Produced by Avinash Kothare and Marc D'Hooghe






ESSAYS ON SOME UNSETTLED QUESTIONS OF POLITICAL ECONOMY

by

JOHN STUART MILL


1844




PREFACE.


Of these Essays, which were written in 1829 and 1830, the fifth alone
has been previously printed. The other four have hitherto remained in
manuscript, because, during the temporary suspension of public interest
in the species of discussion to which they belong, there was no
inducement to their publication.

They are now published (with a few merely verbal alterations) under the
impression, that the controversies excited by Colonel Torrens' _Budget_
have again called the attention of political economists to the
discussions of the abstract science: and from the additional
consideration, that the first paper relates expressly to the point upon
which the question at issue between Colonel Torrens and his antagonists
has principally turned.

From that paper it will be seen that opinions identical in principle
with those promulgated by Colonel Torrens (there would probably be
considerable difference as to the extent of their practical application)
have been held by the writer for more than fifteen years: although he
cannot claim to himself the original conception, but only the
elaboration, of the fundamental doctrine of the Essay.

A prejudice appears to exist in many quarters against the theory in
question, on the supposition of its being opposed to one of the most
valuable results of modern political philosophy, the doctrine of Freedom
of Trade between nation and nation. The opinions now laid before the
reader are presented as corollaries necessarily following from the
principles upon which Free Trade itself rests. The writer has also been
careful to point out, that from these opinions no justification can be
derived for any _protecting_ duty, or other preference given to domestic
over foreign industry. But in regard to those duties on foreign
commodities which do not operate as protection, but are maintained
solely for revenue, and which do not touch either the necessaries of
life or the materials and instruments of production, it is his opinion
that any relaxation of such duties, beyond what may be required by the
interest of the revenue itself, should in general be made contingent
upon the adoption of some corresponding degree of freedom of trade with
this country, by the nation from which the commodities are imported.




CONTENTS.


ESSAY I.

Of the Laws of Interchange between Nations; and the Distribution of the
Gains of Commerce among the Countries of the Commercial World

ESSAY II.

Of the Influence of Consumption upon Production

ESSAY III.

On the Words Productive and Unproductive

ESSAY IV.

On Profits, and Interest

ESSAY V.

On the Definition of Political Economy; and on the Method of
Investigation proper to it




ESSAY I.

OF THE LAWS OF INTERCHANGE BETWEEN NATIONS; AND THE DISTRIBUTION OF THE
GAINS OF COMMERCE AMONG THE COUNTRIES OF THE COMMERCIAL WORLD.


Of the truths with which political economy has been enriched by Mr.
Ricardo, none has contributed more to give to that branch of knowledge
the comparatively precise and scientific character which it at present
bears, than the more accurate analysis which he performed of the nature
of the advantage which nations derive from a mutual interchange of their
productions. Previously to his time, the benefits of foreign trade were
deemed, even by the most philosophical enquirers, to consist in
affording a vent for surplus produce, or in enabling a portion of the
national capital to replace itself with a profit. The futility of the
theory implied in these and similar phrases, was an obvious consequence
from the speculations of writers even anterior to Mr. Ricardo. But it
was he who first, in the chapter on Foreign Trade, of his immortal
_Principles of Political Economy and Taxation_, substituted for the
former vague and unscientific, if not positively false, conceptions with
regard to the advantage of trade, a philosophical exposition which
explains, with strict precision, the nature of that advantage, and
affords an accurate measure of its amount.

He shewed, that the advantage of an interchange of commodities between
nations consists simply and solely in this, that it enables each to
obtain, with a given amount of labour and capital, a greater quantity of
all commodities taken together. This it accomplishes by enabling each,
with a quantity of one commodity which has cost it so much labour and
capital, to purchase a quantity of another commodity which, if produced
at home, would have required labour and capital to a greater amount.
To render the importation of an article more advantageous than its
production, it is not necessary that the foreign country should be able
to produce it with less labour and capital than ourselves. We may even
have a positive advantage in its production: but, if we are so far
favoured by circumstances as to have a still greater positive advantage
in the production of some other article which is in demand in the
foreign country, we may be able to obtain a greater return to our labour
and capital by employing none of it in producing the article in which
our advantage is least, but devoting it all to the production of that in
which our advantage is greatest, and giving this to the foreign country
in exchange for the other. It is not a difference in the _absolute_ cost
of production, which determines the interchange, but a difference in the
_comparative_ cost. It may be to our advantage to procure iron from
Sweden in exchange for cottons, even although the mines of England as
well as her manufactories should be more productive than those of
Sweden; for if we have an advantage of one-half in cottons, and only an
advantage of a quarter in iron, and could sell our cottons to Sweden at
the price which Sweden must pay for them if she produced them herself,
we should obtain our iron with an advantage of one-half, as well as our
cottons. We may often, by trading with foreigners, obtain their
commodities at a smaller expense of labour and capital than they cost
to the foreigners themselves. The bargain is still advantageous to the
foreigner, because the commodity which he receives in exchange, though
it has cost us less, would have cost him more. As often as a country
possesses two commodities, one of which it can produce with less labour,
comparatively to what it would cost in a foreign country, than the
other; so often it is the interest of the country to export the first
mentioned commodity and to import the second; even though it might be
able to produce both the one and the other at a less expense of labour
than the foreign country can produce them, but not less in the same
degree; or might be unable to produce either except at a greater
expense, but not greater in the same degree.

On the contrary, if it produces both commodities with greater facility,
or both with greater difficulty, and greater in exactly the same degree,
there will be no motive to interchange.

"If the cloth and the corn, each of which required 100 days' labour in
Poland, required each 150 days' labour in England; it would follow, that
the cloth of 150 days' labour in England, if sent to Poland, would be
equal to the cloth of 100 days' labour in Poland: if exchanged for corn,
therefore, it would exchange for the corn of only 100 days' labour. But
the corn of 100 days' labour in Poland, was supposed to be the same
quantity with that of 150 days' labour in England. With 150 days' labour
in cloth, therefore, England would only get as much corn in Poland as
she could raise with 150 days' labour at home; and she would, in
importing it, have the cost of carriage besides. In these circumstances
no exchange would take place.

"If, on the other hand, while the cloth produced with 100 days' labour
in Poland was produced with 150 days' labour in England, the corn which
was produced in Poland with 100 days' labour could not be produced in
England with less than 200 days' labour; an adequate motive to exchange
would immediately arise. With a quantity of cloth which England produced
with 150 days' labour, she would be able to purchase as much corn in
Poland as was there produced with 100 days' labour; but the quantity,
which was there produced with 100 days' labour, would be as great as the
quantity produced in England with 200 days' labour.

"The power of Poland would be reciprocal. With a quantity of corn which
cost her 100 days' labour, equal to the quantity produced in England by
200 days' labour, she could in the supposed case purchase in England the
produce of 200 days' labour in cloth." But "the produce of 150 days'
labour in England in the article of cloth would be equal to the produce
of 100 days' labour in Poland [1]."

The remainder of what Mr. Ricardo has done for the philosophical
exposition of the principles of foreign trade, is to shew, that the
truth of the propositions now recapitulated is not affected by the
introduction of money as a medium of exchange; the precious metals
always tending to distribute themselves in such a manner throughout the
commercial world, that every country shall import all that it would have
imported, and export all that it would have exported, if exchanges had
taken place, as in the example above supposed, by barter.

To this branch of the subject we shall, in the sequel of this essay,
return. At present it will be more convenient that we should continue to
suppose, that exchanges take place by the direct trucking of one
commodity against another.

It is established, that the advantage which two countries derive from
trading with each other, results from the more advantageous employment
which thence arises, of the labour and capital--for shortness let us say
the labour--of both jointly. The circumstances are such, that if each
country confines itself to the production of one commodity, there is a
greater total return to the labour of both together; and this increase
of produce forms the whole of what the two countries taken together gain
by the trade.

It is the purpose of the present essay to inquire, in what proportion
the increase of produce, arising from the saving of labour, is divided
between the two countries.

This question was not entered into by Mr. Ricardo, whose attention was
engrossed by far more important questions, and who, having a science to
create, had not time, or room, to occupy himself with much more than the
leading principles. When he had done enough to enable any one who came
after him, and who took the necessary pains, to do all the rest, he was
satisfied. He very rarely followed out the principles of the science
into the ramifications of their consequences. But we believe that to no
one, who has thoroughly entered into the spirit of his discoveries, will
even the minutiae of the science offer any difficulty but that which is
constituted by the necessity of patience and circumspection in tracing
principles to their results.

Mr. Ricardo, while intending to go no further into the question of the
advantage of foreign trade than to show what it consisted of, and under
what circumstances it arose, unguardedly expressed himself as if each of
the two countries making the exchange separately gained the whole of the
difference between the comparative costs of the two commodities in one
country and in the other. But, the whole gain of both countries
together, consisting in the saving of labour; and the saving of labour
being exactly equal to the difference between the costs, in the two
countries, of the one commodity as compared with the other; the two
countries taken together gain no more than this difference: and if
either country gains the whole of it, the other country derives no
advantage from the trade.

Suppose, for example, that 10 yards of broad cloth cost in England as
much labour as 15 yards of linen, and in Germany as much as 20. If
England sends 10 yards of broad cloth to Germany, and is able to
exchange them for linen according to the German cost of production, she
will get 20 yards of linen, with a quantity of labour with which she
could not have produced more than 15; and will gain, therefore, 5 yards
on every 15, or 33-1/3 per cent. But in this case Germany would obtain
only 10 yards of cloth for 20 of linen. Now, 10 yards of cloth cost
exactly the same quantity of labour in Germany as 20 of linen; Germany,
therefore, derives no advantage from the trade, more than she would
possess if it did not exist.

So, on the other hand, if Germany sends 15 yards of linen to England,
and finding the relative value of the two articles in that country
determined by the English costs of production, is enabled to purchase
with 35 yards of linen 10 yards of cloth; Germany now gains 5 yards,
just as England did before,--for with 15 yards of linen she purchases 10
yards of cloth, when to produce these 10 yards she must have employed as
much labour as would have enabled her to produce 20 yards of linen. But
in this case England would gain nothing: she would only obtain, for her
10 yards of cloth, 15 yards of linen, which is exactly the comparative
cost at which she could have produced them.

This, which was not an error, but a mere oversight of Mr. Ricardo,
arising from his having left the question of the division of the
advantage entirely unnoticed, was first corrected in the third edition
of Mr. Mill's _Elements of Political Economy_. It can hardly, however,
be said that Mr. Mill has prosecuted the inquiry any further; which,
indeed, would have been quite as inconsistent with the nature of his
plan as of Mr. Ricardo's.

1. When the trade is established between the two countries, the two
commodities will exchange for each other at the same rate of interchange
in both countries--bating the cost of carriage, of which, for the present,
it will be more convenient to omit the consideration. Supposing, therefore,
for the sake of argument, that the carriage of the commodities from one
country to another could be effected without labour and without cost, no
sooner would the trade be opened than, it is self-evident, the value of
the two commodities, estimated in each other, would come to a level in
both countries.

If we knew what this level would be, we should know in what proportion
the two countries would share the advantage of the trade.

When each country produced both commodities for itself, 10 yards of
broad cloth exchanged for 15 yards of linen in England, and for 20 in
Germany. They will now exchange for the same number of yards of linen in
both. For what number? If for 15 yards, England will be just as she was,
and Germany will gain all. If for 20 yards, Germany will be as before,
and England will derive the whole of the benefit. If for any number
intermediate between 15 and 20, the advantage will be shared between the
two countries. If, for example, 10 yards of cloth exchange for 18 of
linen, England will gain an advantage of 3 yards on every 15, Germany
will save 2 out of every 20.

The problem is, what are the causes which determine the proportion in
which the cloth of England and the linen of Germany will exchange for
each other?

This, therefore, is a question concerning exchangeable value. There must
be something which determines how much of one commodity another
commodity will purchase; and there is no reason to suppose that the law
of exchangeable value is more difficult of ascertainment in this case
than in other cases.

The law, however, cannot be precisely the same as in the common cases.
When two articles are produced in the immediate vicinity of one another,
so that, without expatriating himself, or moving to a distance, a
capitalist has the choice of producing one or the other, the quantities
of the two articles which will exchange for each other will be, on the
average, those which are produced by equal quantities of labour. But
this cannot be applied to the case where the two articles are produced
in two different countries; because men do not usually leave their
country, or even send their capital abroad, for the sake of those small
differences of profit which are sufficient to determine their choice of
a business, or of an investment, in their own country and neighbourhood.

The principle, that value is proportional to cost of production, being
consequently inapplicable, we must revert to a principle anterior to
that of cost of production, and from which this last flows as a
consequence,--namely, the principle of demand and supply.

In order to apply this principle, with any advantage, to the solution of
the question which now occupies us, the principle itself, and the idea
attached to the term demand, must be conceived with a precision, which
the loose manner in which the words are used generally prevents.

It is well known that the quantity of any commodity which can be
disposed of, varies with the price. The higher the price, the fewer will
be the purchasers, and the smaller the quantity sold. The lower the
price, the greater will in general be the number of purchasers, and the
greater the quantity disposed of. This is true of almost all commodities
whatever: though of some commodities, to diminish the consumption in any
given degree would require a much greater rise of price than of others.

Whatever be the commodity--the supply in any market being given, there
is some price at which the whole of the supply exactly will find
purchasers, and no more. That, whatever it be, is the price at which, by
the effect of competition, the commodity will be sold. If the price be
higher, the whole of the supply will not be disposed of, and the
sellers, by their competition, will bring down the price. If the price
be lower, there will be found purchasers for a larger supply, and the
competition of these purchasers will raise the price.

This, then, is what we mean, when we say that price, or exchangeable
value, depends on demand and supply. We should express the principle
more accurately, if we were to say, the price so regulates itself that
the demand shall be exactly sufficient to carry off the supply.

Let us now apply the principle of demand and supply, thus understood, to
the interchange of broadcloth and linen between England and Germany.

As exchangeable value in this case, as in every other, is proverbially
fluctuating, it does not matter what we suppose it to be when we begin;
we shall soon see whether there be any fixed point about which it
oscillates--which it has a tendency always to approach to, and to remain
at.

Let us suppose, then, that by the effect of what Adam Smith calls the
higgling of the market, 10 yards of cloth, in both countries, exchange
for 17 yards of linen.

The demand for a commodity, that is, the quantity of it which can find a
purchaser, varies, as we have before remarked, according to the price.
In Germany, the price of 10 yards of cloth is now 17 yards of linen; or
whatever quantity of money is equivalent in Germany to 17 yards of
linen. Now, that being the price, there is some particular number of
yards of cloth, which will be in demand, or will find purchasers, at
that price. There is some given quantity of cloth, more than which could
not be disposed of at that price,--less than which, at that price, would
not fully satisfy the demand. Let us suppose this quantity to be, 1000
times 10 yards.

Let us now turn our attention to England. There, the price of 17 yards
of linen is 10 yards of cloth, or whatever quantity of money is
equivalent in England to 10 yards of cloth. There is some particular
number of yards of linen, which, at that price, will exactly satisfy the
demand, and no more. Let us suppose that this number is 1000 times 17
yards.

As 17 yards of linen are to 30 yards of cloth, so are 1000 times 17
yards to 1000 times 10 yards. At the existing exchangeable value, the
linen which England requires, will exactly pay for the quantity of cloth
which, on the same terms of interchange, Germany requires. The demand on
each side is precisely sufficient to carry off the supply on the other.
The conditions required by the principle of demand and supply are
fulfilled, and the two commodities will continue to be interchanged, as
we supposed them to be, in the ratio of 17 yards of linen for 10 yards
of cloth.

But our supposition might have been different. Suppose that, at the
assumed rate of interchange, England had been disposed to consume no
greater quantity of linen than 800 times 17 yards; it is evident that,
at the rate supposed, this would not have sufficed to pay for the 1000
times 10 yards of cloth, which we have supposed Germany to require at
the assumed value. Germany would be able to procure no more than 800
times 10 yards, at that price. To procure the remaining 200, which she
would have no means of doing but by bidding higher for them, she would
offer more than 17 yards of linen in exchange for 10 yards of cloth; let
us suppose her to offer 18. At that price, perhaps, England would be
inclined to purchase a greater quantity of linen. She could consume,
possibly, at that price, 900 times 18 yards. On the other hand, cloth
having risen in price, the demand of Germany for it would, probably,
have diminished. If, instead of 1000 times 10 yards, she is now
contented with 900 times ten yards, these will exactly pay for the 900
times 18 yards of linen which England is willing to take at the altered
price: the demand on each side will again exactly suffice to take off
the corresponding supply; and 10 yards for 18 will be the rate at which,
in both countries, cloth will exchange for linen.

The converse of all this would have happened if instead of 800 times 17
yards, we had supposed that England, at the rate of 10 for 17, would
have taken 1200 times 17 yards of linen. In this case, it is England
whose demand is not fully supplied; it is England who, by bidding for
more linen, will alter the rate of interchange to her own disadvantage;
and 10 yards of cloth will fall, in both countries, below the value of
17 yards of linen. By this fall of cloth, or what is the same thing,
this rise of linen, the demand of Germany for cloth will increase, and
the demand of England for linen will diminish, till the rate of
interchange has so adjusted itself that the cloth and the linen will
exactly pay for another; and when once this point is attained, values
will remain as they are.

It may be considered, therefore, as established, that when two countries
trade together in two commodities, the exchangeable value of these
commodities relatively to each other will adjust itself to the
inclinations and circumstances of the consumers on both sides, in such
manner that the quantities required by each country, of the article
which it imports from its neighbour, shall be exactly sufficient to pay
for one another. As the inclinations and circumstances of consumers
cannot be reduced to any rule, so neither can the proportions in which
the two commodities will be interchanged. We know that the limits within
which the variation is confined are the ratio between their costs of
production in the one country, and the ratio between their costs of
production in the other. Ten yards of cloth cannot exchange for more
than 20 yards of linen, nor for less than 15. But they may exchange for
any intermediate number. The ratios, therefore, in which the advantage
of the trade may be divided between the two nations, are various. The
circumstances on which the proportionate share of each country more
remotely depends, admit only of a very general indication.

It is even possible to conceive an extreme case, in which the whole of
the advantage resulting from the interchange would be reaped by one
party, the other country gaining nothing at all. There is no absurdity
in the hypothesis, that of some given commodity a certain quantity is
all that is wanted at any price, and that when that quantity is
obtained, no fall in the exchangeable value would induce other consumers
to come forward, or those who are already supplied to take more. Let us
suppose that this is the case in Germany with cloth. Before her trade
with England commenced, when 10 yards of cloth cost her as much labour
as 20 yards of linen, she nevertheless consumed as much cloth as she
wanted under any circumstances, and if she could obtain it at the rate
of 10 yards of cloth for 15 of linen, she would not consume more. Let
this fixed quantity be 1000 times 10 yards. At the rate, however, of 10
for 20, England would want more linen than would be equivalent to this
quantity of cloth. She would consequently offer a higher value for
linen; or, what is the same thing, she would offer her cloth at a
cheaper rate. But as by no lowering of the value could she prevail on
Germany to take a greater quantity of cloth, there would be no limit to
the rise of linen, or fall of cloth, until the demand of England for
linen was reduced by the rise of its value, to the quantity which one
thousand times ten yards of cloth would purchase. It might be, that to
produce this diminution of the demand, a less fall would not suffice,
than one which would make 10 yards of cloth exchange for 15 of linen.
Germany would then gain the whole of the advantage, and England would be
exactly as she was before the trade commenced. It would be for the
interest, however, of Germany herself, to keep her linen a little below
the value at which it could be produced in England, in order to keep
herself from being supplanted by the home producer. England, therefore,
would always benefit in some degree by the existence of the trade,
though it might be in a very trifling one.

But in general there will not be this extreme inequality in the degree
in which the demand in the two countries varies with variations in the
price. The advantage will probably be divided equally, oftener than in
any one unequal ratio that can be named; though the division will be
much oftener, on the whole, unequal than equal.

2. We shall now examine whether the same law of interchange, which we
have shown to apply upon the supposition of barter, holds good after the
introduction of money. Mr. Ricardo found that his more general
proposition stood this test; and as the proposition which we have just
demonstrated is only a further developement of his principle, we shall
probably find that it suffers a little, by a mere change in the mode
(for it is no more) in which one commodity is exchanged against another.

We may at first make whatever supposition we will with respect to the
value of money. Let us suppose, therefore, that before the opening of
the trade, the price of cloth is the same in both countries, namely, six
shillings per yard [2]. As 10 yards of cloth were supposed to exchange in
England for 5 yards of linen, in Germany for 20, we must suppose that
linen is sold in England at four shillings per yard, in Germany at
three. Cost of carriage and importer's profit are left as before, out of
consideration.

In this state of prices, cloth, it is evident, cannot yet be exported
from England into Germany. But linen can be imported from Germany into
England. It will be so, and, in the first instance, the linen will be
paid for in money.

The efflux of money from England, and its influx into Germany, will
raise money prices in the latter country, and lower them in the former.
Linen will rise in Germany above three shillings per yard, and cloth
above six shillings. Linen in England being imported from Germany, will
(since cost of carriage is not reckoned) sink to the same price as in
that country, while cloth will fall below six shillings. As soon as the
price of cloth is lower in England than in Germany, it will begin to be
exported, and the price of cloth in Germany will fall to what it is in
England. As long As the cloth exported does not suffice to pay for the
linen imported, money will continue to flow from England into Germany,
and prices generally will continue to fall in England, and rise in
Germany. By the fall, however, of cloth in England, cloth will fall in
Germany also, and the demand for it will increase. By the rise of linen
in Germany, linen must rise in England also, and the demand for it will
diminish. Although the increased exportation of cloth takes place at a
lower price, and the diminished importation of linen at a higher, yet
the total money value of the exportation would probably increase, that
of the importation diminish. As cloth fell in price and linen rose,
there would be some particular price of both articles at-which the cloth
exported, and the linen imported, would exactly pay for each other. At
this point prices would remain, because money would then cease to move
out of England into Germany. What this point might be, would entirely
depend upon the circumstances and inclinations of the purchasers on both
sides. If the fall of cloth did not much increase the demand for it in
Germany, and the rise of linen did not diminish very rapidly the demand
for it in England, much money must pass before the equilibrium is
restored; cloth would fall very much, and linen would rise, until
England, perhaps, had to pay nearly as much for it as when she produced
it for herself. But if, on the contrary, the fall of cloth caused a very
rapid increase of the demand for it in Germany, and the rise of linen in
Germany reduced very rapidly the demand in England from what it was
under the influence of the first cheapness produced by the opening of
the trade; the cloth would very soon suffice to pay for the linen,
little money would pass between the two countries, and England would
derive a large portion of the benefit of the trade. We have thus arrived
at precisely the same conclusion, in supposing the employment of money,
which we found to hold under the supposition of barter.

In what shape the benefit accrues to the two nations from the trade, is
clear enough. Germany, before the commencement of the trade, paid six
shillings per yard for broad-cloth. She now obtains it at a lower price.
This, however, is not the whole of her advantage. As the money prices of
all her other commodities have risen, the money incomes of all her
producers have increased. This is no advantage to them in buying from
each other; because the price of what they buy has risen in the same
ratio with their means of paying for it: but it is an advantage to them
in buying any thing which has not risen; and still more, any thing which
has fallen. They therefore benefit as consumers of cloth, not merely to
the extent to which cloth has fallen, but also to the extent to which
other prices have risen. Suppose that this is one-tenth. The same
proportion of their money incomes as before, will suffice to supply
their other wants, and the remainder, being increased one-tenth in
amount, will enable them to purchase one-tenth more cloth than before,
even though cloth had not fallen. But it has fallen: so that they are
doubly gainers. If they do not choose to increase their consumption of
cloth, this does not prevent them from being gainers. They purchase the
same quantity with less money, and have more to expend upon their other
wants.

In England, on the contrary, general money-prices have fallen. Linen,
however, has fallen more than the rest; having been lowered in price, by
importation from a country where it was cheaper, whereas the others have
fallen only from the consequent efflux of money. Notwithstanding,
therefore, the general fall of money-prices, the English producers will
be exactly as they were in all other respects, while they will gain as
purchasers of linen.

The greater the efflux of money required to restore the equilibrium, the
greater will be the gain of Germany; both by the fall of cloth, and by
the rise of her general prices. The less the efflux of money requisite,
the greater will be the gain of England; because the price of linen will
continue lower, and her general prices will not be reduced so much. It
must not, however, be imagined that high money-prices are a good, and
low money-prices an evil, in themselves. But the higher the general
money-prices in any country, the greater will be that country's means
of purchasing those commodities which, being imported from abroad, are
independent of the causes which keep prices high at home.

3. We have hitherto supposed the carriage to be performed without labour
or expense. If we abandon this supposition, we must correct the
statement of the case in a slight degree. The prices of the two articles
will no longer, when the trade is opened, be the same in both countries,
nor will the articles exchange for one another at the same rate in both.
Ten yards of cloth will purchase in Germany a quantity of linen greater
than in England by a per-centage equal to the entire cost of conveyance
both of the cloth to Germany and of the linen to England. The
money-price of linen will be higher in England than in Germany, by the
cost of carriage of the linen. The money-price of cloth will be higher
in Germany than in England, by the cost of carriage of the cloth.

The expense of the carriage is evidently a deduction _pro tanto_ from
the saving of labour produced by the establishment of the trade. The two
countries together, therefore, have their gains by the trade diminished,
by the amount of the cost of carriage of both commodities. But here the
question arises, which of the two countries bears this deduction, or in
what proportion it is divided between them.

At the first inspection it would appear that each country bears its own
cost of carriage, that is, that each country pays the carriage of the
commodity which it imports. Upon this supposition, each country would
gain whatever share of the joint saving of labour would otherwise fall
to its lot, _minus_ the cost of bringing from the other country the
commodity which it imports. This solution is rendered plausible by the
circumstance just now mentioned, that the price of the commodity will be
higher in the country which imports it, than in the country which
exports it, by the amount of the cost of carriage. If linen is sold in
England at a higher price than in Germany, by a per-centage equal to the
cost of carriage of the linen, it appears obvious that England pays for
the carriage of the linen, and Germany, by parity of reason, for that of
the cloth.

But if we apply to these questions the principles already explained, we
shall see that this is not by any means a universal law: the fact may
correspond with it, or it may not.

For suppose that the prices have adjusted themselves, no matter how, and
that the imports and exports balance one another, each commodity, of
course, being dearer by the cost of carriage, in the country which
imports than in that which exports it: and suppose now that the cost of
carriage, both of the one and of the other, were suddenly and
miraculously annihilated, and that the commodities could pass from
country to country without expense. If each country bore its own cost of
carriage before, each country will save its own cost of carriage now.
Cloth, in Germany, will in that case fall exactly to what it is in
England; linen in England, to what it is in Germany.

