation
may prove useful in the early stages of a science. Its
very faults have some usefulness. We must admit, however, that
although their conception of the “natural order” supplied the
foundation, or at least the scaffolding, for political economy, it became
so intertwined with a kind of optimism that it nullified the
work of the Liberal school, especially in France.[111]
But the greatest gap in the Physiocratic doctrine is the total
absence of any reference to value, and their grossly material, almost
terrestrial, conception of production. They seldom mention value,
and what little they do say is often confused and commonplace.
Herein lies the source of their mistakes concerning the unproductive
character of exchange and industry, which are all the more remarkable
in view of the able discussions of this very question by a number
of their contemporaries. Among these may be mentioned Cantillon,[112]
who resembles them in some respects and whose essay on commerce
was published in 1755; the Abbé Galiani, who dealt with the
question in his Della Moneta (1750); and the Abbé Morellet, who discussed
the same topic in his Prospectus d’un Nouveau Dictionnaire du
Commerce (1769). More important than any of them, perhaps, is
Condillac, whose work Du Commerce et du Gouvernement was unfortunately
not published until 1776; but by that time the Physiocratic
system had been completed, and their pre-eminence well established.
Turgot, though one of their number, is an exception. He was
never a thoroughgoing Physiocrat, and his ideas concerning value
are much more scientific.[113] He defines it as “an expression of the
varying esteem which man attaches to the different objects of his
desire.” This definition gives prominence to the subjective character
of value, and the phrases “varying esteem” and “desire” give it
greater precision.[114] It is true that he also added that besides this
relative attribute value always implied “some real intrinsic quality
of the object.” He has frequently been reproached for this, but all
that he meant to say was that our desire always implies a certain correctness
of judgment, which is indisputable unless every judgment
is entirely illusory. But Turgot would never have admitted that.
It is possible that Turgot inspired Condillac, and that he himself
owed his inspiration to Galiani, whose book, which appeared twenty
years earlier, he frequently quotes. This work contains a very
acute psychological analysis of value, showing how it depends upon
scarcity on the one hand and utility on the other.
Besides a difference in his general standpoint, there are other
considerations which distinguish Turgot from the members of the
Physiocratic school, and it would have been juster to him as well as
more correct to have devoted a whole chapter to him.[115] Generally
speaking, his views are much more modern and more closely akin to
Smith’s. In view of the exigencies of space we must be content to
draw attention to the principal doctrines upon which he differs from
the Physiocrats.
1. The fundamental opposition between the productivity of
agriculture and the sterility of industry, if not altogether abandoned,
is at least reduced in importance.
2. Landed property is no longer an institution of divine origin.
Even the appeal to the “ground expenses” is dropped. As an institution
it rests merely upon the fact of occupation and public utility.
3. Movable property, on the other hand, holds a prominent
place. The function of capital is more carefully analysed and the
legitimacy of interest definitely proved.
But we must turn to Condillac’s book if we want to see how the
Physiocratic doctrine should be completed and expurgated of its
errors. Condillac was already well known as a philosopher when,
in his sixtieth year, he published this new work in 1776. This
admirable book, entitled Le Commerce et le Gouvernement considérés
relativement l’un à l’autre, contains an outline of most modern problems.
The title gives no adequate indication of the character of the work,
and possibly accounts for the oblivion into which the book has fallen.
It is a genuine economic treatise, and not a medley of economic
and political suggestions concerning social science, with an admixture
of ethics and jurisprudence. Value is regarded as the foundation
of the science, and the Physiocrats are thus out-classed from the
very first.[116] Value itself is considered to be based upon utility, which
is stripped of its popular meaning, and given a scientific connotation
which it has never lost. It no longer implies an intrinsic, physical
property of matter, but connotes a degree of correspondence between
a commodity and a given human want. “Value is not an attribute
of matter, but represents our sense of its usefulness, and this utility
is relative to our need. It grows or diminishes according as our
need expands or contracts.” This is the foundation of the psychological
theory of value.[117]
But this is not all—though a great deal. He clearly realises that
utility is not the only determinant of value; that quantity, i.e. scarcity
or abundance, also exercises an important influence. With admirable
judgment he seizes upon the connection between them, and shows
how the two statements are united in one, for quantity only influences
value according as its action upon utility intensifies or weakens demand.
“But since the value of things is based upon need it is natural
that a more keenly felt need should endow things with greater value,
while a less urgent need endows them with less. Value increases
with scarcity and diminishes with plenty. In case of plenty it may
even disappear; a superabundant good will be valueless if one
has no use for it.”[118] This could not be put more clearly to-day.
Here we have the germ of the theories of Jevons and the Austrian
school, though it took a long time to develop.
We might naturally expect a superior treatment of exchange
following upon this new theory of value. If value is simply the
satisfaction of want, exchange creates two values when it satisfies
two needs at the same time. The characteristic of exchange is that
each of the two parties yields what it has in superabundance in return
for what it needs. But what is given up is superabundant, is useless,
and consequently valueless; what is demanded has greater utility,
and consequently greater value. Two men come to market each
with a useless thing, and each returns with a useful one.[119] Consequently
the Physiocratic saying that exchange means no gain to
anyone, or at least that the gain of one only compensates for the
loss of the others, is seen to be radically false. The Physiocrats—notably
Trosne—attempted a reply, but, for reasons already given,
they never succeeded in realising the subjective character of value.
This same theory should have carried Condillac a stage further,
and helped in the rectification of the Physiocratic error concerning
production. If value is simply utility and utility itself is just the
correspondence between things and our demand for them, what is
the agency that produces this harmony between things and desires?
It is very seldom that nature succeeds in establishing it. “Nature
is frequently fertile in things we have no desire for and lavish of
what is useless”—a profound remark that ought to have cooled
the Physiocrats’ love of the Alma Parens. “Matter is transformed
and made useful by dint of human labour. Production means giving
new form to matter.”[120] If this be true, then there is no difference
between agricultural and industrial production, for they both transform
what already exists.[121]
Moreover, the theory proves very clearly that if artisans and proprietors
are dependent upon the agriculturists—as, indeed, they are—the
latter in their turn are nothing but artisans. “If someone asks
whether agriculture ought to be preferred to manufacture or manufacture
to agriculture, we must reply that we have no preferences, and
that the best use should be made of both.”[122]
Lastly, his definition of wages, short as it is, is of immense
significance. “Wages represent the share of the product which is
due to the workers as co-partners.”[123] Wages only “represent” the
share that is due to the workers. In other words, the wage-earner,
either through want of will or of power, cannot exercise his rightful
claim to his own work, and simply surrenders the claim in return for
a money price. This constitutes his salary, which is regulated, like
every other price, by competition between buyers and sellers.
Condillac makes no reference to an iron law of wages, but regards
them as determined by the forces of demand and supply. He does,
however, hint at the implicit alliance which exists between capital
and labour.[124]
From a practical standpoint also, especially in his defence of free
labour and his condemnation of corporations, Condillac is more
categorical than the Physiocrats. “All these iniquitous privileges,”
he writes, “have no claim to a place in the order beyond the fact
that they are already established.” He is as persistent as Turgot
in his justification of the taking of interest and in his demand for
the determination of the rate by competition. This very elegant
argument is employed to show its similarity to exchange: Exchange
implies compensation for overcoming the drawbacks of distance,
whether of place or of time.[125] Exchange generally refers to place,
interest to time, and this is really the foundation of the modern theory.
Notwithstanding the originality and vigour displayed by the
Physiocrats, they can only be regarded as the heralds of the new
science. Adam Smith,[126] it is now unanimously agreed, is its true
founder. The appearance of his great work on the Wealth of Nations
in 1776 instantly eclipsed the tentative efforts of his predecessors.
To-day the Physiocratic doctrines scarcely do more than arouse
historical curiosity, while Smith’s work has been the guide for
successive generations of economists and the starting-point of all
their speculation. Even at the present day, despite many changes
in the fundamental principles of the science, no economist can afford
to neglect the old Scotch author without unduly narrowing his
scientific horizon.
Several reasons account for the commanding position held by
this book—a position which no subsequent treatise has ever successfully
rivalled.
First is its supreme literary charm. It is above all an interesting
book, bristling with facts and palpitating with life. The burning
questions of the hour, such as the problems presented by the colonial
régime, the trading companies, the mercantile system, the monetary
question, and taxation, supply the author with congenial themes for
his treatment. His discussion of these questions is marked by such
mastery of detail and such balance of judgment that he convinces
without effort. His facts are intermixed with reasoning, his illustrations
with argument. He is instructive as well as persuasive. Withal
there is no trace of pedantry, no monotonous reiteration in the work,
and the reader is not burdened with the presence of a cumbersome
logical apparatus. All is elegantly simple. Neither is there the
slightest suggestion of the cynic. Rather a passion of genuinely
human sympathy, occasionally bordering upon eloquence, breathes
through the pages. Thanks to rare qualities such as these we can
still feel something of the original freshness of this old book.
In addition to this, Smith has been successful in borrowing from
his predecessors all their more important ideas and welding them
into a more general system. He superseded them because he
rendered their work useless. A true social and economic philosophy
was substituted for their fragmentary studies, and an entirely new
value given to their contributions. Taken out of their isolation, they
help to illustrate his general theory, becoming themselves illuminated
in the process.
Like most great writers, Smith knows how to borrow without
impairing his originality. Over a hundred authors are quoted in
his book, but he does not always acknowledge them. The names of
some of the writers who exercised such influence over him, and
opened up the path which he afterwards followed, deserve more
than a passing reference.
The first place among these belongs, perhaps, to Hutcheson,
Smith’s predecessor in the chair of Moral Philosophy at Glasgow.
The divisions of the subject are almost identical with those given by
Hutcheson, and many of Smith’s best known theories can be traced
in the System of Moral Philosophy published by Hutcheson in
1755, but which we know was written long before. Hutcheson laid
great stress upon the supreme importance of division of labour, and
his views on such questions as the origin and variations in the value
of money and the possibility of corn or labour affording a more
stable standard of value closely resemble those of the Wealth of
Nations.
David Hume is a near second. Smith refers to him as “by far
the most illustrious philosopher and historian of the present age,”[127]
and from 1752 onward they were the closest of friends. Hume was
already the author of some essays on economic questions, the most
important among them dealing with money, foreign trade, the rate
of interest, etc. These, along with several other writings, were published
in the Political Discourses in 1752. Hume’s examination of
these problems displays his original penetrative thought, and there
is evident the profundity and lucidity of treatment characteristic
of all his writings. The absurdity of the Mercantile policy and
of interfering with the natural tendency of money to adapt itself
to the needs of each community, the sophistry of the balance of
trade theory, and the impious consequences resulting from commercial
jealousy among nations are exposed with admirable force
in these essays. No doubt the essays left a great impression upon
Smith. He quoted them in his lectures at Glasgow, and Hume
consulted him before bringing out a second edition. It is true that
Smith eventually became the stauncher Liberal of the two. Hume,
in his essay on the Balance of Trade, recognized the legitimacy of
certain protective rights which Smith wished removed altogether.
Still it was to Hume that Smith owed his conversion to the Liberal
faith.
On this matter of commercial liberty there was already, towards
the end of the seventeenth and the beginning of the eighteenth
centuries, a small but a growing band of Mercantilists who had
begun to protest against the irksomeness of the Customs regulations.
They were, of course, still largely imbued with mercantile prejudice,
but they are rightly classed as “Liberals.” Just as in France
Boisguillebert had foreshadowed the Physiocrats, so in England
Child, Petty, Tucker, Dudley North, and Gregory King had been
preparing the way for a more liberal policy in foreign trade.[128]
In addition to Hutcheson and Hume one other writer must be
mentioned in this connection, namely, Bernard de Mandeville. He
was not an economist at all, but a doctor with considerable philosophical
interests. In 1704 he had published a small poem, which,
along with a number of additions, was republished in 1714 under the
title of The Fable of the Bees; or, Private Vices Public Benefits. The
fundamental idea of the book, which caused quite a sensation at the
time, and which was seized by order of the Government, is that
civilisation—understanding by that term not only wealth, but also
the arts and sciences—is the outcome, not of the virtues of mankind,
but of what Mandeville calls its vices; in other words, that the
desire for well-being, comfort, luxury, and all the pleasures of life
arises from our natural wants. The book was a sort of apology
for the natural man and a criticism of the virtuous.
Smith criticised Mandeville in his Theory of Moral Sentiments,[129]
and reproached him particularly for referring to tastes and desires as
vices though in themselves they were nowise blameworthy. But
despite his criticism Mandeville’s idea bore fruit in Smith’s mind.
Smith in his turn was to reiterate the belief that it was personal
interest (in his opinion no vice, but an inferior virtue) that unwittingly
led society in the paths of well-being and prosperity. A nation’s
wealth for Smith as well as for Mandeville is the result, if not of a
vice, at least of a natural instinct which is not itself virtuous, but
which is bestowed upon us by Providence for the realisation of
ends that lie beyond our farthest ken.
Such are the principal writers in whose works we may find an
outline of some of the more important ideas which Smith was to
incorporate in a true system.
Mere systematisation, however, would not have given the Wealth
of Nations its unique position. Prior to Smith’s time attempts had
been made by Quesnay and the Physiocrats to outline the scope of
the science and to link its various portions together by means of a
few general principles. Although he was not the first to produce a
connected scientific treatise out of this material, he had a much
greater measure of success than any of his predecessors.
Smith owed much to the Physiocrats, but he had little personal
acquaintance with them beyond that afforded by his brief stay in
Paris in 1765. Slight as the intimacy was, however, there is no
doubt about the influence they had upon him. It is also very improbable
that he had read all their works: Turgot’s Réflexions, for
example, written in 1766, but only published in 1769-70, was probably
not known to him. But frequent personal converse with both
Turgot and Quesnay had helped him in acquiring precise first-hand
knowledge of their views. We can easily guess which ideas would
attract him most.
On one point at least he had no need to be enlightened, for in the
matter of economic liberalism he had long been known as a doughty
champion. But the ardent faith of the Physiocrats must have
strengthened his own belief very considerably.
On the other hand, it appears that he borrowed from the Physiocrats
the important idea concerning the distribution of the annual
revenue between the various classes in the nation. In his lectures
at Glasgow he scarcely mentions anything except production, but
in the Wealth of Nations an important place is given to distribution.
The difference can hardly be explained except upon the hypothesis
of Smith’s growing acquaintance with the Tableau économique and
the theory of the “net product.”
But admitting that he borrowed what was most characteristic
and most suggestive in their teaching, his treatment of its many
complicated aspects is altogether superior to theirs. The Physiocrats
were so impressed by the importance of agriculture that they utterly
failed to see the problem in its true perspective. They scanned the
field through a crevice, and their vision was consequently narrow
and limited. Smith, on the other hand, took the whole field of
economic activity as his province, and surveyed the ground from an
eminence where the view was clearest and most extensive.
The economic world he regarded as a vast workshop created by
division of labour, one universal psychological principle—the desire
of everyone to better his lot—supplying unity to its diverse phenomena.
Political economy was at last to be based, not on the interests
of a particular class, whether manufacturing or agricultural, but
upon a consideration of the general interest of the whole community.
Such are the directing principles that inspire the whole work, the
guiding lines amidst what had hitherto seemed a mere chaos
of economic facts. Contemporaries never counted upon the difficulties
which the new science was bound to encounter, so great was
their enthusiasm at having a fixed standpoint from which for the
first time the complex interests of agriculture, industry, and commerce
might be impartially surveyed. With Smith the study
emerged from the “system” stage and became a science.
Our examination of Smith’s views will be grouped around three
points:
(I) Division of labour.
(II) The “natural” organisation of the economic world under
the influence of personal interest.
(III) Liberalism.
It was Quesnay who had propounded the theory that agriculture
was the source of all wealth, both the State’s and the individual’s.[130]
Adam Smith seized upon the phrase and sought to disprove it in his
opening sentence by giving to wealth its true origin in the general
activity of society. “The annual labour of every nation is the fund
which originally supplies it with all the necessaries and conveniences
of life which it annually consumes, and which consist always either
in the immediate produce of that labour or in what is purchased with
that produce from other nations.”
Labour is the true source of wealth. When Smith propounded
this celebrated theory, which has given rise to so many misunderstandings
since, it was not intended that it should minimise the
importance of natural forces or depreciate the part which capital
plays in production.[131] No one, except perhaps J. B. Say, has been
more persistent in emphasising the importance of capital, and to the
land, as we shall presently see, he attributed a special degree of productivity.
But from the very outset Smith was anxious to emphasise
the distinction between his doctrine and that of the Physiocrats.
So he definitely affirms that it is human activity and not natural
forces which produces the mass of commodities consumed every year.
Without the former’s directing energy the latter would for ever
remain useless and fruitless.
He is not slow to draw inferences from this doctrine. Work,
employed in the widest sense, and not nature, is the parent of wealth—not
the work of a single class like the agriculturists, but the work
of all classes. Hence all work has a claim to be regarded as productive.
The nation’s annual income owes something to everyone who
toils. It is the result of their collaboration, of their “co-operation”
as he calls it. There is no longer any need for the distinction between
the sterile and the productive classes, for only the idle are sterile.
A nation is just a vast workshop, where the labour of each,
however diverse in character, adds to the wealth of all. The passage
in which Adam Smith expresses this idea is well known, but no
apology is needed for quoting it once again.[132] “What a variety of
labour too is necessary in order to produce the tools of the meanest
of those workmen! To say nothing of such complicated machines
as the ship of the sailor, the mill of the fuller, or even the loom of
the weaver, let us consider only what a variety of labour is requisite
in order to form that very simple machine, the shears with which
the shepherd clips the wool. The miner, the builder of the furnace
for smelting the ore, the feller of the timber, the burner of the
charcoal to be made use of in the smelting-house, the brick-maker,
the brick-layer, the workmen who attend the furnace, the mill-wright,
the forger, the smith, must all of them join their different arts in
order to produce them. Were we to examine, in the same manner,
all the different parts of his dress and household furniture, the
coarse linen shirt which he wears next his skin, the shoes which
cover his feet, the bed which he lies on, and all the different parts
which compose it, the kitchen-grate at which he prepares his victuals,
the coals which he makes use of for that purpose, dug from the bowels
of the earth, and brought to him perhaps by a long sea and a long
land carriage, all the other utensils of his kitchen, all the furniture
of his table, the knives and forks, the earthen or pewter plates upon
which he serves up and divides his victuals, the different hands
employed in preparing his bread and his beer, the glass window
which lets in the heat and the light, and keeps out the wind and the
rain, with all the knowledge and art requisite for preparing that
beautiful and happy invention, without which these northern parts
of the world could scarce have afforded a very comfortable habitation,
together with the tools of all the different workmen employed
in producing those different conveniencies; if we examine, I say,
all these things, and consider what a variety of labour is employed
about each of them, we shall be sensible that without the assistance
and co-operation of many thousands, the very meanest person in a
civilized country could not be provided, even according to, what we
very falsely imagine, the easy and simple manner in which he is
commonly accommodated.”
Division of labour is simply the spontaneous realisation of a
particular form of this social co-operation. Smith’s peculiar merit
lies in placing this fact in its true position as the basis of his whole
work. The book opens upon this note, whose economic and social
importance has been so frequently emphasised since that it sounds
almost commonplace to-day.
This division of labour effects an easy and natural combination
of economic efforts for the creation of the national dividend. Whereas
animals confine themselves to the direct satisfaction of their individual
needs,[133] men produce commodities to exchange them for others
more immediately desired. Hence there results for the community
an enormous increase of wealth; and division of labour, by establishing
the co-operation of all for the satisfaction of the desires of each,
becomes the true source of progress and of well-being.
In order to illustrate the growth in total production as the
outcome of division of labour, Smith gives an example of its effects
in a particular industry. “The effects of the division of labour, in
the general business of society, will be more easily understood by
considering in what manner it operates in some particular manufactures.”
It is in this connection that he introduces his celebrated
description of the manufacture of pins. “A workman not educated
to this business (which the division of labour has rendered a distinct
trade), nor acquainted with the use of the machinery employed in it
(to the invention of which the same division of labour has probably
given occasion), could scarce, perhaps, with his utmost industry, make
one pin in a day, and certainly could not make twenty. But in the
way in which this business is now carried on, not only the whole
work is a peculiar trade, but it is divided into a number of branches,
of which the greater part are likewise peculiar trades. One man
draws out the wire, another straights it, a third cuts it, a fourth
points it, a fifth grinds it at the top for receiving the head; to make
the head requires two or three distinct operations; to put it on, is a
peculiar business, to whiten the pins is another; it is even a trade
by itself to put them into the paper; and the important business of
making a pin is, in this manner, divided into about eighteen distinct
operations, which, in some manufactories, are all performed by
distinct hands, though in others the same man will sometimes
perform two or three of them. I have seen a small manufactory of
this kind where ten men only were employed, and where some of
them consequently performed two or three distinct operations. But
though they were very poor, and therefore but indifferently accommodated
with the necessary machinery, they could, when they
exerted themselves, make among them about twelve pounds of pins
in a day.”[134]
Such is the picture of man as we find him in society. Division
of labour and exchange have resulted in augmenting production
a hundredfold, and thus increasing his well-being, whereas left to
himself he could scarcely supply his most urgent needs.
In a subsequent analysis Smith ascribes the gain resulting from
division of labour to three principal causes: (1) The greater dexterity
acquired by each workman when confined to one particular task;
(2) the economy of time achieved in avoiding constant change
of occupation; (3) the number of inventions and improvements
which suggest themselves to men absorbed in one kind of work.
Criticism has been levelled at Smith for his omission to mention
the disadvantages of division of labour which might possibly counterbalance
its many advantages. The omission is the result of his
method of treating the whole question, and it is not of much
real importance. The disadvantages, moreover, were not altogether
lost sight of, and it would be difficult to find a more eloquent plea
for some counteracting influence than that which Smith puts forward
in the fifth book of the Wealth of Nations. “In the progress of the
division of labour,” he remarks, “the employment of the far greater
part of those who live by labour, that is, of the great body of the people,
comes to be confined to a few very simple operations; frequently to
one or two.” But “the man whose whole life is spent in performing
a few simple operations, of which the effects too are, perhaps, always
the same, or very nearly the same, has no occasion to exert his
understanding, or to exercise his invention in finding out expedients
for removing difficulties which never occur. He naturally loses,
therefore, the habit of such exertion, and generally becomes as stupid
and ignorant as it is possible for a human creature to become.”[135]
This passage seems in contradiction with the ideas expressed
above. At one moment constant application to one particular kind
of work is regarded as the mother of invention, at another the
unremitting task is branded as a fertile cause of stupefaction. The
contradiction is, however, more apparent than real. An occupation
at first stimulating to the imagination may, if constantly pursued,
result in mental torpor. Smith’s conclusions are at any rate interesting.
In order to remove the inconveniences resulting from over-specialisation
he emphasises the need for bringing within reach of
the people, even of imposing upon them, a system of education
consisting of the three R’s[136]—such education to be supplied through
institutions partly supported by the State. We can imagine the
shock which such heterodoxy must have given to the prophets of
laissez-faire. Fortunately it was not the only one they had to
bear.
Smith next proceeds to indicate the limits of this division of
labour. Of such limits he mentions two: (1) In the first place it
must be limited by the extent of the market. “When the market
is very small, no person can have any encouragement to dedicate
himself entirely to one employment, for want of the power to exchange
all that surplus part of the produce of his own labour, which is over
and above his own consumption, for such parts of the produce of
other men’s labour as he has occasion for.”[137] This is why foreign
trade, including trade with the colonies, by extending the market
for some products is favourable to further division of labour and
a further increase of wealth. (2) The other consideration which,
according to Smith, limits division of labour is the quantity of capital
available.[138] The significance of this observation is not quite so
obvious as that of the former one. Here it seems to us that a
conclusion drawn from one particular trade has been applied to
industry as a whole. It may be true of a private manufacturer that
he will be able to push technical division of labour further than any
of his rivals provided he has more capital than they; but taking
society as a whole it is clear that the existence of division of labour
enables the same product to be produced with less capital than is
necessary for the single producer.[139]
Such is an outline of Adam Smith’s theory of division of labour—a
theory so familiar to everyone to-day that we are often unable to
realise its importance and to appreciate its originality, and this
despite the fact that certain sociologists like Durkheim have
hailed it as supplying the basis of a new ethic. Juxtaposed
with the Physiocratic theory, it is not very difficult to realise its
superiority.
