HBl(bl ^m ^atk i>tatc (QalUge of Agticultutc At (Hatatil Uninersitg 3tt)a(a, ^. f . Sitbraty Cornell University Library HB 161.C14 Some leading principles of political eco 3 1924 013 736 438 Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924013736438 POLITICAL ECONOMY. SOME LEADING PRINCIPLES POLITICAL ECOl^OMY NEWLY EXPOUNDED. BY J. E. CAIRNES, M.A., EMEBITUS PS0FE8B0E OP POLITICAL EOONOMT IN UHTVEESITT COLLEGE. LONDON. NEW YORK: HARPER & BROTHERS, PUBLISHERS, FKANKLIN SQUARE. 18 74. PREFACE. Though the following work is an attempt to recast some considerable portion of Political Economy, I should be sorry it were regarded as in any sense antagonistic in its attitude to- ward the science built up by the labors of Adam Smith, Mal- thus, Ricardo, and Mill. On the contrary, my hope is that it will — should its reasonings find acceptance — strengthen, in some sensible degree, and add consistence to that fabric. As regards those assumptions respecting human character and the physical conditions of external nature which constitute the ul- timate premises of economic science, the position I have taken is identical with that of the four great writers I have named ; and I have endeavored also to follow the method of combined deduction and verification by comparison with facts, which was theirs, and which is, as I believe, the only fruitful, or indeed possible method in economic inquiry. Nor do the final con- clusions which I have reached differ very widely on any im- portant points from those at which they had arrived. The points on which I have ventured to join issue with them are what, in Bacon's language, may be called the axiornata media of the science — those intermediate principles by means of which the detailed results are connected with the higher causes which produce them. ' If I have not deceived myself, there is in this portion of Political Economy, as at present generally received, no small proportion of faulty material ; and the present work may be regarded as an attempt, so far as it goes, to replace this element of weakness with matter better fitted to endure the strain of modern criticism. The nature of the undertaking has brought me, much oft- ener than I could have wished, into collision with more than one living writer for whose abilities and acquirements I ^ -I ... 54 2 PREFACE. high respect, and with whose practical aims I not unfrequent- ]j strongly sympathize ; and in particular I have been com- pelled in several parts of the book to express my strong dis- sent from some of the views of my friend Mr. W. T. Thornton. Mr. Thornton, in his work on " Labor," has contributed much, for which economists will be grateful, to the elucidation of the relations between labor and capital in this country; but he has also taken up certain theoretic positions which it seems to me are fundamentally erroneous. When my path has lain across these, I have not hesitated to challenge them, using here the same freedom which Mr. Thornton has himself em- ployed when criticising the views of preceding writers. I trust that I have also profited by the example he has set me of courtesy toward opponents. Though the main purpose of the book is, as I have already intimated, to aid the improvement of economic theory, I have nevertheless embraced every opportunity that offered of bringing theoretic doctrines into comparison with the facts presented by modern industry and commerce. I have in this way been led to examine the power and pretensions of Trades- Unions, the efficacy of Strikes, and other practical questions involved in the relations of labor and capital; and, in the portion of the book devoted to International Trade, I have, with the same view, considered in some detail the present position of the external trade of the United States, as well as the system of Protection which, in defiance alike of theory and experience, that country has so strangely adopted. I can not conclude these remarks without once again grate- fully acknowledging my deep obligations to my friend Pro- fessor Nesbitt, who has, both by supervision of the work while in progress, and by correction of the proofs as it passed through the press, very materially contributed to its now at length be- ing brought to a close. J. E. Cairnes. KiDBKOOK Paek Road, S.E., March, 1874. CONTENTS. PART I— VALUE. CHAPTER I. peeliminabt. Paoh i 1. Meaning of Value 11 Value and price 12 "A sum of values" 13 When a change in exchanging relations is described as a rise or fall of commodity A, rather than as a fall or rise of commodity B, what is meant ? 13 ; 3. Three problems concerning Value 14 I. Conditions essential to the existence of value 14 II. Causes which detennine "market values " 14 III. Causes which determine "normal values" 14 5 3. Problem I. — Conditions essential to the existence of value 14 I 4. Relation of value to utility. — Professor Jevons's theory examined 16 CHAPTER II. SUPPLT AND DEMAND. 3 1. Fundamental truth in connection with Supply and Demand 33 5 3. Analysis of the phenomena 33 Supply and Demand strictly analogous conceptions 35 Mr. Mill's criticism on this point unfounded 36 5 3. Demand, as "quantity demanded," occasionally a convenient, but not the proper sense of the term 37 J 4. Supply and Demand, as aggregates, are strictly interdependent phenom- ena, and increase or diminish together 30 5 5. Similarly, Production and Consumption are interdependent phenomena. 31 This doctrine not irreconcilable with the existence of an idle rich class who are consumers merely 33 Case of foreign residents engaged in no industry, but simply expend- ing and consuming 35 ) 6. Supply and Demand, as related to particular commodities 36 In this sense not interdependent phenomena: either may increase or diminish irrespective of the other 36 What is meant by the equality or inequality of Supply and Demand ?. . 37 ) 7. The supply of a commodity tends to adapt itself to the demand at the normal price 41 CHAPTER III. NORMAL VALUE. ) 1. Nature of Normal Value 43 \ 3. Current theories, which confine normal value to exchanges governed by cost of production, too narrow 45 Mr. Mill's docrine of Cost of Production 46 ) 3. Criticism of the received theory 48 ^ 4. Examples of practical errors resulting from the received view 54 CONTENTS. Pagk § 5. Statement of the theory of Cost of Production as governing normal value 57 Effective competition an indispensable condition in order to the action of the principle of cost 58 Extent to which effective competition is actually realized in industrial communities 60 Non-competing industrial groups 66 Complication of results 69 Nature of the law of " cost " 'i'S § 6. Analysis and characterization of the constituents of " cost " TS The labor element of " cost" 75 Eelation of skill to "cost" and to "value" 76 Nature of "abstinence" 80 How far does " abstinence" stand in need of reward '! 81 The sacrifices involved in cost of production not necessarily under- gone by distinct persons S3 In computing cost of production, it is the average sacrifice that is to be talien account of 85 § 7. Normal value as determined by Reciprocal Demand 87 Nature of Reciprocal Demand as between nations and non-competing industrial groups 91 Difference ill the modes of action of Cost of Production and of Recip- rocal Demand 93 Probable effect of improved popular education on Reciprocal Demand, and, tlirough Reciprocal Demand, on normal values, in this country. 95 CHAPTER IV. MAKKET VALUE § 1. Market Value, amenable to law 97 § 3. Adam Smith's doctrine of Market Price 98 § 3. Mr. Mill's doctrine 101 § 4. Proposed theory of Market Price in wholesale markets 104 Piay of forces in the market 106 " Proper market price" 107 Function of Speculators 109 Subordinate importance of the theory 110 § 5. Prices in retail markets 113 Capital in retail trade excessive 114 Co-operative competition 115 CHAPTER V. ON SOME DERIVATIVE LAWS OF VALUE. i 1. Character of the industry of new communities 117 Action of the law of " diminishing productiveness " 118 § 8. Course of price in meat and timber 119 § 3. Course of price in the staple food 133 § 4. Reciprocal movements in tillage and pasture 137 Effects on the progress of rent .'..'!]! 127 § 5. Course of price in accessory products 138 § 6. Adam Smith's insight 130 § 7. Course of price in mineral products 131 § 8. " " in manufactures 133 " "in coarse and refined manufactures 135 § 9. Derivative laws in fluctuations of the market I35 § 10. Laws of fluctuation as affecting manufactures 137 § 11. " " as affecting raw products 141 " " as affecting the staple food of a people ......... li'i % 13. Market fiuctuations differ in intensity and in duration 145 In vegetable products more intense 144 In animal products of longer duration 144 Fish and game 14.5 CONTENTS. PAET 11— LABOR AND CAPITAL. CHAPTER I. THE HATE OF WAGES. % 1. The problem of relative wages solved by the theory of value, but not that of positive wages 149 i 3. Eeasons for treating apart labor and commodities as subjects of ex- change value 150 §3. Arewe justified in speaking of a "general" rate of wages? Mr.Longe's objection considered 15i i 4. Present state of the controversy 157 § 5. The Wages-fund theory 159 i 6. Positions taken by the disputants on either side 161 § 7. Mr. Longe's doctrine that "the demand for commodities determines the quantity of wealth spent in the wages of laborers" considered 163 § 8. Exposition of the Wages-fund theory 167 Causes determining the amount of investment 168 Three leading constituents of capital— Fixed Capital, Raw Material, and Wages -fund. Causes determining the proportions in which they combine 170 Mode in which the supply of labor affects the amount of the Wages-fund 173 § 9. Law of the growth of of the Wages-fund 174 Social consequences 177 § 10. Industrial crises— effects on the Wages-fund 178 § 11. Mr. Thornton's objections to the Wages-fund doctrine considered 180 CHAPTER II. DEMAND FOK COMMODITIES. 1 1. Two conditions of Demand for Commodities 189 1. Where, aggregate expenditure remaining the same, a change takes place in the direction of demand 189 3. Where aggregate expenditure, and therefore the aggregate demand for commodities, undergoes increase 189 5 8. Action on the Wages-fund of changes in the direction of the demand foi- commodities 190 Where competition is effective 190 Where competition is not effective 191 International effects produced by changes in the direction of demand. 193 ^ 3. Action on the Wages-fund of an increase in the aggregate demand for commodities 194 5 4. Summary of results 199 J 5. Wages and prices 300 Incomplete theories 301 J 6. Statement of the relation between wages and prices 303 Corresponding movements 304 J 7. I. Case of an increase in wages from a growth of capital more rapid than of population, while the productiveness of industry remains unaltered 305 i 8. II. Case of an increase of wages due to improved industrial processes, or to an extension of trade 306 i 9. III. Case of an increase of wages due to an enlarged supply of money 307 Principle connecting wages and prices 309 j 10. Monetary paradox 310 6 CONTENTS. CHAPTER m. tbades-unionism. — no. i. Page § 1. Question of the limitation of tlie Wages-fund fundamental in Trades- Union controversy 214 § 2. Economic limits of the Wages-fund 215 Law of the tendency of profits to a minimum 216 Bearing of this on the question of limitation 217 § 3. The character of the limitation not such as to exclude Trades-Union action 219 Proper province for this action .- ■ 224 Practical utility of strikes depends upon the ahility of leaders to dis- criminate states of the market 825 How far is this ability likely to be acquired 226 § 4. The foregoing conclusions applicable to countries in which profits are above the minimum; for example, the United States 230 § 5. Recent advance in wages, how far due to Trades-Union action 231 § 6. Power of capitalists by combination to control the labor market 233 § 7. Relation of wages to profits 235 Mr. Brassey's doctrine as to the uniform cost of labor examined 238 CHAPTER IV. TKADES-HNIONISM. — NO. II. § 1. Three methods by which Trades-Unions may operate on the rate of wages 242 § 3. Their mode of acting on the supply of labor 243 Efiectual for its immediate purpose ; but incapable of being made a means for the social advancement of laborers 244 § 3. Mode of acting on the rate of wages by "making work" 249 Theoretical grounds of this mode of action plausible, but fallacious.. . 249 Mr. Thornton's view stated and examined 249 Notion that work and wages are convertible expressions 2-54 Practical refutation 255 Notion that the quantity of work to be done at any given time is fixed 256 Social work indefinite 257 True and only limit to the employment of labor 257 § 4. Examples of Trades-Union rules for " making work" 258 Analysis and characterization of such rules 260 Principle of this policy not confined to Trades-Unions 261 CHAPTER V. PKAOTIOAI, DEDUCTIONS FBOM THE FOREGOING PKINCIPLE3. § 1. Socialistic objections to distribution determined by economic principles. 263 § 2. Maxims of distributive justice 263 " To each according to his wants " 264 " To each according to his works " ' . 264 "To each according to his sacrifice" Sttt § 3. Examination of their applicability to actual problems 266 § 4. Distribution of wealth under the action of economic laws, how far co- incident with the principles of abstract justice 268 § 5. Our present system of industry defensible on utilitarian grounds 270 Need of a large accumulated capital 271 Failure of socialist schemes to provide for this .'.'.'.".'! 272 ^ 6. Prospects offered to the laboring classes under the present regime of industry ^ o^-g Productiveness of industry, how related to profits and wages!.'.""..'!'.'.'. 275 Coincidence of a slight increase in the rates of wages and profits 'with a greatly increased productiveness of general industry explained 277 The phenomenon, in what way related to rent 27') Discouraging result of this aspect of the case , . ,', 280 CONTENTS. 7 Page § 7. No considerable improvement in tlie laborer's condition possible while he remains a mere recipient of wages 384 Recognition of this truth by socialistic writers ; but their expedients for meeting the difficulty indefensible 285 s 8. Practical problem : To attain the socialistic end by means compatible with existing institutions 287 Difficulties moral and intellectual, not physical 387 § 9. Co-operation offers the sole escape from a hopeless position 289 Present prospects of co-operation 390 § 10. An objection answered 391 PART III.— INTERNATIONAL TRADE. CHAPTER I. DOCTKINE OF OOMPAKATIVE COST. § 1. Are there grounds for a separate theory oi International trade? 297 Rationale of trade in general 398 Special province of International trade 300 Impediments to the movement of capital and labor between nations. . . 302 § 3. Character and relative importance of such impediments 305 § 3. Development of the doctrine of comparative cost of production 307 "Comparative cost" to be understood as measured by the sacrifices undergone, not by the wages and profits received, by producers 310 Costs compared are the respective costs in each country of the ex- changed commodities, not the costs of the same commodity in the exchanging countries 313 Examples of the practical working of the principle in the trade of the world 313 Verification of abstract theory in the occurrences following the gold discoveries 315 Trade between New York and Barbados 316 Character of a large portion of International trade obscured by errone- ous conceptions of cost 317 CHAPTER II. INTERNATIONAL TRADE IN ITS RELATION TO THE RATE OE WAGES. § 1. Theory of International trade as expounded by Ricardo and Mill, not in- vulnerable 319 The proximate conditions of trade are prices, not cost 319 "Every transaction in commerce is an independent transaction " 320 Reply from Ricardo's stand-point 321 Criticism of this reply 322 § 2. Proposed modification of the theory of International trade 323 ? 3. Prevalent opinion as to the connection between wages and International trade... 324 In conflict with the received economic doctrine as expounded by Ricardo 335 Grounds of the popular view, superficial and untenable 326 § 4. Illustrative examples showing the effects of partial movements in wages on International trade 327 Sugar cultivation in Queensland 339 Effects on the external trade of England of a fall of wages in some lead- ing branch of manufacture, discussed 330 § 5. Nature of the connection between general wages and foreign trade 334 Illustration ofitered by Australian experience 335 Hypothetical illustration showing the nature of the connection as it would be developed in given circumstances in England 337 General wages and foreign trade connected as co-ordinate effects of a common cause 339 8 CONTENTS. CHAPTER III. intebnationax values. Page § 1. Statement of the problem 342 § 3. Doctrine of international values as set forth in the received text-books, not reconcilable with that of Cost of Production, to be found in the same authorities 343 But reconcilable with the view of cost here contended for 344 § 3. Practical criterion showing the relation of exchange value to cost 345 Application of this criterion to the circumstances of the leading com- mercial countries 347 § 4. Functions respectively of Reciprocal Demand and of Cost of Production in relation to International values 348 Varieties of industrial monopoly in International trade — strict and qualified, one-sided and reciprocal 349 § 5. Conditions of commercial equilibrium 3.53 § 6. Effects of international lending and borrowing on the commercial equi- librium 359 § 7. The foregoing principles illustrated by the course of the United States external trade since 1860 364 § 8. Present state and immediate prospects of that trade 367 CHAPTER IV. PEEE-TEADE AND PEOTECTION. § 1. Present state of the controversy 375 § 2. Protection, an outgrowth of the Balance of Trade system 376 ISither system, consistently carried out, fatal to International trade 377 § 3. M. Alby's statement of the protectionist theory 379 Criticism of M. Alby's statement 380 § 4. Practical issue taken in the United States — the cost of production of commodities 382 The criterion proves too much 388 And, rightly understood, refutes the protectionist argument 384 § 5. Alleged inability of the United States to compete with the cheap labor of Europe examined 386 § 6. Examination of a ten years' experiment of Protection in the United States 388 Difficulty of interpreting an industrial experiment 888 Complication of results only to be unraveled by the deductive method 389 Mr. Wells's contributions to the investigation 391 Lesson of the experiment 39.. § 7. Political argument in favor of Protection, as favoring variety in industry 395 Unfounded in the domain of " extractive industry"' 397 And not better founded in that of manufactures 399 Demoralizing eilects of a protective rigime *. 402 CHAPTER V. ON SOME MINOR TOPICS. § 1. Nature of a country's interest in the scale of its general prices 407 Maxim that "gold is of the same value all the world over" examined. 408 A nation is interested not in having its prices high, but in having its gold cheap 410 § 2. Attempts to measure the gain on foreign trade 415 The problem insoluble 418 PA.RT I. YALTJE. SOME LEADING PEINCIPLES POLITICAL ECONOMY. P^RT I. VALUE. CHAPTBE I. PBELIMINABY. § 1. The sense proper to value in economic discussion may, I think, be said to be universally agreed upon by economists, and I may, therefore, at once define it as expressing the ratio in which commodities in open market are exchanged against each other. This, as every one is aware, is not the only or perhaps the most common meaning borne by "value" in gen- eral discourse, and hence occurs a source of ambiguity which some writers have proposed to avoid by eliminating the term altogether from the nomenclature of Political Economy. Pro- fessor Jevons, for example, would substitute for " value " the expression of "ratio of exchange." Something, it is possible, might be gained in point of clearness by the substitution; but, on the other hand, the term "value" has become far too deep- ly rooted in the ordinary modes of economic thought to be easily displaced; nor, for my part, do I think this extreme course needed ; for, though no doubt there is the danger — associated as the word is with other meanings, and more par- 12 VALUE. ticularly with the idea of "utility" — of sliding in argumenta- tive discussion from the scientific into some other sense, this may, to a very great extent, if not entirely, be precluded by the simple contrivance of qualifying the term, in all doubtful contexts, with the prefix " exchange." " Exchange value " in- volves little departure from ordinary usage, and can hardly fail to remind the reader, where this is necessary, of the spe- cial and limited sense in which the word is employed. Value expressing a ratio or proportion existing between the commodities exchanged, it follows, of course, as is explained in all treatises, that a general rise or a general fall of values is an impossibility, or, rather, a contradiction in terms. If A rise in relation to B, B must fall in relation to A. A and B can not both rise or both fall at the same time in relation to each oth- er ; and what is true of two commodities is true of any num- ber, and of all commodities. But though commodities in gen- eral can not rise or fall simultaneously in relation to each other, they may rise or fall in relation to any selected one among the number ; and if gold or silver be the one selected, commodi- ties in general may rise or fall in relation to gold or silver. The value of other commodities in relation to a commodity thus selected is called " price." It is plain, then, that while a general rise or a general fall of values is a contradiction in terms, a general rise or a general fall of prices is a perfectly possible, as indeed it is a not uncommon, event. At the same time, although "value" expresses a relation, I apprehend we may use without impropriety such expressions as " a sum of values," or " an increase or diminution in the aggregate amount of values." Where, e. g., the quantity of valuable things possessed by a community has been increased, the conditions of production remaining the same ; or where the quantity remaining the same, the conditions of producing commodities have been so altered as to cause a given quantity to exchange for a larger quantity than before of commodities "A SUM OF VALUES." 13 of whicli the conditions of production have remained constant — in either of these cases, it seems to me, we may not improp- erly say that the sum of values, or the aggregate amount of values, has increased in that community. The usage may be illustrated and justified by analogous expressions employed with reference to power. Power, like value, expresses a rela- tion; and a general increase of the power of individuals or of nations in relation to each other is, of course, an impossibility. But this does not prevent us from saying that the aggregate power of any given number of individuals or nations has in- creased; meaning thereby, not that their relative position has been altered, but that the elements which go to support power in them have been multiplied. We should thus say that the power of European nations has greatly increased within the last century. In a precisely similar sense we may speak — and it will often be convenient to speak — of an increase or dimi- nution of aggregate values ; value being only another name for purchasing power. One word more of explanation may be given. If value ex- presses simply a relation, what is meant when the question is raised whether, in the case of two commodities of which the proportions in exchanging have undergone a change, the change is to be attributed to a fall in the value of the one, or to a rise in that of the other? Suppose, for example, we ask whether the advance in the price of butcher's meat is due to meat having risen or to money having fallen in value, what do we mean? Value expressing simply the relation of the commodities in exchange, the price being given, that relation is determined. Obviously there is a tacit reference to the causes on which value depends ; and the question really raised is not strictly as to the change in the exchange value of meat and money, but as to the cause or causes which have produced the change. If we believe that the change is traceable to a cause primarily affecting meat, we say that meat has risen, not 14 VALUE. that money has fallen, in value ; while in the opposite case, we should attribute the change to the reduced value of money. § 2. So much being premised as to the meaning and use of the term "value" in Political Economy, let us now endeavor to set before our minds as distinctly as may be the precise problems respecting value which the science proposes to solve. These are comprised under the following heads : I. We may inquire as to the circumstances which confer on a commodity the power of commanding other things in ex- change — in other words, as to the conditions essential to the existence of value. II. We may inquire as to the circumstances on which de- pend the particular proportions in which commodities ex- change; in other words, as to the conditions which determine value — an inquiry which resolves itself into two distinct is- sues. For, first, we may consider value as manifested in a given act of exchange, and inquire into the causes which de- termine it at a given time and place ; which is the problem of ''market values." Or, secondly, we may regard value as the average proportion resulting from a series of exchanges nu- merous enough to allow of the neutralization of exceptional influences ; and this is the problem of " normal values." The general problem of value, accordingly, embraces these three distinct inquiries: 1, as to the conditions essential to the ex- istence of value; 2, as to the conditions determining market values; and, 3, as to the conditions determining normal val- § 3. The two latter inquiries will be the subject of future consideration ; but we may at once endeavor to dispose of the first of the three problems. And here it is obvious that one of the circumstances essential to the existence of value is a capacity of satisfying some human desire. Plainly, if an ob- RELATION OF VALVE TO UTILITY. 15 ject be unable to fulfill this condition, there can be no motive for seeking to obtain it, still less for parting with something we possess in exchange for it : such an object would, therefore, be incapable of exchange value. The capacity, therefore, of satisfying a desire — in other words, the possession of utility, is the first condition essential to the existence of value. The mere circumstance, however, that a commodity is ca- pable of satisfying a human desire will not necessarily confer upon it the power of commanding other things in exchange. Human beings will not, in pursuit of the satisfaction of their desires, incur sacrifice — such a sacrifice, for example, as is im- plied in parting with something they possess — if the end can be attained without submitting to this condition; and there- fore, in order that a commodity should have the power of com- manding other commodities in exchange, not only must it be capable of satisfying a desire, it must also be unattainable ex- cept on the condition of undergoing a sacrifice of some sort. N"o one living in a healthy locality, for example, will give any thing in exchange for atmospheric air; nor, where water is abundant and also universally accessible, will water fetch a price. But if atmospheric air be required to supply a diving- bell, or if water can only be had by going some distance to fetch it, water and atmospheric air will both acquire exchange value. It results, then, that the necessity of undergoing sac- rifice of some kind as a condition of obtaining the commodi- ty, or, let us say, "difiiculty of attainment," must concur with utility in order to the existence of exchange value. And it is plain also that we must add, as a further condition, the possi- bility of transferring the possession of the articles which are the subject of the exchange. These three circumstances then — utility, difficulty of attain- ment, and transferableness — are the conditions essential to the existence of value. Where they are combined in a commodi- ty, that commodity has the power of commanding other things 16 VALUE. in exchange : where any one of them is absent, exchange value can have no place. § 4. This point being settled, it will be convenient here to enter so far into the larger problems of our subject as to dis- cuss a question much debated some half- century ago, and which has lately been revived: Does utility alone give the law of exchange value? in other words, are commodities ex- changed for each other simply in proportion as they are use- ful? To put the question in a concrete form — supposing gold and silver to exchange for each other in the proportion of 1 to 15 ; silver and copper to exchange in the proportion of 1 to 30 ; and copper and iron to exchange in the proportion of 1 to 3 ; are these ratios due to the fact that gold is fifteen times more useful than silver; that silver is thirty times more useful than copper ; and that copper is three times more useful than iron? Do the proportions of exchange invariably correspond to the relative utilities of those metals? And does this rule hold in all cases of exchange? Unsophisticated readers would, I should think, have no difficulty in answering this question in the negative; and, in truth, this is the sense in which it has in general been answered by political economists. Widely as writers have differed respecting the law governing value, they have generally at least agreed in the negative conclusion that it does not simply follow the utility of the commodity. In a passage which will be familiar to most readers, Adam Smith says: "The things which have the greatest value in use have frequently little or no value in exchange ; and, on the contrary, those which have the greatest value in exchange have frequent- ly little or no value in use. Nothing is more useful than wa- ter; but it will purchase scarce any thing; scarce any thing- can be had in exchange for it. A diamond, on the contrary, has scarce any value in use, but a very great quantity of other goods may frequently be had in exchange for it." To the RELATION OF VALUE TO UTILITY. 17 same effect Eicardo writes: "When I give 2000 times more cloth for a pound of gold than I do for a pound of iron, does it prove that I attach 2000 times more utility to the gold than I do to the iron ? Certainly not. ... If utility were the meas- ure of value, I should probably give more for the iron." Again, " If I give one shilling for a loaf, and twenty-one shillings for a; guinea, it is no proof that this, in my estimation, is the com- parative measure of their utility." In this view the English school of Political Economy have, I think, very generally acquiesced. The principal dissentients, and they have not been numerous, have been in France; and of these the most eminent, perhaps, has been M. Say, who in his celebrated Traiie takes the position that utility is not only essential to value, but also constitutes the exclusive condition determining in all cases the proportions of exchange. The arguments by which M. Say supported this position will be found in his treatise. They were answered by Eicardo in a later edition of his great work ; and I have, for my part, been accustomed to regard the controversy as settled by that reply ; nor should I have thought it necessary here to refer to the question as an open one, but that the view of M. Say has quite lately been revived by Professor Jevons, in his ingenious work on the " Theory of Political Economy." Following M. Say, Professor Jevons maintains that " value depends entirely upon utility ;" and propounds a theorem which recognizes the degree of utility possessed by a commodity as the exclusive condition determining its exchange value. Under these circumstances, it will be proper to consider briefly the precise significance and importance of this view of the law of value. And here I may say at once — what indeed, with the pas- sages which I have quoted from Adam Smith and Eicardo be- fore him, will already be evident to the reader— that the ques- tion raised by Professor Jevons, and which had previously been raised by M. Say, is primarily a question of words — a 2 18 VALUE. question as to what is the proper meaning of " utility." This, I say, is evident, because, accepting utility in the sense in which it is used in those passages, the statements advanced are real- ly not open to controversy. Nor can there be much doubt or difficulty as to what that sense is. Manifestly by utility Adam Smith and Ricardo, and those who have followed their doctrine on this point, have understood the quality of being suitable to human purposes— this quality purely and simply, and irrespective of extraneous considerations; while they would doubtless have regarded the degree of utility as meas- ured by the importance of the purposes to which the useful commodity ministered. In this sense it is true beyond con- troversy that water is useful, even though it fetched nothing in the market, and more useful than many articles— e. g., al- cohol—that sell for more. The world could manifestly get on better without alcohol than without water. Similarly, it is true to say that a diamond is less useful than, e. g., coal, and that gold is less useful than iron ; or, at all events, that the degree of utility of these several products — the importance of the services which they render in the economy of human soci- ety — is not represented by the proportions in which they ex- change for each other. These propositions, I say, are indis- putable in the sense in which they are laid down ; and, ac- cordingly, in taking the position that value depends entirely upon utility, and is measured by the degree of utility, Mr. Jevons must be understood to employ the term, as M. Say for- merly employed it, in a different sense from that in which it is understood by those who maintain the ordinary view. In point of fact this is so. Professor Jevons means by utility, not what Adam Smith and Ricardo meant, but their idea^^ws something more. If we ask what that something more is, we find it to consist of all circumstances and considerations what- ever which, in any given act of exchange, exert an influence on those taking part in it. Thus the fact that water is capa- It ELATION OF VALUE TO UTILITY. 19 ble of ministering to important human purposes would not, as I understand the doctrine, entitle water to be considered, in economic estimation, a useful commodity. Before pronoun- cing on the point, we must know the circumstances under which any given dealings in the commodity take place. If they take place in London, where water can not be pro- cured in the quantity required by the population without ex- pense, and where it consequently bears a price, water is a use- ful commodity. But if the scene be changed to a country village, where water is abundant beyond the needs of the in- habitants, and consequently fetches nothing in exchange, water suddenly becomes useless. Consistently with this view, the degree of utility is measured, not by the importance of the purposes which the article subserves, but by the effect pro- duced by all the considerations aforesaid in deciding what it shall sell for. A woolen coat sells for less now than it did a century ago ; therefore it is less useful now than then. It sells for more in Australia than in England; therefore it is more useful in Australia than in England. According to the same standard of utility, every improvement in production, just in proportion as it cheapens a commodity, diminishes its utility ; while every thing that raises the cost enhances the utility. If, then, I have correctly interpreted Mr. Jevons's doctrine (and I have certainly taken every pains to understand it), the term " utility " stands with him for an entirely different concpption from that which it expresses in the language of Adam Smith, and of most political economists. In attempting, therefore, to estimate his view, we have to consider two points — first, a question of nomenclature, as to the convenience of this partic- ular use of the term ; and, secondly, one of scientific theory, as to the light thrown by the doctrine— utility being understood in the sense explained — on the phenomena of exchange value. As regards the question of nomenclature, it will scarcely, I think, be denied that Mr. Jevons's use of the term "utility" is 20 VALUE. wide of the common signification, and on this ground open to serious objection. A use of language according to which wa- ter is only useful where it is paid for, and in proportion as it is paid for ; according to which atmospheric air is only useful in diving-bells, mines, and other places whither it is costly to carry it; according to which meat and corn are less useful commodities in the United States than in England, and cloth- ing and cutlery less useful in England than in the United States ; according to which diamonds are more useful than coal, and iron is the least useful of the metals — such a use of language, it will be admitted, requires strong reasons for its justification. No doubt, in framing a scientific nomenclature, it is often necessary to depart from the ordinary use of words. Political Economy draws its technical terms from popular lan- guage ; and the mere circumstance that it is obliged to assign a precise meaning to these terms, and to adhere strictly to this meaning once assigned — this circumstance alone constantly compels a deviation from the more or less vague and fluctu- ating sense which attaches to all words in extensive popular use. So much must be admitted. But at least the necessity for deviation should be made out. If a new sense be given to a term in order to convey a novel doctrine, it should at least be shown that the innovation is needed for the due apprecia- tion of the phenomena, and that the idea is best expressed by the term. In other words, it should be shown that the theory, for the sake of which the term is employed in the unusual way, can justify itself by the only test by which a theory is justified, namely, by explaining facts, and, if it be a new theo- ry, by explaining facts not explicable, or not so simply expli- cable, by received theories. Now I must frankly say, I have failed to find in Mr. Jevons's volume any such justification of his doctrine. I must go farther. The current theories respectino- value though, as will be seen, I am far from thinking them perfect RELATION OF VALUE TO UTILITY. 21 nevertheless do succeed in explaining a large proportion of the facts actually presented in the dealings of commerce. But I am wholly unable to conceive how any thing amounting to a real explanation can be extracted from the theory we are now considering. "What does it really amount to ? In my appre- hension to this, and no more — that value depends upon utility, and that utility is whatever affects value. In other words, the name " utility " is given to the aggregate of unknown conditions which determine the phenomenon, and then the phenomenon is stated to depend upon what this name stands for. Suppose, instead of " utility," we call the unknown conditions x, we might then say that value was determined by x; and the prop- osition would be precisely as true, and, so far as I can see, as instructive, as Mr. Jevons's doctrine. In either case the infor- mation conveyed would be that value was determined by the conditions which determine it — an announcement, the impor- tance of which, even though presented under the form of ab- struse mathematical symbols, I must own myself unable to dis- cern.* There seems, therefore, no reason for departing from the hitherto commonly received sense of utility ; and it is accord- ingly in this sense — already defined — that I shall henceforth employ the term. Thus understood, utility; however essential to the existence of value, does not alone and exclusively give the law of the phenomenon. That law, or rather (for, as I have already observed, the phenomenon is twofold) those laws, we have yet to find. * I should be sorry if my dissent from Mr. Jevons on this point should convey an impression that I undervalue the work in which the doctrine I have combated is advanced. Though my ignorance of mathematics disqualifies me for entering into manv of the discussions, I am far from being insensible to the lucid statements of economic doctrine, and to the numerous original and suggestive remarks, with which the volume abounds. CHAPTEE II. SUPPLY AND DEMAND. § 1. Before proceeding to deal with the more specific prob- lems of value, it will be convenient to devote a brief space to a consideration of the agencies of Supply and Demand. If we were to judge by the careless freedom with which these terms are tossed to and fro in popular discussion, we should be apt to conclude that there was no portion of economic science which the general public had more completely at its fingers' ends. " The law of Supply and Demand " is commonly sup- posed to be a principle capable of explaining all or nearly all the phenomena of wealth, and which at the same time reveals itself by its own light. No one is imagined so ignorant as not to know what it means, or so dull as not to perceive its mar- velous efiicncy as a solvent of problems. Indeed, with a large number of people. Supply and Demand would seem to be not so much conditions to be taken account of in solving problems, as conjuring terms, by pronouncing which difiiculties may be exorcised, and obstacles of all sorts removed from our path. In point of fact, I believe there is no doctrine of Political Econ- omy more generally misunderstood, or, to speak plainly, re- specting which a more complete absence of all clear understand- ing of any kind prevails, than this very doctrine. The terms are used and the supposed "law "is appealed to, for the most part, without any distinct ideas being attached to the phrases employed. Nay, even among not a few of the professed culti- vators of economic science there seems to be, in respect to this doctrine, if I may venture to say so, a want of thoroughness AGGSEaATES. 23 and clearness of view singularly prejudicial to sound reason- ing, and which has not a little tended to throw a haze over some important problems of the science. The fundamental truth to be seized in connection with Sup- ply and Demand — the failure to seize which is the source of most of the loose reasoning and fallacious inference of which those terms are made the vehicle — is that, conceived as aggre- gates, as each comprising all the facts of that kind occurring in a given community. Supply and Demand are not independent phenomena, of which either may indefinitely increase or dimin- ish irrespective of the other, but phenomena strictly connect- ed and mutually dependent ; so strictly connected and interde- pendent that (excluding temporary effects, and contemplating them as permanent and normal facts) neither can increase nor diminish without necessitating and implying a corresponding increase or diminution of the other. Aggregate demand can not increase or diminish without entailing a corresponding in- crease or diminution of aggregate supply ; nor can aggregate supply undergo a change without involving a corresponding change in aggregate demand. These propositions seem to me to be quite fundamental, and indeed elementary — expressing, as they do, consequences which arise directly from" the nature of an industrial economy founded on the principle of separa- tion of employments. Fundamental and elementary, however, as they are, and much as has been written on the subject, they stand in need of all the aid that clear exposition and apt illustration can give them. § 2. In attempting something, however inconsiderable, to- ward this much - needed elucidation, I would ask the reader, in the first place, to set before his mind the phenomena in their most elementary form, and to observe their essential character and place in the economy of industry. Supply and Demand are evidently facts incident to the exchange of the 24 SUPPLY AND DEMAND. products of industry, which again is a consequence of the sep- aration of employmeiits. So soon as people engage in pro- ductive industiy upon the principle of separation of employ- ments, the need arises of exchanging the results of their work ; each becomes a supplier of what he has produced, a demander of what he seeks to consume. Let us suppose a regime of barter : under such circumstances Supply would consist in the commodities offered in exchange for other commodities. In what would Demand in such a case consist? We can only give the same reply : in the commodities offered in exchange for other commodities. In other words, under the simplest and most elementary form of exchange. Demand and Supply, as general phenomena, as aggregates, could not be discrimi- nated. Each commodity would be in turn Supply and Demand — Supply in reference to the person seeking to obtain it. De- mand in reference to the person who used it as the means of obtaining something else. It would be possible indeed, even in this state of things, to use the terms with a distinct mean- ing, so long as we referred the acts to individuals or to par- ticular products. A. B. would be a demander of certain ar- ticles, a supplier of others; and the demand for meat or for corn would be a perfectly distinct circumstance from the sup- ply of meat or of corn. But, so soon as the point of view was shifted from the particular to the general — so soon as we at- tempted to conceive Supply or Demand as proceeding from the community at large — the phenomena would be confound- ed, or rather would converge into one. This, I say, would be the character of Supply and Demand under a regime of bar- ter. Let us now observe how this simple character is modi- fied by the introduction of a medium of exchange. A me- dium of exchange represents general purchasing power ; and, all transactions being conducted through this medium, it be- comes possible to distinguish Demand and Supply, not merelv in reference to particular persons and products, but as general ANALOGOUS CONCEPTIONS. 25 ideas. Every act of exchange may now be regarded either from the point of view of him who offers general purchasing power, or from that of him who offers specific commodities ; all acts of the former class may be considered together, and apart from all acts of the latter: and we thus arrive at dis- tinct general ideas of Demand and Supply. Accordingly, under our actual regime we speak of Demand and Supply, not merely as of this or of that person, but as of a whole commu- nity, and not merely with reference to this or that product, but with reference to all products: aggregate Demand or ag- gregate Supply thus become possible ideas. I would, there- fore, define the terms as follows: Demand, as the desire for commodities or services, seeking its end by an offer of general purchasing power ; and Supply, as the desire for general pur- chasing power, seeking its end by an offer of specific commod- ities or services. The reader will not fail to observe that, as I have developed the ideas in question. Demand and Supply are strictly analo- gous conceptions. There is on each side a mental element, a desire, and on each a material element, specific commodities and services* in one case, and that particular commodity which is taken as the representative of general purchasing power in the other; and as in each case the desire may be re- garded as indefinite and practically unlimited, so in each case the complex phenomenon is limited by its material element — Supply by the quantity of specific commodities offered for sale, and Demand by the quantity of purchasing power offered * It will be said, perhaps, that a "service" is not a material condition. But conceding this — though in truth the most numerous class of services really con- sist in their material effects— still conceding this, the capacity to render a service is always embodied in a material form. The supply of services, therefore, will be measured by the number of human beings able and willing to render services. The supply of any given kind of labor, e. g., will be measured by the number of laborers able and willing to perform this kind of labor. 26 SUPPLY AND DEMAND. for their purchase.* The two conceptions are thus strictly analogous — a point on which I feel it the more necessary to insist, inasmuch as the contrary view is countenanced, in one portion of his work on " Political Economy," by the high au- thority of Mr. Mill. Criticising the expression "a ratio be- tween Demand and Supply," Mr. Mill asks, " What ratio can there be between a quantity and a desire, or even a desire combined with a power?" The criticism has been accepted as decisive, as far as I have observed, by all later writers : nev- ertheless, I feel bound to demur to it; and further, I must contend that the perception of the strict analogy between the ideas in question is a point of very great importance. " What ratio can there be between a quantity and a desire combined with a power?" But surely it is not correct to describe Sup- ply simply as a quantity. A mere quantity of goods does not constitute Supply until it is offered for sale, that is to say, until the quantity is connected with a mental feeling; and though it is true, as I have just pointed out, that the phenom- enon is measured by the quantity and not by the feeling, it is not the less true that Demand is also measured by its ma- terial element. The two conceptions are thus essentially anal- ogous ; and the recognition of this seems to be indispensable to 'the correct apprehension of their true relation. Accept the notion that Demand and Supply are facts of a different order, incapable of comparison and measurement, and you can hardly refuse to acknowledge that they are independent facts which may increase or diminish irrespective of each other. But this is precisely the idea that is at the bottom of most of the prevalent fallacies connected with those terms. * I say quantity of purchasing power, because ultimately all purchasing power is resolvable into quantity — under our system into weights of gold ; under others into weights of silver, or of gold and silver ; under inconvertible currencies into numbers of bits of paper printed in a certain way. DEMAND, AS " QUANTITY DEMANDED." 27 § 3. Mr. Mill, indeed, fully recognizes — no one more fully — the importance of keeping in view the strict analogy of De- mand and Supply ; and it is apparently, at least in part, with a view to this end that he gives the peculiar definition of " de- maud " which is to be found in the chapter from which I have quoted. Demand, as there defined, is to be understood as measured, not, as my definition would require, by the quantity of purchasing power offered in support of the desire for com- modities, but by the quantity of commodities for which such purchasing power is offered. There is no doubt that, as thus conceived, that is to say, as quantity demanded and quantity supplied. Demand and Supply are perfectly analogous facts; but, as I think I have shown, this way of regarding them is by no means necessary in order to render them analogous, while it seems to me that the idea of " demand " as quantity demand- ed, though not foreign to economic discussion, is very far from being adequate to the general purposes of the science. In offering a few remarks in justification of this opinion, let me here say that, while contending for the idea of " demand," as set forth above, as the proper meaning of the term, I have no desire to restrict the term exclusively and invariably to that meaning. I quite admit that it may be convenient occa- sionally to employ " demand " in other senses ; and though the employment of the same economic term in different senses is not free from objection, it is an expedient to which the econor mist must, in the dearth of language, occasionally have re- course ; nor will much harm result, if we only bear in mind that the senses are distinct, and do not confound them in ar- gument. Moreover, I am willing to allow that the meaning given to " demand " by Mr. Mill in the passage in question ex- presses a sense in which it is sometimes convenient, perhaps necessary, to use the word. But, while conceding this much, I must still contend for the correctness of my own definition, as expressing the principal and proper sense of the term in 28 SUPPLY AND DEMAND. economic science — meaning by this a sense more important and fundamental than any other to which the term in that sci- ence is applied — a sense indispensable to economic exposition, and which " demand " easily and naturally expresses. The importance and fundamental character of a scientific idea must, I apprehend, be judged by the place which it occu- pies in the theories of a science. Now I have no need to go beyond Mr. Mill's work to show that the sense assigned to "demand" in my definition may be justified by this criterion. I take three capital theories of the science — wages, money, and foreign trade. In each of these Supply and Demand form the pivots of the doctrine, the two poles on which the exposi- tion turns. But when we come to consider in what sense " de- mand " is used in those theories, we find that in every instance it is regarded as represented and measured by the purchasing power offered, not by the quantity of commodities or services demanded. It is fundamental in Mr. Mill's doctrine of wages,* as in every sound exposition of that subject, that demand for labor should be understood as measured by the quantity of capital and other wealth offered in exchange for labor. "When the economist speaks of an increased demand for labor as tend- ing to raise wages, he does not mean a demand for a larger number of laborers — a condition which would have no such tendency, unless accompanied by an increase of purchasing power, in this instance of capital offered ; and, this condition being present, the increased demand would tend to raise wages, whether the numbers actually responding to the call were larger or not ; and so of the other conclusions affecting- wages deduced from the law of Demand and Supply : the sense which I have assigned to the term is the only sense in which they will hold good for a moment. Similarly, in his theory of money Mr. Mill considers the demand for money as measured * "Principles of Political Economy," sixth edition, book ii., chap, xi., § 1. PROPER SENSE OF DEMAND. 29 by the quantity of goods of all sorts offered in exchange for money, not by the quantity of money demanded.* And again, in his theory of foreign trade,f we find "demand" steadily employed, as it seems to me, in the same sense. As the im- ports of each country represent in relation to it the measure of foreign supply, so its exports represent the force of its demand for foreign products. Thus, if England spent more largely on such products, that expenditure would be carried into effect through an increase of exports ; and that increase of exports would indicate an increase of international demand on the part of England, whatever might be the quantity of commodities imported. The exports of each country are thus the measure of its international demand ; and, as when we ex- tend our view from a particular country to the commercial world, the same commodities are in turn exports and imports. Supply and Demand become (as Mr. Mill is careful to point out) ''Eeciprocal Demand.'' It is only by thus understanding the term that I am able to assign any meaning to the very im- portant principle, as I regard it, developed by Mr. Mill in the chapter to which I am referring, and which he designates "the Equation of International Demand.":}: * "Principles of Political Economy," book iii., chap, viii., § 2. t Ibid., book iii., cliap. xviii., § 4. X Mr. Mill indeed states that " the Equation of International Demand is but an extension of the more general law of value, which we called the Equation of Sup- ply and Demand," and refers to his chapter on the latter subject ; but I must con- fess myself unable to follow his reasoning in this remark. On the contrary, the two doctrines appear to me to be perfectly distinct. The equation of Supply and Demand, in the chapter on that subject, refers, as I understand it, to an equality (realized, it is alleged, in every market) between the quantity of a commodity de- manded and the quantity of the same commodity supplied. The equality asserted, therefore, has reference to quantity, and to quantity embodied in a single commod- ity, that which is the subject-matter of exchange. The doctrine, in truth, as'I shall hereafter have occasion more particularly to point out, amounts to an assertion that what is bought is equal to what is sold, that a given quantity of a given com- 30 SUPPLY AND DEMAND. § 4. I conceive, therefore, tLat I am justified by Mr. Mill's practice, if not by his precept, in understanding Demand and Supply in the sense in which I have defined them ; and what I wish now to establish is, that, as thus understood. Demand and Supply, in their general character, and excluding tempo- rary effects, are not independent phenomena, but fundamentally the same phenomena regarded from different points of view — different faces of the same facts; and that consequently nei- ther can increase nor diminish without a corresponding increase or diminution of the other. If the reader will recall the description which I gave a few pages back of what would be the nature of Supply and De- mand under a system of barter, he will have no dif&culty, I think, in admitting the essential soundness of this position, though he may not find it easy at once to reconcile it with some facts that we witness under our actual industrial economy. It was then pointed out that Demand and Supply, on the sup- position of exchange being carried on by barter, though dis- tinct conceptions so long as we refer them to particular indi- viduals or products, become incapable of discrimination, so soon as we pass from the particular to the general point of view and regard them as aggregates. The total demand of a com- munity would under such circumstances be represented by all the commodities and services there offered in exchange for other commodities and services ; and these would also consti- tute the total supply in that community. Now the essential character of exchange is not altered by the employment of a circulating medium, however the increased complexity of the modity is equal to itself. But the equality asserted in " the Equation of Interna- tional Demand," as I understand it, is far from being of this nature : it refers not to quantity but to value, the value, namely, of the imports and exports of each commercial country ; nor is it realized in a single commodity, but in two distinct groups of commodities, namely, those issuing from and those entering such coun- tries. NOT INDEPENDENT PHENOMENA. 