Now this fall of price, supposing it to happen, will probably affect the
demand on both sides; and it will either affect it alike in both
countries, or it will affect it unequally. It will affect it alike, if
the fall of price does not affect the demand at all, or if it affects it
equally in both countries. If either of these results should take place,
the cloth and the linen would continue to balance each other as before:
no money would pass from one country to the other; prices in both would
continue at the point to which they had fallen, and each country would
exactly save the cost of carriage on the commodity which it imports from
the other.

But the result might be, that the fall of price might not have an effect
exactly equal, on the demand in the two countries. Suppose, for
instance, that the fall of cloth in Germany owing to the saving of the
cost of carriage, did not increase the demand for cloth in Germany; but
that the fall of linen in England from a like cause, did increase the
demand for linen in England. The linen imported would be more than could
be paid for by the cloth exported: the difference must be paid in money:
the change in the distribution of the precious metals between the two
countries would lower the price of cloth in England, (and consequently
in Germany), while it would raise the price of linen in Germany, (and
consequently in England). Germany, therefore, by the annihilation of
cost of carriage, would save in price more than the cost of carriage of
the cloth; England would save less in price than the cost of carriage of
the linen. But if by the miraculous annihilation of cost of carriage,
England would not _save_ the whole of the carriage of her imports, it
follows that England did not previously _pay_ the whole of that cost of
carriage.

Thus, the division of the cost of trade, and the division of the
advantage of trade, are governed by precisely the same principles; and
the only general proposition which can be affirmed respecting the cost
is, that it is _pro tanto_ a deduction from the advantage. It cannot
even be maintained that the cost is shared in the same proportion as the
advantage is; because the increase of the demand for a commodity as its
price falls, is not governed by any fixed law. Suppose, for instance,
that the advantage happened to be divided equally: this must be because
the greater cheapness arising from the establishment of the trade,
either did not affect the demand at all, or affected it in an equal
proportion on both sides. Now, because such is the effect of the degree
of increased cheapness resulting from importation burthened with cost of
carriage, it would not follow that the still greater degree of
cheapness, produced by the additional saving of the cost of carriage
itself, would also affect the demand of both countries in precisely an
equal degree. But we cannot be said to bear an expense, which, if saved,
would be saved to somebody else, and not to us. Two countries may have
equal shares of the clear benefit of the trade, while, if the cost of
carriage were saved, they would divide that saving unequally. If so,
they divide the gross gain in one unequal ratio, the cost in another
unequal ratio, though their shares of the cost being deducted from their
shares of the gain leave equal remainders.

4. The question naturally suggests itself, whether any country, by its
own legislative policy, can engross to itself a larger share of the
benefits of foreign commerce, than would fall to it in the natural or
spontaneous course of trade.

The answer is, it can. By taxing exports, for instance, we may, under
certain circumstances, produce a division of the advantage of the trade
more favourable to ourselves. In some cases, we may draw into our
coffers, at the expense of foreigners, not only the whole tax, but more
than the tax: in other cases, we should gain exactly the tax,--in
others, less than the tax. In this last case, a part of the tax is borne
by ourselves: possibly the whole, possibly even, as we shall show, more
than the whole.

Suppose that England taxes her export of cloth: the tax not being
supposed high enough to induce Germany to produce cloth for herself. The
price at which cloth can be sold in Germany is augmented by the tax.
This will probably diminish the quantity consumed. It may diminish it so
much, that even at the increased price, there will not be required so
great a money value as before. It may diminish it in such a ratio, that
the money value of the quantity consumed will be exactly the same as
before. Or it may not diminish it at all, or so little, that, in
consequence of the higher price, a greater money value will be purchased
than before. In this last case, England will gain, at the expense of
Germany, not only the whole amount of the duty, but more. For the money
value of her exports to Germany being increased, while her imports
remain the same, money will flow into England from Germany. The price of
cloth will rise in England, and consequently in Germany; but the price
of linen will fall in Germany, and consequently in England, We shall
export less cloth, and import more linen, till the equilibrium is
restored. It thus appears, what is at first sight somewhat remarkable,
that, by taxing her exports, England would, under some conceivable
circumstances, not only gain from her foreign customers the whole amount
of the tax, but would also get her imports cheaper. She would get them
cheaper in two ways,--for she would obtain them for less money, and
would have more money to purchase them with. Germany, on the other hand,
would suffer doubly: she would have to pay for her cloth a price
increased not only by the duty, but by the influx of money into England,
while the same change in the distribution of the circulating medium
would leave her less money to purchase it with.

This, however, is only one of three possible cases. If, after the
imposition of the duty, Germany requires so diminished a quantity of
cloth, that its total money value is exactly the same as before, the
balance of trade will be undisturbed; England will gain the duty,
Germany will lose it, and nothing more. If, again, the imposition of the
duty occasions such a falling off in the demand, that Germany requires a
less pecuniary value than before, our exports will no longer pay for our
imports, money must pass from England into Germany, and Germany's share
of the advantage of the trade will be increased. By the change in the
distribution of money, cloth will fall in England; and therefore it
will, of course, fall in Germany. Thus Germany will not pay the whole of
the tax. From the same cause, linen will rise in Germany, and
consequently in England. When this alteration of prices has so adjusted
the demand, that the cloth and the linen again pay for one another, the
result is, that Germany has paid only a part of the tax, and the
remainder of what has been received into our treasury has come
indirectly out of the pockets of our own consumers of linen, who pay a
higher price for that imported commodity, in consequence of the tax on
our exports, which at the same time they, in consequence of the efflux
of money and consequent fall of prices, have smaller money incomes
wherewith to pay for the linen at that advanced price.

It is not an impossible supposition that, by taxing our exports, we
might not only gain nothing from the foreigner, the tax being paid out
of our own pockets, but might even compel our own people to pay a second
tax to the foreigner. Suppose, as before, that the demand of Germany for
cloth falls off so much on the imposition of the duty, that she requires
a smaller money value than before, but that the case is so different
with linen in England, that when the price rises the demand either does
not fall off at all, or so little that the money value required is
greater than before. The first effect of laying on the duty is, as
before, that the cloth exported will no longer pay for the linen
imported. Money will, therefore, flow out of England into Germany. One
effect is to raise the price of linen in Germany, and, consequently, in
England. But this, by the supposition, instead of stopping the efflux of
money, only makes it greater, because the higher the price, the greater
the money value of the linen consumed. The balance, therefore, can only
be restored by the other effect, which is going on at the same time,
namely, the fall of cloth in the English, and, consequently, in the
German market. Even when cloth has fallen so low that its price with the
duty is only equal to what its price without the duty was at first, it
is not a necessary consequence that the fall will stop; for the same
amount of exportation as before will not now suffice to pay the
increased money value of the imports; and although the German consumers
have now not only cloth at the old price, but likewise increased money
incomes, it is not certain that they will be inclined to employ the
increase of their incomes in increasing their purchases of cloth. The
price of cloth, therefore, must perhaps fall, to restore the
equilibrium, more than the whole amount of the duty; Germany may be
enabled to import cloth at a lower price when it is taxed, than when it
was untaxed: and this gain she will acquire at the expense of the
English consumers of linen, who, in addition, will be the real payers of
the whole of what is received at their own custom-house under the name
of duties on the export of cloth.

Such are the extremely various effects which may result to ourselves,
and to our customers, from the imposition of taxes on our exports [3]:
and the determining circumstances are of a nature so imperfectly
ascertainable, that it must be almost impossible to decide with any
certainty, even after the tax has been imposed, whether we have been
gainers by it or losers. It is certain, however, that whatever we gain,
is lost by somebody else, and there is the expense of the collection
besides: if international morality, therefore, were rightly understood
and acted upon, such taxes, as being contrary to the universal weal,
would not exist. Moreover, the imposition of such a tax frequently will,
and always may, expose a country to lose this branch of its trade
altogether, or to carry it on with diminished advantage, in consequence
of the competition of untaxed exporters from other countries, or of the
domestic producers in the country to which it exports. Even on the most
selfish principles, therefore, the benefit of such a tax is always
extremely precarious.

5. We have had an example of a tax on exports, that is, on foreigners,
falling in part on ourselves. We shall, therefore, not be surprised if
we find a tax on imports, that is, on ourselves, partly falling upon
foreigners.

Instead of taxing the cloth which we export, suppose that we tax the
linen which we import. The duty which we are now supposing must not be
what is termed a protecting duty, that is, a duty sufficiently high to
induce us to produce the article at home. If it had this effect, it
would destroy entirely the trade both in cloth and in linen, and both
countries would lose the whole of the advantage which they previously
gained by exchanging those commodities with one another. We suppose a
duty which might diminish the consumption of the article, but which
would not prevent us from continuing to import, as before, whatever
linen we did consume.

The equilibrium of trade would be disturbed if the imposition of the tax
diminished in the slightest degree the quantity of linen consumed. For,
as the tax is levied at our own custom-house, the German exporter only
receives the same price as formerly, though the English consumer pays a
higher one. If, therefore, there be any diminution of the quantity
bought, although a larger sum of money may be actually laid out in the
article, a smaller one will be due from England to Germany: this sum
will no longer be an equivalent for the sum due from Germany to England
for cloth, the balance therefore must be paid in money. Prices will fall
in Germany, and rise in England; linen will fall in the German market;
cloth will rise in the English. The Germans will pay higher price for
cloth, and will have smaller money incomes to buy it with; while the
English will obtain linen cheaper, that is, its price will exceed what
it previously was by less than the amount of the duty, while their means
of purchasing it will be increased by the increase of their money
incomes.

If the imposition of the tax does not diminish the demand, it will leave
the trade exactly as it was before. We shall import as much, and export
as much; the whole of the tax will be paid out of our own pockets.

But the imposition of a tax on a commodity, almost always diminishes the
demand more or less; and it can never, or scarcely ever increase the
demand. It may, therefore, be laid down as a principle, that a tax on
imported commodities, when it really operates as a tax, and not as a
prohibition, either total or partial, almost always falls in part upon
the foreigners who consume our goods: and that this is a mode in which a
nation may be almost sure of appropriating to itself, at the expense of
foreigners, a larger share than would otherwise belong to it of the
increase in the general productiveness of the labour and capital of the
world, which results from the interchange of commodities among nations.

It is scarcely necessary to observe, that no such advantage can result
from the duty, if it operate as a protecting duty; if it induce the
country which imposes it, to produce for herself that which she would
otherwise have imported. The saving of labour--the increase in the
general productiveness of the capital of the world--which is the effect
of commerce, and which a non-protecting duty would enable the country
imposing it to engross, could not be engrossed by a protecting duty,
because such a duty prevents any such increased production from
existing.

With a view to practical legislation, therefore, duties on importation
may be divided into two classes: those which have the effect of
encouraging some particular branch of domestic industry, and those which
have not.

The former are purely mischievous, both to the country imposing them,
and to those with whom it trades. They prevent a saving of labour and
capital, which, if permitted to be made, would be divided in some
proportion or other between the importing country and the countries
which buy what that country does or might export.

The other class of duties are those which do not encourage one mode of
procuring an article at the expense of another, but allow interchange to
take place just as if the duty did not exist--and to produce the saving
of labour which constitutes the motive to international as to all other
commerce. Of this kind, are duties on the importation of any commodity
which could not by any possibility be produced at home; and duties not
sufficiently high to counterbalance the difference of expense between
the production of the article at home, and its importation. Of the money
which is brought into the treasury of any country by taxes of this last
description, a part only is paid by the people of that country; the
remainder by the foreign consumers of their goods.

Nevertheless, this latter kind of taxes are in principle as ineligible
as the former, although not precisely on the same ground. A protecting
duty can never be a cause of gain, but always and necessarily of loss,
to the country imposing it, just so far as it is efficacious to its end.
A non-protecting duty on the contrary would, in most cases, be a source
of gain to the country imposing it, in so far as throwing part of the
weight of its taxes upon other people is a gain; but it would be a means
of gain which it could seldom be advisable to adopt, being so easily
counteracted by a precisely similar proceeding on the other side.

If England, in the case already supposed, sought to obtain for herself
more than her natural share of the advantage of the trade with Germany,
by imposing a duty upon cloth, Germany would only have to impose a duty
upon linen, sufficient to diminish the demand for that article about as
much as the demand for cloth had been diminished in England by the tax.
Things would then be as before, and each country would pay its own tax.
Unless, indeed, the sum of the two duties exceeded the entire advantage
of the trade; for in that case the trade, and its advantage, would cease
entirely.

There would be no advantage, therefore, in imposing duties of this kind,
with a view to gain by them, in the manner which has been pointed out.
But so long as any other kind of taxes on commodities are retained, as a
source of revenue, these may often be as unobjectionable as the rest. It
is evident, moreover, that considerations of reciprocity, which are
quite unessential when the matter in debate is a protecting duty, are of
material importance when the repeal of duties of this other description
is discussed. A country cannot be expected to renounce the power of
taxing foreigners, unless foreigners will in return practise towards
itself the same forbearance. The only mode in which a country can save
itself from being a loser by the duties imposed by other countries on
its commodities, is to impose corresponding duties on theirs. Only it
must take care that these duties be not so high as to exceed all that
remains of the advantage of the trade, and put an end to importation
altogether; causing the article to be either produced at home, or
imported from another and a dearer market.

It is not necessary to apply the principles which we have stated to the
case of bounties on exportation or importation. The application is easy,
and the conclusions present nothing of particular interest or
importance.

6. Any cause which alters the exports or imports from one country into
another, alters the division of the advantage of interchange between
those two countries. Suppose the discovery of a new process, by which
some article of export, or some article not previously exported, can be
produced so cheap as to occasion a great demand for it in other
countries. This of course produces a great influx of money from other
countries, and lowers the prices of all articles imported from them,
until the increase of importation produced by this cause has restored
the equilibrium. Thus, the country which acquires a new article of
export gets its imports cheaper. This is not a case of mere alteration
in the division of the advantage; it is a new advantage created by the
discovery.

But suppose that the invention, to which the nation is indebted for this
increase of the return to its industry, comes into use also in the other
country, and that the process is one which can be as perfectly and as
cheaply performed in the one country as in the other. The new
exportation will cease; trade will revert to its old channels, the money
which flowed in will again flow out, and the country which invented the
process will lose that increase of its gain by trade, which it had
derived from the discovery.

Now the exportation of machinery comes within the case which we have
just described.

If the fact be, that by allowing to foreigners a participation in our
machinery, we enable them to produce any of our leading articles of
export, at a lower money price than we can sell those articles, it is
certain that unless we possess as great an advantage in the production
of the machinery itself as we have in the production of other articles
by means of machinery, the permitting of its exportation would alter to
our disadvantage the division of the benefit of trade. Our exports being
diminished, we should have to pay a balance in money. This would raise,
in foreign countries, the price of everything which we import from
thence: while our incomes, being reduced in money value, would render
us less able to buy those articles even if they had not risen. The
equilibrium of exports and imports would only be restored, when either
some of the latter became so dear that we could produce them cheaper at
home, or some articles not previously exported became exportable from
the fall of prices. In the one case, we lose the benefit of importation
altogether, and are obliged to produce at home, at a greater cost. In
the other case, we continue to import, but pay dearer for our imports.

Notwithstanding what has now been observed, restrictions on the
exportation of machinery are not, in our opinion, justifiable, either on
the score of international morality or of sound policy. It is evidently
the common interest of all nations that each of them should abstain from
every measure by which the aggregate wealth of the commercial world
would be diminished, although of this smaller sum total it might thereby
be enabled to attract to itself a larger share. And the time will
certainly come when nations in general will feel the importance of this
rule, and will so direct their approbation and disapprobation as to
enforce observance of it. Moreover, a country possessing machines should
consider that if a similar advantage were extended to other countries,
they would employ it above all in the production of those articles, in
which they had already the greatest natural advantages; and if the
former country would be a loser by their improvements in the production
of articles which it sells, it would gain by their improvements in those
which it buys. The exportation of machinery may, however, be a proper
subject for adjustment with other nations, on the principle of
reciprocity. Until, by the common consent of nations, all restrictions
upon trade are done away, a nation cannot be required to abolish those
from which she derives a real advantage, without stipulating for an
equivalent.

7. The case which we have just examined, is an example in how remarkable
a manner every cause which materially influences exports, operates upon
the prices of imports. According to the ancient theory of the balance of
trade, and to the associations of the generality of what are termed
practical men to this day, the sole benefit derived from commerce
consists in the exports, and imports are rather an evil than otherwise.
Political economists, seeing the folly of these views, and clearly
perceiving that the advantage of commerce consists and must consist
solely of the imports, have occasionally suffered themselves to employ
language evincing inattention to the fact, that exports, though
unimportant in themselves, are important by their influence on imports.
So real and extensive is this influence, that every new market which is
opened for any of our goods, and every increase in the demand for our
commodities in foreign countries, enables us to supply ourselves with
foreign commodities at a smaller cost.

Let us revert to our earliest and simplest example, but which displays
the real law of interchange more luminously than any formula into which
money enters; the case of simple barter. We showed, that if at the rate
of 10 yards of cloth for 17 of linen, the demand of Germany amounted to
1000 times 10 yards of cloth, the two nations will trade together at
that rate of interchange, provided that the linen required in England be
exactly 1000 times 17 yards, neither more nor less. For the cloth and
the linen will then exactly pay for one another, and nobody on either
side will be obliged to offer what he has to sell at a lower rate, in
order to procure what he wants to buy.

Now if the increase of wealth and population in Germany should greatly
increase the demand in that country for cloth, the demand for linen in
England not increasing in the same ratio,--if, for instance, Germany
became willing, at the above rate, to take 1500 times 10 yards; is it
not evident, that to induce England to take in exchange for this the
only article which Germany by supposition has to give, the latter must
offer it at a rate more advantageous to England--at 18, or perhaps 19
yards, for 10 of cloth? So that the division of the advantage becomes
more and more favourable to a country, in proportion as the demand for
its commodities increases in foreign countries.

It is not even necessary that the country which takes its goods, should
supply it with any commodity whatever. Suppose that a country should be
opened to our merchants, disposed to buy from us in abundance, but which
can sell to us scarcely anything, as every commodity which it affords
could be got cheaper by us from some other quarter. Nevertheless, our
trade with this country will enable us to obtain from all other
countries their commodities at a lower price. At the first opening of
this commerce of mere exportation, we must have received in payment a
large quantity of money; for which our customer will have been
indemnified by other countries, in exchange for her commodities. Prices
must consequently be lower in all other countries, and higher with us,
than before the opening of the new branch of trade; and we therefore
obtain the commodities of other countries at a less cost, both as we pay
less money for them, and as that money is lower in value.

8. Another obvious application of the same principle will enable us to
explain, and to bring within the dominion of strict science, the
rivality of one exporting nation and another, or what is called, in the
language of the mercantile system, _underselling_: a subject which
political economists have taken little trouble to elucidate, from the
habit before alluded to of disregarding almost entirely, in their purely
scientific inquiries, those circumstances which affect the trade of a
country by operating immediately upon the exports.

Let us revert to our old example, and to our old figures. Suppose that
the trade between England and Germany in cloth and linen is established,
and that the rate of interchange is 10 yards of cloth for 17 of linen.
Now suppose that there arises in another country, in Flanders, for
example, a linen manufacture; and that the same causes, the working of
which in England and Germany has made 10 yards exchange for 17, would in
England and Flanders, putting Germany out of the question, have made the
rate of interchange 10 for 18. It is evident that Germany also must give
18 yards of linen for 10 of cloth, and so carry on the trade with a
diminished share of the advantage, or lose it altogether. If the play of
demand in England and Flanders had made the rate of interchange not 10
for 18 but 10 for 21, (10 to 20 being in Germany the comparative cost of
production,) it is evident that Germany could not have maintained the
competition, and would have lost, not part of her share of the
advantage, but all advantage, and the trade itself.

It would be no answer to say, that Germany could probably still have
found the means of importing cloth from England, by exporting something
else. If she had purchased cloth with anything else, she would have
purchased it dearer: as is proved by the fact, that having free choice,
she found it most advantageous to purchase it with linen. When she could
get 10 yards of cloth for 17 of linen, that was the mode in which she
could get it with least labour. Being pressed by competition, she gave
successively 17, 18, 18; but rather than give 19 yards of linen, she
perhaps would prefer to give, as costing her rather less labour, 10
yards of silk, (which we will suppose to be the quantity which in
England will purchase 10 yards of cloth.) It is obvious that, although
Germany has found the means of supplying herself with cloth, by
exporting a different article from that in which she was undersold, yet
the advantage of the trade between her and England is now shared in a
proportion much less favourable to Germany.

There is no difficulty in showing that the same series of consequences
takes place in exactly the same manner through the agency of money. The
trade in cloth and linen between England and Germany being supposed to
exist as before, Flanders produces linen at a lower price than that at
which Germany has hitherto afforded it. The exportation from Germany is
suspended; and Germany, continuing to import cloth, pays for it in
money. By so doing she lowers her own prices, and raises those in
England: she has to pay more money for cloth, and to pay it in a
currency of higher value. She thus suffers more and more as a consumer
of cloth, until by the fall of her prices she can either afford to sell
linen as cheap as Flanders, or to export some other commodity which she
could not export before. In either case, her trade resumes its course,
but with diminished advantage on her side. [4]

It is in the mode just described, that those countries which formerly
supplied Europe with manufactures, but which owed their power of doing
so not to any natural and permanent advantages, but to their more
advanced state of civilization as compared with other countries, have
lost their pre-eminence as other countries successively attained an
equal degree of civilization. Lombardy and Flanders, in the middle ages,
produced some descriptions of clothing and ornament for all Europe:
Holland, at a much later period, supplied ships, and almost all articles
which came in ships, to most other parts of the world. All these
countries have probably at this moment a much larger amount of capital
than ever they had, but having been undersold by other countries, they
have lost by far the greater part of the share which they had engrossed
to themselves of the benefit which the world derives from commerce; and
their capital yields to them in consequence a smaller proportional
return. We are aware that other causes have contributed to the same
effect, but we cannot doubt that this is a principal one.

As much as is really true of the great returns alleged to have been made
to capital during the last war, must have arisen from a similar cause.
Our exclusive command of the sea excluded from the market all by whom we
should have been undersold.

The adoption by France, Russia, the Netherlands, and the United States,
of a more severely restrictive commercial policy, subsequently to 1815,
has done great injury undoubtedly to those countries; for the duties
which they have established are intended to be, and really are, of the
class termed _protecting_; that is to say, such as force the production
of commodities by more costly processes at home, instead of suffering
them to be imported from abroad. But these duties, though chiefly
injurious to the countries imposing them, have also been highly
injurious to England. By diminishing her exportation, or preventing it
from increasing as it would otherwise have done, they have kept up the
prices of all imported commodities in England, above what those prices
would have fallen to if trade had been left free.

By another obvious application of the same reasoning, it will be seen,
that there is a real foundation for the notion, that a country may be
benefited by receiving from another country the concession of what used
to be termed commercial advantages, or by restraining its colonies from
purchasing goods of any country except itself. In the figured
illustration last used (p. 34) [not available, M.D.], it is evident,
that if England had been bound by a treaty with Germany to buy linen
exclusively from her, Germany would have retained the trade which we
supposed her to lose, and would have continued to purchase cloth at a
comparatively cheap rate from England, instead of producing it by a more
costly process at home. Suppose that England had been a colony of
Germany, and we see that by compelling colonies to deal at her shop, she
may obtain a real advantage, though of a nature which we may hazard the
assertion that the founders of our colonial policy little dreamt of.

Such an advantage, however, being gained at the expense of another
country, is, at the least, simply equivalent to a tax, or tribute. Now,
if a country has just grounds, or deems superiority of power a
sufficient ground, for exacting a tribute from another country, the most
direct mode is the best. First, because it is the most intelligible, and
has least of trick or disguise. Secondly, because it allows the people
of the country paying the tribute, to raise the money in whatever way
they consider least oppressive to themselves. Thirdly, because the
indirect mode of taxing a country, by restrictions on its commerce,
disturbs the distribution of industry most advantageous to the world at
large, and occasions a greater loss to the restricted country, and to
the other countries with which that country would have traded, than gain
to the country in whose favour the restrictions are imposed. And lastly,
because a country never could obtain such privileges from an independent
nation, and has seldom been so undisguised an oppressor as to demand
them even from its colonies, without subjecting itself to restrictions
in some degree equivalent, for the benefit of those whom it has thus
taxed. Each country, therefore, usually pays tribute to the other; and
to produce this fruitless reciprocity of exaction, the industry and
trade of both countries are diverted from the most advantageous
channels, and the return to the labour and capital of both is
diminished, in pure loss.

9. The same principles which have led to the above conclusions, also
suggest a remark of some importance with respect to the probable effect
of a change from a restricted to a comparatively free trade.

There is no doubt that our prohibiting the importation of a particular
article, which, but for the prohibition, would have been imported,
enables us to obtain our other imports at smaller cost. The article for
which we have the greatest demand, and for which our demand is most
increased by cheapness, is that which we should naturally import
preferably to any other; now of this article we should import the
quantity necessary to pay for our exports, on terms of interchange less
advantageous to us than in the case of any other commodity. If our
legislature prohibits this commodity, the other country will be obliged
to offer any other article on easier terms, in order to force a
sufficient demand for it to be an equivalent to what she purchases from
us.

The steps of the process, money being used, would be these:--We prohibit
the importation of linen. The exportation of cloth continues, but is
paid for in money. Our prices rise, those in Germany fall, until silk,
or some other article, can be imported from Germany cheaper than it can
be produced at home, and in sufficient abundance to balance the export
of cloth. Thus by sacrificing the cheapness of one commodity, we gain
the cheapness of another: but we sacrifice a greater cheapness to gain a
less, and we sacrifice cheapness in the article which we most want, and
would import by preference, while our compensation is cheapness in an
article which we either could produce more advantageously at home, or
which we have so little desire for, that it requires a species of bounty
on the article to create a demand.

Restrictions on importation do, however, tend to keep down the value and
price of our remaining imports, and to keep up the nominal or money
prices of all our other commodities, by retaining a greater quantity of
money in the country than would otherwise be there. From this it
obviously follows, that if the restrictions were removed, we should have
to pay rather more for some of the articles which we now import, while
those which we are now prevented from importing would cost us more than
might be inferred from their _present_ price in the foreign market. And
general prices would fall; to the benefit of those who have fixed sums
to receive; to the disadvantage of those who have fixed sums to pay; and
giving rise, as a general fall of prices always does, to an appearance,
though a temporary and fallacious one, of general distress. [5]

It is right to observe that the measures of the British Legislature
which have been falsely characterised as measures of free trade, must,
from their extremely insignificant extent, have produced far too little
effect in increasing our importation, to have actually led, in any
degree worth mentioning, to the results specified above.

It is of greater importance to take notice, that these effects may be
entirely obviated, if foreign countries can be prevailed upon
simultaneously to relax their restrictive systems, so as to create an
immediate increase of demand for our exports at the present prices. It
is true that exports and imports must, in the end, balance one another,
and if we increase our imports, our exports will of necessity increase
too. But it is a forced increase, produced by an efflux of money and
fall of prices; and this fall of prices being permanent, although it
would be no evil at all in a country where credit is unknown, it may be
a very serious one where large classes of persons, and the nation
itself, are under engagements to pay fixed sums of money of large
amount.