To the Physiocrats the economic world was a hierarchy of classes.
The agriculturist in some mysterious way bore the “whole weary
weight of this unintelligible world” upon his own shoulders, giving
to the other classes a modicum of that sustenance which he had
wrested from the soil. Hence the fundamental importance of the agricultural
classes and the necessity for making the whole economic system
subordinate to them. Adam Smith, on the other hand, attempted
to get a view of production as a whole. He regarded it as the result
of a series of joint undertakings engineered by the various sections
of society and linked together by the tie of exchange. The progress
of each section is bound up with that of every other. To none of
these classes is entrusted the task of keeping all the others alive; all
are equally indispensable. The artisan who spares the labourer the
task of building his house or of making his shoes contributes to the
accumulation of agricultural products just as much as the ploughman
who frees the artisan from turning the furrow or sowing the seed.
The progress of national wealth cannot be measured in terms of a
single net product; it must be estimated by the increase in the
whole mass of commodities placed at the disposal of consumers.
One very evident practical conclusion follows; namely, that
taxation should fall, not upon one class, as the Physiocrats wished,
but upon all classes alike. As against the impôt unique, Smith
advocates multiple taxation which shall strike every source of
revenue equally, labour and capital as well as land; and the fundamental
rule which he lays down is as follows: “The subjects of
every State ought to contribute towards the support of the Government,
as nearly as possible, in proportion to their respective abilities;
that is, in proportion to the revenue which they respectively enjoy
under the protection of the State.”[140] This is his famous maxim of
equality so frequently quoted in every financial discussion.[141]
It is very curious that Smith should have failed to make the best
possible use of this theory. Its full significance was lost upon him.
The theory of division of labour alone was sufficient to dispose of
the whole Physiocratic system. Nevertheless, in the last chapter of
Book IV we find him still valiantly struggling to disprove the conclusions
of the Physiocrats, by the aid of arguments not always
very convincing. Forgetting his principle of division of labour, he
even adopts a part of their thesis and finds himself entangled by the
invalid distinctions which they had drawn between productive and
unproductive workers. He simply gives another definition and
describes as unproductive all works which “perish in the very instant
of their performance, and seldom leave any trace or value behind
them for which an equal quantity of service could afterwards be
procured.”[142] All these services, which comprise the labours of
domestic servants, of administrators and magistrates, of soldiers and
priests, of counsellors, doctors, artists, authors, musicians, etc., Say
classed together as “immaterial products.” By restricting the
term “productive” to material objects only, Smith gave rise to a very
useless controversy on the nature of productive and unproductive
works—a controversy that was first taken up by Say and revived
by Mill, but which to-day seems to be decided against Smith,
thanks to a more exact interpretation of his own doctrines. It is,
indeed, quite clear that all these services constitute a part of the
annual revenue of the nation, and that “production” in a general
sense would be diminished if some persons did not exclusively
devote themselves to the performance of such tasks.
After criticising the Physiocratic distinction drawn between the
wage-earning classes and the productive, Smith immediately admits
that the labour of artisans and traders is not as productive as that
of farmers and agricultural labourers, for the latter not only return
the capital employed by them together with profits, but they also
furnish the proprietor with rent.[143]
Whence this hesitation on the part of Smith? Where did he
come by the idea of the special and superior productivity of agriculture?
An attempt to account for it may prove interesting, and it
will help us to give Smith his true place in a history of economic
doctrines.
Notwithstanding his recantation, Smith was never quite rid
of Physiocratic influence. Writing of the Physiocratic system, he
described it as perhaps “the nearest approximation to the truth
that has yet been published.”[144] So indelible was the impression
which the Physiocrats left upon him that both they and their doctrines,
even when the latter are directly opposed to his own, are
always spoken of with the greatest respect. The most important
evidence of their power over him is the thesis just mentioned which
he attempted to defend, namely, that between agriculture and other
industries lies an essential distinction, because in industry and
commerce the forces of nature are never brought into play, whereas
in agriculture they always collaborate with man. “No equal quantity
of productive labour employed in manufactures can ever occasion
so great a reproduction. In them nature does nothing; man does
all; and the reproduction must always be in proportion to the
strength of the agents that occasion it.”[145] We almost think we
are dreaming when we read such things in the work of a great economist.
Water, wind, electricity, and steam, are they not natural
forces, and do they not co-operate with man in his task of production?
Considerations such as these were allowed to pass quite unheeded,
and Smith persisted in his error because he believed that this new
doctrine furnished him with an explanation of rent, that strange
enigma which had puzzled English economists for so long. How was
it that while other branches of production gave a return only sufficient
to remunerate the capital and labour employed, agriculture, in
addition to these two revenues, yielded a supplementary income
known as rent? It was because “in agriculture nature labours
along with man: and though her labour costs no expence, its
produce has its value as well as that of the most expensive workman.”
Thus “rent may be considered as the produce of those powers of
nature, the use of which the landlord lends to the farmer.”[146] Had
Smith arrived at a true theory of rent this recourse to the natural
powers of the soil to furnish an explanation of the proprietor’s
revenue would have been quite unnecessary, and in all probability
he would not have so easily accepted the idea of the special productivity
of the soil. But this false conception of nature has persisted
in economic theory, and in it Smith thought he saw an additional
reason for adhering to those errors which the Physiocrats had first
induced him to commit.[147]
Apart from his personal attachment to the Physiocrats we must
also remember that Smith more than shared their predilection for
agriculture.
Nothing can be more incorrect, though it is frequently done,
than to regard Smith as the prophet of industrialism and to contrast
him with the Physiocrats, the champions of agriculture. When the
Wealth of Nations appeared in 1776 the economic transformation
known to history as the Industrial Revolution, which consisted
in the rapid substitution of machine production for the old domestic
régime, had as yet scarcely begun. Hargreaves and Arkwright
had doubtless some inventions to their credit. The one had produced
the spinning jenny in 1765, and the other had perfected
the water frame in 1767, improvements that had given considerable
impetus to the cotton trade. James Watt,[148] who was known to
Smith, took out a patent for a steam-engine in 1769. But these
inventions were as yet quite novel, and required time before they
could modify the industrial system. The more important among
them, Crompton’s “mule”[149] and Cartwright’s weaving machine,
were as yet of the future. These dates are significant; they prove
conclusively that the Industrial Revolution had scarcely begun when
Smith’s great work appeared. Moreover, several of the more
important themes treated of in the Wealth of Nations may be discovered
in the course of lectures which Smith delivered at Glasgow
about 1759, so that it is quite impossible to establish anything like
an exact connection between the Industrial Revolution which was
just beginning and the ideas embodied in the Wealth of Nations.
One cannot even say that Smith was particularly enamoured of the
manufacturing régime—apart from the mechanical advance which it
implied. For, as Marx says,[150] the characteristic trait of English
economic life, despite the undisputed advance that industry was
making at that time, was commercial rather than industrial.[151]
Especially was this true of Glasgow, where Smith made most of his
observations. Glasgow then was an essentially commercial town,
principally engaged in the importation of American tobacco.[152]
Far from constituting a prophetic manifesto of the new age,
Smith’s work reveals even to the most superficial reader a thorough
abhorrence of traders and manufacturers. All his sarcasm is
reserved for them, all his criticism levelled at them. While the
interest of landed proprietors and workers appears to him always to
accord with a country’s general interest, that of traders and manufacturers
“is never exactly the same with that of the public,” the
manufacturers having “generally an interest to deceive and even
to oppress the public, and who accordingly have, upon many
occasions, both deceived and oppressed it.”[153]
Again, when it comes to choosing between capitalists and workmen
the issue is not long in doubt. It is quite clear from more
than one passage that Smith’s sympathy was wholly with the workers.
Several paragraphs could be cited in proof of this. Suffice it to
recall the very sympathetic way in which he speaks of the high
wages of workmen and contrast it with his discussion of profits. “Is
this improvement in the circumstances of the lower ranks of the
people to be regarded as an advantage or as an inconveniency to
the society? The answer seems at first sight abundantly plain.
Servants, labourers and workmen of different kinds, make up the
far greater part of every great political society. But what improves
the circumstances of the greater part can never be regarded as an
inconveniency to the whole. No society can surely be flourishing
and happy, of which the far greater part of the members are poor
and miserable. It is but equity, besides, that they who feed,
cloath, and lodge the whole body of the people, should have
such a share of the produce of their own labour as to be themselves
tolerably well fed, cloathed, and lodged.”[154] The tune changes when
he comes to speak of profits. He is of opinion that high profits
raise the price of commodities much more than high wages, and he
dismisses the consideration of the problem with this ironical remark:
“Our merchants and master-manufacturers complain much of the
bad effects of high wages in raising the price, and thereby lessening
the sale of their goods both at home and abroad. They say nothing
concerning the bad effects of high profits. They are silent with
regard to the pernicious effects of their own gains. They complain
only of those of other people.”[155] The contrast is significant. It is
still more deeply marked in that phrase which one is surprised not
to see more frequently quoted by the champions of labour legislation.
“Whenever the legislature attempts to regulate the differences
between masters and their workmen, its counsellors are always the
masters. When the regulation, therefore, is in favour of the workmen,
it is always just and equitable; but it is sometimes otherwise
when in favour of the masters.”[156]
This is not the tone of most of his contemporaries. Nor do we
meet with this note in the writings of the appointed champions of
the industrial system—the MacCullochs, the Ures, and the Babbages
of the next fifty years. His words ring with that generous pity which
proved a source of inspiration to Lord Shaftesbury and Michael Sadler
in their efforts to secure the passing of the Factory Act of 1833.
Smith cannot, accordingly, be regarded as the herald of dawning
industrialism. He clung to agriculture with all the tenacity of his
nature, and no opportunity of showing his preference was ever
missed. The difficulties of agriculture are quite beyond those of
any other craft. “After what are called the fine arts, and the liberal
professions, however, there is perhaps no trade which requires so
great a variety of knowledge and experience.”[157] Not only is it more
difficult, but it is also more useful. Between agriculture, manufacture,
and commerce he draws a long comparison (to which we
shall have to make reference again) purporting to show that of all
employments agriculture is the most profitable field of investment,
and the one most in accord with the general interest. For the more
progressive nations “the natural course of things” would seem to
suggest the investment of capital firstly in agriculture, in the second
place in industry, and finally in foreign trade. The whole of
Book III is an endeavour to show how the policy of European
nations had for many centuries been hostile to agriculture and how
the natural order had been inverted in the interests of merchants
and artisans. Agriculture had always been the victim. In his
theory of taxation he shows how a portion of the taxes on profits
and wages ultimately falls upon property. In his discussion of
duties on imported corn—those duties which aroused the indignation
of Ricardo against the landlords—he reveals the same partiality. And
he even goes the length of saying that it is not because of their
personal interest, but owing solely to a badly conceived imitation of
the doings of merchants and manufacturers, that “the country gentlemen
and farmers of Great Britain so far forgot the generosity which
is natural to their station, as to demand the exclusive privilege of
supplying their countrymen with corn and butchers’-meat.”[158]
Smith’s preference for agriculture and agriculturists need not be
further insisted upon. Despite his own theory of division of labour,
he still cherished a secret regard for the Physiocratic prejudice. He
never subjected agriculture to the indignity of equal treatment along
with other forms of economic activity. In his work at least it still
retains its ancient pre-eminence.
In addition to the conception of the economic world as a great
natural community created by division of labour, we can distinguish
in Smith’s work two other fundamental ideas, around which his
more characteristic theories group themselves. First is the idea of the
spontaneous origin of economic institutions, and secondly their beneficent
character—or, more briefly, Smith’s naturalism and optimism.
The two ideas, though frequently intermingled and sometimes
even confused in Smith’s work, must be carefully distinguished by
the historian of economic thought.
Spontaneity and beneficence were intimately connected for Smith.
In the eighteenth century anything natural or spontaneous was
immediately voted good, and the terms “natural,” “just,” and
“advantageous” were often used as synonymous. Smith did not
escape the confusion of ideas. Having shown the natural origin of
economic institutions, he imagined that at the same time he had
demonstrated their useful and beneficent character.[159] The confusion
is no longer permissible. To give a scientific demonstration of the
origin of social institutions and to gauge their value from the point of
view of the general interest are two equally legitimate but very
different intellectual pursuits. We may agree with Smith that our
economic organisations, both in their origin and functions, participate
of the spontaneity of natural organisms, but we may at the same time
reserve judgment as to their real worth. Pessimism no less than
optimism may be engendered by contemplation of the spontaneous
character of economic institutions. While this conception of the
spontaneity of economic institutions seems to us just and fruitful,
the demonstration given of their beneficent character appears insufficient
and doubtful. The former conception is a commonplace
with all the greatest economists; the latter is rejected by the
majority of them.
These two ideas which have played such an important part in
the history of economic doctrines must be separately examined.
The conception of spontaneity is the one to which Smith refers
most frequently. Il mondo va da se. Here at any rate he and the
Physiocrats were entirely at one. There is no need for organisation,
no call for the intervention of any general will, however far-seeing
or reasonable, and no necessity for any preliminary understanding
between men. Such are the reflections that the study of the
economic world suggests ever anew to our author. The present
aspect of the economic world is the result of the spontaneous action
of millions of individuals, each of whom follows his own sweet will,
taking no heed of others, but never doubting the ultimate result.
The noble outlines of the economic world as we know it have been
traced, not by following a plan issuing complete from the brain of
an organiser and deliberately carried out by an intelligent society,
but by the accumulation of numberless deeds designed by a crowd
of individuals in obedience to an instinctive force wholly unconscious
of the work which it was encompassing.
This idea of the spontaneous constitution of the economic world
is in some aspects analogous to the conception of an “economic
law” of a later period. Both ideas suggest the presence of something
superior to individual wills, and imposed upon them even despite
their resistance. The differences are equally marked, however, the
scope of the former being far greater than that of the latter. The
words “natural law,” in the first place, suggest regularity and repetition—the
constant recurrence of the same phenomena under similar
conditions. This is not the aspect that particularly struck Smith.
He insists less upon the constancy of economic phenomena and more
on their spontaneity, their instinctive and natural character. Say’s
delight was to compare the economic and the physical worlds.
Smith loves to regard the economic world as a living organism which
creates for itself its own indispensable organs. Nowhere is the term
“economic law” employed, but his delineation of the chief economic
institutions and the account of their functions always results in the
same conclusion.
First of all take division of labour, which we have just studied,
and which more than any other institution contributes to the increase
of wealth.
This marvellous institution is “not originally the effect of any
human wisdom, which foresees and intends that general opulence to
which it gives occasion.” “It is the necessary, though very slow
and gradual, consequence of a certain propensity in human nature
which has in view no such extensive utility; the propensity to
truck, barter, and exchange one thing for another.”[160] This tendency
itself is the outcome of personal interest. “Man has almost constant
occasion for the help of his brethren, and it is in vain for him to
expect it from their benevolence only. He will be more likely to
prevail if he can interest their self-love in his favour, and show them
that it is for their advantage to do for him what he requires of them.
Whoever offers to another a bargain of any kind, proposes to do this:
Give me that which I want, and you shall have this which you want,
is the meaning of every such offer; and it is in this manner that
we obtain from one another the far greater part of those good offices
which we stand in need of. It is not from the benevolence of the
butcher, the brewer, or the baker that we expect our dinner, but
from their regard to their own interest. We address ourselves, not
to their humanity, but to their self-love, and never talk to them of
our own necessities, but of their advantages.”[161] This gives rise to
exchange, and with exchange comes division of labour. “And thus
the certainty of being able to exchange all that surplus part of the
produce of his own labour, which is over and above his own consumption,
for such parts of the produce of other men’s labour as he may
have occasion for, encourages every man to apply himself to a
particular occupation, and to cultivate and bring to perfection
whatever talent or genius he may possess for that particular species
of business.” Division of labour is the outcome of a tendency
common to all men, the tendency to barter; and this tendency itself
is spontaneously developed under the influence of personal interest,
which acts simultaneously for the benefit of each and all.
Next comes money, and nothing has so facilitated exchange or
so greatly increased wealth. Every economic treatise since Smith’s
has demonstrated its advantages in terms almost identical with his.
But how did money first come to be employed? It was not by the
act of a public body, nor was it the outcome of a nation’s reflective
judgment. It is simply the result of the operation of a collective
instinct. Some men who were keener than others saw the inconveniences
of the truck system. And “in order to avoid the inconveniency
of such situations, every prudent man in every period of
society, after the first establishment of the division of labour, must
naturally have endeavoured to manage his affairs in such a manner,
as to have at all times by him, besides the peculiar produce of his
own industry, a certain quantity of some one commodity or other,
such as he imagined few people would be likely to refuse in exchange
for the produce of their industry.”[162] Money is thus the product of
the simultaneous though not concerted action of a great number
of people, each obeying his personal inclination. The intervention
of the public authority is much later, and its object is merely to
guarantee by means of a design the weight and purity of such coins
as are already in circulation.
Take another well-known phenomenon—capital.[163] With the
exception of division of labour and the invention of money, Smith
thought there was no phenomenon of greater importance and no
more essential fount of national wealth than capital. The larger
the store of capital, the greater the number of productive workers,
makers of tools and machinery—the essentials of increased productivity—the
further will division of labour extend. To increase a
nation’s capital is to expand its industry and to further its well-being.[164]
In some passages the growth of wealth appears not merely
as the chief but as the only method of augmenting a nation’s wealth.
“The industry of the society can augment only in proportion as its
capital augments, and its capital can augment only in proportion to
what can be gradually saved out of its revenue.”[165] In short, capital
limits industry,[166] a phrase that was destined to become classic, and
one that was repeated by every economist down to Mill. Capital is
the true source of economic life. Let capital increase and industry
will expand in every direction; diminish it and a bar is set to all
improvement. Capital fertilises the earth, whereas the labour of
man simply leaves it a weary waste.
Criticism has been freely levelled at this extravagant importance
which capital is made to assume. It is certainly somewhat curious
that labour should now be treated as altogether subordinate to
capital, whereas earlier in the volume labour alone was regarded as
the great wealth-producing agent. But we are not here concerned
with the revival of these threadbare controversies.[167] We merely wish
to note that Smith finds in this accumulation of capital a new
illustration of spontaneity. The saving of capital is not the result of
any foresight on the part of society, but is solely due to the simultaneous
and concurrent actions of thousands of individuals. These
individuals, urged on by a desire to better their situation, are
spontaneously urged to save their earnings and to employ those
savings productively.
“The principle which prompts to save, is the desire of bettering
our condition, a desire which, though generally calm and dispassionate,
comes with us from the womb, and never leaves us till we go
into the grave.… An augmentation of fortune is the means by
which the greater part of men propose and wish to better their condition.
It is the means the most vulgar and the most obvious; and
the most likely way of augmenting their fortune, is to save and
accumulate some part of what they acquire.” This desire is so
powerful that even the greatest follies perpetrated by Governments
have never succeeded in annulling its beneficial effects. “The
uniform, constant, and uninterrupted effort of every man to better
his condition, the principle from which public and national as well
as private opulence is originally derived, is frequently powerful
enough to maintain the natural progress of things toward improvement,
in spite both of the extravagance of government, and of the
greatest errors of administration. Like the unknown principle of
animal life, it frequently restores health and vigour to the constitution,
in spite, not only of the disease, but of the absurd prescriptions of
the doctor.”[168]
But the idea of the spontaneity of economic institutions finds its
most interesting illustration in the theory of demand and supply,
upon which we must dwell a little.
In a society based upon division of labour, where everyone
produces for a market without any previous arrangement with his
fellow producers and without any external direction, the great difficulty
lies in adapting the amount of goods supplied to the amount
demanded. How, as a matter of fact, are these producers to know
at any particular moment what they ought to produce and in what
quantities? Moreover, who is to direct and who can restrain
them? It is true that Smith was careful to point out that they are
not concerned with the satisfaction of all needs, of whatever kind
they may be. Their duty lies towards what he calls the “effectual,”
not the “absolute,” demand. By effectual demand we are to understand
the demand of those who are capable of offering not merely
something in exchange for the products which they desire, but of
offering at least enough to cover the expenses of raising those
products.[169] Society founded upon division of labour and exchange
implies that nothing can be gratuitous and every loss involves a
sacrifice on the part of some person or other.[170] But if production is
carried on in this haphazard fashion how are we to avoid an
occasional over-production or an accidental under-supply?
Before we can understand this we must acquaint ourselves with
Adam Smith’s theory of prices.
In the preceding chapter we had occasion to note how Condillac
in 1776 put forward a theory of value which was altogether superior
to the Physiocrats’. Smith’s book, also published in 1776, betrays
not the least sign of Condillac’s influence, and the new theory never
comes up for discussion. The very success of the Wealth of Nations
had eclipsed the fame of the French philosopher, and Smith’s theory,
though quite inferior to Condillac’s, held the field for so many years
simply because it won the allegiance of the English economists, whose
influence was paramount throughout the first half of the nineteenth
century. Its popularity only waned with the publication of the
works of Walras, Jevons, and Menger. Its historic interest is further
enhanced by the fact that it had the singular good fortune to win
the approval both of the socialists and the Liberal economists. It
is the fate of writers like Smith, remarkable for wealth of ideas
rather than for logical presentation, to impel minds along different
and sometimes even opposite paths. Unfortunately the theory of
value is not the only one that presents a somewhat hazy outline.
We cannot here enter into the details of the theory, but must content
ourselves with a mere sketch of it. Even this, however, will immediately
enable us to understand its insufficiency, and appreciate the
twofold influence which it exercised upon subsequent doctrines.
Smith opens his treatment by emphasising the fundamental
distinction which exists between “value in use” and “value in
exchange.”[171] By value in use he means almost[172] exactly what we
understand by utility, or what other writers call subjective value,
desirability, or ophelimity.
Present-day economists when treating of prices—the exchange
value of things—chiefly rely upon this conception of “value in use.”
The explanation of the “ratio of exchange” of commodities is based
upon a previous analysis of their utility for those who exchange
them. Smith proceeds in a different fashion. “Value in use” is
mentioned, but only for the purpose of contrasting it with value in
exchange. It is then dismissed without further consideration. The
two notions seem to have no point of contact. Value in exchange
was the only one that was of any interest to Smith; hence there
was all the more reason for denying its derivative character.[173]
Thus from the very first the only avenue that might have led to a
satisfactory solution of this problem of prices was closed. One could
easily have predicted that this was bound to land Smith in difficulty;
as a matter of fact he is doubly involved.[174] Two different but equally
erroneous solutions have been successively adopted by him, but he
has never actually decided between them. The socialists and
economists who are to follow will be engaged in the same task, and
the cleavage between them will be marked by their adoption of one
or other of these two theories.
Smith was led to the study of prices because he wished to know
something of the constant oscillation which is such a feature of their
history. The actual or market price is unstable because of the
unstable connection between demand and supply,[175] or, as he puts it,
“It is adjusted, however, not by any accurate measure, but by
the higgling and bargaining of the market, according to that sort of
rough equality which, though not exact, is sufficient for carrying on
the business of common life.”[176] It seemed impossible that their
perpetual fluctuation should represent the true value of the commodity.
Its real value could not vary from this moment to the
next or from one place to another. Underneath the constantly
oscillating market price may be discerned another price, referred to
by Smith as the real or sometimes as the natural price. The
discovery of a more stable and a more constant element beneath the
continual fluctuations of price movements still constitutes the great
problem of pure economics.[177]
Smith’s first theory makes the true value of any commodity
depend upon the amount of labour or effort it has taken to produce.
“Labour, therefore, is the real measure of the exchangeable value
of all commodities.” “The real price of every thing, what every thing
really costs to the man who wants to acquire it, is the toil and trouble
of acquiring it.”[178] Labour—that is, the effort expended upon the
production of a commodity—is both the origin and the measure of
its exchange value. The theory that labour or effort is the cause
of value (if value can be said to have a cause) was first formulated
by the father of political economy himself. It is curious to think
that it was this same theory that was used with such good effect by
Karl Marx in his attack upon capitalism.