31 facts may tend to conceal its true nature. The process is facil- itated, but what happens is in effect the same. It is still an exchange of commodities and services against commodities and services: and the relation between Demand and Supply re- mains what it was in the simpler case. It is true, where we have a medium of exchange, we can form the conception of general Demand as distinct from general Supply— a distinction which disappears under a barter regime — because we can sepa- rate in our thoughts general purchasing power from specific commodities. But in point of truth and fact the two things are not separable. Purchasing power, in the last resort, owes its existence to the production of a commodity, and, the condi- tions of industry being given, can only be increased by increas- ing the quantity of commodities offered for sale ; that is to say. Demand can only be increased by increasing Supply. The purchasing power of England is represented by the aggregate of all her products ; and as it can not increase except through an increase of these, so an increase of her products (if adapted and duly proportioned to the requirements of human beings), will, other things being the same, carry with it a corresponding increase of her purchasing power. It follows, therefore, that the relation of general Demand and general Supply to each other is not affected by the employment of a circulating me- dium, but continues essentially the same under a monetary, as under a barter, regime. In neither case are they independent facts, but essentially the same facts presenting themselves under different aspects. Demand, as a general phenomenon, can not exist without Supply, and can not increase except in propor- tion as Supply increases. This, I repeat, is fundamental in the theory of exchange ; and all assumptions to the contrary must be regarded as baseless and absurd. § 5. The illusion which I am combating, that Demand and Supply are independent economic forces, sometimes assumes 32 SUPPLY AND DEMAND. another form in the notion that producers and consumers are distinct classes, and that production and consumption are acts which may go on irrespective of each other. It is true, indeed, there are consumers who are not producers (and the bearing of this fact on the theory just expounded I shall presently con- sider); but in the main the relation of consumers and produ- cers in an industrial community may be thus illustrated. A certain number of people, A, B, C, D, E, F, etc., are engaged in industrial occupations — A produces for B, C, D, E, F ; B for A, 0, D, E, F; C for A, B, D, E, F, and so on. In each case the producer and the consumers are distinct, and hence, by a very natural fallacy, it is concluded that the whole body of consumers is distinct from the whole body of producers ; where- as they consist of precisely the same persons. Producers are identified with Supply ; consumers with Demand ; and thus the belief in the independence of those agencies seems to find confirmation. The prevalence of this notion was brought into view very prominently in the discussion which took place a year or two back on the nine hours' movement. By several of those who took part in that discussion, and among these by some who wrote with not a little parade of economic knowl- edge, it was assumed almost as axiomatic, that the result of the movement, supposing it to be extended to the whole circle of industry, would be a general increase of Demand beyond Sup- ply, issuing in a general advance of prices. The producers, it was seen (unless their industry gained in efficiency what it lost in duration), would on the whole produce less; and therefore Supply would diminish ; but, not perceiving any connection between Supply and Demand, the disputants took it for grant- ed that Demand would go on as before. It will be scarcely necessary now, I trust, to point out the gross fallacy of the as- sumption. The producers are also consumers; and if, on the whole, less is produced, there would, on the whole, be fewer commodities to be exchanged. But why should this affect the PRODUCTION AND CONSUMPTION. 33 proportions in which they are exchanged? or why should it affect the relations between commodities in general and money ? If a given group of laborers and capitalists produce less (how- ever they may divide the produce among themselves), they have, as an aggregate, less to offer for sale ; and, as all other groups of laborers and capitalists, including those who are the means, direct or indirect, of bringing gold and silver into the country, would also have less to offer for sale, the relative po- sition of each to the community would not be disturbed ; and the diminution of general Supply would be exactly balanced by a corresponding diminution of general Demand. The ab- surdity of the supposition might indeed be more easily shown by simply adverting to the principles governing the value of money, and by showing the impossibility of its being altered by such a cause as the movement in question ; but the error, in truth, goes deeper, and can only be adequately exposed by ref- erence to the fundamental character of industrial exchange as determined by the separation of employments. But a formidable obstacle to the doctrine of the mutual interdependence and fundamental identity of Demand and Supply is supposed to exist in the presence in all wealthy communities of a large body of persons who are consumers merely, the idle rich, nati consumere fruges — people, it will be urged, who takes a large and effective part in consumption and Demand, but who produce nothing, and contribute nothing to Supply. How, it will be asked, is the existence of this class to be reconciled with the doctrine for which I am contending? It must at once be admitted that the existence of an idle rich class shows that the classes of producers and consumers are not necessarily and always conterminous ; but this is not the issue I have raised, but the dependence of consumptive power upon production, and of Demand upon Supply ._ Let me here ex- plain that by "consumptive power" I mean, as I apprehend those who employ it in this controversy mean, not the mere 3 34 SUPPLY AND DEMAND. physical capacity to consume, but the economic conditions which minister to the physical capacity. Understanding it in this sense, then, I contend that in the case of the idle rich, as in all other cases, consumptive power is limited and measured by production, and Demand by Supply. To perceive this, we have, in truth, only to dip just below the surface. Whence is their purchasing power derived ? It does not descend to them from the skies; nor is it obtained by submarine telegraph di- rect from California or Australia ; nor is its existence exhaust- ively accounted for by the presence of certain figures on the credit side of their accounts in their bankers' books. Let us suppose the class in question to be represented by certain land- lords, mortgagees, and fund-holders. In the first two cases their purchasing power, that is to say, their rents and interest, would, of course, be derived from the sale of certain agricultural prod- ucts ; in the last, also from the sale of products — the products, namely of those who pay the taxes — in all cases from produc- tion and supply. The phenomenon is merely one of a transfer of purchasing power from one set of people to another, who in virtue of contracts are entitled to receive it. If the idle land- lords, mortgagees, and fund-holders were to vanish into space, would the demand of the community diminish ? Certainly not, so long as production and supply continued as before. The only difference would be that different persons would now consume and determine the direction of demand. It was formerly certain idle landlords, mortgagees, and fund-holders : it would now be certain producers and tax-payers, who, find- ing themselves in possession of an enlarged purchasing power, would, I think we may assume, know how to use it. That useful function, therefore, which some profound writers fancy they discover in the abundant expenditure of the idle rich, turns out to be a sheer illusion. Political Economy furnishes no such palliation of unmitigated selfishness. Not that I would breathe a word against the sacredness of contracts. But I think FBOBUCTION AND. CONSUMPTION. 35 it is important, on moral no less than on economic grounds, to insist upon this, that no public benefit of any kind arises from the existence of an idle rich class. The wealth accumu- lated by their ancestors or others on their behalf, where it is employed as capital, no doubt helps to sustain industry ; but what they consume in luxury and idleness is not capital, and helps to sustain nothing but their own unprofitable lives. By all means they must have their rents and interest, as it is writ- ten in the bond ; but let them take their proper place as drones in the hive, gorging at a feast to which they have contributed nothing. One more illustration of the same fallacy will not perhaps be superfluous. A colony of rich persons establish themselves in a foreign country, where they practice no useful industry or art, but simply expend and consume. We may take as our example the English and other foreign residents at such resorts as Pau, Nice, and Rome. "Whether such residents confer ben- efit of any sort on the people among whom they settle is a point which I do not now raise : I may possibly find occasion to consider it farther on. But what I wish now to make clear is, that, if any benefit does arise from the expenditure of such people, it is no instance of a good accruing to a community from Demand as distinct from and independent of Supply. The demand of those foreign residents owes its efficacy (whatever that may amount to) to the supply by which it is supported, as certainly as if they each and all rented farms and lived upon the direct produce of their own exertions; for how is their purchasing power conveyed to them ? They receive it most probably in circular notes or bills, which are perhaps cashed in coin; but how are these instruments finally liquidated? Simply in commodities sent from England or the other coun- tries from which the residents in question come. In other words, every increase in the demand of English people resid- ing in France for French goods is accompanied and rendered 36 SVPPLY AND DEMAND. possible by an increase in the supply of English commodities to the French people. There is no other way in which in the long run it can be supported — a fact, by-the-way, which throws a curious light on the absurdities of Protection. None are so anxious to encourage such idle residents from foreign countries as protectionists ; but while eager to accomplish this object, they do all in their power to render it impossible. They would have English visitors swarming in their capitals, and spending there their money on French products; but they would at the same time put under interdict the only possible means by which in the long run Englishmen can meet their expenses. The protective system is thus an attempt to sever Demand and Supply, and to render them independent of each other — a feat which will be performed when the circle is squared. § 6. I have so far spoken of Demand and Supply as general facts, as related not to particular commodities or services, but to commodities and services in general. I proceed now to con- sider them as they stand related to particular commodities and services. And here we must in the first place note that that fundamental identity and mutual interdependence which have been found to characterize the phenomena in the light in which we have hitherto regarded them, are no longer observable when they are considered with reference to particular commodities. Thus, as I have shown, it is impossible for the general demand of a community to increase or diminish save through a corre- sponding increase or diminution of the general supply of com- modities in that community ; but it is perfectly possible that the demand for a particular commodity or service should in- crease or diminish, the supply undergoing no corresponding change; and, as every one will recognize, such failure of cor- respondence between Supply and Demand is the most common of all occurrences. In truth, it but rarely happens that the supply of any commodity remains for any length of time in OF PASTICULAB ARTICLES. 37 perfect accordance with the demand for it. What we find is a pretty constant state of fluctuation ; the demand sometimes in excess of the supply ; the supply sometimes in excess of the demand; and the alterations in the. relation indicated by par- allel alterations in the prices of the commodity so affected. I have spoken of supply corresponding with, or being greater or less than, demand in the case of a given commodity. There is no expression in more frequent use in commercial and eco- nomic discussion ; and it is probable that most people will think that it stands in need of no elucidation. But the slight- est reflection will show that its meaning is by no means so clear as it might at first sight be considered. What is meant by the supply of a given commodity being equal to the de- mand for it? The demand varies with the price; and so does the supply. It is evident, therefore, that, to give meaning to our assertion, it must be understood as made with reference to some assumed price; but what price? This is a point which is not at once apparent. Again, supposing this difficulty got over, and that we have settled at what price Demand and Supply are to be taken, de- mand at a given price may be measured either by the quantity of purchasing power offered, or by the quantity of the commod- ity demanded. Which standard are we to adopt? I have already stated my view as to the proper sense of " demand ;" nor do I see any necessity for departing in this context from the meaning I have contended for. According to that view, as Supply would be measured by the quantity of the commod- ity offered, so Demand would be measured by the quantity of purchasing power offered ; and the " correspondence " (which I think would be a better word than " equality ") of Supply with Demand at a given price would mean such a state of Demand and Supply as would result, on the one hand, in the absorption of the purchasing power forth-coming at this price by the sup- ply at the same price ; and, on the other hand, in the absorp- 38 SUPPLY AND DEMAND. tion of the supply by the purchasing power; while the non- correspondence of Supply and Demand would mean the exist- ence of an unsatisfied residuum on either side. This, I confess, is the sense of the phrase which I should myself, on scientific grounds, prefer. I have admitted, however, that there are oc- casions in which " demand " may conveniently be employed in other senses ; and this perhaps is one of them. At all events it is certain that, understanding Demand in this context as measured by the quantity demanded, the result will not be af- fected by the change of standard. When Supply corresponds with Demand in the one sense, it will correspond with it in the other; and as the latter, that is to say Demand, as measured by quantity demanded, is perhaps the more familiar concep- tion where the problem has to do with particular commodities, it will on the whole, perhaps, be more convenient to adopt this sense for the purposes of this particular discussion. I shall therefore understand equality or correspondence of Demand and Supply at a given price, when particular commodities are in question, as meaning equality or correspondence of quantity demanded with quantity supplied at that price. But we have got to determine what is the price assumed or contemplated in statements regarding the equality or inequal- ity of Supply and Demand. To resolve this point, two sorts of such statements must be considered. We may assert the equality or inequality of Demand and Supply either with ref- erence to a particular occasion, or with reference to a continu- ing state of things. We may say, for example, that the de- mand for wheat exceeded the supply in a particular market; or we may say that the demand for meat has for some time exceeded, and is likely for some time longer to exceed, the supply of that article. In the former case, it seems to me, the price assumed, so far as people speak with distinct meaning, would always be the price current in the particular market ; and the statement would mean that there were people in that OF PABTICULAB ARTICLES. 39 market who at the current price would have purchased more wheat had it been at that price obtainable. I am aware that, in assuming the possibility of such an occurrence as a market price which does not equalize Supply and Demand, I am put- ting myself in conflict with a celebrated theory. I hope, how- ever, afterward to justify this boldness. For the moment I as- sume that the price current in the particular market is the price with reference to which statements of the kind we are considering are made ; and common language certainly pre- supposes the possibility of a divergence of Demand and Sup- ply at this price. But how with regard to assertions of the other kind indicated, where we declare that, as a continuing state of things, the demand for a commodity is in excess of the supply of it — shall we say, following the analogy of the expla- nation just given, that the price here assumed is the price cur- rent during the period to which the remark applies ; and that the meaning is that the demand at that price has been and is likely to be in excess of the supply? If we attempt to deal with any actual case we shall find that this explanation will not serve us. For example, most persons acquainted with the present state of the iron trade would say that the demand for iron at the present time — meaning, not in this or that market, but in the country generally and over a period of some dura- tion — is greatly in excess of the supply, and would point to the advance in price as evidence of this. Kow it is certain that, in the opinion of those most competent to form an opin- ion, in the opinion of dealers and speculators in the article, the demand for iron in the country at the present time is not in excess of the supply of it at existing prices; for did they think so, they would at once by purchases raise the price beyond its present level. In truth, the precise function which such per- sons perform is that of adapting demand to supply by acting on price ; and, however the adaptation may fail in particular markets, it is impossible that, as a phenomenon of some dura- 40 SUPPLY AND DEMAND. tion, the demand at existing prices should remain, and be known to be, in excess of the supply. How, then, are we to deal with the assertion which undoubtedly would be made by those very persons? It is perhaps not improbable that most of those who make it have not very clearly defined their mean- ing. Still it would be unreasonable to assume that, where so many people, experts in the matter in hand, concur in mak- ing the same statement, their assertion is absolutely without meaning. I shall certainly not presume to fi.nd a meaning for any one, but I venture to lay down this proposition, that, in order to render such statements as those of which I have given examples at once significant and true, demand must be under- stood as existing at some price other than that actually pre- vailing in the markets ; and if I am asked to say what that price is, I answer, the " normal price " — the price which, in the absence of disturbing causes, people consider would be the price of the commodity. Accordingly, the sense in which I understand statements of the kind under consideration, which apply not to particular markets but to a state of things for some time in existence, is as expressing the result of a com- parison between demand taken as it ivould exist at the normal price, and supply either such as it would be at that same price, or such as it actually is. Thus understood, such statements be- come significant ; and, if founded on knowledge of the facts in question, convey information of a really important kind. The result, then, of this verbal but necessary discussion may be thus summed up : 1st. Supply and Demand, when spoken of with reference to particular commodities, must, if our statements are to be sig- nificant, be understood to mean Supply and Demand at a given price; the comparison of Supply and Demand at that price, being made by comparing the quantity of the commodity sup- plied with the amount of purchasing power offered, or with the quantity of the commodity demanded. For considerations OF FABTICULAB ARTICLES. 41 of practical convenience, the latter measure of Demand is em- ployed in this particular discussion. 2d. Where statements respecting the supply and demand of particular commodities have reference to particular markets, the price assumed as that at which Demand and Supply are compared is the price current in that market. 3d. Where such statements have reference to the country at large and to a continuing state of things, then the price as- sumed as that at which Demand is measured is the normal price of the commodity, while Supply is considered as meas- ured either at this or at the actual price. The comparison in- stituted is thus between Demand at the normal price, and Sup- ply either at the normal or at actual prices. § 7. The meaning of this part of our phraseology being thus ascertained, I proceed to lay down what seems to me the fun- damental law of Demand and Supply considered in connection with particular commodities. It is as follows: The supply of a commodity always tends to adapt itself to the demand at the normal price. I may here say briefly, that by the normal price of a commodity I mean that price which suffices, and no more than suffices, to yield to the producers what is considered to be the average and usual remuneration on such sacrifices as they undergo; and the statement is that the supply of each commodity tends to adapt itself to the demand at this price. That it does so is the direct consequence of the motives which induce people to engage in productive industry, and which at- tract them, so far as circumstances permit, toward those occupa- tions which offer the largest rewards in proportion to the sac- rifices undergone. It follows from this that, where the price of a commodity is above the normal level, and where con- sequently the producers are reaping more than average rewards, more producers will be drawn to that employment, and the supply of the commodity will be increased. But the increase 4a SUPPLY AND DEMAND. of supply, by the competition for sales, will tend to lower price, and thus to bring it down toward the normal level. If the increase of supply is not sufficient to reduce the market price quite to the normal level, then, under the influence of the same industrial motives, supply will be further increased ; and the process will go on till this result is accomplished. On the other hand, if the stimulus to production carry the movement too far and price fall below the normal level, motives of the opposite kind will at once come into play to curtail production, and the price will rise till the normal level be once more reach- ed. Such is the law of Supply and Demand in relation to par- ticular commodities : it is described by Adam Smith under the figure of a gravitation of market toward natural price ; but, however described, it is fundamental in this part of our sub- ject, and is the constant assumption running through all reason- ings which have to do with value and price. It is not, how- ever, necessary to advert to its bearings further at present; these will sufficiently appear in the course of the following discussions. I recapitulate briefly the results of the present chapter : I. Demand and Supply, considered as general facts, are not independent phenomena, but essentially the same phenomena regarded from different points of view ; consequently general Demand can not increase or diminish, except in constant rela- tion with general Supply. All notions and doctrines there- fore that proceed upon the contrary assumption are unfounded and fallacious. II. Demand and Supply, considered with reference to par- ticular commodities, may increase or diminish (in the sense ex- plained) in relation to each other ; but in all their mutations they obey this law: Supply always tends to adapt itself to Demand at the normal price of the commoditj'-. CHAPTER in. NORMAL VALUE. § 1. The attribute of normal or usual value implies system- atic and continuous production. We can not predicate normal value of a commodity of which the supply is limited and can not be increased — for example, of a picture of Turner's; be- cause, although it would be possible from a number of sales of such pictures to strii^e an average, this average would merely represent the mean of fluctuations uncontrolled by any presid- ing principle, and so, as having no tendency to keep themselves within any certain bounds, incapable of being made the ground of expectation as to the course of future prices. But when a commodity is systematically and continuously produced, the existence of a normal value soon reveals itself. It is perceived that, however greatly the price may vary from time to time, the variations do not occur at random, but obey a hidden prin- ciple, and tend to conform to a certain rule. The price of wheat may be unusually high one year, but this at once calls into action forces which control the advance, and ultimately bring back the price to its usual level ; or the price may be exceptionally low, and then the same forces are ranged on the opposite side, and the price rises. In this way the fluctuations of the market are kept within certain, not perhaps precisely determinable, but still real, limits, with a constant tendency to approach a central point — the point of " normal value " of which we are in quest. I have remarked that an average of the actual sales effected of a commodity, that is to say, of its market prices, does not 44 NORMAL VALVE. necessarily represent its normal price or value, because the commodity may exist under conditions which do not supply any controlling principle to its fluctuations, and consequently do not develop any tendency in these to revolve round a cen- tral point. But it is still true that, where the conditions for evolving a normal value do exist, that is to say, where a com- modity is systematically and continuously produced, the nor- mal value will generally be coincident with the average of act- ual sales, if only the number of instances taken be sufficient to eliminate the eifects of what we may call disturbing causes — causes, that is to say, which interfere with the adaptation of supply to demand.* The number of instances necessary to ef- fect such elimination will vary greatly with the nature of the commodity. It will in general be least in articles of ordinary manufacture, much greater in those of raw produce, and great- est of all in products of the animal kingdom. These, however, are points which will be more conveniently elucidated in con- nection with the subject of market values. One word more of explanation. Normal values, though, in contrast with market values, they may not improperly be de- scribed as average or permanent values, must not be supposed to represent any thing absolutely fixed or constant in the ex- change relation of commodities. There is no such fixedness or constancy to be found in that relation. All that we can properly understand by the permanency predicated of such val- ues is that they remain the same so long as the conditions of production remain the same. In point of fact, the conditions of production of all commodities undergo change, and those of most commodities frequent and extensive change. In general, however, these changes, where they are of much importance, occur at intervals of some duration, and in the intervening ♦ For the precise sense in wliich these words are used the reader is referred to ante pp. 40, 41. COST OF PHODUCTION. 45 periods the normal price remains constant. The centre about which market prices oscillate is thus not a fixed, but a mov- able centre ; moving, however (as will be fully set forth in a subsequent chapter*), for the most part in constant directions, determined by the character of the commodity and the cir- cumstances under which it is produced. Thus in most manu- factured goods the course of normal prices in this country has for some centuries been steadily downward ; while on the oth- er hand, the normal prices of raw produce, and more particu- larly of produce of the animal kingdom, have pretty constant- ly risen. So far as to the character of the phenomenon which now claims our attention. It remains to consider the conditions which determine it. § 2. The current theories of value connect normal value (called by Adam Smith and Eicardo "natural value," and by Mr. Mill "necessary value," but best expressed, it seems to me, by the term which I have usedf) with one set of condi- tions only, those, namely, comprised under the phrase "cost of production;" and some writers would, under this notion, distinguish such values as "cost values." But this, it seems to me, is to take a much too limited view of the range of this phenomenon. The essence lies in the tendency of the ex- changes of the market to gravitate toward a central point; wherever that tendency is observable, we can predicate of the commodities which exhibit it the possession of a central, usual, or normal value. Now, to go no farther at present, such a tendency exists in the relative values of the commodities ex- changed by different nations, or, as they are called, "interna- * See chap. v. of this Part. t I have adopted the term from M. Cherbuliez's excellent work, ' ' Precis de la Science !^conomique, '' 46 NORMAL VALUE. tional values." In other words, trading countries exchange their productions in certain proportions, which, in any given state of industry, manifest the condition of normality. Devia- tions may, and do occur, but forces are in existence which tend constantly to bring back the proportions to the normal line. International values, however, are admittedly — or at all events are demonstrably — not governed by cost of production, and we have thus normal values which are not connected with cost, but come under the influence of some other princi- ple. And I shall afterward have occasion to show that, even in domestic exchanges, cost of production is by no means co- extensive with the range of this phenomenon. Cost of production, however, is undoubtedly the principal and most important of the conditions on which normal value depends. Not only, as will be shown, does it absolutely de- termine that relation over a very wide field of exchange trans- actions, but over perhaps a still wider it exercises, not a de- cisive, but a powerful influence, and within certain limits con- trols the results. It is therefore necessary, at the outset of our discussion, to ascertain the true nature of Cost of Produc- tion, a clear perception of which, I may observe, quite irre- spective of the theory of value, is indispensable for the solu- tion of most of the problems of production and distribution. The following is the analysis of Cost of Production given by Mr. Mill, and which, so far as I know, has been acquiesced in, either expressly or implicitly, by economists alike in this and in other countries : " The component elements of Cost of Production have been set forth in the first part of this inquiry. The principle of them, and so much the principle as to be nearly the sole, we found to be Labor. What the pro- duction of a thing costs to its producer, or its series of producers, is the labor expended in producing it. If we consider as the producer the capitalist who makes the advances, the word ' labor ' may be replaced by the word ' wages :' what the produce costs to him, is the wages which COST OF PRODUCTION. 47 he has had to pay. At the first glance, indeed, this seems to be only a part of his outlay, since he has not only paid wages to laborers, but has likewise provided them with tools, materials, and perhaps buildings. These tools, materials, and buildings, however, were produced by labor and capital ; and their value, like that of the article to the production of which they are subservient, depends on cost of production, which again is resolvable into labor. The cost of production of broadcloth does not wholly consist in the wages of weavers ; which alone are directly paid by the cloth manufacturer. It consists also of the wages of spin- ners and wool-combers, and, it may be added, of shepherds, all of which the clothier has paid for in the price of yarn. It consists, too, of the wages of builders and brick-makers, which he has reimbursed in the con- tract pi'ice of erecting his factory. It partly consists of the wages of ma- chine-makers, iron-founders, and miners. And to these must be added the wages of the carriers who transported any of the means and appli- ances of the production to the place where they were to be used, and the product itself to the place where it is to be sold." . . . . " Thus far of la- bor, or wages, as an element in cost of production. But in our analysis, in the First Book, of the requisites of production we found that there is another necessary element in it besides labor. There is also capital ; and this being the result of abstinence, the produce, or its value, must be sufficient to remunerate, not only all the labor required, but the absti- nence of all the persons by whom the remuneration of the different class- es of laborers was advanced. The return for abstinence is Profit. And profit, we have also seen, is not exclusively the surplus remaining to the capitalist after he has been compensated for his outlay, but forms, in most cases, no unimportant part of the outlay itself The flax-spinner, part of whose expenses consists of the purchase of flax and of machinery, has had to pay, in their price, not only the wages of the labor by which the flax was grown and the machinery made, but the profits of the grow- er the flax-dresser, the miner, the iron-founder, and the machine-maker. All these profits, together with those of the spinner himself, were again advanced by the weaver, in the price of his material— linen yarn ; and aloncr with them the profits of a fresh set of machine-makers, and of the miners and iron-workers who supplied them with their metallic mate- rial. All these advances form part of the cost of production of linen. Profits therefore, as well as wages, enter into the cost of productioij which determines the value of the produce." .... *' Profits, however, may enter more largely into the conditions of pro- 48 NORMAL VALUE. duction of one commodity than of another, even though there be no dif- ference in tlie rate of profit between the two employments. The one commodity may be called upon to yield profit during a longer period of time than the other. The example by which this case is usually illus- trated is that of wine. Suppose a quantity of wine and a quantity of cloth made by equal amounts of labor, and that labor paid at the same rate. The cloth does not improve by keeping; the wine does. Sup- jjose that, to attain the desired quality, the wine requires to be kept five years. The producer or dealer will not keep it, unless at the end of five years he can sell it for as much more than the cloth as amounts to five years' profit accumulated at compound interest. The wine and the cloth were made by the same original outlay. Here, then, is a case in which the natural values, relatively to one another, of two commodities, do not conform to their cost of production alone, but to their cost of production j)lm something else. Unless, indeed, for the sake of generality in the expression, we include the profit which the wine-merchant foregoes dur- ing the five years in the cost of production of the wine : looking upon it as a kind of additional outlay, over and above his other advances, for which outlay he must be indemnified at last."* And finally lie thus sums up: " Cost of Production consists of several elements, some of which are constant and universal, others occasional. The universal elements of cost of production are the wages of the labor and the profits of the cap- ital. The occasional" elements are taxes, and any extra cost occasioned by a scarcity value of some of the requisites. "+ § 8. Such is the view of Cast of Production which must be considered as now generally accepted by economists. But in spite of the great authority properly attaching to any doctrine propounded by Mr. Mill, and enhanced as this is in the pres- ent instance by the general concurrence of economists, I am compelled to dissent from it. It seems to me that the concep- tion of cost which it suggests is radically unsound, confound- * "Principles of Political Economy," book iii., chap, iv., § l, 4, 5. t Ibid., book iii., chap, vi., § 1. "COST" AS WAGES AND PROFIT. 49 ing things in their own nature distinct and even antithetical, and setting in an essentially false light the incidents of pro- duction and exchange ; further, I think it will appear that it leads to practical errors of a serious kind, not naerely with re- gard to value, but also with regard to some other important doctrines of the science. Of all ideas within the range of economic speculation, the two most profoundly opposed to each other are cost and the reward of cost — the sacrifice incurred by man in productive industry, and the return made by nature to man upon that sacrifice. All industrial progress consists in altering the pro- portion between these two things; in increasing the remuner- ation in relation to the cost, or in diminishing the cost in re- lation to the remuneration. Cost and remuneration are thus economic antitheses of each other; so completely so, that a small cost and a large remuneration are exactly equivalent expressions. Now, in the analysis of cost of production which I have quoted, these two opposites are identified; and cost, which is sacrifice, cost, which is what man pays to nature for her industrial rewards, is said to consist of wages and profits, that is to say, of what nature yields to man in return for his industrial sacrifices. The theory thus in its simple statement confounds opposite facts and ideas, and further examination will show that it involves conclusions no less perplexed, and in conflict with doctrines the most received. For, first, if the analysis in question be accepted, and wages and profits be taken as the constituents of cost of production, this conclusion follows : that the cost of producing commodi- ties, taking industry as a whole, is a constant condition, in- capable, however great or universal the progress of industrial improvement, of undergoing change. Suppose, for example, the general productiveness of industry were increased ; this would mean that the aggregate results of industry in return for a given exertion of labor and abstinence were increased ; 4 50 NORMAL VALVE. in other words, that the fund from which wages and profits were paid had increased in relation to the labor and absti- nence expended. Wjiges^and profits, therefore, as an aggre- gate would rise exactly in proportion as industry had become more_pxQdjictive ; and the cost of producing a given commod- ity, measured in wages and profits, would thus remain precise- ly as before. There would be less labor and abstinence ex- erted, but this smaller exertion being more highly remuner- ated, the cost, measured in the remuneration, would suffer no change. I may mention that this is no fanciful deduction of mine, but has in effect been iipplied by at least two writers to the solution of a practical question. In a paper read some years ago before the Dublin Statistical Society, it was argued by Dr. Hancock that the cost of producing gold had not been reduced by the gold -discoveries ; and what was Dr. Hancock's proof of this assertion ? Simply this, that the wages and profits of the producers of gold had increased as much as the labor and abstinence required for the production of a given quantity of gold had diminished, leaving thus, he said, the cost of production unchanged. The facts were undoubtedly as the argument assumed, and the inference was strictly in ac- cordance with the accepted view of cost of production. But the inevitable conclusion (which Dr. Hancock did not draw) would be that the depreciation of gold is impossible.* Take another example of the consequences involved in this doctrine. If it be true that the wages and profits received by the producers of a commodity are the measure of its cost of production, then it follows that all commodities whatever, it .matters not under what circumstances produced, whether of 'competition or of monopoly, exchange, and can not but ex- i change, in proportion to their costs of production. This re- * The same argument, in principle, will be found in the sixth volume of Tooke and Newmarch's " History of Prices," part vii., § 14. "COST" AS WAGES AND PROFITS. 51 suits at once from the consideration that the value of a com- modity, where it is continuously produced, constitutes for the producers the fund from which wages and profits are paid. Accordingly, such as the value is, such will be the wages and profits of the producers ; but such as are the wages and prof- its of producers, such, according to the theory, is the cost of production. When, therefore, two commodities exchange for each other, or, varying the expression, when their values or prices are the same, their costs of production, according to the view we are considering, will necessarily be the same. It is evident that this argument applies to every case of value and price, and is wholly irrespective of the circumstances, whether of freedom or monopoly, under which commodities are pro- duced. In truth, the principle that " cost of production de- termines value" becomes, when thus understood, littlp more than the assertion of an identical proposition, since it merely amounts to saying that values are in proportion to the aggre- gate of the elements of which they are made up. That a doctrine open to objections so fundamental should have obtained the currency and prestige which this has ac- quired may seem scarcely credible ; and I am in some dread lest I should be suspected of misrepresenting the view I am combating. But that I have not done so will be admitted on consideration of the following sentences occurring in the pas- sage quoted above, in which Mr. Mill discloses with perfect clearness the line of thought by which the view in question has been reached: "What the production of a thing costs to its producer, or its series of producers, is the labor expended in producing it. If we consider as the producer the capitalist who makes the advances, the word labor may he replaced hy wages; what Ihe produce costs to him is the wages which he has had to pay." In other words, the point of view is shifted from the ground of human interests to the partial and limited stand- point of the capitalist employer; and the cost of producing an 52 NORMAL VALUE. article, which really consists in the sacrifices required of hu- man beings for its production, is only considered so far forth as it is " cost to him," that much more important portion of the cost which is cost to the laborer being put altogether out of sight. This point of view being once taken, the rest fol- lows simply and naturally. What is cost to the capitalist, that is to say, his advances, consisting of the profits of previ- ous producers as well as of the wages of laborers, profits as well as wages, must evidently be included in cost; and not only the profits of previous producers, but, in order to meet the case of difierent periods of advancing capital, the profits of the producer of the particular commodity whose cost is con- sidered — an extension of the theory which involves this curi- ous consequence, that among the elements of the cost of pro- ducing a commodity is counted the profit obtained on that commodity by the producer, a profit which I need scarcely say is not realized till after the commodity is produced. Such is the line of thought by which the view in question has been reached; and it is not difficult to see why, once adopted, it should find easy and general acceptance. The vocabulary of commerce is, for obvious reasons, framed almost wholly from the capitalist's stand-point; and Political Economy is for the most part compelled to draw its nomenclature from the vocab- ulary of commerce. A doctrine, therefore, of cost of produc- tion which resolved all cost into capitalist's cost would easily fall in at once with the general phraseology of economic sci- ence, and with the preconceptions and prepossessions gener- ated by commercial modes of thought. That the laborer's share in the industrial sacrifice is by the current doctrine excluded from the conception of cost of pro- duction does not appear to have been seen, or, if seen, to have been adequately appreciated by its adherents. Mr. Mill's lan- guage seems to imply that the wages advanced by the capital- ist — though he admits they only represent " the cost of pro- "COST" AS WAGES AND PROFITS. 53 ducing to him,'" may yet in some way be taken to represent the cost to the laborer also, for, having dealt with this portion of the case, he leads on to the next with the words : " Thus far of labor or wages, as an element of cost of production There is also capital," etc. But I must absolutely deny that wages can in any sense be taken to represent the labor element in cost of production. Wages, as Mr. Mill observed in the passage already quoted, may be regarded as cost to the capi- talist who advances them ; though perhaps it would be more correct to say that, so far as they go, they measure his cost, which really consists in the deprivation of immediate enjoy- ment implied in the fact of the advance. But to the laborer wages are reward, not cost ; nor can it be said that they stand in any constant relation to that which really constitutes cost to him. If they did, wages in all occupations, in all countries, and in all times, would be in proportion to the severity of the toil which they recompensed; whereas the proportion fails, not only in different occupations and in different countries, but whenever a general advance or decline takes place in the conditions of productive industry in the same occupations arid in the same countries. That it fails in different occupations in the same country Mr. Mill himself allows ; rather, let me say, he has been the first economist strongly to insist upon the im- portance of this fact ; that it fails on a comparison of the condi- tion of labor in different countries is too obvious to need proof; and that it fails in the game country and in the same occupa- tions on the occurrence of important changes in the conditions of productive industry we may satisfy ourselves by simply ob- serving the events now passing before our eyes. The remu- neration of labor has for some years been pretty steadily ad- vancing in the majority of occupations in this country — ad- vancing not merely in its money amount, but in the real re- ward it procures for the laborer. And wherever this has hap- pened without a corresponding increase in the severity of the 54 NORMAL VALUE. toil undergone (and in general it has been accompanied rather by a reduction than an extension of working time), the pro- portion between sacrifice and reward has been altered. I re- peat, therefore, that not only do wages not constitute the la- borer's share in the cost of production, but they can not be taken in any sense to represent that cost. Where they are ad- vanced by the capitalist they measure, so far as they go, the capitalist's sacrifice, and the capitalist's alone ; and an analysis of cost of production, therefore, which takes no account of any sacrifices but those represented by wages, simply omits alto- gether the most important element of the case. v.. § 4. The point for which I am contending will possibly ap- pear to some persons to involve a purely theoretical issue. A theoretical issue no doubt is at stake, but I believe a better example could not easily be found of the intimate connection between theory and practice, and of the way in which an un- sound theory can invert for people the true relation of phe- nomena and mislead in the practical business of life, than is furnished by this doctrine. The truth of this statement will only fully appear in the later chapters of this work ; but even here I may give an example or two. What, for instance, is now the grand argument with the people of the United States for the maintenance of protection? Why, the high cost of production in that country. And what is the evidence of this high cost of production? Simply the high rates of wages which prevail. How, they ask, can we, with our high-priced labor, compete with the pauper labor of Europe? I must frankly own that, accepting the point of view of the current theory of cost, I can find no satisfactory reply to this question, and I am quite sure that Mr. Wells, who implicitly adopts this point of view, has wholly failed to furnish one. But to pursue the argument further here would be to anticipate what will come more naturally under review at a later stage of our investigation. BESULTS OF EBSONEOUS THEORY. 55 Nor are our commercial writers here entitled to plume them- selves on the superiority of their economic notions to those of American protectionists, at least as regards this question of cost of production. In dealing with the labor question, the arguments of our capitalists do not differ in principle from that which I have just criticised. Consider, for example, the sig- nificance of such passages as this which I find in the work of so well-informed and thoughtful a writer as Mr. Brassey, and which fairly represents the economic doctrine that per- vades it : "It is the opinion of :5Ir. Lotliian Bell, one of our highest authorities, that, after all the efforts of our iron-masters to contend with the difficul- ty of high-priced labor by the improvement of machinery, labor costs fifteen per cent, more in England than on the Continent, and this disad- vantage, in his opinion, entirely neutralizes the advantages we derive from our great facilities in the proximity of our iron-mines to our coal- beds. Our workmen are not sufficiently alive to the necessity for the exercise of the utmost effi)rts of ingenuity, in order to enable capital invested in England to hold its own in the industrial campaign."* Now, I ask, what inversion of the true relations of things can be more complete than to represent high-priced labor as an obstacle to production in the same sense in which the prox- imity of our coal-beds to our iron-mines constitutes a facility? Dear labor neutralizing the advantages of our coal-beds and iron-mines ! As well speak of the large fees reaped by a suc- cessful barrister as neutralizing the advantage of his skill; for not more certainly are the large fees the consequence of the barrister's legal skill, than the high wages of our artisans are the consequence of the industrial advantages under which they work. Now what is the explanation of this singular confusion of thought and perversion of facts ? Obviously this — the whole problem of industry is looked at exclusively from the capitalist's * See "Work and Wages," p. 19. 56 NORMAL VALUE. point of view. " The advantages we derive " from our coal- beds and iron-mines are the advantages which capitalists derive from them. " British trade" means capitalists' profits; and, as the only cost taken account of in production is the capitalists' cost, so naturally the capitalists' remuneration is the only remu- neration thought worth attending to. Hence high wages are represented as "neutralizing" industrial advantages, as if noth- ing were gain which did not come to the capitalist's maw ; and the liberal remuneration of the working'people is deplored as a national calamity because it sets limits to the capitalist's share in the produce of their joint exertions. " Dear labor," says Mr. Brassey (p. 142), summing up the argument of a chapter, "is now the great obstacle to the extension of British trade."* It does not occur to him that high profits are an obstacle in pre- cisely the same sense. If British laborers and capitalists will only consent to accept a lower scale of remuneration for their services they may have the satisfaction of indefinitely extend- ing British trade and achieving the great goal of commercial ambition by underselling all the nations of the earth. Each, however, halts, and would prefer that the other should take * I can not resist quoting the sentence which follows : "But we see how cheap labor at the command of our competitors [continental capitalist employers] seems to exercise the same enervating influence as the delights of Capua on the soldiers of Hannibal " (p. 142). To which this, from the Times's money article, may serve as a pendant: "It must be borne in mind that no discovery of fresh supplies [of coal], either in Europe or America, would cause any decisive benefit, because the present difficulty in those parts of the world is not from want of coal, but from want of labor The ^ast is t\\s only qna,rter where labor is untrammeled ; and it would be interesting to the English public to learn, as far as the coal ques- tion is concerned, why, in a British settlement, where labor and material are both in abundance, nothing can be accomplished to mitigate an evil which promises to become one of the most serious ever inflicted upon the industry of civilized na- lions." It is not clear whether the evil deprecated is the scarcity of coal or the high price of British labor ; but, from the point of view both of the Times and of Mr. Brassey, those would both be evils of the same order. TSEOBY OF COST OF PUODUCTION. 57 the initiative in the patriotic sacrifice, desiring, like the French soldiers at the battle of Fontenoy, to give to his opponent the honor of firing first. § 5. It seems to me that a sufficient case has now been made out to justify an attempt at a fresh exposition of the doctrine of Cost of Production. I therefore proceed to submit to the reader that view of it which such reflection as I have been able to give to the subject has led me to form. And here I must, in the first place, insist that cost means sacri.fi£e, and can not, without risk of hopelessly confusing ideas, be identified with any thing that is not sacrifice. It represents what man parts with in the barter between him and nature, which must be kept eternally distinct from the return made by nature on that payment. This is the essential nature of cost ; and the problem of cost of production as bearing on the theory of value is to ascertain how far and in what way the payment thus made by man to nature in productive indus- try determines or otherwise influences the exchange value of the products which result. To find an answer to this question we need not go beyond that fundamental principle of conduct which leads men to seek their ends by the easiest and shortest means. The end of engaging in industry is the acquisition of wealth ; and the means, self-denial, toil, forethought, vigilance. The problem of industry is, therefore, to attain wealth at the least expenditure of those bodily and mental exertions — or, as we may say, at the least sacrifice or cost. And the law of cost of production, as governing value, is merely the practical con- sequence and outcome of the pursuit of wealth under this con- dition. In order to perceive this, it is only necessary to keep stead- ily in view the two following facts: First, that under the influ- ence of the motive just indicated, men, in selecting their occu- pations, whether as laborers or as capitalists, will, so far as ihey 58 NOBMAL VALUE. have the power of choice, select those whicb, in return for a given sacrifice, yield, or promise to yield, the largest rewards; and secondly, the fact that, under a system of separation of employ- ments, industrial rewards consist for each producer, or, more properly, for each group of producers, employed on a given work, in the value of the commodities which result from their exertions. I say in the value of the commodities, not in the commodities themselves; for it is not always that the man who is engaged in industry needs the particular commodity on which his own exertions are bestowed, and it is seldom that he needs more than at most an insignificant quantity of what he pro- duces; consequently his remuneration must come, not from the direct but from the indirect results of his labors — from those things, whatever they are, which the commodity he pro- duces enables him by sale and purchase to command — in other words, from its value. Given the productiveness of a man's industry, this alone will not enable us to determine the amount of his remuneration. In order to this, we must fur- ther know the proportions in which what he produces will ex- change for what he wants — that is to say, for the articles of his consumption. The value of the product resulting from in- dustry forms thus the source from which, under the actual state of things, industry is remunerated. Nor is this conclu- sion invalidated by the fact that, under the industrial organiza- tion prevailing in this and other civilized countries, the laborer commonly receives his reward in the form of wages advanced by the capitalist before the product is completed ; since what he receives is subsequently recouped to the capitalist, the sum being drawn from the value of the product; so that it is still the value of the product from which the remuneration of all concerned in the creation of that product ultimately comes. Wages and profits in each branch of industry are thus derived from the value of the commodities proceeding from that branch of industry, and, as (with the exception of the case where rent IMPLIES FEME COMPETITION. 59 is also an element in the -value of commodities — a case which, those acquainted with the economic theory of rent will per- ceive, does not affect the general argument) wages and profits also absorb the whole of that value, it follows that, other things being the same, the aggregate of wages and profits re- ceived by any given group of producers will always vary with the value of the aggregate of commodities which they pro- duce. Where wages and profits, therefore, in different occu- pations are in proportion to the sacrifices undergone, the value of the commodities proceeding from those occupations will also be in proportion to the same sacrifices, that is to say, the commodities will exchange in proportion to their- costs of production. Now wages and profits will be in pro- portion to the sacrifices undergone wherever, and only so far as, competition prevails among producers — wherever, and so far only as, laborers and capitalists have an effective choice in selecting among the various occupations presented to them in the industrial field. Give them this effective choice, and the correspondence of remuneration to sacrifice, not indeed in ev- ery act of production, but as a permanent and continuing state of things, is secured by the most active and constant of human motives. Each competitor, aiming at the largest reward in return for his sacrifices, will be drawn toward the occupations which happen at the time to be the best remunerated; while he will equally be repelled from those in which the remunera- tion is below the average level. The supply of products pro- ceeding from the better paid employments will thus be in- creased, and that from the less remunerative reduced, until supply, acting on price, corrects the inequality, and brings remuneration into proportion with the sacrifices undergone. Competition, therefore, is at once the security for the corre- spondence of industrial remuneration with sacrifice, and also, and because it is so, the security for the correspondence of the values of commodities with the costs of their production. 