10. The only remaining application of the principle set forth in this
essay, which we think it of importance to notice specially, is the
effect produced upon a country by the annual payment of a tribute or
subsidy to a foreign power, or by the annual remittance of rents to
absentee landlords, or of any other kind of income to its absent owners.
Remittances to absentees are often very incorrectly likened in their
general character to the payment of a tribute; from which they differ in
this very material circumstance, that tribute, if not paid to a foreign
country, is not paid at all, whereas rents are paid to the landlord, and
consumed by him, even if he resides at home. The two kinds of payment,
however, have a perfect resemblance to each other in such parts of their
effects as we are about to point out.

The tribute, subsidy, or remittance, is always in goods; for, unless the
country possesses mines of the precious metals, and numbers those metals
among its regular articles of export, it cannot go on, year after year,
parting with them, and never receiving them back. When a nation has
regular payments to make in a foreign country, for which it is not to
receive any return, its exports must annually exceed its imports by the
amount of the payments which it is bound so to make. In order to force a
demand for its exports greater than its imports will suffice to pay for,
it must offer them at a rate of interchange more favourable to the
foreign country, and less so to itself, than if it had no payments to
make beyond the value of its imports. It therefore carries on the trade
with less advantage, in consequence of the obligations to which it is
subject towards persons resident in foreign countries.

The steps of the process are these. The exports and imports being in
equilibrium, suppose a treaty to be concluded, by which the country
binds itself to pay in tribute to another country, a certain sum
annually. It makes, perhaps, the first payment by a remittance of money.
This lowers prices in the paying country, and raises them in the
receiving one: the exports of the tributary country increase, its
imports diminish. When the efflux of money has altered prices in the
requisite degree, the exports exceed the imports annually, by the amount
of the tribute; and the latter, being added to the sum of the payments
due, restores the balance of payments between the two countries. The
result to the tributary country is a diminution of her share in the
advantage of foreign trade. She pays dearer for her imports, in two
ways, because she pays more money, and because that money is of higher
value, the money incomes of her inhabitants being of smaller amount.

Thus the imposition of a tribute is a double burthen to the country
paying it, and a double gain to that which receives it. The tributary
country pays to the other, first, the tax, whatever be its amount, and
next, something more, which the one country loses in the increased cost
of its imports, the other gains in the diminished cost of its own.

Absenteeism, moreover, though not burthensome in the former of these
ways, since the money is paid whether the receiver be an absentee or
not, is yet disadvantageous in the second of the two modes which have
been mentioned. Ireland pays dearer for her imports in consequence of
her absentees; a circumstance which the assailants of Mr. M'Culloch,
whether political economists or not, have not, we believe, hitherto
thought of producing against him.

11. If the question be now asked, which of the countries of the world
gains most by foreign commerce, the following will be the answer.

If by gain be meant advantage, in the most enlarged sense, that country
will generally gain the most, which stands most in need of foreign
commodities.

But if by gain be meant saving of labour and capital in obtaining the
commodities which the country desires to have, whatever they may be; the
country will gain, not in proportion to its own need of foreign
articles, but to the need which foreigners have of the articles which
itself produces.

Let us take, as an illustration of our meaning, the case of France and
England. Those two nations, in consequence of the restrictions with
which they have loaded their commercial intercourse, carry on so little
trade with each other, as may almost, regard being had to the wealth and
population of the two countries, be called none at all. If these fetters
were at once taken off, which of the two countries would be the greatest
gainer? England without doubt. There would instantly arise in France an
immense demand for the cottons, woollens, and iron of England; while
wines, brandies, and silks, the staple articles of France, are less
likely to come into general demand here, nor would the consumption of
such productions, it is probable, be so rapidly increased by the fall of
price. The fall would probably be very great before France could obtain
a vent in England for so much of her exports as would suffice to pay for
the probable amount of her imports. There would be a considerable flow
of the precious metals out of France into England. The English consumer
of French wine would not merely save the amount of the duty which that
wine now pays, but would find the wine itself falling-in prime cost,
while his means of purchasing it would be increased by the augmentation
of his own money income. The French consumer of English cottons, on the
contrary, would not long continue to be able to purchase them at the
price they now sell for in England. He would gain less, as the English
would gain more, than might appear from a mere comparison between the
present prices of commodities in the two countries.

Various consequences would flow from opening the trade between France
and England, which are not expected, either by the friends or by the
opponents of the present restrictive system. The wine-growers of France,
who imagine that free trade would relieve their distress by raising the
price of their wine, might not improbably find that price actually
lowered. On the other hand, our silk manufacturers would be surprised if
they were told that the free admission of our cottons and hardware into
the French market, would endanger _their_ branch of manufacture: yet
such might very possibly be the effect. France, it is likely, could most
advantageously pay us in silks for a portion of the large amount of
cottons and hardware which we should sell to her; and though our silk
manufacturers may now be able to compete advantageously, in some
branches of the manufacture, with their French rivals, it by no means
follows that they could do so when the efflux of money from France, and
its influx into England, had lowered the price of silk goods in the
French market, and increased all the expenses of production here.

On the whole, England probably, of all the countries of Europe, draws to
herself the largest share of the gains of international commerce:
because her exportable articles are in universal demand, and are of such
a kind that the demand increases rapidly as the price falls. Countries
which export food, have the former advantage, but not the latter. But
our own colonies, and the countries which supply us with the materials
of our manufactures, maintain a hard struggle with us for an equal share
of the advantages of their trade; for _their_ exports are also of a kind
for which there exists a most extensive demand here, and a demand
capable of almost indefinite extension by a fall of price. Contrary,
therefore, to common opinion, it is probable that our trade with the
colonies, and with the countries which send us the raw materials of our
national industry, is not more but less advantageous to us, in
proportion to its extent, than our trade with the continent of Europe.
We mean in respect to the mere amount of the return to the labour and
capital of the country; considered abstractedly from the usefulness or
agreeableness of the particular articles on which the receivers may
choose to expend it.


NOTES:

[1] _Elements of Political Economy_, by James Mill, Esq., 3rd
edit., pp. 120-1.

[2] The figures used are of course arbitrary, having no
reference to any existing prices.

[3] We have not deemed it necessary to enter minutely into all
the circumstances which might modify the results mentioned in the text.
For example, let us revert to the first case, that in which the demand
for cloth in Germany is so little affected by the rise of price in
consequence of the tax, that the quantity bought exceeds in pecuniary
value what it was before. As the German consumers lay out more money in
cloth, they have less to lay out in other things; other money prices
will fall; among the rest that of linen; and this may so increase the
demand for linen in England as to restore the equilibrium of exports and
imports without any passage of money. But England's treasury will still
gain from Germany the whole of the tax, and the English people will buy
their linen cheaper besides. Again, in the opposite case, where the tax
so diminishes the demand, that a smaller pecuniary value is required
than before. The German consumers have, therefore, more to expend in
other things; these, and among the rest linen, will rise; and this may
so diminish the demand for linen in England, as to restore the
equilibrium without the transmission of money. But the effect, as
respects the division of the advantage, is still as stated in the text.

[4] The world at large, sellers and buyers taken together, is
always a gainer by underselling. If, in the case supposed, England were
compelled by a commercial treaty to exclude the linen of Flanders from
her market, the total wealth of the world, if affected at all, would be
diminished.

For, what is the cause which enables Flanders to undersell Germany? That
Flanders, if she had the trade, would exchange linen for cloth at a rate
of interchange more advantageous to England. And why can Flanders do so?
It must be either because Flanders can produce the article with a less
comparative quantity of labour than Germany, and therefore the total
advantage to be divided between the two countries is greater in the case
of Flanders than of Germany; or else because, though the total advantage
is not greater, Flanders obtains a less share of it, her demand for
cloth being greater, at the same rate of interchange, than that of
Germany. In the former case, to exclude Flemish linen from England would
be to prevent the world at large from making a greater saving of labour
instead of a less. In the latter, the exclusion would be inefficacious
for the only end it could be intended for, viz., the benefit of Germany,
unless Flemish money were excluded from England as well as Flemish
linen. For Flanders would buy English cloth, paying for it in money,
until the fall of her prices enabled her to pay for it with something
else: and the ultimate result would be that, by the rise of prices in
England, Germany must pay a higher price for her cloth, and so lose a
part of the advantage in spite of the treaty; while England would pay
for German linen the same price indeed, but as the money incomes of her
own people would be increased, the same money price would imply a
smaller sacrifice.

[5] This last possible effect of a sudden introduction of free
trade, was pointed out in an able article on the Silk question, in a
work of too short duration, the _Parliamentary Review_.




ESSAY II.

OF THE INFLUENCE OF CONSUMPTION ON PRODUCTION.


Before the appearance of those great writers whose discoveries have
given to political economy its present comparatively scientific
character, the ideas universally entertained both by theorists and by
practical men, on the causes of national wealth, were grounded upon
certain general views, which almost all who have given any considerable
attention to the subject now justly hold to be completely erroneous.

Among the mistakes which were most pernicious in their direct
consequences, and tended in the greatest degree to prevent a just
conception of the objects of the science, or of the test to be applied
to the solution of the questions which it presents, was the immense
importance attached to consumption. The great end of legislation in
matters of national wealth, according to the prevalent opinion, was to
create consumers. A great and rapid consumption was what the producers,
of all classes and denominations, wanted, to enrich themselves and the
country. This object, under the varying names of an extensive demand, a
brisk circulation, a great expenditure of money, and sometimes _totidem
verbis_ a large consumption, was conceived to be the great condition of
prosperity.

It is not necessary, in the present state of the science, to contest
this doctrine in the most flagrantly absurd of its forms or of its
applications. The utility of a large government expenditure, for the
purpose of encouraging industry, is no longer maintained. Taxes are not
now esteemed to be "like the dews of heaven, which return again in
prolific showers." It is no longer supposed that you benefit the
producer by taking his money, provided you give it to him again in
exchange for his goods. There is nothing which impresses a person of
reflection with a stronger sense of the shallowness of the political
reasonings of the last two centuries, than the general reception so long
given to a doctrine which, if it proves anything, proves that the more
you take from the pockets of the people to spend on your own pleasures,
the richer they grow; that the man who steals money out of a shop,
provided he expends it all again at the same shop, is a benefactor to
the tradesman whom he robs, and that the same operation, repeated
sufficiently often, would make the tradesman's fortune.

In opposition to these palpable absurdities, it was triumphantly
established by political economists, that consumption never needs
encouragement. All which is produced is already consumed, either for the
purpose of reproduction or of enjoyment. The person who saves his income
is no less a consumer than he who spends it: he consumes it in a
different way; it supplies food and clothing to be consumed, tools and
materials to be used, by productive labourers. Consumption, therefore,
already takes place to the greatest extent which the amount of
production admits of; but, of the two kinds of consumption, reproductive
and unproductive, the former alone adds to the national wealth, the
latter impairs it. What is consumed for mere enjoyment, is gone; what is
consumed for reproduction, leaves commodities of equal value, commonly
with the addition of a profit. The usual effect of the attempts of
government to encourage consumption, is merely to prevent saving; that
is, to promote unproductive consumption at the expense of reproductive,
and diminish the national wealth by the very means which were intended
to increase it.

What a country wants to make it richer, is never consumption, but
production. Where there is the latter, we may be sure that there is no
want of the former. To produce, implies that the producer desires to
consume; why else should he give himself useless labour? He may not wish
to consume what he himself produces, but his motive for producing and
selling is the desire to buy. Therefore, if the producers generally
produce and sell more and more, they certainly also buy more and more.
Each may not want more of what he himself produces, but each wants more
of what some other produces; and, by producing what the other wants,
hopes to obtain what the other produces. There will never, therefore, be
a greater quantity produced, of commodities in general, than there are
consumers for. But there may be, and always are, abundance of persons
who have the inclination to become consumers of some commodity, but are
unable to satisfy their wish, because they have not the means of
producing either that, or anything to give in exchange for it. The
legislator, therefore, needs not give himself any concern about
consumption. There will always be consumption for everything which can
be produced, until the wants of all who possess the means of producing
are completely satisfied, and then production will not increase any
farther. The legislator has to look solely to two points: that no
obstacle shall exist to prevent those who have the means of producing,
from employing those means as they find most for their interest; and
that those who have not at present the means of producing, to the extent
of their desire to consume, shall have every facility afforded to their
acquiring the means, that, becoming producers, they may be enabled to
consume.

These general principles are now well understood by almost all who
profess to have studied the subject, and are disputed by few except
those who ostentatiously proclaim their contempt for such studies. We
touch upon the question, not in the hope of rendering these fundamental
truths clearer than they already are, but to perform a task, so useful
and needful, that it is to be wished it were oftener deemed part of the
business of those who direct their assaults against ancient prejudices,
--that of seeing that no scattered particles of important truth are
buried and lost in the ruins of exploded error. Every prejudice, which
has long and extensively prevailed among the educated and intelligent,
must certainly be borne out by some strong appearance of evidence; and
when it is found that the evidence does not prove the received
conclusion, it is of the highest importance to see what it does prove.
If this be thought not worth inquiring into, an error conformable to
appearances is often merely exchanged for an error contrary to
appearances; while, even if the result be truth, it is paradoxical
truth, and will have difficulty in obtaining credence while the false
appearances remain.

Let us therefore inquire into the nature of the appearances, which gave
rise to the belief that a great demand, a brisk circulation, a rapid
consumption (three equivalent expressions), are a cause of national
prosperity.

If every man produced for himself, or with his capital employed others
to produce, everything which he required, customers and their wants
would be a matter of profound indifference to him. He would be rich, if
he had produced and stored up a large supply of the articles which he
was likely to require; and poor, if he had stored up none at all, or not
enough to last until he could produce more.

The case, however, is different after the separation of employments. In
civilized society, a single producer confines himself to the production
of one commodity, or a small number of commodities; and his affluence
depends, not solely upon the quantity of his commodity which he has
produced and laid in store, but upon his success in finding purchasers
for that commodity.

It is true, therefore, of every particular producer or dealer, that
a great demand, a brisk circulation, a rapid consumption, of the
commodities which he sells at his shop or produces in his manufactory,
is important to him. The dealer whose shop is crowded with customers,
who can dispose of a product almost the very moment it is completed,
makes large profits, while his next neighbour, with an equal capital
but fewer customers, gains comparatively little.

It was natural that, in this case, as in a hundred others, the analogy
of an individual should be unduly applied to a nation: as it has been
concluded that a nation generally gains in wealth by the conquest of a
province, because an individual frequently does so by the acquisition of
an estate; and as, because an individual estimates his riches by the
quantity of money which he can command, it was long deemed an excellent
contrivance for enriching a country, to heap up artificially the
greatest possible quantity of the precious metals within it.

Let us examine, then, more closely than has usually been done, the case
from which the misleading analogy is drawn. Let us ascertain to what
extent the two cases actually resemble; what is the explanation of the
false appearance, and the real nature of the phenomenon which, being
seen indistinctly, has led to a false conclusion.

       *       *       *       *       *

We shall propose for examination a very simple case, but the explanation
of which will suffice to clear up all other cases which fall within the
same principle. Suppose that a number of foreigners with large incomes
arrive in a country, and there expend those incomes: will this operation
be beneficial, as respects the national wealth, to the country which
receives these immigrants? Yes, say many political economists, if they
save any part of their incomes, and employ them reproductively; because
then an addition is made to the national capital, and the produce is a
clear increase of the national wealth. But if the foreigner expends all
his income unproductively, it is no benefit to the country, say they,
and for the following reason.

If the foreigner had his income remitted to him in bread and beef, coats
and shoes, and all the other articles which he was desirous to consume,
it would not be pretended that his eating, drinking, and wearing them,
on our shores rather than on his own, could be of any advantage to us in
point of wealth. Now, the case is not different if his income is
remitted to him in some one commodity, as, for instance, in money. For
whatever takes place afterwards, with a view to the supply of his wants,
is a mere exchange of equivalents; and it is impossible that a person
should ever be enriched by merely receiving an equal value in exchange
for an equal value.

When it is said that the purchases of the foreign consumer give
employment to capital which would otherwise yield no profit to its
owner, the same political economists reject this proposition as
involving the fallacy of what has been called a "general glut." They
say, that the capital, which any person has chosen to produce and to
accumulate, can always find employment, since the fact that he has
accumulated it proves that he had an unsatisfied desire; and if he
cannot find anything to produce for the wants of other consumers, he can
for his own.

It is impossible to contest these propositions as thus stated. But there
is one consideration which clearly shews, that there is something more
in the matter than is here taken into the account; and this is, that the
above reasoning tends distinctly to prove, that it does a tradesman no
good to go into his shop and buy his goods. How can he be enriched? it
might be asked. He merely receives a certain value in money, for an
equivalent value in goods. Neither does this give employment to his
capital; for there never exists more capital than can find employment,
and if one person does not buy his goods another will; or if nobody
does, there is over-production in that business, he can remove his
capital, and find employment for it in another trade.

Every one sees the fallacy of this reasoning as applied to individual
producers. Every one knows that as applied to them it has not even the
semblance of plausibility; that the wealth of a producer does in a great
measure depend upon the number of his customers, and that in general
every additional purchaser does really add to his profits. If the
reasoning, which would be so absurd if applied to individuals, be
applicable to nations, the principle on which it rests must require much
explanation and elucidation.

Let us endeavour to analyse with precision the real nature of the
advantage which a producer derives from an addition to the number of his
customers.

For this purpose, it is necessary that we should premise a single
observation on the meaning of the word capital. It is usually defined,
the food, clothing, and other articles set aside for the consumption of
the labourer, together with the materials and instruments of production.
This definition appears to us peculiarly liable to misapprehension; and
much vagueness and some narrow views have, we conceive, occasionally
resulted from its being interpreted with too mechanical an adherence to
the literal meaning of the words.

The capital, whether of an individual or of a nation, consists, we
apprehend, of all matters possessing exchangeable value, which the
individual or the nation has in his or in its possession for the purpose
of reproduction, and not for the purpose of the owner's unproductive
enjoyment. All unsold goods, therefore, constitute a part of the
national capital, and of the capital of the producer or dealer to whom
they belong. It is true that tools, materials, and the articles on which
the labourer is supported, are the only articles which are directly
subservient to production: and if I have a capital consisting of money,
or of goods in a warehouse, I can only employ them as means of
production in so far as they are capable of being exchanged for the
articles which conduce directly to that end. But the food, machinery,
&c, which will ultimately be purchased with the goods in my warehouse,
may at this moment not be in the country, may not be even in existence.
If, after having sold the goods, I hire labourers with the money, and
set them to work, I am surely employing capital, though the corn, which
in the form of bread those labourers may buy with the money, may be now
in warehouse at Dantzic, or perhaps not yet above ground.

Whatever, therefore, is destined to be employed reproductively, either
in its existing shape, or indirectly by a previous (or even subsequent)
exchange, is capital. Suppose that I have laid out all the money I
possess in wages and tools, and that the article I produce is just
completed: in the interval which elapses before I can sell the article,
realize the proceeds, and lay them out again in wages and tools, will it
be said that I have no capital? Certainly not: I have the same capital
as before, perhaps a greater, but it is locked up, as the expression is,
and not disposable.

When we have thus seen accurately what really constitutes capital, it
becomes obvious, that of the capital of a country, there is at all times
a very large proportion lying idle. The annual produce of a country is
never any thing approaching in magnitude to what it might be if all the
resources devoted to reproduction, if all the capital, in short, of the
country, were in full employment.

If every commodity on an average remained unsold for a length of time
equal to that required for its production, it is obvious that, at any
one time, no more than half the productive capital of the country would
be really performing the functions of capital. The two halves would
relieve one another, like the semichori in a Greek tragedy; or rather
the half which was in employment would be a fluctuating portion,
composed of varying parts; but the result would be, that each producer
would be able to produce every year only half as large a supply of
commodities, as he could produce if he were sure of selling them the
moment the production was completed.

This, or something like it, is however the habitual state, at every
instant, of a very large proportion of all the capitalists in the world.

The number of producers, or dealers, who turn over their capital, as the
expression is, in the shortest possible time, is very small. There are
few who have so rapid a sale for their wares, that all the goods which
their own capital, or the capital which they can borrow, enables them to
supply, are carried off as fast as they can be supplied. The majority
have not an _extent of business_, at all adequate to the amount of the
capital they dispose of. It is true that, in the communities in which
industry and commerce are practised with greatest success, the
contrivances of banking enable the possessor of a larger capital than he
can employ in his own business, to employ it productively and derive a
revenue from it notwithstanding. Yet even then, there is, of necessity,
a great quantity of capital which remains fixed in the shape of
implements, machinery, buildings, &c, whether it is only half employed,
or in complete employment: and every dealer keeps a stock in trade, to
be ready for a possible sudden demand, though he probably may not be
able to dispose of it for an indefinite period.

This perpetual non-employment of a large proportion of capital, is the
price we pay for the division of labour. The purchase is worth what it
costs; but the price is considerable.

Of the importance of the fact which has just been noticed there are
three signal proofs. One is, the large sum often given for the goodwill
of a particular business. Another is, the large rent which is paid for
shops in certain situations, near a great thoroughfare for example,
which have no advantage except that the occupier may expect a larger
body of customers, and be enabled to turn over his capital more quickly.
Another is, that in many trades, there are some dealers who sell
articles of an equal quality at a lower price than other dealers. Of
course, this is not a voluntary sacrifice of profits: they expect by the
consequent overflow of customers to turn over their capital more
quickly, and to be gainers by keeping the whole of their capital in more
constant employment, though on any given operation their gains are less.

The reasoning cited in the earlier part of this paper, to show the
uselessness of a mere purchaser or customer, for enriching a nation or
an individual, applies only to the case of dealers who have already as
much business as their capital admits of, and as rapid a sale for their
commodities as is possible. To such dealers an additional purchaser is
really of no use; for, if they are sure of selling all their commodities
the moment those commodities are on sale, it is of no consequence whether
they sell them to one person or to another. But it is questionable
whether there be any dealers in whose case this hypothesis is exactly
verified; and to the great majority it is not applicable at all. An
additional customer, to most dealers, is equivalent to an increase of
their productive capital. He enables them to convert a portion of their
capital which was lying idle (and which could never have become
productive in their hands until a customer was found) into wages and
instruments of production; and if we suppose that the commodity, unless
bought by him, would not have found a purchaser for a year after, then
all which a capital of that value can enable men to produce during a
year, is clear gain--gain to the dealer, or producer, and to the
labourers whom he will employ, and thus (if no one sustains any
corresponding loss) gain to the nation. The aggregate produce of the
country for the succeeding year is, therefore, increased; not by the
mere exchange, but by calling into activity a portion of the national
capital, which, had it not been for the exchange, would have remained
for some time longer unemployed.

Thus there are actually at all times producers and dealers, of all, or
nearly all classes, whose capital is lying partially idle, because they
have not found the means of fulfilling the condition which the division
of labour renders indispensable to the full employment of capital,--viz.,
that of exchanging their products with each other. If these persons
could find one another out, they could mutually relieve each other from
this disadvantage. Any two shopkeepers, in insufficient employment, who
agreed to deal at each other's shops so long as they could there
purchase articles of as good a quality as elsewhere, and at as low a
price, would render the nation a service. It may be said that they must
previously have dealt, to the same amount, with some other dealers; but
this is erroneous, since they could only have obtained the means of
purchasing by being previously enabled to sell. By their compact, each
would gain a customer, who would call his capital into fuller employment;
each therefore would obtain an increased produce; and they would thus be
enabled to become better customers to each other than they could be to
third parties.

It is obvious that every dealer who has not business sufficient fully to
employ his capital (which is the case with all dealers when they commence
business, and with many to the end of their lives), is in this
predicament simply for want of some one with whom to exchange his
commodities; and as there are such persons to about the same degree
probably in all trades, it is evident that if these persons sought one
another out, they have their remedy in their own hands, and by each
other's assistance might bring their capital into more full employment.

We are now qualified to define the exact nature of the benefit which a
producer or dealer derives from the acquisition of a new customer. It is
as follows:--

1. If any part of his own capital was locked up in the form of unsold
goods, producing (for a longer period or a shorter) nothing at all;
a portion of this is called into greater activity, and becomes more
constantly productive. But to this we must add some further advantages.

2. If the additional demand exceeds what can be supplied by setting at
liberty the capital which exists in the state of unsold goods; and if
the dealer has additional resources, which were productively invested
(in the public funds, for instance), but not in his own trade; he is
enabled to obtain, on a portion of these, not mere interest, but profit,
and so to gain that difference between the rate of profit and the rate
of interest, which may be considered as "wages of superintendance."

3. If all the dealer's capital is employed in his own trade, and no part
of it locked up as unsold goods, the new demand affords him additional
encouragement to save, by enabling his savings to yield him not merely
interest, but profit; and if he does not choose to save (or until he
shall have saved), it enables him to carry on an additional business
with borrowed capital, and so gain the difference between interest and
profit, or, in other words, to receive wages of superintendance on a
larger amount of capital.

This, it will be found, is a complete account of all the gains which a
dealer in any commodity can derive from an accession to the number of
those who deal with him: and it is evident to every one, that these
advantages are real and important, and that they are the cause which
induces a dealer of any kind to desire an increase of his business.

It follows from these premises, that the arrival of a new unproductive
consumer (living on his own means) in any place, be that place a
village, a town, or an entire country, is beneficial to that place, if
it causes to any of the dealers of the place any of the advantages above
enumerated, without withdrawing an equal advantage of the same kind from
any other dealer of the same place.

This accordingly is the test by which we must try all such questions,
and by which the propriety of the analogical argument, from dealing with
a tradesman to dealing with a nation, must be decided.

Let us take, for instance, as our example, Paris, which is much
frequented by strangers from various parts of the world, who, as
sojourners there, live unproductively upon their means. Let us consider
whether the presence of these persons is beneficial, in an _industrial_
point of view, to Paris.

We exclude from the consideration that portion of the strangers' incomes
which they pay to natives as direct remuneration for service, or labour
of any description. This is obviously beneficial to the country. An
increase in the funds expended in employing labour, whether that labour
be productive or unproductive, tends equally to raise wages. The
condition of the whole labouring class is, so far, benefited. It is true
that the labourers thus employed by sojourners are probably, in part or
altogether, withdrawn from productive employment. But this is far from
being an evil; for either the situation of the labouring classes is
improved, which is far more than an equivalent for a diminution in mere
production, or the rise of wages acts as a stimulus to population, and
then the number of productive labourers becomes as great as before.

To this we may add, that what the sojourners pay as wages of labour or
service (whether constant or casual), though expended unproductively by
the first possessor, may, when it passes into the hands of the receivers,
be by them saved, and invested in a productive employment. If so, a direct
addition is made to the national capital.