This first attempt to find a firmer foundation for exchange value
than that afforded by the shifting sands of demand and supply was
scarcely made before Smith became aware of some difficulties in the
path. For example, how was this work and the value dependent
upon it to be measured? “There may be more labour in an hour’s
hard work than in two hours’ easy business; or in an hour’s application
to a trade which it cost ten years’ labour to learn, than in a
month’s industry at an ordinary and obvious employment. But it
is not easy to find any accurate measure either of hardship or
ingenuity.”[179] A second objection arises when the theory is applied
to civilized society. Work by itself cannot produce anything;
something must be contributed by both land and capital. But
neither of these is a free good, and they must cost something to those
who employ them. Accordingly primitive societies[180] are the only
ones where “the quantity of labour commonly employed in acquiring
or producing any commodity is the only circumstance determining
its value.” We must nowadays take some account of land and
capital. So that labour is not the only source of value, nor is it
its sole measure.
Another hypothesis becomes necessary forthwith. This time cost
of production is hit upon as the likely regulator of value. Hitherto
the “real” price has signified the price that is based upon labour.
Now the “natural” price is defined as the price of goods valued at
their cost of production. The change of name is not of any great
significance. What Smith was in search of on both occasions was
that true value which always kept in hiding behind the fluctuations
of market prices. It is the same problem, but with a new solution.
Just now we were informed that if a commodity sold at a price
representing the labour which it cost to produce, that price would
also represent its real cost. With no less assurance we are now told
that a commodity sold at cost of production “is then sold precisely
for what it is worth, or for what it really costs the person who brings
it to market.”[181] The true value of goods corresponds to their cost of
production. By this we are to understand a sum sufficient to pay
at normal rates the wages of labour, the interest of capital, and the
rent of land, all of which have collaborated in the production of
the particular commodity.
Smith, having discarded labour, finds a new determinant of value
in cost of production, and if socialists rallied to his first hypothesis
the great majority of economists right up to Jevons have clung to
his second. As for Smith himself, he never had the courage to
choose between them. They remain juxtaposed in the Wealth of
Nations because he never made up his mind which to adopt. As a
result his work is full of contradictions which it would be futile to
try to reconcile. For example, land and capital in one place are
regarded as sources of new values, adding to and increasing the value
which labour creates, and producing normally an element of profit
and rent, which, together with the wages of labour, makes up the
cost of production. In another connection they are treated as
deductions made by capitalists and landlords from the value created
by labour alone.[182] Some writers accordingly argue that Smith must
have been a socialist. On the whole the cost of production theory
prevailed, and the natural price of commodities is taken to mean
that price which coincides with their cost of production. As to
market price, he makes the remark that it is higher or lower than the
natural price according as the quantity offered diminishes or increases
as compared with the quantity demanded.
Such is Smith’s theory of prices. The element of truth which it
contains, namely, that the prices of goods tend to coincide with their
cost of production (the remark is not originally Smith’s at all), must
not blind us to its many faults. It is open to at least two very
serious objections.
An attempt is made to explain the price of goods by referring
to the price of the services (wages, interest, and rent) which make up
the cost of production. When the cost of those services comes up
for consideration it is assumed that their cost is dependent upon the
price of the goods. Wages, for example, are determined by the
selling price of the commodities which labour has produced. Escape
from the vicious circle is only possible by availing ourselves of the
modern theory of economic equilibrium. That theory shows us
how prices generally, whether of goods or of services, are interdependent;
all being determined simultaneously—like the unknown
in an algebraical formula—just when the exchange is taking place.
But this theory of economic equilibrium was, of course, unknown to
Smith.
Cost of production being the regulator of price, it is very
important that an analysis of cost of production and a study of the
causes which determine the rates of wages, profit, and rent should be
made. One might have expected that this study would have cleared
away any obscurity that still clung to the theory of prices. But
this analysis is one of the least satisfactory portions of Smith’s work.
We have already had occasion to note the unsatisfactory character
of his theory of rent. That of profits—which Smith fails to distinguish
from interest—is equally useless;[183] and his theory of wages
is hopelessly inconsistent. He hesitates between the subsistence
theory of wages and the other theory which makes them depend
upon the relations between demand and supply, without ever making
a final choice.
We cannot agree with Say in considering Smith’s theory of
distribution one of his best claims to fame. His treatment of this
problem, which afterwards became the kernel of Ricardian economics,
is altogether inferior to his handling of production. We also know
that this is the least original part of his work. It was simply added
as a kind of afterthought, the original intention being to deal
only with production. This becomes evident if we compare the
Wealth of Nations with the Glasgow course of 1763, the whole of
which is devoted to production. The addition of a theory of
distribution to the original skeleton was probably due to the
Physiocrats, with whom in the meantime he had become acquainted;
and the hesitations and uncertainties which mar this part of the
work merely go to prove that Smith had not thought it out as
clearly as the other sections.
The subject cannot be pursued here. We can only point to the
inference which Smith draws from his theory of value, and how it is
made to support the contention that demand adapts itself spontaneously
to the conditions of supply. This is how Smith explains
the continual oscillation of prices: “When the quantity brought to
market exceeds the effectual demand, it cannot be all sold to those
who are willing to pay the whole value of the rent, wages and profit,
which must be paid in order to bring it thither. Some part must be
sold to those who are willing to pay less, and the low price which
they give for it must reduce the price of the whole. The market
price will sink more or less below the natural price according as the
greatness of the excess increases more or less the competition of the
sellers, or according as it happens to be more or less important to
them to get immediately rid of the commodity.” The reverse will
happen when demand exceeds supply. “When the quantity brought
to market is just sufficient to supply the effectual demand and no
more, the market price naturally comes to be either exactly, or as
nearly as can be judged of, the same with the natural price. The
whole quantity upon hand can be disposed of for this price, and
cannot be disposed of for more. The competition of the different
dealers obliges them all to accept of this price, but does not oblige
them to accept of less.” Thus “the quantity of every commodity
brought to market naturally suits itself to the effectual demand.”[184]
And this very remarkable result is simply the outcome of personal
interest. “If at any time it exceeds the effectual demand, some of
the component parts of its price must be paid below their natural
rate. If it is rent, the interest of the landlords will immediately
prompt them to withdraw a part of their land; and if it is wages or
profit, the interest of the labourers in the one case, and of their
employers in the other, will prompt them to withdraw a part of
their labour or stock from this employment. The quantity brought to
market will soon be no more than sufficient to supply the effectual
demand. All the different parts of its price will rise to their natural
rate, and the whole price to the natural price.”
And so, in the majority of cases at least, this natural and spontaneous
mechanism secures a constant balancing of the quantities of
goods produced and the quantities effectively demanded. The
circumstances under which such a result does not follow are really
quite exceptional—although Smith does not deny that sometimes
they do exist. Whenever such conditions obtain—that is, when the
market price remains for a considerable length of time above the
natural price—we find that it is always due to the capitalists’ action
in concealing the high rate of profits which they draw, or in retaining
possession of some patent or natural monopoly, such as wine of a
special quality. It occasionally happens also as the result of an
artificial monopoly.[185] But these are mere exceptions, their rare
occurrence confirming the fundamental rule concerning the spontaneous
adaptation of the quantity offered to the quantity demanded,
thanks to this oscillation of the market price about the natural.
This theory of adaptation, we know, is one of the most important
in the whole of political economy. Since Smith wrote it has been
reproduced by almost every economist, and without any very
substantial alteration. It remains even to this day the basis of our
theory of production.
It is interesting to note the manner in which Smith makes use of
his theory to illustrate his thesis. We shall refer to two cases which
are intrinsically important as well as affording admirable illustrations
of that spontaneity upon which Smith laid such stress.
The first concerns population. Population, like commodities,
may be superabundant or it may be insufficient. What regulates its
numbers? “The number of people,” Smith replies, “depends upon
the demand of society, and this is how it works. Among the
proletariat, generally speaking, children are plentiful enough. It is
only when wages are very low that poverty and misery cause the
death of many of them; but when wages are fairly high several of
them manage to reach maturity.” “It deserves to be remarked,
too,” he continues, “that it necessarily does this as nearly as
possible in the proportion which the demand for labour requires. If
this demand is continually increasing, the reward of labour must
necessarily encourage in such a manner the marriage and multiplication
of labourers as may enable them to supply that continually
increasing demand by a continually increasing population. If the
reward should at any time be less than what was requisite for this
purpose, the deficiency of hands would soon raise it; and if it should
at any time be more, their excessive multiplication would soon lower
it to this necessary rate. The market would be so much under-stocked
with labour in the one case, and so much over-stocked in the other, as
would soon force back its price to that proper rate which the circumstances
of the society required. It is in this manner that the demand
for men, like that for any other commodity, necessarily regulates the
production of men; quickens it when it goes on too slowly, and
stops it when it advances too fast.”[186]
The second case relates to the demand for money and its supply.
We have already seen how the problem of its origin is solved.
Alongside of that problem is now placed another, namely, how
is the quantity in circulation regulated to meet the requirements
of exchange? Smith’s first task was to expose the popular fallacy
concerning this topic.[187] According to one school of thinkers, money
was wealth par excellence, and it was all the more important that he
should get rid of this view seeing that it constituted the very
foundation of the Mercantile theory, the overthrow of which was the
immediate object in publishing the Wealth of Nations. The Mercantilists
contended that a country should export more than it imports,
receiving the balance in money. If it can be proved that this balance
is useless because money is a mere commodity possessing no greater
and no less utility than any other, then the Mercantilist foundation
is completely destroyed. Smith thought that money was less
indispensable than some other goods, seeing that we are anxious to
pass it on as often as we can. The disdain with which Smith
regarded money was the result of a reaction against Mercantilism,
and it led some of his followers to over-emphasise his point of view
and to misconceive the special character of monetary phenomena.
A nation’s true wealth “consists,” Smith tells us, “not in its gold
and silver only, but in its lands, houses, and consumable goods of
all different kinds.”[188] “It is the annual produce of the land and
labour of the society.”[189] Hence in evaluating a country’s net revenue
we must omit money because it is not consumed. It only serves
as an instrument for the circulation of wealth and for the measurement
of value. It is the “great wheel of circulation.”[190] In virtue
of this title, although Smith himself classed money along with circulating
capital, he remarks that it might be likened to the fixed
capital of an industry, to machinery or workshops. The greater the
economy in the use of fixed capital, provided there is no diminution
in production, the better, for the larger will be the net product.
This is equally true of money—a necessary but a very costly instrument
of social production. “Every saving in the expence of collecting
and supporting that part of the circulating capital which consists
in money is an improvement of exactly the same kind”[191] as that
which reduces the fixed capital of industry.[192]
This is why bank-notes—the circulation of which diminishes the
quantity of money needed—have proved such a precious invention.
What they do is to set free a certain quantity of gold and silver which
may be sent abroad to pay for machinery and other instruments of
production, and which will in turn increase the true revenue of the
country. Smith’s parable in which he illustrates these advantages,
has long since become classic: “The gold and silver money which
circulates in any country may very properly be compared to a highway,
which, while it circulates and carries to market all the grass
and corn of the country, produces itself not a single pile of either.
The judicious operations of banking, by providing, if I may be
allowed so violent a metaphor, a sort of waggon-way through the
air; enable the country to convert, as it were, a great part of its
highways into good pastures and cornfields, and thereby to increase
very considerably the annual produce of its land and labour.”[193]
The conclusion is that every policy—the Mercantilist, for example—which
aims at increasing the quantity of money within the country,
whether by direct or indirect methods, is absurd, for money, far
from being indispensable, is really an encumbrance.
It is not only absurd, but also useless. Have we not seen already
that money is a mere commodity designed to facilitate circulation
and that the demand for it is entirely determined by that object?
But the supply of any commodity usually adapts itself spontaneously
to the demand for it. No one concerns himself with supplying the
nation with wine or with crockery. Why trouble about money?[194]
If the quantity of goods diminishes, exchange slackens and a part
of the money becomes useless. But “the interest of whoever
possesses it requires that it should be employed.”[195] Accordingly
“it will, in spite of all laws and prohibitions, be sent abroad, and
employed in purchasing consumable goods which may be of some
use at home.”
On the other hand, as the prosperity of a nation grows it necessarily
attracts the precious metals because a multiplication of
exchanges leads to a growing demand for money. These exportations
and importations will depend, as Hume[196] had already shown,
upon the relative cheapness or dearness of money. What is true
of metallic money is also true of a special kind of money known
as bank-notes. Smith has given us a vivid description of the functions
of banks, and especially of the fortunes of the most famous bank of
this period, the Bank of Amsterdam. This afforded him another
opportunity of demonstrating how the quantity of notes offered
spontaneously adapts itself to the quantity demanded. If banks
issue more notes than the circulation warrants prices will rise. Buying
from foreign countries will be resorted to and the notes will be
returned to the banks to be exchanged for gold and silver—the only
international money. The banks clearly have no interest in issuing
too many notes, because it involves a greater metallic reserve as
the result of the more frequent demands for payment which they
will have to face. Of course, “every particular banking company
has not always understood or attended to its own particular interest,
and the circulation has frequently been over-stocked with paper
money.”[197] But this does not affect the main principle, and we have
one further proof of the spontaneous activity of the economic
mechanism.
We have now reviewed some of Smith’s principal themes, and we
have seen how every phenomenon impresses him in the same fashion.
Had space permitted we might have cited other examples all pointing
to the same conclusion.[198] This conception of spontaneity and wise
beneficence is by no means the product of mere a priori thinking. It
was no abstract theory that needed the backing of a rigid demonstration.
It was a belief gradually borne in upon him in the course of
his review of the economic field. This is characteristic of all his
thought, and with every new vista we are reminded of it. The
conclusion is hinted at again and again, and the impression left upon
the reader’s mind is that no other conclusion could ever be possible.
Smith thought of the economic order as an organism—the creation
of a thousand human wills unconscious of the end whither they are
tending, but all of them obedient to the impulse of one instinctive,
powerful force. This force, the root of all economic activity, its
constancy and uniformity triumphant over every artificial obstacle
and giving unity to the whole system, what is it?
We have already encountered it on more than one occasion. It
is personal interest, or, as Smith prefers to call it, “the natural effort
of every individual to better his own condition.”[199] Hidden deep in
the heart of every individual lies this essential spring of human life
and social progress.
Doubtless it is not the only one. Smith is never exclusive. He
knew that there were other passions[200] besides self-interest, and he is
not afraid of naming them, as when he attributes an economic
revolution which had such beneficial effects as the emancipation of
the rural classes to “the most childish vanity of proprietors.”[201]
Neither did he omit to point out that personal interest is not equally
strong in the breast of every one, and that there is the greatest
diversity in human motives. All this he had forgotten, according to
some of his critics, while others charge him with the creation of the
homo œconomicus, a poor representation of reality and a mere automaton
exclusively guided by material interests. Someone has
remarked that if you add to this figure a tinge of patriotism you have
a faithful picture of the Englishman and Scotsman of his day. Had
he been acquainted with Germans or Frenchmen, with their less
sordid attachment to material gain, he might have judged differently.
It may be that our reading of him is incorrect. He seems to have
taken care to note that his remarks do not apply to all, but only
to the generality of men. He continually recalls the fact that
he is speaking of men of common understanding,[202] or of those gifted
with common prudence.[203] He knew well enough that the principles
of common prudence do not always govern the conduct of every
individual, but he was of opinion that they always influenced
that of the majority of every class and order.[204] His reasoning is
applicable to men en masse, and not to individuals in particular.
Moreover, he does not deny that man may be unacquainted with
or may even entirely ignore his own interest. We have just quoted
a passage wherein he remarks that bankers who temporarily issue too
many notes are at that moment ignorant of their own interests.
These reservations notwithstanding, and full account being taken
of all the exceptions to the principle as laid down by Smith, it is still
true to say that as a general thesis he considers “the natural effort
of every individual to better his own condition”—that is, personal
interest—as the fundamental psychological motive in political
economy. Any reference to the case of business men who are really
actuated by a desire to take general welfare as their guide in matters
of conduct is treated with a measure of scepticism which it is difficult
not to share. “I have never known much good done by those who
affected to trade for the public good. It is an affectation, indeed,
not very common among merchants, and very few words need be
employed in dissuading them from it.”[205] Not that sentiment does
not play a part, and a very important part, in the philosophy of
Smith; but sentiment, or sympathy, as he calls it, has the domain
of morality for its own, while interest dominates that of economics.
All his thinking led him to a firm belief in a spontaneous economic
order founded and guided by self-interest.
Comparison with the Physiocratic doctrine concerning the
natural and essential order of societies is illuminating. To the
Physiocrats the “natural order” implied a system—an ideal. It
required a genius to discover it, and only an enlightened despotism
could realise it. For Smith the “spontaneous order” was a fact.
It was not a thing to be brought into being. It already existed. It
was doubtless held in check by a hundred imperfections, including,
among others, the stupidity of human legislation.[206] But it was
triumphant over them all. Beneath the artificial constitution of
society lay the natural constitution which completely dominated it.
This natural constitution, which for the Physiocrats was nothing
more than an ideal, Smith discovered in actual operation, and he was
able to describe its modus operandi. Political economy, which with
Quesnay was nothing better than a system of rules and regulations,
became in Smith’s hands a natural science based upon the observation
and analysis of existing facts. In a passage written in his usual
lucid style Smith shows the superiority of his system over that of the
Physiocrats. “Some speculative physicians seem to have imagined
that the health of the human body could be preserved only by a
certain precise regimen of diet and exercise, of which every, the
smallest, violation necessarily occasioned some degree of disease or
disorder proportioned to the degree of the violation.… Mr.
Quesnai, who was himself a physician, and a very speculative physician,
seems to have entertained a notion of the same kind concerning
the political body, and to have imagined that it would thrive and
prosper only under a certain precise regimen, the exact regimen of
perfect liberty and perfect justice. He seems not to have considered
that in the political body, the natural effort which every man is
continually making to better his own condition, is a principle of
preservation capable of preventing and correcting, in many respects,
the bad effects of a political œconomy in some degree both partial
and oppressive. Such a political œconomy, though it no doubt retards
more or less, is not always capable of stopping altogether the natural
progress of a nation towards wealth and prosperity, and still less of
making it go backwards. If a nation could not prosper without the
enjoyment of perfect liberty and perfect justice, there is not in the
world a nation which could ever have prospered. In the political
body, however, the wisdom of nature has fortunately made ample
provision for remedying many of the bad effects of the folly and
injustice of man; in the same manner as it has done in the natural
body, for remedying those of his sloth and intemperance.”[207]
This passage leads us to his second thesis, namely, the excellence
of these economic institutions. As we have already remarked, these
two ideas of spontaneity and excellence, though confused by Smith,
ought to be treated apart. His naturalism and optimism are
inseparable, and both of them find expression in the same paragraph.
The passage just quoted affords a proof of this. Personal interest
not only creates and maintains the economic organism, but at the
same time ensures a nation’s progress towards wealth and prosperity.
The institutions are not only natural, but are also beneficial. They
interest him not merely as objects of scientific curiosity, but also as
the instruments of public weal. Herein lies their chief attraction
for him, for political economy to him was more of a practical art
than a science.[208]
But this is hardly emphatic enough. Natural economic institutions
are not merely good: they are providential. Divine Providence
has endowed man with a desire to better his condition,
whence arises the “natural” social organism: so that man, following
where this desire leads, is really accomplishing the beneficent designs
of God Himself. By pursuing his own interest, man “is in this as
in many other cases” (he is writing now of the employment of
capital) “led by an invisible hand to promote an end which was no
part of his intention.”[209] The Physiocrats could hardly have improved
upon that.
We can scarcely share in his optimism to-day. But it has played
too prominent a rôle in the history of ideas not to detain us for a
moment. We must examine the arguments upon which it is based
and endeavour to grasp their import.
Let us note, in the first place, that every example hitherto deduced
with a view to proving the spontaneity of economic institutions at
the same time furnishes a demonstration of the beneficial effects of
personal interest. Owing to a coincidence by no means fortuitous
every institution mentioned by Smith as owing its existence to the
prevalence of action of this kind is at the same time favourable to
economic progress. Division of labour, the invention of money, and
the accumulation of capital are so many natural social facts that
also increase wealth. The adaptation of demand and supply, the
distribution of money according to the need for a circulating medium,
the growth of population according to the demand for it, are so
many spontaneous phenomena which ensure the efficient working of
economic society. A perusal of Smith’s work leaves us with the
impression that these spontaneous institutions must also be the
best.
The general proof of this thesis is scattered throughout the
whole book. But there was one point especially upon which Smith
was very anxious to show complete accord between public and
private interest. This was in connection with the investment of
capital. In his opinion capital spontaneously seeks, and as spontaneously
finds, the most favourable field for investment—most
favourable, that is to say, to the interest of society in general. This
proof at first sight seems to apply only to one special fact, but
it really has a more general import. We know the great stress
which Smith laid upon capital. Division of labour depends upon
it, and so does the abundance or scarcity of produce. It determines
the quantity of work and fixes the limit of population. To show
that the investment of capital conforms to the general interest is to
show that all production is organised in the manner most favourable
to national prosperity.
Smith distinguishes between four methods of investing capital:
in agriculture, in industry, in the wholesale and in the retail trades.
Wholesale industry is further divided into three classes: domestic
trade; foreign trade, furnishing the nation with foreign products;
and the carrying trade which transports those goods from one country
to another. Smith maintained that the order in which these various
forms of activity were mentioned was also the order of their utility,
agriculture being the most advantageous, industry the second
best, etc.
He also proposes two criteria for testing this hierarchy: (1) the
quantity of productive labour put into operation by means of the
capital employed by each; (2) the amount of exchange value
annually added to the revenue by each of these employments. As
we pass from agriculture to the other branches, the quantity of
productive labour brought into operation and the amount of exchange
value obtained gradually decreases, and with this decrease goes a
diminishing utility for the country. Smith thought that a nation
ought to employ its capital in the way he had suggested. It ought
to give the preference to agriculture, and engage in the other
branches only as the accumulation of capital permitted.
But this is precisely what the capitalists would do were they
entirely free. Every one of them, in fact, is interested in keeping
his capital as near home as possible, with a view to better supervision.
Only as a last resource does he venture to engage in foreign
commerce. Again, even among the industries carried on in his own
country every capitalist will preferably choose that which will result
in the production of the greatest exchange value, seeing that his profit
varies with the amount of this exchange value. His investments
will accordingly be made in the order mentioned, an order which
roughly corresponds to the greater or lesser quantity of exchange
values produced by each industry. And finally, when contemplating
investment in foreign trade he will for the same reason follow the
order specified above—the order of greatest general utility. Thus the
double desire of keeping one’s capital within one’s reach and of
finding for it the most lucrative field of investment leads every
capitalist to employ his capital in the fashion which is most advantageous
for the nation. Such is the argument, whatever its value.
Even if we adopted his criteria it is obvious that his classification
is altogether too arbitrary. How, for example, can we justify the
statement that an industrial enterprise or the carrying trade employs
less capital than agriculture? The exact contrary would be nearer
the truth, and agriculture ought to be given a much more modest
position. Moreover, the conception of such a hierarchy does not
accord very well with the theory of division of labour, which seeks
to put the various forms of human activity more nearly on an
equality.
As a matter of fact we cannot even accept a criterion which takes
the amount of exchange values furnished by an industry as the test
of its social utility. This increase in the quantity of exchange values
simply proves that the demand for the goods concerned is stronger
than the demand for some others. When capital flows into
certain industries it only points to the spontaneous satisfaction of
social demand. But social demand and social utility are not
necessarily the same. Demand is the outcome of human desires,
and its intensity depends upon the revenue drawn by the individual.
But we can neither regard these desires in themselves or the system
of distribution that makes such desires “effective” as sufficient tests
of social utility. And to say that production follows demand is to
prove nothing at all. Smith himself seems to have realised this;
hence his other criterion—the quantity of productive labour employed
by capital. According to this test those industries that
employ the least amount of machinery and the greatest amount of
hand labour are the most useful—quite an untenable view.
A demonstration of a somewhat similar character has been
attempted by the Hedonistic school. They have shown how free
competition always tends to direct production into such channels as
will result in maximum utility, or, in other words, that it affords the
best method of satisfying the actual demands of the market. But
they have been very careful to note that social utility and ophelimity
are two very different expressions that must never be confused,
and that they have failed to find any scientific test of social utility.
Smith’s argument is unsatisfactory, and its foundation untrustworthy.