60 NORMAL VALUE. The indispensable condition to the action of cost of produc- tion Es the regulator of normal values is thus the existence of an effective competition among those engaged in industrial pursuits ; and the point to which we have now to turn our at- tention is the extent to which such effective competition is actually realized in industrial communities. Confining our at- tention for the present to England, we find competition here active and widely prevalent. In trade, as distinguished from industry, I mean in the buying and selling of commodities as distinguished from their production, it may be said to be uni- versal and unlimited. Every one is at liberty, and not only at liberty, but in general has -the practical power, to sell his commodity,* whatever it may be, in any market in the coun- try. Again, every one, speaking broadly, is free, so far as the law is concerned, to engage in any industrial pursuit he pleases, from hedging and ditching up to the learned profes- sions. But for the present purpose something more than this is necessary. Not only must there be for dealers the right and power of selling the commodity where they please, and for workmen the legal right of admission to whatever occupa- tion each prefers, but there must be, for laborers and capital- ists respectively, the practical power of employing their labor and capital in whatever direction each may please — in a word, an effective choice in deciding on the destination of the in- strument of which they have each to dispose. It matters not what the obstacle may be to the effectiveness of the choice, whether law, ignorance, or poverty — if there be an obstacle, if the producer can not pass freely from the less to the more lucra- tive occupation, ■competition is defeated, so far as regards the re- quirements of the law of cost, since there can be no security * I say his "commodity," not his "sen'ice." The gi-ounds for not including labor and commodities in the same category, in an exposition of the theory of value, will be found stated further on (part ii., chap. i.). COMPETITION, MOW FAB EFFECTIVE. 61 under such circumstances that remuneration shall be brought into correspondence with sacrifice. This is the sort of com- petition through which cost of production, as a regulator of value, works ; and the question is, How far does competition in this sense prevail in this and other industrial communities ? There is a school of reasoners who will not hesitate to an- swer this question by flatly denying the existence of competi- tion at all in the sense defined. I shall be told that the as- sumption so readily made by economists, that capital and labor may be shifted about from one occupation to another in search of the highest remuneration, is a mere figment of the econom- ical brain, without foundation in fact. Once embodied in a form suited to actual work, capital, it will be urged, is for the most part incapable of being turned to other uses. The build- ings, plant, and material required for one kind of manufacture can rarely be adapted to any other, and, even where the con- version is possible, the process will only be accomplished at great expense and loss. The difficulty of transferring labor, it will be contended, is even greater, since we are here in contact with mental as well as physical obstacles. Industrial skill is not a thing to be acquired in a moment, and that which a man possesses is the result, in general, of considerable time and out- lay devoted to its acquisition. Is it likely that, having spent his time and money in acquiring this skill and fitting himself for a particular occupation, a workman will desert the line of life he has chosen on the first sign of an advance in remunera- tion elsewhere? We are reminded how long the hand-loom weavers persisted in their unprofitable labors after power-looms were in general use; and we can imagine how extreme the case would be which would cause a carpenter to become a smith, or a smith a carpenter, still more, which would cause ei- ther to take to hair-dressing or tailoring. On such grounds, it has been contended that competition, such as I have defined it as necessary to the action of the principle of cost, has no real 60 NORMAL VALUE. existence, and that consequently all theories assuniing its ex- istence fall to the ground. Alike with regard to capital and labor, it is held that either, once embarked in a particular em- ployment, is practically committed to that employment, and may therefore be regarded as taken out of the field of compe- tition with agents, of the same kind engaged in other branch- es of industry. I am- anxious to do the fullest justice to the quantum of truth contained in this argument, and I admit at once that the facts alleged are substantially true. But I think it will not be difficult to show that they by no means sustain the practical conclusion they are adduced to support, and that, taking account of other conditions of the case which the argu- ment overlooks, they are perfectly compatible with the exist- ence of an effective industrial competition. In the first place, it may be remarked that, in order to secure an effective industrial competition — such a competition as shall bring rewards into correspondence with sacrifices — it is not necessary that every portion of capital, or that every laborer, should be at all times capable of being turned to any selected occupation. It is enough that a certain quantity of each agent — varying according to circumstances — should be thus disposa- ble.' Suppose some branch of industry to be specially flourish- ing and to be realizing exceptional gains, there is no need that the whole industry of the country should be disturbed to cor- rect the inequality. A small diversion of capital and labor — small, I mean, in comparison with the aggregate embarked in any important industry — will in general suffice for the pur- pose. Even on extraordinary occasions, when unlooked-for events in the political or commercial world disturb ordinary calculations and give an enormous advantage to particular in- dustries — such occasions, for example, as occurred in the early years of railway enterprise, or again in the linen trade on the breaking out of the American civil war — even on such occa- sions, the equilibrium of remuneration and cost can always be COMPETITION, SOW FAR EFFECTIVE. 63 restored, not indeed in a moment, but after no long delay, through the action of labor and capital still uncommitted to actual industrial employment, and wittojit any sensible en- croachment on the stock already actipiDf employed. ,< AU that is necessary, therefore, with a viev^»xp an ^fective^ industrial competition, is the presence in a cjwQ^unJljr of a certaij^ quan- tity of those instruments of pro(jictioi^apsdag^W''^posable form, ready to be turned toward t^V/more^M[^^ pursuits, and sufficiently large to correct ine^faaitSe^as they arise. Now, it will not be difficult to show that this condition is ful- filled in many industrial communities, completely in the case of capital, and less perfectly, but still within certain limits real- ly and effectually, in the case of labor also. The existence of a large amount of capital in commercial countries in disposable form — or, to speak less equivocally, in the form of money or other purchasing power, capable of being turned to any purpose required — is a patent and undeniable fact Nor is it less certain that this capital is constantly seek- ing the best investments, and rapidly moves toward any branch of industry that happens at the moment to offer special attrac- tions.* It is plain, too, that the capital thus disposable is sufii- * "Political economists say that capital sets toward the most pi-ofitable trades, ami that it rapidly leaves the less profitable and non-paying trades. But in ordi- nary countries this is a slow process, and some persons, who want to have ocular demonstration of abstract truths, have been inclined to doubt it because they could not see it. In England, however, the process would be visible enough if you could only see the books of the bill-brokers and the bankers. Their bill-cases, as a rule, are full of the bills drawn in the most profitable trades, and cmteris paribus and in comparison empty of those drawn in the less profitable. If the iron trade ceases to be as profitable as usual, less iron is sold ; the fewer the sales the fewer the bills ; and in consequence the number of iron bills in Lombard Street is diminished. On the other hand, if in consequence of a bad haiTCst the com trade becomes on a sud- den profitable, immediately ' corn bills ' are created in great numbers, and if good, are discounted in Lombard Street. Thus English capital runs as surely and in- stantly where it is most wanted, and where there is most to be made of it, as water runs to find its level." — " Lombard Street," p. 13, by Walter Bagehot. 64 NORMAL VALUE. cient for the purpose we have here in view, namely, to ren- der competition effective among the various industries ; since we find a portion of it constantly moving abroad for foreign investment — a destination it would scarcely receive while there was a prospect of reaping exceptionally high returns from in- vestment within the country. We have, therefore, in the exist- ence of this fund all that is required for a practically effective competition, so far as one instrument of production is concern- ed, and this without necessitating any serious encroachment on the capital actually engaged in productive operations. But is the corresponding condition satisfied in the case of labor? A little consideration will show that, within certain limits and subject to certain qualifications, it is fulfilled in this as well. For here also we have a disposable fund, capable of being turned, as remuneration may tempt, in various directions. Granted that labor, once engaged in a particular occupation, is practically committed to that species of occupation ; all la- bor is not thus engaged and committed. A young generation is constantly coming forward, whose capabilities may be re- garded as still in disposable form, fulfilling the same function in relation to the general labor force of the country which capital, while yet existing as purchasing power, discharges in relation to its general capital. The young persons composing this body, or others interested in their welfare, are eagerly watching the prospects of industrj' in its several branches, and will not be slow to turn toward the pursuits that promise the largest rewards. Individual tastes, no doubt, will go for some- thing in the decision, but varieties of tastes, taken over a large area, may be assumed pretty well to balance each other ; and there will remain a steady gravitation of disposable labor to- ward the more remunerative callings. On the other hand, while fresh labor is coming on the scene, worn-out labor is passing off; and the departments of industry, in which remu- neration has from any causes fallen below the average level. COMPETITION, HOW FAB EFFECTIVE. 65 ceasing to be recruited, the numbers of those employed in them will quickly decline, until supply is brought within the limits of demand, and remuneration is restored to its just proportions. In this way, then, in the case of labor as in that of capital, the conditions for an effective competition exist, notwithstanding the practical difficulties in the way of transferring labor, once trained to a particular occupation, to new pursuits. But, as I have already intimated, the conditions are in this case realized only in an imperfect manner, and this involves, as a conse- quence, certain limitations on the action of competition in the labor nrarket, and certain corresponding effects on the values of commodities. What the nature of those limitations are I shall now proceed to point out. I remarked just now that the youthful labor constantly com- ing forward to recruit the labor market might be compared to the capital still existing in the form of purchasing power, and ready to be applied to any occupation, according as the pros- pect of profit might determine. In one important respect, however, the analogy fails. Of the capital existing in this dis- posable form any portion may be applied to any industrial pur- pose. But of the disposable labor each element — that is to say, each individual laborer — can only choose his employment with- in certain tolerably well-defined limits. These limits are the limits set by the qualifications required for each branch of trade and the amount of preparation necessary for their acquisition. Take an individual workman whose occupation is still undeter- mined, he will, according to circumstances, have a narrower or wider field of choice ; but in no case will this be co-extensive with the entire range of domestic industry. If he belongs to the class of agricultural laborers, all forms of mere u nskilled jabor are open to him, but beyond this he is practically shut out from competition. The barrier is his social position and circum- stances, which render his education defective, while his means are too narrow to allow of his repairing the defect, or of defer- 5 66 NORMAL VALUE. ring the return upon his industry till he has qualified himself Ibr a skilled occupation. Mounting a step higher in the in- dustrial scale — to the artisan class, including with them the class of small dealers whose pecuniary position is much upon a par with artisans, here also within certain limits there is com- plete freedom of choice, but beyond a certain range practical exclusion. The man who is brought up to be an ordinary car- penter, mason, or smith, may go to any of these callings, or a hundred more, according as his taste prompts, or the prospect of remuneration attracts him ; but practically he has no power to compete in those higher departments of skilled labor for which a more elaborate education and larger training are nec- essary, for example, mechanical engineering. Ascend a step higher still, and we find ourselves again in presence of similar limitations : we encounter persons competent to take part in any of the higher skilled industries, but practically excluded from the professions. It is true, indeed, that in none of these cases is the exclusion absolute. The limits imposed are not such as may not be overcome by extraordinary energy, self- denial, and enterprise; and by virtue of these qualities indi- viduals in all classes are escaping every day from the bounds of their original position, and forcing their way into the ranks of those who stand above them. All this, no doubt, is true. But such exceptional phenomena do not afiPect the substantial truth of our position. What we find, in effect, is, not a whole population competing indiscriminately for all occupations, but a series of industrial layers, superposed on one another, within each of which the various candidates for employment possess a real and effective power of selection, while those occupying the several strata are, for all purposes of effective competition, practically isolated from each other. We may perhaps vent- ure to arrange them in some such order as this: first, at the bottom of the scale there would be the large group of unskill- ed or nearly unskilled laborers, comprising agricultural labor- NON-COMPETING GROUPS. 67 ers, laborers engaged in miscellaneous occupations in towns, or acting in attendance on skilled labor. Secondly, there would be the artisan group, comprising skilled laborers of the second- ary order — carpenters, joiners, smiths, masons, shoe - makers, tailors, batters, etc., etc., with whom might be included the very large class of small retail dealers, whose means and po- sition place them within the reach of the same industrial op- portunities as the class of artisans. The third layer would con- tain producers and dealers of a higher order, whose work would demand qualifications only obtainable by persons of substantial means and fair educational opportunities — for example, civil and mechanical engineers, chemists, opticians, watch-makers, and others of the same industrial grade, in which might also find a place the superior class of retail tradesmen ; while above these there would be a fourth, comprising persons still more favorably circumstanced, whose ampler means would give them a still wider choice. This last group would contain members of the learned professions, as well as persons engaged in the various careers of science and art, and in the higher branches of mercantile business. The reader will not understand me as offering here an exhaustive cla-ssification of the industrial pop- ulation. I attempt nothing of the kind; but merely seek to exhibit in rough outline the form which industrial organiza- tion, under the actual conditions of modern life, tends to as- sume; my object being, by putting the fact in a concrete shape, to furnish help toward a more distinct apprehension of the limitations imposed by social circumstances on the free competition of labor than would be obtained from more gen- eral statements. As I have already said, I am far from con- tending for the existence of any hard lines of demarkation be- tween any categories of persons in this country. No doubt the various ranks and classes fade into each other by imper- ceptible gradations, and individuals from all classes are con- stantly passing up or dropping down ; but while this is so, it 68 NORMAL VALUE. is nevertheless true tBat the average workman, from whatever rank he be taken, finds his power of competition limited for practical purposes to a certain range of occupations, so that, however high the rates of remuneration in those which lie be- yond may rise,- he is excluded from sharing them. We are thus compelled to recognize the existence of non-competing in- dustrial groups as a feature of our social economy ; and this is the fact which I desire here to insist upon. It remains to be considered how this organization of industry is calculated to modify the action of the principle of cost of production. The reader will remember that there are two distinct sac- rifices undergone in the business of production — the sacrifice of the capitalist, and the sacrifice of the laborer. As regards the former, the competition of capital being, as we have seen, effective over the entire industry of each commercial country, it follows that so much of the value of commodities as goes to remunerate the capitalist's sacrifice, and which may be regard- ed as the " profit fund," will correspond throughout the range of domestic industry with that portion of the cost which falls to the capitalist. The defalcation from the principle of cost occurs not here, but in that other and larger element in the value of commodities which goes to remunerate the laborer. The nature of the failure may be thus described: The ex- change of all commodities produced by laborers belonging to the same industrial group, or competing circle, will be govern- ed by the principle of cost — this results necessarily from the fact that competition is effective within such groups or cir- cles; but the exchange of commodities produced by laborers belonging to different groups or competing circles will, for the opposite reason, not be governed by this principle. Thus all the products of unskilled labor will exchange for each other in proportion to their costs ; as will also all the products of ordinary artisan labor as among themselves. But the latter products will not exchange against the former in proportion LIMITATION ON THE LAW OF COST. 69 to their costs, nor will the products of artisan labor, or of un- skilled labor, exchange in proportion to their costs against those of the higher industrial groups. The price of a deal table and the price of a common lock will be found to corre- spond to the sacrifices actually undergone by their producers ; or again, the price of a barometer and the price of a watch will be found to correspond to the same conditions ; but if we com- pare the price of either of the latter commodities with that of either of the former, we shall find that the correspondence fails ; the prices of the barometer and of the watch will bear a far larger proportion to their respective costs than those of the deal table, or of the common lock, to theirs. If any one ques- tions the fact, the evidence is to be found in the relative re- muneration of the producers of the several articles. That re- muneration, as I have shown, comes from the price of the com- modity in each case ; but, while it is in proportion to the rela- tive sacrifices of production in the case of the workmen who are in competition with each other, it is not in proportion to those sacrifices where the workmen are excluded from mutual competition. The result, then, is that the principle of cost of production controls exchange value in the transactions taking place within certain limited industrial areas; while, in the re- ciprocal dealings of those several areas with one another, its operation fails. This is the principal modification suffered by cost of produc- tion in consequence of the circumstance we are considering. In reality, however, the effects of that state of things are a good deal more complex than would appear from the state- ment just made ; for in that statement account was not taken of the fact that the same commodity is very frequently the product of labor belonging to different industrial circles. For example, a house is mainly produced by masons, brick-layers, carpenters, plasterers, and others, who would all rank in the class of artisans ; but a considerable quantity of purely un- 70 NORMAL VALUE. skilled labor is also employed in attendance upon these, as labor of a higher degree of skill than that of the onlinary ar- tisan is employed in the finishing and decoration ol' the house. Now suppose a commodity of this kind, the joint production of workmen of different orders, to be exchanged against one produced by workmen belonging to some one industrial group, or to several groups, but in proportions different from those obtaining in the other case, what principle would here govern exchange value, or — to express the conception in a more fa- miliar form — the relative prices of the commodities? Mani- festly more than one principle will be engaged in determining the result. So far as the two commodities are the products of workmen in competition with each other, their values will be governed by cost of production, but so far as they proceed from workmen not in mutual competition, they will be gov- erned by that other principle, yet to be ascertained, which governs normal value in the absence of competition. Sup- posing the commodity with which a house is compared were produced exclusively by the artisan class, the cost principle would be mainly operative in determining the exchange rela- tion; but it would not be entirely so, since a portion, though a small portion, of the house has been produced by workmen not in competition with the producers of the other article. On the other hand, if the comparison were made between a house and a commodity produced either wholly by unskilled labor, or wholly by labor of a degree of skill superior to that of or- dinary artisan labor, the relative values would follow, but in a slight degree, the rule of cost of production, being mainly con- trolled by the principle prevailing in the absence of the condi- tions which secure the action of cost. This example will serve to show the great complication that arises in the relative values of commodities under the actual conditions of their production. And if we bear in mind that all manufactured commodities are produced from raw materials which are very frequently the LIMITATION OF THE LAW OF COST. 71 product of workmen not in competition with those who per- form the manufacturing process, we shall see how widely the range of this sort of complication extends. Still we must not exaggerate its importance. What mainly happens is, that the bulk of the value of each commodity follows one law — say the law of cost, or what we shall afterward find to be the law of reciprocal demand, while a small remaining element is govern- ed by a different principle. Thus, reverting for a moment to a previous illustration, a barometer and a watch are in very large proportion the products of workmen of a high order of skill, and in industrial competition with each other; in a very insignificant degree, of workmen of an inferior order: as, on the other hand, a deal table and a common lock are mainly the products of ordinary artisan labor, though, it may be in some small degree, also of labor not in competition with the labor of artisans. In so far, however, as any portion of the labor employed on the barometer is out of competition with some portion of that employed on the watch, and in so far as the same is true of the labor employed on the other compared ar- ticles, to that extent we were not justified in asserting that the commodities in question exchanged, either pair of them, in pro- portion to their costs of production. Nevertheless, it is certain that our statement was substantially true, since the chief por- tion, and so much the chief portion as to be nearly the whole, of the labor employed on each pair fulfilled the required con- dition ; and this would govern a corresponding proportion of their values. A similar qualification would be needed in the case of most assertions of a like nature. In strictness, we can sel- dom say that the values of two commodities are in their whole extent governed by their costs of production : we can only say that they are so mainly, and in their chief elements. In effect the point in question is of little more than theoretic importance. As a point of theory it is proper to notice it, but the circumstance it deals with has little sensible effect upon the facts of exchange. 72 NORMAL VALVM. The mode in which the cost of producing commodities op- erates in regulating their values has now, I trust, been made tolerably clear. It will probably have been observed, that as I have departed from the current doctrine in my view of the elements of cost, go also have I departed from it in my manner of representing the operation of the law. That law is ordina- rily regarded as a principle governing value universally wher- ever it affects value at all — governing, that is to say, the value of certain classes of commodities in all exchanges; so that, the conditions of their production being known, the law of their value is supposed to be known, whatever may be the nature or the conditions of production of the commodities against which they are exchanged. For example, the price of calico would commonly be said to be governed by its cost of produc- tion, and this would be laid down without any limitation as to the article which might form the other member in the ex- change. If, however, the exposition contained in the forego- ing pages be sound, this conception of the law can not be cor- rect. For what has there appeared is a tendency in commodi- ties to exchange in proportion to their costs of production only so far as there exists free competition among their producers. The exchange, therefore, in proportion to cost would only take place within the limits of the field of free competition ; and a commodity produced within this field, but exchanged against one produced by workmen from beyond it, would not in such case exchange in proportion to its cost of production. Sup- posing, for example, A, B, C, D, B, F, to be commodities, the producers of which are all in free competition with each other, such commodities would exchange among themselves in pro- portion to their costs. Again, supposing X, Y, Z, to be com- modities produced by workmen also in free competition with each other, but excluded from competing with those who had produced A, B, C, D, etc. ; here again the values of X, Y, Z, in the exchanges of these commodities against each other would NATURE OF TEE LAW OF COST. 73 be governed by the principle of cost. But now suppose the exchange to be made of a commodity belonging to the former category against one belonging to the latter — value would in this case be no longer governed by cost of production, inas- much as there was no longer free competition among those who had produced the commodities exchanged. Now if the reader will recall the description that has been given of the various non-competing groups of which our industrial system is made up, he will perceive that the case last supposed repre- sents no inconsiderable proportion of all the exchanges which take place within such a country as this ; and that, therefore, the action of cost of production in regulating value is by no means as extensively prevalent, even within the limits of the same country, as the current theory would lead us to suppose. The same commodity follows the law of cost of production in some exchanges and does not follow it in others ; nor is it true that the value of any commodity conforms to the principle of cost in all exchanges. In order that this should happen, effective competition should be established among producers over the entire field of industry — a condition which, I need hardly say, is very far yet from being anywhere fulfilled. The true conception of the law of cost is thus, not of a law governing universally the values of any class of commodities, but that of one governing the values of certain commodities in certain exchanges. § 6. In what has gone before, cost of production has been discussed without more than a passing reference to the nature of the elements which compose it. There was no need to dis- criminate those elements with .particularity while we were oc- cupied in establishing the general principle, but the evidence for that principle having now been set forth, it will be desira- ble to attempt some analysis and characterization of the con- stituents of cost. 74 NORMAL VALUK There can not be mucli difficulty in determining the princi- pal elements of cost of production, once we have firmly seized the fact that, as cost means sacrifice and not reward, so cost of production means the sacrifice involved in production — in the act or acts of rendering certain objects supplied by nature fitted for human purposes, not the beneficial result or return upon such acts. This sacrifice, so soon as industry has passed its most primitive stage, assumes two distinct forms — first, that involved in the physical or mental exertion incident to taking part personally in the work of production, which we may call briefly the sacrifice of "labor;" and, secondly, that involved in supplying the prerequisites of productive operations, or capi- tal — a form of sacrifice which is conveniently expressed by the term "abstinence." These are the principal kinds of sacrifices involved in productive industry ; but there is also a third, the liability, namely, of producers to certain evils over and above the usual and calculable sacrifices incident to their work, which we may call " risk." There is no reason in the nature of things that these several sacrifices should not be undergone by the same person, that is to say, that the same person should not be at once laborer and capitalist, and also incur all the risk of the industrial operation ; and in point of fact this arrangement has place more or less in every country, and in some countries, especially those in which peasant proprietorship prevails, to a great extent. In England, however, and in all the non-agri- cultural industry of most civilized countries, the sacrifices of labor and abstinence are, for the most part, undergone by dis- tinct classes, who are named, accordingly, laborers and capi- talists. The sacrifice of risk, on the other hand, falls on both classes of producers alike, though the nature of the risk differs according as it affects one or the other. Affecting the capital- ist, it is risk to his property ; affecting the laborer, it is risk to his bodily and mental faculties or life, but in either case it is an element of cost ; being a real sacrifice incurred by a pro- THE LABOR ELEMENT. 75 ducer, and demanding consequently a corresponding compen- sation in the value of the product.* Our analysis, then, of cost of production resolves it into three principal elements, which, I may remark, are also ultimate ele- mentsf — Labor, Abstinence, and Eisk; the first, under the prevailing industrial arrangements of this and other civilized countries, borne by the laborer, in that enlarged sense of the term in which "laborer" includes all who take a personal part in the business of production ; the second by the capitalist ; the third falling upon laborer and capitalist alike. A few re- marks on each of these elements will suffice for my present purpose. Considering labor as an element of cost of production, the principal remark that seems called for is that, in estimating it in this character, three circumstances, and three circumstances only, must be taken account of — namely, the duration of the exertion, the degree of its severity or irksomeness, and the risk or liability to injury of any kind attending it. As commodi- ties differ greatly more in the duration of the exertion, or the quantity of the labor required for their production, than in the severity of this labor or the risk attending it, the former is ob- viously the most important circumstance in the case, and it was to it alone that Eicardo, in his analysis of cost, had re- * In the usual exposition of the doctrine of cost of production the only risk taken account of is that incurred by the capitalist ; but this is merely a consequence of that habit of contemplating the work of production exclusively from the capital- ist's stand-point, of which I have already spoken. t As I understand the word, "an ultimate element" in the subject-matter of any science is either an element which in the actual state of knowledge does not admit of.being farther resolved, or one the resolution of which belongs to some other department of knowledge. In this sense labor, abstinence, and risk are ul- timate elements in Political Economy, since, though they all admit of being traced to prior conditions and so "explained," the task of performing this process falls within the province of other sciences. In what sense profits and wages can, in any case, be considered ultimate elements of cost I am at a loss to understand. 76 NORMAL VALUE. &' gard ; but manifestly his exposition was in this respect defect- ive. The labor employed in producing different commodities differs in severity and in liability to accident as well as in mere quantity, and, in proportion as it is more severe or more lia- ble to accident, implies, other things being the same, a greater sacrifice, and therefore a larger cost. This greater sacrifice will require corresponding compensation, which, as in other cases, can only be furnished from the value of the product. I Com- modities, accordingly, will exchange — if we confine our atten- tion to the labor element of cost — not simply in proportion to the quantity of labor employed in their production, but in pro- portion to this multiplied by the severity of the labor or the risk attending it.| When, however, we have taken account of quantity, irksomeness, and risk, we have taken account of ev- ery incident in virtue of which labor is an element of cost of production, and affects through this principle the value of com- modities. it will be observed that in the brief analysis just given I have not taken any account of skill as an incident of labor en- tering into the cost of production. In making this omission, I have no doubt I shall be considered by many to have omitted a principal element of the case. Nevertheless, I must main- tain that skill, as skill, is no part of the cost of production, and I add, that no article is dearer than another simply in vir- tue of the skill bestowed upon it. Let me explain. Skill, I say, is no element of cost, but it may be, and generally is, an indication of that which is an element of cost — namely, the sacrifice, whether in the form of labor or abstinence, under- gone in acquiring the skill. Now, so far as skill is the prod- uct of such sacrifice, it undoubtedly represents an element of the cost of production ; but the point to be attended to is, that the addition thus made to the cost of production is in propor- tion, not to the skill, but to the sacrifice necessary to the acquisition of the skill. As a matter of fact, the products of RELATION OF SKILL TO "COST." 77 most kinds of skilled labor exchange against those of unskill- ed in a proportion much more favorable to the former than cost of production, as I have defined the doctrine, would pre- scribe. But this does not prove that skill is an element of cost ; because it will be found that, where the products of skilled labor command these high terms of exchange, the con- ditions of production are not those in which cost of produc- tion would govern value ; in other words, the result in ques- tion only occurs where skilled labor represents a monopoly. If we desire evidence of the powerlessness of skill, as such, to affect the value of commodities, we have only to consider the very low prices which many works of the highest literary and scientific excellence fetch, as compared with products of a far lower degree of skill. The eminent skill embodied in such works does not prevent their selling at a price far below their cost of production, as measured by the prices of commodi- ties representing skill of a different order; and if in other in- stances the products of skill command prices far above what the law of cost would prescribe, no more is this elevated value due to the skill which such products represent, but to the circum- stances which limit the possession of this skill to a small num- ber of persons as compared with the demand for their services.* * The reader vnll observe that the doctrine here laid down as to the relation of skill to the value of commodities and, as depending on this, to the relative remu- neration of services, relates to skill of different kinds as existing in the different departments of industiy. Within the limits of the same trade or profession dif- ferences of skill will, in general, under free competition, be accompanied with corresponding differences of remuneration. What the capitalist employing labor looks to is not the labor, but the result; and, consequently, where two inferior workmen only produce the same result as one of superior skill, it will be worth his while to pay the latter double what he could afford to pay either of the former. Relative wages, therefore, within the same occupation, will, where competition pre- vails, be, in general, pretty accurately adjusted to the different degrees of skill : in different occupations — and it is only with these, as furnishing the occasion of exchange, that a theoiy of value has to do — they will be affected by skill only in the manner pointed out in the text. 78 NOliMAL VALUE. The true relation between skill and value may be expressed in the following propositions : First, skill, as skill, produces no effect upon value ; in other words, commodities do not under any circumstances exchange for each other in proportion to the degree of skill bestowed upon them. Secondly, skill, though in itself inoperative on value, nevertheless affects it indirectly in two distinct ways : first, where competition is effective among producers, through the cost which must be undergone in acquiring the skill — in such cases the value of skilled products will, axteris paribus, exceed that of unskilled by the amount of the normal returns upon this cost ; and, secondly, in the absence of effective com- petition, through the principle of monopoly, by limiting the number of competitors in skilled occupations, and so acting on the supply of skilled products. In either of these ways skill may raise value; but, as skill, that is to say, in virtue of its own excellence, whether measured by the standard of utility or of artistic merit, it is powerless for this result. There is, indeed, a mode of speaking sanctioned by the lan- guage of some economists, and much in favor with those who seek to justify in all things existing industrial arrangements, which implies that skill, as such, is a source of value, and that high or low wages and prices are to be explained by reference simply to the results of the skill which services or commodities embody. For example, we constantly hear it said, in reply to complaints of wages being unduly low in certain industries, that this must be so, inasmuch as the services remunerated by these low wages are of little worth, while the higher wages ob- tained in others are explained by reference to the high worth of the services rendered by the workmen emploj^ed. Em- ployers, we are told, can not afford to pay any class of work- men more than their services are worth. Now, what is the standard of " worth" here adopted? There would seem to be but two standards possible; first that furnished by the ex- RELATION OF SKILL TO " COST." 79 change itself: in other words, the "worth" of a service maj' be measured by the money it commands. According to this conception of "worth," the statement that wages are low be- cause the services they remunerate are of little worth, and high because the worth of the services is high, merely means that wages are high or low because they are high or low, which does not much elucidate the problem ; while, in the assertion that employers can not pay their workmen more than their services are worth, the point at issue is formally begged, since — the standard of worth being the actual terms of the exchange — it amounts to saying that employers can not afford to pay their workmen more than they actually do pay them, which is just what the complainants deny. In truth, however, though this is the standard of worth upon which those who use the argument I am considering would, if pushed, probably rely, their language really suggests something more than this — the idea, namely, that industrial "worth " is something varying with the utility embodied in the services, or, what comes nearly to the same thing, with the skill which is productive of this utility. Some such sense as this must be assigned to their words if they are not to be taken as expressing barren truisms; but in any such sense, the statements in question are wholly unfounded. No such connection between wages (it will be understood that I speak now of comparative wages) and the utility or skillfulness of the services rendered exists as the language assumes, any more than a similar connection can be made out between these qualities and the prices of commodities. The true connection is not with either utility or skill, but, where competition is effective, with cost of production, and in the absence of effect- ive competition, with monopoly, more or less qualified, and acting through supply and demand. To return from this par- tial digression, we find labor, as an element of cost of produc- tion, measurable by reference to three of its incidents, and to three of its incidents only — 1st, the duration of the exertion, or 80 NORMAL VALUE. the quantity of labor ; 2d, its severity or irksomeness ; and 3d, the risk attending it. In whatever other qualities various sorts of labor may differ, unless so far as these are indications of onerous effort expended, they are no portion of the labor ele- ment of cost, and must be regarded as irrelevant to the ques- tion now- in hand. The term " abstinence " is the name given to the sacrifice in- volved in the advance of capital. As to the nature of this sacrifice, it is mainly of a negative kind ; consisting chiefly in the deprivation or postponement of enjoyment, implied in the fact of parting with our wealth so far at least as concerns our present power of commanding it. The term, indeed, would im- ply that the sacrifice is wholly negative; but I am inclined to include in it a certain small positive element, namely, that low degree of risk which is never absent from the advance of capi- tal. That some degree of risk always accompanies the act in question is evident from the nature of the case, since it implies either the trusting of one's wealth to other persons, or, where it is employed by the owner himself in productive industry, the putting of it, with a view to future results, into forms not capable of being directly converted to his uses. It will be more convenient, I think, to consider, this slight and inevitable risk, which is always present where abstinence is exercised for economic ends, as an incident of that sacrifice, than as a sub- stantive element of cost to be associated with " risk " as I have defined it in that character. I shall, therefore, so understand it, and shall accordingly define " abstinence " as the act of abstain- ing from the personal use of wealth with a view to employing it in productive industry, combined with that low degree of risk inevitably attaching to every such act. This being the nature of abstinence, the question will sug- gest itself how far it may be properly considered as an indus- trial sacrifice needing a stimulus to its exercise in the form of specific reward, and to be co-ordinated with labor in an analy- DOES ABSTINENCE NEED BEWABDf 81 sis of the sacrifices of production. It must be admitted that its connection with production is not so intimate as that of labor, since capital, however it may augment the efSciency of industry, is not absolutely indispensable to it. What we have to deal with, however, is not industry, as it may exist among savages or in very primitive communities, but industry as it ex- ists in civilized countries ; and to industry in this sense, to in- dustry as it must be carried on if the populations now inhabit- ing civilized countries are to continue to exist, capital is absolute- ly indispensable. But, if so, then abstinence, the act by which capital comes into existence, must be regarded as a necessary con- dition toward the efficacious prosecution of industrial pursuits. But is it properly a sacrifice? a sacrifice which needs, in order that it be undergone, the prospect of a specific reward ? To put the question in another form, are profits to be placed on the same line with wages in an analysis of the economy of production? As to the economic foundation of wages, the case is very clear. Wages are necessary, first, to support the laborer, and, secondly, in a free community, to induce him to work. Capital has no need to be fed and clothed, but, in order to its existence, there must be an adequate motive offered to the owners of wealth to induce them to employ it in this way. At present this inducement is found in profit; and the ques- tion to be considered is, whether, consistently with the main- tenance of capital, this inducement can be dispensed with. There are those who think it may, who hold that capital may be maintained without any deduction in favor of the capitalist from the value of the product which results from its use, and which they would assign in its entirety to those who take a personal, not to say a manual, part in the business of produc- tion.* Assuming that those who take this view understand * The language of some of the manifestoes of the International justifies this representation ; but I argue the question throughout as if it was only proposed to deprive the capitalist of his profit. 6 o2 NOUMAL VALUE. the process by which capital exists and grows, we must sup- pose them to regard the act of abstaining from present enjoy- ment as in itself agreeable, and, coupled with the risk which always attends abstinence when practiced for industrial pur- poses, as constituting in some inscrutable way, irrespective of the gains which flow from it, its own reward ; so that, the pres- ent inducement being removed, the accumulation and increase of capital would go on with unabated force. It is scarcely necessary to remark on the perfect gratuitousness, not to say preposterousness, of such a notion. It is true, indeed, that ab- stinence may be for the rich, with whom its exercise rarely implies any sensible encroachment on customary comforts and luxuries, and still less on necessaries, but a trifling sacrifice; but even in their case, when practiced with a view to indus- trial investment, it means, as we know, risk also ; which is cer- tainly a sacrifice great enough not to be undergone without the clear prospect of adequate compensation. And even if we grant that a reservation of a portion of their wealth from im- mediate consumption would still be practiced by prudent and well-to-do people, even though the specific reward which now attends it were taken away (since there would still be the de- sire to provide for the future), it does not follow that what was thus reserved would necessarily go to assist productive indus- try ; nay, it is pretty certain that this would not be its destina- tion, since it might with much less risk be converted into gold or silver, and hoarded. Even for those, therefore, with whom the sacrifice of abstinence would be slightest, a specific reward would be needed to secure its exercise. But with those who are not included among the rich, with that great class of dealers and producers, from the ranks of unskilled labor up- ward, whose aggregate savings form the main support of the capital of civilized states, abstinence, far from being a slight, is always a serious, and often a very severe sacrifice. The mere act of resisting the temptation to present enjoyment, and of INCMEASE OF CAPITAL. 83 repressing the urgent requirements of the moment, often con- stitutes in itself a severe discipline, and demands for its accom- plishment no little strength of character; and to this has to be added the inevitable risk incident to industrial investment. Even as matters stand at present, the inducement is found for many to be all too weak ; but take away this inducement, ex- clude the prospect of future gain as the compensation for pres- ent trials, and what reason have we to suppose that such trials will be undergone? I seem to be laboring to prove a truism ; and, indeed, I am inclined to attribute the opinion I am combating rather to blank ignorance, or, at the least, profound mystification, on the part of those who hold it, respecting the nature and source of capital, than to deliberate acceptance of the premises on which alone it can logically rest. That the conversion of wealth to the purposes of productive industry, in other words, the crea- tion of capital,* involves self-denial, is what probably has nev- er crossed their imaginations: much more likely, if they have speculated on its origin at all, it would be connected in their minds with the issue of paper money and other operations of banking. But, however unsettled for them be the question as to the origin of capital, on one point they have no hesitation or doubt. Governments, it is a fixed article in their economic creed, have an unlimited command over capital, and may pos- sess themselves of it at all times, in any quantity required. Where such notions respecting capital prevail, it is natural enough that profits and interest should appear superfluous institutions. Unfortunately for the speculations in ques- \ tion, capital is not the creation of Banks, nor has Government ■ * "Parsimony, and not industry, is the immediate cause of the increase of capital. Industry, indeed, provides the subject which parsimony accumulates. But whatever industry might acquire, if parsimony did not save and store up, the capital would never be the greater." — Wealth of Nations, McCullooh's edition, p. 149. 84 NORMAL VALUE. any means of obtaining it, except through the crude expedient of taking it from those to whom it belongs. Unfortunately, again, tbe process by which capital is brought into existence, maintained, and increased, is, for the great mass of those who take part in the work, a really painful one. Under such cir- cumstances compensation and reward for those who perform this function is plainly an indispensable condition to the effect- ual prosecution of industry — a consideration which justifies us in co-ordinating abstinence with labor among the elements of cost of production, as we co-ordinate profits with wages in re- lation to the value of the product. Perhaps it may be well here to guard against a possible mis- apprehension of the doctrine just laid down. It has been as- sumed in the argument that capital is indispensable to the pros- ecution of systematic industry ; and the act, creative of capital, saving, parsimony, or abstinence, has been characterized as a sacrifice distinct from labor. It must not be supposed from this that there is any economic necessity, or any economic rea- son whatever, at least derivable from the arguments just used, that capitalists should form a distinct class from laborers. The distinctness of the sacrifices constitutes no ground for assign- ing them to different sets of persons. The same person may both labor and abstain, and, performing the double sacrifice, become entitled to the double reward. So far, indeed, am I from thinking that there is any thing in this combination of the parts of capitalist and laborer in one person which militates against the true economy of productive industry, that it is pre- cisely in this direction that, for my part, I am disposed to look for an escape from the growing embarrassments and difficulties that now beset the relations of capital and labor. But this is a point the consideration of which will more properly fall within another part of this work. Another possible ambiguity it may be well here to clear up. As was intimated just now, the sacrifice involved in a given INEQUALITIES OF SACBIFICE. 85 act of abstinence is very different in the case of different per- sons. A rich man abstains from the consumption of his super- fluous wealth, and is scarcely conscious, perhaps quite uncon- scious, of having suffered any deprivation whatever : his sur- plus income goes to his capital account, which continues to groWj while his expenditure remains precisely as before. On the other hand, the same or a much smaller amount of wealth reserved from personal consumption by an artisan or a small tradesman will frequently demand the most rigorous self-de- nial. The same_ individual, too, feels very differently the pains of abstinence at different stages of his career — in the struggling outset and at the successful close. And it is similar with labor. The laborious effort fitted to produce a given re- sult does not represent the same sacrifice for different people : it is one thing for the strong, another for the weak ; one for the trained workman, another for the raw beginner. This being so, the question arises — How are such differences to be dealt with in computing the cost of production ? Are we to take account of what is personal and peculiar to the actual producers, and regard the cost of the commodity as higher or lower according as it has been produced by a weak or a strong workman, or by capital the result of painful or of painless sav- ing? The answer must be in the negative. The sacrifices to be taken account of, and which govern exchange value, are, not those undergone by A, B, or C, but the ayerage_sacrifices _ undergone by the class of laborers or capitalists to which the producers of the commodity belong. A few remarks will en- able us to make this clear. What at bottom maintains the connection between value and cost of production is, it must always be remembered, the power of choice residing in laborers and capitalists to decide between different occupations. Now what is it determines the choice? No doubt the prospects of the pursuit, the remu- neration being compared with the sacrifice. But what sacri- 66 XOEMAL VALUE. fice ? Plainly the sacrifice about to be undergone by the par- ticular workman or capitalist who has to make the choice. Each takes account of the incidents of the course proposed as it bears upon himself, and considers how it stands in the com- parison with others equally open to him. The conclusion he arrives at on this point determines his decision. Through a process of this kind every laborer and capitalist, either per- sonally himself, or vicariously through a parent or other ad- viser, passes. Carried on over any given field of industrial competition, it is evident the result of this proceeding must be, not to bring the remuneration of each of the individuals com- prised within it into conformity with the sacrifice which each undergoes, but to establish this conformity among the aggre- gates of those engaged in the several competing occupations; so that the total remuneration falling to each branch of indus- try shall bear the same proportion to the total sacrifices un- dergone in that branch as the total remuneration falling to any other within the same field bears to the sacrifices undergone in that other. The total remuneration falling to any branch of industry, however, consists of the total value of the commod- ities proceeding from it. This value, therefore, will bear the same proportion to the sacrifices undergone in producing it, as the value proceeding from any other industry within the same field of competition bears to the sacrifices of which it is the result. It follows that the relation which competition estab- lishes between cost and value is one, not between the value of particular commodities and the sacrifices of the individual or individuals who have produced each such commodity, but one between commodities taken as sorts and their cost of produc- tion. We can not, for example, assert that a particular pair of shoes will exchange against a particular coat in proportion to the sacrifices undergone respectively by the shoe-maker and the tailor in the actual case ; but we may assert that, within a given field of competition, shoes, as one sort of commodity, will AVERAGE SACRIFICE. 