All this is obvious, and is sufficiently allowed by political economists;
who have invariably set apart the gains of all persons coming under the
class of domestic servants, as real advantages arising to a place from
the residence there of an increased number of unproductive consumers.

We have only to examine whether the purchases of commodities by these
unproductive consumers, confer the same kind of benefit upon the
village, town, or nation, which is bestowed upon a particular tradesman
by dealing at his shop.

Now it is obvious that the sojourners, on their arrival, confer the
benefit in question upon some dealers, who did not enjoy it before. They
purchase their food, and many other articles, from the dealers in the
place. They, therefore, call the capital of some dealers, which was
locked up in unsold goods, into more active employment. They encourage
them to save, and enable them to receive wages of superintendance upon a
larger amount of capital. These effects being undeniable, the question
is, whether the presence of the sojourners deprives any others of the
Paris dealers of a similar advantage.

It will be seen that it does; and nothing will then remain but a
comparison of the amounts.

It is obvious to all who reflect (and was shown in the paper which
precedes this) that the remittances to persons who expend their incomes
in foreign countries are, after a slight passage of the precious metals,
defrayed in commodities: and that the result commonly is, an increase of
exports and a diminution of imports, until the latter fall short of the
former by the amount of the remittances.

The arrival, therefore, of the strangers (say from England), while it
creates at Paris a market for commodities equivalent in value to their
funds, displaces in the market other commodities to an equal value. To
the extent of the increase of exports from England into France in the
way of remittance, it introduces additional commodities which, by their
cheapness, displace others formerly produced in that country. To the
extent of the diminution of imports into England from France,
commodities which existed or which were habitually produced in that
country are deprived of a market, or can only find one at a price not
sufficient to defray the cost.

It must, therefore, be a matter of mere accident, if by arriving in a
place, the new unproductive consumer causes any net advantage to its
industry, of the kind which we are now examining. Not to mention that
this, like any other change in the channels of trade, may render useless
a portion of fixed capital, and so far injure the national wealth.

A distinction, however, must here be made.

The place to which the new unproductive consumers have come, may be a
town or village, as well as a country. If a town or village, it may
either be or not be a place having an export trade.

If the place had no previous trade except with the immediate
neighbourhood, there are no exports and imports, by the new arrangement
of which, the remittance can be made. There is no capital, formerly
employed in manufacturing for the foreign market, which is now brought
into less full employment.

Yet the remittance evidently is still made in commodities, but in this
case without displacing any which were produced before. To shew this, it
is necessary to make the following remarks.

The reason why towns exist, is that _ceteris paribus_ it is convenient,
in order to save cost of carriage, that the production of commodities
should take place as far as practicable in the immediate vicinity of the
consumer. Capital finds its way so easily from town to country and from
country to town, that the amount of capital in the town will be regulated
wholly by the amount which can be employed there more conveniently than
elsewhere. Consequently the capital of a place will be such as is
sufficient

1st. To produce all commodities which from local circumstances can be
produced there at less cost than elsewhere: and if this be the case to
any great extent, it will be an exporting town. When we say _produced_,
we may add, or _stored_.

2nd. To produce and retail the commodities which are consumed by the
inhabitants of the town, and the place of whose production is in other
respects a matter of indifference. To the inhabitants of the town must
be added such dwellers in the adjoining country, as are nearer to that
place than to any other equally well furnished market.

Now, if new unproductive consumers resort to the place, it is clear that
for the latter of these two purposes, more capital will be required than
before. Consequently, if less is not required for the former purpose,
more capital will establish itself at the place.

Until this additional capital has arrived, the producers and dealers
already on the spot will enjoy great advantages. Every particle of their
own capital will be called into the most active employment. What their
capital does not enable them to supply, will be got from others at a
distance, who cannot supply it on such favourable terms; consequently
they will be in the predicament of possessing a partial monopoly
--receiving for every thing a price regulated by a higher cost of
production than they are compelled to pay. They also, being in possession
of the market, will be enabled to make a large portion of the new capital
pass through their hands, and thus to earn wages of superintendance upon
it.

If, indeed, the place from whence the strangers came, previously traded
with that where they have taken up their abode, the effect of their
arrival is, that the exports of the town will diminish, and that it will
be supplied from abroad with something which it previously produced at
home. In this way an amount of capital will be set free equal to that
required, and there will be no increase on the whole. The removal of the
court from London to Birmingham would not necessarily, though it would
probably [6], increase the amount of capital in the latter place. The
afflux of money to Birmingham, and its efflux from London, would render
it cheaper to make some articles in London for Birmingham consumption;
and to make others in London for home consumption, which were formerly
brought from Birmingham.

But instead of Birmingham, an exporting town, suppose a village, or a
town which only produced and retailed for itself and its immediate
vicinity. The remittances must come thither in the shape of money; and
though the money would not remain, but would be sent away in exchange
for commodities, it would, however, first pass through the hands of the
producers and dealers in the place, and would by them be exported in
exchange for the articles which they require--viz. the materials, tools,
and subsistence necessary for the increased production now required of
them, and articles of foreign luxury for their own increased unproductive
consumption. These articles would not displace any formerly made in the
place, but on the contrary, would forward the production of more.

Hence we may consider the following propositions as established:

1. The expenditure of absentees (the case of domestic servants excepted,)
is not necessarily any loss to the _country_ which they leave, or gain to
the _country_ which they resort to (save in the manner shown in Essay I.):
for almost every _country_ habitually exports and imports to a much
greater value than the incomes of its absentees, or of the foreign
sojourners within it.

2. But sojourners often do much good to the _town_ or village which they
resort to, and absentees harm to that which they leave. The capital of
the petty tradesman in a small town near an absentee's estate, is
deprived of the market for which it is conveniently situated, and must
resort to another to which other capitals lie nearer, and where it is
consequently outbid, and gains less; obtaining only the same price, with
greater expenses. But this evil would be equally occasioned, if, instead
of going abroad, the absentee had removed to his own capital city.

If the tradesman could, in the latter case, remove to the metropolis, or
in the former, employ himself in producing increased exports, or in
producing for home consumption articles now no longer imported, each in
the place most convenient for that operation; he would not be a loser,
though the place which he was obliged to leave might be said to lose.

Paris undoubtedly gains much by the sojourn of foreigners, while the
counteracting loss by diminution of exports from France is suffered by
the great trading and manufacturing towns, Rouen, Bordeaux, Lyons, &c,
which also suffer the principal part of the loss by importation of
articles previously produced at home. The capital thus set free, finds
its most convenient seat to be Paris, since the business to which it
must turn is the production of articles to be unproductively consumed by
the sojourners.

The great trading towns of France would undoubtedly be more flourishing,
if France were not frequented by foreigners.

Rome and Naples are perhaps purely benefited by the foreigners
sojourning there: for they have so little external trade, that their
case may resemble that of the village in our hypothesis.

Absenteeism, therefore, (except as shown in the first Essay,) is a
local, not a national evil; and the resort of foreigners, in so far as
they purchase for unproductive consumption, is not, in any commercial
country, a national, though it may be a local good.

From the considerations which we have now adduced, it is obvious what
is meant by such phrases as a _brisk demand_, and a rapid circulation.
There is a brisk demand and a rapid circulation, when goods, generally
speaking, are sold as fast as they can be produced. There is slackness,
on the contrary, and stagnation, when goods, which have been produced,
remain for a long time unsold. In the former case, the capital which has
been locked up in production is disengaged as soon as the production is
completed; and can be immediately employed in further production. In the
latter case, a large portion of the productive capital of the country is
lying in temporary inactivity.

From what has been already said, it is obvious that periods of "brisk
demand" are also the periods of greatest production: the national
capital is never called into full employment but at those periods. This,
however, is no reason for desiring such times; it is not desirable that
the whole capital of the country should be in full employment. For, the
calculations of producers and traders being of necessity imperfect,
there are always some commodities which are more or less in excess, as
there are always some which are in deficiency. If, therefore, the whole
truth were known, there would always be some classes of producers
contracting, not extending, their operations. If _all_ are endeavouring
to extend them, it is a certain proof that some general delusion is
afloat. The commonest cause of such delusion is some general, or very
extensive, rise of prices (whether caused by speculation or by the
currency) which persuades all dealers that they are growing rich. And
hence, an increase of production really takes place during the progress
of depreciation, as long as the existence of depreciation is not
suspected; and it is this which gives to the fallacies of the currency
school, principally represented by Mr. Attwood, all the little
plausibility they possess. But when the delusion vanishes and the truth
is disclosed, those whose commodities are relatively in excess must
diminish their production or be ruined: and if during the high prices
they have built mills and erected machinery, they will be likely to
repent at leisure.

In the present state of the commercial world, mercantile transactions
being carried on upon an immense scale, but the remote causes of
fluctuations in prices being very little understood, so that
unreasonable hopes and unreasonable fears alternately rule with
tyrannical sway over the minds of a majority of the mercantile public;
general eagerness to buy and general reluctance to buy, succeed one
another in a manner more or less marked, at brief intervals. Except
during short periods of transition, there is almost always either great
briskness of business or great stagnation; either the principal
producers of almost all the leading articles of industry have as many
orders as they can possibly execute, or the dealers in almost all
commodities have their warehouses full of unsold goods.

In this last ease, it is commonly said that there is a general
superabundance; and as those economists who have contested the
possibility of general superabundance, would none of them deny the
possibility or even the frequent occurrence of the phenomenon which we
have just noticed, it would seem incumbent on them to show, that the
expression to which they object is not applicable to a state of things
in which all or most commodities remain unsold, in the same sense in
which there is said to be a superabundance of any one commodity when it
remains in the warehouses of dealers for want of a market.

This is merely a question of naming, but an important one, as it seems
to us that much apparent difference of opinion has been produced by a
mere difference in the mode of describing the same facts, and that
persons who at bottom were perfectly agreed, have considered each other
as guilty of gross error, and sometimes oven misrepresentation, on this
subject.

In order to afford the explanations, with which it is necessary to take
the doctrine of the impossibility of an excess of all commodities, we
must advert for a moment to the argument by which this impossibility is
commonly maintained.

There can never, it is said, be a want of buyers for all commodities;
because whoever offers a commodity for sale, desires to obtain a
commodity in exchange for it, and is therefore a buyer by the mere fact
of his being a seller. The sellers and the buyers, for all commodities
taken together, must, by the metaphysical necessity of the case, be an
exact equipoise to each other; and if there be more sellers than buyers
of one thing, there must be more buyers than sellers for another.

This argument is evidently founded on the supposition of a state of
barter; and, on that supposition, it is perfectly incontestable. When
two persons perform an act of barter, each of them is at once a seller
and a buyer. He cannot sell without buying. Unless he chooses to buy
some other person's commodity, he does not sell his own.

If, however, we suppose that money is used, these propositions cease to
be exactly true. It must be admitted that no person desires money for
its own sake, (unless some very rare cases of misers be an exception,)
and that he who sells his commodity, receiving money in exchange, does
so with the intention of buying with that same money some other commodity.
Interchange by means of money is therefore, as has been often observed,
ultimately nothing but barter. But there is this difference--that in the
case of barter, the selling and the buying are simultaneously confounded
in one operation; you sell what you have, and buy what you want, by one
indivisible act, and you cannot do the one without doing the other. Now
the effect of the employment of money, and even the utility of it, is,
that it enables this one act of interchange to be divided into two
separate acts or operations; one of which may be performed now, and the
other a year hence, or whenever it shall be most convenient. Although he
who sells, really sells only to buy, he needs not buy at the same moment
when he sells; and he does not therefore necessarily add to the
_immediate_ demand for one commodity when he adds to the supply of
another. The buying and selling being now separated, it may very well
occur, that there may be, at some given time, a very general inclination
to sell with as little delay as possible, accompanied with an equally
general inclination to defer all purchases as long as possible. This is
always actually the case, in those periods which are described as
periods of general excess. And no one, after sufficient explanation,
will contest the possibility of general excess, in this sense of the
word. The state of things which we have just described, and which is of
no uncommon occurrence, amounts to it.

For when there is a general anxiety to sell, and a general
disinclination to buy, commodities of all kinds remain for a long time
unsold, and those which find an immediate market, do so at a very low
price. If it be said that when all commodities fall in price, the fall
is of no consequence, since mere money price is not material while the
relative value of all commodities remains the same, we answer that this
would be true if the low prices were to last for ever. But as it is
certain that prices will rise again sooner or later, the person who is
obliged by necessity to sell his commodity at a low money price is
really a sufferer, the money he receives sinking shortly to its ordinary
value. Every person, therefore, delays selling if he can, keeping his
capital unproductive in the mean time, and sustaining the consequent
loss of interest. There is stagnation to those who are not obliged to
sell, and distress to those who are.

It is true that this state can be only temporary, and must even be
succeeded by a reaction of corresponding violence, since those who have
sold without buying will certainly buy at last, and there will then be
more buyers than sellers. But although the general over-supply is of
necessity only temporary, this is no more than may be said of every
partial over-supply. An overstocked state of the market is always
temporary, and is generally followed by a more than common briskness of
demand.

In order to render the argument for the impossibility of an excess of
all commodities applicable to the case in which a circulating medium is
employed, money must itself be considered as a commodity. It must,
undoubtedly, be admitted that there cannot be an excess of all other
commodities, and an excess of money at the same time.

But those who have, at periods such as we have described, affirmed that
there was an excess of all commodities, never pretended that money was
one of these commodities; they held that there was not an excess, but
a deficiency of the circulating medium. What they called a general
superabundance, was not a superabundance of commodities relatively to
commodities, but a superabundance of all commodities relatively to
money. What it amounted to was, that persons in general, at that
particular time, from a general expectation of being called upon to meet
sudden demands, liked better to possess money than any other commodity.
Money, consequently, was in request, and all other commodities were in
comparative disrepute. In extreme cases, money is collected in masses,
and hoarded; in the milder cases, people merely defer parting with their
money, or coming under any new engagements to part with it. But the
result is, that all commodities fall in price, or become unsaleable.
When this happens to one single commodity, there is said to be a
superabundance of that commodity; and if that be a proper expression,
there would seem to be in the nature of the case no particular
impropriety in saying that there is a superabundance of all or most
commodities, when all or most of them are in this same predicament.

It is, however, of the utmost importance to observe that excess of all
commodities, in the only sense in which it is possible, means only a
temporary fall in their value relatively to money. To suppose that the
markets for all commodities could, in any other sense than this, be
overstocked, involves the absurdity that commodities may fall in value
relatively to themselves; or that, of two commodities, each can fall
relatively to the other, A becoming equivalent to B-_x_, and B to A-_x_,
at the same time. And it is, perhaps, a sufficient reason for not using
phrases of this description, that they suggest the idea of excessive
production. A want of market for one article may arise from excessive
production of that article; but when commodities in general become
unsaleable, it is from a very different cause; there cannot be excessive
production of commodities in general.

The argument against the possibility of general over-production is quite
conclusive, so far as it applies to the doctrine that a country may
accumulate capital too fast; that produce in general may, by increasing
faster than the demand for it, reduce all producers to distress. This
proposition, strange to say, was almost a received doctrine as lately as
thirty years ago; and the merit of those who have exploded it is much
greater than might be inferred from the extreme obviousness of its
absurdity when it is stated in its native simplicity. It is true that if
all the wants of all the inhabitants of a country were fully satisfied,
no further capital could find useful employment; but, in that case, none
would be accumulated. So long as there remain any persons not possessed,
we do not say of subsistence, but of the most refined luxuries, and who
would work to possess them, there is employment for capital; and if the
commodities which these persons want are not produced and placed at
their disposal, it can only be because capital does not exist, disposable
for the purpose of employing, if not any other labourers, those very
labourers themselves, in producing the articles for their own consumption.
Nothing can be more chimerical than the fear that the accumulation of
capital should produce poverty and not wealth, or that it will ever take
place too fast for its own end. Nothing is more true than that it is
produce which constitutes the market for produce, and that every increase
of production, if distributed without miscalculation among all kinds of
produce in the proportion which private interest would dictate, creates,
or rather constitutes, its own demand.

This is the truth which the deniers of general over-production have
seized and enforced; nor is it pretended that anything has been added
to it, or subtracted from it, in the present disquisition. But it is
thought that those who receive the doctrine accompanied with the
explanations which we have given, will understand, more clearly than
before, what is, and what is not, implied in it; and will see that, when
properly understood, it in no way contradicts those obvious facts which
are universally known and admitted to be not only of possible, but of
actual and even frequent occurrence. The doctrine in question only
appears a paradox, because it has usually been so expressed as
apparently to contradict these well-known facts; which, however, were
equally well known to the authors of the doctrine, who, therefore, can
only have adopted from inadvertence any form of expression which could
to a candid person appear inconsistent with it. The essentials of the
doctrine are preserved when it is allowed that there cannot be permanent
excess of production, or of accumulation; though it be at the same time
admitted, that as there may be a temporary excess of any one article
considered separately, so may there of commodities generally, not in
consequence of over-production, but of a want of commercial confidence.


NOTE:

[6] Probably; because most articles of an ornamental description being
still required from the same makers, these makers, with their capital,
would probably follow their customers, Besides, from place to place
within the same country, most persons will lather change their
habitation than their employment. But the moving on this score would be
reciprocal.




ESSAY III.

ON THE WORDS PRODUCTIVE AND UNPRODUCTIVE.


It would probably be difficult to point out any two words, respecting
the proper use of which political economists have been more divided,
than they have been concerning the two words _productive_ and
_unproductive_; whether considered as applied to _labour_, to
_consumption_, or to _expenditure_.

Although this is a question solely of nomenclature, it is one of
sufficient importance to be worth another attempt to settle it
satisfactorily. For, although writers on political economy have not
agreed in the ideas which they were accustomed to annex to these terms,
the terms have generally been employed to denote ideas of very great
importance, and it is impossible that some vagueness should not have
been thrown upon the ideas themselves by looseness in the use of the
words by which they are habitually designated. Further, so long as the
pedantic objection to the introduction of new technical terms continues,
accurate thinkers on moral and political subjects are limited to a very
scanty vocabulary for the expression of their ideas. It therefore is of
great importance that the words with which mankind are familiar, should
be turned to the greatest possible advantage as instruments of thought;
that one word should not be used as the sign of an idea which is already
sufficiently expressed by another word; and that words which are
required to denote ideas of great importance, should not be usurped for
the expression of such as are comparatively insignificant.

The phrases _productive labour_, and _productive consumption_, have been
employed by some writers on political economy with very great latitude.
They have considered, and classed, as productive labour and productive
consumption, all labour which serves any _useful_ purpose--all
consumption which is not _waste_. Mr. M'Culloch has asserted, _totidem
verbis_, that the labour of Madame Pasta was as well entitled to be
called productive labour as that of a cotton spinner.

Employed in this sense, the words _productive_ and _unproductive_ are
superfluous, since the words _useful_ and _agreeable_ on the one hand,
_useless_ and _worthless_ on the other, are quite sufficient to express
all the ideas to which the words _productive_ and _unproductive_ are
here applied.

This use of the terms, therefore, is subversive of the ends of language.

Those writers who have employed the words in a more limited sense, have
usually understood by productive or unproductive labour, labour which is
productive of wealth, or unproductive of wealth. But what is wealth? And
here the words productive and unproductive have been affected with
additional ambiguities, corresponding to the different extension which
different writers have given to the term wealth.

Some have given the name of wealth to _all things_ which tend to the use
or enjoyment of mankind, and which possess exchangeable value. This last
clause is added to exclude air, the light of the sun, and any other
things which can be obtained in unlimited quantity without labour or
sacrifice; together with all such things as, though produced by labour,
are not held in sufficient general estimation to command any price in
the market.

But when this definition came to be explained, many persons were
disposed to interpret "_all things_ which tend to the use or enjoyment
of man," as implying only all _material_ things. _Immaterial_ products
they refused to consider as wealth; and labour or expenditure which
yielded nothing but immaterial products, they characterised as
unproductive labour and unproductive expenditure.

To this it was, or might have been, answered, that according to this
classification, a carpenter's labour at his trade is productive labour,
but the same individual's labour in learning his trade was unproductive
labour. Yet it is obvious that, on both occasions, his labour tended
exclusively to what is allowed to be production: the one was equally
indispensable with the other, to the ultimate result. Further, if we
adopted the above definition, we should be obliged to say that a nation
whose artisans were twice as skilful as those of another nation, was
not, _ceteris paribus_, more wealthy; although it is evident that every
one of the results of wealth, and everything for the sake of which
wealth is desired, would be possessed by the former country in a higher
degree than by the latter.

Every classification according to which a basket of cherries, gathered
and eaten the next minute, are called wealth, while that title is denied
to the acquired skill of those who are acknowledged to be productive
labourers, is a purely arbitrary division, and does not conduce to the
ends for which classification and nomenclature are designed.

In order to get over all difficulties, some political economists seem
disposed to make the terms express a distinction sufficiently definite
indeed, but more completely arbitrary, and having less foundation in
nature, than any of the former. They will not allow to any labour or to
any expenditure the name of productive, unless the produce which it
yields returns into the hands of the very person who made the outlay.
Hedging and ditching they term productive labour, though those
operations conduce to production only indirectly, by protecting the
produce from destruction; but the necessary expenses incurred by a
government for the protection of property are, they insist upon it,
consumed unproductively: though, as has been well pointed out by Mr.
M'Culloch, these expenses, in their relation to the national wealth, are
exactly analogous to the wages of a hedger or a ditcher. The only
difference is, that the farmer, who pays for the hedging and ditching,
is the person to whom the consequent increase of production accrues,
while the government, which is at the expense of police officers and
courts of justice, does not, as a necessary consequence, get back into
its own coffers the increase of the national wealth resulting from the
security of property.

It would be endless to point out the oddities and incongruities which
result from this classification. Whether we take the words wealth and
production in the largest, or in the most restricted sense in which they
have ever yet been employed, nobody will dispute that roads, bridges,
and canals, contribute in an eminent degree, and in a very direct
manner, to the increase of production and wealth. The labour and
pecuniary resources employed in their construction would, according to
the above theory, be considered productive, if every occupier of land
were compelled by law to construct so much of the road, or canal, as
passes through his own farm. If, instead of this, the government makes
the road, and throws it open to the public toll-free, the labour and
expenditure would be, on the above system, clearly unproductive. But if
the government, or an association of individuals, made the road, and
imposed a toll to defray the expense, we do not see how these writers
could refuse to the outlay the title of productive expenditure. It would
follow, that the very same labour and expense, if given gratuitously,
must be called unproductive, which, if a charge had been made for it,
would have been called productive.

When these consequences of the purely arbitrary classification to which
we allude have been pointed out and complained of, the only answer which
we have ever seen made to the objection is, that the line of demarcation
must be drawn somewhere, and that in every classification there are
intermediate cases, which might have been included, with almost equal
propriety, either in the one class or in the other.

This answer appears to us to indicate the want of a sufficiently
accurate and discriminating perception, what is the kind of inaccuracy
which generally cannot be avoided in a classification, and what is that
other kind of inaccuracy, from which it always may be, and should be,
exempt.

The classes themselves may be, mentally speaking, perfectly definite,
though it may not always be easy to say to which of them a particular
object belongs. When it is uncertain in which of two classes an object
should be placed, if the classification be properly made, and properly
expressed, the uncertainty can turn only upon a matter of fact. It is
uncertain to which class the object belongs, because it is doubtful
whether it possesses in a greater degree the characteristics of the one
class or those of the other. But the characteristics themselves may be
defined and distinguished with the nicest exactness, and always ought to
be so. Especially ought they in a case like the present, because here it
is only the distinction between the ideas which is of any importance.
That we should be able with ease to portion out all employments between
the two classes, does not happen to be of any particular consequence.

It is frequently said that classification is a mere affair of
convenience. This assertion is true in one sense, but not if its meaning
be, that the most proper classification is that in which it is easiest
to say whether an object belongs to one class or to the other. The use
of classification is, to fix attention upon the distinctions which exist
among things; and that is the best classification, which is founded upon
the most important distinctions, whatever be the facilities which it may
afford of ticketing and arranging the different objects which exist in
nature. In fixing, therefore, the meaning of the words productive and
unproductive, we ought to endeavour to render them significative of the
most important distinctions which, without too glaring a violation of
received usage, they can be made to express.

We ought further, when we are restricted to the employment of old words,
to endeavour as far as possible that it shall not be necessary to
struggle against the old associations with those words. We should, if
possible, give the words such a meaning, that the propositions in which
people are accustomed to use them, shall as far as possible still be
true; and that the feelings habitually excited by them, shall be such as
the things to which we mean to appropriate them ought to excite.

We shall endeavour to unite these conditions in the result of the
following enquiry.

In whatever manner political economists may have settled the definition
of productive and unproductive labour or consumption, the consequences
which they have drawn from the definition are nearly the same. In
proportion to the amount of the productive labour and consumption of
a country, the country, they all allow, is enriched: in proportion to
the amount of the unproductive labour and consumption, the country is
impoverished. Productive expenditure they are accustomed to view as
a gain; unproductive expenditure, however useful, as a sacrifice.
Unproductive expenditure of what was destined to be expended
productively, they always characterise as a squandering of resources,
and call it profusion and prodigality. The productive expenditure of
that which might, without encroaching upon capital, be expended
unproductively, is called saving, economy, frugality. Want, misery, and
starvation, are described as the lot of a nation which annually employs
less and less of its labour and resources in production; growing comfort
and opulence as the result of an annual increase in the quantity of
wealth so employed.

Let us then examine what qualities in expenditure, and in the employment
of labour, are those from which all the consequences above mentioned
really flow.

The end to which all labour and all expenditure are directed, is
twofold. Sometimes it is _enjoyment_ immediately; the fulfilment of
those desires, the gratification of which is wished for on its own
account. Whenever labour or expense is not incurred _immediately_ for
the sake of enjoyment, and is yet not absolutely wasted, it must be
incurred for the purpose of enjoyment _indirectly_ or mediately; by
either repairing and perpetuating, or adding, to the _permanent sources_
of enjoyment.

Sources of enjoyment may be accumulated and stored up; enjoyment itself
cannot. The wealth of a country consists of the sum total of the
permanent sources of enjoyment, whether material or immaterial, contained
in it: and labour or expenditure which tends to augment or to keep up
these permanent sources, should, we conceive, be termed productive.

Labour which is employed for the purpose of directly affording
enjoyment, such as the labour of a performer on a musical instrument, we
term unproductive labour. Whatever is consumed by such a performer, we
consider as unproductively consumed: the accumulated total of the
sources of enjoyment which the nation possesses, is diminished by the
amount of what he has consumed: whereas, if it had been given to him in
exchange for his services in producing food or clothing, the total of
the permanent sources of enjoyment in the country might have been not
diminished but increased.

The performer on the musical instrument then is, so far as respects that
act, not a productive, but an unproductive labourer. But what shall we
say of the workman who made the musical instrument? He, most persons
would say, is a productive labourer; and with reason; because the
musical instrument is a permanent source of enjoyment, which does not
begin and end with the enjoying, and therefore admits of being
accumulated.