We do not forget that his optimism is based not so
much upon this specious demonstration as upon the great number
of observations which he had occasion to make in the course of his
work. This idea of a harmony between private interest and the
general well-being of society was not put forward as a rigidly demonstrable
a priori theory, open to no exceptions. It was rather a
general view of the whole position—the conclusion drawn from
repeated observations, the résumé of a detailed inquiry which
had covered every corner of the economic field. A particular process
of reasoning may have helped to confirm this conclusion, but the
reasoning itself was largely based upon experience, the universal
experience of history. It was the study of this experience that led
to the discovery of a “vital” principle of health and progress in the
“body social.” Smith would have been the first to oppose the
incorporation of his belief in any dogma. He was content to say
that “most frequently” and in a “majority of cases” general
interest was satisfied by the spontaneous action of private interest.
He was also the first to point out instances—in the case of merchants
and manufacturers, for example—where the particular and the
general interest came into conflict. We might cite many characteristic
passages in which he takes pains to qualify his optimism.
Absolute his optimism was not, neither was it universal. In fact,
it would not be difficult to prove that it was never intended to apply
to anything other than production. Nowhere does the great Scotch
economist pretend that the present distribution of wealth is the justest
possible—a trait that distinguishes him from the optimists of Bastiat’s
school. His optimism deserted him when he reached that portion of
his subject. On the contrary, he showed that landed proprietors as
well as capitalists “love to reap where they have not sown,” that inequalities
in social position give masters an advantage in bargaining
with their men.[210] In more than one passage he speaks of interest and
rent as deductions from the produce of labour.[211] Smith, indeed,
might well be regarded as a forerunner of socialism. There is no
difficulty in believing, so far as the experience of old countries goes,
that “rent and profit eat up wages and the two superior orders of
people oppress the inferior one.”[212]
It is especially important that we should make a note of the
opinions of those people who think that Smith intended his optimism
to extend to distribution as well as to production. As a matter
of fact he was too level-headed to entertain any such idea. Even
Say himself in the last edition of his Treatise expresses some doubts
as to the equity of the present system of distribution.[213] Smith
was not really concerned with the question at all. It is only at a
much later date, when the socialists had demonstrated the importance
of the problem, that we hear of this belief in the beneficence of
economic institutions. It really represents a reaction against the
socialistic teaching and an attempt at a justification of the present
methods of distribution.
We must beware of confusing Smith’s optimism with that of
modern Hedonism, or of identifying it with Bastiat’s answer to the
socialists. It lacks the scientific precision of the one and has none
of the apologetic tone of the other. It is little more than a reflection
prompted by the too naïve confidence of the eighteenth century in
the bounty of “nature,” and an expression of profound conviction
rather than the conclusion of a logical argument.
The practical conclusion to which naturalism leads and to which
Smith’s optimism points is economic liberty. So naturally does it
proceed from what we have just said that the reader finds himself
quite prepared for Smith’s celebrated phrases: “All systems either
of preference or of restraint, therefore, being thus completely taken
away, the obvious and simple system of natural liberty establishes
itself of its own accord. Every man, as long as he does not violate
the laws of justice, is left perfectly free to pursue his own interest
his own way, and to bring both his industry and capital into competition
with those of any other man, or order of men.” As to
the Government, or “sovereign,” as Smith calls him, “he is completely
discharged from a duty, in the attempting to perform which
he must always be exposed to innumerable delusions, and for the
proper performance of which no human wisdom or knowledge
could ever be sufficient; the duty of superintending the industry
of private people, and of directing it towards the employments
most suitable to the interests of the society.”
Smith, following the Physiocrats, but in a more comprehensive
and scientific fashion, finds himself driven to the same conclusion,
namely, the wisdom of non-intervention by the State in matters
economic.[214]
But here, as elsewhere in his work, the sense of the positive and
the concrete, so remarkable in Smith, prevents his being content
with a general demonstration. He is not satisfied with proving the
inefficiency of intervention as compared with the efficiency of those
institutions which are spontaneously created by society itself, but
he attempts to show that the State, by its very nature, is unfitted
for economic functions. His arguments have been the arsenal from
which the opponents of State intervention have been supplied with
ammunition ever since.
Let us briefly recall them.
“No two characters seem more inconsistent than those of trader
and sovereign.”[215] Governments are “always, and without any
exception, the greatest spendthrifts in the society.”[216] The reasons for
this are numerous. In the first place, they employ money which has
been gained by others, and one is always more prodigal of the wealth
of others than of one’s own. Moreover, the Government is too far
removed from the centres of particular industries to give them that
minute attention which they deserve if they are going to prosper.
“The attention of the sovereign can be at best but a very general and
vague consideration of what is likely to contribute to the better
cultivation of the greater part of his dominions. The attention of
the landlord is a particular and minute consideration of what is
likely to be the most advantageous application of every inch of
ground upon his estate.”[217]
This necessity for a thorough cultivation of the soil and for the
best employment of capital, for direct and careful superintendence,
is an idea to which he continually reverts. He regrets, among
other things, that the growth of public debts causes a portion of the
land and the national capital to pass into the hands of fund-holders,
who are doubtless interested in the good administration of a country,
but “are not interested in the good condition of any particular portion
of land, or in the good management of any particular portion
of capital stock.”[218]
Lastly, the State is an inefficient administrator because its agents
are negligent and thriftless, not being directly interested in administration,
but paid out of public funds. Should the administration
of the land pass into the hands of the State he exclaims that not a
fourth of the present produce would ever be raised, because of “the
negligent, expensive, and oppressive management of his factors and
agents.”[219] On the contrary, he proposes that the remainder of the
common land should be distributed among individuals. On this
point European Governments have followed his advice somewhat
too closely.[220] For the same reason—the necessity for stimulating
personal interest wherever possible—he commends, instead of a
fixed salary for public officers, payment by those who benefit by
their services, such payment in every case to be in strict proportion
to the zeal and activity displayed. This was to apply, for example,
to judges and professors.[221]
State administration is accordingly a pis aller, and intervention
ought to be strictly limited to those cases in which individual action
is impossible. Smith recognises three functions only which the State
can perform, namely the administration of justice, defence, “and,
thirdly, the duty of erecting and maintaining certain public works and
certain public institutions, which it can never be for the interest
of any individual, or small number of individuals, to erect and
maintain; because the profit could never repay the expence to any
individual or small number of individuals, though it may frequently
do much more than repay it to a great society.”[222]
We must beware, however, lest we exaggerate this point.
Although Smith, in the majority of cases, preferred individual action,
we must not conclude from this that he had unlimited confidence in
individuals. Smith’s individualism was of a particular kind. It
was not a mere blind preference for every private enterprise, for he
knew that industry frequently falls a prey to the spirit of monopoly.
“People of the same trade seldom meet together, even for merriment
and diversion, but the conversation ends in a conspiracy against the
public, or in some contrivance to raise prices.”[223] In order that a
private enterprise may be useful for the community two conditions
are necessary. The entrepreneur must be: (1) actuated by personal
interest; (2) his actions must by means of competition be kept
within the limits of justice. Should either of these two conditions
be wanting, the public would run the risk of losing as much by
private as they would by State enterprise.
Thus Smith throughout remains very hostile to certain collective
enterprises of a private nature, such as joint-stock companies,[224]
because of the absence of personal interest. The only exceptions
which he would tolerate are banks, insurance companies, and companies
formed for the construction or maintenance of canals or for
supplying great towns with water, for the management of such
undertakings can easily be reduced to a kind of routine, “or to such
a uniformity of method as admits of little or no variation.”[225]
His opposition to every kind of monopoly granted either to an
individual or to a company is even more pronounced. A whole
chapter is devoted to an attack upon the great trading companies
of the seventeenth and eighteenth centuries, which were created
with a view to the development of colonial trade, and of which the
East India Company was the most famous.
One other observation remains to be made. Non-intervention
for Smith was a general principle, and not an absolute rule. He was
no doctrinaire, and he never forgot that to every rule there are some
exceptions. An interesting list could be made, giving all the cases
in which, according to Smith, the legitimacy of State intervention
was indisputable—legal limitation of interest,[226] State administration
of the post-office, compulsory elementary education, State examinations
as a condition of entry into the liberal professions or to
any post of confidence whatever, bank-notes of a minimum value
of £5, etc.[227] In a characteristic phrase he gave expression to his
feeling on the question of restricting the liberty of banks. “Such
regulations may, no doubt, be considered as in some respects
a violation of natural liberty. But those exertions of the natural
liberty of a few individuals, which might endanger the security of
the whole of society, are, and ought to be, restrained by the laws
of all governments; of the most free, as well as of the most
despotical.”[228] Despite these reservations it is still very evident that
the whole of Smith’s work is a plea for the economic freedom of the
individual. It is an eloquent appeal against the Mercantilist policy
and a violent attack upon every economic system inspired by it.
On this point there is absolute agreement between the work done
by Smith in England and that carried on at the same time by the
Physiocrats in France. Both in foreign and domestic trade producers,
merchants, and workmen were hemmed in by a network of
restrictions either inherited from the traditions of the Middle Ages
or imposed by powerful party interests and upheld by false economic
theories. The corporations still existed in the towns; although their
regulations could not be applied to industries born after the passing
of Elizabeth’s famous law concerning apprenticeship. The Colbertian
system, with its mob of officials entrusted with the task of superintending
the processes of production, of examining the weight, the
length, and the quality of the material employed, was still a grievance
with the woollen manufacturers.[229] The fixing of the duration of
apprenticeship at seven years, the limitation of the number of
apprentices in the principal industries, the obstacles put in the way
of the mobility of labour by the Poor Law and by the series of
statutes passed since the reign of Elizabeth, fettered the movement
of labour and the useful employment of capital. Smith opposed
these measures with the whole of his energy. England, unlike
France, had fortunately escaped internal restrictions upon trade, but
the restraints placed upon foreign trade still kept England and
Ireland commercially separated. These checks upon foreign trade
proved as irksome in England as they did everywhere else. Manufactured
goods from foreign countries were heavily taxed or were
prohibited entrance altogether. Certain natural products, e.g. French
wine, were similarly handicapped; the importation of a number of
commodities necessary for national industry was banned; a narrow
and oppressive policy regarded the colonies as the natural purveyors
of raw materials for the mother-country and the willing buyers of its
manufactured goods. Against all this mass of regulations, destined,
it was thought, to secure the supremacy of England among other
commercial nations, Smith directed his most spirited onslaughts.
The fourth book of the Wealth of Nations is an eloquent and vigorous
attack upon Mercantilism, admirable alike for the precision and the
extent of its learning. It was this section of his work that interested
his contemporaries most. For us it would have been the least
interesting but for its theory of international trade and its criticism
of Protection in general. On this account, however, it is of considerable
importance in the study of economic doctrines.
In the struggle for Free Trade, as on other points, Smith was
forestalled by the Physiocrats. But again has he shown himself
superior in the breadth of his outlook. Physiocratic Liberalism was
the result of their interest in agriculture, foreign trade being of quite
secondary importance. Smith, on the other hand, considered foreign
trade in itself advantageous, provided it began at the right moment
and developed spontaneously.[230] Although his point of view is far
superior to that of the Physiocrats, even Smith failed to give us a
satisfactory theory. It was reserved for Ricardo and his successors,
particularly John Stuart Mill, to find a solid scientific basis for the
theory of international trade. The doctrine of the Scotch economist
is somewhat lame. But the hesitancy of a great writer is often
interesting, and some of his arguments deserve to be recalled.
Already in our review of his theory of money we have become
familiar with Smith’s criticism of the balance of trade theory. But
the balance of trade theory is not the whole of Protection, and we
find in Smith something more than its mere refutation. In the
first place, we have a criticism of Protectionism in general considered
in its Mercantilistic aspect, followed by an attempt to demonstrate
the positive advantages of international commerce.
The first criticism that he offers might be summed up in the
well-known phrase: “Industry is limited by capital.” “The general
industry of the society can never exceed what the capital of the
society can employ.” But Protection, perhaps, increases the quantity
of capital? No, “for it can only divert a part of it into a direction
into which it might not otherwise have gone.” But the direction
spontaneously given to their capital by individuals is the most
favourable to a country’s industry. Has not Smith demonstrated
this already? Protection, consequently, is not merely useless; it
may even prove injurious.[231]
The argument does not appear decisive, especially when we recall
the criticism of Smith’s optimism given above. To borrow an
expression of M. Pareto, it is the maximum of ophelimity and not
the maximum of utility that is realised by the capitalists under the
action of personal interest.
A second and a more striking argument shows the absurdity of
manufacturing a commodity in this country at a great expense,
when a similar commodity might be supplied by a foreign country
at less cost. “It is the maxim of every prudent master of a family,
never to attempt to make at home what it will cost him more to
make than to buy.… What is prudence in the conduct of every
private family, can scarce be folly in that of a great kingdom.”[232]
It is foolish to grow grapes in hothouses in Scotland when better
and cheaper can be got from Portugal or France. Everybody is
convinced of that. But a similar stupidity prevails when we are
hindered by tariffs from profiting by the natural advantages which
foreign nations possess as compared with ourselves. All “the
mean rapacity and the monopolizing spirit of merchants and manufacturers”[233]
was necessary to blind men to their true interests
on this point. According to Smith, there exists a natural distribution
of products among various countries, resulting in an advantage
to all of them. It is Protection that hinders our sharing in the
advantages. This is the principle known as the “territorial division
of labour.”
But the argument is inconclusive, for capital and labour do not
circulate from one nation to another in the same way as they do
within a country. The distribution of industry among the various
nations is regulated, not by absolute cost of production, but by
relative cost of production. The credit of having shown this belongs
to Ricardo.
Smith’s demonstration of the inconveniences of Protection is
incomplete, and we feel the incompleteness all the more when he
attempts to prove the advantages of international trade.
The real and decisive argument in favour of free exchange turns
upon a consideration of the consumer’s interests. Increased
utilities placed at his disposal mark the superiority of free exchange,
or as John Stuart Mill puts it, “the only direct advantage of foreign
commerce consists in the imports.”[234] With Smith this is the point
of view developed least of all. True, he wrote that “consumption
is the sole end and purpose of all production. But, in the
mercantile system, the interest of the consumer is almost constantly
sacrificed to that of the producer.”[235] This criticism, however, was
placed at the end of his examination of the Mercantilist system in
chap. 8 of Book IV. It is not found in the first edition of the
work, and was only added in the third.[236]
It is the point of view of the producer that Smith invariably adopts
when attempting to illustrate the advantages of international trade.[237]
Just now foreign trade seemed to afford a means of disposing of
a country’s surplus products, and this extension of the market, it
was argued, would lead to further division of labour and increased
productivity.[238] But one is led to ask why, instead of producing the
superfluous goods which it must export, it does not produce those
things which it is obliged to import.
Smith, being now desirous of showing that international trade
necessarily benefits both countries, bases his argument upon the
fact that the merchants in both countries must make a profit—i.e. get
an additional exchange value, which must be added to the others.
To this Ricardo justly replied that the profits of a merchant do not
necessarily increase the sum of utilities possessed by any country.
Here again, in striking contrast with the attitude of the Physiocrats,
Smith, despite himself, has championed his own adversaries.
As yet he is not sufficiently rid of Mercantilist prejudice not to be
concerned with the welfare of the producer, and in his great work
we find excellent argument and debatable points of view placed side
by side. It does not appear that he himself realised this incompatibility.
An irresistible tide was sweeping everybody before it
in the direction of a more liberal policy. It proved too powerful for
his contemporaries, who were not concerned to give a careful
consideration to every part of his thesis. Enough that they found
in him an ardent champion of an attractive cause.
We have already noticed more than once the hesitation which
Smith displays when he comes to apply his principle, and we must
again refer to it in this connection.
Theoretically a champion of absolutely free exchange, he mitigates
his belief in practice, and mentions an exception to his policy
which seemed to him a mere matter of common sense. “To expect,
indeed, that the freedom of trade should ever be entirely restored in
Great Britain, is as absurd as to expect that an Oceana or Utopia
should ever be established in it. Not only the prejudices of the
public, but what is more unconquerable, the private interests of
many individuals, irresistibly oppose it.”[239] Facts have belied this
prophecy, like many others. England of the nineteenth century
succeeded in realising this Utopia of free exchange—almost to
perfection.
Without any illusion as to the future, his condemnation of the
past was not altogether unqualified. He justified some of the acts
that were inspired by Mercantilism. “The act of navigation[240] is
not favourable to foreign commerce,” said he; “as defence,
however, is of much more importance than opulence, the act of
navigation is, perhaps, the wisest of all the commercial regulations
of England.”[241] In another instance he justifies an import duty
where a tax is levied upon goods similar to those imported. Here
an import duty merely restores that normal state of competition
which was upset by the imposition of the Excise. Retaliation as
a means of securing the abolition of foreign duties is not altogether
under his ban.[242] And he finally admits that liberty is best introduced
gradually into those countries in which industry has long enjoyed
Protection or where a great number of men are employed.[243]
His practical conclusion is somewhat as follows: Instead of
innumerable taxes which hinder importation and hamper production,
England ought to content herself with the establishment of a certain
number of taxes of a purely fiscal character, placed upon commodities
such as wine, alcohol, sugar, tobacco, cocoa. Such a
system, though perfectly consonant with a great deal of free exchange,
would yield abundant revenue to the Treasury, and would afford
ample compensation for the losses resulting from the introduction of
Free Trade.[244]
England has followed his advice, and her financial system is
to-day founded on these bases. Few economists can boast of such
a complete realisation of their projects.
The eighteenth century was essentially a century of levelling down.
In Smith’s conception of the economic world we have an excellent
example of this. Its chief charm lies in the simplicity of its outlines,
and this doubtless accounted for his influence among his contemporaries.
The system of natural liberty towards which both their
political and philosophical aspirations seemed to point were here
deduced from, and supported by, evidence taken direct from a study
of human nature—evidence, moreover, that seemed to tally so well
with known facts that doubt was out of the question. Smith’s work
still retains its irresistible charm. Even if his ideas are some day
shown to be untenable—a contingency we cannot well imagine—his
book will remain as a permanent monument of one of the most
important epochs in economic thought. It must still be considered
the most successful attempt made at embracing within a single
purview the infinite diversity of the economic world.
But its simplicity also constituted its weakness. To attain this
simplicity more than one important fact that refused to fit in with
the system had to remain in the background. The evidence employed
was also frequently incomplete. None of the special themes—price,
wages, profits, and rent, the theory of international trade or of
capital—which occupy the greater portion of the work, but has
been in some way corrected, disputed, or replaced. But the structure
loses stability if some of the corner-stones are removed. And new
points of view have appeared of which Smith did not take sufficient
account. Instead of the pleasant impression of simplicity and
security which a perusal of Smith’s work gave to the economists of
the early nineteenth century, there has been gradually substituted
by his successors a conviction of the growing complexity of
economic phenomena.
To pass a criticism on the labours of Adam Smith would be to
review the economic doctrines of the nineteenth century. That is
the best eulogy one can bestow upon his work. The economic ideas
of a whole century were, so to speak, in solution in his writings.
Friends and foes have alike taken him as their starting-point. The
former have developed, extended, and corrected his work. The latter
have subjected his principal theories to harsh criticism at every point.
All with tacit accord admit that political economy commenced
with him. As Garnier, his French translator, put it, “he wrought
a complete revolution in the science.”[245] To-day, even although the
Wealth of Nations may no longer appear to us as a truly scientific
treatise on political economy, certain of its fundamental ideas remain
incontestable. The theory of money, the importance of division of
labour, the fundamental character of spontaneous economic institutions,
the constant operation of personal interest in economic life,
liberty as the basis of rational political economy—all these appear
to us as definite acquisitions to the science.
The imperfections of the work will be naturally demonstrated
in the chapters which follow. In order to complete our exposition
of Smith’s doctrines it only remains to show how they were
diffused.
The rapid spread of his ideas throughout Europe and their
incontestable supremacy remains one of the most curious phenomena
in the history of ideas. Smith persuaded his own generation and
governed the next.[246] History affords us some clue. To attribute
it solely to the influence of his book is sheer exaggeration. A great
deal must be set to the credit of circumstances more or less fortuitous.
M. Mantoux remarks with much justice that “it was the American
War rather than Smith’s writings which demonstrated the decay of
the ancient political economy and compassed its ruin. The War
of Independence proved two things: (1) The danger lurking in
a colonial system which could goad the most prosperous colonies
to revolt; (2) the uselessness of a protective tariff, for on the very
morrow of the war English trade with the American colonies was
more flourishing than ever before. “The loss of the American
colonies to England was really a gain to her.” So wrote Say in
1803, and he adds: “This is a fact that I have nowhere seen disputed.”[247]
To the American War other causes must be added:
(1) The urgent need for markets felt by English merchants at the
close of the Napoleonic wars; they were already abundantly
supplied with excellent machinery. (2) Coupled with this was a
growing belief that a high price of corn as the result of agricultural
protection increased the cost of hand labour. These two reasons
were enough to create a desire for a general lowering of the customs
duties.
Subsequent events have justified Smith’s attitude on the question
of foreign trade. In the matter of domestic trade he has been less
fortunate.
The French Revolution, which owed its economic measures to
the Physiocrats, gave a powerful impulse to the principle of liberty.
The influence of the movement was patent enough on the Continent.
Even in England, where this influence was least felt; everybody was
in favour of laissez-faire. Pitt became anxious to free Ireland from
its antiquated system of prohibitions, and he succeeded in doing
this by his Act of Union of 1800. The regulations laid down by the
Elizabethan Statute of Apprentices, with its limitation of the hours
of work and the fixing of wages by justices of the peace, became more
and more irksome as industry developed. Every historian of the
Industrial Revolution has described the struggle between workers
and masters and shown how the former clung in despair to the old
legislative measures as their only safeguard against a too rapid
change, while the latter refused to be constrained either in the
choice of workmen or the methods of their work.[248] They wished to
pay only the wages that suited them and to use their machines as
long as possible. These repeated attacks rendered the old Statute
of Apprentices useless, and Parliament abolished its regulations one
after another, so that by 1814 all traces of it were for ever effaced
from the Statute Book.
But Smith did not foresee these things. He did not write with
a view to pleasing either merchants or manufacturers. On the
contrary, he was never weary of denouncing their monopolistic
tendencies. But by the force of circumstances manufacturers
and merchants became his best allies. His book supplied them
with arguments, and it was his authority that they always
invoked.
His authority never ceased growing. As soon as the Wealth of
Nations appeared, men like Hume, and Gibbon, the historian,
expressed to Smith or to his friends their admiration of the new
work. In the following year the Prime Minister, Lord North,
borrowed from him the idea of levying two new taxes—the tax on
malt and the tax on inhabited houses. Smith was yet to make
an even more illustrious convert in the person of Pitt. Pitt was a
student when the Wealth of Nations appeared, but he always declared
himself a disciple of Smith, and as soon as he became a Minister he
strove to realise his ideas. It was he who signed the first Free
Trade treaty with France—the Treaty of Eden, 1786.[249] When
Smith came to London in 1787, Pitt met him more than once
and consulted him on financial matters. The story is told that
after one of these conversations Smith exclaimed: “What an
extraordinary person Pitt is! He understands my ideas better than
myself.”
While Smith made converts of the most prominent men of his
time, his book gradually reached the public. Four editions in
addition to the first appeared during the author’s lifetime.[250] The
third, in 1784, presents important differences in the way of additions
and corrections as compared with the first. From the date of his
death in 1790 to the end of the century three other editions were
published.[251]
Similar success attended the appearance of the work on the Continent.
In France he was already known through his Theory of Moral
Sentiments. The first mention of the Wealth of Nations in France
appears in the Journal des Savants in the month of February, 1777.
Here, after a brief description of the merits of the work, the critic
gives expression to the following curious opinion: “Some of our
men of letters who have read it have come to the conclusion that it
is not a book that can be translated into our language. They point
out, among other reasons, that no one would be willing to bear the
expense of publishing because of the uncertain return, and a book-seller
least of all. They are bound to admit, however, that the work
is full of suggestions and of advice that is useful as well as curious,
and might prove of benefit to statesmen.” In reality, despite the
opinion of those men of letters, several translations of the work
did appear in France, as well as elsewhere in Europe. In little more
than twenty years, between 1779 and 1802, four translations had
appeared. This in itself affords sufficient proof of the interest which
the book had aroused.[252]
Few works have enjoyed such complete and universal success.
But despite admiration the ideas did not spread very rapidly.