87 exchange against coats as another ia this proportion. The costs, therefore, to which the values of particular commodities correspond are not the particular sacrifices undergone in pro- ducing each commodity, but the average sacrifice undergone in producing each sort of commodity. We may, therefore, state broadly, that differences in the sacrifices incident to pro- duction, -whether of labor or of abstinence, which are due to peculiarities either in the physical, mental, or social circum- stances of individuals, are to be excluded from consideration in estimating cost of production. What we have to do with is, not individual sacrifice, but the average sacrifice of each in- dustrial class. This point being cleared up, we can have no difficulty in seeing how cost in its principal elements is to be computed. In the case of labor, the cost of producing a given commodity will be represented by the number of average laborers em- ployed in its production — regard at the same time being had to the severity of the work and the degree of risk it involves ■ — multiplied by the duration of their labors. In that of ab- stinence, the principle is analogous : the sacrifice will be meas- ured by the quantity of wealth abstained from, taken in con- nection with the risk incurred, and multiplied by the duration of the abstinence. § 7. We have now treated the subject of normal value, so far as it is regulated by the principle of cost of production. But, as I stated in the opening of this chapter, the phenomenon in question is by no means confined to cases in which the con- ditions necessary to the action of cost of production exist. The essence of normal value, as I then remarked, is a tendency in the exchanging proportions of commodities to gravitate toward a central point, and this tendency is observable in departments of exchange where effective competition among exchanging producers has no place. The most important example of this 88 yOEMAL VALUE. kind is furnished by international trade. As between the pro- ducers in different nations, whether laborers or capitalists, there is no effective competition, nothing, therefore, to secure that industrial rewards in different countries shall be brought into correspondence with industrial sacrifices ; nor, consequently, that international values shall correspond with cost of produc- tion. ISTevertheless international values, or, let us say, the rel- ative prices of the products of different nations, do not vary at random irrespective of rule or measure, but exhibit precisely the same tendency to gravitate toward a central point as is manifested in those exchanges which are governed by cost of production. A less striking and hitherto, so far as I know, unnoticed, example of the same kind meets us in domestic trade. As I have pointed out, cost of production does not control value universally even within the limits of a single country : in respect to a considerable class of exchanges — all those, namely, which take place between what I have called non-competing industrial groups — its action fails. Yet not the less we observe here, as in international trade, the phenomenon of normal value. The exchanges between the non-competing groups — or, let us say, the relative prices of the products of such non-competing groups — though unamenable to the law of cost, are not without a controlling force which restrains their fluctuations and guides them toward a normal result. This is the phenomenon with which we have now to deal; and the question to be considered is the nature of the force or forces which, in such cases, come into play. Fortunately the problem has already, in principle at least, been solved for us by Mr. Mill. Mr. Mill has not, indeed, car- ried his solution beyond the case of international values ; but his doctrine is manifestly applicable to all cases in which groups of producers, excluded from reciprocal industrial com- petition, exchange their products. Such cases, as I have shown, occur in domestic trade in the exchanges between "THE EQUATION OF INTERNATIONAL DEMAND." 89 those non-competing industrial groups of which I have spolien. The principle, therefore, which operates in international trade must operate here ; and little more needs to be done, to qom- plete the theory of this part of our subject, than to point the application of Mr. Mill's doctrine to this strictly parallel case. That doctrine may be thus briefly stated: International val- ues are governed by the reciprocal demand of commercial countries for each other's productions, or, more precisely, by the demand of each country for the productions of all other countries as against the demand of all other countries for what it produces; the result of this play offerees being that, on the whole, the exports of each country discharge its liabilities (of which the principal are on account of its imports) toward all other countries.* Whatever be the exchanging proportions — or, let us say, whatever be the state of relative prices — in dif- ferent countries which is requisite to secure this result, those exchanging proportions, that state of relative prices, will be- come normal — will furnish the central point toward which the-, fluctuations of international prices will gravitate, the rule to which in the long run they will conform. Such is the law governing international values, called by Mr. Mill " the Equa- tion of International Demand." What we have now to con- sider is the mode in which this principle operates in the case of the non-competing groups of domestic trade. And first, in what sense are we to understand "reciprocal demand" as applied to non-competing industrial groups? Manifestly, in conformity with the analogy of the international case, as the demand of each group for the products of all oth- er groups compared with the demand of all other groups for what this group produces. How, again, are we to measure * As the doctrine is ordinarily stated, tfie exports of each country are said to balance its imports, but, as I shall liereafter show, this mode of stating it is not accurate. See post, part iii. , chap. iii. 90 NORMAL VALUE. such demand? Again I say, in conformity with the same analogy, by the quantity of the products of each group avail- able for the purchase of the products of other groups ; while the products of other groups available for the purchase of the products of any given group will measure their demand for the products of that group. Lastly, how are we to understand the "Equation of Demand," as applied to non - competing groups? Still following the international analogy, I reply, as such a state of exchanging proportions among the products of the various groups — or, let us say, as such a state of relative prices among such products as shall enable that portion of the products of each group which is applied to the purchase of the products of all other groups to discharge its liabilities toward those other groups. The two cases thus run strictly on all- fours, and the play of the forces in action is in all respects the same. As in international trade an increased demand for the products of other countries will, other things being equal, affect international values — or, let us say, affect the relative prices of the products of different countries — unfavorably for the country whose demand is increased ; and as, again, the converse of this condition, an increased demand by other coun- tries for the products of a given country, will operate in the contrary direction ; so it will be in the exchanges which take place between non-competing domestic groups. Whatever in- creases the demand of a given group for the products of out- side, that is to say non-competing, industries, or (what comes to the same thing) whatever increases the supply of its prod- ucts available for the purchase of the products of such indus- tries, will, other things being the same, depress the prices of its products in relation to the prices of the products of the in- dustries against which they are exchanged, and vice, versa; while whatever increases the demand of the outside industries for the products of a given group will have the contrary ef- fect, and will raise the level of its prices in relation to those NATURE OF MECIPBOCAL DEMAND. 91 of the non -competing groups with which it trades, and vice versa. The relative position, commercially considered, of each group may thus be affected either by an increase or diminu- tion of its own products not consumed within the group, or by an increase or diminution of the products of other groups, so far as those products are disposable for the purchase of the products of the group in question. Such is the nature of "re- ciprocal demand," and of its mode of action as between the non-competing groups of domestic industry. As the reader will observe, it is simply "supply and demand" taken twice over, first in the sale and then in the purchase, or, rather, we may describe it as Supply and Demand contemplated at once from both sides of a completed exchange. But it may not be at once apparent how a principle of this character is fitted to accomplish the result ascribed to it — that of determining normal, as distinguished from temporary or market, value. As I have remarked, Eeciprocal Demand is merely duplicate Supply and Demand regarded in its full sig- nificance; but Supply and Demand, as we are most familiar with their action, are, in their relation to prices, merely proxi- mate agencies, governing indeed the fluctuations of the mar- ket, but themselves controlled by forces lying deeper in the economy of production. How then does it happen that, in the cases under consideration, those agencies are capable of doing more than this — capable of determining, not simply the fluctuations of the market, but the rule to which, in the long run, the fluctuations of the market conform? The answer to this question is to be found in the circum- stances which give stability to Eeciprocal Demand in the class of exchanges we are now considering. Eeciprocal Demand, or, if the reader prefers it. Supply and Demand, in relation to a particular commodity, or even to a considerable number of commodities, may, as we know, vary in almost any conceivable degree, and with great rapidity. But when we consider them 92 NORMAL VALUE. as affecting aggregates of transactions carried on between limit- ed bodies of producers — for example, between independent na- tions, or between non-competing industrial groups — the case is very different ; and the limits within which variation is possi- ble are in fact pretty strictly determined ; for in this case the measure of the aggregate demand of each trading body will be the total of its productions, and the measure of its demand for the productions of the bodies with which it trades will be the proportion of its total production which it desires to apply to the purchase of the productions of those bodies. Now, in the absence of any great changes in the conditions of productive industry, and of legislation specially contrived for this purpose, neither the aggregate production of a community nor the pro- portion of its means employed in interchanges with other com- munities can easily undergo on a sudden serious variation. The total production will depend on the nature and extent of its resources ; and the proportion employed in external trading on the comparative character of those resources as they stand related to those of the communities with which it trades. These, indeed, are not circumstances which can be regarded as absolutely fixed. On the contrary, the conditions of produc- tive industry over the best portion of the industrial world are and have for long been pretty steadily progressive. But the progress, though steady, has in general been slow. Sudden changes, at least on a scale large enough to effect great aggre- gates of transactions, but rarely occur ; and further, what is pertinent to our purpose, where important improvements in productive industry do happen, they are seldom confined to a single community, but, after an interval more or less brief, are in general shared by other communities, so that the relative positions of the various trading bodies are in the end but slightly affected. It follows that the demand of such bodies, however it may vary in respect to particular commodities, can not easily as an aggregate undergo any great or sudden NATURE OF BECIPEOCAL DEMAND. 93 change; while their reciprocal demand for each other's pro- ductions, which expresses their relative industrial condition, will be still less liable to serious or abrupt disturbance. Here, then, we find the conditions fitted to produce that stability of exchanging relations which is implied in the term "normal value." While the prices of particular commodities may fluc- tuate indefinitely in international as in other trade, the same possibility does not exist for the prices of aggregates of com- modities exchanged by definite groups of producers, such as independent nations, or the non-competing sections in domestic industry. The limits to such fluctuations are set in the limit- ed purchasing power, incident to the limited productive power, at any given time possessed by such trading groups. It is in this way that a normal relation arises in the terms of the trans- actions carried on, and that a central point is furnished toward which the fluctuations of the market gravitate, performing in such trade the same function discharged under a regime of com- petition by the principle of cost. Cost of Production and Eeciprocal Demand in the sense ex- plained, it thus appears, perform in certain circumstances sim- ilar economic offices. It remains now to point out an impor- tant difference in their modes of action and in the character of the results which flow from them. They each, as I have said, furnish a centre about which market values gravitate; but there is this difference between the two cases: The centre furnished by Cost of Production stands related to the fluctua- tions of the individual commodity ; that supplied by Recipro- cal Demand to the average fluctuations of considerable aggre- gates of commodities. A reduction in the cost of producing a hat will lower its price, but will have no tendency to affect the price of any other thing. But an alteration in the recip- rocal demand of two trading nations will act upon the price, not of any commodity in particular, but of every commodity which enters into the trade. What such an alteration necessi- 94 NORMAL VALUE. tates is a change in the average terms on which the trade is carried on ; but it decides nothing as to the details by which the required average shall be attained and maintained. This is determined, not by international demand, but by those cir- cumstances in the internal industries of each country which regulate in each the relative prices of its products. And sim- ilarly in the interchanges of non-competing domestic groups, what the reciprocal demand of the groups determines is the average relative level of prices within each group ; the distri- bution of price among the individual products being regulated by the cause which governs value within it, namely cost of production. The net result would seem to be this: Reciprocal Interna- tional Demand determines the average level of prices through- out the entire trade of each commercial country in relation to that prevailing in other countries in commercial connection with it. Reciprocal Domestic Demand determines certain minor relative averages extending over classes of articles, the products of non-competing industrial groups ; while Cost of Production acts upon particular commodities, and, in each case, within the range of industrial competition, determines their rel- ative prices. The actual price, therefore, of any given commod- ity will, it is evident, be the composite result of the combined action of these several agencies. Another distinction needs to be noticed between Reciprocal Demand and Cost of Production in their operation upon nor- mal value. The former is, on the whole, far more steady and equable in its action than the latter. The reason is plain. Changes in cost of production depend mainly on the progress of the industrial arts, and this has for some time been and, we may perhaps assume, is likely for a long time to continue to be, remarkably rapid. Thus we find in the course of the pres- ent century an immense reduction in the costs of producing a large number of articles of general consumption, accompanied NATURE OP BECIPBOCAL DEMAND. 95 by a corresponding reduction in their value. On the other hand, changes in reciprocal demand are chiefly due to moral, social, and political causes, operating on a scale large enough to affect the relative positions of considerable bodies of men. Such changes are necessarily of slow accomplishment; and consequently the variations in value which result from them are rarely of a striking character, and in general proceed so slowly that they can seldom be perceived unless the compari- son be made between prices taken at periods separated by con- siderable intervals of time. Still such changes do occur, and international values, as well as the corresponding class of values in domestic trade, respond to them. For example, I think we may assume that the adoption of free trade by England has improved her international position in the trade of the world. I do not refer to the extension of her trade, which, as all the world knows, has been enormous, but to the terms on which it is carried on. A given exertion of English industry will now command in the exchange with foreign countries the product of a larger exertion of foreign industry than former- ly. In the domestic sphere, probably the most potent agency affecting reciprocal demand is the progress of popular educa- tion. Supposing, for example, that the system of primary ed- ucation now being established in this country proves as suc- cessful as the friends of education desire ; and supposing again, and more particularly, that effective provision is made in it for facilitating the ascent of promising boys from the lower to the higher educational levels, I think we may with some confi- dence predict that the movement will issue in a considerable change in the relative prices of certain classes of commodities in this country; nor can we have much difficulty in perceiving what will be the general direction of the change. Plainly the effect will be to augment the number of skilled workmen in relation to the unskilled, and of highly skilled workmen in relation to workmen possessing skill of the more common 96 NORMAL VALUE. sorts. The social wall of partitioa which now divides the non-competing groups will to a large extent be broken down, and many of those occupying the lower levels will talie ad- vantage of the breach to press into those above them. The result will be a change in the reciprocal demand of the several groups. The demand of the groups representing the higher sorts of industrial skill will increase relatively to that of the groups representing the lower; or, to put the same point in a different form, the supply of the products of the former groups will increase relatively to that of the products of the latter. The inevitable consequence must be a change in relative prices unfavorable to the higher, and in a corresponding degree fa- vorable to the lower sorts, of skilled industry. In a word, the qualified monopolies resting upon social conditions which now exist will be still further qualified: the range of competition will be enlarged; and, just in proportion as these results are attained, relative prices, and with them relative wages, will be made to approximate, more closely than at present, to the rule of cost. We may illustrate the case by the state of things in new colonies. There, owing to causes precisely similar to those which the educational movement is tending to develop here — owing, that is to say, to the great equality of conditions pre- vailing among the industrial population — the coarser kinds of labor and the lower sorts of skill are not merely positively, but comparatively, in relation to the finer and higher sorts, far more highly remunerated than they are at present with us. The explanation is that which has just been given: competi- tion has there a wider range; and wherever this is so, prices and remuneration will represent more truly the actual sacri- fices undergone by producers. CHAPTER IV. MARKET VALUE. § 1. The nature of Normal Value has been discussed in the preceding chapter. As was there pointed out, the propor- tion which it represents is not necessarily that which is real- ized in any actual sale, but that to which all sales, in the case of commodities which possess normal value, tend to conform. The problem which we have now to consider is that presented by actual sales. What are the conditions which determine the proportions in which commodities exchange for each other on any given occasion in any given market? More briefly, what is the explanation of market prices? This question, after having been discussed by economists from Turgot and Adam Smith to Mill, was at length supposed to have received its definitive solution in the chapter on " Demand and Supply " in the Principles of Political Economy by the latter authority. That solution, however, has lately been challenged by Mr. Thornton, I must own it seems to me, so far as the negative portion of his criticism is concerned, with success. As re- gards, however, the explanation he has offered in lieu of that which he has displaced, I fail to discover in it what can be considered a satisfactory account of the phenomenon under discussion. According to Mr. Thornton, market prices de- pend upon "competition;" while of competition he tells us that, " if it can properly be said to depend on any thing, it de- pends partly on individual necessity, partly on individual dis- cretion ; and as for the first of these there is proverbially, and for the other manifestly, no law, so likewise is there no law of 7 98 MARKET VALVE. competition. Neither, if there be no law of competition, and if competition be, as it has been shown to be, the determining cause of price, can there be any law of price." As I do not admit that there is " no law " for " individual necessity " any more than I admit that there is " no law " for " individual dis- cretion "—understanding " law " in the scientific sense of the word, which alone is that with which Political Economy is concerned— I should be unable to accept Mr. Thornton's con- clusion, even though his analysis of "competition" were much more satisfactory than it seems to me to be. For my part, I believe that, whether we are able to discover it or not, there is a law of market price, as there is a law of normal price, as there is a law of wages, of profits, of rent, as there are laws of the winds and tides and seasons, and of the phenomena of external nature — a law in the only sense in which law can be predicated of natural objects ; namely, as consisting in the con- stancy of the relation between facts and the conditions which produce them. § 2. Market price — I speak now exclusively of price in wholesale markets — has from the first been seen to be con- nected with the agencies of Supply and Demand ; it has al- ways been very obvious that an increase of supply tends to lower price, and an increase of demand to raise it; but be- yond this rather crude generalization economic speculation did not for some time pass. To furnish what deserves to be called a law of the phenomenon, it is evidently necessary to determine with some degree of precision the elements that en- ter into Supply and Demand when acting upon the prices of the market, and the mode in which these two agencies co-op- erate to produce the actual result. In other words, Demand and Supply must be defined, and the manner of their influence ascertained. The following was Adam Smith's contribution toward the solution of this problem : " The market price of ADAM SMITH'S DOCTRINE. 99 every particular commodity is regulated by the proportion betweea the quantity which is actually brought to market and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labor, and profit which must be paid in order to bring it thither."* Ac- cording to this, "Supply" is to be understood as the quantity of a commodity actually brought to market, and " Demand " as the desire to purchase felt by those who are willing to pay the natural, or (as I have phrased it) the normal, price; the terms of the exchange in the particular market being regu- lated by the " proportion " between these two things. Every economist knows the criticism passed by Mr. Mill on this doctrine. "These phrases," he says, "fail to satisfy any one who re- quires clear ideas and a perfectly precise expression of them. Some confusion must always attach to a phrase so inappropri- ate as that of a ratio between things not of the same denomina- tion. "What ratio can there be between a quantity and a desire, or even a desire combined with a power ?"f This criticism has been generally acquiesced in; but I have endeavored in a former chapter:}: to show that it is not conclusive; that in truth Supply (in the sense in which it affects price) is not sim- ply a quantity, but a quantity accompanied by a mental feel- ing, as Demand is not simply a mental feeling, but a mental feeling accompanied by a quantity, the quantity, namely, of purchasing power offered by the demander ; in short, that Supply and Demand are things essentially of the same order, of the same denomination, and such therefore as may properly be regarded as bearing a ratio to each other. But though not open, as it seems to me, to Mr. Mill's criticism, Adam Smith's * " Wealth of Nations," book i., chap. vii. t "Principles of Political Economy, " vol. i., p. 549. t See ante, pp. 25, 26, 100 MARKET VALUE. doctrine can less easily be defended against objections of an- other kind. It is not quite clear from the passage in what sense he uses the word " market," -whether as a sort of abstract term to comprise all places where things are bought and sold, or as signifying some one particular or given place of this kind. I am, for my part, disposed to understand him in the latter sense; indeed the former would hardly have satisfied the requirements of the problem he had to consider ; and tak- ing the word in this sense, his statement is that the price of a commodity in any particular market is regulated by the "pro- portion " which the quantity of it in that market bears to the demand for it (in the sense defined) there existing. Now it will be seen on reflection that this statement is, as a matter of fact, untrue. The price of corn, for example, in a given mar- ket does not depend (other things there being supposed con- stant) on the quantity of corn brought to that market, under- standing by this all that the dealers are then and there pre- pared to sell. For example, it often happens that intelligence received during the holding of a market respecting supply in some remote quarter of the world affects price, though no change has been made in the quantity of the commodity im- mediately available in the particular market. And occasions have occurred when a sudden change of weather in some criti- cal period of the year, from the effect it is supposed likely to produce on the harvest, has led to a similar result. It is evi- dent, therefore, that the supply which constitutes one factor in the determination of market price is not simply the quantity of a commodity present in a particular market. A similar criticism may be passed upon Adam Smith's definition of " de- mand." It is not true that the demand which constitutes the other factor in the case is always, or necessarily, "the demand for the commodity at its natural price." Suppose the selling price at a particular time and place to be above the natural price, so much of the demand as refuses to rise beyond the MM. MILL'S DOCTRINE. 101 natural price ceases to affect the result ; while, on the other hand, on the supposition that the selling price were lower than the natural price, the result would be affected by a' de- mand at a lower than the natural price, namely, by any de- mand which is content to give the selling price, or any price above that. Lastly, even though the definitions of "supply'' and "demand" given by Adam Smith could be shown to satisfy the conditions of the case, which we have seen they»do not, the statement that market price is regulated by, the "pro- portion " between them, while we are left uninformed as to the nature of this proportion, can not but be regarded as too vague to fulfill the requirements of a scientific theory. § 8. I turn now to Mr. Mill's doctrine of Market Price. As I have just said, that doctrine has been challenged by Mr. Thornton, and, in my opinion, successfully; but I prefer to state my objection to it in my own way. According to Mr. Mill, demand is measured, not by the purchasing power offered in support of the desire to purchase, but by the quantity of the commodity demanded at the selling price in a given market ;• and similarly the measure of supply is the quantity ofiered at the selling price. Understanding Demand and Supply in these senses, he laid it down that the actual price ruling in any given market is the price which equalizes demand and supply. As a matter of fact, however, it may be pointed out, and has been pointed out by Mr. Thornton, that the demand in the market at the selling price may be greater than the supply forth-com- ing in that market can satisfy ; as, on the other hand, the sup- ply at the selling price may be in excess of what the actual de- mand at that price will take off. In either of these cases (and one or other of them is the case of almost all markets) Supply and Demand are not equalized. In all such instances, there- fore, Mr. Mill's theory fails to explain the phenomenon of mar- ket price. To this objection Mr. Mill has replied by saying 102 MARKET VALUE. that " reserving a price is to all intents and purposes withdraw- ing supply " — in other words, so much of the supply as is not sold, either because the owner is dissatisfied with the current price, or can not find sufficient purchasers at that price, is not to be counted as supply. " When no more than forty shillings a head can be obtained for sheep, all sheep whose owners are determined not to sell them for less than fifty shillings are out of the market, and form no part at all of the supply which ■is now determining price. They may have been offered for sale, but they have been withdrawn. ... In the mean while, the price has been de- termined without any reference to his [the owner's] withheld stock, and determined in such a manner that the demand at that price shall (if pos- sible) be equal to the supply which the dealers are willing to part with at that price. The economists who say that market price is determined by demand and supply do not mean that it is determined by the wliole sup- ply which would be forthcoming at an unattainable price, any more than by the whole demand that would be called forth if the article could be had for an old song. They mean that, whatever the price turns out to be, it will be such that the demand at that price, and the supply at that price, will be equal to one another.'"* It is evident that the same reasons which require that Sup- ply should be limited to so much of the commodity as is dis- posed of in actual sale, would make it necessary that Demand should be limited to so much of the desire to purchase as finds satisfaction in actual purchase ; since otherwise there would be no security that it might not exceed Supply. So explained, it can not be denied that Mr. Mill's position is logically impreg- nable. Unfortunately, however, the same limitations which render it logically impregnable make it also not worth defend- ing ; for, understood in the sense in which the terms have now been defined, the doctrine of the equality of Demand and Sup- ply as the condition of market price becomes a mere identical * Fortnightly Review, May, 1869, Mr. Mill's review of Mr. Thornton's " La- lmr,"pp, 512, .'513. MB. MILL'S DOCTRINE. 103 proposition. The quantity demanded and the quantity supplied at the market price are necessarily equal when the quantity demanded is only another name for the quantity bought, and the quantity supplied another name for the quantity sold. They are necessarily equal, since they are one and the same quantity. Mr. Mill's doctrine, then, limited as he has limited it, is undeniably true ; but the question remains, what light does it throw upon the phenomenon it undertakes to explain ? — how far can it be considered as stating the law of market prices? We desire to know the circumstances which deter- mine price ; and we are told that the selling price is always such that the quantity of a commodity purchased in a given market is equal to the quantity sold in that market. The statement is incontrovertible, but I fail to perceive how it helps us to understand the facts. Further, the limitation by which the doctrine is rescued is itself open to serious objection. In the passage I have quoted it is stated that the portion of the supply which is reserved for future sale "forms no part of the supply which is now determining price." Here I join issue on a question of fact. I contend that, in coming to a decision on the actual price, the dealers in a market take account, not merely of the quantity of the commodity that is there actually sold, but of all the commodity in the market; and not merely of this, but of the supply obtainable from other quarters. On this point I can only appeal to facts. It appears to me cer- tain that the supply which determines price is quite as much the supply that is not sold as the supply that is sold ; and the demand quite as much the demand that is not satisfied as the demand that is satisfied. In other words, supply and demand outside the market are among the conditions which determine price within the market. But if so, Mr. Mill's doctrine not merely fails to solve the problem of market price, but pointed- ly excludes from consideration conditions which are essential to the solution of that problem. Under these circumstances I 104 MARKET VALUE. shall perhaps be pardoned for attempting some more precise statement of the facts governing the phenomenon than is fur- nished by the current doctrine. § 4. In order to bring the terms of our theory into conform- ity with the facts of the case, it appears to me that we must give to the words "supply" and "demand" a much more ex- tended signification than is given to them in the formulas ei- ther of Adam Smith or of Mill. By " supply," as affecting market price, I would understand not merely the quantity of a commodity sold, offered for sale, or present in a given mar- ket, but the quantity intended for sale wherever it exists which the dealers in the particular market know or believe to be available, to meet, within certain limits of time, the demand which falls within the range of their dealing ; and by " de- mand," a strictly analogous conception, namely, the desire, so far as accompanied by purchasing power anywhere existing for the commodity, which, in the opinion of the dealers in the market, admits of being satisfied within certain limits of time by the attainable supply; the "certain limits of time" in each case being the period intervening between the time of sale and that at which fresh supplies can be brought forward from the ordinary sources of production. I am far from thinking that these definitions are free from flaw, or that cases of supply and demand affecting market price may not be found which will not easily fall within their scope, but I believe they comprise the most important conditions determining the result, and I am sure that no less extensive definitions would be even ap- proximately adequate. Understanding, then, Demand and Supply in the senses de- fined, as the factors which conjointly produce the phenomenon, we have next to consider the manner of their operation. This, it is evident, can only be indirect, since price expresses a con- tract between human beings, whose wills, therefore, must form CONSTANCY OF RELATION. 105 the primary link in the causal chain. As we have seen, the notion of Adam Smith was, and this is probably still the pre- vailing idea, that the result is regulated by the " proportion " between demand and supply — this proportion, as we must sup- pose, producing its effect through the minds of those who take part in the exchange. I have already stated my reasons for regarding Demand and Supply as ideas of the same order, be- tween which, therefore, a proportion may properly be assumed to exist. But to render Adam Smith's doctrine effectual for its purpose, we must not only suppose a proportion existing between demand and supply, but also that between this pro- portion and the market price there is some constancy of rela- tion, such that, knowing the relation in any given case, we should be able to predict what the price would be in the event of a change in the conditions of the market. Now this is what I believe it would be quite impossible to establish. At all events, it may be shown that the formula, if it were possible to evolve one, would need to be different for every different kind of commodity, and to be altered with every change in either the amount or the distribution of purchasing power in a com- munity. Thus a change in the supply of a necessary of life is, as has often been pointed out, capable of producing effects on price much greater than in proportion to the extent of the change. A reduction of one-fourth, or one-third, for instance, in the food of a people might easily issue in a twofold or three- fold advance of price ; while an equal change in the supply of a comfort or convenience, which may easily be dispensed with, but may also by increased cheapness rapidly attract a larger demand, is generally attended with effects on price much less marked. And, as I have said, these results would be further varied by every change in the amount or the distribution of the available purchasing power. For these reasons it appeart- to me that the idea of a proportion, as furnishing a clue to the connection of demand and supply with market price, must b^ 106 MARKET VALUE. abandoned, if on no other ground, from the impossibility of de- termining it ; and that, instead of a quantitative formula, we must content ourselves with an approximately accurate de- scription. Let us consider the circumstances under which the selling price comes to be decided in any wholesale market. We will suppose the commodity dealt in to be corn. An intending purchaser enters the market, having previously obtained by such means as were open to him information respecting the stock of corn in the country, or likely within a certain period to be forth-coming from abroad ; and he there finds certain quantities offered for sale. He has also made himself acquaint- ed with the demand for ordinary consumption, so far as it seems likely to come within the range of his dealings. On these data he founds an opinion as to what the price of corn ought to be. The opinion thus formed is not absolutely defin- itive. He allows it to be modified more or less by the opinions which he finds prevailing in the market. Under the influence of all these considerations he comes to a conclusion as to the price, which — while anxious to procure his commodity as cheaply as he can — he will, rather than go without, be pre- pared to pay. The seller of corn goes through a similar proc- ess, with of course the converse object, availing himself accord- ing to his intelligence of similar means of information. Sup- posing the conclusion he comes to be that the demand, in the sense I have defined it, is capable of taking off the supply, un- derstood also in the sense I have defined it, at a higher price than that which formed the conclusion of the buyer's calcula- tions, under these circumstances there would be no transaction between them ; and if their opinions represented respectively the opinions of all the buyers and all the sellers in the market, no transaction would in that market take place. This of course is what rarely or never happens. Buyers and sellers in the same town or district, having mostly the same opportu- PROPER MARKET PRICE. 107 nities of information, will not in general differ very widely in their estimates of demand and supply ; and where they differ but slightly, their opinions coming in so limited an area within the sphere of each other's attraction, are apt to issue in agree- ment; the exact price arrived at always depending in some degree on the firmness and shrewdness of individual men. This is what is called the 'higgling of the market' — the proc- ess on which, within the narrow limits of variation set by the deliberate opinions of experts, the final result depends. The influence of Demand and Supply on the price-current in a given market is thus exercised through the opinions of the dealers in that market; and the problem to which the dealers in forming their opinions address themselves, is to as- certain, having regard to the known conditions of the case, what the price of the commodity ought to be. Let us now endeavor to determine, with as much precision as may be, the nature of the problem thus presented to buyers and sellers in a wholesale market. I grant it is very probable that most of those who speak freely of the price which happens to obtain in a market as " too high " or " too low," or " such as it ought to be," might find it difficult, if challenged, to explain the meaning of their words: nevertheless, I believe that these ex- pressions do at least point to a meaning, perhaps a latent one, in the minds of those who use them. However this may be, it can at all events be shown that there is in every market a price at which it is desirable that the commodity, whatever it may be, should sell at that time and place — desirable ultimate- ly in the interest of consumers, but in a certain sense desirable also in the interest of dealers, taking buyers and sellers to- gether, and which the combined operations of both, so far as they are well informed respecting the conditions of supply and demand, really tend to establish. To satisfy ourselves of this, it is only necessary to consider that, in all states of supply and demand, there is always a certain price beyond which, if the 108 MABKET VALUE. markets I'ise, consumption is unnecessarily checked, and the stocks in the country pass off more slowly than is needful. In time the error is discovered, and a competition sets in among holders of the commodity, which issues in a fall of price, tending to stimulate consumption as much as it had pre- viously been unduly checked. On the other hand, supposing the market price to be set too low, stocks become exhausted too soon, and the undue fall will need to be compensated by a corresponding advance at a later period. Such oscillations are at variance with the interest of the consumer; and the price, therefore, which renders them unnecessary, which is just sufficient, and no more than suflBcient, to carry the existing supply over, with such a surplus as circumstances may ren- der advisable,* to meet the new supplies forth-coming, may, I think, be conveniently designated as the "proper price" of the market.f It is this price which, it seems to me, the deal- * It is necessary to introduce this qualifying clause, since it is not always for the interest of the consumer that consumption should proceed at such a pace as to exhaust existing stocks exactly as the new supplies are coming into the market. It would be so if he could be sure that the new supplies would sell .at a price not higher than that which had been previously current; but in the case of raw prod- ucts, and more especially in that of food (for reasons which will presently be pointed out), he can not be sure of this. It is, therefore, in the interest of con- sumers, that is to say of the community, that, in the uncertainty as to what may be the degree of abundance or scarcity of forthcoming supplies, a certain surplus should be kept in hand, which should be greater or less accoi-ding to the prospects of the incoming season, with a view to supplement the possible deficiencies of fu- ture supplies ; and the market price c.nlled for by the interest of consumers would manifestly be that which would be sufficient, not merely to carry existing stocks over to the arrival of new supplies, but to maintain also such a surplus. (See Tooke's '.'History of Prices," vol. v., part i., § 22, where the reader will find the subject discussed with Mr. Tooke's usual discrimination.) t According to Mr. Mill, the actual market price is the price which equalizes supply and demand in a given market : as I view the case, the " proper market price " is the price which equalizes supply and demand, not as existing in the particular market, but in the larger sense which I have assigned to the terms. FUNCTION OF SPECULATORS. 109 ers in the market have dimly in view when by implication they refer to a standard by which they pronounce the actual price to be " too high," or " too low," or " what it ought to be." I would define it as the price which suffices to adjust in the most advantageous way the existing supply to the existing demand pending the coming forward of fresh supplies from the sources of production. I have now, I hope, made it plain that in a given state of demand and supply there is a certain market price which is identified with the consumer's interest; and, in doing so, I have observed incidentally that the price satisfies no less the true interest of dealers. It remains to show somewhat more explicitly how it comes within the range of the latter's specu- lations, so as to become the point toward which the operations converge ; since it is only in proportion as this is the case that the action of the wholesale market has any tendency to evolve what I have called the "proper price." The buyer, as we know, seeks to buy as cheaply as he can ; the seller to sell as dearly as he can ; but, with all this, it is the interest of both to know the price beyond which, in one direction the buyer, in the other the seller, can not pass without loss; and this is precisely the price which stands identified with the consumer's interest. For, as we have seen, if the price rises beyond this point, consumption is checked, stocks accumulate, and a fall of price is necessitated, to the loss of all dealers who have pur- chased above the depressed rate; while, on the other hand, if the price falls below it, the result is an advance at a future time, to the loss of all who had sold while the loiver price prevailed. It is evident, therefore, that dealers are interested in knowing the "proper price" of the market, and further, it is evident that it is toward this point that the combined efforts of buyer To this price the actual market price will, according to my view, approximate, in proportion to the intelligence and knowledge of the dealers. no MARKET VALUE. aud seller, in proportion as they are well informed respecting the conditions of supply and demand, really converge. Deal- ers thus, while simply pursuing their own interests, are uncon- sciously performing for the community a service of first-rate importance — a service which has been well compared by Archbishop Whately to that rendered by the captain of a ship, who, taking account of the stock of provisions at his dis- posal, and the length of his intended voyage, adjusts to these conditions the rations of his crew. Such is the tendency of the speculation of the market, and the end is attained in pro- portion to the intelligence and the knowledge of those who engage in the pursuit; and such are the grounds on which freedom of commercial speculation may be justified. Of course mistakes are often made, sometimes very serious mis- takes; and then we have reaction, oscillation, and perhaps commercial crises. But under all circumstances the price in the market is determined by the opinions of dealers in the market, founded upon their knowledge of demand and supply — of dealers pursuing their interests under circumstances which, in proportion to the intelligence and knowledge at their command, favor the establishment of the " proper mar- ket price." The foregoing is the nearest approximation I can make to a statement of the law of market price. I can well believe how utterly unsatisfactory it will appear to some economists whose views in connection with their science are much more ambi- tious than my own, and who apparently do not think it hope- less that we should have, ere long, an exposition of economic principles drawn up in quantitative formulas. That such a consummation would be desirable, assuming the exposition to be sound, I should be the last to deny, though I own I do not expect to witness it ; and I can not but think that, whatever may be the case in other instances, at least in that of market price the scientific game would scarcely be worth the candle. IMPOBTANCE OF THE THEORY. Ill In effect, questions respecting market, as distinguished from normal price, are such as do not often meet us in the field of economic or social speculation. The circumstances which gov- ern prices in the latter sense ; which regulate the relative pro- portions in which the various classes of goods usually ex- change ; which cause the prices of some of the most important articles of consumption \a he permanently higher in some coun- tries than in others — these are topics of very great moment, which have the closest connection with some most important questions of national and class well-being. But the most accu- rate determination of the conditions which issue in the price- current in a particular market on a particular day, and which rule the fluctuations of the market from day to day — however important such knowledge may be to the practical merchant and speculator — can furnish, so far as I can see, but slight help toward the solution of any question of large or permanent in- terest.* I do not, therefore, affect to think that the incom- * The announcements of the pending famine in Bengal warn me that it is pos- sible to disparage too much the importance of the doctrine of market prices. In the comments on this subject by the press of this country, much anxiety has been evinced in some quarters lest merchants, by storing supplies, may force up the price of food to a famine rate in certain isolated districts. A slight acquaintance with the doctrine of market price might serve to re-assui'e such writers. Provided that the merchants in question have not the power to exclude supplies from the isolated districts, any advance in price beyond what the interest of the consumers in the district requires would, as I have shown in the foregoing pages, be at the cost of the speculators whose operations produced it. What is desirable is, that the price should be raised as soon as possible to a point sufficient at once to com- pel the utmost economy in consumption, and to attract supplies from the largest possible area. As to the action of the Government for the relief of the famine being a "setting aside of the laws of Political Economy," it would be just as rea- sonable to talk of precautions against a hurricane, or against a high tide, being a setting aside of the laws of physical nature. Will people never understand that a "law" of Political Economy is a "law" in no other sense than the law of gravitation, and that it is not an act of Parliament, or a rule prescribed by any one, which governors-general can " set aside ?" 112 MARKET VALUE. pleteness and imperfection which are apparent enough in this portion of economic theory are very much to be deplored. So far as the doctrine of market price is concerned, it seems to me to suffice for the purposes of Social Philosophy, if we are enabled to set forth in a general way the connection be- tween the fluctuations of the market and the more fundament- al conditions on which production and exchange depend. And so much, I venture to think, the theory, as I have stated it, taken in connection with the known facts of particular cases, will sufficiently enable us to perform. § 5. The foregoing discussion has been confined exclusive- ly to the question of prices in wholesale markets : it remains to consider the case of retail prices ; but these need not detain us long. The chief circumstances in which the determination of price in retail dealings differs from its determination in wholesale markets appear to be these two : first, competition in retail markets is conducted under conditions which may be described as of greater friction than those which exist in whole- sale trade. In the wholesale market, the sellers and purchas- ers meet together in the same place, affording thus to each other reciprocally the opportunity of comparing directly and at once the terms on which they are severally disposed to trade. In retail dealing it is otherwise. In each place of sale there is but one seller; and though it is possible to compare his terms with the prices demanded elsewhere by others, this can not always be done on the moment, and may involve much inconvenience and delay. A purchaser frequently finds it, on the whole, better to take the word of the seller for the fairness of the price demanded than to verify his statements by going on the occasion of every purchase to another shop. It is probable, indeed, that if the charge be excessive, the pur- chaser will in time come to discover this, and may then trans- fer his custom to a cheaper market. This shows that compe- IN RETAIL DEALING. 113 tition is not inoperative in retail trade, but it shows also the sort of friction under which it works, and helps to explain, what has often been remarked upon, and what, as a matter of fact, it is practically important people should bear in mind, the different prices at which the same commodity is frequent- ly found to sell within a very limited range, of retail dealing — almost in what we may call the same market. This is (5ne circumstance that distinguishes retail from wholesale trading. The other lies in the advantage which his superior knowledge gives the buyer over the seller in the transaction taking place between them — a superiority which has no counterpart in the relations of wholesale dealers. In the wholesale market, buy- er and seller are upon a strictly equal footing as regards knowledge of all the circumstances calculated to affect the price of the commodity dealt in. It is the business of each to inform himself as to the state of supply and demand, and if he fails to do so, he has no just ground of complaint if the other party to the transaction gains an advantage in the bar- gain. The advantage so obtained is the natural and proper reward of the greater skill exhibited — skill which, as I have shown, it is for the interest of the community that each should cultivate to the highest degree. The circumstances of retail dealing are here again in contrast with those of the wholesale trade. The transactions do not take place between dealers possessing, or with the opportunities of acquiring, equal knowl- edge respecting the commodities dealt in, but between experts on one side, and on the other persons in most cases wholly ignorant of the circumstances at the time affecting the market. Between persons so qualified the game of exchange, if the rules be rigorously enforced, is not a fair one; and it has conse- quently been recognized, universally in England, and very ex- tensively among the better class of retail dealers in continental countries, as a principle of commercial morality, that the dealer should not demand from his customer a higher price for his 114 MARKET VALVE. commodity than the lowest he is prepared to take. Eetail buying and selling is thus made to rest upon a moral rather than upon an economic basis, and, there can be no doubt, for the advantage of all parties concerned. The practice, however, of unprofitable higgling, as all travelers know, is still rife in most parts of the Continent, and, in general, every- where among the class of smaller dealers, involving a great waste of time, by which perhaps the dealer in the end loses as much as he now and then gains by taking advantage of his superiority over his customer in knowledge of the game. These, it seems to me, are the principal circumstances which distinguish the determination of price in the retail trade from its determination in wholesale markets ; and they suffice to ac- count for, what has often been noticed and is indeed a very patent fact, the much greater variety to be found in the prices of the same and similar commodities in the former than in the latter department of business. I do not think thaX fluctuations of price (to be distinguished from variety) are greater in the re- tail than in the wholesale trade. Perhaps, on the whole, they may in this country be somewhat less ; as the practice of hav- ing a fixed price for all goods would make the prudent retail dealer unwilling to change his price, and so disappoint and harass his customer, with every slight fluctuation of the whole- sale market. But though fluctuations of price may be some- what less, varieties of price are undoubtedly very much great- er. Not only in different localities, but often in different shops in the same locality, it is quite usual to find the same articles, and of the same quality, selling at widely different prices at the same time; and this quite in excess of what the special circumstances of particular localities or situations might ac- count for. This is not a satisfactory state of things ; but though perhaps in some degree inevitable, because due to what we may regard as essential incidents of retail trading, the evil is, at least in this country, greatly aggravated by a cause which is quite removable, and which, we may hope, is in process of CO-OPEBATIVE COMPETITION. 