But the _skill_ of the musician is a permanent source of enjoyment, as
well as the instrument which he plays upon: and although skill is not a
material object, but a quality of an object, viz., of the hands and mind
of the performer; nevertheless skill possesses exchangeable value, is
acquired by labour and capital, and is capable of being stored and
accumulated. Skill, therefore, must be considered as wealth; and the
labour and funds employed in acquiring skill in anything tending to the
advantage or pleasure of mankind, must be considered to be productively
employed and expended.

The skill of a productive labourer is analogous to the machinery he
works with: neither of them is enjoyment, nor conduces directly to it,
but both conduce indirectly to it, and both in the same way. If a
spinning-jenny be wealth, the spinner's skill is also wealth. If the
mechanic who made the spinning-jenny laboured productively, the spinner
also laboured productively when he was learning his trade: and what they
both consumed was consumed productively, that is to say, its consumption
did not tend to diminish, but to increase the sum of the permanent
sources of enjoyment in the country, by effecting a new creation of
those sources, more than equal to the amount of the consumption.

The skill of a tailor, and the implements he employs, contribute in the
same way to the convenience of him who wears the coat, namely, a remote
way: it is the coat itself which contributes immediately. The skill of
Madame Pasta, and the building and decorations which aid the effect of
her performance, contribute in the same way to the enjoyment of the
audience, namely, an immediate way, without any intermediate
instrumentality. The building and decorations are consumed
unproductively, and Madame Pasta labours and consumes unproductively;
for the building is used and worn out, and Madame Pasta performs,
immediately for the spectators' enjoyment, and without leaving, as a
consequence of the performance, any permanent result possessing
exchangeable value: consequently the epithet unproductive must be
equally applied to the gradual wearing out of the bricks and mortar, the
nightly consumption of the more perishable "properties" of the theatre,
the labour of Madame Pasta in acting, and of the orchestra in playing.
But notwithstanding this, the architect who built the theatre was a
productive labourer; so were the producers of the perishable articles;
so were those who constructed the musical instruments; and so, we must
be permitted to add, were those who instructed the musicians, and all
persons who, by the instructions which they may have given to Madame
Pasta, contributed to the formation of her talent. All these persons
contributed to the enjoyment of the audience in the same way, and that
a remote way, viz., by the production of a _permanent source of
enjoyment_.

The difference between this case, and the case of the cotton spinner
already adverted to, is this. The spinning-jenny, and the skill of the
cotton spinner, are not only the result of productive labour, but are
themselves productively consumed. The musical instrument and the skill
of the musician are equally the result of productive labour, but are
themselves unproductively consumed.

Let us now consider what kinds of labour, and of consumption or
expenditure, will be classed as productive, and what as unproductive,
according to this rule.

The following are always productive:

Labour and expenditure, of which the direct object or effect is the
creation of some material product useful or agreeable to mankind.

Labour and expenditure, of which the direct effect and object are, to
endow human or other animated beings with faculties or qualities useful
or agreeable to mankind, and possessing exchangeable value.

Labour and expenditure, which without having for their direct object the
creation of any useful material product or bodily or mental faculty or
quality, yet tend indirectly to promote one or other of those ends, and
are exerted or incurred solely for that purpose.

The following are partly productive and partly unproductive, and cannot
with propriety be ranged decidedly with either class:

Labour or expenditure which does indeed create, or promote the creation
of, some useful material product or bodily or mental faculty or quality,
but which is not incurred or exerted for that sole end; having also for
another, and perhaps its principal end, enjoyment, or the promotion of
enjoyment.

Such are the labour of the judge, the legislator, the police-officer,
the soldier; and the expenditure incurred for their support. These
functionaries protect and secure mankind in the exclusive possession of
such material products or acquired faculties as belong to them; and by
the security which they so confer, they indirectly increase production
in a degree far more than equivalent to the expense which is necessary
for their maintenance. But this is not the only purpose for which they
exist; they protect mankind, not merely in the possession of their
permanent resources, but also in their actual enjoyments; and so far,
although highly useful, they cannot, conformably to the distinction
which we have attempted to lay down, be considered productive labourers.

Such, also, are the labour and the wages of domestic servants. Such
persons are entertained mainly as subservient to mere enjoyment; but
most of them occasionally, and some habitually, render services which
must be considered as of a productive nature; such as that of cookery,
the last stage in the manufacture of food; or gardening, a branch of
agriculture.

The following are wholly unproductive:

Labour exerted, and expenditure incurred, directly and exclusively for
the purpose of enjoyment, and not calling into existence anything,
whether substance or quality, but such as begins and perishes in the
enjoyment.

Labour exerted and expenditure incurred uselessly, or in pure waste, and
yielding neither direct enjoyment nor permanent sources of enjoyment.

It may be objected, that expenditure incurred even for pure enjoyment
promotes production indirectly, by inciting to exertion. Thus the view
of the splendour of a rich establishment is supposed by some writers to
produce upon the mind of an indigent spectator an earnest desire of
enjoying the same luxuries, and a consequent purpose of working with
vigour and diligence, and saving from his earnings, thus increasing the
productive capital of the country.

It is true that mankind are, for the most part, excited to productive
industry solely by the desire of subsequently consuming the result of
their labour and accumulation. The consumption called unproductive,
viz., that of which the direct result is enjoyment, is in reality the
end, to which production is only the means; and a desire for the end,
is what alone impels any one to have recourse to the means.

But, notwithstanding this, it is of the greatest importance to mark the
distinction between the labour and the consumption which have enjoyment
for their immediate end, and the labour and the consumption of which the
immediate end is reproduction. Though the sight of the former may still
further stimulate that desire for the enjoyments afforded by wealth,
which the mere knowledge, without the immediate view, would suffice to
excite (and without dwelling on the consideration that if the example
of a large expenditure excites one individual to accumulation, it
encourages two to prodigal expense); still, if we look only to the
effects which are intended, or to those which immediately follow from
the consumption, and whose connexion with it can be distinctly traced,
it evidently renders a country poorer in the permanent sources of
enjoyment; while reproductive consumption leaves the country richer in
these same sources. Besides, if what is spent for mere pleasure promotes
indirectly the increase of wealth, it can only be by inducing others
_not_ to expend on mere pleasure.

Before quitting the subject, one more observation should be added. It
must not be supposed that what is expended upon unproductive labourers
is necessarily, the whole of it, unproductively consumed. The
unproductive labourers may save part of their wages, and invest them in
a productive employment.

It is not unusual to speak of what is paid in wages to a labourer as
being thereby _consumed_, as if all profit and loss to the nation were
to be seen in the capitalist's account-book. What is paid for productive
labour is said to be productively consumed; what is paid for
unproductive labour is said to be consumed unproductively. It would be
proper to say, not that it is productively or unproductively _consumed_,
but productively or unproductively _expended_; otherwise, we shall be
obliged to say that it is consumed twice over; the first time
unproductively, perhaps, and the second, it may be, productively.

To pronounce in which way the wages of the labourer are consumed, we
must follow them into the labourer's own hands. As much as is necessary
to keep the productive labourer in perfect health and fitness for his
employment, may be said to be consumed productively. To this should be
added what he expends in rearing children to the age at which they
become capable of productive industry. If the state of the market for
labour be such as to afford him more, this he may either save, or, as
the common expression is, he may spend it. If he saves any portion, this
(unless it be merely hoarded) he intends to employ productively, and it
will be productively consumed. If he spends it, the consumption is for
enjoyment immediately, and is therefore unproductive.

This suggests another correction in the established language. Political
economists generally define the "net produce" to be that portion of the
gross annual produce of a country which remains after replacing the
capital annually consumed. This, as they proceed to explain, consists of
profits and rent; wages being included in the other portion of the gross
produce, that which goes to replace capital. After this definition, they
usually proceed to tell us that the net produce, and that alone,
constitutes the fund from which a nation can accumulate, and add to its
capital, as also that which it can, without retrograding in wealth,
expend unproductively, or for enjoyment. Now, it is impossible that both
the above propositions can be true. If the net produce is that which
remains after replacing capital, then net produce is not the only fund
out of which accumulation may be made: for accumulation may be made from
wages; this is in all countries one of the great sources, and in countries
like America perhaps the greatest source of accumulation. If, on the other
hand, it is desirable to reserve the name of net produce to denote the
fund available for accumulation or for unproductive consumption, we must
define net produce differently. The definition which appears the best
adapted to render the ordinary doctrines relating to net produce true,
would be this:

The net produce of a country is whatever is annually produced beyond
what is necessary for maintaining the stock of materials and implements
unimpaired, for keeping all productive labourers alive and in condition
for work, and for just keeping up their numbers without increase. What
is required for these purposes, or, in other words, for keeping up the
productive resources of the country, cannot be diverted from its
destination without rendering the nation as a whole poorer. But all
which is produced beyond this, whether it be in the hands of the
labourer, of the capitalist, or of any of the numerous varieties of
rent-owners, may be taken for immediate enjoyment, without prejudice to
the productive resources of the community; and whatever part of it is
not so taken, constitutes a clear addition to the national capital, or
to the permanent sources of enjoyment.




ESSAY IV.

ON PROFITS, AND INTEREST.


The profits of stock are the surplus which remains to the capitalist
after replacing his capital: and the ratio which that surplus bears to
the capital itself, is the _rate_ of profit.

This being the definition of profits, it might seem natural to adopt, as
a sufficient theory in regard to the rate of profit, that it depends
upon the productive power of capital. Some countries are favoured beyond
others, either by nature or art, in the means of production. If the
powers of the soil, or of machinery, enable capital to produce what is
necessary for replacing itself, and twenty per cent more, profits will
be twenty per cent; and so on.

This, accordingly, is a popular mode of speaking on the subject of
profits; but it has only the semblance, not the reality, of an
explanation. The "productive power of capital," though a common, and,
for some purposes, a convenient expression, is a delusive one. Capital,
strictly speaking, has no productive power. The only productive power is
that of labour; assisted, no doubt, by tools, and acting upon materials.
That portion of capital which consists of tools and materials, may be
said, perhaps, without any great impropriety, to have a productive
power, because they contribute, along with labour, to the accomplishment
of production. But that portion of capital which consists of wages, has
no productive power of its own. Wages have no productive power; they are
the price of a productive power. Wages do not contribute, along with
labour, to the production of commodities, no more than the price of
tools contributes along with the tools themselves. If labour could be
had without purchase, wages might be dispensed with. That portion of
capital which is expended in the wages of labour, is only the means by
which the capitalist procures to himself, in the way of purchase, the
use of that labour in which the power of production really resides.

The proper view of capital is, that anything whatever, which a person
possesses, constitutes his capital, provided he is able, and intends,
to employ it, not in consumption for the purpose of enjoyment, but in
possessing himself of the means of production, with the intention of
employing those means productively. Now the means of production are
labour, implements, and materials. The only productive power which
anywhere exists, is the productive power of labour, implements, and
materials.

We need not, on this account, altogether proscribe the expression,
"productive power of capital;" but we should carefully note, that it can
only mean the quantity of real productive power which the capitalist,
by means of his capital, can command. This may change, though the
productive power of labour remains the same. Wages, for example, may
rise; and then, although all the circumstances of production remain
exactly as they were before, the same capital will yield a less return,
because it will set in motion a less quantity of productive labour.

We may, therefore, consider the capital of a producer as measured by the
means which he has of possessing himself of the different essentials of
production: namely, labour, and the various articles which labour
requires as materials, or of which it avails itself as aids.

The ratio between the price which he has to pay for these means of
production, and the produce which they enable him to raise, is the
_rate_ of his _profit_. If he must give for labour and tools four-fifths
of what they will produce, the remaining fifth will constitute his
profit, and will give him a rate of one in four, or twenty-five per
cent, on his outlay.

It is necessary here to remark, what cannot indeed by any possibility be
misunderstood, but might possibly be overlooked in cases where attention
to it is indispensable, viz., that we are speaking now of the _rate_ of
profit, not the gross profit. If the capital of the country is very
great, a profit of only five per cent upon it may be much more ample,
may support a much larger number of capitalists and their families in
much greater affluence, than a profit of twenty-five per cent on the
comparatively small capital of a poor country. The _gross_ profit of a
country is the actual amount of necessaries, conveniences, and luxuries,
which are divided among its capitalists: but whether this be large or
small, the rate of profit may be just the same. The rate of profit is
the proportion which the profit bears to the capital; which the surplus
produce after replacing the outlay, bears to the outlay. In short, if we
compare the _price paid_ for labour and tools with what that labour and
those tools will _produce_, from this ratio we may calculate the rate of
profit.

As the gross profit may be very different though the rate of profit be
the same; so also may the absolute price paid for labour and tools be
very different, and yet the proportion between the price paid and the
produce obtained may be just the same. For greater clearness, let us
omit, for the present, the consideration of tools, materials, &c, and
conceive production as the result solely of labour. In a certain
country, let us suppose, the wages of each labourer are one quarter of
wheat per year, and 100 men can produce, in one year, 120 quarters. Here
the price paid for labour is to the produce of that labour as 100 to
120, and profits are 20 per cent. Suppose now that, in another country,
wages are just double what they are in the country before supposed;
namely, two quarters of wheat per year, for each labourer. But suppose,
likewise, that the productive power of labour is double what it is in
the first country; that by the greater fertility of the soil, 100 men
can produce 240 quarters, instead of 120 as before. Here it is obvious,
that the real price paid for labour is twice as great in the one country
as in the other; but the produce being also twice as great, the ratio
between the price of labour and the produce of labour is still exactly
the same: an outlay of 200 quarters gives a return of 240 quarters, and
profits, as before, are 20 per cent.

Profits, then (meaning not gross profits, but the rate of profit),
depend (not upon the price of labour, tools, and materials--but) upon
the ratio between the price of labour, tools, and materials, and the
produce of them: upon the proportionate share of the produce of industry
which it is necessary to offer, in order to purchase that industry and
the means of setting it in motion.

       *       *       *       *       *

We have hitherto spoken of tools, buildings, and materials, as
essentials of production, co-ordinate with labour, and equally
indispensable with it. This is true; but it is also true that tools,
buildings, and materials, are themselves the produce of labour; and that
the only cause (cases of monopoly excepted) of their having any value,
is the labour which is required for their production.

If tools, buildings, and materials were the spontaneous gifts of nature,
requiring no labour either in order to produce or to appropriate them;
and if they were thus bestowed upon mankind in indefinite quantity, and
without the possibility of being monopolized; they would still be as
useful, as indispensable as they now are; but since they could, like air
and the light of the sun, be obtained without cost or sacrifice, they
would form no part of the expenses of production, and no portion of the
produce would be required to be set aside in order to replace the outlay
made for these purposes. The whole produce, therefore, after replacing
the wages of labour, would be clear profit to the capitalist.

Labour alone is the primary means of production; "the original
purchase-money which has been paid for everything." Tools and materials,
like other things, have originally cost nothing but labour; and have a
value in the market only because wages have been paid for them. The
labour employed in making the tools and materials being added to the
labour afterwards employed in working up the materials by aid of the
tools, the sum total gives the whole of the labour employed in the
production of the completed commodity. In the ultimate analysis,
therefore, labour appears to be the only essential of production. To
replace capital, is to replace nothing but the wages of the labour
employed. Consequently, the whole of the surplus, after replacing wages,
is profits. From this it seems to follow, that the ratio between the
wages of labour and the produce of that labour gives the rate of profit.
And thus we arrive at Mr. Ricardo's principle, that profits depend upon
wages; rising as wages fall, and falling as wages rise.

To protect this proposition (the most perfect form in which the law of
profits seems to have been yet exhibited) against misapprehension, one
or two explanatory remarks are required.

If by wages, be meant what constitutes the real affluence of the
labourer, the _quantity_ of produce which he receives in exchange for
his labour; the proposition that profits vary inversely as wages, will
be obviously false. The rate of profit (as has been already observed and
exemplified) does not depend upon the price of labour, but upon the
proportion between the price of labour and the produce of it. If the
produce of labour is large, the price of labour may also be large
without any diminution of the rate of profit: and, in fact, the rate of
profit is highest in those countries (as, for instance, North America)
where the labourer is most largely remunerated. For the wages of labour,
though so large, bear a less proportion to the abundant _produce_ of
labour, there than elsewhere.

But this does not affect the truth of Mr. Ricardo's principle as he
himself understood it; because an increase of the labourer's real
comforts was not considered by him as a rise of wages. In his language
wages were only said to rise, when they rose not in mere quantity but in
_value_. To the labourer himself (he would have said) the _quantity_ of
his remuneration is the important circumstance: but its _value_ is the
only thing of importance to the person who purchases his labour.

The rate of profits depends not upon absolute or real wages, but upon
the _value_ of wages.

If, however, by value, Mr. Ricardo had meant _exchangeable_ value, his
proposition would still have been remote from the truth. Profits depend
no more upon the exchangeable value of the labourer's remuneration, than
upon its quantity. The truth is, that by the exchangeable value is meant
the quantity of commodities which the labourer can purchase with his
wages; so that when we say the exchangeable value of wages, we say their
quantity, under another name.

Mr. Ricardo, however, did not use the word value in the sense of
exchangeable value.

Occasionally, in his writings, he could not avoid using the word as
other people use it, to denote value in exchange. But he more frequently
employed it in a sense peculiar to himself, to denote cost of
production; in other words, the _quantity of labour_ required to produce
the article; that being his criterion of cost of production. Thus, if a
hat could be made with ten days' labour in France and with five days'
labour in England, he said that the value of a hat was double in France
of what it was in England. If a quarter of corn could be produced a
century ago with half as much labour as is necessary at present, Mr.
Ricardo said that the value of a quarter of corn had doubled.

Mr. Ricardo, therefore, would not have said that wages had risen,
because a labourer could obtain two pecks of flour instead of one, for a
day's labour; but if last year he received, for a day's labour,
something which required eight hours' labour to produce it, and this
year something which requires nine hours, then Mr. Ricardo would say
that wages had risen. A rise of wages, with Mr. Ricardo, meant an
increase in the cost of production of wages; an increase in the number
of hours' labour which go to produce the wages of a day's labour; an
increase in the _proportion_ of the fruits of labour which the labourer
receives for his own share; an increase in the ratio between the wages
of his labour and the produce of it. This is the theory: the reasoning,
of which it is the result, has been given in the preceding paragraphs.

Some of Mr. Ricardo's followers, or more properly, of those who have
adopted in most particulars the views of political economy which his
genius was the first to open up, have given explanations of Mr.
Ricardo's doctrine to nearly the same effect as the above, but in rather
different terms. They have said that profits depend not on _absolute_,
but on _proportional_ wages: which they expounded to mean the proportion
which the labourers _en masse_ receive of the total produce of the
country.

It seems, however, to be rather an unusual and inconvenient use of
language to speak of anything as depending upon the wages of labour, and
then to explain that by wages of labour you do not mean the wages of an
individual labourer, but of all the labourers in the country
collectively. Mankind will never agree to call anything a rise of wages,
except a rise of the wages of individual labourers, and it is therefore
preferable to employ language tending to fix attention upon the wages of
the individual. The wages, however, on which profits are said to depend,
are undoubtedly _proportional_ wages, namely, the proportional wages of
one labourer: that is, the ratio between the wages of one labourer, and
(not the whole produce of the country, but) the amount of what one
labourer can produce; the amount of that portion of the collective
produce of the industry of the country, which may be considered as
corresponding to the labour of one single labourer. Proportional wages,
thus understood, may be concisely termed the cost of production of
wages; or, more concisely still, the cost of wages, meaning their cost
in the "original purchase money," labour.

We have now arrived at a distinct conception of Mr. Ricardo's theory of
profits in its most perfect state. And this theory we conceive to be the
basis of the true theory of profits. All that remains to do is to clear
it from certain difficulties which still surround it, and which, though
in a greater degree apparent than real, are not to be put aside as
wholly imaginary.

Though it is true that tools, materials, and buildings (it is to be
wished that there were some compact designation for all these essentials
of production taken together,) are themselves the produce of labour, and
are only on that account to be ranked among the expenses of production;
yet the _whole_ of their value is not resolvable into the wages of the
labourers by whom they were produced. The wages of those labourers were
paid by a capitalist, and that capitalist must have the same profit upon
his advances as any other capitalist; when, therefore, he sells the
tools or materials, he must receive from the purchaser not only the
reimbursement of the wages he has paid, but also as much more as will
afford him the ordinary rate of profit. And when the producer, after
buying the tools and employing them in his own occupation, comes to
estimate his gains, he must set aside a portion of the produce to
replace not only the wages paid both by himself and by the tool-maker,
but also the profits of the tool-maker, advanced by himself out of his
own capital.

It is not correct, therefore, to state that all which the capitalist
retains after replacing wages forms his profit. It is true the whole
return to capital is either wages or profits; but profits do not compose
merely the surplus after replacing the outlay; they also enter into the
outlay itself. Capital is expended partly in paying or reimbursing
wages, and partly in paying the profits of other capitalists, whose
concurrence was necessary in order to bring together the means of
production.

If any contrivance, therefore, were devised by which that part of the
outlay which consists of previous profits could be either wholly or
partially dispensed with, it is evident that more would remain as the
profit of the immediate producer; while, as the quantity of _labour_
necessary to produce a given quantity of the commodity would be
unaltered, as well as the quantity of produce paid for that labour, it
seems that the ratio between the price of labour and its produce would
be the same as before; that the cost of production of wages would be the
same, proportional wages the same, and yet profits different.

To illustrate this by a simple instance, let it be supposed that
one-third of the produce is sufficient to replace the wages of the
labourers who have been immediately instrumental in the production; that
another third is necessary to replace the materials used and the fixed
capital worn out in the process; while the remaining third is clear
gain, being a profit of 50 per cent. Suppose, for example, that 60
agricultural labourers, receiving 60 quarters of corn for their wages,
consume fixed capital and seed amounting to the value of 60 quarters
more, and that the result of their operations is a produce of 180
quarters. When we analyse the price of the seed and tools into its
elements, we find that they must have been the produce of the labour of
40 men: for the wages of those 40, together with profit at the rate
previously supposed (50 per cent) make up 60 quarters. The produce,
therefore, consisting of 180 quarters is the result of the labour
altogether of 100 men: namely, the 60 first mentioned, and the 40 by
whose labour the fixed capital and the seed were produced.

Let us now suppose, by way of an extreme case, that some contrivance is
discovered, whereby the purposes to which the second third of the
produce had been devoted, may be dispensed with altogether: that some
means are invented by which the same amount of produce may be procured
without the assistance of any fixed capital, or the consumption of any
seed or material sufficiently valuable to be worth calculating. Let us,
however, suppose that this cannot be done without taking on a number of
additional labourers, equal to those required for producing the seed and
fixed capital; so that the saving shall be only in the profits of the
previous capitalists. Let us, in conformity with this supposition,
assume that in dispensing with the fixed capital and seed, value 60
quarters, it is necessary to take on 40 additional labourers, receiving
a quarter of corn each, as before.

The rate of profit has evidently risen. It has increased from 50 per
cent to 60 per cent. A return of 180 quarters could not before be
obtained but by an outlay of 120 quarters; it can now be obtained by an
outlay of no more than 100.

Here, therefore, is an undeniable rise of profits. Have wages, in the
sense above attached to them, fallen or not? It would seem not.

The produce (180 quarters) is still the result of the same quantity of
labour as before, namely, the labour of 100 men. A quarter of corn,
therefore, is still, as before, the produce of 10/18 of a man's labour
for a year. Each labourer receives, as before, one quarter of corn;
each, therefore, receives the produce of 10\18 of a year's labour of one
man, that is, the same cost of production; each receives 10/18 of the
produce of his own labour, that is, the same proportional wages; and the
labourers collectively still receive the same proportion, namely 10/18,
of the whole produce.

The conclusion, then, cannot be resisted, that Mr. Ricardo's theory is
defective: that the rate of profits does _not_ exclusively depend upon
the value of wages, in his sense, namely, the quantity of labour of
which the wages of a labourer are the produce; that it does _not_
exclusively depend upon proportional wages, that is, upon the proportion
which the labourers collectively receive of the whole produce, or the
ratio which the wages of an individual labourer bear to the produce of
his individual labour.

Those political economists, therefore, who have always dissented from
Mr. Ricardo's doctrine, or who, having at first admitted, ended by
discarding it, were so far in the right; but they committed a serious
error in this, that, with the usual one-sidedness of disputants, they
knew no medium between admitting absolutely and dismissing entirely;
and saw no other course than utterly to reject what it would have been
sufficient to modify.

It is remarkable how very slight a modification will suffice to render
Mr. Ricardo's doctrine completely true. It is even doubtful whether he
himself, if called upon to adapt his expressions to this peculiar case,
would not have so explained his doctrine as to render it entirely
unobjectionable.

It is perfectly true, that, in the example already made use of, a rise
of profits takes place, while wages, considered in respect to the
quantity of labour of which they are the produce, have not varied at
all. But though wages are still the produce of the same _quantity of
labour_ as before, the _cost of production_ of wages has nevertheless
fallen; for into cost of production there enters another element besides
labour.

We have already remarked (and the very example out of which the
difficulty arose presupposes it) that the cost of production of an
article consists generally of two parts,--the _wages_ of the labour
employed, and the _profits_ of those who, in any antecedent stage of
the production, have advanced any portion of those wages. An article,
therefore, may be the produce of the same quantity of labour as before,
and yet, if any portion of the profits which the last producer has to
make good to previous producers can be economized, the cost of
production of the article is diminished.

Now, in our example, a diminution of this sort is supposed to have taken
place in the cost of production of corn. The production of that article
has become less costly, in the ratio of six to five. A quantity of corn,
the means of producing which could not previously have been secured but
at an expense of 120 quarters, can now be produced by means which 100
quarters are sufficient to purchase.

But the labourer is supposed to receive the same quantity of corn as
before. He receives one quarter. The cost of production of wages has,
therefore, fallen one-sixth. A quarter of corn, which is the
remuneration of a single labourer, is indeed the produce of the same
quantity of labour as before; but its cost of production is nevertheless
diminished. It is now the produce of 10/18 of a man's labour, and
nothing else; whereas formerly it required for its production the
conjunction of that quantity of labour with an expenditure, in the form
of reimbursement of profit, amounting to one-fifth more.

If the cost of production of wages had remained the same as before,
profits could not have risen. Each labourer received one quarter of
corn; but one quarter of corn at that time was the result of the same
cost of production, as 1 1/5 quarter now. In order, therefore, that each
labourer should receive the same cost of production, each must now
receive one quarter of corn, _plus_ one-fifth. The labour of 100 men
could not be purchased at this price for less than 120 quarters; and the
produce, 180 quarters, would yield only 50 per cent, as first supposed [7].

It is, therefore, strictly true, that the rate of profits varies
inversely as the cost of production of wages. Profits cannot rise,
unless the cost of production of wages falls exactly as much; nor fall,
unless it rises.

The proof of this position has been stated in figures, and in a
particular case: we shall now state it in general terms, and for all
cases.