Faults of composition have been burdened with the responsibility
for this, and it is a reproach that has clung to the Wealth of Nations
from the first. Its organic unity is very pronounced, but Smith
does not seem to have taken the trouble to give it even the semblance
of outward unity. To discover its unity requires a real effort of
thought. Smith whimsically regarded it as a mere discourse, and
the reading occasionally gives the impression of conversation. The
general formulæ which summarise or recapitulate his ideas are
indifferently found either in the middle or at the end of a chapter,
just as they arose. They represent the conclusions from what
preceded as they flashed across his mind. On the other hand, a
consideration of such a question as money is scattered throughout
the whole work, being discussed on no less than ten different occasions.
As early as April 1, 1776, Hume had expressed to Smith
some doubts as to the popularity of the book, seeing that its reading
demanded considerable attention. Sartorius in 1794 attributed to
this difficulty the slow progress made by Smith’s ideas in Germany.
Germain Garnier, the French translator, gave an outline of the
book in order to assist his readers. It was generally agreed that
the work was a striking one, but badly composed and difficult to
penetrate owing to the confused and equivocal character of some
of the paragraphs. When Say referred to it as “a chaotic collection
of just ideas thrown indiscriminately among a number of positive
truths,”[253] he expressed the opinion of all who had read it.
But a complete triumph, so far as the Continent at least was
concerned, had to be the work of an interpreter. Such an interpreter
must fuse all these ideas into a coherent body of doctrines,
leaving useless digressions aside.[254] This was the task that fell into the
hands of J. B. Say. Among his merits (and it is not the only one) is
that of popularising the ideas of the great Scotch economist on the
Continent, and of giving to the ideas a somewhat classical appearance.
The task of discrediting the first French school of economists and of
facilitating the expansion of English political economy fell, curiously
enough, to the hands of a Frenchman.
J. B. Say was twenty-three years of age in 1789.[255] At that time
he was Clavières’ secretary. Clavières became Minister of Finance
in 1792, but at this period he was manager of an assurance company,
and was already a disciple of Smith. Say came across some stray
pages of the Wealth of Nations, and sent for a copy of the book.[256]
The impression it made upon him was profound. “When we read this
work,” he writes, “we feel that previous to Smith there was no
such thing as political economy.” Fourteen years afterwards, in
1803, appeared Le Traité d’Économie politique. The book met with
immediate success, and a second edition would have appeared had
not the First Consul interdicted it. Say had refused to support the
Consul’s financial recommendations, and the writer, in addition to
having his book proscribed, found himself banished from the Tribunate.
Say waited until 1814 before republishing it. New editions rapidly
followed, in 1817, 1819, and 1826. The treatise was translated into
several languages. Say’s authority gradually extended itself; his
reputation became European; and by these means the ideas of
Adam Smith, clarified and logically arranged in the form of general
principles from which conclusions could be easily deduced, gradually
captivated the more enlightened section of public opinion.
It would, however, be unjust to regard Say as a mere populariser
of Smith’s ideas. With praiseworthy modesty, he has never
attempted to conceal all that he owed to the master. The master’s
name is mentioned in almost every line, but he never remains
content with a mere repetition of his ideas. These are carefully
reconsidered and reviewed with discrimination. He develops some
of them and emphasises others. Amid the devious paths pursued
by Smith, the French economist chooses that which most directly
leads to the desired end. This path is so clearly outlined for his
successors that “wayfaring men, though fools, could not err therein.”
In a sense he may be said to have filtered the ideas of the master, or
to have toned his doctrines with the proper tints. He thus imparted
to French political economy its distinctive character as distinguished
from English political economy, to which at about the same time
Malthus and Ricardo were to give an entirely new orientation.
What interests us more than his borrowing is the personal share
which he has in the work, an estimate of which we must now
attempt.
(1) In the first place, Say succeeded in overthrowing the work of
the Physiocrats.
The work of demolition was not altogether useless. In France
there were many who still clung to the “sect.” Even Germain
Garnier, Smith’s translator, considered the arguments of the Physiocrats
theoretically irrefutable. The superiority of the Scotch economist
was entirely in the realm of practice.[257] “We may,” says
he, “reject the Economistes’ theory [meaning the Physiocrats’]
because it is less useful, although it is not altogether erroneous.”
Smith himself, as we know, was never quite rid of this idea, for he
recognised a special productiveness of land as a result of the co-operation
of nature, and doctors, judges, advocates, and artists were
regarded as unproductive. But Say’s admission was the last straw.
Not in agriculture alone, but everywhere, “nature is forced to work
along with man,”[258] and by the funds of nature was to be understood
in future all the help that a nation draws directly from nature, be
it the force of wind or rush of water.[259] As to the doctors, lawyers,
etc., how are we to prove that they take no part in production?
Garnier had already protested against their exclusion. Such services
must no doubt be classed as immaterial products, but products none
the less, seeing that they possess exchange value and are the outcome[260]
of the co-operation of capital and industry. In other respects
also—e.g., in the pleasure and utility which they yield—services
are not very unlike commodities. Say’s doctrine meets with some
opposition on this point, for the English economists were unwilling
to consider a simple service as wealth because of its unendurable
character, and the consequent fact that it could not be considered
as adding to the aggregate amount of capital. But he soon wins
over the majority of writers.[261] Finally Say, like Condillac, discovered
a decisive argument against Physiocracy in the fact that the production
of material objects does not imply their creation. Man never
can create, but must be content with mere transformation of matter.
Production is merely a creation of utilities, a furthering of that
capacity of responding to our needs and of satisfying our wants
which is possessed by commodities; and all work is productive which
achieves this result, whether it be industry, commerce, or agriculture.[262]
The Physiocratic distinction falls to the ground, and Say
refutes what Smith, owing to his intimacy with his adversaries,
had failed to disprove.
(2) On another point Say carries forward Smith’s ideas, although
at the same time superseding them. He subjects the whole conception
of political economy and the rôle of the economist to a most
thorough examination.
We have already noticed that the conception of the “natural
order” underwent considerable modification during the period which
intervened between the writings of the Physiocrats and the appearance
of the Wealth of Nations. The Physiocrats regarded the “order”
as one that was to be realised, and the science of political economy
as essentially normative. For Smith it was a self-realising order.
This spontaneity of the economic world is analogous to the vitality
of the human body, and is capable of triumphing over the artificial
barriers which Governments may erect against its progress. Practical
political economy is based upon a knowledge of the economic constitution
of society, and its sole aim is to give advice to statesmen.
According to Say, this definition concedes too much to practice.
Political economy, as he thinks, is just the science of this “spontaneous
economic constitution,” or, as he puts it in 1814, it is a study
of the laws which govern wealth.[263] It is, as the title of his book
suggests, simply an exposition of the production, distribution, and
consumption of wealth. It must be distinguished from politics,
with which it has been too frequently confused, and also from
statistics, which is a simple description of particular facts and not a
science of co-ordinate principles at all.
Political economy in Say’s hands became a purely theoretical
and descriptive science. The rôle of the economist, like that of the
savant, is not to give advice, but simply to observe, to analyse, and
to describe. “He must be content to remain an impartial spectator,”
he writes to Malthus in 1820. “What we owe to the public is to
tell them how and why such and such a fact is the consequence of
another. Whether the conclusion be welcomed or rejected, it is
enough that the economist should have demonstrated its cause; but
he must give no advice.”[264]
In this way Say broke with the long tradition which, stretching
from the days of the Canonists and the Cameralists to those of the
Mercantilists and the Physiocrats, had treated political economy as
a practical art and a guide for statesmen and administrators. Smith
had already tried to approach economic phenomena as a scientist, but
there was always something of the reformer in his attitude. Say’s
only desire was to be a mere student; the healing art had no attraction
for him, and so he inaugurates the true scientific method. He,
moreover, instituted a comparison between this science and physics
rather than between it and natural history, and in this respect also
he differed from Smith, for whom the social body was essentially a
living thing. Without actually employing the term “social physics,”
he continually suggests it by his repeated comparison with Newtonian
physics. The principles of the science, like the laws of physics, are
not the work of men. They are derived from the very nature of
things. They are not established; they are discovered. They
govern even legislators and princes, and one never violates them with
impunity.[265] Like the laws of gravity, they are not confined within
the frontiers of any one country, and the limits of State administration,
which are all-important for the student of politics, are mere
accidents for the economist.[266] Political economy is accordingly
based on the model of an exact science, with laws that are universal.
Like physics, it is not so much concerned with the accumulation of
particular facts as with the formulation of a few general principles
from which a chain of consequences of greater or smaller length may
be drawn according to circumstances.
A delight in uniformity,[267] love of universality, and contempt for
isolated facts, these are the marks of the savant. But the same
qualities in men of less breadth of view may easily become deformed
and result in faults of indifference or of dogmatism, or even contempt
for all facts. And are these very faults not produced by
the stress which he lays upon these principles? Was not political
economy placed in a vulnerable position for the attacks of Sismondi,
of List, of the Historical school, and of the Christian Socialists
by this very work of Say? In his radical separation of politics
and economics, in avoiding the “practical” leanings of Adam
Smith, he has succeeded in giving the science a greater degree of
harmony. But it also acquired a certain frigidity which his less
gifted successors have mistaken for banality or crudity. Rightly
or wrongly, the responsibility is ascribed to Say.
(3) We have just seen the influence which the progress of the
physical sciences had upon Say’s conception of political economy;
but he was also much influenced by the progress of industry. Between
1776, the date of the appearance of the Wealth of Nations, and the
year 1803, when Say’s treatise appeared, the Industrial Revolution
had taken place. This is a fact of considerable importance for the
history of economic ideas.
When Say visited England a little before 1789, he found machine
production already in full swing there. In France at the same date
manufactures were only just beginning. They increased rapidly
under the Empire, and the progress after 1815 became enormous.
Chaptal in his work De l’Industrie française reckons that in 1819
there were 220 factories in existence, with 922,200 spindles consuming
13 million kilograms of raw cotton. This, however, only represented
a fifth of the English production, which twenty years later
was quadrupled. Other industries were developing in a similar
way. Everybody was convinced that the future must be along those
lines—an indefinite future it is true, but it was to be one of wealth,
work, and well-being. The rising generation was intoxicated at
the prospect. The most eloquent exposition of this debauchery will
be found in Saint-Simonism.
Say did not escape the infection. While Smith gives agriculture
the premier place, Say accords the laurels to manufactures. For
many years industrial problems had been predominant in political
economy, and the first official course of lectures given by Say himself
at the Conservatoire des Arts et Métiers was entitled “A Course
of Lectures on Industrial Economy.”
In that hierarchy of activities which Smith had drawn up
according to the varying degree of utility each possessed for the
nation, Smith had placed agriculture first. Say preserved the order,
but placed alongside of agriculture “all capital employed in utilising
any of the productive forces of nature. An ingenious machine
may produce more than the equivalent of the interest on the capital
it has cost to produce, and society enjoys the benefit in lower prices.”[268]
This sentence is not found in the edition of 1803, and appears only
in the second edition. Say in the meantime had been managing
his factory at Auchy-les-Hesdins, and he had profited by his experience.
This question of machinery, which was merely touched
on by Smith in a short passage, finds a larger place in every successive
edition of Say’s work. The general adoption of machinery by
manufacturers both in England and France frequently incited the
workers to riot. Say does not fail to demonstrate its advantages.
At first he admits that the Government might mitigate the resulting
evils by confining the employment of machinery at the outset
to certain districts where labour is scarce or is employed in other
branches of production.[269] But by the beginning of the fifth edition
he changed his advice and declared that such intervention involved
interference with the inventor’s property,[270] admitting only that the
Government might set up works of public utility in order to employ
those men who are thrown out of employment on account of the
introduction of machinery.
The influence of these same circumstances must be accounted
responsible for the stress which is laid by Say upon the rôle of an
individual whom Smith had not even defined, but one who is henceforth
to remain an important personage in the economic world, namely,
the entrepreneur. At the beginning of the nineteenth century the
principal agent of economic progress was the industrious, active,
well-informed individual, either an ingenious inventor, a progressive
agriculturist, or an experienced business man. This type became
quite common in every country where mechanical production and
increasing markets became the rule. It is he rather than the
capitalist properly so called, the landed proprietor, or the workman,
who is “almost always passive,” who directs production and
superintends the distribution of wealth. “The power of industrial
entrepreneurs exercises a most notable influence upon the distribution
of wealth,” says Say. “In the same kind of industry one
entrepreneur who is judicious, active, methodical, and willing makes
his fortune, while another who is devoid of these qualities or who
meets with very different circumstances would be ruined.”[271] Is it
not the master spinner of Auchy-les-Hesdins who is speaking here?
We are easily convinced of this if we compare the edition of
1803 with that of 1814, and we can trace the gradual growth and
development of this conception with every successive edition of
the work.
Say’s classic exposition of the mechanism of distribution is based
upon this very admirable conception, which is altogether superior to
that of Smith or the Physiocrats. The entrepreneur serves as the
pivot of the whole system. The following may be regarded as an
outline of his treatment.
Men, capital, and labour furnish what Say refers to as productive
services. These services, when brought to market, are given in
exchange for wages, interest, or rent. It is the entrepreneur, whether
merchant, manufacturer, or agriculturist, who requires them, and
it is he who combines them with a view to satisfying the demand
of consumers. “The entrepreneurs, accordingly, are mere intermediaries
who set up a claim for those productive services which
are necessary to satisfy the demand for certain products.” Accordingly
there arises a demand for productive services, and the demand
is “one of the factors determining the value of those services.”
“On the other hand, the agents of production, both men and things,
whether land, capital, or industrial employees, offer their services
in greater or less quantities according to various motives, and thus
constitute another factor which determines the value of these
same services.”[272] In this fashion the law of demand and supply
determines the price of services, the average rate of interest, and
rent. Thanks to the entrepreneur, the value produced is again
distributed among these “various productive services,” and the
various services allotted according to need among the industries.
This theory of distribution is in complete accordance with the
theory of exchange and production.
Say’s very simple scheme of distribution constitutes a real progress.
In the first place, it is much more exact than the Physiocrats’, who
conceived of exchange as taking place between classes only, and not
between individuals. It also enables us to distinguish the remuneration
of the capitalist from the earnings of the entrepreneur, which
were confounded by Adam Smith. The Scotch economist assumed
that the entrepreneur was very frequently a capitalist, and confused
the two functions, designating his total remuneration by the single
word “profit,” without ever distinguishing between net interest of
capital and profit properly so called. This regrettable confusion
was followed by other English authors, and remained in English
economic theory for a long time. Finally, Say’s theory has another
advantage. It gave to his French successors a clear scheme of
distribution which was wanting in Smith’s work, just at the time
when Ricardo was attempting to overcome the omission by outlining
a new theory of distribution. According to Ricardo, rent, by its very
nature and the laws which give rise to it, is opposed to other revenues,
and the rate of wages and of profits must be regarded as direct opposites,
so that the one can only increase if the other diminishes—an
attractive but erroneous theory, and one which led to endless discussion
among English economists, with the result that they abandoned
it altogether. Say, by showing this dependence, which
becomes quite clear if we regard wages and profits from the point
of view of demand for commodities, and by his demonstration
that rent is determined by the same general causes—viz. demand
and supply—as determine the exchange value of other productive
services, saved political economy in France from a similar disaster.
It was he, also, who furnished Walras with the first outlines of his
attractive conception of prices and economic equilibrium. This
explains why he never attached to the theory of rent the supreme
importance given to it by English economists. In this respect
he has been followed by the majority of French economists. On the
other hand, and for a similar reason, he never went to the opposite
extreme of denying the existence of rent altogether by regarding it
merely as the revenue yielded by capital sunk in land. In this way
he avoided the error which Carey and Bastiat attempted to defend
at a later period.[273]
(4) So far it is Say’s brilliant power of logical reasoning that we
have admired. But has he contributed anything which is entirely
new to the science?
His theory of markets was for a long time considered first-class
work. “Products are given in exchange for products.” It
is a happy phrase, but it is not in truth very profound. It
simply gives expression to an idea that was quite familiar to the
Physiocrats and to Smith, namely, that money is but an intermediary
which is acquired only to be passed on and exchanged for
another product. “Once the exchange has been effected it is
immediately discovered that products pay for products.”[274] Thus
goods constitute a demand for other goods, and the interest of a
country that produces much is that other countries should produce
at least as much. Say thought that the outcome of this would be
the advent of the true brotherhood of man. “The theory of markets
will change the whole policy of the world,” said he.[275] He thought
that the greater part of the doctrine of Free Trade could be based
upon this principle. But to expect so much from such a vague, self-evident
formula was to hope for the impossible.
Still more interesting is the way in which he applied this “theory
of markets” to a study of over-production crises, and the light which
that sheds upon the nature of Say’s thought. Garnier had already
pointed out that a general congestion of markets was possible. As
crises multiplied this fear began to agitate the minds of a number of
thinkers. “Nothing can be more illogical,” writes Say. “The total
supply of products and the total demand for them must of necessity
be equal, for the total demand is nothing but the whole mass of
commodities which have been produced: a general congestion
would consequently be an absurdity.”[276] It would simply mean a
general increase of wealth, and “wealth is none too plentiful among
nations, any more than it is among individuals.”[277] We may have an
inefficient application of the means of production, resulting in the
over-production of some one commodity or other—i.e. we may have
partial over-production.[278] Say wishes to emphasise the fact that
we need never fear general over-production, but that we may have
too much of some one product or other. He frequently gave
expression to this idea in the form of paradoxes. We might almost
be led to believe that he denies the existence of crises altogether in
the second edition of his work.[279] In reality he was very anxious to
admit their existence, but he wished to avoid everything that might
prove unfavourable to an extension of industry.[280]
He thought that crises were essentially transient, and declared
that individual liberty would be quite enough to prevent them. He
was extremely anxious to get rid of the vague terrors which had
haunted those people who feared that they would not be able to
consume all this wealth, of a Malthus who thought the existence of
the idle rich afforded a kind of safety-valve which prevented over-production,[281]
of a Sismondi who prayed for a slackening of the pace
of industrial progress and a checking of inventions. Such thoughts
arouse his indignation, especially, as he remarks, when it is remembered
that even among the most flourishing nations “seven-eighths
of the population are without a great number of products which would
be regarded as absolute necessities, not by a wealthy family, but even
by one of moderate means.”[282] The inconvenience—and he is never
tired of repeating it—is not the result of over-production, but is
the effect of producing what is not exactly wanted.[283] Produce,
produce all that you can, and in the natural course of events a lowering
of prices will benefit even those who at first suffered from the
extension of industry.
In this once famous controversy between Say, Malthus, Sismondi,
and Ricardo (the latter sided with Say) we must not expect to find
a clear exposition of the causes of crises. Indeed, that is nowhere
to be found. All we have here is the expression of a sentiment
which is at bottom perfectly just, but one which Say wrongly
attempted to state in a scientific formula.
J. B. Say plays a by no means negligible part in the history of
doctrines. Foreign economists have not always recognised him.
Dühring, who is usually perspicacious, is very unjust to him when he
speaks of “the labour of dilution” to which Say devoted his energies.[284]
His want of insight frequently caused him to glide over problems
instead of attempting to fathom them, and his treatment of political
economy occasionally appears very superficial. Certain difficulties
are veiled with pure verbiage—a characteristic in which he is very
frequently imitated by Bastiat. Despite Say’s greater lucidity, it
is doubtful whether Smith’s obscurity of style is not, after all, more
stimulating for the mind. Notwithstanding all this, he was faithful
in his transmission of the ideas of the great Scotch economist into
French. Happily his knowledge of Turgot and Condillac enabled
him to rectify some of the more contestable opinions of his master,
and in this way he avoided many of the errors of his successors.
He has left his mark upon French political economy, and had the
English economists adopted his conception of the entrepreneur earlier,
instead of waiting until the appearance of Jevons, they would have
spared the science many useless discussions provoked by the work
of a thinker who was certainly more profound but much less judicious
than Say, namely, David Ricardo.[285]
A new point of view is presented to us by the economists of whom
we are now going to speak. Hitherto we have heard with admiration
of the discovery of new facts and of their beneficent effects both
upon nations and individuals. We are now to witness the enunciation
of new doctrines which cast a deepening shadow across the
radiant dawn of economics, giving it that strangely sinister aspect
which led Carlyle to dub it “the dismal science.”
Hence the term “Pessimists,” although no reproach is implied
in our use of that term. On the contrary, we shall have to show
that the theories of the school are often truer than those of the
Optimists, which we must study at a later stage of our survey. While
nominally subscribing to their predecessors’ doctrine concerning the
identity of individual and general interests, the many cogent reasons
which they have adduced against such belief warrants our classification.
The antagonism existing between proprietors and capitalists,
between capitalists and workmen, is a discovery of theirs. Instead
of the “natural” or “providential” laws that were to secure the
establishment of the “order” provided they were once thoroughly
understood and obeyed, they discovered the existence of other laws,
such as that of rent, which guaranteed a revenue for a minority of
idle proprietors—a revenue that was destined to grow as the direct
result of the people’s growing need; or the “law of diminishing returns,”
which sets a definite limit to the production of the necessaries
of life. That limit, they asserted, was already being approached,
and mankind had no prospect of bettering its lot save by the
voluntary limitation of its numbers. There was also the tendency
of profits to fall to a minimum—until it seemed as if the whole of
human industry would sooner or later be swallowed up by the
stagnant waters of the stationary State.
Lastly, they deserve to be classed as pessimists because of their
utter disbelief in the possibility of changing the course of these
inevitable laws either by legislative reform or by organised voluntary
effort. In short, they had no faith in what we call progress.
But we must never imagine that they considered themselves
pessimists or were classed as such by their contemporaries. This
verdict is posterity’s, and would have caused them no little surprise.
As for themselves, they seem to stand aloof from their systems with
an insouciance that is most disconcerting. The “present order of
things” possessed no disquieting features for them, and they never
doubted the wisdom of “Nature’s Lord.” They believed that
property had been put upon an immovable basis when they demonstrated
the extent of its denotation, and that the spirit of revolt had
been disarmed by impressing upon the poor a sense of responsibility
for their own miseries.[286]
The best known representatives of the school are Malthus and
Ricardo. They claimed to be philanthropists and friends of the
people, and we have no reason to suspect their sincerity.[287] Their
contemporaries, also, far from being alarmed, received the new
political economy with the greatest enthusiasm. A warm welcome
was extended to its apostles by the best of English society,[288] and
ladies of distinction contended with one another for the privilege
of popularising the abstract thoughts of Ricardo in newspaper
articles and popular tales.[289]
Neither should we omit to pay them full homage for the eminent
services rendered to the science, and among these not the least
important was the antagonism which their theories aroused in the
minds of the working classes. Pessimists unwittingly often do
more for progress than optimists. To these two writers fell the task
of criticising economic doctrines and institutions, a task that has
been taken up by other writers in the course of the century, but
which seems as far from completion as ever. Karl Marx, another
critic, is intellectually a scion of the Ricardian family. It would
be a mistake to imagine that all their theories savour of pessimism,
but their reputation has always been more or less closely linked with
the gloomier aspect of their teaching.
Malthus is best known for his “law of population.” That he was
a great economist, even apart from his study of that question, might
easily be proved by reference to his treatise on political economy,
or by a perusal of the many miscellaneous articles which he wrote
on various economic questions. A consideration of many of these
theories, notably the theory of rent, must be postponed until we
come to study them in connection with the name of Ricardo.
The Law of Population
Twenty years had elapsed since the publication of Smith’s immortal
work, without economics making any advance, when the
appearance of a small anonymous volume, known to be the work of
a country clergyman, caused a great sensation. Even after the
lapse of a century the echo of the controversy which it aroused
has not altogether passed away. At first sight one might be led to
think that the book touches only the fringe of economics, seeing
that it is chiefly a statistical study of population, or demography,
as the science is called to-day. But this new science, of which
Malthus must be regarded as the founder, was separated from the
main trunk of economics at a much later date. Furthermore, we
shall find that the influence of his book upon all economic theories,
both of production and distribution, was enormous. The essay
might even be considered a reply to that of Adam Smith. The same
title with slight modification would have served well enough, and
James Bonar wittily remarks that Malthus might have headed it
An Essay on the Causes of the Poverty of Nations.
The attempt to explain the persistence of certain economic
phenomena by connecting them with the presence of a new factor,
biological in its character and differing in its origin both from personal
interest and the mere desire for profit, considerably expanded the
economic horizon and announced the advent of sociology. We know
that Darwin himself acknowledged his indebtedness to the work of
Malthus for the first suggestion of what eventually became the most
celebrated scientific doctrine of the nineteenth century, namely, the
conception of the struggle for existence and the survival of the fittest
as one of the mainsprings of progress.