115 being removed. This is the excessive amount of capital which, from one cause or another, has found its way into the business of mere distribution. The inevitable consequence is that the capital thus in excess, taking it as an aggregate, turns slowly — more slowly than it need turn consistently with the due dis- charge of its functions ; and that those who have embarked in retail business are compelled, in order to obtain average profits on their capital, to charge higher prices for their goods than would be necessary if the total amount of capital in the trade were less. That such a state of things should exist and con- tinue is doubtless due to that excessive friction in the action of competition in retail dealing of which I have spoken. The prices charged in different retail establishments are but rare- ly compared, and continue consequently to differ widely from each other, as they no doubt differ still more widely from what they might be in a more healthy condition of the trade. The source of the evil is, thus, the sluggish action of competition ; and the remedy must be sought in the quickening of this ac- tion. This is what the co-operative retail establishments are, in effect, doing. By adopting a lower scale of prices, and tak- ing good means to advertise their terms, they draw a larger amount of custom to their shops in proportion to the capital embarked than other competing establishments. The result is that, turning their capital more rapidly, they succeed in realiz- ing as high profits as their rivals, while charging lower prices. The opposition given to this movement by the ordinary retail establishments, however little ground for it there may be in reason and justice, is perfectly natural, inasmuch as the drift of it unquestionably is toward the extrusion of some of them from the trade. Nothing less than this, it is clear, will satisfy the exigencies of the case. What we have to contemplate as the proper goal of co-operative competition is a general fall of retail prices; but to reconcile this with a realization by the whole trade of an average remuneration on the capital embark- ed in it, it would be necessary that this capital should be turn- 116 MARKET VALUE. ed over in a given time as often as the capital of the co-opera- tors. In order to this, however, the entire capital employed in the trade would need to be brought into the same propor- tion with the business to be done as the co-operators' capital bears to their business— that is to say, the total capital now employed in the business of distribution would need to be largely curtailed. The necessity of this is not always per- ceived ; and people argue that, as the co-operative stores have succeeded in turning over their capital rapidly by the expe- dient of a reduction in price, so the same end may be attained by the retail trade in general through the adoption of the same means. But this is just one of those cases, so common in Po- litical Economy, in which what is true in particular instances ceases to be true when the instances become the rule. How is it that co-operators have accomplished the more rapid turn- ing of their capital? Simply by drawing off custom through the attraction of low prices from other shops. Supposing these latter now to adopt the same policy, we may assume that their custom would flow back to them. The capital of the whole would then turn at the same rate as formerly ; but it was just this slow rate of turning that necessitated exorbitant prices in the retail trade ; and if prices are to range lower, other things being the same, profits must decline below their former and average level. Other things, indeed, would not, in the case supposed, remain for any long time the same ; for a fall in the rate of profit would have the effect of driving capital from the trade, or at all events of preventing the capital now in the trade from being recruited by the accessions that otherwise would flow to it. The definitive result toward which such a process would tend is manifestly a reduction of the existing capital of retail dealing to an amount which would be no more than adequate to perform the services required of it. This point reached, while the public would enjoy the advantage of lower- ed prices, retail dealers would, as a body, derive from their investments the rate of remuneration current in the country. CHAPTEE V. o:^ SOME DEBIYATIYE LAWS OF VALUE. § 1. I PEOPOSE to call attention in this chapter to some ex- amples of value which I think may not improperly be called "derivative laws" of that phenomenon. I refer to those changes in the values of different kinds of commodities which occur when the general laws of value, such as we have found them to be, come into operation under the actual circumstances of progressive societies. When a colony establishes itself in a new country, the course of its industrial development naturally follows the character of the opportunities offered to industrial enterprise by the environment. These will of course vary a good deal, according to the part of the world in which the new society happens to be placed ; but, speaking broadly, they will be such as to draw the bulk of the industrial activity of the new people into some one or more of those branches of industry which have been conveniently designated "extractive." Ag- riculture, pastoral and mining pursuits, and the cutting of lumber, are among the principal of such industries; and they, together with the rude handicrafts immediately dependent on them, are what we find, in fact, to be the main occupations of all newly-settled communities. Now it is mainly, if not ex- clusively, to this class of industrial pursuits that that law of Political Economy, or more properly of physical nature, ap- plies, which Mr. Mill has rightly characterized as the most im- portant proposition in economic science — the law, as he phrased it, of " diminishing productiveness." Most of my readers will 118 DERIVATIVE LAWS OF VALUE. be familiar with the principle in question, but it may be well to recall it here. It may be thus briefly stated: In any given state of the arts of production, the returns to human industry employed upon natural agents will, up to a certain point, be the maximum which those natural agents, cultivated with the degree of skill brought to bear upon them, are capa- ble of yielding; but after this point has been passed, though an increased application of labor and capital will obtain an in- creased return, it will not obtain a proportionally increased re- turn : on the contrary, every further increase of outlay — al- ways assuming that the skill employed in applying it contin- ues the same as before — will be attended with a return con- stantly diminishing. To this principle, in conjunction with the varying quality of different soils, is due, as every econo- mist knows, the phenomenon of agricultural rent; but this has been so fully illustrated in works now in every one's hands, in its application alike to agriculture and to other branches of extractive industry, that I may content myself with merely referring to it here. What I am concerned now to show is the manner in which, with the progress of society, the law in question affects the course of normal values in all commodities coming under its influence. The case which I am considering, the reader will remember, is that of newly-settled communities, among whom the condi- tions of social and industrial life are, on the whole, much more equal and uniform than in old countries like this. It results that industrial competition among the several social classes will at this stage of social growth — unless where restrained by laws enacted directly for this purpose — be more general and effective than in this part of the world we are accustomed to find it ; and, as a further consequence from the same state of things, it must follow that the principle of cost of production as governing value is more extensively operative in such so- cieties than with us. For the purposes of our present investi- mCBEASE OF COST OF COMMODITIES. 119 gation it will be convenient to assume, and the assumption will be sufSciently near the truth, that, in the case of their domestic exchanges, the principle in question is operative uni- versally. This being so, it is evident that an inquiry into the course of normal values in such communities resolves itself into an inquiry into the changes which occur in the costs of producing the several classes of commodities which are there the subject of exchange ; these commodities consisting mainly, as we have seen, at least during the earlier stages of their growth, of the products of extractive industry. From the law of diminishing productiveness just referred to, taken in connection with the circumstance that the settlers in a new country naturally have recourse, in the first instance, to those natural agents which, from their superior fertility or more convenient situation, promise the largest returns to in- dustry, it follows that, as population increases and larger de- mands are made upon the resources of the country, the cost of producing commodities tends constantly to rise. This tend- ency may indeed be counteracted by the progress of mechan- ical and chemical invention, and the improved industrial proc- esses which usually result. But, in point of fact, it has never been found in the history of any country, that such inventions have kept pace with the declining rate of return yielded by natural agents, as their capabilities have been subjected to the increasing demands of a growing community ; and it is there- fore safe to assume that the tendency to an increase of cost in the class of commodities under consideration would in any actual case be realized. The degree, however, in which this result occurred would be very different in different kinds of "extractive" products, and this would lead to corresponding differences in the course of their normal values. § 2. The class of commodities in the production of which the facilities possessed by new communities, as compared with 120 DElilVATirE LAWS OF VALUE. old, attain their greatest height, are those of which timber and meat may be taken as the type, and comprises such articles as wool, game, furs, hides, horns, pitch, resin, etc. The character- istic of all such products is, that they admit of being raised with little previous outlay, and, therefore, with comparatively little capital, and in general require for their production a large extent of ground. Now capital is the industrial agent which new countries are least able to command, while they commonly possess land in unlimited abundance. There can, therefore, be no diflBculty in perceiving that, for the produc- tion of the class of commodities mentioned above, newly-set- tled communities are especially adapted, and that, consequent- ly, the value of all such commodities will be in them excep- tionally low. The circumstance which most powerfully affects the course of values in the products of extractive industry, and in the commodities just referred to among the rest, is the degree in which they admit of being transported from place to place, that is to say, their portabieness, depending, as it does, partly on their durability and partly on their bulk. Taking timber and butcher's meat as exemplifying respectively a high and a low degree of portabieness, we find that while the values of both range in new countries, where the circumstances are fa- vorable for their production, at a very low point compared with their values in old, the difference is. even at the outset, considerably greater in the case of meat than in that of tim- ber; and further, that, while the value of the latter rises in general slowly, and never attains a very great elevation, reck- oning from its height at starting, that of the former rises more rapidly, and continues to rise with the growth of the commu- nity, the highest point which it is capable of attaining being, in the present state of our knowledge at least, quite indeter- minable. The explanation of this contrast lies entirely in the circumstance to which I have adverted — the different portable- MEAT AND TIMBER. 121 ness of the two commodities. Timber, notwithstanding its bulk, being a very portable commodity, easily finds its way from the forests of new to the markets of old countries. As soon, therefore, as a new community is brought into commer- cial connection with the more advanced parts of the world, if timber be there an article of production, its price will at once rise to a level lower than that prevailing in old countries only by the cost of transport. This, no doubt, in so bulky a commodity, will represent a considerable proportion of the whole value; but the important point to attend to is that the price thus determined will in future bear a constant relation to the price in old countries ;* the difiference between the two be- ing always such as the cost of transport will render it. Meat, on the other hand, unsuited as it is, owing to its perishable na- ture, for a distant trafi&c, is confined for a market, if not to the immediate locality where it is produced, at least to the border- ing countries ; and being raised in new countries at very low cost, its value during the early stages of their growth is neces- sarily low. But as population advances, and agriculture en- * It is not to be supposed from this that the price, as compared with that of oth- er commodities raised within the same district, will cease to be determined by its cost of production. If, for example, the opening afforded by foreign markets had the effect of raising the price of timber above the point prescribed by its cost of production as compared, let us say, with agricultural products, the higher profits of the lumber trade, in the circumstances supposed, would have the effect of draw- ing off capital and labor from agriculture to lumber cutting. The curtailment of the area of cultivation in agriculture would be attended with a reduction in the cost of its products, involving, caeteris paribus, an advance in agricultural profits ; while, on the other hand, the extension of the field of production in lumber cut- ting, necessitating a resort to more distant forests, would be followed by the oppo- site effect ; and this process would manifestly go on till the prices of timber and agricultural products were brought into relation with their respective costs. The normal price of timber, therefore, would still be such as its cost of production pre- scribed ; but this cost of production, as happens with the products of all extract- ive industry, would tend to rise with the increased demands made upon the nat- ural agent. 122 DEBIVAIIVE LAWS OF VALUE. croaches on the natural pasture lands originally available for the rearing of cattle, still more as it becomes necessary to cul- tivate land for the purpose of pasture, the cost of meat con- stantly rises. It was the opinion of Adam Smith, that, so soon as this last.stage was reached, the price of all " extractive" products of whatever kind attained its maximum height, and that no farther advance (unless so far as this might arise from a fall in the value of money) was henceforth to be expected. The only reason he assigns for this opinion is, that if the price rose higher, " more land would soon be turned to that pur- pose."* I need scarcely point out the entire inadequacy of this reason. More land no doubt would be turned to the pro- duction of the article, whatever it might happen to be, the ad- vancing price of which made it profitable to cultivate land for this purpose ; but it does not follow, that, as the extension of cultivation went on, the cost of production, and with it the price of the article, would not rise. On the contrary, this is what we know does happen, and has happened in a signal manner in the case of meat. The same cause which depresses the price of meat in the earlier stages of a nation's career — its perishable nature and consequent unfitness for transport — op- erates to raise the price in the later stages by practically con- fining each country to what it can itself produce. It is thus led with the increasing demands of a growing population to extend the supply at a constantly increasing cost. The price of meat, accordingly, has, since the time of Adam Smith, though with numerous fluctuations, on the whole steadily ad- vanced; and, notwithstanding the unexampled height which it has now attained in this country, when one considers the peculiar place which meat holds in the dietary of the masses of a people — that it is the article on which, in the event of any improvement in their condition, increased expenditure most * "Wealth of Nations," pp. 101-4, 5. GEAIN. 123 certainly finds vent — one can not doubt but that its progress must still be upward,* even irrespective of the depreciation of money now going on, which can not fail to accelerate the movement. § 3. Next to those products of extractive industry of which meat and timber are the type, and which exhibit in the high- est degree the special productive aptitudes of new countries, the commodity which offers greatest scope for their special re- sources is grain. The course of normal price in this article differs in a very striking way from that of those which we have just considered. Like theirs, indeed, the course is up- ward ; and like that of timber — corn being also an extremely portable commodity — the price is at an early stage brought into relation with the quotations ruling in the great markets of the world ; with this difference, however, that the cost of carriage being for corn, in proportion to its value, much less than for timber, its price in the new community approximates more closely to its price in old countries than does that of the latter commodity. But the noteworthy circumstance in the course of price in corn — so far at least as corn forms the staple food of a people — is that advancing, with of course much fluc- tuation, in the early period of growth, it at length in the prog- ress of industrial development reaches a point beyond which (unless so far as it is affected by changes in the value of mon- ey) it manifests no tendency, at least no permanent tendency, to advance farther. I am not aware that this peculiar incident in the price of corn has been pointed out before, and it is * In connection with this suhject one perceives the immense national impor- tance of inventions bearing on the preservation of meat, and of the development of a trade in preserved meats, between new countries Mke Australia and old ones like this. It is satisfactory to find that some progress has been made in this di- rection ; but apparently the art will need great improvement before the preserved meats of Australia can enter largely into our general consumption. 124 DESIVAIIVE LAWS OF VALUE. possible it may* be disputed as a matter of fact : nevertheless, I make the assertion with some confidence, inasmuch as I find grounds for it in the economic conditions under which corn is produced, taken in connection with the purposes to which it is applied. Corn is raised at various costs, according to the character of the land and the degree of skill employed in its cultivation ; but, as every economist knows, the cost which governs the price of corn is the cost of the most costly portion brought to market. In the early stages of a nation's career, as with the increase of population resort is had to more distant and inferior soils, the cost of this most costly portion steadily rises, and along with it the normal price of corn. But an in- crease in the cost of corn means a diminished return on the in- dustry employed in producing it; and this diminished return — corn being the principal article of the laborer's consumption — involves for him diminished means of support. It needs but slight reflection to perceive that this circumstance contains within it a necessary limit to the increasing cost of producing corn, and, consequently, to the advance in its price. In the case of what we may call secondary articles of consumption, such as meat and dairy produce, the same consequence does not arise, because an advance in the price of such commodities, entering as they do but sparingly into his consumption, falls, by comparison at least, lightly on the laborer. These articles * Unless Adam Smith's view as to the steadiness of the price of corn, compar- ing century with century, in contrast with the market fluctuations from year to year, be considered as tantamount to it. Mr. Mill, indeed, has controverted Adam Smith's doctrine, which, he says, " we now know to be an error. Corn tends to rise in cost of production with every increase of population, and to fall with every improvement in agriculture, either in the country itself, or in any for- eign country from which it draws a portion of its supplies" ("Principles of Polit- ical Economy," vol. ii., p. 104). I venture here to take side with Adam Smith ; for though the tendencies pointed out by Mr. Mill do exist and operate, their operation, as I think I have shown in the text, is not inconsistent with the sub- stantial truth of Adam Smith's assertion. GRAIN. 125 may continue to rise indefinitely, and yet population may continue to live and grow. But an advance in the price of the staple food, after it attains a certain elevation, inevita- bly reacts on population, and, checking the demand, arrests the extension of cultivation, and by consequence, the ad- vance of normal price. The progress of industrial inven- tion comes no doubt in time to affect the course of agri- culture, and then ensues a succession of cyclical movements which may be thus described. The cost of producing corn on the worst soils cultivated is cheapened : the normal price of corn for a time falls : the condition of the laborer improves, and with the improvement in his condition he mar- ries earlier, and brings up a larger family : population increases, and, the demand for food increasing with it, cultivation is ex- tended to soils which, previous to the introduction of the better agricultural processes, could not have been profitably cultivated; at length the "margin of cultivation" attains a range where the inferior quality of the natural agents brought into requisition just neutralizes the gain derived from the ad- vance in agricultural skill. At this point the cost of produc- ing the most costly portion of the nation's food is just where it was before improved processes had been introduced into agri- culture ; and the normal price of food attains its former eleva- tion. The laborer's condition, unless so far as the standard of comfort has been raised in the interval, returns to its former level ; and the high rates of subsistence once more react on and control population. Under the influence of a play of motives of this kind, the normal price of corn has in all long -settled countries been kept, as a permanent state of things, within the limit which it had reached at a comparatively early stage of their career, in this respect strongly contrasting with the course of price in meat, and in most other secondary articles of con- sumption. M. Cherbuliez,* in connection with this subject, * "Pr&is de la Science feonomique," vol. i., pp. 356, 357. 126 BEBIVATIYE LAWS OF VALUE. has remarked that, comparing the present prices of meat and corn in the countries of Western Europe with their prices in former times, it has been found that, in the same period in which the price of corn has risen in the proportion of one to two, the price of meat has risen in the proportion of one to ten. I venture to assert that, at all events since the beginning of the seventeenth century,* the normal price of wheat has not risen in England more than the depreciation of the precious metals since that time will fully account for. According to Adam Smith, the average price of wheat during the first sixty- four years of the eighteenth century ruled at about twenty- eight shillings the quarter, and this price he considered some- what lower than it would have been had not the period been marked by an unusual number of good harvests. In the last sixty-four years of the preceding century, the price of wheat, according to the same authority, stood somewhat higher. Tak- ing the whole hundred and twenty -eight years, the average price of wheat probably might be taken as ruling between thirty and five-and-thirty shillings. Its price in average years now would, I apprehend, stand at somewhere about fifty shil- lings the quarter ; and the difference is certainly not more than a reference to the diminished value of money would explain. The reader will not understand me as adducing these rough and summary statements in proof of the principle to which I am calling attention. I give them merely for the purpose of illustration ; but I have little doubt that, if the question were gone into statistically, and due allowance made for changes in the value of money, the results would bear out the conclusion at which, on purely economic grounds, I have arrived. * I have no doubt the date might be put some centuries farther back ; but as the question of price in the preceding centuries becomes complicated by the combined effect of the depreciation of money and the deterioration of the standard coin, and as my object is to illustrate my position, not to prove it, I think it better to avoid entering on ground that might be disputed. COURSE OF CULTIVATION. 127 § 4. One or two consequences involved in the state of things I have been describing it may perhaps be worth while here to point out. We have seen that in the early stages of a nation's history the tillage of the soil steadily encroaches upon pasture farming, until the latter becomes at length itself a branch of agriculture. A little later on, the nation, instead of being an exporter of agricultural produce, becomes an importer; and then agricultural industry takes a new turn. Corn can now be imported from abroad, but meat can not ; and, whether im- ported or produced at home, the price of corn, for the reasons I have stated, has no tendency to rise permanently beyond the level it has already attained, whereas the price of meat may advance indefinitely. It follows from these facts that, as the nation increases its numbers and needs augmented supplies of food, it naturally resorts to foreign countries to supplement the deficiency in its corn supply, while the additions needed to its supply of meat are obtained by extending the area under pas- ture at home. The constant tendency, accordingly, of tillage to encroach upon pasture, which up to this time had been the law of industrial progress, is now reversed; and from this point the area of pasture tends steadily to increase, that of till- age to diminish. The stage in question had been reached by England just about the time that Adam Smith wrote ; and notwithstanding the powerful obstacles offered by wars and corn-laws to the natural course of development, the movement of agriculture has, on the whole, been in the direction I have indicated. At the present time it is decidedly and unequivo- cally so, and indeed I believe the fact is very generally recog- nized. Another consequence depending on the same causes is exhibited in the movements of agricultural rent. In the early periods of a nation's history the lands from which the highest rent can be obtained are those which offer the greatest advantages for tillage, while pasture lands, owing to the low price of their produce, yield comparatively low returns in rent. 128 DERIVATIVE LAWS OF VALUE. But St) soon as that stage in its advancing career is reached when corn begins to be imported from abroad, and meat is raised by extending the area of pasture, the lands which thence- forward yield the highest rent are those whose special excel- lence lies in the rearing of cattle. I have no statistics which would enable me to illustrate this point, but the inference from the facts of the case is so plain that I think it may be advanced with little hesitation. There will be lands, no doubt, which may equally well be turned to either purpose ; but where lands have special aptitudes for one of the two, those which are fitted in the highest degree for the raising of meat (and with meat we may include dairy produce, hops, and in general those articles which I have called "secondary" in relation to human requirements) are, I venture to think, those from which after the period indicated the highest rent will be obtained. § 5. There is a class of commodities which in the industry of newly - settled countries occupies an important place, the course of whose values is affected by rather peculiar conditions. I refer to what are called "accessory products" — commodities which are produced, not separately, but as parts of a common industry, and of which the most obvious examples are mutton and wool, beef, tallow and hides, gas and coke, and the like. As regards the values of such commodities, the general law determining them has been stated by Mr. Mill in his chapter on "Some Peculiar Cases of Value."* It is to the followino- effect : Cost of production here operates, 'but in a peculiar manner: it determines, not the price of each of the articles conjointly produced, but the sum of their prices; "their val- ues relatively to each other being those which will create a demand for each in the ratio of the quantities in which thev are sent forth by the productive process." The workino- of 'Principles of Political Economy," vol. ii., book iii., chap. xvi. "ACCESSORY products:' 129 this principle, under the changing circumstances of advancing communities, is what I desire now to call attention to. I have already explained the course of price in one of the most important of those commodities — butcher's meat; and it was then seen how powerfully that course is affected by the difficulty of carriage incident to that article. On the other hand, the facility with which the products accessory to the production of butcher's meat, wool, tallow, and hides, are con- veyed, is not less powerful in the opposite sense in affecting the course of their prices. Wool, for example, rises at once in a new country to the price ruling in the great markets of com- merce, minus only the cost of carriage, which, owing to the great portableness of wool, bears but a small proportion to its total value. In other words, the demand for wool, let us say for wool grown in Australia, is only limited by the demand of the entire commercial world ; while the demand for meat raised in the same country is practically confined to the local markets. It is evident that this circumstance must lead, in the industrial development of the colony, to a complete divergence in the courses of price of the two commodities. Indeed, that divergence has already become very sensible ; for though it is true an advance has occurred in the price of wool since the early days of Australian settlement (mainly due, as I believe, to a fall in the value of money), the price of meat has advanced in a far greater degree. Nor is it difficult to foresee that it is in the directions thus indicated that the future prices of the two commodities will move. In both cases there will prob- ably be an advance due to the declining value of gold; but the price of meat will be urged upward by other, and inde- pendent, causes. The durable character and slight bulkiness of wool, which even in the infancy of the colony sustained its price at a level but little below that of European markets, will, in later times, when the now sparse communities of Australia have grown into nations, confine it within limits not greatly 9 130 DERIVATIVE LAWS OF VALUE. larger than it now commands, by furnishing the same facilities for its importation which they now furnish for its exportation — a result exactly the converse of what we found to be the fate of meat, of which the perishable nature, as it excludes it from exportation when nations are young, so prevents its im- portation, at least on any great scale, when the increasing de- mand of the growing community outruns the internal facilities of production. § 6. In comparing the state of prices in old and new com- munities, the circumstance in which they stand perhaps most strikingly contrasted is that which has been brought out in the foregoing discussion — the remarkable difference found to exist in the two cases between the relative prices of corn or other products of prime necessity, on the one hand, and, on the other, those of butcher's meat, dairy produce, and such secondary commodities. The contrast was not unperceived by Adam Smith, and has been commented on at much length in the very interesting chapter in the "Wealth of Nations" which he devotes to this subject. The notion, however, which he had taken up as to a limitation, developed with the prog- ress of society, to the advancing price of the latter class of articles, prevented him from seeing the full significance of the facts to which he drew attention ; nor indeed are his infer- ences, even within the range of what he had perceived, abso- lutely unexceptionable. Nevertheless, his remarks in sum- ming up the results of his investigation are sufficiently strik- ing, and may fitly be quoted here : " But though the low money price either of goods in general, or of corn in particular, be no proof of the poverty or barbarism of the times, the low money price of some particular sorts of goods, such as cattle, poultry, game of all kinds, etc., in proportion to that of corn, is a most decisive one. It clearly demonstrates, first, their great abundance in proportion to that of corn, and consequently the great extent of the MINERAL PBODVCTS. 131 land which they occupied in proportion to what was occupied by corn ; and, secondly, the low value of this land in proportion to that of corn land, and consequently the uncultivated and unimproved state of the far greater part of the lands of the country. It clearly demonstrates that the stock and population of the country did not bear the same pro- portion to the extent of its territory which they commonly do in civil- ized countries, and that society was at that time, and in that country, but in its infancy. From the high or low money price either of goods in general, or of corn in particular, we can infer only that the mines which at that time happened to supply the commercial world with gold and silver were fertile or barren, not that the country was rich or poor. But, from the h jgh or low money price of some sorts of goods in propor- tion to that of others, we can infer, with a degree of probability that approaches almost to certainty, that it was rich or poor, that the greater part of its lands were improved or unimproved, and that it was either in a more or less barbarous state, or in a more or less civilized one." Strictly interpreted, the line of this inference would lead to the conclusion that Australia and California were poor coun- tries, which would scarcely be considered a tenable position; but, barring this slip, as we may regard it, of substituting " rich and poor " for " old and young," the tenor of the re- marks is essentially sound and just, and shows, considering the time when they were written, a remarkable insight into the causes governing industrial development. §7. There is another class of "extractive" commodities which does not fall properly under any of the foregoing heads, on which a few remarks seem called for here. These are mineral products, comprising the coarser and precious metals, coal, and a few other articles. The circumstances in which products of this class differ from those which we have just considered appear to be chiefly these two: In the first place, the sources from which they are obtained are distributed over the earth with very great inequality ; some countries being en- tirely destitute of them, others possessing them in great abun- 132 DERIVATIVE LAWS OF VALUE. dance, and of the most varied degrees of fertility ; and, sec- ondly, their production is more mechanical in its nature than that of agricultural or pastoral products, from which it results that their cost of production is more directly dependent, than that of other rude products, on the progress of mechanical and chemical invention. To follow out the consequences involved in these distinctions, more especially in the instance of the precious metals, would take me very far afield indeed ; nor do I propose to attempt any such excursion here. I shall content myself, as regards this part of my subject, with observing in a general way, that the circumstances of the case have been con- ducive in the past history of the world to great variation in the normal prices of mineral products ; nor can it be said, in spite of the fact that they come so largely under the influence of scientific invention, that the movements of normal price in their case have, with the progress of communities, been in any constant direction. As regards future movements of price in this class of products, so much depends on the discovery of new mines and coal measures, and this is so much a matter of accident, so large a portion of the world, moreover, still re- mains unexplored, that I do not think we can be said to pos- sess the data for even a probable conjecture. § 8. I turn now from the domain of raw products to that other great industrial division — manufacturing industry. Be- tween these two industrial departments it is not indeed possi- ble to draw a perfectly hard and fast line, nor is it at all neces- sary that we should do so ; it is sufficient that the designations —raw products and manufactured goods— indicate a real and important distinction in things, and one which will be easily and with sufficient correctness apprehended. What I have now to consider is the course which normal prices take with the progress of society in the latter of these two classes. And here this remark may at once be made : that, as the MANVFACTVBES. 133 course of price in the field of raw products is, on the whole, up- ward, so in that of manufactured goods the course is, not less strikingly, in the opposite direction. The reasons of this are exceedingly plain. In the first place, division of labor — the first and most powerful of all cheapeners of production, but for which there is in extractive industry but very limited scope — finds in manufacturing industry an almost unbounded range for its application ; and, secondly, it is in manufacturing indus- try also that machinery, the other great cheapener of produc- tion, admits of being employed on the largest scale, and has in fact been employed with the most signal success. It follows at once from these facts, taken in connection with the further fact that industrial invention does not take place per saltum, but gradually — one invention ever treading on the heels of an- other — and that its advance seems to be subject to no limita- tion ; it follows, I say, from these considerations, that that por- tion of the cost of manufactured goods which properly belongs to the manufacturing process must, with the progress of society, undergo constant diminution. We can not, indeed, infer di- rectly from this circumstance that the value of such goods must decline, because the manufacturing process represents but a portion of their cost, which also embraces that involved in raising the raw material out of which they are manufactured ; and we have already seen that the cost of this element tends to advance with the progress of society. Whether, therefore, the price of manufactures will advance or decline must depend upon whether the tendency to fall, incident to improvements in the manufacturing process, will, on the whole, prevail over the tendency to advance inherent in the raw material, or be sur- passed by the latter force. On this point, however, save in the case of a few very slightly manufactured articles, such, for ex- ample, as bread, in which the manufacturing process bears but a small proportion to the value of the raw material, there is no room for a moment's doubt. In all the great branches of man- 134 DEBIVATIVE LAWS OF VALUE. ufacturing industry the portion of the cost incurred in the man- ufacturing process bears in general a large proportion to that represented by the raw material, while the influence of indus- trial invention, in reducing this portion of the cost, is, as every one knows, great and unintermitting in its action. From all these circumstances it results that the tendency to a reduction of cost in manufactured goods must, at least as the conditions of production stand at present, prevail, and in most cases pre- vail largely, over the tendency to an increase ; and that conse- quently the course of normal prices in this class of commodities is, with the progress of society, inevitably and, at times, rapid- ly downward. The illustration of this truth is to be found in the history of all manufacturing countries, and pre-eminently in that of Great Britain. There are few commodities of any im- portance falling within the domain of manufacture which have not within the last century or two fallen to a small fraction of their former price. But among manufactured commodities, as among raw prod- ucts, there is a difference. As has just been stated, the two great cheapeners of production are division of labor and ma- chinery, and the degree in which these admit of being ap- plied to manufacture is mainly dependent upon the scale on which the manufacturing process is carried on. Those manu- factures, therefore, that are produced upon a large scale are the sort of manufactures in which we may expect to find the great- est reduction in cost ; in which, therefore, the fall in price, with the progress of society, will be most marked. But the manu- factures which are produced upon the largest scale are those for which there exists the largest demand— that is to say, are those which enter most extensively into the consumption of the great mass of the people. They are also, I may add, those in which a fall in price is apt to stimulate a great increase of demand. All the common kinds of clothing, furniture, and utensils fall within the scope of this remark ; and it is in these, MANUFACTURES. 135 rather than in the commodities consumed exclusively or main- ly by the richer classes, that we should, accordingly, expect to find the greatest marvels of cheapening. There is indeed one incident of the case the bearing of which, so far as it goes, would, as between the two classes, rather favor the reduction of the more luxurious products. The manufactured articles which enter into the consumption of the masses are, as a rule, less manufactured than those which enter into the consump- tion of the rich — in other words, the amount of manufacture bestowed upon them bears a smaller proportion to the raw material than is the case with the more elaborate manu- factures. Such coarser manufactures, therefore, would feel the effects of the advancing cost of the raw material more sensibly than the refined sorts. Thus, for example, compar- ing a piece of Brussels lace with a piece of common calico, it is evident that there would need to be a very great change indeed in the value of the raw material to produce any sen- sible effect in the price of the former article; whereas, as recent experience has taught us, an advance in the price of the raw material of common calico is capable of causing very serious effects in its price. This circumstance, therefore, so far as it goes, certainly favors in the race for cheapness the more luxurious as against the commoner and less elaborate manufactures. Nevertheless, it can not be supposed to com- pensate the advantages due to the causes I have pointed out which fall to the share of the commoner sorts. It is in this class of goods that the most remarkable reductions in price have been accomplished in the past ; and it is in them probably that we shall witness in the future the greatest results of the same kind. § 9. Hitherto I have examined the derivative laws of value in so far only as they are exemplified in the movements of normal prices. It will be interesting now to consider whether 136 DERIVATIVE LAWS OF VALUE. it is possible to discover in the movements of market prices any corresponding phenomena; whether, that is to say, the fluctuations of the market, as they occur in the several classes of commodities, conform to any modes of action analogous to those which we have found to obtain in the case of normal price. And here it may be well to state precisely what is to be un- derstood by a "fluctuation of the market," as distinguished from those changes of normal price which we have been con- sidering. Normal price, as we have seen, is governed, accord- ing to the circumstances of the case, by one or other of two causes — cost of production and reciprocal demand (in the sense explained in a former chapter). A change in normal price, therefore, is a change which is the consequence of an alteration in one or other of these conditions. So long as the determining condition — be it cost of production or reciprocal demand — re- mains constant, the normal price must be considered as remain- ing constant; but, the normal price remaining constant, the market price (which, as we have seen, depends on the opinion of dealers respecting the state of supply and demand in rela- tion to the particular article) may undergo a change — may de- viate, that is to say, either upward or downward from the nor- mal level. Such changes of price, occurring while the perma- nent conditions of production remain -unaffected, can only be temporary, calling into action as they do forces which at once tend to restore the normal state of things: they may, there- fore, be properly described as "fluctuations of the market;" and the question now to be considered is how far we can con- nect such phenomena with the causes which determine them, and, by stating this connection, bring them within the domain of scientific law. With a view to this inquiry, the first point to be attended to is the condition on which the correspondence of market with normal price depends. It is evident that this condition can be MARKET FLUCTUATIONS. 137 no Other than such an adjustment of supply to demand — or, to speak more strictly, such a state of opinion among dealers re- specting the adjustment of supply to demand — as shall produce the correspondence in question — a state of things which is re- alized when the disposable supply is regarded as sufficient, and no more than sufficient, to satisfy the demand for the commod- ity which exists at the normal level of price, or, as we may say, in Adam Smith's phrase, to satisfy the "effectual de- mand." Bearing this in mind, it will be seen that the devia- tion of the market price from the normal standard will be mainly influenced by the difficulties in the way of adapting supply to "effectual demand;" or, what comes to the same thing, that the closeness with which the market follows the normal price will depend upon the facilities available for this adaptation. On what, then, do these facilities depend? Chief- ly, it appears to me, on the three following circumstances : first, on the conditions of production as affecting the commod- ity; secondly, on the nature of the commodity; and thirdly, on the greater or less urgency of human wants in relation to it. In tracing the derivative laws of normal prices we found that the most fundamental distinction between commodities, with a view to the purpose then in hand, lay in the line of sep- aration between the products of extractive and those of manu- facturing industry. For our present purpose the same dis- tinction is equally important ; and I shall, therefore, once again adopt it. Eegarding, then, commodities as falling under one or other of these two great heads, let us observe how, on the one hand, manufactures, on the other, agricultural and pastor- al products, stand affected by each of the three conditions just named. § 10. Taking manufactures first, it is evident at once that, as regards conditions of production, the circumstances of the case are such as to secure, in general, great rapidity and also 138 DERIVATIVE LAWS OF VALUE. great certainty in bringing commodities to market. A deal table may be made in a few hours, a piece of cloth in a few weeks, a moderate-sized house in a month or little more. Ta- bles, cloth, and houses may be produced with certainty in any quantity required. It results from this, that it is scarcely possible that, under ordinary circumstances, the selling price of a product of manufacture should for any long time much exceed its normal price ; for so soon as the excess became pal- pable, inasmuch as this would imply exceptionally high prof- its for the producers, production would receive a stimulus; and, the facilities for producing the article being great, the supply would quickly be increased until it overtook the " ef- fectual demand;" whereupon the market price would fall to the normal level. This, I say, is what would happen " under ordinary circumstances;" for in order that the supply should be thus rapidly adjusted to the increase of demand, it would be necessary that the latter should not exceed certain limits. In all the most important branches of manufacture fixed cap- ital, chiefly in the form of machinery, is largely employed ; and the limited quantity of such capital existing in a country at any time sets limits for the time being to the possible aug- mentation of supply. If the demand then exceed what the means of production thus immediately available can satisfy, the market price may rule for some considerable time in ad- vance of the normal price— until, that is to say, time is allow- ed for erecting buildings and machinery suitable to the in- creased requirements of the community. Even on such oc- casions, however, it is rare that the elevation of price which results is very great ; for here come into play those other con- ditions of which I have spoken. The nature of manufactures is, in general, such as to fit them admirably for distant trans- port. Any considerable elevation of price, therefore, is pretty certain to attract supplies from remote sources. Further, con- sidered in their relation to human needs, I think it may be FLUCTUATION IN MANUFACTURES. 139 said of manufactured goods, that either the need for them is not very urgent, or, where it happens to be so, substitutes more or less suitable for the commodity or commodities which happen to be scarce may, in general, easily be found. From all these circumstances it results that an advance in the price of a manufacture, so soon as it becomes at all considerable, either attracts supplies from extraordinary sources, or deters purchasers, or brings substitutes into the field— by one or more of such means setting a limit to deviations, and prevent- ing any great departure from the usual terms of the market. So far as to deviations from the normal standard upward. With regard to movements in the opposite direction, the cir- cumstances under which they occur are commonly of this kind. The adaptation of supply to demand is a tentative proc- ess, and when any sudden change in demand happens, it is not easy for producers at once to determine its extent. The result is that mistakes are made. Commodities are produced in excess : nay more, fixed capital is created in excess ; and capital once committed to a "fixed" form is rarely capable of being applied to any purpose other than that for which it was intended. Hence, the supply once carried beyond the due limits of the " effectual demand," it becomes difficult to reduce it to its proper proportions. Mills and machinery once set up, it is of two evils often the least to continue production at a moiety, or less, of the ordinary profit, rather than to allow cap- ital to lie absolutely unproductive: one hears besides that production, from motives of humanity to the workmen em- ployed, is sometimes carried on even at a loss. Owing to causes of this kind, the markets for manufactured products sometimes continue for many months, possibly for a year or more, below the level of normal price. Here again, however, the same qualities which, as we saw, keep in check the up- ward movement, come into play to prevent a very great de- pression. Manufactures not being in general quickly perish- 140 DERIVATIVE LAWS OF VALUE. able, it is rarely necessary, ia their case, to force a sale, while their great portability gives them access to distant markets. On the whole, then, we find that, having regard alike to the conditions of production, the nature of the commodity, and the degree of urgency of human needs in relation to it, the cir- cumstances of the case are such as to reduce within rather narrow limits the fluctuations of the market in the instance of manufactured goods* And this is the more noteworthy, inasmuch as it is precisely in this class of commodities that, as we have seen, the changes in normal price, depending as they do on changes in the cost of production, are most frequent and most striking. The state of things just described, and which exhibits, on the whole, a somewhat limited range of variation for the mar- ket (as distinguished from the normal) value of the products of manufacturing industry, might at first sight seem to offer but small scope for the sudden creation by individuals of large for- tunes; and yet we know that it is in manufacturing indus- tries that the largest and most rapid fortunes have been made. What is the explanation of this circumstance? I apprehend it will be found to lie mainly in the rapidity with which the circulating portion of manufacturing capital admits of being turned. The same rapidity of production which accelerates the reduction of price facilitates the turning of capital. Ac- cordingly, when such a chance occurs as the sudden opening of a large and unlooked-for market — such an occasion, for ex- ample, as was presented by the rapid growth of the markets of California and Australia consequent on the gold discoveries ; or again, such as the American civil war produced for the * The chief exception to this is where a fluctuation of the market connects it- self with some irregularity in the supply of the raw mateiial, as happened during the cotton famine. But in this case the phenomenon should rather be considered as falling under our next head, which deals with the market fluctuations of raw products. FLUCTUATION IN MAW PRODUCTS. 141 linen manufacturers, when the failing supply of calico threw a large and unexpected, consumption upon linen — when, I say, occasions of this kind occur, those whose capital is already embarked in the trade can generally — such are the facilities for rapidly turning capital over in manufactures — contrive, even at a moderate advance of price, to realize large gains before the re-enforcements of fixed capital rendered necessary by the altered state of trade can be brought into the field. This is one, and the principal, source of the very large fortunes occa- sionally achieved by individuals in this branch of trade. For the rest I should conjecture that, where exceptional and ex- traordinary gains have been made, the end has been accomplish- ed, less thrqugh manufacturing operations properly so called, than through speculations carried on in the raw material of the industry. This, at least, we know, was notoriously the case with the large fortunes made during the continuance of the American civil war. § 11. Turning now to the products of agricultural, pastoral, or, more generally, " extractive " industry, we find the circum- stances under which this class of goods is brought to market in all respects extremely different from those which we have just examined, and such as to permit a much wider margin of deviation for the market from the normal price. Here the period of production is longer, the result of the process much more uncertain, the commodity is at once more perishable and less portable, and human requirements in relation to it are mostly of a more urgent kind. The shortest period within which additions can be made to the supply of food and raw material of the vegetable kind is in general a year, and if the commodity be of animal origin, the minimum period is con- siderably longer. Again, the farmer may decide upon the breadth of ground to be devoted to a particular crop, or upon the number of cattle he will maintain, but the actual returns 142 DERIVATIVE LAWS OF VALUE. will vary according to the season, and may prove far in excess or far in defect of his calculations. These circumstances all present obstacles to the adjustment of supply to demand, and consequently tend to produce frequent and extensive devia- tions of the market from the normal price. JSTor are the other conditions of the case such as to neutralize the influence of such disturbing agencies. The nature, indeed, of some of the principal agricultural products fits them sufficiently well for distant transport, and so far tends to correct fluctuations of price. But, on the other hand, the relation of these products to human wants is such as greatly to enhance that tendency to violent fluctuation incident to the conditions of their produc- tion. More especially is this the case with the commodity, whatever it may be, which forms the staple food of a people. For observe the peculiar nature of human requirements with reference to such a commodity. They are of this kind, that, given the number of a population, the quantity of the staple food required is nearly a fixed quantity, and this almost irre- spective of price : except among the very poorest, increased cheapness will not stimulate a larger consumption, while, on the other hand, all, at any cost within the range of their means, will obtain their usual supply. The consequence is, that, when even a moderate deficiency or excess occurs in the supply of the staple food of a people, in the one case the competition of consumers for their usual quantum of food rapidly forces up the price far out of proportion to the diminution in the supply; in the other, no one being inclined to increase his usual con- sumption, the competition of sellers, in their eagerness to find a market for the superfluous portion of the supply, is equally powerful to depress it. Those who have studied the history of English prices while England was yet under the regime of Protection, are aware of the enormous and sudden fluctuations which from time to time occurred under the influence of causes of this description. Such violent fluctuations will scarcely be FLUCTUATION^ IN STAPLE FOOD. 143 witnessed again ; but even under the moderating regime of free trade, the peculiar character of the staple food in its re- lation to the requirements of human beings continues from time to time to make its influence felt, and to produce sudden and considerable changes in the quotations of the market. And here I may notice the converse of a phenomenon advert- ed to just now in connection with the market prices of the products of manufacture. I then pointed out that, while cir- cumstances, on the whole, contributed to steadiness of market value in such products, their normal values were in an especial degree liable to extensive changes. In the case of agricultural products, but more especially in the case of staple food, this re- lation is inverted. I ventured to assert, and in doing so I was supported by the authority of Adam Smith, that of all com- modities whatever, that which forms the staple food of a peo- ple is the commodity of which the normal value in the course of time undergoes the least variation. As I have already said, I believe we should find, if we went into the case, that during the course of some centuries the normal value of wheat (I do not say the normal ^n'ce) has altered very little in the more advanced countries of Europe. On the other hand, for the reasons which have been just set forth, wheat is, of all impor- tant commodities, that one which exhibits, in the movements of the market, variation in the most extreme degree. Inci- dents .of this kind, it may be observed in passing, show the absolute necessity, if we desire to elucidate the phenomena of price, of distinguishing between market and normal values in economic discussion. The phenomena are perfectly distinct, and, as the foregoing examination has shown, sometimes fol- low, even in the instance of the same commodities, opposite laws. What likelihood, then, of getting a correct chart of their movements, if they are treated, as frequently happens in treatises on value, as one and the same manifestation, and con- founded together as the subject-matter of a single exposition ? 