We have supposed, for simplicity, that wages are paid in the finished
commodity. The agricultural labourers, in our example, were paid in
corn, and if we had called them weavers, we should have supposed them to
be paid in cloth. This supposition is allowable, for it is obviously of
no consequence, in a question of value, or cost of production, what
precise article we assume as the medium of exchange. The supposition
has, besides, the recommendation of being conformable to the most
ordinary state of the facts; for it is by the sale of his own finished
article that each capitalist obtains the means of hiring labourers to
renew the production; which is virtually the same thing as if, instead
of selling the article for money and giving the money to his labourers,
he gave the article itself to the labourers, and they sold it for their
daily bread.

Assuming, therefore, that the labourer is paid in the very article he
produces, it is evident that, when any saving of expense takes place in
the production of that article, if the labourer still receives the same
cost of production as before, he must receive an increased quantity, in
the very same ratio in which the productive power of capital has been
increased. But, if so, the outlay of the capitalist will bear exactly
the same proportion to the return as it did before; and profits will not
rise.

The variations, therefore, in the rate of profits, and those in the cost
of production of wages, go hand in hand, and are inseparable. Mr.
Ricardo's principle, that profits cannot rise unless wages fall, is
strictly true, if by low wages be meant not merely wages which are the
produce of a smaller quantity of labour, but wages which are produced at
less cost, reckoning labour and previous profits together. But the
interpretation which some economists have put upon Mr. Ricardo's
doctrine, when they explain it to mean that profits depend upon the
proportion which the labourers collectively receive of the aggregate
produce, will not hold at all; for that, in our first example, remained
the same, and yet profits rose.

The only expression of the law of profits, which seems to be correct,
is, that they depend upon the cost of production of wages. This must be
received as the ultimate principle.

From this may be deduced all the corollaries which Mr. Ricardo and
others have drawn from his theory of profits as expounded by himself.
The cost of production of the wages of one labourer for a year, is the
result of two concurrent elements or factors,--viz., 1st, the quantity
of commodities which the state of the labour market affords to him;
2ndly, the cost of production of each of those commodities. It follows,
that the rate of profits can never rise but in conjunction with one or
other of two changes,--1st, a diminished remuneration of the labourer;
or, 2ndly, an improvement in production, or an extension of commerce, by
which any of the articles habitually consumed by the labourer may be
obtained at smaller cost. (If the improvement be in any article which is
not consumed by the labourer, it merely lowers the price of that article,
and thereby benefits capitalists and all other people so far as they are
consumers of that particular article, and may be said to increase gross
profit, but not the rate of profit.)

So, on the other hand, the rate of profit cannot fall, unless
concurrently with one of two events: 1st, an improvement in the
labourer's condition; or, 2ndly, an increased difficulty of producing
or importing some article which the labourer habitually consumes. The
progress of population and cultivation has a tendency to lower profits
through the latter of these two channels, owing to the well known law
of the application of capital to land, that a double capital does not
_caeteris paribus_ yield a double produce. There is, therefore, a
tendency in the rate of profits to fall with the progress of society.
But there is also an antagonist tendency of profits to rise, by the
successive introduction of improvements in agriculture, and in the
production of those manufactured articles which the labourers consume.
Supposing, therefore, that the actual comforts of the labourer remain
the same, profits will fall or rise, according as population, or
improvements in the production of food and other necessaries, advance
fastest.

The rate of profits, therefore, tends to _fall_ from the following
causes:--1. An increase of capital beyond population, producing
increased competition for labour; 2. An increase of population,
occasioning a demand for an increased quantity of food, which must be
produced at a greater cost. The rate of profits tends to _rise_ from
the following causes:--1. An increase of population beyond capital,
producing increased competition for employment; 2. Improvements
producing increased cheapness of necessaries, and other articles
habitually consumed by the labourer.

       *       *       *       *       *

The circumstances which regulate the rate of interest have usually been
treated, even by professed writers on political economy, in a vague,
loose, and unscientific manner. It has, however, been felt that there is
some connexion between the rate of interest and the rate of profit; that
(to use the words of Adam Smith) much will be given for money, when much
can be made of it. It has been felt, also, that the fluctuations in the
market-rate of interest from day to day, are determined, like other
matters of bargain and sale, by demand and supply. It has, therefore,
been considered as an established principle, that the rate of interest
varies from day to day according to the quantity of capital offered or
called for on loan; but conforms on the average of years to a standard
determined by the rate of profits, and bearing some proportion to that
rate--but a proportion which few attempts have been made to define.

In consequence of these views, it has been customary to judge of the
general rate of profits at any time or place, by the rate of interest at
that time and place: it being supposed that the rate of interest, though
liable to temporary fluctuations, can never vary for any long period of
time unless profits vary; a notion which appears to us to be erroneous.

It was observed by Adam Smith, that profits may be considered as divided
into two parts, of which one may properly be considered as the
remuneration for the use of the capital itself, the other as the reward
of the labour of superintending its employment; and that the former of
these will correspond with the rate of interest. The producer who
borrows capital to employ it in his business, will consent to pay, for
the use of it, all that remains of the profits he can make by it, after
reserving what he considers reasonable remuneration for the trouble and
risk which he incurs by borrowing and employing it.

This remark is just; but it seems necessary to give greater precision to
the ideas which it involves.

The difference between the profit which can be made by the use of
capital, and the interest which will be paid for it, is rightly
characterized as wages of superintendance. But to infer from this that
it is regulated by entirely the same principles as other wages, would be
to push the analogy too far. It is wages, but wages paid by a commission
upon the capital employed. If the general rate of profit is 10 per cent,
and the rate of interest 5 per cent, the wages of superintendance will
be 5 per cent; and though one borrower employ a capital of 100,000_l_.,
another no more than 100_l_., the labour of both will be rewarded with
the same per centage, though, in the one ease, this symbol will
represent an income of 5_l_., in the other case, of 5000_l_. Yet it
cannot be pretended that the labour of the two borrowers differs in this
proportion. The rule, therefore, that equal quantities of labour of
equal hardness and skill are equally remunerated, does not hold of this
kind of labour. The wages of any other labour are here an inapplicable
criterion.

The wages of superintendance are distinguished from ordinary wages by
another peculiarity, that they are not paid in advance out of capital,
like the wages of all other labourers, but merge in the profit, and are
not realized until the production is completed. This takes them entirely
out of the ordinary law of wages. The wages of labourers who are paid in
advance, are regulated by the number of competitors compared with the
amount of capital; the labourers can consume no more than what has been
previously accumulated. But there is no such limit to the remuneration
of a kind of labour which is not paid for out of wealth previously
accumulated, but out of that produce which it is itself employed in
calling into existence.

When these circumstances are duly weighed, it will be perceived, that
although profit may be correctly analyzed into interest and wages of
superintendance, we ought not to lay it down as the law of interest,
that it is profits _minus_ the wages of superintendance. Of the two
expressions, it would be decidedly the more correct, that the wages of
superintendance are regulated by the rate of interest, or are equal to
profits _minus_ interest. In strict, propriety, neither expression would
be allowable. Interest, and the wages of superintendance, can scarcely
be said to depend upon one another. They are to one another in the same
relation as wages and profits are. They are like two buckets in a well:
when one rises, the other descends, but neither of the two motions is
the cause of the other; both are simultaneous effects of the same cause,
the turning of the windlass.

       *       *       *       *       *

There are among the capitalists of every country a considerable number
who are habitually, and almost necessarily, lenders; to whom scarcely
any difference between what they could receive for their money and what
could be made by it, would be an equivalent for incurring the risk and
labour of carrying on business. In this predicament is the property of
widows and orphans; of many public bodies; of charitable institutions;
most property which is vested in trustees; and the property of a great
number of persons unused to business, and who have a distaste for it,
or whose other occupations prevent their engaging in it. How large a
proportion of the property lent to the nation comes under this
description, has been pointed out in Mr. Tooke's _Considerations on the
State of the Currency._

There is another large class, consisting of bankers, bill-brokers, and
others, who are money-lenders by profession; who enter into that
profession with the intention of making such gains as it will yield
them, and who would not be induced to change their business by any but
a very strong pecuniary inducement.

There is, therefore, a large class of persons who are habitually
lenders. On the other hand, all persons in business may be considered
as habitually borrowers. Except in times of stagnation, they are all
desirous of extending their business beyond their own capital, and are
never desirous of lending any portion of their capital except for very
short periods, during which they cannot advantageously invest it in
their own trade.

There is, in short, a productive class, and there is, besides, a class
technically styled the monied class, who live upon the interest of their
capital, without engaging personally in the work of production.

The class of borrowers may be considered as unlimited. There is no
quantity of capital that could be offered to be lent, which the
productive classes would not be willing to borrow, at any rate of
interest which would afford them the slightest excess of profit above a
bare equivalent for the additional risk, incurred by that transaction,
of the evils attendant on insolvency. The only assignable limit to the
inclination to borrow, is the power of giving security: the producers
would find it difficult to borrow more than an amount equal to their own
capital. If more than half the capital of the country were in the hands
of persons who preferred lending it to engaging personally in business,
and if the surplus were greater than could be invested in loans to
Government, or in mortgages upon the property of unproductive consumers;
the competition of lenders would force down the rate of interest very
low. A certain portion of the monied class would be obliged either to
sacrifice their predilections by engaging in business, or to lend on
inferior security; and they would accordingly accept, where they could
obtain good security, an abatement of interest equivalent to the
difference of risk.

This is an extreme case. Let us put an extreme case of a contrary kind.
Suppose that the wealthy people of any country, not relishing an idle
life, and having a strong taste for gainful labour, were generally
indisposed to accept of a smaller income in order to be relieved from
the labour and anxiety of business. Every producer in flourishing
circumstances would be eager to borrow, and few willing to lend. Under
these circumstances the rate of interest would differ very little from
the rate of profit. The trouble of managing a business is not
proportionally increased by an increase of the magnitude of the
business; and a very small surplus profit above the rate of interest,
would therefore be a sufficient inducement to capitalists to borrow.

We may even conceive a people whose habits were such, that in order to
induce them to lend, it might be necessary to offer them a rate of
interest fully equal to the ordinary rate of profit. In that case, of
course, the productive classes would scarcely ever borrow. But
government, and the unproductive classes, who do not borrow in order to
make a profit by the loan, but from the pressure of a real or supposed
necessity, might still be ready to borrow at this high rate.

Although the inclination to borrow has no _fixed_ or _necessary_ limit
except the power of giving security, yet it always, in point of fact,
stops short of this; from the uncertainty of the prospects of any
individual producer, which generally indisposes him to involve himself
to the full extent of his means of payment. There is never any permanent
want of market for things in general; but there may be so for the
commodity which any one individual is producing; and even if there is a
demand for the commodity, people may not buy it of him but of some other.
There are, consequently, never more than a portion of the producers, the
state of whose business encourages them to add to their capital by
borrowing; and even these are disposed to borrow only as much as they
see an _immediate_ prospect of profitably employing. There is, therefore,
a practical limit to the demands of borrowers at any given instant; and
when these demands are all satisfied, any additional capital offered on
loan can find an investment only by a reduction of the rate of interest.

The amount of borrowers being given, (and by the amount of borrowers is
here meant the aggregate sum which people are willing to borrow at some
given rate,) the rate of interest will depend upon the quantity of
capital owned by people who are unwilling or unable to engage in trade.
The circumstances which determine this, are, on the one hand, the degree
in which a taste for business, or an aversion to it, happens to be
prevalent among the classes possessed of property; and on the other
hand, the amount of the annual accumulation from the earnings of labour.
Those who accumulate from their wages, fees, or salaries, have, of
course, (speaking generally) no means of investing their savings except
by lending them to others: their occupations prevent them from personally
superintending any employment.

Upon these circumstances, then, the rate of interest depends, the amount
of borrowers being given. And the counter-proposition equally holds,
that, the above circumstances being given, the rate of interest depends
upon the amount of borrowers.

Suppose, for example, that when the rate of interest has adjusted itself
to the existing state of the circumstances which affect the disposition
to borrow and to lend, a war breaks out, which induces government, for
a series of years, to borrow annually a large sum of money. During the
whole of this period, the rate of interest will remain considerably
above what it was before, and what it will be afterwards.

Before the commencement of the supposed war, all persons who were
disposed to lend at the then rate of interest, had found borrowers, and
their capital was invested. This may be assumed; for if any capital had
been seeking for a borrower at the existing rate of interest, and unable
to find one, its owner would have offered it at a rate slightly below
the existing rate. He would, for instance, have bought into the funds,
at a slight advance of price; and thus set at liberty the capital of
some fundholder, who, the funds yielding a lower interest, would have
been obliged to accept a lower interest from individuals.

Since, then, all who were willing to lend their capital at the market
rate, have already lent it, Government will not be able to borrow unless
by offering higher interest. Though, with the existing habits of the
possessors of disposable capital, an increased number cannot be found
who are willing to lend at the existing rate, there are doubtless some
who will be induced to lend by the temptation of a higher rate. The same
temptation will also induce some persons to invest, in the purchase of
the new stock, what they would otherwise have expended unproductively in
increasing their establishments, or productively, in improving their
estates. The rate of interest will rise just sufficiently to call forth
an increase of lenders to the amount required.

This we apprehend to be the cause why the rate of interest in this
country was so high as it is well known to have been during the last
war. It is, therefore, by no means to be inferred, as some have done,
that the general rate of profits was unusually high during the same
period, because interest was so. Supposing the rate of profits to have
been precisely the same during the war, as before or after it, the rate
of interest would nevertheless have risen, from the causes and in the
manner above described.

The practical use of the preceding investigation is, to moderate the
confidence with which inferences are frequently drawn with respect to
the rate of profit from evidence regarding the rate of interest; and to
shew that although the rate of profit is one of the elements which
combine to determine the rate of interest, the latter is also acted upon
by causes peculiar to itself, and may either rise or fall, both
temporarily and permanently, while the general rate of profits remains
unchanged.

       *       *       *       *       *

The introduction of banks, which perform the function of lenders and
loan-brokers, with or without that of issuers of paper-money, produces
some further anomalies in the rate of interest, which have not, so far
as we are aware, been hitherto brought within the pale of exact science.

If bankers were merely a class of middlemen between the lender and the
borrower; if they merely received deposits of capital from those who had
it lying unemployed in their hands, and lent this, together with their
own capital, to the productive classes, receiving interest for it, and
paying interest in their turn to those who had placed capital in their
hands; the effect of the operations of banking on the rate of interest
would be to lower it in some slight degree. The banker receives and
collects together sums of money much too small, when taken individually,
to render it worth while for the owners to look out for an investment,
but which in the aggregate form a considerable amount. This amount may
be considered a clear addition to the productive capital of the country;
at least, to the capital in activity at any moment. And as this addition
to the capital accrues wholly to that part of it which is not employed
by the owners, but lent to other producers, the natural effect is a
diminution of the rate of interest.

The banker, to the extent of his own private capital, (the expenses of
his business being first paid,) is a lender at interest. But, being
subject to risk and trouble fully equal to that which belongs to most
other employments, he cannot be satisfied with the mere interest even
of his whole capital: he must have the ordinary profits of stock, or he
will not engage in the business: the state of banking must be such as to
hold out to him the prospect of adding, to the interest of what remains
of his own capital after paying the expenses of his business, interest
upon capital deposited with him, in sufficient amount to make up, after
paying the expenses, the ordinary profit which could be derived from his
own capital in any productive employment. This will be accomplished in
one of two ways.

1. If the circumstances of society are such as to furnish a ready
investment of disposable capital; (as for instance in London, where the
public funds and other securities, of undoubted stability, and affording
great advantages for receiving the interest without trouble and
realizing the principal without difficulty when required, tempt all
persons who have sums of importance lying idle, to invest them on their
own account without the intervention of any middleman;) the deposits
with bankers consist chiefly of small sums likely to be wanted in a very
short period for current expenses, and the interest on which would
seldom be worth the trouble of calculating it. Bankers, therefore, do
not allow any interest on their deposits. After paying the expenses of
their business, all the rest of the interest they receive is clear gain.
But as the circumstances of banking, as of all other modes of employing
capital, will on the average be such as to afford to a person entering
into the business a prospect of realizing the ordinary, and no more than
the ordinary, profits upon his own capital; the gains of each banker by
the investment of his deposits, will not on the average exceed what is
necessary to make up his gains on his own capital to the ordinary rate.
It is, of course, competition, which brings about this limitation.
Whether competition operates by lowering the rate of interest, or by
dividing the business among a larger number, it is difficult to decide.
Probably it operates in both ways; but it is by no means impossible that
it may operate in the latter way alone: just as an increase in the
number of physicians does not lower the fees, though it diminishes an
average competitor's chance of obtaining them.

It is not impossible that the disposition of the lenders might be such,
that they would cease to lend rather than acquiesce in any reduction of
the rate of interest. If so, the arrival of a new lender, in the person
of a banker of deposit, would not lower the rate of interest in any
considerable degree. A slight fall would take place, and with that
exception things would be as before, except that the capital in the
hands of the banker would have put itself into the place of an equal
portion of capital belonging to other lenders, who would themselves have
engaged in business (e.g., by subscribing to some joint-stock company,
or entering into commandite). Bankers' profits would then be limited to
the ordinary rate chiefly by the division of the business among many
banks, so that each on the average would receive no more interest on his
deposits than would suffice to make up the interest on his own capital
to the ordinary rate of profit after paying all expenses.

2. But if the circumstances of society render it difficult and
inconvenient for persons who wish to live upon the interest of their
money, to seek an investment for themselves, the bankers become agents
for this specific purpose: large as well as small sums are deposited
with them, and they allow interest to their customers. Such is the
practice of the Scotch banks, and of most of the country banks in
England. Their customers, not living at any of the great seats of money
transactions, prefer entrusting their capital to somebody on the spot,
whom they know, and in whom they confide. He invests their money on the
best terms he can, and pays to them such interest as he can afford to
give; retaining a compensation for his own risk and trouble. This
compensation is fixed by the competition of the market. The rate of
interest is no further lowered by this operation, than inasmuch as it
brings together the lender and the borrower in a safe and expeditious
manner. The lender incurs less risk, and a larger proportion, therefore,
of the holders of capital are willing to be lenders.

When a banker, in addition to his other functions, is also an issuer of
paper money, he gains an advantage similar to that which the London
bankers derive from their deposits. To the extent to which he can put
forth his notes, he has so much the more to lend, without himself having
to pay any interest for it.

If the paper is convertible, it cannot get into circulation permanently
without displacing specie, which goes abroad and brings back an
equivalent value. To the extent of this value, there is an increase of
the capital of the country; and the increase accrues solely to that part
of the capital which is employed in loans.

If the paper is inconvertible, and instead of displacing specie
depreciates the currency, the banker by issuing it levies a tax on every
person who has money in his hands or due to him. He thus appropriates to
himself a portion of the capital of other people, and a portion of their
revenue. The capital might have been intended to be lent, or it might
have been intended to be employed by the owner: such part of it as was
intended to be employed by the owner now changes its destination, and is
lent. The revenue was either intended to be accumulated, in which case
it had already become capital, or it was intended to be spent: in this
last case, revenue is converted into capital: and thus, strange as it
may appear, the depreciation of the currency, when effected in this way,
operates to a certain extent as a forced accumulation. This, indeed, is
no palliation of its iniquity. Though A might have spent his property
unproductively, B ought not to be permitted to rob him of it because B
will expend it on productive labour.

In any supposable case, however, the issue of paper money by bankers
increases the proportion of the whole capital of the country which is
destined to be lent. The rate of interest must therefore fall, until
some of the lenders give over lending, or until the increase of
borrowers absorbs the whole.

But a fall of the rate of interest, sufficient to enable the money
market to absorb the whole of the paper-loans, may not be sufficient to
reduce the profits of a lender who lends what costs him nothing, to the
ordinary rate of profit upon his capital. Here, therefore, competition
will operate chiefly by dividing the business. The notes of each bank
will be confined within so narrow a district, or will divide the supply
of a district with so many other banks, that on the average each will
receive no larger amount of interest on his notes than will make up the
interest on his own capital to the ordinary rate of profit.

Even in this way, however, the competition has the effect, to a certain
limited extent, of lowering the rate of interest; for the power of
bankers to receive interest on more than their capital attracts a
greater amount of capital into the banking business than would otherwise
flow into it; and this greater capital being all lent, interest will
fall in consequence.


NOTE:

[7] It would be easy to go over in the same manner any other case. For
instance, we may suppose, that, instead of dispensing with the _whole_
of the fixed capital, material, &c, and taking on labourers in equal
number to those by whom these were produced, _half_ only of the fixed
capital and material is dispensed with; so that, instead of 60 labourers
and a fixed capital worth 6O quarters of corn, we have 80 labourers and
a fixed capital worth 30. The numerical statement of this case is more
intricate than that in the text, but the result is not different.





ESSAY V.

ON THE DEFINITION OF POLITICAL ECONOMY; AND ON THE METHOD OF
INVESTIGATION PROPER TO IT.


It might be imagined, on a superficial view of the nature and objects of
definition, that the definition of a science would occupy the same place
in the chronological which it commonly does in the didactic order. As a
treatise on any science usually commences with an attempt to express, in
a brief formula, what the science is, and wherein it differs from other
sciences, so, it might be supposed, did the framing of such a formula
naturally precede the successful cultivation of the science.

This, however, is far from having been the case. The definition of a
science has almost invariably not preceded, but followed, the creation
of the science itself. Like the wall of a city, it has usually been
erected, not to be a receptacle for such edifices as might afterwards
spring up, but to circumscribe an aggregation already in existence.
Mankind did not measure out the ground for intellectual cultivation
before they began to plant it; they did not divide the field of human
investigation into regular compartments first, and then begin to collect
truths for the purpose of being therein deposited; they proceeded in a
less systematic manner. As discoveries were gathered in, either one by
one, or in groups resulting from the continued prosecution of some
uniform course of inquiry, the truths which were successively brought
into store cohered and became agglomerated according to their individual
affinities. Without any intentional classification, the facts classed
themselves. They became associated in the mind, according to their
general and obvious resemblances; and the aggregates thus formed, having
to be frequently spoken of as aggregates, came to be denoted by a common
name. Any body of truths which had thus acquired a collective
denomination, was called a _science_. It was long before this fortuitous
classification was felt not to be sufficiently precise. It was in a more
advanced stage of the progress of knowledge that mankind became sensible
of the advantage of ascertaining whether the facts which they had thus
grouped together were distinguished from all other facts by any common
properties, and what these were. The first attempts to answer this
question were commonly very unskilful, and the consequent definitions
extremely imperfect.

And, in truth, there is scarcely any investigation in the whole body of
a science requiring so high a degree of analysis and abstraction, as the
inquiry, what the science itself is; in other words, what are the
properties common to all the truths composing it, and distinguishing
them from all other truths. Many persons, accordingly, who are
profoundly conversant with the details of a science, would be very much
at a loss to supply such a definition of the science itself as should
not be liable to well-grounded logical objections. From this remark, we
cannot except the authors of elementary scientific treatises. The
definitions which those works furnish of the sciences, for the most part
either do not fit them--some being too wide, some too narrow--or do not
go deep enough into them, but define a science by its accidents, not its
essentials; by some one of its properties which may, indeed, serve the
purpose of a distinguishing mark, but which is of too little importance
to have ever of itself led mankind to give the science a name and rank
as a separate object of study.

The definition of a science must, indeed, be placed among that class of
truths which Dugald Stewart had in view, when he observed that the first
principles of all sciences belong to the philosophy of the human mind.
The observation is just; and the first principles of all sciences,
including the definitions of them, have consequently participated
hitherto in the vagueness and uncertainty which has pervaded that most
difficult and unsettled of all branches of knowledge. If we open any
book, even of mathematics or natural philosophy, it is impossible not to
be struck with the mistiness of what we find represented as preliminary
and fundamental notions, and the very insufficient manner in which the
propositions which are palmed upon us as first principles seem to be
made out, contrasted with the lucidity of the explanations and the
conclusiveness of the proofs as soon as the writer enters upon the
details of his subject. Whence comes this anomaly? Why is the admitted
certainty of the results of those sciences in no way prejudiced by the
want of solidity in their premises? How happens it that a firm
superstructure has been erected upon an unstable foundation? The
solution of the paradox _is_, that what are called first principles,
are, in truth, _last_ principles. Instead of being the fixed point from
whence the chain of proof which supports all the rest of the science
hangs suspended, they are themselves the remotest link of the chain.
Though presented as if all other truths were to be deduced from them,
they are the truths which are last arrived at; the result of the last
stage of generalization, or of the last and subtlest process of
analysis, to which the particular truths of the science can be
subjected; those particular truths having previously been ascertained
by the evidence proper to their own nature.

Like other sciences, Political Economy has remained destitute of a
definition framed on strictly logical principles, or even of, what is
more easily to be had, a definition exactly co-extensive with the thing
defined. This has not, perhaps, caused the real bounds of the science to
be, in this country at least, practically mistaken or overpassed; but
it has occasioned--perhaps we should rather say it is connected with
--indefinite, and often erroneous, conceptions of the mode in which the
science should be studied.

We proceed to verify these assertions by an examination of the most
generally received definitions of the science.

1. First, as to the vulgar notion of the nature and object of Political
Economy, we shall not be wide of the mark if we state it to be something
to this effect:--That Political Economy is a science which teaches, or
professes to teach, in what manner a nation may be made rich. This
notion of what constitutes the science, is in some degree countenanced
by the title and arrangement which Adam Smith gave to his invaluable
work. A systematic treatise on Political Economy, he chose to call an
_Inquiry into the Nature and Causes of the Wealth of Nations_; and the
topics are introduced in an order suitable to that view of the purpose
of his book.

With respect to the definition in question, if definition it can be
called which is not found in any set form of words, but left to be
arrived at by a process of abstraction from a hundred current modes of
speaking on the subject; it seems liable to the conclusive objection,
that it confounds the essentially distinct, though closely connected,
ideas of _science_ and _art_. These two ideas differ from one another as
the understanding differs from the will, or as the indicative mood in
grammar differs from the imperative. The one deals in facts, the other
in precepts. Science is a collection of _truths_; art, a body of
_rules_, or directions for conduct. The language of science is, This is,
or, This is not; This does, or does not, happen. The language of art is,
Do this; Avoid that. Science takes cognizance of a _phenomenon_, and
endeavours to discover its _law_; art proposes to itself an _end_, and
looks out for _means_ to effect it.

If, therefore, Political Economy be a science, it cannot be a collection
of practical rules; though, unless it be altogether a useless science,
practical rules must be capable of being founded upon it. The science of
mechanics, a branch of natural philosophy, lays down the laws of motion,
and the properties of what are called the mechanical powers. The art of
practical mechanics teaches how we may avail ourselves of those laws and
properties, to increase our command over external nature. An art would
not be an art, unless it were founded upon a scientific knowledge of the
properties of the subject-matter: without this, it would not be
philosophy, but empiricism; [Greek: empeiria,] not [Greek: technae,] in
Plato's sense. Rules, therefore, for making a nation increase in wealth,
are not a science, but they are the results of science. Political
Economy does not of itself instruct how to make a nation rich; but
whoever would be qualified to judge of the means of making a nation
rich, must first be a political economist.