There is no necessity for thinking that the dangers which might
result from an indefinite growth of population had not engaged the
attention of previous writers. In France Buffon and Montesquieu
had already shown some concern in the matter. But a numerous
population was usually regarded as advantageous, and fear of excess
was never entertained inasmuch as it was believed that the number
of people would always be limited by the available means of subsistence.[291]
This was the view of the Physiocrat Mirabeau, stated in
his own characteristic fashion in his book L’Ami des Hommes, which
has for its sub-title Traité de la Population. Such a natural fact as
the growth of population could possess no terrors for the advocates
of the “natural order.” But in the writings of Godwin this “natural”
optimism assumed extravagant proportions. His book on Political
Justice appeared in 1793 and greatly impressed the public. Godwin,
it has been well said, was the first anarchist who was also a doctrinaire.
At any rate he seems to have been the first to employ that famous
phrase, “Government even in its best state is an evil.” His illimitable
confidence in the future of society and the progress of science,
which he thought would result in such a multiplicity of products
that half a day’s work would be sufficient to satisfy every need,
and his belief in the efficacy of reason as a force which would
restrain personal interest and check the desire for profit, really entitles
him to be considered a pioneer. But life having become so
pleasant, was there no possibility that men might then multiply
beyond the available means of subsistence? Godwin was ignorant
of the terrible intricacies of the problem he had thus raised, and he
experienced no difficulty in replying that such a result, if it ever
came to pass, must take several centuries, for reason may prove as
powerful in controlling the sexual instinct as in restraining the
desire for profit. Godwin even goes so far as to outline a social State
in which reason shall so dominate sense that reproduction will cease
altogether and man will become immortal.[292]
Almost at the same time there appeared in France a volume
closely resembling Godwin’s, entitled Esquisse d’un Tableau historique
des Progrès de l’Esprit humain, written by Condorcet (1794).
It displays the same confidence in the possibility of achieving
happiness through the all-powerful instrumentality of science, which,
if not destined actually to overcome death, was at least going to
postpone it indefinitely.[293] This optimistic book, written by a man
who was about to poison himself in order to escape the guillotine,
cannot leave us quite unmoved. But, death abolished, Condorcet
finds that he has to face the old question propounded to Godwin:
“Can the earth always be relied upon to supply sufficient means of
subsistence?” To this question he gives the same answer: either
science will be able to increase the means of subsistence or reason
will prevent an inordinate growth of population.
It was inevitable, in accordance with the law of rhythm which
characterises the movements of thought no less than the forces of
nature, that such hasty optimism should provoke a reaction. It
was not long in coming, and in Malthus’s essay we have it developed
in fullest detail.
To the statement that there are no limits to the progress of
mankind either in wealth or happiness, and that the fear of over-population
is illusory, or at any rate so far removed that it need
cause no apprehension, Malthus replied that, on the contrary, we
have in population an almost insurmountable obstacle, not merely
looming in the distant future, but pressing and insistent[294]—the stone
of Sisyphus destined to be the cause of humanity’s ceaseless toil
and final overthrow. Nature has planted an instinct in man which,
left to itself, must result in starvation and death, or vice. This is the
one fact that affords a clue to men’s suffering and a key to the history
of nations and their untold woes.
Everyone, however little acquainted with sociological study,
knows something of the memorable formula by which Malthus endeavoured
to show the contrast between the frightful rapidity with which
population grows when it is allowed to take its own course and the
relative slowness in the growth of the means of subsistence. The
first is represented by a geometrical series where each successive
number is a multiple of the previous one. The second series increases
in arithmetical progression, that is, by simple addition, the illustration
being simply a series of whole numbers:
| 1 |
2 |
4 |
8 |
16 |
32 |
64 |
128 |
256 |
| 1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
Every term corresponds to a period of twenty-five years, and a
glance at the figures will show us that population is supposed to
double every twenty-five years, while the means of subsistence
merely increases by an equal amount during each of these periods.
Thus the divergence between the two series grows with astonishing
rapidity. In the table given above, containing only nine terms,
the population figure has already grown to twenty-seven times the
means of subsistence in a period of 225 years. Had the series been
extended up to the hundredth term a numerical representation of
the divergence would have required some ingenuity.
The first progression may be taken as correct, representing as it
does the biological law of generation. The terms “generation” and
“multiplication” are not used as synonyms without some purpose.
It is true that doubling supposes four persons to arrive at the
marriageable age, and this means five or six births if we are to allow
for the inevitable wastage from infant mortality. This figure appears
somewhat high to those who live in a society where limitation of the
birth-rate is fairly usual. But it is certain that among living beings
in general, including humankind, who are least prolific, the number
of births where no restraint of any kind exists is really much higher.
Women have been known to give birth to twenty or even more
children. And there are no signs of diminishing capacity among the
sexes, for population is still growing. In taking two as his coefficient
Malthus has certainly not overstepped the mark.[295]
The period of twenty-five years as the interval between the two
terms is more open to criticism.[296] The practice of reckoning three
generations to a century implies that an interval of about thirty-three
years must elapse between one generation and another.
But these are unimportant details. It is immaterial whether
we lengthen the interval between the two terms from twenty-five
to thirty-three years, or reduce the ratio from 2 to 1½, or even to something
between 1¼ and 1¹/₁₀. The movement will be a little slower,
but it is enough that its geometrical character should be admitted,
for however slow it moves at first it will grow by leaps and bounds
until it surpasses all limits. These corrections fail to touch the real
force of Malthus’s reasoning concerning the law of reproduction.
The series representing the growth of the means of subsistence is
also open to criticism. It is evidently of a more arbitrary character,
and we cannot say whether it is simply supposed to represent a
possible contingency like the first, or whether it pretends to represent
reality. At least it does not correspond to any known and certain
law, such as the law of reproduction. As a matter of fact it rather
seems to give it the lie; for, in short, what is meant by means of
subsistence unless we are to understand the animal and vegetable
species that reproduce themselves according to the same laws as
human beings, only at a much faster rate? The power of reproduction
among plants, like corn or potatoes, or among animals, like
fowls, herrings, cattle even, or sheep, far surpasses that of man. To
this criticism Malthus might have replied as follows. This virtual
power of reproduction possessed by these necessaries of life is in
reality confined to very limited areas of the habitable globe. It is
further restricted by the difficulty of obtaining the proper kind of
nourishment, and by the struggle for existence. But if we admit
exceptions in the one case why not also in the other? It certainly
seems as if there were some inconsistency here. As a matter of fact
we have two different theses. The one attempts to show how
multiplication or reproduction need not of necessity be less rapid
among plants or animals than it is among men. The other expresses
what actually happens by showing that the obstacles to
the indefinite multiplication of men are not less numerous than the
difficulties in the way of an indefinite multiplication of vegetables
or animals, or, in other words, that the former is a function of the
latter.
In order to grasp the true significance of the second formula it
must be translated from the domain of biology into the region of
economics. Malthus evidently thought of it as the amount of corn
yielded by a given quantity of land. The English economists could
think of nothing except in terms of corn! What he wished to
point out was that the utmost we can expect in this matter is that
the increase in the amount of the harvest should be in arithmetical
progression—say, an increase of two hectolitres every twenty-five
years. This hypothesis is really rather too liberal. Lavoisier
in 1789 calculated that the French crop yielded on an average
about 7¾ hectolitres per hectare. During the last few years it
has averaged about 16, and if we admit that the increment has been
regular throughout the 120 years which have since elapsed we have
an increase of 2 hectolitres per 25 years. This rate of increase has
proved sufficient to meet the small increase which has taken place in
the population of France. But would it have sufficed for a population
growing as rapidly as that of England or Germany? Assuredly
not, for these countries, despite their superior yields, are forced to
import from outside a great proportion of the grain which they consume.
The question arises whether France can continue indefinitely
on the same basis during the course of the coming centuries. This
is, indeed, unlikely, for there must be a physical limit to the earth’s
capacity on account of the limited number of elements it contains.
The economic limit will be reached still earlier because of the increasing
cost of attempting to carry on production at these extreme
limits. Thus it seems as if the law of diminishing returns, which we
must study later, were the real basis of the Malthusian laws, although
Malthus himself makes no express mention of it.
It is a truism that the number of people who can live in any place
cannot exceed the number of people who can gain subsistence there.
Any excessive population must, according to definition, die of
hunger.[297] This is just what happens in the animal and vegetable
kingdoms. Germs are extraordinarily prolific, but their undue
multiplication is pitilessly retarded by a law which demands the
death of a certain proportion, so that life, like a well-regulated
reservoir, always remains at a mean level, the terrible gaps made
by death being replenished by a new flow. Among savages, just as
among animals, which they much resemble, a large proportion
literally dies of hunger. Malthus devoted much attention to the
study of primitive society, and he must be regarded as one of the
pioneers of prehistoric sociology—a subject that has made much
headway since then.
He proceeds to show how insufficient nourishment always brings
a thousand evils in its train, not merely hunger and death, but also
epidemics and such terrible practices as cannibalism, infanticide, and
slaughter of the old, as well as war, which, even when not undertaken
with a definite view to eating the conquered, always results in robbing
them of their land and the food which it yielded. These are the
“positive” or “repressive” checks.
But it may be replied that both among savages and animals the
cause of this insufficiency of food is an incapacity for production
rather than an excess of population.
Malthus has no difficulty in answering this objection by showing
how savage customs prevailed among such civilised people as the
Greeks. And even among the most modern nations the repressive
checks, somewhat mitigated it is true, are never really absent.
Famine in the sense of absolute starvation is seldom experienced
nowadays, except in Russia and India, perhaps, but it is by no
means a stranger even to the most advanced communities. Tuberculosis,
which involves such terrible bodily suffering, is nothing but
a deadly kind of famine. Lack of food is also responsible for the
abnormally high rate of infant mortality and for the premature
death of the adult worker. As for war, it still demands its toll.
Malthus was living during the wars of the Revolution and the First
Empire—bloody catastrophes that caused the death of about ten
million men, all in the prime of life.
In civilized communities equilibrium is possible through humaner
methods, in the substitution of the preventive check with its reduced
birth-rate for the repressive check with its abnormal death-rate.
Here is an expedient of which only the rational and the provident
can avail themselves, an expedient open only to man. Knowing
that his children are doomed to die—perhaps at an early age—he may
abstain from having any. In reality this is the only efficacious way
of checking the growth of population, for the positive check only
excites new growth, just as the grass that is mown grows all the
more rapidly afterwards. The history of war furnishes many a
striking illustration of this. The year following the terrible war of
1870-71 remains unique in the demographic annals of France on
account of the sudden upward trend of the declining curve of
natality.
It was in the second edition of his book that Malthus expanded
his treatment of the preventive checks, thus softening the somewhat
harsher aspects of his first edition. It is very important that we
should grasp his exact meaning. We therefore make no apology for
frequently quoting his views on one point which is in itself very
important, but upon which the ideas of the reverend pastor of
Haileybury have been so often misrepresented.
The preventive check must be taken to imply moral restraint.
But does this mean abstaining from sexual intercourse during the
period of marriage after the birth, say, of three children, which may
be taken as sufficient to keep the population stationary or moderately
progressive? We cannot find that Malthus ever advocated such
abstention. We have already seen that he considered six children
a normal family, implying the doubling of the population every
twenty-five years. Neither is it suggested that six should be
the maximum, for he adds: “It may be said, perhaps, that even
this degree of prudence might not always avail, as when a man
marries he cannot tell what number of children he shall have, and
many have more than six. This is certainly true.” (P. 536.)
But where does moral restraint come in? This is how he defines
it: “Restraint from marriage which is not followed by irregular
gratifications may properly be termed moral restraint” (p. 9); and to
avoid any possible misunderstanding he adds a note: “By moral
restraint I would be understood to mean a restraint from marriage
from prudential motives with a conduct strictly moral during the
period of this restraint, and I have never intentionally deviated from
this sense.” All this is perfectly explicit. He means abstention
from all sexual intercourse outside the bonds of marriage, and
the postponement of marriage itself until such time as the man can
take upon himself the responsibility of bringing up a family—and
even the complete renunciation of marriage should the economic
conditions never prove favourable.
Malthus unceremoniously rejected the methods advocated by those
who to-day bear his name, and expressly condemned all who favoured
the free exercise of sexual connection, whether within or without
the marriage bond, through the practice of voluntary sterilization.
All these preventive methods are grouped together as vices and their
evil effects contrasted with the practice of moral restraint. Malthus is
equally explicit on this point. “Indeed, I should always particularly
reprobate any artificial and unnatural modes of checking population.
The restraints which I have recommended are quite of a different
character. They are not only pointed out by reason and sanctioned
by religion, but tend in the most marked manner to stimulate
industry.” (P. 572.) And he adds these significant words, so strangely
prophetic so far as France is concerned: “It might be easy to fall
into the opposite mistake and to check the growth of population
altogether.”
It is quite needless to add that if Malthus thus made short work
of conjugal frauds he all the more strongly condemned that other
preventive method, namely, the institution of a special class of
professional prostitutes.[298] He would similarly have condemned the
practice of abortion, of which scarcely anything was heard in his day,
but which now appears like a scourge, taking the place of infanticide
and the other barbarous practices of antiquity. Criminal law seems
powerless to suppress it, and it has already received the sanction of a
new morality.
But apart from the question of immoral practices, did Malthus
really believe that moral restraint as he conceived of it would
constitute an effective check upon population?
He doubtless was anxious that it should be so, and he tried to
rouse men to a holy crusade against this worst of all social evils.
“To the Christian I would say that the Scriptures most clearly and
precisely point it out to us as our duty to restrain our passions within
the bounds of reason.… The Christian cannot consider the
difficulty of moral restraint as any argument against its being his
duty.” (P. 452.) And to those who wish to follow the dictates of
reason rather than the observances of religion he remarks: “This
virtue [chastity] appears to be absolutely necessary in order to avoid
certain evils which would otherwise result from the general laws of
nature.” (P. 452.)[299]
At bottom he was never quite certain as to the efficacy of moral
restraint. The threatening hydra always peered over the fragile
shield of pure crystal with which he had hoped to do battle.[300] He also
felt that celibacy might not merely be ineffective, but would actually
prove dangerous by provoking the vices it was intended to check.
Its prolongation, or worse still its perpetuation, could never be favourable
to good morals.
Malthus was faced with a terrible dilemma, and the uncompromising
ascetic is forced to declare himself a utilitarian philosopher
of the Benthamite persuasion. He has now to condone those practices
which satisfy the sexual instinct without involving maternity,
although at an earlier stage he characterised them as vices. It
seemed to him to be the lesser of two evils, for over-population[301] is
itself the cause of much immorality, with its misery, its promiscuous
living and licence. All of which is very true.[302] At the same time the
rule of conduct now prescribed is no longer that of “perfect purity.”
It is, as he himself says, the grand rule of utility. “It is clearly our
duty gradually to acquire a habit of gratifying our passion, only in
that way which is unattended with evil.” (P. 500.) These concessions
only served to prepare the way for the Neo-Malthusians.
Malthus gives us a picture of man at the cross-roads. Straight
in front of him lies the road to misery, on the right the path of virtue,
while on the left is the way of vice. Towards the first man is impelled
by a blind instinct. Malthus warns him to rein in his desires
and seek escape along either by-road, preferably by the path on his
right. But he fears that the number of those who will accept his
advice and choose “the strait road of salvation” will be very small.
On the other hand, he is unwilling to admit, even in the secrecy of his
own soul, that most men will probably follow the road that leads on to
vice, and that masses will rush down the easy slope towards perdition.
In any case the prospect is anything but inviting.
No doctrine ever was so much reviled. Imprecations have been
showered upon it ever since Godwin’s memorable description of it as
“that black and terrible demon that is always ready to stifle the
hopes of humanity.”
Critics have declared that all Malthus’s economic predictions have
been falsified by the facts, that morally his doctrines have given
rise to the most repugnant practices, and not a few French writers
are prepared to hold him responsible for the decline in the French
birth-rate. What are we to make of these criticisms?
History certainly has not confirmed his fears. No single country
has shown that it is suffering from over-population. In some cases—that
of France, for example—population has increased only very
slightly. In others the increase has been very considerable, but
nowhere has it outstripped the increase in wealth.
The following table, based upon the decennial censuses, gives
the per capita wealth of the population of the United States, the
country from which Malthus obtained many of his data:
| Year |
Dollars |
| 1850 |
308 |
| 1860 |
514 |
| 1870 |
780 |
| 1880 |
870 |
| 1890 |
1036 |
| 1900 |
1227 |
| 1905 |
1370 |
In fifty years the wealth of every inhabitant has more than
quadrupled, although the population in the same interval also shows
a fourfold increase (23 millions to 92 millions).[303]
Great Britain, i.e. England and Scotland, at the time Malthus
wrote (1800-5), had a population of 10½ millions. To-day it has
a population of 40 millions. Such a figure, had he been able to
foresee it, would have terrified Malthus. But the wealth and
prosperity of Great Britain have in the meantime probably quadrupled
also.
Does this prove the claim that is constantly being made, that
Malthus’s laws are not borne out by the facts? We think that it is
correct to say that the laws still remain intact, but that the conclusions
which he drew from them were unwarranted. No one can
deny that living beings of every kind, including the human
species, multiply in geometrical progression. Left to itself, with
no check, such increase would exceed all limits. The increase of
industrial products, on the other hand, must of necessity be limited
by the numerous conditions which regulate all production—that is,
by the amount of space available, the quantity of raw material, of
capital and labour, etc. If the growth of population has not outstripped
the increase in wealth, but, as appears from the figures
we have given, has actually lagged behind it, it is because population
has been voluntarily limited, not only in France, where the preventive
check is in full swing, but also in almost every other country.
This voluntary limitation which gave Malthus such trouble is one
of the commonest phenomena of the present time.
Malthus’s apprehensions appear to involve some biological confusion.
The sexual and the reproductive instincts are by no means
one and the same;[304] they are governed by entirely different motives.
Only to the first can be attributed that character of irresistibility
which he wrongly attributes to the second. The first is a mere
animal instinct which rouses the most impetuous of passions and is
common to all men. The second is frequently social and religious
in its origins, assuming different forms according to the exigencies of
time and place.
To the religious peoples who adopted the laws of Moses, of Manu,
or of Confucius to beget issue was to ensure salvation and to realise
true immortality.[305] For the Brahmin, the Chinese, or the Jew not to
have children meant not merely a misfortune, but a life branded with
failure. Among the Greeks and Romans the rearing of children was
a sacred duty laid upon every citizen and patriot. An aristocratic
caste demanded that the glories of its ancestors and founders should
never be allowed to perish for the want of heirs. Even among the
working classes, whose lot is often miserable and always one of
economic dependence, there are some who are buoyed up by the
hope that the more children they have the larger will be their weekly
earnings and the greater their power of enlisting public sympathy.
And in every new country there is a demand for labourers to
cultivate its virgin soil and to build up a new people.
The reproductive instinct, on the other hand, may be thwarted
by antagonistic forces—by the selfishness of parents who shun their
responsibilities, or of mothers who dread the pains and perils of
child-bearing; by the greed of parents who would endow old age
rather than foster youth; by the desire of women to enjoy independence
rather than seek marriage; by the too early emancipation
of children, which leaves to the parents no gains and no joys beyond
the cost and trouble of upbringing; by insufficient house-room or
exorbitant taxation, or by any one of a thousand causes.
Thus the considerations that influence reproduction are infinitely
varied, and being of a social character they are neither necessary nor
permanent, nor yet universal. They may very well be defeated by
motives that belong to the social order, and this is just what happens.
And it is at least possible to conceive of a state of society where
religious faith has vanished and patriotism is dead, where the family
lasts only for one generation, and where all land has been appropriated
so that the calling of the father is denied to the son; where existence
has again become nomadic and suffering unbearable, and where
marriage, easily annulled by divorce, has become more or less of a
free union. In such a community, with all incentives to reproduction
removed and all antagonistic forces in full operation, the birth-rate
would fall to zero. And if all nations have not yet arrived at this
stage they all seem to be tending towards it. It is true that a new
social environment may give rise to new motives. We believe
that it will, but as yet we are ignorant of the nature of these
promptings.
Paradoxical as it may seem, the sexual instinct plays quite a
secondary rôle in the procreation of the human species. Nature
doubtless has united the two instincts by giving them the same organs,
and those who believe in final causes can admire the ruse which
Nature has adopted for securing the preservation of the species by
coupling generation with sexual attraction. But man has displayed
ingenuity even greater than Nature’s by separating the two functions.
He now finds that (since he has known how to get rid of reproduction)
he can gratify his lust without being troubled by the consequences.
The fears of Malthus have vanished: the other spectre, race suicide,
is new casting a gloom over the land.
Malthus’s condemnation of such practices was of little avail.
Other moralists more indulgent than the master have given them
their sanction by endeavouring to show that this is the only way in
which men can perform a double function, on the one hand giving
full scope to sexual instinct in accordance with the physiological and
psychological laws of their being, and on the other taking care not
to leave such a supreme duty as that of child-bearing to mere chance
and not to impose upon womankind such an exhausting task as
that of maternity save when freely and voluntarily undertaken.
This is quite contrary to the pastor’s teaching concerning moral
restraint. The Neo-Malthusians, on the other hand, consider his
teaching very immoral, as being contrary to the laws of physiology,
infected with ideas of Christian asceticism, and altogether worse
than the evil it seeks to remedy. His rule of enforced celibacy
might, in their opinion, involve more suffering even than want of
food, and late marriages simply constitute an outrage upon morality
by encouraging prostitution and increasing the number of illegitimate
births. The Neo-Malthusians[306] persist in regarding themselves as
his disciples because they think that he clearly demonstrated, despite
himself perhaps, that the exercise of the blind instinct of reproduction
must result in the multiplication of human beings who are
faced by want and disease and liable to sudden extinction or slow
degradation, and that the only way of avoiding this is to check the
instinct.
There is reason to believe, however, that were Malthus now alive
he would not be a Neo-Malthusian. He would not have willingly
pardoned his disciples the perpetration of sexual frauds which enable
man to be freed from the responsibilities which Nature intended
him to bear. Nevertheless we must recognise that the concessions
which he made prepared the way for this further development.
Malthus did not seem to realise the full import of these delicate
questions which contributed so powerfully to the overthrow of his
doctrine. Especially is this true of the emphasis which he laid upon
chastity, involving as he thought abstention from the joys of marriage.
Such celibacy he would impose only upon the poor.[307] The
rich are obviously so circumstanced that children cannot be a
hindrance. We know well enough that it was in the interests of the
poor themselves that Malthus imposed his cruel law “not to bring
beings into the world for whom the means of support cannot be
found.” But that does not prevent its emphasising in the most
heartless fashion imaginable the inequality of their conditions, forcing
the poor to choose between want of bread and celibacy. Malthus
gave a quietus to the old song which eulogises love in a cottage as the
very acme of happiness. It is only just to remark, however, that he
does not go so far as to put an interdict upon marriage altogether,
which is actually the case in some countries. The old liberal economist
asserts himself here. He sees clearly enough that, leaving aside
all humanitarian considerations, the remedy offered would be worse
than the evil, for its only result would be a diminution in the number
of legitimate children and an increase in the number of those born
out of wedlock.[308]
When telling the poor that they themselves were the authors of
their misery,[309] because of their improvident habits, their early
marriages, and their large families, and that no written law, no
institution, and no effort of charity could in any way remedy it, he
failed to realise that he was furnishing the propertied classes with a
good pretext for dissociating themselves from the fate of the working
classes.[310] And during the century which has passed since he wrote
the way to every comprehensive scheme of socialistic or communistic
organisation has been barred and every projected reform which
claimed to ameliorate the condition of the poor effectively thwarted
by the argument that the only result would be to increase the
number of participators as well as the amount to be distributed,
and that consequently no one would be any the better off.
Whatever opposition Malthus’s doctrines may have aroused, his
teaching has long since become a part and parcel of economic science.