144 DERIVATIVE LAWS OF VALUE. § 12. It will serve still farther to elucidate the fluctuations of market price within the sphere of extractive industry if we regard its deviations from normal price under two aspects : 1, with reference to its intensity ; 2, with reference to its dura- tion. A commodity may rise very suddenly and greatly in price, but may quickly return to its usual terms of sale ; or, on the other hand, rising slowly and not very greatly above its ordinary level, it may, nevertheless, continue for a long time at the elevation thus attained. If now, bearing this distinc- tion in mind, we compare among the raw products of industry those derived from the vegetable with those derived from the animal kingdom, I think we shall find the following rule in the main to hold true : namely, that vegetable products are for the most part subject to market fluctuations of the former charac- ter — the fluctuations, that is to say, are apt to be sudden and considerable, but comparatively short; while the market prices of commodities of animal origin rarely rise rapidly, but, when a sensible advance is established, commonly remain for a long time at the enhanced rate. Thus it has happened, even since the establishment of free trade, that the price of corn has, within the space of a few years, been halved and doubled again, and then in another year or two fallen once more to a medium level ;* but no such sharp oscillation has, so far as I am aware, occurred (at least in recent times) in the price of any animal product. Butcher's meat is perhaps, among animal products, that one which has lately exhibited the most marked advance. It would, however, be a mistake to assume that the * The weekly average price of wheat, for example, had risen in 1847 to as hio-h a point as 102«. per quarter : within a year from that time it fell to little more than half that price, and in 1851 to as low as 43s. Within two years more name- ly, about the commencement of the Crimean war — having in the interval oscillated slightly about the point of 45s. — it rose very suddenly to 73s. ; and in January, 18.54, attained its maximum elevation of 84s., from which point it gradually declined. (See Tooke's " History of Prices," vol. v., part 1, § 14.) ANIMAL AND VEGETABLE PRODUCTS. 145 great rise which has occurred in this article within the last twenty years represents sinaply a market fluctuation, because there is reason to believe that, if not the cost of production in ' the strict sense of the term, at all events the cost of production as measured in money, has during this time very considerably risen. Unless, therefore, the value of gold were, by some ex- traordinary freak of economic nature, to recover what it has lost, there is not the smallest probability that the price of meat will ever return to the level at which it stood twenty years ago. The present advance, therefore, can not be considered, at all events for the chief portion of its amount, as a mere phe- nomenon of the market, but rather as a definitive rise of the normal price ; and it may be added that the same is, in a great- er or less degree, true of most instances of augmented price that have recently occurred. To return to the difference in the incidents of market price between vegetable and anirhal prod- ucts, its cause is mainly to be found in the conditions of their production. Commodities drawn from the vegetable kingdom can, in general, be multiplied more rapidly than those taken from the animal; and, therefore, deviations from the normal standard of price require for their correction, in this case, a shorter period of time. On the other hand, the same commod- ities are subject to much greater uncertainty in the process of production than those of animal origin, the agencies employed being here far less amenable to human control. Animals may, at least, be housed, and, by other artificial expedients, sheltered from the violence of natural agencies, but few such means of mitigation can well be employed when the production of veg- etables on a large scale is the business in hand. Hence the defalcations of supply are usually more considerable in their case, and hence the oscillations of market price, though short- er, are also more intense. The most important exception to the rule just laid down oc- curs in the case offish and game, but it is an exception of that 10 146 DEEIVATIVE LAWS OF VALUE. kind which proves the rule; for, unlike animal products ob- tained by domestication and breeding, the supply of fish, and in a less degree of game, is singularly at the mercy of causes uncontrollable by man, while the time requisite for catching them, as compared with the time required for the completion of ordinary industrial processes, is extremely short. The prin- ciple, therefore, on which the lule rests, would lead us to ex- pect here violent and brief fluctuations, more especially when we take into account, in connection with the conditions, of their production, the extremely perisbable nature of the articles in question — a circumstance which compels the dealers, at almost any sacrifice, to find a market for their goods within a strictly limited time. P^RT II. LABOR AND CAPITAL. P^RT II. LABOR AND CAPITAL. CHAPTEE I. TEE RATE OF WAGES. § 1. In discussing the laws of value, we have already par- tially solved the problems of wages and profits. For it has appeared that, where production assumes the character of a continuous operation, producers are in effect remunerated out of the values of their products, and tliat consequently wages and profits in each branch of production must stand, in the normal state of things and on the average, to wages and profits in every other branch, in the same relation as the values of the products from which they are derived. " Relative wages and profits" thus follow the same laws which govern the ex- change value of commodities. In other words, onr reasoning has involved this conclusion, that wages and profits, regarded as relative phenomena, are governed by Cost of Production, where the producers are in effective competition with one an- other, and, where they are not, by Reciprocal Demand. So far we were carried toward the solution of the wages and profits problem in the discussion of that of value; but it is important that we should not overrate the progress that has been effected. Let me repeat : what the doctrine of value re- veals to us on this subject is the causes which determine the relative remuneration of laborers as among themselves, and that of capitalists as among themselves. It tells us why some 150 TSE BATE OF WAGES. classes of workmen and some classes of capitalists receive the same or equivalent remuneration, while in other cases in- equality in various degrees prevails ; but it tells us nothing as to what determines the positive remuneration which any class of capitalists or of laborers receives, nor as to the causes on which depend the average well-being of all classes. In a word, we have ascertained what produces the ripples on the surface of the industrial stream; but of the source from which the waters are derived, and of the depth and force of the cur- rent, nothing has yet been disclosed. Why is the remunera- tion of industry, as a whole, such as we find it to be in the va- rious countries of the earth? Why is it maintained at one level in England, at another on the continent of Europe, at yet another in Asia, and at another still in the United States? And why again is this level progressive in some countries, stationary in others, declining in a third class? These are questions on which the doctrine of value throws no light, and it is, therefore, to this side of the general problem that we have now to direct our attention. § 2. I shall perhaps here be reminded that the question of the rate of wages, as well as that of the rate of profits, under whatever aspect we regard them, are, and can never be other than, problems of value; since they are simply questions of the value respectively of labor and abstinence ; and that they should be dealt with in connection with that subject in the general theory of which they are implicated. I am certainly not going to dispute the allegation that wages and profits are, in a certain sense, phenomena of value. " Eate of wages" and "value of labor," "rate of profit" and "value of abstinence," are no doubt equivalent expressions ; and for my part .1 see no objection to regarding the doctrines elucidating these phe- nomena as constituting branches of the same general theory with that which explains the value of commodities. But I A CASE OF EXCHANGE VALUE. 151 apprehend the objection, embodied in the above remark, points to something more than this. What some students of Polit- ical Economy seem to desiderate is a comprehensive formula which shall embrace in a single solution, along with the laws of the exchange relations of commodities, those of the ex- change relations of labor and abstinence, and, along with these again, the laws of the exchange relations of land— that is to say, the theory of rent. Some such aim seems to have guided the speculations of Bastiat, whose work on the "Harmonies of Political Economy " is in effect an essay toward the determi- nation of the required formula; but the result of Bastiat's at- tempt is not encouraging to those who would essay the same path. He produces, indeed, generalizations which seem to sat- isfy the needed conditions ; but, closely examined, they either collapse into mere identical propositions, or are found to con- tain some flagrant petitio principii. Where not open to either of these objections, they will be found to relate to the phe- nomena of comparative remuneration — that is to say, to that portion of the theory of wages and profits which I have ad- mitted and shown may be treated in connection with the gen- eral laws of value. The truth is, the fundamental facts of the two problems are too essentially discrepant to admit of this mode of treatment. Verbal generalizations are of course easy. For example, noth- ing is easier than to say that the value of labor (I put aside abstinence and profit as not included in my present inquiry), like the value of other things, depends upon supply and de- mand — we may find the formula in any newspaper we take up; but what light does this throw upon the causes which govern the values either of labor or of commodities ? Simply none at all, or next to none at all. What we want to know is, not whether an increase of supply will cheapen a commodity or will cheapen labor, and an increase of demand raise the price of each — every coster-monger will tell you this much — but what 152 IRM BATE OF WAGES. it is which governs supply and demand in each case. Now, we can not take a step toward dealing with this question without being brought face to face with the fact that the motives which influence human beings in the production and supply of com- modities are not those which influence them in the production and supply of labor ; in other words, that the conditions oper- ative in the two cases are essentially distinct. If this is not already apparent to the reader, a brief consideration will suffice to make it so. First, then, the production of commodities is an onerous act, which will only be undertaken in the prospect of reward; whence it follows that the supply of commodities will only be secured on the condition of this prospect presenting itself. On the other hand, the production of labor, which in other words is the production of human beings, is not an onerous act, but a consequence of complying with one of the strongest instincts of humanity — an instinct which, so far from needing the stimulus of reward, can only be kept under due control by powerful restraints. In the one case, action entails self-denial; in the other, self-denial lies in abstaining from action. Pro- spective recompense indeed comes into requisition in both cases; but in the one it is needed to stimulate, in the other to control. Exclude the prospect of reward from productive in- dustry, and the supply of commodities will cease; exclude the prospect of the reward which results from providence in re- producing human beings, and the supply of labor will run to excess. Nor shall we have need to modify seriously our con- clusion upon this point, if, passing from the primary act of reproducing human beings, we take account of what is neces- sary in order to fit them, once in existence, for an industrial career. They must be fed and clothed; they must be brouo'ht up in a certain state of comfort ;■ and they must receive a cer- tain education — conditions which, unlike the act of orio-ina- D ting their existence, call for, in order to their fulfillment, con- LABOR AND COMMODITIES. 153 tinuous and often arduous effort. Here, we must admit, there is an analogy between the preparation of a human being for industrial work, and the production of a commodity for the market; both processes involve cost. But there still remains this broad distinction, which effectually discriminates the two cases: The cost in the production of a commodity is under- gone deliberately, and with a distinct view to industrial ends: in the preparation of human beings for their career in life — I will not say that industrial ends have no place at all in the calculation, but I will assert this, that, except in the case of technical or professional education — a mere bagatelle in the general expense of rearing a laborer — industrial considerations are entirely subordinate to considerations of a wider and alto- gether different character. A man, whatever be his rank of life, brings up his children — I speak of the common case — as far as he is able, according to the ideas prevailing in that rank of life. He does so mainly because he feels certain obligations of morality and affection toward them, and because it would be shameful to do otherwise. His children once arrived at maturity, no doubt his views and theirs will take a direction more distinctly governed by industrial considerations, or at least considerations bearing upon material success in life ; but at this point the supph'- of labor has hec-n already determined. It is now in existence; and the industrial motive, now that it comes into play, operates, not upon the aggregate supply of labor, but merely upon the mode of its distribution. I do not deny, indeed, that, in a certain irregular way, and taking con- siderable periods of time, the supply of labor as a whole fol- lows the demand for labor; but what I contend is, that it is not connected with demand by the same links which connect the supply of commodities with the demand for them. The adaptation of the supply of commodities to the demand is de- termined by strictly commercial motives: the adaptation of the supply of labor to the demand is not so determined. Hu- 154 THE BATE OF WAGES. man beings, at least out of slave countries, are not produced to meet the requirements of the market, but for entirely differ- ent reasons. Now, this being so — the conditions determining the phenomena in the two cases being essentially distinct — what can come of forcing the solutions by dint of verbal re- finements into a single formula? Simply this: either our theory will be flagrantly untrue, or it will not go more than word-deep, and our show of explanation will merely serve to obscure the essential facts of the problem. § 3. These preliminary points being disposed of, I turn now to the proper subject of this chapter — the causes determining the general or average rate of wages. But here an objection meets me on the threshold. Are we justified in speaking of a "general" rate of wages? Are the facts expressed by wages such as may be usefully embraced in a general conception and reasoned about as an aggregate ? A recent writer, Mr. Longe, lias denied the existence of any facts which can warrant this expression : " The notion of all the laborers of a country constituting a body of general laborers capable of competing with each other, and whose "general" or "average" wage depends upon the ratio between their number and the aggregate wage-fand, is just as absurd as the notion of all the different goods existing in a counti-y at any given time — for ex- ample, the ships, and the steam-engines, and the cloth, etc. — constituting the stock of general commodities, the general or average price of which is determined by the ratio between the supposed quantity of the whole aggregate stock and the total purchase-fund of the community How could the shoe-makers compete with the tailors, or the blacksmiths with the glass-blowers ? Or how should the capital which a master- shoe-maker saved by reducing the wages of his journeymen, get into the hands of the master-tailor ?"* To the latter questions I think I have already supplied a * "A Refutation of the Wage-fund Theory of Modern Political Economy, "by F. D. Longe, pp. 55, 56. MB. LONGE'S IDEA. 155 sufficient answer; but with regard to the objection itself, and the illustration by which it is supported, the reader will ob- serve to what length it goes. The author of the passage just quoted is apparently unable to conceive a general or average rate where the average is not realized in each individual in- stance; otherwise where is the absurdity of speaking of a "general" or "average" price of commodities? If the no- tion of a general or average price of commodities is absurd, then what does the writer mean when he speaks of a rise or fall in. the value of money? Or is that idea also beyond his couceptive power? A rise or fall in the value of money is only another name for a fall or rise of general or average prices. The idea, in short, which Mr. Longe adduces as an extreme example of absurdity, is simply one of the most fa- miliar in the range of economic speculation. A general rate of wages is neither more nor less easy to conceive, neither more nor less absurd, than general prices. I think I know what. I mean when I say that prices and wages in the United States, measured in greenbacks, have risen generally as com- pared with prices and wages, measured in gold ; that the aver- age rate is higher in the one case than in the other ; and I do not think I should be very wide of the mark if I attributed this difference to the different proportions in which purchasing power measured in gold, and purchasing power measured in greenbacks, stand related to commodities and labor. Yet these familiar notions are what Mr. Longe finds it impossible to conceive. An expression in the passage quoted would seem to imply that universal competition among laborers is an essential con- dition to the existence of an average rate of wages. Why it should be so (except on the supposition I have referred 'to, that an average rate requires that the average be realized in each particular instance) I am quite at a loss to imagine ; but Mr. Longe's language seems further to imply that, as a matter of 156 THE BATE OF WAGES. fact, the several departments of industry in this and other countries are so practically isolated from each other, that wages in any of them may rise or fall without producing any effect beyond the particular department. I have already considered the extent to which competition is really effective in our in- dustrial life, and have endeavored to show in what way its ex- istence or non-existence affects relative wages. To what was then said I desire now to add that, even where competition among laborers is not effective, and where consequently wages are not in proportion to sacrifices, it is very far from being true that any such industrial isolation obtains as Mr. Longe's argument would suggest. A rise of wages, let us suppose, oc- curs in the coal trade : does any one suppose that this could continue without affecting wages, not merely in other mining industries in full competition with coal-mining, but in indus- tries the most remote from coal-mining, industries alike higher and lower in the industrial scale? Most undoubtedly it could not ; and if any one questions the assertion, he may have his doubts resolved by what is now going on before our eyes. Nor is the explanation far to seek. Though laborers in cer- tain departments of industry are practically cut off from com- petition with laborers in other departments, the competition of capitalists, as I have already pointed out, is effective over the whole field. The communication between the different sec- tions of industrial life, which is not kept open by the move- ments of labor, is effectually maintained by the action of capi- tal constantly moving toward the more profitable employ- ments. In this way our entire industrial organization becomes a connected system, any change occurring in any part of which will extend itself to others and entail complementary changes. Not only, therefore, are we justified in generalizing the -various facts of wages into a single conception, and in discussing "gen- eral" or "average'' wages, but we have grounds for regarding this general or average rate as constituted of elements bound POSITION OF TEE CONTROVEBSY. 157 together by a common connection, and forming parts of an integral whole. § 4. The problem of the general rate of wages, after being the occasion of perhaps more bitter controversy than any other within the field of social inquiry, seemed some years ago to have received, so far as the essentials of the matter went, its definitive solution. The great stumbling-block to its accept- ance had long been the law of population, which, in spite of the overwhelming evidence adduced in its support by Malthus, provoked, as all the world knows, a violent opposition, and led to a controversy which, extending over half a century, has only died out, if indeed it has died out, within a few years. This result may be attributed partly, we may perhaps assume, to the gradual progress of sound reason getting the better of the strongest prepossessions ; but it has of late been powerfully helped forward by the influence of Mr. Darwin's great work, in which the obnoxious principle — the tendency of human be- ings to increase faster than subsistence, which had been de- nounced as at once demoralizing to man and discreditable to the Author of the Universe — was shown to be merely a partic- ular instance of a law pervading all organic existence. How- ever this may be, in point of fact those attacks upon the eco- nomic doctrine of wages which were based upon objections to the Malthusian doctrines — attacks upon what we may call the supply side of the wages problem — have for some time come to an end. We may therefore assume that so much of the prob- lem has been solved to the general satisfaction of competent thinkers, and are consequently dispensed from entering on its consideration here. But the controversy has scarcely been closed on one side when it has been opened on another. The law of the supply of labor is no longer called in question ; but several able writers have within a few years, in dissertations directed 158 TBE BATE OF WAGES. against what is known as the "Wages-fund" doctrine, chal- lenged the view hitherto received as to the law of its demand. Foremost among these has been Mr. Thornton, who, in his book on "Labor,"* has made the Wages-fund doctrine the ob- ject of a special and elaborate attack ; nor is it possible to deny the ability and skill with which the assault has been conducted, when we find that he can boast, as among the first-fruits of his argument, no less a result than the conversion of Mr. Mill. Such a'n event, it must be frankly conceded, affords an ex- tremely strong presumption in favor of the soundness of Mr. Thornton's view. Mr. Mill had himself been, if not the origi- nator of the Wages-fund doctrine, certainly its most able and effective expositor ; and this doctrine, supported by his argu- ment, and implicated in his general theory, he has been led hj Mr. Thornton's reasoning to discard. I say, it can not be de- nied that such a circumstance constitutes a weighty presump- tion in favor of Mr. Thornton's view ; but I must also contend that it amounts to no more than a presumption. In the free- dom of science, I claim for myself the right of examining the doctrine on its merits. I must own myself unconvinced by Mr. Thornton's reasonings, strengthened and enforced though these have been by the powerful comments of Mr. Mill.f Not indeed that I am prepared to defend all that has been written on what, for convenience, I may call the orthodox side of this question, but I believe the view maintained by those who have written on that side, and pre-eminently the view maintained by Mr. Mill himself— taking it as set forth in his original work, not as explained in his retractation— to be substantially sound, though needing, as it seems to me, at once fuller development and more accurate determination than it has yet received. * "On Labor: its Wrongful Claims and Rightful Dues, '"etc., by W. T. Thorn- ton. Second Edition, 1870. t See Fortnightly Review for May 1, 1869. THE WAGES-FUND TREOBT. 159 § 5. I can not, I think, better open the examination which I propose to make of this subject, than by quoting the following statement from Mr. Mill's " Principles of Political Economy," of the nature of the Wages-fund, and its place in the industrial economy : " Wages, then, depend mainly upon the demand and supply of labor ; or, as it is often expressed, on the proportion between population and capital. By population is here meant the number only of the laboring class, or rather of those who work for hire ; and by capital, only circu- lating capital, and not even the whole of that, but the part which is ex- pended in the direct purchase of labor. To this, however, must be add- ed all funds which, without forming a part of capital, are paid in ex- change for labor, such as the wages of soldiers, domestic servants, and all other unproductive laborers. There is unfortunately no mode of ex- pressing by one familiar term the aggregate of what may be called the Wages-filnd of a country : and as the wages of productive labor form nearly the whole of that fuhd, it is usual to overlook the smaller and less important part, and to say that wages depend on population and capital. It will be convenient to employ this expression, remembering, however, to consider it as elliptical, and not as a literal statement of the entire truth."* As I understand this passage, it embraces the following statements : 1st, " Wages-fund " is a general term, used in the absence of any other more familiar, to express the aggregate of all wages at any given time in possession of the laboring population ; 2d, on the proportion of this fund to the number of the laboring population depends at any given time the av- erage rate of wages ; 3d, the amount of the fund is determined by the amount of the general wealth which is applied to the direct purchase of labor, whether with a view to productive or to unproductive employment. If the reader will carefully con- sider these several propositions, I think be will perceive that they do not contain matter which can be properly regarded as * "Principles of Political Economy," book ii., chap. xi. 1(50 THE BATE OF WAGES. open to dispute. The first is little more than a definition ; at most, it assumes that that exists in the aggregate which is ad- mitted to exist in detail. The second merely amounts to say- ing that the quotient will be such as the dividend and divisor determine. The third equally contains an indisputable asser- tion ; since, whatever be the remote causes on which the wages of hired labor depend (and the question at present is exclusive- ly of hired labor) the proximate act determining their aggregate amount must in all cases be a direct purchase of its services. In truth, the demand for labor, thus understood, as measured by the amount of wealth applied to the direct purchase of labor, might more correctly be said to be, than to determine, the Wages-fund. It is the Wages-fund in its inchoate stage, dif- fering from it only as wealth just about to pass into the hands of laborers differs from the same wealth when it has got into their hands. Our analysis thus leads us to the result, that the passage quoted from Mr. Mill can not be taken to contain con- troversial matter. The statements are such as may not be dis- puted, once their meaning is clearly understood. At the same time it must be freely confessed that it contains no solution of the wages problem : it is not a solution, but a statement of that problem — a statement, as it seems to me, at once clear, comprehensive, and succinct, presenting in clear light the two factors which constitute the phenomenon — the Wages-fund re- sulting from the direct demand for labor, and the laboring population forming the supply. The solution will consist in connecting these factors with those principles of human nature and facts of the external world which form the premises of economic science.* * "The political economy of the wages question,'' says Mr. Brassey (p. 251), "is simple enough." Certainly it is, if it consists in showing that every rise or fall of wages is traceable to a change in the relation of supply and demand. But it seems to me that Mr. Brassey has mistaken the statement of the problem for its solution. It needs no proof surely to see that if £40,000,000 be added to the ex- THE WAGES-FUND THEORY. 161 § 6. As I have already observed, it is with a portion only of this problem that we have need now to concern ourselves. The causes governing the supply of labor may be taken as sufficiently elucidated. Our business is with the causes gov- erning the demand — governing the amount of wealth applied to the direct purchase of labor, or, as we may equally well ex- press it, governing the Wages-fund. It is here for the first time that room for controversy really occurs ; and though the issue has not always been taken with precision, it is in effect on the point just indicated that the re- cent controversy turns. By the upholders of the Wages-fund doctrine the view taken is, that the amount of a nation's wealth expended in wages at any given time stands — the character of the national industries and the methods of production employ- ed being given — in a definite relation to its general capital, while the amount of its general capital is determined by cer- tain economic conditions resulting from the character of the people and the nature of their environment.* The Wages- fund, therefore, according to this view, depends, the conditions of production being given, proximately on the amount of a nation's capital, and ultimately on those more remote causes which control the growth of this fund. It is against this view isdng capital of a countiy, and the greater portion applied to the direct purchase of labor (the supply of labor and other things continuing the same), wages must rise ; or that the withdrawal of a great sum from the payment of wages, as on the occasion of a commercial collapse, must on the other hand, ccBteris paribus, in- volve a fall of wages. To tell us this is not to solve the wages question, but to state it. What we want to know is what determines the relation of supply and demand— of the Wages-fund to the laboring population. Why is that relation such as to yield one rate of wages in the United States, another rate in Great Britain, and a third rate on the continent of Europe? If Mr. Brassey would fairly address himself to this problem, I think he would find that the political economy of the wages question is not quite so " simple " as he supposes. *As set forth, for example, in Mill's "Principles of Political Economy," book i., chap. xi. 11 102 THE RATE OF WAGES. of the connection of facts that the opponents of the impugned doctrine have directed their arguments. According to Mr. Thornton there is no portion of a nation's wealth " determined " toward the payment of wages. The amount which actually reaches the laborer is, I presume he would say, the result of circumstances (which, as not being "determined," must be re- garded as accidental) of which the most important are those in- cidents in the position respectively of employer and employed which favor or restrict the capacity for bargaining. And sub- stantially the same language is held by Mr. Longe. Rather in- consistently, however, while denying the determination of any portion of the general wealth to the payment of wages, Mr. Longe propounds a theory to explain the fact of this deter- mination. The determining cause, he says, is not, as alleged in the Wages-fund theory, the economic conditions affecting the growth of capital, but " the demand for commodities." ■'The demand for commodities certainly does not directly de- termine the quantity of labor or number of laborers in a coun- try, nor the quantity of corn or other things available for the maintenance of laborers, but it does determine the quantity of labor employed, and the quantity of wealth spent in the wages of laborers " (p. 46). As he elsewhere puts it, " the demand for commodities which can only be got by labor is as much a demand for labor as a demand for beef is a demand for bullocks." § 7. Such are the positions taken in this controversy by the disputants on either side. In proceeding to state the doctrine in question, with a view to meet the objections which have been advanced against it, it will be convenient in the first place to examine the theory put forward by Mr. Longe, and which apparently finds favor with Mr. Thornton also, as to the bear- ing of the demand for commodities upon the remuneration of labor ; I shall then set forth the grounds on which the doctrine THE DEMAND FOB COMMODITIES. 16:i of the Wages-fund rests ; and having done this, I shall be in a position to consider the arguments advanced by Mr. Thornton against the existence of any "determining" causes in the case. Mr. Longe has refused to admit the existence of, and has thrown doubt upon the possibility of conceiving, " a general rate of wages." He, however, allows, at least by implication, that we may conceive an aggregate quantity of wealth as spent in wages, or what I call a Wages-fund ; for in the passage just quoted he tells us the cause which determines the amount of this fund. It is, he says, "the demand for commodities." I need scarcely remark that the view here expressed is not pe- culiar to Mr. Longe. It is in truth about the most popular of all popular fallacies. From this root has sprung a whole clus- ter of maxims, such as that "the extravagance of the rich is the gain of the poor," that " profusion and waste are for the good of trade," and others of like import which have in their time done much to perplex and demoralize mankind, and are still far from being extinct. That there is much plausibility in the view here taken of the economy of industry can not in- deed be denied, since otherwise how should it have obtained the almost universal vogue which it enjoys? It will therefore be worth while to sift with some care the grounds of an opin- ion which has certainly exercised no small amount of evil in- fluence on modes of thinking and acting in economic affairs. To state in its strongest form the argument for the view which I am combating : What, it may be asked, is the primary consideration that weighs with a capitalist in investing his wealth ? Is it not the prospect of finding a sale for his prod- ucts — in other words, the demand for commodities? And, as this is that which first moves him to action, is it not also that which governs the proportions -of his operations after he has en- tered upon action ? Increase the demand for his commodities, and he will increase the amount of his investment; diminish the demand, and he will diminish the investment. But, other 164 THE BATE OF WAGES. things being the same, the greater the investment, the greater will be the amount of his wealth spent in the wages of labor. In proportion, therefore, as the demand for his commodity is large, his expenditure in wages will be large. This is true of every capitalist and of every branch of production. From which the conclusioni-sroms to follow that the quantity of wealth spent in the wages of labor — i. e., the aggregate Wages- fund — is determined by 'the demand for commodities. It seems to follow, but it does not follow ; for, looking close- ly into the above reasoning, we find that while the conclusion is an assertion as to quantity, the premises relate to propor- tion. The existence of a demand, for example, for houses in a given degree of intensity will cause a certain quantity of the national capital to be directed to the .building of houses ; but it will not and can not determine what that quantity shall be. This will depend, in the first place, upon the amount of the total capital available for investment ; and secondly, on the relative force of the demand for houses as compared with the demand for other things. What the demand for houses and for other things determines is merely the proportions in which the available capital of a country shall be distributed over the field of production. Those proportions will adapt themselves to the proportions of the various demands for commodities. Increase the demand for a given commodity, and, other things being the same, a larger proportion of the available capital will be directed toward its production ; diminish the demand for it, and a contrary result will ensue: but neither in the one case nor in the other will the demand for the commodity determine how much capital shall be devoted to its production ; nor for similar reasons will the demand for commodities in general determine a like result with regard to them. It is as if we ar- gued, that because a man distributes his income in the propor- tion of his various needs, spending more on those articles to purchase which a larger sum is wanted to satisfy his require- TBE DEMAND FOR COMMODITIES. 165 ments, therefore, the greater his needs the larger must be his income. Large or small, his income willjbe, distributed in pro- portion to his needs; and, large or sra^li^'the Wage^-fund will be distributed over the various induistriar occupations in the proportions indicated by the, A^^A foa^mmgdities. But this tells us nothing as to what ||lBJl hi||| either .the amount of a man's income, or the arixounmbf tJlSBTiiafi^^Et^df We are thus brought to Mr. Mill's conb]usi|j#jjfeattifflre?^°*l ^^^ *^°™" modities determines the direction'^qf in>ei4ilRand production, but not the more or less of what thelat^jreron an average re- ceives'. But it may be well perhaps to give the argument a more practical direction ; and for this purpose I will ask the reader to consider some of the consequences which would follow from this theory of which Mr. Longe has made himself the expos- itor, in connection with the condition of labor in different countries. Supposing it to be true that the amount of wealth spent in the wages of labor is determined by the demand for commodities, then it will follow that, given the demand for commodities, we are given the amount of wealth spent in the wages of labor. The latter will vary with the former, and the Wages-fund will, on this view, bear a constant proportion to the aggregate demand for commodities. Now, as has been ex- plained in a former chapter of this work,* the aggregate de- mand for commodities depends on the aggregate production of commodities. Speaking broadly, all commodities produced under a regime of division of labor are produced in order to be exchanged. The more each man produces, the more he will have to sell, and the more he will be able to buy. It results, therefore, from the theory we are considering, that the aggre- gate wealth appropriated to the use of the laboring population must always bear a constant proportion to the gross produce * See ante, pp. 23-26. 166 THE BATE OF WAGES. of the community. Now, how does this accord with the facts of wages as presented, let us say, in England and in the United States? According to computations made by Mr. Wells,* the United States Commissioner, taken in connection with some made by Mr. Dudley Baxter for this country, it would seem that the annual gross prdduce of the United States per head of the population bears to the annual gross produce of the United Kingdom per head of the population the proportion of $140 to $134. The United Kingdom includes Ireland, which can not but sensibly reduce the average for this countr3^ Omitting Ireland, the annual per capita produce of Great Brit- ain and of the United States would, therefore, according to these computations, be as nearly as possible the same. But the annual gross produce would determine the demand for commodities, and the demand for commodities, according to Mr. Longe, determines the quantity of wealth spent in the wages of labor. From which several positions the conclusion follows that the Wages-fund of Great Britain stands to that of the United States in the same proportion as the population of the former country to the population of the latter. Now, tak- ing this to be so, and assuming further that the proportion of the population working for hire is the same in both countries, then the average rate of wages would for both countries be the same. In point of fact, the working population constitutes a smaller fraction of the entire population in Great Britain than in the United States : it would, therefore, according to this view, bear a less proportion to the Wages -fund here than there. In other words, we are led by " the demand for com- modities" theory, applied to the results ascertained by English and American statisticians, to this singular conclusion, that the rate of wages in Great Britain should be on an average higher than in the United States ! I have taken for comparison Great Britain and the United * "Wells's Report, 1869, p. 13. TBE DEMAND FOB COMMODITIES. 167 States, because the requisite data were here easily obtainable ; but any one who has followed the foregoing argument will perceive that, had the comparison been made between Great Britain and some still more recently settled country — for ex- ample, some of the Western States of North America, or one of our own Australian colonies — the reduclio ad absurdum would have been yet more glaring. In effect, statistical de- tails in such a comparison are superfluous. The broad facts of the case are such as can not be missed. It is evident at a glance that in such countries as our Australian colonies, or as Illinois or California, the amount of the entire annual produc- tion appropriated to the laboring population bears a far larger proportion to the whole than in old countries like Great Brit- ain or France ; that is to say, the Wages-fund in those parts of the world bears a larger proportion to the dema,nd for com- modities than in Western Europe. The demand for commod- ities, therefore, does not determine the Wages-fund. Obser- vation, moreover, of the course of industrial development in such countries exhibits this fact, that, while with the progress of society the amount of wealth which goes to support hired labor pretty constantly increases, the proportion which this bears to the total produce of industry nearly as constantly de- clines — growing smaller as the realization of fortunes enables a larger proportion of the people to retire from active work, and as capital assumes more extensively a fixed form. In a word, the most prominent features in the industrial economy of new, old, and advancing countries absolutely precludes the supposition that the demand for commodities has any such connection with the interests of the laboring population as the doctrine I am now considering assumes. § 8. So far as to Mr. Longe's theory of Wages. I proceed now to state the doctrine of the Wages-fund, as at least I my- self understand it. 168 THE BATE OF WAGES. It will be remembered that in the enunciation which I quoted from Mr. Mill of the wages problem, the Wages-fund is stated to consist of two distinct parts — one, the largest and by much the most important, constituting a portion of the general cap- ital of the country ; while the other is derived from that part of the nation's wealth which goes to support unproductive la- bor, of which Mr. Mill gives as an example the wages of sol- diers and domestic servants. In proceeding to deal with the wages question, it will be convenient to omit for a time all consideration of the latter part : this will be more easily dealt with when we have ascertained the causes which govern the main phenomenon. Eestricting our view then for the present to that portion of the general Wages-fund which goes to support productive la- bor, we have, in the first place, to observe that the hiring of labor for productive purposes is an incident of the investment of capital. A capitalist engages and pays a workman from precisely the same motives which lead him to purchase raw material, a factory, or a machine. In searching, therefore, for the causes which govern the amount of wealth spent in the hiring of labor, we must advert to the considerations which weigh with men in devoting their means to productive invest- ment. Why, for example, does A. B. employ his wealth in productive operations? And why does he employ so much and no more in productive operations ? An adequate answer to these questions will carry us some way toward the goal we have in view. It seems to me that the proper answer is as follows : A. B. invests his wealth productively in order to obtain a profit on the portion of his means so employed ; and he invests so much and no more, because, his total means being what they are, and regard being had on the one hand to his private requirements and taste for indulgence, on the other to his desire to augment his means, coupled with the opportunities afforded him of do- CAUSES OF INVESTMENT. 169 ing SO by making profit, this is the amount which it is suit- able to- his disposition, in the circumstances in which he is placed, so to invest. In other words, we find the amount of A. B.'s investment determined by the following circumstances: First, the amount of his total means ; secondly, his character and disposition as affected by the temptation to immediate en- joyment on the one hand, and by the prospect of future ag- grandizement on the other ; thirdly, the opportunities of mak- ing profit. Alter any of these conditions — his total means, his character, or his opportunities of making profit, and the effect will be an alteration in the amount of his investment. Increase his means, and, other things being the same, he will invest more largely : again, increase the prospect of profit, and, other things being the same, he will invest more largely : lastly, increase the strength of the accumulative principle in his character in rela- tion to the taste for immediate enjoyment, and once more, other things being the same, he will invest more largely : on the other hand, a change in any of these conditions in the opposite direc- tion would lead to his investment being correspondingly con- tracted. Applying these considerations to the case of a community, it seems to me that we are justified in laying down the follow- ing proposition : That, the amount of wealth in a country be- ing given, the proportion of this wealth which shall be invest- ed in industrial operations with a view to profit will depend, first, upon the strength of those qualities in the average char- acter of its inhabitants which lead to productive investment — what Mr. Mill calls " the effective desire of accumulation ;" and secondly, on the opportunities of industrial investment open to the community offering a rate of profit sufficient to call this principle into activity — in a word, on " the extent of the field for investment." Such being the conditions determining the investment of capital, it is plain that, if all capital consisted in wages, or if 170 TEE MATE OF WAGES. wages bore always the same proportion to a given quantity of capital, the problem with which we are immediately concerned would here be solved; and we might refer the phenomenon in question — we may describe it as we please, the extent of the demand for labor or the amount of the Wages-fund — simply and directly to the conditions which have just been stated, viz., in a given state of the national wealth, to the strength of the effective desire for accumulation, taken in connection with the extent of the field for investment. In point of fact, however, wages constitute but a portion of capital, and, what greatly complicates the inquiry, this portion bears no constant relation to the aggregate amount. It therefore still remains for us to determine the circumstances on which depends the distribution of capital between wages and the other elements of which cap- ital consists. Those other elements may be summed up under the heads of " Fixed Capital " and " Eaw Material." Fixed Capital, Raw Material, and Wages-fund, therefore, form the three constitu- ents of Capital, and the problem to be solved is. What are the causes which, in a given field of industrj^, determine the pro- portion in which these three constituents combine? Let us again suppose an individual A. B. contemplating in- vestment ; he has decided how much of his whole means he intends to employ in productive operations, but, this point hav- ing been settled, he has yet to consider in what proportions the amount shall be divided between Fixed Capital, Raw Materi- al, and Wages. What is to prescribe the respective quotas? Manifestly, in the first place, the nature of the industry in which he proposes to embark his capital. Suppose, for exam- ple, his purpo.se is to engage in cotton or woolen manufacture, a very large proportion of his whole capital will assume the form of buildings, machinery, and raw wool or cotton ; that is to say, of fixed capital and raw material, which would leave a correspondingly small proportion available for the payment of ELEMENTS OF CAPITAL. 171 wages. On the other hand, if, with the same capital to invest, he had selected agriculture as the field for its employment, the bulk of his capital would take the form of wages, and fixed capital and raw material would assume a relatively unimpor- tant place in his outlay. It is thus evident that the nature of the industry selected for investment must go a long way in de- termining the proportions in which the capital shall be distrib- uted among the several instruments of production, and, there- fore, must go a long way in determining the proportion which the wages element in that particular capital shall bear to its whole amount. Now the considerations which weigh with an individual capitalist are those which weigh with a community of capitalists ; and we are therefore justified in concluding that the main circumstance governing the proportion which the Wages-fund shall bear to the general capital of a nation is the nature of the national industries. We are justified in concluding that this is the main circum- stance; but a close examination will show that other circum- stances also enter into the conditions which determine the final result. What the nature of the national industries really de- termines is the proportion in which labor shall be combined with the other instruments of production — fixed capital and raw material — in the general industry of a country ; but what we want to know is the place which wages shall hold in this combination. Now the consideration of a simple example will show that, the proportion of labor to the other instruments of production being given, the proportion which wages shall bear to the total capital may vary. Let us suppose a capitalist starting with £10,000. He finds that with £5000 he can buy fixed capital and raw material which will give full employment to 100 competent workmen ; and if we suppose the rate of wages for these workmen to aver- age £50 a year, the payment of their wages at this rate would absorb the rest of his capital, viz., £5000. His entire capital 172 THE BATE OF WAGES. would thus be divided into £5000 for fixed capital and raw material, and £5000 for wages. But now suppose the current rate of wages for such labor as he required to have been £40 instead of £50 a year, he would have been able to procure the 100 workmen which his fixed capital and raw material re- quired for £4000 : £5000 having as before been invested in fixed capital and raw material, he would thus find himself with £1000 of capital still disposable. This we may suppose he would invest in the same business, and it would accordingly be necessary to bring together the instruments of production purchasable for £1000 in the same proportions as before — that is to say, he would have to distribute the £1000 nearly as fol- lows : Fixed capital and raw material (let us say for the sake of round numbers) £550 ; wages £450. His whole capital will now be divided thus : Fixed capital and raw material £5,550 Wages (110 men at £40) 4,450 Total capital £10,000 The proportion between labor, fixed capital, and raw ma- terial would here be the same as before, but whereas in the first case the Wages-fund represented 50 per cent, of his whole capital, it now represents but 44 per cent. It is of course evi- dent that, had I made the opposite supposition, and taken the current rate of wages at £60 instead of £40, it would have been necessary, in order to maintain the due proportion be- tween labor and the other productive instruments, that the wages element should have been increased at the expense of fixed capital and raw material. The distribution of the total capital would then have stood nearly thus : Fixed capital and raw material £4,550 Wages of 90 men at £60 (nearly) 5,450 Total capital £10,000 ELEMENTS OF CAPITAL. I73 In Other w.ords, the Wages-fund would now constitute 54 per cent, of the total investment. These examples show that the nature of the national indus- tries do not determine absolutely the distribution of the na- tional capital among the three leading instruments of produc- tion, but that the result is liable to be modified by the rate of wages which happens to be current. Now, so far as this is the case, it will perhaps strike the reader that our reasoning has conducted us into a vicious circle, inasmuch as, while seeking a solution of the rate of wages in the causes determining the Wages-fund, we have been suddenly confronted with the phe- nomenon itself as one of those causes. A little reflection, how- ever, will show that the circle is apparent merely, and that the grounds of our argument are really independent and distinct. For, whatever be the causes which determine the Wages-fund, the amount of that fund being so determined, the rate of wages is merely the industrial outcome, and I might even say, the concrete expression, of the supply of labor. The modifying circumstance, therefore, in the case, though indicated by the rate of wages, is really the supply of labor ; and our analysis accordingly issues in the following conditions aS the determin- ing causes of the Wages-fund, viz. : the total capital of the country (determined in the manner already explained); the nature of the national industries; and the supply of labor — facts at once distinct, and entirely independent of the subject of our investigation. It would seem, then, that the amount of the Wages-fund (which the reader will be careful to distinguish from the rate of wages) is to some extent affected by the number of compe- tent laborers offering their services, wherever those laborers are employed in conjunction with fixed capital and raw ma- terial. Now it may be worth while to point out the manner in which this influence is exerted. Eeverting to our previous illustrations, it appears that, other things being the same, a rise 174 THE MATE OF WAGES. in the current rate of wages issues in an expansion of the Wages-fund, and, contrariwise, a fall in the current rate in its contraction. But, the rate of wages, other things being the same, varying inversely with the supply of labor, this is equiva- lent to saying that the Wages-fund expands as the supply of labor contracts, and contracts as the supply of labor expands. An unexpected consequence, not, so far as I know, before ad- verted to, results from this play of economic forces, namely, that an increase or diminution in the supply of labor, where it is of a kind to be employed in conjunction with fixed capital and raw material, acts upon the rate of wages with a force more than proportional to the increase or diminution in the sup- ply ; for it tells at the same time upon both the factors on which the result depends, modifying them in opposite direc- tions — the fund undergoing diminution as the number of those who are to share it is increased ; or, on the other hand, ex- panding as the sharers become fewer. This occurs, I say, where labor is of a kind to be employed in conjunction with fixed capital and raw material ; and, it may be added, that the effect would only assume sensible dimensions where those agencies constituted a substantial proportion of the whole capi- tal invested. Indeed it would be a mistake to regard this par- ticular condition — the supply of labor considered as a cause affecting, not the rate of wages, but the aggregate Wages-fund — as under any circumstances more than a subordinate and modifying influence in the case. The point is one of theoretic rather than of practical importance ; and, in considering the variations of the Wages-fund, it will rarely be necessary to take account of more than the two main determining conditions of that phenomenon — the growth or decline of capital, and the nature of the prevailing industries. § 9. It appears, then, that the aggregate amount of wealth appropriated to the laboring population in any country varies, GROWTH OF THE WAaES-FUND. 175 not simply with the progress of the national wealth, nor yet with the progress of the national capital, but with this latter circumstance taken in connection with the character of the na- tional industries, the result being also, within certain narrow limits, modified by the supply of labor. In other, words, it ap- pears that the same amount of capital will yield under different circumstances Wages-funds of different dimensions, and will consequently be capable of supporting populations of different magnitudes. This position finds its illustration and verification in the industrial phenomena of different countries. For ex- ample, it is obvious at a glance that a given amount of capital invested in the Western States of North America supports a larger laboring population than the same amount invested in the New England States; and the reason is plain: the former States are more extensively agricultural than the latter, and consequently employ fixed capital and raw material less ex- tensively in. their staple industries; it follows of course that the proportion of the total investment applicable to the pay- ment of wages is correspondingly greater in those States. Again, a comparison of an average investment in the United States — ^it matters not in what part of them — and in Great Britain would reveal analogous differences. Fixed capital be- ing more largely employed in the industries of Great Britain, a given amount of capital invested in those industries would yield a smaller Wages-fund than the same capital invested in the United States, and consequently would support — allowance made for the different rates of wages in the two countries — a smaller laboring population. Similarly, if, instead of compar- ing different countries, the comparison were made between dif- ferent epochs, we should still find the power of capital to sup- port labor varying with the changes in the character of the in- dustries in which it is employed. And, in connection with this, we may notice what amounts to an economic derivative law in the industrial development of progressive communities. 