2. The definition most generally received among instructed persons, and
laid down in the commencement of most of the professed treatises on the
subject, is to the following effect:--That Political Economy informs us
of the laws which regulate the production, distribution, and consumption
of wealth. To this definition is frequently appended a familiar
illustration. Political Economy, it is said, is to the state, what
domestic economy is to the family.

This definition is free from the fault which we pointed out in the
former one. It distinctly takes notice that Political Economy is a
science and not an art; that it is conversant with laws of nature,
not with maxims of conduct, and teaches us how things take place of
themselves, not in what manner it is advisable for us to shape them,
in order to attain some particular end.

But though the definition is, with regard to this particular point,
unobjectionable, so much can scarcely be said for the accompanying
illustration; which rather sends back the mind to the current loose
notion of Political Economy already disposed of. Political Economy is
really, and is stated in the definition to be, a science: but domestic
economy, so far as it is capable of being reduced to principles, is an
art. It consists of rules, or maxims of prudence, for keeping the family
regularly supplied with what its wants require, and securing, with any
given amount of means, the greatest possible quantity of physical
comfort and enjoyment. Undoubtedly the beneficial _result_, the great
practical _application_ of Political Economy, would be to accomplish
for a nation something like what the most perfect domestic economy
accomplishes for a single household: but supposing this purpose
realised, there would be the same difference between the rules by which
it might be effected, and Political Economy, which there is between the
art of gunnery and the theory of projectiles, or between the rules of
mathematical land-surveying and the science of trigonometry.

The definition, though not liable to the same objection as the
illustration which is annexed to it, is itself far from unexceptionable.
To neither of them, considered as standing at the head of a treatise,
have we much to object. At a very early stage in the study of the
science, anything more accurate would be useless, and therefore
pedantic. In a merely initiatory definition, scientific precision is not
required: the object is, to insinuate into the learner's mind, it is
scarcely material by what means, some general preconception of what are
the uses of the pursuit, and what the series of topics through which he
is about to travel. As a mere anticipation or _ébauche_ of a definition,
intended to indicate to a learner as much as he is able to understand
before he begins, of the nature of what is about to be taught to him,
we do not quarrel with the received formula. But if it claims to be
admitted as that complete _definitio_ or boundary-line, which results
from a thorough exploring of the whole extent of the subject, and is
intended to mark the exact place of Political Economy among the
sciences, its pretension cannot be allowed.

"The science of the laws which regulate the production, distribution,
and consumption of wealth." The term wealth is surrounded by a haze of
floating and vapoury associations, which will let nothing that is seen
through them be shewn distinctly. Let us supply its place by a
periphrasis. Wealth is defined, all objects useful or agreeable to
mankind, except such as can be obtained in indefinite quantity without
labour. Instead of all objects, some authorities say, all material
objects: the distinction is of no moment for the present purpose.

To confine ourselves to production: If the laws of the production of all
objects, or even of all material objects, which are useful or agreeable
to mankind, were comprised in Political Economy, it would be difficult
to say where the science would end: at the least, all or nearly all
physical knowledge would be included in it. Corn and cattle are material
objects, in a high degree useful to mankind. The laws of the production
of the one include the principles of agriculture; the production of the
other is the subject of the art of cattle-breeding, which, in so far as
really an art, must be built upon the science of physiology. The laws of
the production of manufactured articles involve the whole of chemistry
and the whole of mechanics. The laws of the production of the wealth
which is extracted from the bowels of the earth, cannot be set forth
without taking in a large part of geology.

When a definition so manifestly surpasses in extent what it professes to
define, we must suppose that it is not meant to be interpreted literally,
though the limitations with which it is to be understood are not stated.

Perhaps it will be said, that Political Economy is conversant with such
only of the laws of the production of wealth as are applicable to _all_
kinds of wealth: those which relate to the details of particular trades
or employments forming the subject of other and totally distinct
sciences.

If, however, there were no more in the distinction between Political
Economy and physical science than this, the distinction, we may venture
to affirm, would never have been made. No similar division exists in any
other department of knowledge. We do not break up zoology or mineralogy
into two parts; one treating of the properties common to all animals, or
to all minerals; another conversant with the properties peculiar to each
particular species of animals or minerals. The reason is obvious; there
is no distinction _in kind_ between the general laws of animal or of
mineral nature and the peculiar properties of particular species. There
is as close an analogy between the general laws and the particular ones,
as there is between one of the general laws and another: most commonly,
indeed, the particular laws are but the complex result of a plurality of
general laws modifying each other. A separation, therefore, between the
general laws and the particular ones, merely because the former are
general and the latter particular, would run counter both to the
strongest motives of convenience and to the natural tendencies of the
mind. If the case is different with the laws of the production of
wealth, it must be because, in this case, the general laws differ in
kind from the particular ones. But if so, the difference in kind is the
radical distinction, and we should find out what that is, and found our
definition upon it.

But, further, the recognised boundaries which separate the field of
Political Economy from that of physical science, by no means correspond
with the distinction between the truths which concern all kinds of
wealth and those which relate only to some kinds. The three laws of
motion, and the law of gravitation, are common, as far as human
observation has yet extended, to all matter; and these, therefore, as
being among the laws of the production of all wealth, should form part
of Political Economy. There are hardly any of the processes of industry
which do not partly depend upon the properties of the lever; but it
would be a strange classification which included those properties among
the truths of Political Economy. Again, the latter science has many
inquiries altogether as special, and relating as exclusively to
particular sorts of material objects, as any of the branches of physical
science. The investigation of some of the circumstances which regulate
the price of corn, has as little to do with the laws common to the
production of all wealth, as any part of the knowledge of the
agriculturist. The inquiry into the rent of mines or fisheries, or into
the value of the precious metals, elicits truths which have immediate
reference to the production solely of a peculiar kind of wealth; yet
these are admitted to be correctly placed in the science of Political
Economy.

The real distinction between Political Economy and physical science must
be sought in something deeper than the nature of the subject-matter;
which, indeed, is for the most part common to both. Political Economy,
and the scientific grounds of all the useful arts, have in truth one and
the same subject-matter; namely, the objects which conduce to man's
convenience and enjoyment: but they are, nevertheless, perfectly
distinct branches of knowledge.

3. If we contemplate the whole field of human knowledge, attained or
attainable, we find that it separates itself obviously, and as it were
spontaneously, into two divisions, which stand so strikingly in
opposition and contradistinction to one another, that in all
classifications of our knowledge they have been kept apart. These are,
_physical_ science, and _moral_ or psychological science. The difference
between these two departments of our knowledge does not reside in the
subject-matter with which they are conversant: for although, of the
simplest and most elementary parts of each, it may be said, with an
approach to truth, that they are concerned with different subject-
matters--namely, the one with the human mind, the other with all things
whatever except the mind; this distinction does not hold between the
higher regions of the two. Take the science of politics, for instance,
or that of law: who will say that these are physical sciences? and yet
is it not obvious that they are conversant fully as much with matter as
with mind? Take, again, the theory of music, of painting, of any other
of the fine arts, and who will venture to pronounce that the facts they
are conversant with belong either wholly to the class of matter, or
wholly to that of mind?

The following seems to be the _rationale_ of the distinction between
physical and moral science.

In all the intercourse of man with nature, whether we consider him as
acting upon it, or as receiving impressions from it, the effect or
phenomenon depends upon causes of two kinds: the properties of the
object acting, and those of the object acted upon. Everything which can
possibly happen in which man and external things, are jointly concerned,
results from the joint operation of a law or laws of matter, and a law
or laws of the human mind. Thus the production of corn by human labour
is the result of a law of mind, and many laws of matter. The laws of
matter are those properties of the soil and of vegetable life which
cause the seed to germinate in the ground, and those properties of the
human body which render food necessary to its support. The law of mind
is, that man desires to possess subsistence, and consequently wills the
necessary means of procuring it.

Laws of mind and laws of matter are so dissimilar in their nature, that
it would be contrary to all principles of rational arrangement to mix
them up as part of the same study. In all scientific methods, therefore,
they are placed apart. Any compound effect or phenomenon which depends
both on the properties of matter and on those of mind, may thus become
the subject of two completely distinct sciences, or branches of science;
one, treating of the phenomenon in so far as it depends upon the laws of
matter only; the other treating of it in so far as it depends upon the
laws of mind.

The physical sciences are those which treat of the laws of matter, and
of all complex phenomena in so far as dependent upon the laws of matter.
The mental or moral sciences are those which treat of the laws of mind,
and of all complex phenomena in so far as dependent upon the laws of
mind.

Most of the moral sciences presuppose physical science; but few of the
physical sciences presuppose moral science. The reason is obvious. There
are many phenomena (an earthquake, for example, or the motions of the
planets) which depend upon the laws of matter exclusively; and have
nothing whatever to do with the laws of mind. Many, therefore, of the
physical sciences may be treated of without any reference to mind, and
as if the mind existed as a recipient of knowledge only, not as a cause
producing effects. But there are no phenomena which depend exclusively
upon the laws of mind; even the phenomena of the mind itself being
partially dependent upon the physiological laws of the body. All the
mental sciences, therefore, not excepting the pure science of mind, must
take account of a great variety of physical truths; and (as physical
science is commonly and very properly studied first) may be said to
presuppose them, taking up the complex phenomena where physical science
leaves them.

Now this, it will be found, is a precise statement of the relation in
which Political Economy stands to the various sciences which are
tributary to the arts of production.

The laws of the production of the objects which constitute wealth, are
the subject-matter both of Political Economy and of almost all the
physical sciences. Such, however, of those laws as are purely laws of
matter, belong to physical science, and to that exclusively. Such of
them as are laws of the human mind, and no others, belong to Political
Economy, which finally sums up the result of both combined.

Political Economy, therefore, presupposes all the physical sciences; it
takes for granted all such of the truths of those sciences as are
concerned in the production of the objects demanded by the wants of
mankind; or at least it takes for granted that the physical part of the
process takes place somehow. It then inquires what are the phenomena of
_mind_ which are concerned in the production and distribution [8] of
those same objects; it borrows from the pure science of mind the laws of
those phenomena, and inquires what effects follow from these mental
laws, acting in concurrence with those physical one. [9]

From the above considerations the following seems to come out as the
correct and complete definition of Political Economy:--"The science
which treats of the production and distribution of wealth, so far as
they depend upon the laws of human nature." Or thus--science relating to
the moral or psychological laws of the production and distribution of
wealth."

For popular use this definition is amply sufficient, but it still falls
short of the complete accuracy required for the purposes of the
philosopher. Political Economy does not treat of the production and
distribution of wealth in all states of mankind, but only in what is
termed the social state; nor so far as they depend upon the laws of
human nature, but only so far as they depend upon a certain portion of
those laws. This, at least, is the view which must be taken of Political
Economy, if we mean it to find any place in an encyclopedical division
of the field of science. On any other view, it either is not science at
all, or it is several sciences. This will appear clearly, if, on the one
hand, we take a general survey of the moral sciences, with a view to
assign the exact place of Political Economy among them; while, on the
other, we consider attentively the nature of the methods or processes by
which the truths which are the object of those sciences are arrived at.

Man, who, considered as a being having a moral or mental nature, is the
subject-matter of all the moral sciences, may, with reference to that
part of his nature, form the subject of philosophical inquiry under
several distinct hypotheses. We may inquire what belongs to man
considered individually, and as if no human being existed besides
himself; we may next consider him as coming into contact with other
individuals; and finally, as living in a state of _society_, that is,
forming part of a body or aggregation of human beings, systematically
co-operating for common purposes. Of this last state, political
government, or subjection to a common superior, is an ordinary
ingredient, but forms no necessary part of the conception, and, with
respect to our present purpose, needs not be further adverted to.

Those laws or properties of human nature which appertain to man as a
mere individual, and do not presuppose, as a necessary condition, the
existence of other individuals (except, perhaps, as mere instruments or
means), form a part of the subject of pure mental philosophy. They
comprise all the laws of the mere intellect, and those of the purely
self-regarding desires.

Those laws of human nature which relate to the feelings called forth in
a human being by other individual human or intelligent beings, as such;
namely, the _affections_, the _conscience_, or feeling of duty, and the
love of _approbation_; and to the conduct of man, so far as it depends
upon, or has relation to, these parts of his nature--form the subject of
another portion of pure mental philosophy, namely, that portion of it on
which _morals_, or _ethics_, are founded. For morality itself is not a
science, but an art; not truths, but rules. The truths on which the
rules are founded are drawn (as is the case in all arts) from a variety
of sciences; but the principal of them, and those which are most nearly
peculiar to this particular art, belong to a branch of the science of
mind.

Finally, there are certain principles of human nature which are
peculiarly connected with the ideas and feelings generated in man by
living in a state of _society_, that is, by forming part of a union or
aggregation of human beings for a common purpose or purposes. Few,
indeed, of the elementary laws of the human mind are peculiar to this
state, almost all being called into action in the two other states. But
those simple laws of human nature, operating in that wider field, give
rise to results of a sufficiently universal character, and even (when
compared with the still more complex phenomena of which they are the
determining causes) sufficiently simple, to admit of being called,
though in a somewhat looser sense, _laws_ of society, or laws of human
nature in the social state. These laws, or general truths, form the
subject of a branch of science which may be aptly designated from the
title of _social economy_; somewhat less happily by that of _speculative
politics_, or the _science_ of politics, as contradistinguished from the
art. This science stands in the same relation to the social, as anatomy
and physiology to the physical body. It shows by what principles of his
nature man is induced to enter into a state of society; how this feature
in his position acts upon his interests and feelings, and through them
upon his conduct; how the association tends progressively to become
closer, and the co-operation extends itself to more and more purposes;
what those purposes are, and what the varieties of means most generally
adopted for furthering them; what are the various relations which
establish themselves among human beings as the ordinary consequence of
the social union; what those which are different in different states of
society; in what historical order those states tend to succeed one
another; and what are the effects of each upon the conduct and character
of man.

This branch of science, whether we prefer to call it social economy,
speculative politics, or the natural history of society, presupposes the
whole science of the nature of the individual mind; since all the laws
of which the latter science takes cognizance are brought into play in a
state of society, and the truths of the social science are but
statements of the manner in which those simple laws take effect in
complicated circumstances. Pure mental philosophy, therefore, is an
essential part, or preliminary, of political philosophy. The science of
social economy embraces every part of man's nature, in so far as
influencing the conduct or condition of man in society; and therefore
may it be termed speculative politics, as being the scientific
foundation of practical politics, or the art of government, of which the
art of legislation is a part. [10]

It is to _this_ important division of the field of science that one of
the writers who have most correctly conceived and copiously illustrated
its nature and limits,--we mean M. Say,--has chosen to give the name
Political Economy. And, indeed, this large extension of the
signification of that term is countenanced by its etymology. But the
words "political economy" have long ceased to have so large a meaning.
Every writer is entitled to use the words which are his tools in the
manner which he judges most conducive to the general purposes of the
exposition of truth; but he exercises this discretion under liability to
criticism: and M. Say seems to have done in this instance, what should
never be done without strong reasons; to have altered the meaning of a
name which was appropriated to a particular purpose (and for which,
therefore, a substitute must be provided), in order to transfer it to an
object for which it was easy to find a more characteristic denomination.

What is now commonly understood by the term "Political Economy" is not
the science of speculative politics, but a branch of that science. It
does not treat of the whole of man's nature as modified by the social
state, nor of the whole conduct of man in society. It is concerned with
him solely as a being who desires to possess wealth, and who is capable
of judging of the comparative efficacy of means for obtaining that end.
It predicts only such of the phenomena of the social state as take place
in consequence of the pursuit of wealth. It makes entire abstraction of
every other human passion or motive; except those which may be regarded
as perpetually antagonizing principles to the desire of wealth, namely,
aversion to labour, and desire of the present enjoyment of costly
indulgences. These it takes, to a certain extent, into its calculations,
because these do not merely, like other desires, occasionally conflict
with the pursuit of wealth, but accompany it always as a drag, or
impediment, and are therefore inseparably mixed up in the consideration
of it. Political Economy considers mankind as occupied solely in
acquiring and consuming wealth; and aims at showing what is the course
of action into which mankind, living in a state of society, would be
impelled, if that motive, except in the degree in which it is checked by
the two perpetual counter-motives above adverted to, were absolute ruler
of all their actions. Under the influence of this desire, it shows
mankind accumulating wealth, and employing that wealth in the production
of other wealth; sanctioning by mutual agreement the institution of
property; establishing laws to prevent individuals from encroaching upon
the property of others by force or fraud; adopting various contrivances
for increasing the productiveness of their labour; settling the division
of the produce by agreement, under the influence of competition
(competition itself being governed by certain laws, which laws are
therefore the ultimate regulators of the division of the produce); and
employing certain expedients (as money, credit, &c.) to facilitate the
distribution. All these operations, though many of them are really the
result of a plurality of motives, are considered by Political Economy as
flowing solely from the desire of wealth. The science then proceeds to
investigate the laws which govern these several operations, under the
supposition that man is a being who is determined, by the necessity of
his nature, to prefer a greater portion of wealth to a smaller in all
cases, without any other exception than that constituted by the two
counter-motives already specified. Not that any political economist was
ever so absurd as to suppose that mankind are really thus constituted,
but because this is the mode in which science must necessarily proceed.
When an effect depends upon a concurrence of causes, those causes must
be studied one at a time, and their laws separately investigated, if we
wish, through the causes, to obtain the power of either predicting or
controlling the effect; since the law of the effect is compounded of the
laws of all the causes which determine it. The law of the centripetal
and that of the tangential force must have been known before the motions
of the earth and planets could be explained, or many of them predicted.
The same is the case with the conduct of man in society. In order to
judge how he will act under the variety of desires and aversions which
are concurrently operating upon him, we must know how he would act under
the exclusive influence of each one in particular. There is, perhaps, no
action of a man's life in which he is neither under the immediate nor
under the remote influence of any impulse but the mere desire of wealth.
With respect to those parts of human conduct of which wealth is not even
the principal object, to these Political Economy does not pretend that
its conclusions are applicable. But there are also certain departments
of human affairs, in which the acquisition of wealth is the main and
acknowledged end. It is only of these that Political Economy takes
notice. The manner in which it necessarily proceeds is that of treating
the main and acknowledged end as if it were the sole end; which, of all
hypotheses equally simple, is the nearest to the truth. The political
economist inquires, what are the actions which would be produced by this
desire, if, within the departments in question, it were unimpeded by any
other. In this way a nearer approximation is obtained than would
otherwise be practicable, to the real order of human affairs in those
departments. This approximation is then to be corrected by making proper
allowance for the effects of any impulses of a different description,
which can be shown to interfere with the result in any particular case.
Only in a few of the most striking cases (such as the important one of
the principle of population) are these corrections interpolated into the
expositions of Political Economy itself; the strictness of purely
scientific arrangement being thereby somewhat departed from, for the
sake of practical utility. So far as it is known, or may be presumed,
that the conduct of mankind in the pursuit of wealth is under the
collateral influence of any other of the properties of our nature than
the desire of obtaining the greatest quantity of wealth with the least
labour and self-denial, the conclusions of Political Economy will so far
fail of being applicable to the explanation or prediction of real
events, until they are modified by a correct allowance for the degree of
influence exercised by the other cause.

Political Economy, then, may be defined as follows; and the definition
seems to be complete:--

"The science which traces the laws of such of the phenomena of society
as arise from the combined operations of mankind for the production of
wealth, in so far as those phenomena are not modified by the pursuit of
any other object."

But while this is a correct definition of Political Economy as a portion
of the field of science, the didactic writer on the subject will
naturally combine in his exposition, with the truths of the pure
science, as many of the practical modifications as will, in his
estimation, be most conducive to the usefulness of his work.

       *       *       *       *       *

The above attempt to frame a stricter definition of the science than
what are commonly received as such, may be thought to be of little use;
or, at best, to be chiefly useful in a general survey and classification
of the sciences, rather than as conducing to the more successful pursuit
of the particular science in question. We think otherwise, and for this
reason; that, with the consideration of the definition of a science, is
inseparably connected that of the _philosophic method_ of the science;
the nature of the process by which its investigations are to be carried
on, its truths to be arrived at.

Now, in whatever science there are systematic differences of opinion
--which is as much as to say, in all the moral or mental sciences, and
in Political Economy among the rest; in whatever science there exist,
among those who have attended to the subject, what are commonly called
differences of principle, as distinguished from differences of
matter-of-fact or detail,--the cause will be found to be, a difference
in their conceptions of the philosophic method of the science. The
parties who differ are guided, either knowingly or unconsciously, by
different views concerning the nature of the evidence appropriate to the
subject. They differ not solely in what they believe themselves to see,
but in the quarter whence they obtained the light by which they think
they see it.

The most universal of the forms in which this difference of method is
accustomed to present itself, is the ancient feud between what is called
theory, and what is called practice or experience. There are, on social
and political questions, two kinds of reasoners: there is one portion
who term themselves practical men, and call the others theorists; a
title which the latter do not reject, though they by no means recognise
it as peculiar to them. The distinction between the two is a very broad
one, though it is one of which the language employed is a most incorrect
exponent. It has been again and again demonstrated, that those who are
accused of despising facts and disregarding experience build and profess
to build wholly upon facts and experience; while those who disavow
theory cannot make one step without theorizing. But, although both
classes of inquirers do nothing but theorize, and both of them consult
no other guide than experience, there is this difference between them,
and a most important difference it is: that those who are called
practical men require _specific_ experience, and argue wholly _upwards_
from particular facts to a general conclusion; while those who are
called theorists aim at embracing a wider field of experience, and,
having argued upwards from particular facts to a general principle
including a much wider range than that of the question under discussion,
then argue _downwards_ from that general principle to a variety of
specific conclusions.

Suppose, for example, that the question were, whether absolute kings
were likely to employ the powers of government for the welfare or for
the oppression of their subjects. The practicals would endeavour to
determine this question by a direct induction from the conduct of
particular despotic monarchs, as testified by history. The theorists
would refer the question to be decided by the test not solely of our
experience of kings, but of our experience of men. They would contend
that an observation of the tendencies which human nature has manifested
in the variety of situations in which human beings have been placed, and
especially observation of what passes in our own minds, warrants us in
inferring that a human being in the situation of a despotic king will
make a bad use of power; and that this conclusion would lose nothing of
its certainty even if absolute kings had never existed, or if history
furnished us with no information of the manner in which they had
conducted themselves.

The first of these methods is a method of induction, merely; the last a
mixed method of induction and ratiocination. The first may be called the
method _à posteriori;_ the latter, the method _à priori_. We are aware
that this last expression is sometimes used to characterize a supposed
mode of philosophizing, which does not profess to be founded upon
experience at all. But we are not acquainted with any mode of
philosophizing, on political subjects at least, to which such a
description is fairly applicable. By the method _à posteriori_ we mean
that which requires, as the basis of its conclusions, not experience
merely, but specific experience. By the method _à priori_ we mean (what
has commonly been meant) reasoning from an assumed hypothesis; which is
not a practice confined to mathematics, but is of the essence of all
science which admits of general reasoning at all. To verify the
hypothesis itself _à posteriori_, that is, to examine whether the facts
of any actual case are in accordance with it, is no part of the business
of science at all, but of the _application_ of science.

In the definition which we have attempted to frame of the science of
Political Economy, we have characterized it as essentially an _abstract_
science, and its method as the method _à priori_. Such is undoubtedly
its character as it has been understood and taught by all its most
distinguished teachers. It reasons, and, as we contend, must necessarily
reason, from assumptions, not from facts. It is built upon hypotheses,
strictly analogous to those which, under the name of definitions, are
the foundation of the other abstract sciences. Geometry presupposes an
arbitrary definition of a line, "that which has length but not breadth."
Just in the same manner does Political Economy presuppose an arbitrary
definition of man, as a being who invariably does that by which he may
obtain the greatest amount of necessaries, conveniences, and luxuries,
with the smallest quantity of labour and physical self-denial with which
they can be obtained in the existing state of knowledge. It is true that
this definition of man is not formally prefixed to any work on Political
Economy, as the definition of a line is prefixed to Euclid's Elements;
and in proportion as by being so prefixed it would be less in danger of
being forgotten, we may see ground for regret that this is not done. It
is proper that what is assumed in every particular case, should once for
all be brought before the mind in its full extent, by being somewhere
formally stated as a general maxim. Now, no one who is conversant with
systematic treatises on Political Economy will question, that whenever a
political economist has shown that, by acting in a particular manner, a
labourer may obviously obtain higher wages, a capitalist larger profits,
or a landlord higher rent, he concludes, as a matter of course, that
they will certainly act in that manner. Political Economy, therefore,
reasons from _assumed_ premises--from premises which might be totally
without foundation in fact, and which are not pretended to be
universally in accordance with it. The conclusions of Political Economy,
consequently, like those of geometry, are only true, as the common
phrase is, _in the abstract_; that is, they are only true under certain
suppositions, in which none but general causes--causes common to the
_whole class_ of cases under consideration--are taken into the account.

This ought not to be denied by the political economist. If he deny it,
then, and then only, he places himself in the wrong. The _à priori_
method which is laid to his charge, as if his employment of it proved
his whole science to be worthless, is, as we shall presently show, the
only method by which truth can possibly be attained in any department of
the social science. All that is requisite is, that he be on his guard
not to ascribe to conclusions which are grounded upon an hypothesis a
different kind of certainty from that which really belongs to them. They
would be true without qualification, only in a case which is purely
imaginary. In proportion as the actual facts recede from the hypothesis,
he must allow a corresponding deviation from the strict letter of his
conclusion; otherwise it will be true only of things such as he has
arbitrarily supposed, not of such things as really exist. That which is
true in the abstract, is always true in the concrete with proper
_allowances_. When a certain cause really exists, and if left to itself
would infallibly produce a certain effect, that same effect, _modified_
by all the other concurrent causes, will correctly correspond to the
result really produced.

The conclusions of geometry are not strictly true of such lines, angles,
and figures, as human hands can construct. But no one, therefore,
contends that the conclusions of geometry are of no utility, or that it
would be better to shut up Euclid's Elements, and content ourselves with
"practice" and "experience."

No mathematician ever thought that his definition of a line corresponded
to an actual line. As little did any political economist ever imagine
that real men had no object of desire but wealth, or none which would
not give way to the slightest motive of a pecuniary kind. But they were
justified in assuming this, for the purposes of their argument; because
they had to do only with those parts of human conduct which have
pecuniary advantage for their direct and principal object; and because,
as no two individual cases are exactly alike, no _general_ maxims could
ever be laid down unless _some_ of the circumstances of the particular
case were left out of consideration.