Occasionally it has thwarted legitimate claims, while at other times
it has been used to buttress some well-known Classical doctrine, such
as the law of rent or the wages fund theory. On more than one
occasion it has done service in the defence of family life and private
property, two institutions which are supposed to act as effective
checks upon the growth of population, because of the responsibilities
which they involve.[311]
The population question has lost none of its importance, although
it has somewhat changed its aspect. What Malthus called the
preventive check has got such a hold of almost every country that
modern economists and sociologists are concerned not so much
with the question of an unlimited growth of population as with the
regular and universal decline of the birth-rate. Everyone is further
agreed that the causes must be social.
It is not enough to say that the cause is a deliberate determination
of parents to have no children or to have only a limited number.
The question is, Why do they decide to have none or to limit their
family to a certain number only? Why is this limitation more
marked in France than elsewhere, and why is it more pronounced
there to-day than it was say two or three generations ago? The
special causes which apply to the France of to-day must somehow
be discovered, and such causes may be expected to be less active
elsewhere. It may be that Paul Leroy-Beaulieu is right when he
claims that the progress of civilisation must always mean a declining
birth-rate, because the fresh needs and desires and the extra expenditure
which it necessarily involves are incompatible with the duties
and responsibilities of maternity. It is possible that it diminishes
as democracy advances, because the latter strengthens the telescopic
faculty and quickens the desire to rise in the social scale as
rapidly and as effectively as possible. M. Dumont, who advocates
this view, has happily named it the law of capillarity. More
precise causes are sometimes invoked, but they vary according
to the particular school that formulates them. Le Play thinks
that it is due to the practice of social inheritance. Paul Bureau
takes it as a sign of the weakening of moral and religious belief, and
of the growth of intemperate habits of every kind—alcoholism,
debauchery, etc. Unfortunately none of the explanations given seem
quite satisfactory, and a second Malthus is required to open up a new
chapter in the history of demography.[312]
Next to Smith, Ricardo is the greatest name in economics, and
fiercer controversy has centred round his name than ever raged
around the master’s. Smith founded no school, and his wisdom and
moderation saved him from controversy. Hence every economist,
whatever his views, is found sitting at his feet straining to catch the
divine accents as they fall from his lips.
But Ricardo was no dweller in ethereal regions. He was in the
thickest of the fight—the butt of every shaft. In discussions on the
question of method the attack is always directed against Ricardo,
who is charged with being the first to lead the science into the fruitless
paths of abstraction. The Ricardian theory of rent affords a target
for every Marxian in his general attack upon private property. The
Ricardian theory of value is the starting-point of modern socialism—a
kinship that he could never have disavowed, however little to his
taste. The same thing is true of controversies concerning banks
of issue and international trade: Ricardo’s place was ever with
the vanguard.
His defects are as interesting as his merits, and have been equally
influential. Of his theories, especially his more characteristic ones,
there is now little left, unless we recall what is after all quite as important—the
criticisms they aroused and the adverse theories which
they begot. The city banker was a very indifferent writer, and his
work is adorned with none of those beautiful passages so characteristic
of Smith and Stuart Mill. No telling phrase or striking
epithet ever meets the eye of the reader. His principal work is
devoid of a plan, its chapters being mere fragments placed in
juxtaposition. His use of the hypothetical method and the constant
appeal to imaginary conditions makes its reading a task of
some difficulty. This abstract method has long held dominion over
the science, and it is still in full activity among the Mathematical
economists. His thoughts are penetrating, but his exposition is
frequently obscure, and a remark which he makes somewhere in
speaking of other writers, namely, that they seldom know their own
strength, may very appropriately be applied to him. But obscurity
of style has not clouded his fame. Indeed, it has stood him in good
stead, as it did Marx at a later date. We hardly like to say that a
great writer is unintelligible—a feeling prompted partly by respect
and partly arising out of fear lest the lack of intelligence should really
be on our side. The result is an attempt to discover a profound
meaning in the most abstruse passage—an attempt that is seldom
fruitful, especially in the case of Ricardo.
It is clearly impossible to outline the whole of this monumental
work. We shall content ourselves with an attempt to place the
leading conceptions clearly before our readers.[313]
Speaking generally, Ricardo’s chief concern is with the distribution
of wealth. He was thus instrumental in opening up a new
field of economic inquiry, for his predecessors had been largely
engrossed with production. “To determine the laws which regulate
this distribution is the principal problem in political economy.”
We have already some acquaintance with the tripartite division of
revenues corresponding with the threefold division of the factors of
production—the rent of land, the profits of capital, and the wages
of labour. Ricardo wanted to determine the way in which this
division took place and what laws regulated the proportion which
each claimant got. Although unhampered by any preconceptions
concerning the justice or injustice of distribution, we can easily
understand how he ushered in the era of polemics and of socialistic
discussion, seeing that the natural laws pale into insignificance
when contrasted with the influence wielded by human institutions
and written laws. The latter override the former, and individual
interests which may co-operate in production frequently prove
antagonistic in distribution.
We shall follow him in his exposition of the laws of rent, wages,
and profits, but especially rent, for according to him the share given
to land determines the proportions which the other factors are going
to receive.
One would imagine that an indispensable preliminary to this study
would be an examination of the Ricardian theory of value, especially
when we recall the importance of his theory of labour-value in the
history of economics doctrine and how it prepared the way for the
Marxian theory of surplus value, which is the foundation-stone of
contemporary socialism. Despite all this we shall only refer to his
theory of value incidentally, and chiefly in connection with the laws of
distribution. We have Ricardo’s own authority for doing this:
“After all, the great problem of rent, of wages, or of profits might
be elucidated by determining the proportions in which the total
product is distributed between the proprietors, the capitalists, and the
workers, but this is not necessarily connected with the doctrine of
value.”[314]
It is, moreover, probable that Ricardo himself did not begin with
an elaborate theory of value from which he deduced the laws of
distribution, but after having discovered, or having convinced
himself that he had discovered, the laws of distribution he attempted
to deduce from them a theory of value. One idea had haunted
him his whole life long, namely, that with the progress of time nature
demanded an ever-increasing application of human toil. No doubt
it was this that suggested to him that labour was the foundation,
the cause, and the measure of value. But he never came to a final
decision on the question, and his statements concerning it are frequently
contradictory. We must also confess that his theory of value
is far from being his most characteristic work. In the elucidation of
that difficult question, vigorous thinker though he was, he has not
been much more fortunate than his predecessors. He himself
acknowledged this on more than one occasion, and shortly before his
death, with a candour that does him honour, he recognised his
failure to explain value.[315]
1. The Law of Rent
Of all Ricardian theories that of rent is the most celebrated, and
it is also the one most inseparably connected with Ricardo’s name.
So well known is it that Stuart Mill spoke of it as the economic pons
asinorum, and it has always been one of the favourite subjects of
examiners.
The question of rent—that is, of the return which land yields—had
occupied the attention of others besides Ricardo. It was the
burning question of the day. The problem of rent dominated
English political economy during the first half of the nineteenth
century, and a later period has witnessed a revival of it in the land
nationalisation policy of Henry George. In France there was but
a feeble echo of the controversy, for France even long before the
Revolution had been a country of small proprietors. Landlordism
was far less common there, and where it existed its characteristics
were very different. That threefold hierarchy which consisted of
a worker toiling for a daily wage in the employ of a capitalist farmer
who draws his profits towered over by a landlord in receipt of rents
formed a kind of microcosmic picture of the universal process of
distribution, but it was seldom as clearly seen in France as it was
in England.
The first two incomes presented no difficulties. But how are we
to explain that other income—that revenue which had created English
aristocracy and made English history? The Physiocrats had named
it the “net product,” and they argued a liberality of nature and a
gift of God. Adam Smith, although withholding the title of creator
from nature and bestowing it upon labour, nevertheless admits that
a notable portion—perhaps as much as a third of the revenue of land—is
due to the collaboration of nature.[316]
Malthus had already produced a book on the subject,[317] and
Ricardo hails him as the discoverer of the true doctrine of rent.
Malthus takes as his starting-point the explanation offered by the
Physiocrats and Adam Smith, namely, that rent is the natural
outcome of some special feature possessed by the earth and given it
by God—that is, the power of enabling more people to live on it
than are required to till it. Rent is the result, not of a merely physical
law, but also of an economic one, for nature seems to have a unique
power of creating a demand for its products, and consequently of
maintaining and even of increasing indefinitely both its own revenue
and value. The reason for this is that the population always tends
to equal and sometimes to surpass the means of subsistence. In
other words, the number of people born is seldom less than the
maximum number that the earth can feed. This new theory of
rent is a simple deduction from Malthus’s law concerning the constant
pressure of population upon the means of subsistence.
Malthus emphasised another important feature of rent, and it was
this characteristic that especially attracted Ricardo. Seeing that
different parts of the earth are of unequal fertility, the capitals employed
in cultivation must of necessity yield unequal profits. The
difference between the normal rate of profit on mediocre lands and
the superior rate yielded by the more fertile land constitutes a special
kind of profit which is immediately seized by the owner of the more
fertile land. This extra profit afterwards became known as differential
rent.
To Malthus, as well as to the Physiocrats, this kind of rent seemed
perfectly legitimate and conformed to the best interests of the public.
It was only the just recompense for the “strength and talent”
exercised by the original proprietors. The same argument applies
to those who have since bought the land, for it must have been
bought with the “fruits of industry and talent.” Its benefits
are permanent and independent of the proprietor’s labour, and in
this way the possession of land becomes a much-coveted prize, the
otium cum dignitate which is the just reward of meritorious effort.
Ricardo enters upon an entirely new track. He breaks the
connection with Smith and the Physiocrats—a connection that
Malthus had been most anxious to maintain. All suggestion of
co-operation on the part of nature is brushed aside with contempt.
Business-man and owner of property as he was, he had no superstitious
views concerning nature, whose work he contemplated
without much feeling of reverence. As against the celebrated phrase
of Adam Smith he quotes that of Buchanan: “The notion of
agriculture yielding a produce and a rent in consequence because
nature concurs with human industry in the process of cultivation
is a mere fancy.”[318] He proceeds to defend the converse of Smith’s
view and to show how rent implies the avarice rather than the
liberality of nature.
The proof that the earth’s fertility, taken by itself, can never
be the cause of rent is easily seen in the case of a new country. In
a newly founded colony, for example, land yields no rent, however
fertile, if the quantity of land is in excess of the people’s demand.
“For no one would pay for the use of land when there was an abundant
quantity not yet appropriated, and therefore at the disposal of
whosoever might choose to cultivate it.”[319] Rent only appears “when
the progress of population calls into cultivation land of an inferior
quality or less advantageously situated.” Here we have the very
kernel of Ricardo’s theory. Instead of being an indication of
nature’s generosity, rent is the result of the grievous necessity of
having recourse to relatively poor land under the pressure of population
and want.[320] “Rent is a creation of value, not of wealth,” says
Ricardo—a profound saying, and one that has illuminated many a
mystery attaching to the theory of rent. In that sentence he
draws a distinction between wealth born of abundance and satisfaction
and value begotten of difficulty and effort, and he declares
that rent is of the second category and not of the first.
Still, this cannot be accepted as the final explanation. It is
difficult to understand how a purely negative condition such as the
absence of fertile land could ever create a revenue. It were better
to say that the want of suitable land supplies the occasion for the
appearance of rent, although it is not its cause. The cause is the
high price of agricultural products—say corn—due to the increased
difficulty of cultivating the less fertile lands.[321] In short, the cause
and the measure of the rent of corn-land are determined by the
quantity of labour necessary to produce corn under the most unfavourable
circumstances, “meaning by the most unfavourable
circumstances the most unfavourable under which the quantity of
produce required renders it necessary to carry on production.”[322]
Let us assume, as Ricardo did, that first-class land yields a bushel
of corn as the result of ten hours’ work, the corn selling for ten
shillings a bushel.[323] In order to supply a population that is increasing
in accordance with the Malthusian formula, land of the second class
has to be cultivated, when the production of a bushel requires
fifteen hours’ work. The value of corn will rise proportionately to
fifteen shillings, and landed proprietors of the first class will draw
a surplus value or a bonus of five shillings per bushel. So rent
emerges. Presently the time for cultivating lands of the third
class will approach, when twenty hours’ labour will be necessary for
the production of a bushel. The price of corn goes up to twenty
shillings, and proprietors of the first class see their gift increased or
their rent raised from five to ten shillings per bushel, while the owners
of the second-class land obtain a bonus of five shillings per bushel.
This marks the advent of a new class of rent-receivers, who modestly
take their place a little below the first class. The third class of landowner
will receive a rent whenever the cultivation of fourth-class land
becomes a necessity.[324]
It has been said in criticism of the theory that the hierarchy of
lands has simply been invented for the purpose of illustrating the
theory. But what Ricardo has really done is to put in scientific
language what every peasant knows—what has been handed down to
him from father to son in unbroken succession, namely, that all land
is not equally fertile.
Ricardo, so often represented as a purely abstract thinker, was
in reality a very practical man and a close observer of those facts that
were then occupying the attention of both public and Parliament.
High rents, following upon high prices, constituted the most important
phenomenon in the economic history of England towards the end
of the eighteenth and the beginning of the nineteenth centuries.
Right through the eighteenth century—that is, up to 1794—the
highest price paid for corn was only a few pence above 60s. per
quarter. But in 1796 the price rose to 92s., and in 1801 it reached
177s.—nearly three times the old price. The exceptionally high
price, due to extraordinary causes, chief among them being the
Napoleonic wars and the Continental blockade, could not last long,
although the average during the years 1810-13 remained as high
as 106s.[325]
This high price of corn was not entirely due to accidental causes.
Something must be attributed to the fact that the available land was
insufficient for the upkeep of the population, and that new land
had to be cultivated irrespective of situation or degree of fertility.
The pastures which had formerly covered England were daily disappearing
before the plough. It was the period of the iniquitous
Enclosure Acts, when landlords set their hearts upon enclosing the
common lands. Professor Cannan has drawn up an interesting
chart to show the close correspondence between the progress of the
enclosure movement and the high price of corn.[326]
In 1813 a Commission appointed by the House of Commons to
inquire into the price of corn—for the proprietors dreaded the day
when the return of peace would allow of importation—came to the
conclusion that new lands could not produce corn at a less cost than
80s. a quarter. What an argument for Ricardo’s theory![327]
But is there no possible means of avoiding the cultivation of lands
of the second and third order? Intensive cultivation might doubtless
do something to swell the returns on the older lands, but only
up to a certain point. It would be absurd to imagine that on a
limited area of land an unlimited quantity of subsistence can be produced.
There must be a limit somewhere—an elastic limit perhaps,
and one which the progress of science will push farther and farther
away, even beyond our wildest hopes. But the cultivator stops
long before this ideal limit is reached, for practice has taught him
that the game is not worth the candle, because the outlay of capital
and labour exceeds the profits on the return. This practical limit
is determined for him by the law of diminishing returns.[328]
That law is indispensable to an understanding of the Ricardian
theory, and is implied in Malthus’s theory of population. Its discovery
is still earlier, and we have an admirable statement of it in Turgot’s
writings: “It can never be imagined that a doubling of expenditure
would result in doubling the product.” Malthus, unconsciously no
doubt, repeated Turgot’s dictum.[329] It is evident, says he, that
as cultivation extends, the annual addition made to the average
product must continually diminish.[330] Ricardo witnessed the operation
of the law under his very eyes, and he frequently hinted at the decreasing
returns yielded by capital successively applied to the same land.
Even in cases of that kind, where recourse to new lands was impossible,
rents were bound to increase.
Taking again land No. 1, which yields corn at 10s. a bushel, let
us imagine that there is an increased demand for wheat. Instead of
breaking up land No. 2 an attempt might be made to increase the
yield on No. 1, but nothing will be gained by it because the new
bushel produced on No. 1 will cost 15s., which is just what it would
cost if raised on second-class land. Furthermore, the price will now
rise to 15s., and the two bushels will be disposed of for 30s., thus
giving the proprietor a rent of 5s., because they have only cost 25s.
to produce.[331]
There is still another possibility, however. Resort might be had
to emigration and colonists might be encouraged to cultivate the
best soils of distant lands, soils equal in fertility to those in the first
class. The products of such lands would be got in exchange for
the manufactured goods of the home country, to which the law of
diminishing returns does not apply. But some account of the cost
of transport, which increases the cost of production, must be taken,
and this leads to the same result, namely, a rent for those nearest the
market, because of the advantages of a superior situation. Distance
and sterility, as J. B. Say remarks, are the same thing. If land in
America yields corn at 10s. a bushel and freightage equals 5s., it is clear
that corn imported into England must sell for 15s.—exactly the same
condition of things as if land of the second order had been cultivated,
and English landlords of the first class will still draw a rent of 5s.
This third possibility was scarcely mentioned by Ricardo, and he
could hardly have foreseen the wonderful developments in transportation
that took place during the next fifty years, which resulted
in a reversal of the law of diminishing returns and the confuting
of the prophets.[332]
The great Ricardian theory, prima facie self-evident, is in reality
based upon a number of postulates to which we must pay more
attention. Some of them must be regarded as economic axioms, but
the validity of others is somewhat more doubtful.
In the first place there is the assumption that the produce of lands
unequally fertile and representing unequal amounts of labour will
always sell at the same price, or, in other words, will always possess
the same exchange value. Is this proposition demonstrably sound?
It is true when the product in question—for example, corn—is of
uniform quality and kind. When the goods offered on the same
market are so much alike that it is a matter of indifference to the
buyer whether he takes the one or the other, then it is true that he
will not pay a higher price for the one than he will for the other.
This is what Jevons called the “law of indifference.”[333]
In the second place it is implied that this exchange value, uniform
for all identical products, is determined by the maximum amount
of labour required for its production, or, in other words, by the
amount of labour necessary for the production of the more costly
portion.
This brings us to the Ricardian theory of value. We know that
he considered that the value of everything was determined by the
amount of labour necessary for its production.[334] Adam Smith had
already declared that value was proportional to the amount of labour
employed, but that this was the case only in primitive societies. “In
civilised society, on the contrary, there is a still smaller number [of
cases] in which it consists altogether in the wages of labour.” Labour
was regarded by Smith as one of the factors determining value—though
by no means the only one, land and capital being obviously
the others.
But Ricardo simplified matters, as abstract thinkers frequently
do, by neglecting the last-named factors. This leaves us only labour.
Land is dismissed because rent contributes nothing to the creation of
value, but is itself entirely dependent upon value.[335] Corn is not dear
because land yields rent, but land yields rent because corn is dear.
“The clearly understanding this principle is, I am persuaded, of the
utmost importance to the science of political economy.” As for
capital, why should we make a special factor of it, seeing that it is
only labour? Its connotation might be extended so as to include
“the labour bestowed not on their immediate production only, but
on all those implements or machines required to give effect to the
particular labour to which they were applied.”[336] But Ricardo was
not thoroughly satisfied with this identification of capital and labour,
and, great capitalist that he was, it must have caused him much
searching of heart. Furthermore, it was not very easy to apply the
conception to such commodities as timber and wine, which increase
in value as they advance in age. In a letter to McCulloch he admits
the weakness of his theory. After all the study that he had given to
the matter, he had to confess that the relative value of commodities
appeared to be determined by two causes: (1) the relative quantity of
labour necessary for its production; (2) the relative length of time
required to bring the commodity to market. He seems to have had
a presentiment of the operation of a new and distinct factor, to which
Böhm-Bawerk was to ascribe such importance.
The usual method of stating the Ricardian theory of value is to
say that value is determined by cost of production. It is also the
correct way, inasmuch as he stated it thus himself. It is, however,
quite a different thing to say on the one hand that value is determined
by labour and on the other that it depends upon the sum of
wages and profits (supposing we omit rent).[337] On this point, as
on several others, obscurity of thought alone saves Ricardo from
the reproach of self-contradiction.
Suppose we proceed a step farther. The statement that value is
determined by labour is not enough to account for the phenomenon
of rent. Let us imagine a market where three sacks of corn are
available for sale. Let us further suppose that the production of each
involved a different quantity of labour, one being produced on land
that was very fertile, the other on soil that was less generous, etc.
Every sack will sell at the same price, but the question is, which of
those different quantities of labour is the one that determines the
price? Ricardo replies that it is the maximum quantity, and the
value of the corn is determined by the value of that sack which is
produced under the greatest disadvantages. But why should it
not be determined by the value of the sack grown under the most
favourable circumstances, or by the value of that other sack raised
under conditions of average difficulty?
That is impossible. Let us imagine that the three sacks of corn
came from three different kinds of land, A, B, and C, where the
necessary quantities of labour were respectively 10, 15, and 20. It
is inconceivable that the price should fall below 20, the cost of
production of corn grown on C, for if it did C would no longer be
cultivated; but the produce of C is ex hypothesi indispensable. The
market price cannot rise above 20, for in that case lands of the fourth
class would be brought under cultivation, and their yield would be
added to the quantity already on the market. The supposition
is that the quantity of corn on the market is already sufficient to
meet the demand, and the increase in supply would soon cause the
price to fall again to the irreducible minimum of 20.
We cannot but admire the ingenuity of a demonstration that
seeks to explain a phenomenon like rent—which is a revenue obtained
independently of all labour—by the aid of a generalisation
which regards labour as the one source of value. But the explanation
is ingenious rather than convincing, for it is quite clear that only in
the case of one of the sacks do value and amount of labour actually
coincide. In the two other instances the quantity of labour and
exchange value are absolutely and indefinitely divergent.
Most contemporary economists, while denying that value is
solely the product of labour and preferring to regard it as a reflection
of human preferences, would willingly recognise the element of
truth contained in the Ricardian view. But it must be understood
in the sense that competition, although tending to reduce price to the
level of cost of production, cannot reduce it below the maximum
cost of production, or the price necessary to repay the expenses of
producing the most costly portion of the total amount demanded
by the market.[338] In this sense it is true not only of agricultural
but also of all other products, and it has a wider scope than was at
first ascribed to it by its authors. Rent is nowadays recognised as
an element which enters into all incomes. But with an extension of
sway has gone attenuation, and the term has lost something of its
original significance and precision. To-day rent is treated as the
outcome of certain favourable conjunctures, which are to be found
in all stations in life, and it is no uncommon thing to speak of
consumer’s rent even.
The Ricardian theory, moreover, presupposed the existence of
a class of land which yielded no rent, the returns which it gave
being only just sufficient to cover cost of production. In other
words, Ricardo only recognised the existence of differential rents,
and dismissed the other cases mentioned by Malthus.
It really seems as if Malthus were in this instance more correct
than Ricardo. It is quite possible that in the colonies, for example,
there may be lands which yield no rent because of the superabundance
of fertile land. Or the same thing may occur in an old country
because of the extreme poverty of the land. But it is quite evident
that in a society having a certain density of population the mere
fact that there exists only a limited amount of land is enough to
give to all lands and to their products a scarcity value independent
of unequal returns. Nor would the case be materially different if
all lands were supposed to be of equal fertility, for who would be
willing to cultivate land which only yielded the bare equivalent of
the expenses of production?
Ricardo’s unwillingness to recognise this other class of rent, which
depends solely upon the limited quantity of land, was due to the
fact that it would have contradicted his other theory that there is no
value except labour. It is true that he made an exception of some
rare “products,” such as valuable paintings, statuary, books,
medals, first-class wines, etc., the quantity of which could not be
increased by labour. Nobody would have taken any notice of such
a slight omission as that, but had he left out such an important
item of wealth as the earth itself there would be great danger of the
whole theory crumbling to dust.[339]
Such is the theory of rent, celebrated above all economic doctrines,
and concerning which it might be said that no doctrine, not
even that of Malthus, has ever excited such impassioned criticism.
For this there are several reasons.
In the first place, it led to an overthrow of the majesty of the
“natural order” by simply depicting some of its gloomier aspects.
Men had been led to believe that the “order” was for ever beyond
challenge. Now, however, it seemed that if the new doctrine was
true then the interests of the landed proprietors were opposed not
only to those of every other class in the community—for sharing
always begets antagonism—but also to the general interest of society
as a whole.
For what are the real interests of proprietors? First, that
population and its demands should increase as rapidly as possible
in order that men may be forced to cultivate new lands, and that
these new lands should be as sterile as possible, requiring much
toil and thus causing an increase in rents. Exhaustive labour
bestowed upon the cultivation of land that is gradually becoming
poorer and poorer would soon make the fortune of every landlord.