176 TSE BATE OF WAGES. The modifications -which occur in the distributioa of capital among its several departments as nations advance are by no means fortuitous, but follow on the whole a well-defined course, and move toward a determined goal. In effect, what we find is, a constant growth of the national capital, accompanied with a nearly equally constant decline in the proportion of this cap- ital which goes to support productive labor. This is the inev- itable consequence of the progress of the industrial arts, the effect of which is to cause a steady substitution of the agencies of inanimate nature for the labor of man. In making this remark it is perhaps superfluous to add that it is not to be inferred from the circumstance stated that the progress of those arts is unfavorable to the interests of labor. Even on the lowest and most materialistic view of the interests of la- bor the reverse is the fact; for what industrial progress under the influence of the advancing arts and sciences effects is a diminution, not in the absolute amount of the Wages-fund, but only in the proportion which it bears to the total capital of a country — a diminution which is perfectly compatible with a steadily progressive increase of the fund. One has only in- deed to consider what the Wages-fund of such a country as Great Britain has grown to under a regime of advancing indus- trial art, and reflect on what it would probably now have been had that progress been arrested a century ago, to perceive the utter groundlessness of the notion that industrial art can, in the long run, be antagonistic to labor. Not the less, however, is it indispensable, if we would understand the most salient facts of modern industrial life, to keep constantly in view the tendency of the Wages-fund, with the progress of wealth and art, to lag behind the advances of the other factors of the national capi- tal.* The fact is one of very great significance, and highly de- * These remarks receive a practical illustration from tlis important and suggest- ive article by Professor Pawcett in tlie Fortnightly Review (January, 1874), in SOCIAL CONSEQUENCES. 177 serving the consideration of those who speculate on social sub- jects. For it involves this double consequence bearing on the laws of social growth — a tendency toward a relative increase of the classes not living by hired labor as compared with those who do: and again, a tendency toward increased inequality in the distribution of wealth.* I say it involves these conse- quences as tendencies ; and I may add, that up to the present time those tendencies have in general been very fully realized in the actual experience of the world, and in an eminent degree in the experience of Great Britain. They exist, however, as tendencies only, and may, like other tendencies or laws of na- ture, be counteracted through the influence of tendencies of an opposite kind; in a word, the balance may be redressed by suitable expedients. Though the fund for the remuneration of mere labor, whether skilled or unskilled, must, so long as industry is progressive, ever bear a constantly diminishing pro- portion alike to the growing wealth and growing capital, there is nothing in the nature of things which restricts the laboring population to this fund for their support. In return, indeed, for their mere labor, it is to this that they must look for their sole reward ; but they may help production otherwise than by their labor: they may save, and thus become themselves the owners of capital, and profits may thus be brought to aid the which he calls attention to the slight increase which has occurred in the rate of wages in Great Britain contemporaneously with the large additions recently made to our national wealth. * This latter result can not indeed be said to be necessary ; since it is conceivable that laborers by limiting their numbers might keep the rate of their remuneration on a level with the growing incomes of other classes. To do this, however, two con- ditions would have to be fulfilled : the productiveness of industry would have to increase in a degree sufficient to permit of this high rate of remuneration consist- ently with yielding also a rate of profit high enough to attract capital toward in- vestment ; and secondly, the result would imply such a degree of self-control on the part of the laboring population as, I fear, experience gives us no warrant for expecting. 12 178 TEE HATE OF WAGES. Wages-fund. I merely note this point at present as bearing upon the controversy respecting the future of the laboring classes, reserving the full consideration of the latter question for another place. There are those who regard it as a law of industrial development that capital should ever become more and more aggregated in a few hands, and that, as a conse- quence of this, the position of the laborer in the future must remain substantially what it is at present in the more advanced industrial countries — that of a recipient of wages merely. I do not pretend here to pronounce upon this question — the eco- nomic data for its determination have not yet been fully worked out; but I am justified even here in asserting this much, that the permanent maintenance of a regime such as is contemplated, co-existing with a progressive industry, can only issue in one result — a constant exaggeration of those features already beginning to mark so unpleasantly the aspect of our social state — namely, a harsh separation of classes, combined with those glaring inequalities in the distribution of wealth which most people will agree are among the chief elements of our social instability. § 10. I remarked just now, that under a progressive state of industry, though the proportion of the Wages-fund to the whole capital of a country diminishes, the positive amount of the fund for the most part undergoes increase. It must be confessed, however, that while this represents the ordinary rule, there is nothing strictly necessary in the relation of the phenomena thus presented ; and that instances do occur, and sometimes on a large scale, in which the progress of wealth and industry is accompanied with a positive contraction of the Wages-fund. Such a result happens whenever that process takes place which is described by economists as a conversion of circulating capital into fixed. As Mr. Mill has remarked, the proceeding in question is not INDUSTRIAL CRISES. 179 one wbicli in practice is frequently resorted to; the introduc- tion and extension of fixed capital being, as a general rule, ef- fected through the agency of fresh savings rather than by with- drawal from the support of labor of funds already thus employ- ed. But it is beyond question that such conversions of circu- lating into fixed capital do sometimes occur; and, in this event, it is not less certain that the Wages-fund must, at all events for a time, be curtailed. For the most part, however, it happens that movements of this kind are on a limited scale, and, the re- sulting arrangements always issuing in increased efficiencj' of production (for this is the motive for adopting them), the gaps made in the Wages-fund are quickly filled up ; so that the con- sequences which ensue, though perhaps serious enough, are rarely of large dimensions. I say this is what usually happens when circulating capital is converted into fixed ; but there are times when the process is conducted on something like a na- tional scale, and then it may be productive of even disastrous results. An occasion of this kind, for example, occurred in the industrial history of England during the sixteenth century, when the exchange of a very rude and primitive agriculture for one that might by comparison be called scientific, and more particularlj' an extensive conversion of tillage-lands to pasture, under the influence of causes then affecting her general trade, issued in the remarkable phenomenon of a rapidly growing national capital, with improved industrial processes and ex- tending trade, accompanied by a sudden and portentous de- velopment of pauperism. No doubt the recuperative power of progressive industry told in the long run ; and perhaps be- fore the century was over, or the new Poor Law had well come into operation, the encroachment made on the laborers' division of the national wealth had been more than repaid : but it is nevertheless true that the event amounted to a crisis in the national industry, and was, for a large portion of the people, fraught with disaster and ruin. Something of the same kind IriO THE RATE OF WAGES. has been in progress in our own day in Ireland. A protective Corn Law, combined with the demoralization of the people from political and social causes, had generated an industrial system which could not be permanently sustained. Under the combined influence of free trade and the potato disease this sj's- tem suddenly collapsed, and it became necessary to pass from a crude regime of tillage to one in which capital was extensive- ly converted into fixed and permanent forms. The result has been the introduction of an agriculture suited to the country, and largely carried on by improved modern processes, and a rapid increase in general wealth ; but simultaneously with this a sudden contraction of the Wages-fund, of which the unequiv- ocal evidence is found in a population reduced in a few years from eight to five and a half millions. Occurrences of this kind place it beyond doubt that extensive changes in the character of the industry of a country, even though they be all in the direction of scientific progress, improved processes, and ultimately and even immediately augmented wealth, may nevertheless effect a reduction in the means for supporting- productive labor, and may for a time act disastrously on its interests. § 11. I have now stated the doctrine of the Wages-fund as I understand it, in connection with the general problem of the rate of wages; but before proceeding to trace its bearing upon the relations of capital and labor, and the various practical questions arising therefrom, it will be convenient to pause here for a short time in our development of the general theo- ry, in order to consider the objections which have been urged against the doctrine by Mr. Thornton — -objections which, as I have already informed the reader, have been powerful enough to effect the conversion of Mr. Mill. Mr. Thornton's argu- ment ranges over a considerable portion of his volume, but the gist of it will be found in the following passage : MB. THORNTON'S OBJECTIONS. 181 " If there really were a national fund, the whole of which must neces- sarily be applied to the payment of wages, that fund could be no other than an aggregate of smaller similar funds possessed by the several indi- viduals who composed the employing part of the nation. Does, then, any individual employer possess any such fund ! Is there any specific jjortion of any individual's capital which the owner must necessarily ex- pend upon labor ? Of course every employer possesses a certain amount of money, whether his own or borrowed, out of which all his expenses must be met, if met at all. "With so much of this amount as remains af- ter deduction of what he takes for family and personal expenses, he car- ries on his business — with one portion of that balance providing or keep- ing in repair buildings and machinery, with a second portion procuring materials, with a third hiring labor. But is there any law fixing the amount of his domestic expenditure, and thereby fixing likewise the balance available for his industrial operations ? May he not spend more or less on his family and himself, according to his fancy — in the one case having more, in the other less, left for the conduct of his business ? And of what is left, does he or can he determine beforehand how much shall be laid out on buildings, how much on materials, how much on labor ? May not his outlay on repairs be unexpectedly increased by fire or other accident ? will not his outlay on materials vary with their dearness or cheapness, or with the varying demand for the finished article ? and must not the amount available for wages vary accordingly ? And even though the latter amount were exactly ascertained beforehand, even though he did know to a farthing how much he would be able to spend on labor, would he be bound so to spend the utmost he could afford to spend ? If he could get as much labor as he wanted at a cheap rate, would he voluntarily pay as much for it as he would be compelled to pay if it were dearer ? It sounds like mockery or childishness"to ask these questions, so obvious are the only answers that can possibly be given to them ; yet it is only on the assumption that directly opposite answers must be given that the Wages-fund can for one moment stand. For if in the case of individual employers there be no Wages-funds — no definite or definable portions of their capitals which, and neither more nor less than which, they must severally apjily to the hiring of labor — clearly there can be no aggregate of such funds, clearly tliere can be no national Wages-fund. And be it observed, fixity or definiteness is the very essence of the supposed Wages-fund. jSTo one denies that some amount or other must within any given period be disbursed in the form 182 THE BATE OF WAGES. of wages. The only question is, whether that amount be determinate or indeterminate. If indeterminate, it can not of course be divided, and might as well not exist for any power it possesses of performing the sole function of a Wages-fund, that, viz., of yielding a quotient that would indicate the average rate of wages."* Mr. Thornton, the reader will perceive from this passage, does not deny the existence of a Wages-fund : he admits the legitimacy of contemplating in the aggregate those funds— the wao-es of individual workmen — of which we know the exist- ence in detail ; but he contends that neither the particular sums in detail, nor therefore the aggregate which they compose, are " determinate " — an expression under which he includes a.t once their "predetermination" toward the destination they after- ward receive, and their " limitation " within their actual bounds. It must at once be conceded that, in the sense in which (as ap- pears from this passage as well as from the whole tenor of his argument) Mr. Thornton understands the "predetermination" and "limitation" of the Wages-fund, his position is unassail- able. Undoubtedly " there is no specific portion of any indi- vidual's capital which the owner must necessarily expend upon wages." "There is no law fixing the amount" of any man's " domestic expenditure, and thereby fixing likewise the balance available for industrial operations." Nor is any man "bound to spend," in the payment of labor, "the utmost he can afford to spend." I should have confidently asserted, I will not say that no economist, but that no reasonable being had ever ad- vanced the theory of a Wages-fund in this sense, if it had not been that Mr. Mill had accepted the reasoning I have quoted as a refutation of that theory. f As it is, I can only say that * "Labor, etc.," pp. 84, 85. t Mr. Mill's acceptance of Mr. Thornton's argument on this point is the more perplexing as he has himself, in more than one passage of liis work, strenuously disclaimed that notion of an economic law against which Mr. Thornton's reason- ing is directed, and, on the other hand, asserted the view for which I contend in MB. THORNTON'S OBJECTIONS. 183 this is not the sense in which I have myself understood the doctrine (and I first learned it from Mr. Mill's pages) ; and fur- ther, I must add, that if economic doctrines in general are to be understood in the sense here assigned to the Wages-fund doc- trine — namely, as expressing principles which compel human beings to the adoption of certain courses of conduct in despite of their own inclination and will, there is not a single one with- in the range of economic science that could endure ten minutes' criticism. The doctrine, for example, that the supply of a commodity tends to conform to the quantity demanded at the normal price, is as well established as any principle of Political Economy. How is it proved? B3' showing that, if the supply of the commodity falls short of this quantity, the market price will rise above the normal price, profits on the production will be exceptionally high, and, as a consequence, a larger amount of capital and labor will be "determined" toward the produc- tion; while in the contrary case the "determination" of capi- tal and labor would be in the opposite direction. But if by " determination " of capital is to be understood some force which compels the capitalist irrespective of his own wishes and views of his own interest, the reasoning is manifestly ground- less. Mr. Thornton might say here, quite as truly as in his argument against the Wages-fund, there is no law, physical or legal, there is no moral principle, which compels any capitalist to employ his capital in a branch of production simply because profits in that branch are rising. Again, take the law of rent : howis that law established? By some such reasoning as this, namely, by showing that the competition of farmers for land the text: for example, in the following: "Demand and supply are not physical agencies, which thrust a given amount of wages into a laborer's hand without the participation of his own will and actions. The market rate is not fixed for him by some self-acting instrument, but is the result of bargaining between human be- ings—of what Adam Smith calls ' the higgling of the market.' " (Book v., chap. -, § 5.) 184 THE BATE OF WAGES. will " determine " to the possession of landlords all that profit upon land which is in excess of the ordinary profits upon in- dustry ; while the competition of other occupations with agri- culture will prevent the amount so determined from rising be- yond the limits of the exceptional profit. But what is to pre- vent Mr. Thornton from interposing here the same series of objections he has urged against the Wages-fund? "Eent," he might exclaim, " determined by the law of exceptional prof- it! Is there any specific portion of a farmer's capital which the owner must necessarily expend upon rent? And who can tell beforehand what the amount of his exceptional profit will be? May not his outlay on repairs be unexpectedly increased by flood or other accident? Will not his outlay on materials vary with their dearness or cheapness, or with the varying de- mand for the produce? and must not the amount available for rent vary accordingly ? And even though the amount of exceptional profit were exactly ascertained beforehand, even though the farmer did know to a farthing how much he would be able to pay to the landlord, while reserving average profit to himself, would he be bound so to spend the utmost he could so afford to spend?" And so the theory of rent would collapse, and Mr. Thornton might enjoy an easy triumph over Ricardo and all who have since followed in his wake. In short, it is evident that, if this style of reasoning be legitimate, the whole structure of economic doctrine must inevitably go down. What then is the answer to Mr. Thornton ? Why, I take it, this: that his reasoning from beginning to end proceeds upon a radically erroneous conception of the nature of an eco- nomic law — of what is meant by "predetermination" aiid "limitation" in the sphere of economic action. A "law" in Political Economy does not mean either legal coercion or physical compulsion, or yet moral obligation ; nor does the "determination" expressed in an economic law mean the nec- essary realization of certain resultsindependently of the human MB. THORNTON'S OBJECTIONS. 185 •will. What an economic law asserts is, not that men must do so and so whether they like it or not, but that in given circum- stances they will like to do so and so ; that their self-interest or other feelings will lead them to this result. The predeter- mination in question is of that sort which leads a hungry man to eat his dinner, or an honest man to pay his debts, and de- pends for its fulfillment, not upon external compulsion of any sort, but upon the influence of certain inducements on the will, our knowledge of which enables us to say how in given cir- cumstances a man will act. It is in this sense that, speaking for myself, I understand the "predetermination" of a certain portion of the wealth of a country to the payment of wages. I believe that, in the existing state of the national wealth, the character of Englishmen being what it is, a certain prospect of profit will " determine " a certain proportion of this wealth to productive investment ; that the amount thus " determined " will increase as the field for investment is extended, and that it will not increase beyond what this field can find employ- ment for at that rate of profit which satisfies English commer- cial expectation. Further, I believe that, investment thus tak- ing place, the form which it shall assume will be " determined " by the nature of the national industries — "determined," not under acts of Parliament, or in virtue of any physical law, but through the influence of the investor's interests; while this, the form of the investment, will again " determine " the pro- portion of the whole capital which shall be paid as wages to laborers. It is in this sense I say that I understand the "pre- determination" implied in the Wages-fund doctrine; and against the doctrine so understood I can not find that there is any thing very formidable in Mr. Thornton's criticisms. They are simply beside the mark — at all events, beside my mark. "Capitalists put aside a portion of their means with a de- termination that, whatever happens, they shall be spent in wages!" — The doctrine, as I understand it, makes no such 186 THE BATE OF WAGES. assumption ; nor am I, in holding it, bound to maintain any such absurdity. "Employers are anxious to buy their labor as cheap as they can, to spend as little as possible in wages.'' — No doubt they are ; but while they are anxious to get their labor cheap, they are also anxious to place certain amounts of their wealth at profitable investment ; and, to do this in the most advantageous way, a certain proportion of the sums so invested must go to the payment of wages. I say deliberately " inust " go to the payment of wages, for this is the consequence involved in the doctrine I have endeav- ored to expound. Assuming a certain field for investment, and the prospect of profit in this such as to attract a certain aggregate capital, and assuming the national industries to be of a certain kind, the proportion of this aggregate capital which shall be invested in wages is not a matter within the discre- tion of capitalists, always supposing they desire to obtain the largest practical return upon their outlay. To accomplish this, the instruments of production, labor, fixed capital, and raw material must be brought together in certain proportions — a condition which requires, as I have shown — the supply of la- bor being given — a distribution of the aggregate capital in cer- tain proportions among those instruments. Supposing, now, capitalists to succeed in forcing down the rate of wages below the point at which, having regard to the number of the labor- ing population, the amount, which the fulfillment of this con- dition would assign to the payment of wages, was absorbed — either the capital thus withdrawn from the Wages-fund must remain uninvested and therefore unproductive, or if invested, and not invested in wages, it would take the form of fixed capital or raw material. But by hypothesis the fixed capital and raw material were already in due proportion to the labor force, and they would consequently now be in excess of it. A competition among capitalists for labor would consequently ensue; and what could this end in but a restoration to the MS. THOBNTON'S OBJECTIONS. 187 Wages-fund of the amount withdrawn from it? Mr. Thorn- ton probably would tell me that the amount saved from the payment of wages might, and probably would, be turned to swell the private expenditure of capitalists, who, taking out the results in this form, would simply continue to receive larger profits at the expense of their workmen. No doubt this is a possible contingency in particular cases, but, the char- acter of the wealthy classes remaining on the whole what it is, increased accumulations in other quarters would neutralize ex- ceptional extravagance in some; and larger profits would not be less powerful than before to attract increased investment. In a word, my argument brings me back to the position from which I started, that, the aggregate investment being deter- mined by certain mental and physical conditions, and the na- tional industries being such as they are, there is but one dis- tribution of the capital invested which is consistent with the greatest advantage to the investors. That distribution in- volves a certain proportion spent in the payment of wages, and it is to this result that capitalists, if true to their own interest, must conform their conduct.* * The notion that any portion of the wealth of the country should be " detei'- mined" to the payment of wages would seem also to shock Mr. Longe's sense of economic propriety ; which is strange, seeing that his own doctrine that itis " the demand for commodities which determines the quantity of wealth spent in the payment of wages " plainly involves this consequence. He puts the case of a cap- italist who, by taking advantage of the necessities of his workmen, effects a reduc- tion in their wages, and succeeds in withdrawing so much, call it £1000, from the Wages-fund ; and asks how is the sum, thus withdrawn, to be restored to the fund? On Mr. Longe's principles the answer is simple — "by being spent on com- modities;" for it may be assumed that the sum so Avithdrawn will, in any case, not be hoarded. " But," urges Mr. Longe, "it might be spent on foreign wines, or on a trip to Switzerland ;" the suggestion of course being that in this case the expenditure could do no good to English labor. If so, then we seem to have made a mistake in repealing our protective laws ; nor were protectionists, after all, so very wrong in seeking to encourage native industry by compelling expenditure toward domestic productions. May I venture to remind Mr. Longe that expendi- 188 THE RATE OF WAGES. So far as to one leading objection urged against the Wages- fund doctrine. It is further contended that the doctrine as- sumes the existence of a limitation to the amount of that fund for which there is no warrant in facts. As Mr. Thornton puts it, " may not the capitalist spend more or less on his family and himself according to his fancy — in the one case having more, in the other less, left for the conduct of his business?" The aspect of the question here brought into view involves consid- erations of so much importance that it will be best discussed in a separate chapter. ture on foreign wines and in Swiss travel must and can only be paid for by an ex- port of British productions, and tliat it therefore creates a demand for such pro- ductions, though more cireuitously, quite as certainly as if it toolc a more direct form. The answer, therefore, to the case put by Mr. Longe is easy on his own principles ; and I am disposed to flatter myself that the reader who has gone with me in the foregoing discussion will not have much difficulty in replying to it upon mine. CHAPTER II. DEMAND FOB COMMODITIES — WAGES AND FBICES. § 1. I MUST here depart for a space from the main line of my argument in order to work out a side issue already partial- ly dealt with, over which I think it must be confessed, not- withstanding some considerable discussion alreadj' bestowed upon it, no small amount of obscurity still hangs. I mean the question as to the relation existing between the demand for commodities and the interests of those who live by labor. We have already seen that this relation is not what it is commonly supposed to be : the demand for commodities does not deter- mine the quantity of wealth spent in the wages of labor. Still, it is not to be denied that the agency in question stands in in- timate relation with the wealth thus expended, or, as I call it, the Wages-fund ; and my purpose now is to attempt some more precise determination of the character and the extent of the connection than has yet been given by writers on economic science. With a view to this it will be convenient to distinguish two conditions of demand for commodities: (1) Where, the aggre- gate expenditure on commodities remaining the same, a change takes place in its direction, as, for example, when a country passes from a state of peace to one of war, or when any con- siderable change occurs in the tastes or habits of the people leading to a diversion of expenditure from certain classes of objects to others; and (2) where, as the consequence of a posi- tive growth of purchasing power in a community, the aggre- gate demand for commodities undergoes increase. 190 TBE DEMAND FOB COMMODITIES. § 2. I. That a change in the mode in which the general in- come of a country is spent, if occun-ing on a considerable scale, is capable of affecting the condition of labor in different branches of industry, is extremely obvious; nor can there be much dif- ficulty as to the manner in which the results are brought about. A change of fashion, for example, taking place, certain com- modities are brought into increased demand, while the demand for others declines. The productive and distributive arrange- ments of the country iiaving been made with a view to a dif- ferent state of the public requirements, the supply of the for- mer articles will be insufficient, and they will therefore rise in price ; while the supply of the latter will be in excess, and they will fall. Bat, as I have pointed out, the price of the product is the fund from which the remuneration of capital and labor — viewing production as a continuous act — is derived ; and this fund has now been increased in certain branches of industry and curtailed in others. It follows that capital- or labor, or both, will receive in the former employments more, and in the latter less, than average rewards; and this state of remunera- tion will continue until, by increasing the supply of the one sort of products and reducing that of the other, prices are re- stored to their former level — a consummation which will only be accomplished when capital and labor in the industries affect- ed havebeen re-adjusted to meet the altered conditions of the public demand. The immediate result will thus be, as regards such industries, a change in relative wages or profits, or in both. In point of fact, as we shall hereafter see, the effect is generally divided between both branches of remuneration, and for the present I stall assume that this is the case. Where, however, competition among workmen is effective, such a change can not be permanent: it will only last until the labor force of the country has adapted itself to the altered conditions of the market. So soon as this is accomplished, prices, profits, and wages will return to their former condition. EFFECT OX RELATIVE WAGES. 191 This is what will happen where competition is really effect- ive. But we have seen that competition in the article of la- bor is not effective throughout the entire field of industry in a country like this. Certain industrial circles or groups exist, the workmen composing each of which, while competing among themselves, are, from social circumstances, excluded from effect- ive competition with the workmen of different groups ; with this result, that the relative value of the products of such non- competing groups are determined, not by cost of production, but by reciprocal demand. Now, where this is the case, a change in the mode of expending the general income of a community may, under certain circumstances, be attended with more than temporary consequences. For, supposing the change in expenditure to involve a transfer of demand from the products of one of those non-competing industrial groups to those of another, the result in the first instance would be the same as in other cases; namely, an advance in the rates of re- muneration for laborers and capitalists within the group profit- ing by the enlarged demand, accompanied by a corresponding fall in the other group. But this would not be followed in the present instance by the same consequences as in the case in which effective competition prevailed. Capital, indeed, would still move freely to the more lucrative occupations; but labor would not follo;w, or would follow in inadequate proportions; and the equalization of profits would be effected, not by a re- duction of prices, but by an advance of wages. To restore the prices of the commodities affected by the change in demand to their former relative level, it would be necessary to adjust the supply of these commodities to the altered conditions of de- mand ; and to do this it would be necessary to distribute the labor force of the country in conformity with the altered re- quirements. But this is just what, under the circumstances we are supposing, it is not possible to do. The occurrence, therefore, would issue in an advance at once in the price of the 192 THE DEMAND FOB COMMODITIES. products falling under the enlarged demand, and in the wages of the workmen engaged in their production, while profits, after some fluctuation, would return to their former state; and, on the other hand, there would be an equivalent decline in prices and wages in the branches of industry from which the demand had been withdrawn, and these results .would be definitive — that is to say, they would continue until social prog- ress had removed the barriers which interfered with industrial competition, or until the altered condition of the workmen in the different industrial groups should have acted on the growth of population within the groups. In this way, then, a mere change in the direction of national expenditure may issue in permanent effects in the relative remuneration of laborers. It need scarcely be remarked that in occurrences of this na- ture, whether the results are temporary or permanent, no ad- dition would be made to the aggregate Wages-fund, nor there- fore to the well-being of the laboring population as a whole.* The effects would be limited to a mere transference of wealth from certain groups of workmen to others, so that the gains would always be compensated by corresponding losses. The former might indeed be sometimes concentrated and the latter diffused, and the gains might in consequence be seen and the losses not seen ; or the contrary result might happen. But, from the nature of the case, there could be no clear gain : if Peter were enriched, there would always be some Paul at whose expense it was done.f * The tendency indeed is the othev way ; since a portion of the products of in- dustry having, in consequence of the change in the public tastes or requirements, been deprived of their power of satisfying human wants, a certain amount of pro- ductive effort would have been wasted,' and consequently the aggregate wealth must for a time have suffered diminution. The loss, however, would not necessa- rily be shown in the average rates of wages or profits (measured in money, which I suppose constant in value), but would be realized by the public at large, includ- ing capitalists and laborers, in their capacity of consumers. t In theoretical strictness, this position needs qualification. It would only be IN THE INTERNATIONAL SPHERE. 193 And what may happen to a particular industrial group in its relation to other industrial groups in the community of which they form parts, may happen equally, and through the action of precisely the same causes, to an entire community in its relation to other communities in the larger society of com- mercial nations. For, as has been already pointed out, inde- pendent nations occupy, as regards the circumstance of indus- trial competition, a position entirely analogous to that of the industrial groups which we have been contemplating. Labor passes from country to country, indeed, with even greater diffi- culty than from the less to the more highly skilled industries within the same country ; and the consequence is that changes in the international demand for commodities are even more -likely to issue in permanent effects on the rates of wages in different countries than similar changes in the domestic demand to produce permanent consequences in the internal rates. Thus any circumstance which should turn any consid- erable portion of the general purchasing power of commercial nations from English toward French productions, or vice, versa, would have the effect of enhancing in France and depreciating in England, or vich versa, the general value of products. The strictly true, if the Wages-fund bore always the same proportion to the capital employed in pi'oduction, which is not the fact. Supposing, e. g., expenditure were largely directed from clothing to food, and that in consequence capital were transferred from manufactures to agriculture, inasmuch as a given amount of cap- ital employed in agriculture will in general contain a larger element of Wages- fund than the same amount of capital employed in manufactures (owing to the larger use of fixed capital in the latter case), it follows that a substitution of a de- mand for food for a demand for clothes would in this case issue in an increase of the aggregate Wages-fund ; as a substitution in the contrary sense would have the opposite effect. A change of this kind, however, occurring in Great Biitain, would not probably be attended with any such consequences, because it is not probable that it woiild lead to any transference of capital to agriculture. The ad- ditional food would be obtained from foreign countries through an extension of our exports. 13 194 THE BEMAXD FOB COMMODITIES. wealth of one country would be increased, that of the other diminished, and the results just traced would be realized on an international scale. Here, however, as in the former case, although the laboring classes of .an entire community might be benefited, yet, taking an international or cosmopolitan view, there would be no clear gain for the interests of labor. It would be merely so much withdrawn from industrial well- being in one country in order to be added to the same cause in another. § 3. II. Such changes in the demand for commodities are ' in the nature of mere diversions of purchasing power, where the aggregate amount remains the same. But the aggregate purchasing power of a community, or of the world, may ex- perience increase, and, in fact, is pretty constantly increasing; and we have now to consider what may be the effect on the Wages-fund of an increased demand for commodities aris- ing under this state of things. Now here it is most impor- tant to observe that the increased demand for commodities is a mere incident in the general conditions which the as- sumed case supposes. An increase in the aggregate demand for commodities, resting on a larger aggregate of purchas- ing power — putting aside the case of a mere inflation of cred- it unsustained by any basis of real wealth — means an in- creased production of wealth ; and implies, therefore, a corre- sponding increase in the aggregate supply of commodities. Supply and Demand, in short, considered as aggregates, are, as I have already more than once observed, the reciprocals of each other, and in effect the opposite faces of the same facts. An article is produced and is offered in the market : it is now sup- ply, but the possession of that article confers upon the owner a purchasing power, and that power being exercised, the arti- cle becomes a source of demand ; nor is there any other source from which demand can spring. Demand, as an aggregate, GROWS AS WEALTH INCREASES. 195 can not increase without supply, nor supply without demand. This is fundamental, the direct consequence of industry carried on upon the principle of division of labor. But, this being so, we are led to ask, what is the significance of the question which has been proposed? Suppose the Wages-fund to in- crease under the circumstances imagined ; and suppose further, that, in every instance, the increase is found to be connected with a demand for commodities — what then ? Have we sound- ed the problem when we attribute the result to the demand for commodities? Or rather, is it not very evident that, in offer- ing this as a solution, we are confounding the mechanism by which certain results are brought about with the motive forces which work through this mechanism. The upward and down- ward movements of the piston of a steam-engine are invariably preceded by certain movements of the valves which admit the steam alternately above and below it. As the action of the valves becomes more rapid, the movements of the piston be- come more rapid, and if the former ceases, the engine stops. Yet it will scarcely be maintained that the motion of the steam-engine is explained by referring it to the action of the steam-valves. This, however, is precisely the sort of explana- tion that satisfies those persons who undertake to explain an increase of wealth by reference to the demand for commodities. They observe, for example, a sudden increase of prosperity in some branch of industry, and they perceive that this has been preceded by an increased demand for the products of that in- dustry. They perceive also, that the increased prosperity of this industry will extend itself to others through the medium of a demand for products; and from these again to others, in a still widening circle. Further they perceive, or at least, if they carry their study of the problem so far, they may perceive, that, when the supply of each commodity has been brought up to the enlarged demand for it, the returns on the industry de- cline to their normal level; and again, that, where the exten- 196 THE DEMAND FOB COMMODITIES. sion of supply is carried beyond this point, and demand falls short, the gains are converted into losses. Trading gains are thus found in every instance to be associated with a demand for commodities, and trading losses with a failure of demand; and our philosophers, struck with the coincidence, exclaim "£iipj)k-a!" and exultingly produce "the demand for commodi- ties" as the key to the industrial problem. It never occurs to them to inquire what set the economic valves in motion, or to reflect that the increased demand for commodities is itself a phenomenon requiring explanation ; but having traced the in- dustrial movements up to the valves of supply and demand, they consider their task accomplished, and all searching after remoter causes as supererogatory, if not profane. The real nature of the connection between the demand for commodities and the progress of industrial well-being is, after, all, not mysterious — at least for any one who bears in mind the elementary truth that our industrial system is founded upon division of labor. It results from this, that every in- crease of wealth implies an increase of products to be ex- changed — an increase, therefore, at once of demand and of sup- ply ; and it results also from this — seeing that the satisfaction of reciprocal needs is the end and purpose of the system — that a demand for a producer's or a dealer's commodities must al- ways be a condition precedent to the realization of his gains. This is the real nature of the connection ; which, though it im- plies a constant correspondence between the aggregate income of a country and the aggregate demand for commodities with- in that country, does not imply that the latter phenomenon is the cause of the former ; nor that any particular branch of the aggregate income, such as that which s.upports the laboring population, must increase pari passu with the increase of the whole, or with that of the aggregate demand for commodities. If this were so, as the same argument would apply equally to all other branches of the aggregate income, it would follow GROWS AS WEALTH INCREASES. 197 that the several constituent parts, into which the income of ev- ery community resolves itself, should always bear the same proportion to each other, and that, for example, wages, prof- its, and rent should always preserve the same relative mag- nitude. This ought to be a sufficient redudio ad absurdum of the doctrine. But I have already given direct proof of its fallacy. Of the well-being which results from a growth of national wealth, there is, however, one element which, though not prop- erly attributable to the increased demand for commodities, yet connects itself with this agency in a somewhat special and pe- culiar way. Adam Smith, in a well-known passage, has re- marked that the division of labor is limited by the extent of the market, and it is obvious that, not merely division of labor, but the use of machinery, is limited by this condition. Pro- duction, universally in manufacturing industry, and to some extent in agriculture, must be carried on upon a certain scale of magnitude before labor can be duly organized, and the most efficient appliances be brought into operation ; .but production on this scale will not be profitable unless the demand for the commodity at the normal price be sufficiently great to take off the whole supply. Where, therefore, the scale of production has not already attained the maximum of efficiency, an en- larged demand for commodities, by permitting its extension, may lead to a more efficient organization of productive forces, and thus accelerate the growth of wealth. This consequence, indeed, has no special connection with the remuneration of la- borers, any more than with that of any other industrial class. But it at lea,st favors, as every thing that tends to increase wealth and render industry more productive must favor, the growth of the Wages-fund. Even here, however, the attribu- tion of the result to the demand for commodities fails to set the phenomenon in its true light ; while this mode of stating the case is open to the objection of countenancing the notion 198 TSE DEMAND FOR COMMODITIES. that the demand for commodities may increase independently of the supply — a notion, as I have said, at the bottom of nearly all the confusion of thought that prevails on this subject. The fact only receives its adequate explanation when it is referred, neither to demand nor to supply, but to that extension of the field for the interchange of products incident to an increasing production of wealth, which leads to an augmentation at once of demand and of supply. In the remarks just made I have had in view the effect of an increase in the demand for commodities upon the condition of the laboring population as a whole. I have not considered its effect upon relative wages. But it is evident that what has been already said upon this aspect of the case in connec- tion with diversions of demand will apply here, with this dif- ference, that the changes in relative wages which may result from an increase in aggregate demand will in general be in the nature of different degrees of advance, and will not necessarily, or in fact generally, issue in the positive depression of wages in any department of trade. According as the new demand takes one direction or another, certain industries will gain more or less largely than others ; and the capital of the coun- try will be distributed to meet this state of things; but as, in the case we are now supposing, the aggregate capital of the country would almost certainly increase — whether in propor- tion to the increase in the aggregate demand for commodities or not would depend upon the general conditions affecting in- vestment — the larger application of it to particular industries would not necessarily imply any withdrawal of it from others. Such changes, therefore, in relative wages as might occur would generally be in the nature of different degrees of advance ; and these relative results would, as in the case of diversions of de- mand, be temporary merely or permanent, according as there was or was not an effective competition among the workmen in the industries concerned. SUMMARY OF SESULTS. 199 § 4. Summing up the results of this discussion, we may lay down the following propositions : I. Where the influence exerted by the demand for com- modities arises, not from an increase in its aggregate amount, but from a change in its direction, the effect is limited to a change in the distribution of the Wages-fund, without affect- ing the aggregate amount of wealth placed at the disposal of labor. II. Such changes in the distribution of the Wages-fund are attended with changes in the relative rates of remuneration in different branches of industry, leading to a rise in some and a fall in others; and those changes may or may not be perma- nent, according as labor is free or not to move between the oc- cupations affected. Where competition among workmen is effective, the relative rates will after a little time be restored to their former level; but, where competition is not effective, the changes which take place become definitive — that is to say, will continue so long as social circumstances remain the same and the altered conditions of remuneration in the several in- dustrial groups do not operate to disturb the relation of popu- lation to capital within those groups. III. The influence thus exerted by changes in the demand for commodities may be operative on an international scale, and may thus affect the average level of wages throughout an entire community ; the gain, however, to the country profiting by the movement being always compensated by a correspond- ing loss incurred by some other country or countries. IV. When the change in the demand for commodities is in the nature of an increase in its aggregate amount, arising from a growth of general wealth, the increase of demand is here an accompaniment of conditions which are favorable to the growth of the Wages-fund ; but its connection with the consequences that ensue is not that of a causal kind : it is merely an inci- dent of the industrial mechanism by which, under a system of 200 TEE DEMAND FOB COMMODITIES. division of labor, the results of increased production are real- ized by individuals and classes. V. Such an increase in the aggregate demand for commodi- ties may, however, produce changes in the relative remunera- tion of labor, analogous to those produced by changes in the direction of demand — changes which, as in the former case, will be temporary or permanent according as the competition among the workmen concerned is effective or not. § 5. The point of view which we have now reached will en- able us, I think, to set in a somewhat clearer light than has hitherto been done a problem of some intricacy — the nature of the relation between wages and prices. The doctrine laid down upon this subject in the best treatises of Political Econ- omy is contained in two propositions to the effect, first, that general wages (understanding by this general real wages, the real remuneration received by the workmen) and general prices have no necessary connection. High wages, we are told, do not make high prices, any more than high prices make high wages. And, secondly, that when the wages of any class of workmen are exceptionally high or low — that is to say, either above or below the rate prevailing in other occupations, allow- ance being made for the special circumstances of each case — then they do affect prices. Apparently it is not considered that in any ease prices may affect wages. The first of these propositions I hold to be indisputably sound and quite fundamental. It is scarcely possible indeed that any one reflecting on the elementary conditions of human well-being should hesitate to admit its truth. For to suppose that the real wages of labor — the food, clothing, lodging, and other comforts and conveniences which go to form the remu- neration of industry— have any necessary connection with the general range of prices, is to suppose that the well-being of the mass of mankind is linked to the abundance or scarcity of the INCOMPLETE THEORIES. 201 particular substance which happens to form the material of money ; nay, if the position taken be that money, wages, and prices must, as general facts, fluctuate together, it is to suppose, not only that the condition of the immense majority of human beings is determined by this purely artificial circumstance, but also that it is fixed and unchangeable; since there could man- ifestly be no improvement in the laborer's condition if every augmentation of the money paid him was attended with a cor- responding diminution of its purchasing power. The first of the propositions laid down, therefore, must be taken as incon- trovertible; and yet perhaps there are few statements in eco- nomic science that are more apt to strike an outsider as par- adoxical. It would, on the contrar3', be held by those who only look at the phenomena from the practical stand-point that wages and prices are, as a general rule, strictly connected ; that high wages make high prices, and high prices high wages ; a view in support of which they would confidently appeal to experience, and might easily adduce facts which, at all events, the current theory, as it stands, wholly fails to explain. In short, there is here a conflict between the conclusions of theory and the generalizations of practical observers. Now where this happens, we may pretty confidently assume, even though, as in the case we are considering, the popular inductions can be shown to be erroneous and even absurd, that the theory also is in fault. It will in general at best be incomplete; and I think it will not be difficult to show that this is so in the pres- ent instance. The economic doctrine as to the relation between wages and prices, as commonly set forth, seems to be defective in two points. First, it fails to recognize, or at all events to take due account of the fact, that changes in general wages or prices never take place ^er saltum; that the general result is always reached by a succession of partial movements, usually extend- ing over a considerable period of time. And, secondly, the 202 THE DEMAND FOB COMMODITIES. recognition given to the connection between prices and wages is quite inadequate. According to the current doctrine, prices may be effected by wages, where wages in particular trades are exceptionally high or low: this is the sole relation ac- knowledged to subsist between the phenomena; and the lan- guage suggests that the connection in this case is abnormal. ISTow, in the first place, it' is not true that, where wages and prices vary together, wages are always the cause and prices the effect. In point of fact, the rise or fall of price more fre- quently precedes than follows that of wages. The most usual order of occurrence would probably be — a rise or fall of price ; then a movement of capital toward or from the trade ; and lastly an advance or fall of wages.* Instead of prices rising, in order to allow capital the current profit on a production in ivhich wages have already risen (which is the usual way of put- ting the case),f the more common event is — wages for a time quiescent, until the exceptionally high profits of capitalists, due to a previous rise of price, attract new capital to the trade ; then competition for labor, issuing in an advance of wages and a * Nearly such has heen the order of proceedings in the recent movements in the iron and coal trades. "It is clearly shown,'' says the Select Committee on Coal (p. xi. of their Report) "that the real order of events has been the rise in the price of iron, the rise in the price of coal, and the rise in the rate of vrages." I say " nearly such," because in this case the movement of capital toward the af- fected trades did not precede the advance of wages ; the two latter stages of the process having been accelerated, and made to synchronize, by the action of strikes. t For example, Professor Fawcett writes: "It frequently happens that the wages of the laborers employed in the manufacture of a particular commoditv advance as the demand for the commodity increases. If this occurs, these par- ticular manufactured goods will rise in price, in order that the employer may be compensated for the higher wages he is now obliged to pay" ("Manual of Po- litical Economy," p. 290). That is to say, the increased demand for the com- modity will cause an advance in the wages of the laborers who produce it before producing any effect upon its price. I confess that appears to me to be a scarce- ly possible occurrence : at least, I can not but regard it as an inversion of the usual order of events. INCOMPLETE THEORIES. 203 fall of profits to the current level. Nor is the close corre- spondence and mutual interaction of the phenomena in any sense abnormal or exceptional : it may, on the contrary, be said to be the rule ; while the case in which they diverge or move independently of each other is the exception. The act- ual state of this portion of economic theory, therefore, however irrefragable so far as it goes, is plainly inadequate ; failing as it does to elucidate many familiar phenomena of wages and prices ; and the purpose of the remaining portion of this chap- ter will be to supplement, as far as seems needful, existing de- ficiencies in this respect. § 6. And here I must premise by observing that the relation which it is proposed to examine is that between prices and wages measured in money, not that between prices and real wages; a remark which needs to be supplemented by an- other, viz., that it is not to be assumed on this account, that the real interest of the laborer is not involved in the discus- sion. A parallel movement between wages and prices is im- material where it is general, where all wages and all prices are affected at the same time and in the same degree. But, as I have already observed, this is what never happens. The changes which occur in prices and wages are always confined, for a period longer or shorter, according to circumstances, to particular branches of trade ; and where this is so, a change in money wages will generally* involve a change, though not necessarily a proportional change, in real wages too; since, owing to the circumstance that the movement is not general, it will place the recipients in a better or a worse position (as the case may be) in reference to all commodities of which the prices remain at their former level. Where in one or more * Not necessarily always — e. g., if the things which did not rise or fall were commodities only consumed by the rich, the laborer would be none the bettei- or worse for the change. 204 THE DEMAND FOB COMMODITIES. trades wages and prices advance or fall equally, the workmen in the trades thus affected will neither gain nor lose so far as they consume their own productions; but they will gain or lose to the full extent of the advance or fall in their wages so far as they consume the productions of other trades. So much being premised, I proceed now to the consideration of our problem. It has been already shown that a change in the demand for commodities, proceeding from a diversion of expenditure from its ordinary course, may produce a change in relative wages, raising the rate in some branches of industry and lowering it in others; and, further, that occurring on an international scale, the same circumstance may affect the rate of wages throughout an entire community. Now in all such cases — and they com- prise a large proportion of all fluctuations in wages — the result, if not brought about through an action on prices, at least coin- cides with an action on prices: the two phenomena move al- ways in the same direction, and generally in parallel lines. The reasons for this have been already partially set forth, and will be presently more fully stated. But, again, not in such cases only, but, with a single important exception to be present- ly noticed, in all considerable movements of prices and wages, if not a strict parallelism, at least a general correspondence be- tween the phenomena of prices and wages will be found to ob- tain. An advance or fall of prices in any branch of production, if sustained for any considerable time, will, pretty certainly, be followed by an advance or fall of wages in the same industries; as an advance or fall of wages will with equal certaintj^ be fol- lowed by an advance or fall of prices. In order to exhibit the grounds of this statement, it will be desirable to consider the several sets of conditions (irrespective of that already referred to which consists in a change in the demand for commodities) under which important alterations in the rate of wages may take place. In what I am about to say I shall confine my at- COBBESPONDING MOVEMEXTS. 