But we go farther than to affirm that the method _à priori_ is a
legitimate mode of philosophical investigation in the moral sciences: we
contend that it is the only mode. We affirm that the method _à
posteriori_, or that of specific experience, is altogether inefficacious
in those sciences, as a means of arriving at any considerable body of
valuable truth; though it admits of being usefully applied in aid of the
method _à priori_, and even forms an indispensable supplement to it.

There is a property common to almost all the moral sciences, and by
which they are distinguished from many of the physical; this is, that it
is seldom in our power to make experiments in them. In chemistry and
natural philosophy, we can not only observe what happens under all the
combinations of circumstances which nature brings together, but we may
also try an indefinite number of new combinations. This we can seldom do
in ethical, and scarcely ever in political science. We cannot try forms
of government and systems of national policy on a diminutive scale in
our laboratories, shaping our experiments as we think they may most
conduce to the advancement of knowledge. We therefore study nature under
circumstances of great disadvantage in these sciences; being confined to
the limited number of experiments which take place (if we may so speak)
of their own accord, without any preparation or management of ours; in
circumstances, moreover, of great complexity, and never perfectly known
to us; and with the far greater part of the processes concealed from our
observation.

The consequence of this unavoidable defect in the materials of the
induction is, that we can rarely obtain what Bacon has quaintly, but not
unaptly, termed an _experimentum crucis_.

In any science which admits of an unlimited range of arbitrary
experiments, an _experimentum crucis_ may always be obtained. Being able
to vary all the circumstances, we can always take effectual means of
ascertaining which of them are, and which are not, material. Call the
effect B, and let the question be whether the cause A in any way
contributes to it. We try an experiment in which all the surrounding
circumstances are altered, except A alone: if the effect B is
nevertheless produced, A is the cause of it. Or, instead of leaving A,
and changing the other circumstances, we leave all the other
circumstances and change A: if the effect B in that case does _not_ take
place, then again A is a necessary condition of its existence. Either of
these experiments, if accurately performed, is an _experimentum crucis_;
it converts the presumption we had before of the existence of a
connection between A and B into proof, by negativing every other
hypothesis which would account for the appearances.

But this can seldom be done in the moral sciences, owing to the immense
multitude of the influencing circumstances, and our very scanty means of
varying the experiment. Even in operating upon an individual mind, which
is the case affording greatest room for experimenting, we cannot often
obtain a _crucial_ experiment. The effect, for example, of a particular
circumstance in education, upon the formation of character, may be tried
in a variety of cases, but we can hardly ever be certain that any two of
those cases differ in all their circumstances except the solitary one of
which we wish to estimate the influence. In how much greater a degree
must this difficulty exist in the affairs of states, where even the
_number_ of recorded experiments is so scanty in comparison with the
variety and multitude of the circumstances concerned in each. How, for
example, can we obtain a crucial experiment on the effect of a
restrictive commercial policy upon national wealth? We must find two
nations alike in every other respect, or at least possessed, in a degree
exactly equal, of everything which conduces to national opulence, and
adopting exactly the same policy in all their other affairs, but
differing in this only, that one of them adopts a system of commercial
restrictions, and the other adopts free trade. This would be a decisive
experiment, similar to those which we can almost always obtain in
experimental physics. Doubtless this would be the most conclusive
evidence of all if we could get it. But let any one consider how
infinitely numerous and various are the circumstances which either
directly or indirectly do or may influence the amount of the national
wealth, and then ask himself what are the probabilities that in the
longest revolution of ages two nations will be found, which agree, and
can be shown to agree, in all those circumstances except one?

Since, therefore, it is vain to hope that truth can be arrived at,
either in Political Economy or in any other department of the social
science, while we look at the facts in the concrete, clothed in all the
complexity with which nature has surrounded them, and endeavour to
elicit a general law by a process of induction from a comparison of
details; there remains no other method than the _à priori_ one, or that
of "abstract speculation."

Although sufficiently ample grounds are not afforded in the field of
politics, for a satisfactory induction by a comparison of the effects,
the causes may, in all cases, be made the subject of specific
experiment. These causes are, laws of human nature, and external
circumstances capable of exciting the human will to action. The desires
of man, and the nature of the conduct to which they prompt him, are
within the reach of our observation. We can also observe what are the
objects which excite those desires. The materials of this knowledge
every one can principally collect within himself; with reasonable
consideration of the differences, of which experience discloses to him
the existence, between himself and other people. Knowing therefore
accurately the properties of the substances concerned, we may reason
with as much certainty as in the most demonstrative parts of physics
from any assumed set of circumstances. This will be mere trifling if the
assumed circumstances bear no sort of resemblance to any real ones; but
if the assumption is correct as far as it goes, and differs from the
truth no otherwise than as a part differs from the whole, then the
conclusions which are correctly deduced from the assumption constitute
_abstract_ truth; and when completed by adding or subtracting the effect
of the non-calculated circumstances, they are true in the concrete, and
may be applied to practice.

Of this character is the science of Political Economy in the writings of
its best teachers. To render it perfect as an abstract science, the
combinations of circumstances which it assumes, in order to trace their
effects, should embody all the circumstances that are common to all
cases whatever, and likewise all the circumstances that are common to
any important class of cases. The conclusions correctly deduced from
these assumptions, would be as true in the abstract as those of
mathematics; and would be as near an approximation as abstract truth can
ever be, to truth in the concrete.

When the principles of Political Economy are to be applied to a
particular ease, then it is necessary to take into account all the
individual circumstances of that case; not only examining to which of
the sets of circumstances contemplated by the abstract science the
circumstances of the case in question correspond, but likewise what
other circumstances may exist in that case, which not being common to it
with any large and strongly-marked class of cases, have not fallen under
the cognizance of the science. These circumstances have been called
_disturbing causes_. And here only it is that an element of uncertainty
enters into the process--an uncertainty inherent in the nature of these
complex phenomena, and arising from the impossibility of being quite
sure that all the circumstances of the particular case are known to us
sufficiently in detail, and that our attention is not unduly diverted
from any of them.

This constitutes the only uncertainty of Political Economy; and not of
it alone, but of the moral sciences in general. When the disturbing
causes are known, the allowance necessary to be made for them detracts
in no way from scientific precision, nor constitutes any deviation from
the _à priori_ method. The disturbing causes are not handed over to be
dealt with by mere conjecture. Like _friction_ in mechanics, to which
they have been often compared, they may at first have been considered
merely as a non-assignable deduction to be made by guess from the result
given by the general principles of science; but in time many of them are
brought within the pale of the abstract science itself, and their effect
is found to admit of as accurate an estimation as those more striking
effects which they modify. The disturbing causes have their laws, as the
causes which are thereby disturbed have theirs; and from the laws of the
disturbing causes, the nature and amount of the disturbance may be
predicted _à priori_, like the operation of the more general laws which
they are said to modify or disturb, but with which they might more
properly be said to be concurrent. The effect of the special causes is
then to be added to, or subtracted from, the effect of the general ones.

These disturbing causes are sometimes circumstances which operate upon
human conduct through the same principle of human nature with which
Political Economy is conversant, namely, the desire of wealth, but which
are not general enough to be taken into account in the abstract science.
Of disturbances of this description every political economist can
produce many examples. In other instances the disturbing cause is some
other law of human nature. In the latter case it never can fall within
the province of Political Economy; it belongs to some other science; and
here the mere political economist, he who has studied no science but
Political Economy, if he attempt to apply his science to practice, will
fail. [11]

As for the other kind of disturbing causes, namely those which operate
through the same law of human nature out of which the general principles
of the science arise, these might always be brought within the pale of
the abstract science if it were worth while; and when we make the
necessary allowances for them in practice, if we are doing anything but
guess, we are following out the method of the abstract science into
minuter details; inserting among its hypotheses a fresh and still more
complex combination of circumstances, and so adding _pro hác vice_ a
supplementary chapter or appendix, or at least a supplementary theorem,
to the abstract science.

Having now shown that the method _à priori_ in Political Economy, and
in all the other branches of moral science, is the only certain or
scientific mode of investigation, and that the _à posteriori_ method,
or that of specific experience, as a means of arriving at truth, is
inapplicable to these subjects, we shall be able to show that the latter
method is notwithstanding of great value in the moral sciences; namely,
not as a means of discovering truth, but of verifying it, and reducing
to the lowest point that uncertainty before alluded to as arising from
the complexity of every particular case, and from the difficulty (not to
say impossibility) of our being assured _à priori_ that we have taken
into account all the material circumstances.

If we could be quite certain that we knew all the facts of the
particular case, we could derive little additional advantage from
specific experience. The causes being given, we may know what will be
their effect, without an actual trial of every possible combination;
since the causes are human feelings, and outward circumstances fitted to
excite them: and, as these for the most part are, or at least might be,
familiar to us, we can more surely judge of their combined effect from
that familiarity, than from any evidence which can be elicited from the
complicated and entangled circumstances of an actual experiment. If the
knowledge what are the particular causes operating in any given instance
were revealed to us by infallible authority, then, if our abstract
science were perfect, we should become prophets. But the causes are not
so revealed: they are to be collected by observation; and observation in
circumstances of complexity is apt to be imperfect. Some of the causes
may lie beyond observation; many are apt to escape it, unless we are on
the look-out for them; and it is only the habit of long and accurate
observation which can give us so correct a preconception what causes we
are likely to find, as shall induce us to look for them in the right
quarter. But such is the nature of the human understanding, that the
very fact of attending with intensity to one part of a thing, has a
tendency to withdraw the attention from the other parts. We are
consequently in great danger of adverting to a portion only of the
causes which are actually at work. And if we are in this predicament,
the more accurate our deductions and the more certain our conclusions in
the abstract, (that is, making abstraction of all circumstances except
those which form part of the hypothesis,) the less we are likely to
suspect that we are in error: for no one can have looked closely into
the sources of fallacious thinking without being deeply conscious that
the coherence, and neat concatenation of our philosophical systems, is
more apt than we are commonly aware to pass with us as evidence of their
truth.

We cannot, therefore, too carefully endeavour to verify our theory, by
comparing, in the particular cases to which we have access, the results
which it would have led us to predict, with the most trustworthy
accounts we can obtain of those which have been actually realized. The
discrepancy between our anticipations and the actual fact is often the
only circumstance which would have drawn our attention to some important
disturbing cause which we had overlooked. Nay, it often discloses to us
errors in thought, still more serious than the omission of what can with
any propriety be termed a disturbing cause. It often reveals to us that
the basis itself of our whole argument is insufficient; that the data,
from which we had reasoned, comprise only a part, and not always the
most important part, of the circumstances by which the result is really
determined. Such oversights are committed by very good reasoners, and
even by a still rarer class, that of good observers. It is a kind of
error to which those are peculiarly liable whose views are the largest
and most philosophical: for exactly in that ratio are their minds more
accustomed to dwell upon those laws, qualities, and tendencies, which
are common to large classes of cases, and which belong to all place and
all time; while it often happens that circumstances almost peculiar to
the particular case or era have a far greater share in governing that
one case.

Although, therefore, a philosopher be convinced that no general truths
can be attained in the affairs of nations by the _à posteriori_ road,
it does not the less behove him, according to the measure of his
opportunities, to sift and scrutinize the details of every specific
experiment. Without this, he may be an excellent professor of abstract
science; for a person may be of great use who points out correctly what
effects will follow from certain combinations of possible circumstances,
in whatever tract of the extensive region of hypothetical cases those
combinations may be found. He stands in the same relation to the
legislator, as the mere geographer to the practical navigator; telling
him the latitude and longitude of all sorts of places, but not how to
find whereabouts he himself is sailing. If, however, he does no more
than this, he must rest contented to take no share in practical
politics; to have no opinion, or to hold it with extreme modesty, on
the applications which should be made of his doctrines to existing
circumstances.

No one who attempts to lay down propositions for the guidance of
mankind, however perfect his scientific acquirements, can dispense with
a practical knowledge of the actual modes in which the affairs of the
world are carried on, and an extensive personal experience of the actual
ideas, feelings, and intellectual and moral tendencies of his own
country and of his own age. The true practical statesman is he who
combines this experience with a profound knowledge of abstract political
philosophy. Either acquirement, without the other, leaves him lame and
impotent if he is sensible of the deficiency; renders him obstinate and
presumptuous if, as is more probable, he is entirely unconscious of it.

Such, then, are the respective offices and uses of the _à priori_ and
the _à posteriori_ methods--the method of abstract science, and that of
specific experiment--as well in Political Economy, as in all the other
branches of social philosophy. Truth compels us to express our
conviction that whether among those who have written on, these subjects,
or among those for whose use they wrote, few can be pointed out who have
allowed to each of these methods its just value, and systematically kept
each to its proper objects and functions. One of the peculiarities of
modern times, the separation of theory from practice--of the studies of
the closet, from the outward business of the world--has given a wrong
bias to the ideas and feelings both of the student and of the man of
business. Each undervalues that part of the materials of thought with
which he is not familiar. The one despises all comprehensive views, the
other neglects details. The one draws his notion of the universe from
the few objects with which his course of life has happened to render him
familiar; the other having got demonstration on his side, and forgetting
that it is only a demonstration _nisi_--a proof at all times liable to
be set aside by the addition of a single new fact to the hypothesis
--denies, instead of examining and sifting, the allegations which are
opposed to him. For this he has considerable excuse in the worthlessness
of the testimony on which the facts brought forward to invalidate the
conclusions of theory usually rest. In these complex matters, men see
with their preconceived opinions, not with their eyes: an interested or
a passionate man's statistics are of little worth; and a year seldom
passes without examples of the astounding falsehoods which large bodies
of respectable men will back each other in publishing to the world as
facts within their personal knowledge. It is not because a thing is
_asserted_ to be true, but because in its nature it _may_ be true, that
a sincere and patient inquirer will feel himself called upon to
investigate it. He will use the assertions of opponents not as evidence,
but indications leading to evidence; suggestions of the most proper
course for his own inquiries.

But while the philosopher and the practical man bandy half-truths with
one another, we may seek far without finding one who, placed on a higher
eminence of thought, comprehends as a whole what they see only in
separate parts; who can make the anticipations of the philosopher guide
the observation of the practical man, and the specific experience of the
practical man warn the philosopher where something is to be added to his
theory.

The most memorable example in modern times of a man who united the
spirit of philosophy with the pursuits of active life, and kept wholly
clear from the partialities and prejudices both of the student and of
the practical statesman, was Turgot; the wonder not only of his age, but
of history, for his astonishing combination of the most opposite, and,
judging from common experience, almost incompatible excellences.

Though it is impossible to furnish any test by which a speculative
thinker, either in Political Economy or in any other branch of social
philosophy, may know that he is competent to judge of the application of
his principles to the existing condition of his own or any other country,
indications may be suggested by the absence of which he may well and
surely know that he is not competent. His knowledge must at least enable
him to explain and account for what _is_, or he is an insufficient judge
of what ought to be. If a political economist, for instance, finds
himself puzzled by any recent or present commercial phenomena; if there
is any mystery to him in the late or present state of the productive
industry of the country, which his knowledge of principle does not
enable him to unriddle; he may be sure that something is wanting to
render his system of opinions a safe guide in existing circumstances.
Either some of the facts which influence the situation of the country
and the course of events are not known to him; or, knowing them, he
knows not what ought to be their effects. In the latter case his system
is imperfect even as an abstract system; it does not enable him to trace
correctly all the consequences even of assumed premises. Though he
succeed in throwing doubts upon the reality of some of the phenomena
which he is required to explain, his task is not yet completed; even
then he is called upon to show how the belief, which he deems unfounded,
arose; and what is the real nature of the appearances which gave a
colour of probability to allegations which examination proves to be
untrue.

When the speculative politician has gone through this labour--has gone
through it conscientiously, not with the desire of finding his system
complete, but of making it so--he may deem himself qualified to apply
his principles to the guidance of practice: but he must still continue
to exercise the same discipline upon every new combination of facts as
it arises; he must make a large allowance for the disturbing influence
of unforeseen causes, and must carefully watch the result of every
experiment, in order that any residuum of facts which his principles did
not lead him to expect, and do not enable him to explain, may become the
subject of a fresh analysis, and furnish the occasion for a consequent
enlargement or correction of his general views.

The method of the practical philosopher consists, therefore, of two
processes; the one analytical, the other synthetical. He must _analyze_
the existing state of society into its elements, not dropping and losing
any of them by the way. After referring to the experience of individual
man to learn the _law_ of each of these elements, that is, to learn what
are its natural effects, and how much of the effect follows from so much
of the cause when not counteracted by any other cause, there remains an
operation of _synthesis_; to put all these effects together, and, from
what they are separately, to collect what would be the effect of all the
causes acting at once. If these various operations could be correctly
performed, the result would be prophecy; but, as they can be performed
only with a certain approximation to correctness, mankind can never
predict with absolute certainty, but only with a less or greater degree
of probability; according as they are better or worse apprised what the
causes are,--have learnt with more or less accuracy from experience the
law to which each of those causes, when acting separately, conforms,
--and have summed up the aggregate effect more or less carefully.

With all the precautions which have been indicated there will still be
some danger of falling into partial views; but we shall at least have
taken the best securities against it. All that we can do more, is to
endeavour to be impartial critics of our own theories, and to free
ourselves, as far as we are able, from that reluctance from which few
inquirers are altogether him to expect, and do not enable him to
explain, may become the subject of a fresh analysis, and furnish the
occasion for a consequent enlargement or correction of his general
views.

The method of the practical philosopher consists, therefore, of two
processes; the one analytical, the other synthetical. He must _analyze_
the existing state of society into its elements, not dropping and losing
any of them by the way. After referring to the experience of individual
man to learn the _law_ of each of these elements, that is, to learn what
are its natural effects, and how much of the effect follows from so much
of the cause when not counteracted by any other cause, there remains an
operation of _synthesis_; to put all these effects together, and, from
what they are separately, to collect what would be the effect of all the
causes acting at once. If these various operations could be correctly
performed, the result would be prophecy; but, as they can be performed
only with a certain approximation to correctness, mankind can never
predict with absolute certainty, but only with a less or greater degree
of probability; according as they are better or worse apprised what the
causes are,--have learnt with more or less accuracy from experience the
law to which each of those causes, when acting separately, conforms,--and
have summed up the aggregate effect more or less carefully.

With all the precautions which have been indicated there will still be
some danger of falling into partial views; but we shall at least have
taken the best securities against it. All that we can do more, is to
endeavour to be impartial critics of our own theories, and to free
ourselves, as far as we are able, from that reluctance from which few
inquirers are altogether exempt, to admit the reality or relevancy of
any facts which they have not previously either taken into, or left a
place open for in, their systems.

If indeed every phenomenon was generally the effect of no more than one
cause, a knowledge of the law of that cause would, unless there was a
logical error in our reasoning, enable us confidently to predict all the
circumstances of the phenomenon. We might then, if we had carefully
examined our premises and our reasoning, and found no flaw, venture to
disbelieve the testimony which might be brought to show that matters had
turned out differently from what we should have predicted. If the causes
of erroneous conclusions were always patent on the face of the
reasonings which lead to them, the human understanding would be a far
more trustworthy instrument than it is. But the narrowest examination of
the process itself will help us little towards discovering that we have
omitted part of the premises which we ought to have taken into our
reasoning. Effects are commonly determined by a _concurrence_ of causes.
If we have overlooked any one cause, we may reason justly from all the
others, and only be the further wrong. Our premises will be true, and
our reasoning correct, and yet the result of no value in the particular
case. There is, therefore, almost always room for a modest doubt as to
our practical conclusions. Against false premises and unsound reasoning,
a good mental discipline may effectually secure us; but against the
danger of _overlooking_ something, neither strength of understanding nor
intellectual cultivation can be more than a very imperfect protection.
A person may be warranted in feeling confident, that whatever he has
carefully contemplated with his mind's eye he has seen correctly; but no
one can be sure that there is not something in existence which he has
not seen at all. He can do no more than satisfy himself that he has seen
all that is visible to any other persons who have concerned themselves
with the subject. For this purpose he must endeavour to place himself at
their point of view, and strive earnestly to see the object as they see
it; nor give up the attempt until he has either added the appearance
which is floating before them to his own stock of realities, or made out
clearly that it is an optical deception.

       *       *       *       *       *

The principles which we have now stated are by no means alien to common
apprehension: they are not absolutely hidden, perhaps, from any one, but
are commonly seen through a mist. We might have presented the latter
part of them in a phraseology in which they would have seemed the most
familiar of truisms: we might have cautioned inquirers against too
extensive _generalization_, and reminded them that there are _exceptions_
to all rules. Such is the current language of those who distrust
comprehensive thinking, without having any clear notion why or where it
ought to be distrusted. We have avoided the use of these expressions
purposely, because we deem them superficial and inaccurate. The error,
when there is error, does _not_ arise from generalizing too extensively;
that is, from including too wide a range of particular cases in a single
proposition. Doubtless, a man often asserts of an entire class what is
only true of a part of it; but his error generally consists not in making
too wide an assertion, but in making the wrong _kind_ of assertion: he
predicated an actual result, when he should only have predicated a
_tendency_ to that result--a power acting with a certain intensity in that
direction. With regard to _exceptions_; in any tolerably ably advanced
science there is properly no such thing as an exception. What is thought
to be an exception to a principle is always some other and distinct
principle cutting into the former: some other force which impinges against
the first force, and deflects it from its direction. There are not a _law_
and an _exception_ to that law--the law acting in ninety-nine cases, and
the exception in one. There are two laws, each possibly acting in the
whole hundred cases, and bringing about a common effect by their conjunct
operation. If the force which, being the less conspicuous of the two, is
called the disturbing force, prevails sufficiently over the other force
in some one case, to constitute that case what is commonly called an
exception, the same disturbing force probably acts as a modifying cause
in many other cases which no one will call exceptions.

Thus if it were stated to be a law of nature, that all heavy bodies fall
to the ground, it would probably be said that the resistance of the
atmosphere, which prevents a balloon from falling, constitutes the
balloon an exception to that pretended law of nature. But the real law
is, that all heavy bodies _tend_ to fall; and to this there is no
exception, not even the sun and moon; for even they, as every astronomer
knows, tend towards the earth, with a force exactly equal to that with
which the earth tends towards them. The resistance of the atmosphere
might, in the particular case of the balloon, from a misapprehension of
what the law of gravitation is, be said to _prevail_ over the law; but
its disturbing effect is quite as real in every other case, since though
it does not prevent, it retards the fall of all bodies whatever. The
rule, and the so-called exception, do not divide the cases between them;
each of them is a comprehensive rule extending to all cases. To call one
of these concurrent principles an exception to the other, is
superficial, and contrary to the correct principles of nomenclature and
arrangement. An effect of precisely the same kind, and arising from the
same cause, ought not to be placed in two different categories, merely
as there does or does not exist another cause preponderating over it.

It is only in art, as distinguished from science, that we can with
propriety speak of exceptions. Art, the immediate end of which is
practice, has nothing to do with causes, except as the means of bringing
about effects. However heterogeneous the causes, it carries the effects
of them all into one single reckoning, and according as the sum-total is
_plus_ or _minus_, according as it falls above or below a certain line,
Art says, Do this, or Abstain from doing it. The exception does not run
by insensible degrees into the rule, like what are called exceptions in
science. In a question of practice it frequently happens that a certain
thing is either fit to be done, or fit to be altogether abstained from,
there being no medium. If, in the majority of cases, it is fit to be
done, that is made the rule. When a case subsequently occurs in which
the thing ought not to be done, an entirely new leaf is turned over; the
rule is now done with, and dismissed: a new train of ideas is introduced,
between which and those involved in the rule there is a broad line of
demarcation; as broad and _tranchant_ as the difference between Ay and
No. Very possibly, between the last case which comes within the rule and
the first of the exception, there is only the difference of a shade: but
that shade probably makes the whole interval between acting in one way
and in a totally different one. We may, therefore, in talking of art,
unobjectionably speak of the _rule_ and the _exception_; meaning by the
rule, the cases in which there exists a preponderance, however slight,
of inducements for acting in a particular way; and by the exception, the
cases in which the preponderance is on the contrary side.


THE END.


NOTES:

[8] We say, the _production_ and _distribution_, not, as is usual with
writers on this science, the production, distribution, and _consumption_.
For we contend that Political Economy, as conceived by those very
writers, has nothing to do with the consumption of wealth, further than
as the consideration of it is inseparable from that of production, or
from that of distribution. We know not of any _laws_ of the _consumption_
of wealth as the subject of a distinct science: they can be no other
than the laws of human enjoyment. Political economists have never treated
of consumption on its own account, but always for the purpose of the
inquiry in what manner different kinds of consumption affect the production
and distribution of wealth. Under the head of Consumption, in professed
treatises on the science, the following are the subjects treated of: 1st,
The distinction between _productive_ and _unproductive_ consumption; 2nd,
The inquiry whether it is possible for _too much_ wealth to be _produced_,
and for too great a portion of what has been produced to be applied to the
purpose of further _production_; 3rd, The theory of taxation, that is to
say, the following two questions--by whom each particular tax is paid
(a question of _distribution_), and in what manner particular taxes affect
_production_.

[9] The physical laws of the production of useful objects are all
equally presupposed by the science of Political Economy: most of them,
however, it presupposes in the gross, seeming to say nothing about them.
A few (such, for instance, as the decreasing ratio in which the produce
of the soil is increased by an increased application of labour) it is
obliged particularly to specify, and thus seems to borrow those truths
from the physical sciences to which they properly belong, and include
them among its own.

[10] The _science_ of legislation is an incorrect and misleading
expression. Legislation is _making laws_. We do not talk of the
_science_ of _making_ anything. Even the _science of government_ would
be an objectionable expression, were it not that _government_ is often
loosely taken to signify, not the act of governing, but the state or
condition of _being governed_, or of living under a government. A
preferable expression would be, the science of _political society_; a
principal branch of the more extensive science of society, characterized
in the text.

[11] One of the strongest reasons for drawing the line of separation
clearly and broadly between science and art is the following:--That the
principle of classification in science most conveniently follows the
classification of _causes_, while arts must necessarily be classified
according to the classification of the _effects_, the production of
which is their appropriate end. Now an effect, whether in physics or
morals, commonly depends upon a concurrence of causes, and it frequently
happens that several of these causes belong to different sciences. Thus
in the construction of engines upon the principles of the science of
_mechanics_, it is necessary to bear in mind the _chemical_ properties
of the material, such as its liability to oxydize; its electrical and
magnetic properties, and so forth. From this it follows that although
the necessary foundation of all art is science, that is, the knowledge
of the properties or laws of the objects upon which, and with which, the
art dons its work; it is not equally true that every art corresponds to
one particular science. Each art presupposes, not one science, but
science in general; or, at least, many distinct sciences.



(Editor's note:)

Essays on some Unsettled Questions of Political Economy

These five essays represent Mill's earliest thoughts on economic matters
and were first composed in 1829 and 1830 before his reputation had been
established by the publication of _Logic_ in 1843. Their successful
reception no doubt hastened the composition of his comprehensive work
the _Principles of Political Economy_ (1848).