As a class, proprietors have every interest in retarding the progress
of agricultural science, a paradox which the slightest reflection
will show to be true. Every advance in agricultural science must
mean more products from the same amount of land and a check upon
the law of diminishing returns, resulting in lower prices and reduced
rents, since it would no longer be necessary to cultivate the poorer
soils. In a word, since rent is measured by reference to the obstacles
which thwart cultivation, just as the level of water in a pond is
determined by the height of the sluice, everything that tends to
lower this obstacle must reduce the rent. In mitigation of this charge
it must, however, be noted that, taken individually, every proprietor
is of necessity interested in agricultural improvement, because he
may have an opportunity of benefiting by larger crops before the
improvements have become general enough to lower prices and to
push back the margin of cultivation. If every proprietor argued in
this way, individual interest would finally cheat itself, to the advantage
of the general public. But this is nothing to be very proud of.
Ricardo set out to demonstrate the antagonism,[340] and with what
a vigorous pen does he not picture it! The study of this question of
rent made of him a Free Trader stauncher than Adam Smith, more
firmly convinced than the Physiocrats. Free Trade was for them
founded upon the conception of a general harmony of interests, while
Ricardo built his faith upon one clearly demonstrated fact—the high
price of corn and its concomitant, high rents. Free Trade seemed to
be the means of checking this disastrous movement. The free
importation of corn implied the cultivation of distant lands as rich
as or even richer than any in Britain. All this meant avoiding the
cultivation of inferior lands and reducing the high price of corn.
He was also desirous of proving to the proprietors that the practice
of free exchange, even though it might involve some loss of revenue
to them, was really to their interest. Their opposition, he thought,
was very short-sighted. “They fail to see,” he writes, “that commerce
everywhere tends to increase production, and that as a result
of this increased production general well-being is also improved,
although there may be partial loss as the result of it. To be consistent
with themselves they ought to try to arrest all improvement
in agriculture and manufacture and all invention of machinery.”[341]
The theory of rent, in the second place, endangered the reputation
of landowners by showing that their income is not the product of
labour, and is consequently anti-social. No wonder that it has been
so severely criticised by conservative economists. Ricardo himself,
however, seemed quite unconscious of the nature of the blow thus
aimed at the institution of private property. His indifference,
which appears to us so surprising, is partly explained by the fact that
the theory absolved the proprietor from all responsibility in the
matter. Unlike profits and wages, rent does not figure in cost of
production because it makes no contribution to the price of corn,
but is itself wholly determined by that price.[342] The landed proprietor
thus appears as the most innocent of the co-partners, playing a purely
passive rôle. He does not produce rent, but simply accepts it.
That may be; but the fact that the proprietor plays no part
in the production of rent, whilst exonerating him from complicity
in its invidious consequences, spells ruin to his title of proprietor—that
is, if we consider labour to be the only title to proprietorship.
It was just this aspect of the question that drew the attention of
Ricardo’s contemporary James Mill. Mill advocated the confiscation
of rent or its socialisation by means of taxation.[343] He thus became a
pioneer in the movement for land nationalisation, a cause that has
since been championed by such writers as Colins, Gossen, Henry
George, and Walras.
Finally, the theory of rent seems to give colour to certain theories
which predict an extremely dark future for the race, corroborating the
gloomy forebodings of Malthus. As society grows and advances it will
be forced to employ lands that are less fertile and means of production
that are more onerous. It seems as if the curse uttered in Genesis has
been scientifically verified. “Thorns also and thistles shall it bring
forth to thee; … in the sweat of thy face shalt thou eat bread.”
True, he did not carry his pessimism so far as to say that as the
result of this fatal exhaustion of this most precious instrument of
production the progress of mankind would for ever be arrested by
the ravages of famine. Other beneficent forces, the progress of
agricultural science and a larger employment of capital, would surmount
the difficulty. “Although the lands that are actually being
cultivated may be inferior to those which were in cultivation some
years ago, and consequently production is becoming more difficult,
can anyone doubt that the quantity of products does not greatly
exceed that formerly produced?”
Ricardo’s theory does not involve a denial of progress. But it
shows how the struggle is becoming more and more difficult, and how
scarcity and want, if not actual famine, must lie in the path along
which we are advancing. Suppose Great Britain were now to
attempt to feed her 45 million inhabitants from her own soil, would
there be much doubt as to the correctness of Ricardo’s prophecy?
It is an easy matter to reproach Ricardo[344] with his failure to foresee
the remarkable development in the methods of transport and
cheap importation which resulted in the arrest, if not the reversal, of
the upward movement of the rent curve. The complaints of landlords
both in England and Europe seem to belie the Ricardian theory.[345]
But who can tell whether the peril is finally removed or not?
The inevitable day will arrive when new countries will consume
the corn which to-day they export. This may not come about
in the history of England and Europe for some centuries yet,
but when it does happen, rent, instead of being stationary and
retrogressive, as it has been so long, will again resume its upward
trend.
It is true that we may reckon upon the aid of agricultural science
even if foreign importation should fail us. Ricardo was ever mindful
of the great possibilities of human industry. Other economists,
notably Carey and Fontenay, one of Bastiat’s disciples, have propounded
a theory which is the exact antithesis of the Ricardian,
namely, that human industry in its utilisation of natural forces
always begins with the feeblest as being more easily tamed, the more
powerful and recalcitrant forces only coming in for attention later
on. The earth is no exception to the rule, and agricultural industry
might well become not less but more productive.
This thesis, which implies a negation of the law of diminishing
returns, is based upon a very debatable analogy.
When speaking of the future of industry it is well to remember
that forces now seldom used, and perhaps seldom thought of, such
as the energies liberated by chemical and intermolecular action, may
hold infinite resources in reserve for mankind. But agriculture is
different. Admitting that with nitrogen got from the atmosphere, or
with phosphorus extracted from the subsoil, we may enrich the land
indefinitely, still we are continually confronted with the limitations
of time and space, which must determine the development of living
things, and of agricultural products among them. When albumen
can be scientifically produced then will the Ricardian theory become
obsolete. Until then it holds the field.
2. Of Wages and Profits
Let us now approach these two laws of Malthus and Ricardo—the
law of population and the law of rent—and ask what effect they
are likely to have upon the condition of the worker and the amount of
his wages. The answer is not very reassuring. On the one hand
there is an indefinite increase in the numbers of the proletariat—the
result of unchecked procreation, for “the moral restraint” can
hardly be said to have influence at all. The inevitable result is the
degradation of human labour. On the other hand, the law of
diminishing returns causes a continuous rise in the price of necessaries.
Between low wages on the one hand and high prices on the other, the
worker feels himself crushed as between the hammer and the anvil.
Turgot had long since given utterance to the tragic thought
that the wages of the worker are only just sufficient to keep him alive.
His contemporary Necker gave expression to the view in terms still
more melancholy. “Were it possible,” writes Necker, “to discover
a kind of food less agreeable than bread but having double its sustenance,
people would then be reduced to eating only once in two
days.” These must be looked upon as mere isolated statements,
sufficiently well attested by contemporary facts, perhaps, but laying
no claim to be considered general, permanent, and inevitable laws
such as Ricardo and Malthus would have regarded them.
And Ricardo still more emphatically declares that “the natural
price of labour is that price which is necessary to enable the labourers
one with another to subsist and to perpetuate their race without
either increase or diminution.” Note the last words, “without increase
or diminution”; that is, if a working man has more children
than are necessary for replacing their parents, then their wages will
fall below the normal rate until increased mortality shall have again
established equilibrium.
This is not tantamount to saying that nominal wages measured in
terms of money cannot increase. Indeed, it is absolutely necessary
that they should increase, seeing that the price of commodities is
continually rising. If they were to remain the same the workman
would soon be reduced to starvation. Wages accordingly will show a
tendency to rise in sympathy with the rising price of corn, so that
the workman will always be able to procure just the same quantity
of bread, no more and no less. It is his real wages measured in
corn that remain stationary, and upon this depends the well-being
of the working class.
But do they really remain stationary? Ricardo does not seem
to think so. “In the natural advance of society the wages of labour
will have a tendency to fall, as far as they are regulated by supply
and demand; for the supply of labourers will continue to increase at
the same rate, whilst the demand for them will increase at a slower
rate.”[346]
It is even possible that an increase in nominal wages may hide a
decrease in real wages. In that case, of course, wages will appear to
rise, but “the fate of the labourer will be less happy; he will receive
more money wages it is true, but his corn wages will be reduced.”
Only when the working classes are sufficiently thoughtful to limit
the number of their children will it be possible to hope for a preservation
of the status quo. “It is a truth which admits not a doubt, that the
comforts and well-being of the poor cannot be permanently secured
without some regard on their part or some effort on the part of the
legislature to regulate the increase of their numbers, and to render
less frequent among them early and improvident marriages.”
In other words, there will always be a demand for a certain number
of individuals in order to supply the needs of industry. So long as
this indispensable minimum is not exceeded the wages even of the
very lowest order must be sufficient to maintain existence, for they
must all be kept alive at any rate. But should the working population
exceed this demand nothing can prevent wages falling even
below the minimum necessary for existence, for there will no longer
be any necessity for keeping them all alive.
It must be remarked here that on this question, as on that of
rent, Malthus is less pessimistic than Ricardo. Far from maintaining
that every rise in wages of necessity involves an excess of population
and a consequent lowering of wages, Malthus believed that a
capacity for forethought, which constitutes the most efficacious check
upon the operation of blind instinct, may be engendered even among
the working classes, and that a high standard of life once secured
may become permanent. All this may be very true, but the
reasoning involves us in a vicious circle. In order that a high rate of
wages may produce its beneficial effects it must first of all be established,
but how can it possibly be established as long as the working
classes remain steeped in the misery caused by not exercising this
forethought?
An exit from the circle is only possible by recalling the fact that
the market wage incessantly oscillates about the natural wage
according to the exigencies of demand and supply. If this accidental
rise could be prolonged a little it might become permanent and
modify the workman’s standard of life.[347]
Such is the law of wages, which has long since passed into an
axiom, and whose authority is invoked in every discussion on social
reform. To every socialistic scheme, to every proposal for social
reform, there is always one answer: “There is no means of improving
the lot of the worker except by limiting the number of his
children. His destiny is in his own hands.”[348] Latter-day socialism,
commencing with Lassalle, makes a careful study of the law, and
returns to the charge against the existing economic order by affirming
that in no respect is it a natural law, but merely a result of the
capitalist régime, upon which it supplies an eloquent commentary.
We must not fail to note that in the Ricardian theory there is
not what we can exactly call antagonism between the landed proprietor
and the proletarian. To the latter it is a matter of indifference
whether rents be high or low, for his money wages move
in sympathy with the price of corn, but his real wages never change.
The proprietor on his side is equally indifferent to rising or falling
wages, for they never affect his receipts. His rent, as a matter of
fact, is determined by the quantity of labour employed on the
least fertile lands, but this quantity of labour has nothing to do with
the rate of wages. The landlords are the grandees of a different
order.[349]
The real struggle lies between capitalist and worker. Once the
value of corn has been determined by the cost of producing it on
the least favoured land, the proprietor seizes whatever is over and
above this, saying to both worker and capitalist, “You can divide the
rest between you.” This clearly is Ricardo’s view.[350] “Whatever
raises the wages of labour lowers the profits of stock.” Wages can
only rise at the expense of profits, and vice versa—a terrible prophecy
that has been abundantly illustrated by the fortunes of the labour
movement, but never more clearly than at the present moment.
But the mere statement of the fatal antagonism between capitalist
and workman must have caused both grief and surprise to those
economists who had endeavoured to demonstrate the solidarity of
interests between them as between brothers. Bastiat was one of
these, and he tried to show that in the course of economic evolution
the share of each factor tends to grow, but that labour’s shows the
greatest increase.
There can be no objection to Ricardo’s method of stating the
law. The whole thing is so evident that it is almost a truism. A
cake is being shared between two persons. If one gets more than
his due share is it not evident that the other must get less? It may
be pointed out, on the other hand, that the amount available for
distribution is continually on the increase, so that the share which
each participant gets may really be growing bigger. But that is
hardly the problem to be solved.[351] Increase the cake tenfold, even
a hundredfold, but if one person gets more than half of it the other
must have less. Ricardo’s implication is just that. His law deals
with proportions and not with quantities.
Admitting that the proportion which one of the two factors
receives can be increased only if the other is lessened, the problem is
to discover which of the two, capital or labour, has the bigger
portion. It really seems as if it were labour, for Ricardo speaks
of another law of profits, namely, “the tendency of profits to a
minimum.” Here is another thesis which has had a long career in the
history of economics, but what are the reasons that can be adduced in
support of it? The natural tendency of profits, then, is to fall; “for
in the progress of society and wealth the additional quantity of food
required is obtained by the sacrifice of more labour.” It is determined
by the same cause as determined rent—the system is a solid
piece of work at any rate.
But how does the cultivation of inferior land affect the rate of
profits? We have already seen how the worker’s share, the minimum
necessary for keeping body and soul together, goes to swell the high
price of corn.[352] But the manufacturer cannot transfer the cost of
high wages to the consumer, for the rate of wages has no effect on
prices. (Labour has, but wages have none.) As a consequence,
the capitalist’s share must be correspondingly reduced. We must
remember that the workman gains nothing by the high rate of
wages, for his consumption of food is limited by nature, but this does
not hinder the capitalist losing a great deal by it.
And so there must come a time when the necessary wage will
have absorbed everything and nothing will remain for profit. There
will be a new era in history, for every incentive to accumulate capital
will disappear with the extinction of profit. Capital will cease
growing, no new lands will be cultivated, and population will be
brought to a sudden standstill.[353] The stationary state with its
melancholy vistas will be entered upon. Mill has described it in such
eloquent terms that we are almost reconciled to the prospect. But
it could hardly have been a pleasant matter for Ricardo, who was
primarily a financier and had but little concern with philosophy. He
was very much attached to his prophecies, and there is a delicate
piece of irony in the thought that the tendency of profits towards a
minimum should have been first noted by this great representative of
capitalism. At the same time he felt a little reassured when he
thought of the opposing forces which might check its downward
trend and arrest the progress of rent. In both instances the best
corrective seemed to lie in the freedom of foreign trade.
The general lines of distribution are presented to us in a strikingly
simple fashion. The demonstration is neater even than the famous
Tableau économique, and it has the further merit of being nearer
the actual facts as they appeared in Ricardo’s day, for they are no
longer quite the same. It may be represented by means of a diagram
consisting of three lines.
At the top is an ascending line representing rent—the share of
Mother Earth. The proprietor’s rent reveals a double increase both
of money and kind, for as population and its needs grow it requires
an increasing quantity of corn at an increased price. Still, the high
price cannot be indefinitely prolonged, for beyond a certain point a
high price of corn would arrest the growth of population and at the
same time the growth of rent; then it would no longer be necessary
to cultivate new lands.
In the middle is a horizontal line representing wages—labour’s
share. The real wages of labour remain stationary, for it simply
receives the quantity of corn necessary to keep it alive. It is true
that as the corn is gradually becoming dearer the worker’s nominal
wages increase, but with no real benefit to him.
Below this is a descending line representing profits—capital’s
share.[354] It shows a downward trend for the simple reason that it
finds itself squeezed between the proprietor’s share, which tends to
increase, and the labourer’s, which is stationary. The capitalist is
brought to our notice in the guise of an English farmer who is obliged
to raise his servants’ wages as the corn becomes dearer, but who
gains nothing by this rise because the extra revenue is taken by the
proprietor in the form of higher rent. But profits cannot fall indefinitely,
for beyond a certain point it would involve an end to the
employment of old capital and the formation of new capital. This
would hinder the cultivation of new lands, and would arrest the high
price of corn and lower rent.
3. The Balance of Trade Theory and the Quantity
Theory of Money
Such are the more characteristic of Ricardo’s doctrines—at any
rate, those that left the deepest impression upon his successors and
caused the greatest stir among his contemporaries. There are other
doctrines besides which, regarded as contributions to the science,
are much more important and more definite; but just because they
figured almost directly in the category of universally accepted truths
whose validity and authorship have never been questioned they
have contributed less to his fame. Such are his theories of international
trade and banking, where the theorist becomes linked to a
first-rate practical genius. Here at any rate there is no note of
pessimism and no suggestion of conflicting interests. On the contrary,
he was able to point out that “under a system of perfectly free
commerce the pursuit of individual advantage is admirably connected
with the universal good of the whole.”
In the matter of international trade he showed himself a more
resolute Free Trader than either Smith or the Physiocrats. It seemed
to him that the only way of arresting the terrible progress of rent
and of checking the rising price of corn and the downward tendency
of profits was by the freest importation of foreign corn.[355]
In addition to this twofold argument in favour of Free Trade,
Ricardo brings forward another which is of considerable importance
even at the present time. This argument is based upon the advantages
which accrue from the territorial division of labour. “By
stimulating industry, by rewarding ingenuity, and by using most
efficaciously the peculiar powers bestowed by Nature, it distributes
labour most effectively and most economically.”
It may be worth while remarking that his illustrious contemporary
Malthus remained more or less of a Protectionist.[356] It might seem
strange that Malthus, continually haunted as he was by the spectre
of famine, should refuse to welcome importation. But his point
of view was doubtless largely that of the modern agricultural Protectionist,
who believes that the surest way of preserving a country
from famine is not to abandon its agriculture to the throes of foreign
competition, but, on the contrary, to strengthen and develop the
home industry by securing it a sufficiently high price for its products.
We must also remember that Malthus’s theory of rent differed somewhat
from Ricardo’s, and that he was not so violently opposed to
State intervention.[357]
But Ricardo’s principal contribution to the science was his discovery
of the laws governing the movements of commodities and
the counter-movements of money from one place to another, and the
admirable demonstration which he has given us of this remarkable
ebb and flow.
As soon as the balance of commerce becomes unfavourable to
France, let us say—that is, as soon as importation exceeds exportation
say by £1,000,000—money is exported to pay for this excessive
importation. Money becomes scarce, its value rises, and prices fall.
But a fall in price will check foreign importation and will encourage
exportation, so that imports will show signs of falling off while exports
will grow. Money will no longer be sent abroad, and the current
will begin to run the other way, until the £1,000,000 sent abroad is
returned again. Moreover, the £1,000,000 sent abroad will cause a
movement in the opposite direction—superabundance and a depreciation
in the value of money, high prices, a premium on importation
and a check upon exportation. Accordingly economic forces on
both sides will conspire to bring back the balance of commerce to a
position of equilibrium—that is, to that position where each country
will possess just the quantity of money that it needs.
It might be pointed out, on the other hand, that this somewhat
complicated mechanism can only operate very slowly, and that
considerable time must elapse before the prices of goods begin to
respond to the change in the quantity of money. But as a matter of
fact it is not necessary to wait until this phenomenon becomes
established, for another striking feature precedes it and announces
its approach so to speak, and this is, as Smith had already noted, a
change in the value of bills drawn on foreign countries. The foreign
exchanges are so sensitive that the slightest rise is enough to stimulate
exportation and to check importation.
Accordingly money seldom leaves a country, or only leaves it for
a short time. In other words, contrary to the generally accepted
opinion, silver and gold in international trade do little more than
oil the wheels of commerce. The trade is carried on as if the
metals were non-existent. In short, it is essentially of the nature
of barter.[358]
The explanation is very schematic. Every incidental phenomenon
is omitted, and the whole theory implies the validity of the quantity
theory of money, which is now open to considerable criticism as being
altogether inadequate for an explanation of the facts involved. But
this theory of the automatic regulation of the balance of trade by
means of variations in the value of money, although already hinted
at by Hume and Smith, is none the less a discovery of the first order,
and one that has done service as a working hypothesis for a whole
century.[359]
Its explanation turns upon a particular theory of international
trade which we can only mention in passing, but which we shall find
more fully developed in Stuart Mill’s theory of international values.
4. Paper Money, its Issue and Regulation
The enunciation of the principles which should govern the conduct
of bankers in issuing paper money is another debt that we owe to the
genius of Ricardo. The Bank Act of 1822, and that of 1844 especially,
which laid down the future policy of the Bank of England, represent
an attempt on the part of the Government to put his principles into
practice.
Ricardo was an eye-witness of the great panic of February 26,
1797, when the reserves of the Bank of England fell from ten millions
to a million and a half, necessitating an Order in Council suspending
cash payments. The suspension, which was supposed to be a
temporary expedient, extended right up to 1821. The depreciation
in the value of the bank-note averaged about 10 per cent., but at
one period towards the end of the Napoleonic wars it rose as high
as 30 per cent. He also witnessed the suffering which such depreciation
caused. Landlords demanded the payment of their rents
in gold, or claimed an increase in the rent equal to the fall in the
value of the note.
Ricardo tried to unravel the causes of this depreciation in his
pamphlet entitled The High Price of Bullion, published in 1809,
and came to the conclusion that there was only one cause, namely,
an excessive supply of paper. At this distance of time it might not
be thought such an extraordinary discovery after all. Still, he had
the greatest difficulty in getting people to admit this, and in refuting
the absurd explanations which had previously been suggested. He
showed how a depreciation in the value of the note necessarily resulted
in the exportation of gold, although most of his contemporaries, on
the contrary, believed that the exportation of gold was the cause of
all the mischief which they sought to check by an Act of Parliament.
“The remedy which I propose for all the evils in our currency is
that the Bank should gradually decrease the amount of their notes
in circulation until they shall have rendered the remainder of equal
value with the coins which they represent, or in other words till the
prices of gold and silver bullion shall be brought down to their Mint
price.”[360]
But if that is the case why not cut the Gordian knot and suppress
paper money altogether? The reply shows how well Ricardo had
studied Smith: “A well-regulated paper currency is so great an
improvement in commerce that I should greatly regret if prejudice
should induce us to return to a system of less utility.” “The introduction
of the precious metals for the purposes of money may with
truth be considered as one of the most important steps towards the
improvement of commerce and the arts of civilised life; but it is
no less true that with the advancement of knowledge and science
we discover that it would be another improvement to banish them
again from the employment to which, during a less enlightened
period, they had been so advantageously applied.”[361]
Proceeding, he points out that where you have only metallic
money it might happen that the production of gold fails to keep
pace with the growth of population, in which case you have a rise
in the value of gold accompanied by a fall in prices. This danger
might be obviated by a careful issue of notes in accordance with
the demands of society. In short, Ricardo is so little disposed to
abandon the system of paper money and to return to the previous
system of metallic money that, on the contrary, he would prefer to
abolish the metallic system altogether, taking good care that paper
money did not become superabundant.
So convinced was he of the superiority of paper money that he
had no desire to see the Bank resume cash payment. The result of
the resumption would be a demand on the part of the public for a
conversion of their paper money, “and thus, to indulge a mere
caprice, a most expensive medium would be substituted for one of
little value.”
But if the notes are not convertible into cash, what is there to
guarantee their value or to regulate their issue and prevent depreciation?
This can be done merely by keeping a reserve of gold at the
bank, not necessarily in the form of money, but in the form of ingots.
The bank would not be allowed to issue any notes beyond the value
of these ingots. This regulation would have the effect of keeping
the value of the note at par, for bankers and money-dealers would
immediately proceed to convert these notes into gold as soon as
they showed any signs of depreciation. This would not mean,
however, that the public at large would again return to the use
of metallic money, for these ingots would be of little use for purposes
of everyday life.
It is a curious system. One would hardly expect the great
champion of Liberal political economy to outline a banking system
which could only operate through a State bank. This was clearly
his opinion, however. He declared himself utterly opposed to the
free banking system, and doubted the ability of such a system to
regulate the currency. “In that sense there can be no excess
whilst the bank does not pay in specie, because the commerce of the
country can easily employ and absorb any sum which the bank may
send into circulation.”[362] This shows what little confidence a
Liberal individualist like Ricardo had in the liberty of individuals
and their ability to judge of the kind of money that is most serviceable.
Ricardo’s disciples are legion, and among them is every economist
of standing of the earlier part of the nineteenth century. The
best known among these are the three writers who immediately
follow him in chronological order: James Mill, the father of John
Stuart Mill (Elements of Political Economy, 1821), his friend McCulloch
(Principles of Political Economy, 1825), and Nassau Senior (Political
Economy, 1836).
The two first-named writers contented themselves with a vigorous
defence of the master’s views without contributing anything very
new. We have already referred to the very different conclusions
which James Mill draws from the theory of rent, and how he became
an advocate of land nationalisation. McCulloch also was one of
the earliest advocates of the right to strike.
Senior deserves a few pages to himself, for his work in systematising
the Classical doctrines. We shall deal with him in our chapter
on John Stuart Mill.