205 tention chiefly to the case of an advance of wages ; but it will be obvious that precisely analogous considerations apply to that of a fall. § 7. "We may take then, first, the case of a new country, in which the rate of profit is still considerably above the p'ractical minimum ; in which, consequently, wages may rise at the ex- pense of profits, and therefore without any increase in the pro- ductiveness of industry ; and we will suppose that the advance is occasioned by a growth of capital more rapid than that of population. The advance of wages which would occur under such circumstances would not be a mere relative movement — an advance in some industries balanced by an equivalent fall in others, such as occurs under the action of a demand for commodities, but an advance unaccompanied by any fall, and implying therefore a rise of the average rate. Even here, how- ever, though the movement might be ultimately general, it would still proceed by partial and limited steps. The new capital would not be distributed indifferently over all industries, but would be determined toward the particular industries in which at the moment there was the best prospect of an en- larged sale for products; and it would be in those industries that wages would first rise. But these would be the industries in which the products were selling above the normal rates. In other words, high wages, if not produced by high prices, would at least attend on high prices. And this coincidence would not be confined to the first steps, but would be maintained throughout the whole course of the ascending movement; which would be realized in the several industries in the order in which the prices of their products ranged above the normal level. It is true, indeed, the advance in wages and prices would not necessarily be a proportional advance. Wages might advance more than prices, or prices more than wages. And it is also true that the correspondence, such as it was. 206 WAGES AND PRICES. might not be of long continuance; since the increased produc- tion would sooner or later bring down the abnormally raised prices, while (profits not being at the minimum) the advance in wages might be maintained. But, conceding all this, the correspondence would still be generally maintained at all events while the movement was in progress ; while it is further to be considered that, as the case is that of a normal growth of capi- tal, unaccelerated by any important improvements in produc- tion, it is probable that population, under the stimulus of its bettered condition, would speedily overtake the increase of capital, in which event wages would subside to their former level ; and, in subsiding, would again follow the course indi- cated by prices, falling first in those industries in which prices were lowest. On the whole, then, in this case, though I do not pretend to say that the parallelism would be exact, and though it is possible the ultimate result might be a definitive diver- gence of the two phenomena; still, speaking broadly, we may say that a general correspondence between prices and wages would be maintained, a correspondence quite sufficient to ac- count for the popular impression. § 8. Let us now consider another case : an advance in wages arising under a growth of wealth due either to improved in- dustrial processes, or to an extension of foreign trade. The latter cause, as I have already pointed out, would operate al- ways through a demand for commodities, and the advance of wages would therefore in this case be always preceded or at- tended by an advance of prices — not indeed, it must always be remembered, a general advance of prices, but an advance in the particular industries affected by the extension of for- eign trade. But, where the growth of capital proceeded from improved industrial processes, the course of things would be somewhat different. This is the case which offers the most striking exception to the general correspondence between ADVANCE IN PRICES. 207 wages and prices; for here, while wages would rise, prices in the industries profiting by the improved processes would fall. Nevertheless, though the rule would fail in the instance of those industries, it would receive abundant illustration from the accompanying phenomena. For one result of the cheap- ness effected in certain products would be to leave a larger amount of purchasing power available for expenditure in other directions. Hence would arise an increased demand for the commodities of other industries, which would be followed by an advance in their prices, by a larger application of capital to their production, and finally by a rise in the wages of the pro- ducers. The advance in prices would not indeed in this case (assuming the value of money to remain constant) be perma- nently maintained, at least where the competition among work- men was effective ; but no more — profits being at the practical minimum- — would the advance in money wages; and the im- provement in the real wages of laborers, so far as it was per- nanently realized, would be only in proportion to the cheap- ening of products. On the other hand, where circumstances had given a virtual monopoly to any particular class of work- men, money wages and prices alike, as I have already shown, would remain permanently above the normal level ; and such workmen would be enriched by a double process — they would receive larger money returns for their own labor, and would obtain the products of other industries at a reduced price. In this case also, then, though in certain branches of production there would be a marked divergence between wages and prices, in the great majority of industries the two phenomena would fluctuate together. § 9. One case still remains to be considered, and it deserves our attention the more, as the influence which it exhibits is one now in constant operation — I mean the effects produced on wages and prices by an increased supply of the precious 208 WAGES AND PBICEH. metals, and a consequent depreciation of money. As the case is ordinarily represented, a depreciation of money takes effect in a uniform and simultaneous advance of all wages and prices ; a state of things which would leave the real well-being of the several classes of society substantially unaffected ; each person receiving a larger sum of money, and paying away a propor- tionally larger sum, in every transaction. But such a state- ment, though it expresses truly enough the final result of an increase of money, after the disturbances it creates have found their due correction — a result which it may take perhaps half a century to accomplish — yet, as an exposition of the actual phenomena which it purports to describe, must be pronounced to be absolutely erroneous. The supposition that wages and prices advanced pan passu over the whole area of productive industry is no more true where an increase of money is con- cerned than in any other case. The new money can only pro- duee its effects by being made the instrument of demand ; and the demand is not distributed indifferently over commodities in general, but is directed toward particular classes of commod- ities according to the needs and tastes of its possessors. What happens, therefore, in this case is what happens in all others. Certain commodities rise in price first ; these are followed by others, and these again by others, the interval between the sev- eral .steps being often of considerable duration; and the ad- vance in prices is followed by au advance of wages. What chiefly distinguishes this case from those previously adverted to is, first, that the movement ultimately extends over the whole area of industry, embracing all occupations; and, secondly, that, though the prices of some commodities may temporarily drop from overproduction, and with them the wages of the producers the normal level of both wages and prices is permanently raised.* * I say the "normal," not the actual, level; for prices might be actually lower than formerly, yet if production had been cheapened by improved processes in a still greater degree, the lower actual price would indicate n higher normal price. CONNECTING PRINCIPLES. 209 The result of our examination, then, has been to show a very intimate relation subsisting between wages and prices. The movements indeed are not always in the nature of striatly parallel movements ; but they are always in the same direc- tion, and are manifestly under the attraction of some common influence. Nor can there be much difficulty in determining what that influence is. As I have already frequently remark- ed, the real source of the remuneration of producers, looking at production as a continuous act, is the value of their prod- ucts. Money wages and profits, therefore, as an aggregate, must vary in each branch of trade with the sum representing the aggregate products proceeding from the industry of the producers in that trade; or (assuming the efficiency of indus- try in the trade to remain constant)* with the prices of the specific commodiiies which constitute those products. If wages, therefore, do not rise or fall strictly in proportion to the money value of the aggregate products, or (in the absence of changes in productive power) to the prices of the specific commodities, it can only be because a larger share of the re- sult has fallen to profits, whether in the form of loss or gain. But profits will not remain permanently in any branch of trade above or below the normal level ; and the competition of capitalists will result either in lowering prices or raising wages, or, mutatis mutandis, in raising prices or lowering wages. In any case, wages and prices will gravitate toward each other. Where, indeed, prices have been reduced through improve- ments in production, the result will follow, not the variations in the price of the specific commodity, but those in the money * The reader will note the reason for this qualification. The price of the com- modity may rise or fall ; but, if it only vises or falls in proportion to the cost of production, the money value of the product proceeding from a given exertion of industry will remain the same. It is only on the supposition that the productive- ness of industry remains constant, that the price of the specific commodity will vary with the money value of the product. 14 ■210 WAGES AND PSICES. value of the aggregate product. This latter will be larger in proportion as industry is more productive; but the specific price falling with the cost, the money returns divisible among the producers will be the same as before;* and the ultimate gain for them will be realized, not in an increase of either wages or profits (measured in money), but in the lowered price of the article they produce. There is thus a real and funda- mental connection between money wages and prices. Yet I conceive it would be incorrect to describe either phenomenon as the cause or the effect of the other :-f- they are rather co-or- dinate results of a common cause — that cause being the in- fluence, whatever it may happen to be, which determines the products of a particular industry to exchange for those of others on more or less favorable terms than had previously obtained. § 10. One point in connection with the problem we are con- sidering remains still to be cleared up. It has been strongly asserted that there is absolutely no necessary connection be- tween the high or low range of general prices and the real well-being of workmen : that high general wages do not make * I assume for convenience that the demand for the article would increase in proportion to the fall in the price. There is, of course, no necessity that this should happen ; but on any other supposition, with regard to the effect of the fall of price upon demand, the argument, though a little more complicated, would be equally valid. t In the cases which I have examined, the advance or fall in price vi-onld almost always precede the advance or fall in wages ; but it is quite possible that the change in wages should occur first, as happens, for example, when laborers by » strike compel an advance in wages, for which capitalists are led afterward to in- demnify themselves by putting an increased price upon their commodity — an ex- pedient which, it must be carefully borne in mind, is only possible when the cir- cumstances of the trade or the conditions of production are such as would in any case, after a time, lead to the same result, and probably by the more usual process in which the rise in prices precedes the rise in wages. MONETARY PARADOX. 211 high general prices, nor high general prices high general wages (understanding wages here to mean the real remunera- tion of the laborer) ; and yet it has appeared from our investi- gation that money wages stand in intimate relation to prices, to a very great extent fluctuating with them ; while it has been also pointed out that changes in money wages are scarce- ly ever merely nominal, but almost always entail a real im- provement or deterioration of the workman's condition. These two positions, it is possible, may seem contradictory to some people ; and it will therefore be desirable to look a little more closely than we have yet done into the reciprocal action of the several phenomena. For this purpose I will consider briefly the case in which the supposed discrepancy assumes its most prominent shape — that, namely, in which a rise of wages and prices results from an increase of money. To put the supposed contradiction in its strongest form — what results in wages and prices as the final outcome, from an increase of money, is a regime of higher nominal values in which all wages and all prices have risen in an equal degree ; in which, therefore, it is evident, no one's real position, as re- gards command over the necessaries and comforts of life, is substantially altered: and yet,.in each step toward the higher nominal level, the particular advance will have brought to the workmen whose wages are affected a distinct gain in real well- being. The final outcome of a process, every step of which is productive of positive effects, will thus be purely negative. The thing to be shown is, the process by which these several partial but positive movements issue in this general negative result ; and for this a simple illustration will suffice. As I have already remarked, the advance in wages and prices under an increase of money will follow the direction of the demand for commodities. Now let us suppose the com- modity first to feel the effect of the increased money demand to be shoes : shoes will then rise in price, and in due time the 212 WAGES AND ITdCES. inoney wages of journeymen shoe-makers. But it is evident that this will be for the shoe-makers an advance of real wages ; since, while receiving larger money wages than before, the only article of their consumption of which the price will have pro- portionally risen will be shoes. Next, we may suppose the enlarged demand to reach clothes, leading to a rise in the money wages of journeymen tailors; but this, again, will be for the tailors a rise of real wages ; for the case will stand thus: shoes have already risen; and the only prices affected as the condition of the advance in their wages will be the price of clothes: on all commodities, therefore, except clothes, the tailors will gain in fall proportion to the rise in their money wages. It is plain that the same considerations will apply to every step in the ascending process, until the entire cycle of the industries is completed; at which point shoe-makers, tai- lors, and producers of all kinds will find themselves in posses- sion of incomes increased exactly in proportion as prices have risen — that is to say (excluding the gains and losses which may have been realized during the period of transition), neither bet- ter nor worse off' than at starting. The solution of the enigma — if enigma it is to be considered — is of course to be found in the circumstance that the gain made by each class of workmen is in every instance obtained at the cost of other workmen, those namely whose wages do not share in that particular ad- vance. The journeyman shoe-maker is, in the first instance, benefited, when, receiving a larger money remuneration, he pays the same sum for his clothes, hats, and bread ; but the tailor, hatter, and baker, who, receiving the same money re- turns as before, have to pay more for their shoes, lose in the aggregate precisely what the shoe - maker gains. The subse- quent advance in their wages and prices deprives the shoe- maker, for the future, of so much of the gain accruing from the advance in his case, and places them at an advantage as regards other workmen ; whose wages and prices rising in MONETARY PARADOX. 213 their turn gradually restore them to their original position, though at the expense of those who, during the period of transition, profited by their depression. Thus each class of workmen gains by the advance of money wages in its own case; but as the circle extends, and the advance reaches other classes, those previously benefited part, item by item, with the advantage they had apparently secured, until in the end the real condition of each is restored to the original footing. It is like the gains and losses at a round game of cards. Every time the pool is won, the winner is richer precisely by the amount of the pool ; but, if the pool were always of the same amount, and each player won in turn, it is plain that at the end of the evening every tnember of the company would rise from the table neither richer nor poorer than he had sat down.* We may now resume the general argument interrupted by this incidental discussion. * Analogies do not run on all fours, and the present analogy is not perfect. The card-players at the close of the game would not merely have regained the relative positions from which they started, but would each have recovered the losses he had incurred during the progress of the game ; on the other hand, the gains and losses, incident to the period of transition from a low to u high regime of prices, would be definitive. CHAPTER III. TRADES- UNIONISM.— I. § 1. The question whether in any given state of national wealtli there can properly be said to be a limit to the amount of wealth available for the payment of wages, and if so, what the nature of that limit is, is one which brings us into imme- diate contact with Trades- Unionism in its most ambitions, if not its most important, aims. If there be no limit to the fund available for expenditure in wages, or if such limit as exists be of a kind which may easily be overpassed ; if beyond the amount actually spent on wages at any given time there be an indefinite margin of wealth which workmen by judicious com- bination may conquer ; then it is evident Trades-Unionism has a great field before it, and workmen will naturally and prop- erly look to this agency as the principal means of improving their condition. But if, on the other hand, the amount of wealth spent in wages at any given time be confined within limits which, the conditions of industry and the character of the owners of wealth being what they are, can not be perma- nently extended by the action of workmen, then it follows that the scope for Trades-Union action is proportionally nar- rowed ; and all attempts to accomplish a permanent increase of wages by such means, beyond what the unassisted action of supply and demand would ultimately bring about, are doom- ed beforehand to disappointment and failure. The question, therefore, of the limitation of the Wages-fund is evidently one oF paramount importance in the present position of the con- troversy between labor and capital in this country ; and we LIMITS OF THE WAGES-FUND. 215 should approach the problem with all the care and circum- spection which so momentous an issue demands. § 2. And, in the first place, I need scarcely point out that there are at all times certain limits to the possible Wages-fund which, if not strictly physical limits, come very close to that character. The Wages-fund of a country, at any given time, must, at all events, find a limit in the total wealth of the coun- try at that time, and manifestly, under any circumstances, it must fall very much short of that total ; for, in order to main- tain the stock of commodities of all sorts which in any civil- ized community goes to support the laboring population, a cer- tain large proportion of the general wealth must exist in the form of fixed capital and raw material. The wealth available, therefore, for the remuneration of labor can not at the utmost be more than the balance which remains after these indispensa- ble requirements have been provided for, under pain of a com- plete failure of the fund. These are what we may describe as the physical limits of the Wages-fund, and they are obviously such as must be observed under all forms of industrial organi- zation, even under a system of the most absolute communism. But the question I wish now to consider is whether, within these quasi physical limits, there are not, at least for societies organized as ours, and resting on the institution of private prop- erty and personal freedom, what may properly be called eco- nomic limits — that is to say, limits arising from the action of human interests operating under the actual circumstances of man's environment in the world. Now the principles already established in this work, taken in connection with other funda- mental truths of economic science, will, I think, lead us to the conclusion that such limits do exist, and will also enable us to perceive the character of the obstacles which they oppose to the indefinite extension of the Wages-fund. The reader has already seen the conditions on which depend '216 TBADES-VNIONISM.~I. the investment of capital in productive industry, and the cir- cumstances which determine its distribution, when invested, among the several instruments of production. He has seen that the motive to its investment is the prospect of proiit, and that, the character of the owners of wealth being given, the strength of the inducement will vary as this prospect varies. -Such being the fundamental facts on which the accumulation and investment of capital depend, there exists for every in- dustrial society, as Mr. Mill has pointed out, a certain rate of profit which is the lowest that will suf&ce to call the accumu- lative principle leading to the investment of capital into action. This lowest rate of profit will be different for different commu- nities and for different stages of civilization. It will be com- paratively high where the accumulative principle among the owners of wealth is weak, since here the inducement will need to be proportionally strong, and low where that principle is strong. But under all circumstances there will be a minimum rate, below which, if the return on capital fall, accumulation, at least for the purpose of investment, will cease for want of adequate inducement. Mr. Mill has further shown that in all progressive societies, after a certain stage in their career is reached — that stage, namely, at which the best soils and the most productive natural agents of all kinds have been brought into requisition for the purposes of production — the tendency of profits is to fall, and ultimately to approach the minimum which exists for each society. This tendency is, indeed, con- stantly counteracted by the progress of invention and improve- ment in the industrial arts (including under this head the ex- tension of the field for division of labor by the growth of trade), but nevertheless it continues to operate, and on the whole prevails against the opposing forces. "With every in- crease of capital, this stage in the economic growth of a coun- try once attained, a fall in the general rate of profit occurs, unless so far as the diminishing productiveness of industr}' is THE MINIMUM BATE OF PROFIT. 217 compensated bj these incidents of progressive societies, until at lengtii capitcal in its growth reaches the point at which the rate of profit is at, or, to borrow Mr. Mill's expression, within a hand-breadth of, the minimum. Lastly, Mr. Mill has shown that in countries in which capital has grown to this point, and among such countries, pre-eminently in Great Britain, the prin- ciple leading to accumulation is, as a rule, always strong enough, not merely to keep the aggregate capital of the country up to that amount at which profits approximate to the minimum, but even to cause it to exceed this amount; the proof of which lies in the large and continuous exportation of capital which occurs in such cases for investment in colonies or in foreign states. It results from these several positions that the amount of capital actually invested in Great Britain and in countries similarly circumstanced is, as a rule, at or, close upon its max- imum: — that is to say, as great as, economically speaking, it can be in the actual state of the industrial arts and of general trade. Such is the doctrine of the "tendency of profits to a mini- mum," for the proof of which I must refer the reader to Mr. Mill's chapter on that subject;* and I have now to ask him to consider the bearing of this doctrine upon the problem we have undertaken to discuss. As he has seen, it is of the essence of the doctrine, first, that, in any given state of the arts of indus- try and of trade, the quantity of capital which can be employ- ed in a country is strictly limited, limited by those conditions which limit the inducement to save and invest — to perform those acts, that is to say,' which, constitute the source and spring from which capital is derived and fed ; and, secondly, that, in countries which have attained that stage in their economical development which England has long ago reached and passed, the accumulation of capital under the influence of the ordinary motives, is, as a rule, constantly in excess of the amount which * "Principles of Political Economy, "book iv., chap. iv. 218 TBADES-UNIOmSM.—I. can be invested in the country consistently with obtaining the minimum rate of profit. These things being so, what can be the effect of an attempt on the part of Trades-Unions to com- pel, by pressure upon capitalists, an increase of the Wages- fund? Such an increase can only be accomplished in one or other of two ways — either by an increase of the total capital invested, or by a change in its distribution among the several agents of which it consists, in favor of labor, for example, by a conversion of what now goes to maintain machinery to the payment of wages. But either of these courses would inevita- bly result in a fall of profits, and profits are already at or with- in a hand-breadth of the minimum. It is true that the field for the investment of capital is being constantly extended in this and other progressive countries. Every step in the prog- ress of industrial invention, every gain in the efficiency of labor, every nQvr market opened to our trade, pushes farther back the limit set by the minimum of profit, and creates new room for the investment of capital. But the doctrine we have been considering shows us that the ordinary motives pressing upon capitalists are always sufficient, of their inherent strength, to fill up the room thus constantly created for fresh investment, and do in fact fill it up ; and this being so, where is the scope for Trades-Union action in enlarging the "Wages-fund ? I con- fess I am unable to see how, in presence of these considera- tions, founded as they are on incontrovertible facts, the larger pretensions of Trades-Unionism can be sustained. The per- manent elevation of the average rate- of wages — or, what comes to the same thing, the permanent elevation of the rate of wages in any branch of industry not accompanied by an equivalent fall in some other branch or branches — ^beyond the level deter- mined by the economic conditions prevailing in the country, is, as it seems to me, a feat beyond its power. Such is the broad general conclusion to which economic principles applied to the facts of the case appear to conduct us. LIMITS OF ITS POWER. 219 § 3. We must be careful, however, not to strain this con- clusion beyond the limits which its terms define. The reader will observe that it applies to the average rate of wages, as a permanent state of things, and further, that the question is left open as to the possibility of accelerating the operation of eco- nomic conditions, by action on the part of those whom they affect. Wow it will be found that, these qualifications of the position just laid down duly considered, a certain scope still remains for Trades-Union action on the rate of wages — a cer- tain scope, but of a range altogether more limited than that which the pretensions of those bodies to control the labor mar- ket commonly assume. In the first place, it is not inconsistent with the general con- clusion arrived at that an advance of wages in certain depart- ments of industry should be effected by the action of Trades- Unions where this is accompanied by an equivalent fall in others; and, supposing the workmen in such departments of industry had it in their power to exclude the competition of outsiders, it is quite possible that an advance of wages so ef- fected might be permanently maintained. Such a result is not only a perfectly possible achievement, but one which has oc- casionally been accomplished.* It amounts, however, merely * According to Mr. Thornton, this has hitherto been the nature of all Trades- Union victories, and must be so until Unionism becomes universal. "In a coun- tiy commercially stationary — in which national wealth is not increasing — when a permanent advance of the rate of wages is obtained artificially by Unionist action, there must needs be a corresponding lowering of wages in other trades. Even in a country commercially progressive, it is impossible for Unionism to raise wages in any particular trade without causing the demand for the produce of other trades to be less than it would have been, or without equally checking the demand for labor in those other trades. Whether i country be stationary or progressive, an exceptionally high rate of wages can not be maintained in any particular trade, unless the workmen of all other trades are prevented from entering that particular trade, and endeavoring to get the same rate. Unionism can not keep up the rate in one trade without keeping it down in others. It can not benefit one portion of 220 TBADES-VNIONISM.—I. to a change ia the distribution of the Wages-fund, while its aggregate quantity is left unaltered; and for the present it will be more convenient to confine the discussion to the power of Trades-Unionism in relation to the general fund — its power, that is to say, to effect an advance of wages by a positive in- crease of capital, and not simply by drawing off capital from fields in which it was already invested, at the cost of the la- borers in those fields. Confining our view, then, for the present to this aspect of the case, we have now to consider — Trades-Unionism being, as we have seen, powerless to effect a permanent increase in the average rate of wages beyond what the economic conditions of the country permit — how far it is capable of modifying the rate for a time, or of acceleiating an advance rendered possible by the state of trade and industry, but still pending and un- realized. It is obvious at once, even apart from experience, that, where workmen have the power of combining, it will always be possible for them, by taking advantage of particular exi- gencies, to compel their employers to a temporary advance of wages. For example, where employers have bound them- the laboring population vvitliout, during ■■• period of stagnation, injuring the re- mainder, nor even in a season of prosperity, without at least shutting out the bulk of the laboring population from the advantages secured for a portion.'' ("On Labor," p. 310.) I confess 1 am quite unable to reconcile the drift of this passage with Mr. Thornton's denial of the existence of a determinate Wages-fund ; but, not to dwell upon this, it appears to me that the inference drawn from the state of things he describes, namely, that as Unionism is extended its advantages will be proportion- ally enlarged, until finally, becoming universal, they will represent pure gain un- qualified by any set-off, is exactly the reverse of what the facts warrant. An ad- vantage which depends upon the exclusion of others can not but be impaired by the admission of any of the excluded, and can not but be wholly lost by the ad- mission of all. But I have dealt with this point more fully in a later cliapter, post pp. 246-248. PROVINCE FOB ITS ACTION. 221 selves under penalties to execute certain definite work within specified limits of time, it is evidently possible for workmen, by combination, to place their employers in the alternative of either complying with their demands or of incurring a greater loss; and under such circumstances a strike, it may be as- sumed, will be successful, so far as the immediate aims of the workmen are concerned. This, if an extreme case, is in actual life a very common one ; and the principle on which the suc- cess of the workmen depends has a much wider range than that of time contracts. To a certain extent all persons who embark their means in business are at the mercy of those on whose co-operation they rely for carrying their plans into ef- fect; and this liability to be injured by refusal on the part of others to co-operate will evidently become greater in propor- tion as the preliminary outlay incident to the undertaking is large. A capitalist, for example, who has committed himself to an industrial enterprise by making large purchases of build- ing and plant, wherewith to carry it on, must find laborers to work for him, or suffer heavy loss ; for either, his capital ly- ing idle, he loses the interest it might bring him, or, if he at- tempts by sale or otherwise to convert it into other forms, it is pretty sure to be largely depreciated in the process. Under these circumstances, supposing the workmen on whom he re- lies to strike for higher wages, and that he has reason to be- lieve that they possess the resolution and are in command of ■ funds sufficient to enable them to maintain a prolonged strike, it may be his wisdom to concede their demands, even though the result should be not merely to bring his profits below the minimum, but to annihilate them altogether, or even convert them into loss; since the entire cessation of his business for so long a period might involve him in still greater loss. It is evi- dent, therefore, that workmen have, by means of combination and by accumulating sufficient funds, very considerable power of acting upon the rate of wages. But the question remains as ;J22 TEADES-VNIOmSM.—I. to the ultimate consequences of such action ; as to its effect upon the workman's well-being, taking an extended view of his in- terest To determine this point, we must consider two distinct states of industry and trade — one where the business of the coun- try is in its normal or average condition, and where consequent- ly, in old countries like Great Britain, the rate of profit is at or close upon the minimum ; the other, where trade is exception- ally prosperous, and profits may be assumed to be considera- bly in advance of the minimum rate. Taking the former case first, what will be the definitive result under those circum- stances of a successful strike for higher wages? The rate of profit having been previously at or near the lowest point at which there is an adequate inducement to invest capital, the action of the workmen has forced it below this point. As has already been intimated, capital can not, except at great loss, be withdrawn suddenly from industries in which it has once been embarked, and therefore workmen may for a time enjoy the fruits of their success. But though capital can not be with- drawn suddenly, it may be withdrawn by degrees — at the worst by the simple process of not renewing it as it is worn out. And this is what, in the case we are considering, we may confidently assume would happen. Employers whose capital is bringing them a rate of profit below what (allowance made for risk and other drawbacks) they might obtain from its in- vestment in other industries or in other places, will seize ev- ery opportunity that offers for withdrawing it from an employ- ment so unremunerative. After a little the successful work- men will find that their services are not required, and will be compelled for their support to throw themselves on the general labor market. The inevitable result must be a fall in the gen- eral rate of wages at least to its former level — to a level, that is to say, which is consistent with giving to capitalists what they conceive to be an adequate return upon their outlay. This is the least unfavorable consequence which could ensue PROVINCE FOB ITS ACTION. 223 from the success of a compulsory action on wages where the condition of trade is what we may describe as quiescent. Sup- posing, however, that proceedings of this kind were not mere- ly isolated and exceptional, but became sufficiently frequent to be looked forward to by capitalists as a normal incident of pro- ductive investment, the consequences for workmen would be much more serious than a mere return to the former state of things. The constant liability to a sudden reduction of profits from such causes would become an element in the regular cal- culation of capitalists, and before embarking in an industrial undertaking they would look for compensation in a rate of profit high enough to cover such risks. In other words, the action of Trades-Unions in forcing up wages under the circum- stances in question, however it might for the moment raise wages at the expense of profits, would have for permanent con- sequence precisely the opposite result; for, by increasing the risks of investment, it would tend to raise the minimum rate of profit, and, in proportion as it did so, to narrow the field for the employment of capital in the country. The aggregate capital being less, the Wages -fund, ccderis paribus, would be less, and unless laborers consented to reduce their numbers, the general rate of wages would fall. Such, it seems to me, must be the inevitable consequence of frequent and systematic attempts to force up the rate of wages when the economic conditions of the country do not war- rant a rise; and a fortiori, I may add, these disastrous results would be only more certainly realized, if this policy were at- tempted in a depressed condition of trade when profits barely reached the necessary level. But let us now consider how the case would stand supposing the demand for an advance to oc- cur when trade is exceptional!}'- prosperous. Mechanical in- ventions, we may suppose, or improved processes, have cheap- ened production ; or the opening of new markets for trade has enabled our manufacturers to exchange their commodities on 224 TBADES-UmONISM.—I. better terms with foreign countries. Under such circum- stances profits may advance considerably above the minimum ; and the question arises, what is the scope for Trades-Union ac- tion offered by a contingency of this kind. We have already seen that, even under the ordinary conditions of trade, it is frequently in the power of workmen, by skillfully taking ad- vantage of the position of their employers, to force up wages above the actual rate. But a state of trade in. which profits were sensibly above the minimum limit would obviously be highly favorable for such operations. For, by refusing to work, the men could now not merely inflict the same loss as before on their masters, but could compel them to forego the opportunities of reaping the unusual gains which the time, of- fered. There can be no doubt at all, therefore, that under such circumstances well-concerted Trades -Union action would be capable of achieving success. This, however, does not in itself establish the wisdom of such policy; for the question would remain, whether the game were worth the candle; whether the results attainable by this course would compensate for the trouble and risk involved in the movement. For it must be remembered that, under the influence of the ordinary motives which, we have seen, govern the growth of capital, the state of things we are considering would act as a powerful incentive to accumulation and investment. An increased demand for labor would sooner or later spring up, and ultimately an advance of wages to as high a point as the actual state of things permitted. This being so, it may be asked whether the action of Trades- Unions, mischievous in the case we last considered, would not here be superfluous. Now the answer to this question must, I think, be in the negative. The workman, no doubt, is interest- ed in the final result, but he is also interested in its speedy re- alization ; and the process by which the fruits of exceptionally prosperous trade issue in an advance of wages is a circuitous one, and generally covers some considerable period of time. FBOriNCE FOB ITS ACTION. 335 Employers as a class, we may take for granted, will not propose an advance of wages except under the stress of competition, and before competition becomes actually operative the new capital may lie for some time upon the market, in the "floating" con- dition, seeking investment, but not at once finding it. Even after investment has been found, preliminary arrangements have to be made, and a considerable time may^elapse before the new demand for labor is practically felt. Throughout this period wages, in the absence of external pressure, may remain absolutely unaffected, and laborers may be excluded from all share in the prosperity of which the entire fruits are appro- priated by their employers. If, then, laborers have the power, as we have seen they have, of shortening or of annihilating al- together this interval, why may they not use it? It seems to me that there is here a perfectly legitimate field for Trades- Union action. The state of trade being such as to permit an advance of wages. Trades -Unionism, using its powers judi- ciously, may determine capital at once toward those issues which, under the influence of the ordinary motives governing industrial investment, it would indeed in any case ultimately reach. A distinct and substantial gain may thus be secured for labor without encroaching on the indispensable margin for the remuneration of capital, and without impairing any of those conditions on which its own permanent well-being depends.* It results from the foregoing considerations that the action of Trades-Unions, directed toward raising the rate of wages by combination among workmen, may be hurtful or beneficial ac- cording to circumstances. The practical utility, therefore, of this mode of action will depend upon the ability of those who control the conduct of these bodies to discriminate the states of * The history of the Newcastle engineering strike is instructive. It was in that case admitted, on the side of the masters, that the conditions of trade from the beginning permitted an advance of wages ; yet no advance was proposed till the pressure of Trades-Unionism was brought to bear. 15 226 TRADES-UNIONISM.— I. the market in which action may be taken with advantage from those in which it can only be productive of harm. It thus becomes matter of deep interest to know if the working-class leaders possess this ability or may be expected to acquire it. And here I touch a point on which I should not be justified in speaking otherwise than with extreme diffidence. I fear it must be admitted that, up to the present, the competency of Trades-Union leaders to form a correct judgment on the state of trade, even in the particular departments with which they each happen to be practically conversant, and to decide upon the seasonableness of a demand for increased wages, must be considered as at least problematical. The temporary success of a strike does not necessarily prove its wisdom ; but the fail- ure of a strike, immediate or ultimate, is decisive evidence that it ought never to have been undertaken ; and hitherto unsuc- cessful strikes have been extremely numerous. " The most protracted strikes (says Mr. Brassey) in which the working- men have been engaged have generally taken place, not for the purpose of securing an advance of wages, but for the purpose of resisting a fall. Resistance to a proposed reduction was the cause of the engineers' strike in 1853 ; of the strike at Preston in 1853 ; of the strike in the iron trade in 1865; and of the strike of the colliers at Wigan in 1868. In each of these cases the masters had found it necessary, in consequence of the de- pressed state of trade, to reduce the rate of wages ; but the men, ignor- ing the circumstances of the trade, and looking only to what they be- lieved to be a degradation of their position as workmen, refused to ac- cept the reduction. They therefore went out on strike ; but, after a pro- tracted struggle, were compelled to accept the original proposal of their employers The leaders in several protracted strikes have exhib- ited a melancholy ignorance of the state of their own trade, and even of the market value of the goods in the production of which they are en- gaged. How much suffering might have been spared to the working- classes, if they had but known, before they engaged in a hopeless strug- gle, the true merits of their case ! I was once present at a meeting of employers during a large strike in the coal trade. I had the means of knowing that the wages which had been offered were the highest which PROVINCE FOB ITS ACTION. 227 the employers could afford to pay, and that the markets were so over- stocked that it was a positive advantage to suspend the working of the pits for a time. But the facts which I had the means of knowing were apparently unknown to the miners ; and it was indeed lamentable to see the hard-earned accumulations of many years exhausted in an obstinate resistance to a reduction of wage, which had not been proposed by the employers until it had been forced upon them by the unfavorable condi- tion of their trade."* Nevertheless, I think there is evidence to show that Union- ists are gathering wisdom with experience, and this Mr. Bras- sey admits. The great majority of recent strikes have been successful. But it is not so much the success of recent strikes, as the manner in which the success has been achieved — -the moderation and good sense with which for the most part the demands of the men have been put forward and supported, and the increasing indications in their various manifestoes of a growing comprehension of the true conditions of the problem — that constitutes the most solid ground of hope. I would point in particular to the Newcastle engineers' strike of the year J.871 as an occasion when these qualities were manifested in an eminent degree. Certainly, to my apprehension as a dis- interested spectator, the conduct of the men in that struggle contrasted favorably with that of their employers. But in or- der to convert Trades-Unionism into an agency, not merely capable now and then of achieving an advance of wages by a coup de main, while on other occasions it leads its supporters into ruinous contests, from which they only emerge enfeebled and impoverished, to accept worse terms than they had pre- viously refused — in order to convert it into an agency perma- nently and constantly beneficent, workmen must learn to rec- ognize more distinctly than they have yet done the essential conditions of success; and not merely this, but also to adopt * " Work and Wages," pp. 6, 7, and 10, H. 228 TRADES -UNIONISM.— I. the needful means for determining in each case as it arises how far these conditions are fulfilled. In other words, Trades- Unions must frankly recognize the impossibility of forcing profits permanently below that rate which capitalists regard, and show by their conduct that they regard, as only an ade- quate return upon their outlay ; and they must organize the means for obtaining sufficient and trustworthy information re- specting the actual state of trade, with a view to determine whether profits are or are not in advance of this minimum level. It has been said, indeed, that workmen can not know the state of profits in a trade so long as they are excluded from access to their employers' books, and that this is a privilege which will never be conceded them. But for the purposes of Trades-Unionism I can not see that any such detailed knowl- edge as might be obtained by inspection of the books of em- ployers is necessar3^ The object in view is not to know the precise gains of particular employers, which may depend quite as much upon individual skill and management as upon the general circumstances of the trade, but whether the circum- stances of the trade, as a whole, are such as, with average man- agement, to admit of more than the usual gains. The data for this lie in a knowledge of the state of prices, at different pe- riods, alike of the finished article and of the raw material, of the conditions of production as regards mechanical, chemical, or other facilities, and of the greater or less accessibility of markets. These are circumstances an adequate knowledge of which is quite within reach of Trades-Unions, if only the proper means be taken to obtain it; and Mr. Brassey in the following passage gives an example of what these means should be: " It is not the less essential to keep a watchful eye on all that is taking place abroad. The organization of Trades-Unions might be utilized for this important purpose. The resources of a joint purse should afford the means of sending delegates abroad, for whom opportunities ought to be PBOVINCM FOB ITS ACTION. 229 provided of studying foreign languages, and whose duty it should be to keep the artisans of England closely informed of the fluctuations in the activity of trade and the reward of labor in the countries in which they resided. Trades-Unions can not in the long run materially influence the rate of wages, but there are many valuable services which they can ren- der ; and none would be more practically useful than the frequent publi- cation of faithful reports on the state of the labor market from well-placed observers on the Continent."* I believe the influence of Trade-Unionism organized thus with a deliberate purpose of collecting and diffusing sound in- formation among its supporters would be in more ways than one largely beneficial. The collection of the necessary facts, their careful study and examination, and the discussions to which these would lead, combined with the sense of responsi- bility attaching to the formation of opinions on which practical issues of the gravest import depended, would in themselves be for workmen a means of practical education of the highest val- ue. But the more obvious advantages of this course of action would lie in its direct consequences — in the immense saving which would result both to men and masters in preventing abortive strikes. Indeed the adoption of such a policy by Trades - Unions would powerfully tend to the cessation of strikes altogether — at least for the purpose of effecting an ad- vance of wages — by rendering them unnecessary. It is not probable that, when employers came to understand that work- men had mastered the real facts of the situation and knew the strength and weakness of their reciprocal positions, the refusal of reasonable demands would be long persisted in. Each side would perceive that both alike were cognizant of what the cir- cumstances of the case permitted, of what was feasible, and of what was not so ; and neither would probably seek to strain its pretensions beyond the limit thus mutually recognized. * "Work and Wages," pp. 14, 15. 330 TRADES -UNIONISM.— I. § 4. The foregoing conclusions as to the power of combina- tions of workmen to effect an advance in the rate of wages may seem to be applicable only to old countries, in which, like our own, the rate of profit is normally at or close upon the mini- mum point, and from which, consequently, capital is from time to time flowing off into foreign investment. In countries like the United States, in which the rate of profit is still far above the minimum, and which, instead of lending capital to foreign countries, are themselves habitual recipients of their redundant supplies, it will perhaps be thought that the arguments which have been used would cease to have any force. It can not be denied that the same obstacles which set limits to Trades-Union action in the Old World do not exist in the New. Never- theless, I apprehend that though the obstacles may not be the same, the limitations on such action will be found in effect to be scarcely less real there than with us. If, indeed, capitalists could be reduced to the alternative of either conceding the de- mands of Trades-Unions, or being deprived altogether of the opportunity of investing their wealth, one can imagine that, rather than accept the latter course, they might consent to so great an advance of wages as would, under the actual condi- tions of productive industry, issue in a decline of the returns on capital considerably below the level at which profits in the United States now ordinarily stand; and it is possible that the change in distribution thus effected might be permanent. I say this would be a conceivable result, if capitalists could be reduced to the alternative just stated. But in a country of such vast magnitude as the United States, covering as it does the greater portion of a continent, what grounds are there for believing that Trades-Union organization can ever become at once so complete and so all-embracing as to be capable of pre- scribing terms such as these ? For my part, I find it impossible to contemplate such a consummation as a condition of thino-s to be taken into serious account. Within a limited area — with- IN NEW COUNTRIES. 231 in perhaps a single State — one can imagine Trades-Unionism absolute ; but, limited to a single State, or even to half a dozen States, the attempt to enforce its decrees in the sense described would issue, not in raising the rate of wages generally over the American continent, or even in raising it permanently within the State or States in which the organization was dominant, but simply in driving capital from one State to another — in sending it from New England or New York to Illinois, Mis- souri, or California; and workmen would find their prize es- caping them just as they fancied they had grasped it. In this way, in the New World no less than in the Old, the larger aims of Trades-Unionism must, as I apprehend, find defeat. Under all circumstances the facilities of escape open to capital are too great to make it possible to hem it in, and so to compel a sur- render at discretion ; and we shall have no need to modify the conclusions at which we have arrived even in applying them to a country in its economical circumstances and development so widely separated from our own as the United States. § 5. As the reader has seen, the utmost power which I am disposed to concede to Trades-Unions over wages, where they seek their ends by compelling a positive increase of investment, is that of accelerating an advance, already, so to speak, in the air, and which would come in the end without their interven- tion. Where strikes have been permanently successful, where they have not merely gained to-day what has been lost to-mor- row, but have issued in a permanently improved condition of the workmen, I believe the explanation of their success will always be found in a state of trade exceptionally prosperous which would in any case before long have attracted an increase of capital, and resulted in an enlarged demand for labor. But this explanation of the success of strikes is, I find, strenuously repudiated by Mr. Thornton, who regards Trades-Unionism as an agency capable not merely of raising wages in anticipation 232 TRADES-VXIONISM.—I. of the ordinary commercial influences, but of permanently sus- taining them at a level higher than they would without its ac- tion ever have attained, and in conformity with this view is disposed to attribute the advance of wages which within twenty years has occurred in most branches of industry to Trades-Un- ion action as its proper cause. I confess Mr. Thornton's ar- gument on this point is to me singularly unsatisfactory. He writes : " Of course it is open to any one to question whether the enhancement of labor's remuneration which has thus been going on at both ends is due to the influence of Trades-Unions, and whether it would not have taken place equally if the price of labor had been left to find its own level without extraneous interference. The questioner here, however, may very properly be left to answer himself, as he may satisfactorily do, by proceeding to inquire how often any portion of the enhancement re- ferred to has been volunteered by the masters, and how often it has been only yielded to solicitation with force in the background. He will find the instances of masters spontaneously raising wages to be about as nu- merous as those of workmen conscientiously believing themselves to be overpaid and coming forward to insist that their wages should be re- duced."* Mr. Thornton apparently is unable to conceive a middle term between " volunteering " an advance, and " yielding to solicitation with force in the background;" as if it were not the essence of his opponent's case that there is this middle term — to be found in those economic influences distinct alike from mere benevolence and from coercion from without, which issue in increased competition for labor, and as a consequence an advance in its price. I commend to Air. Thornton the fol- lowing facts supplied by Mr. Brassey : " In the famous engine-building establishment at Creuzot, founded by the father of jMr. Charles Manby, 10,000 persons are now employed, and the annual expenditure in wages amounts to iE400,000. Mechanics were * "On Labor," pp. 257, 258. CAPITALISTS IN COMBINATION. 233 paid, when the establishment was first created, at the rate of SJ ftancs a day. At the present time none receive less than 5 francs a day. Be- tween 1850 and 1866 the mean rate advanced from 2s. to 3«. lU. per head, or thirty-eight per cent., and some men earned from 6«. M. to 8«. 4cZ. per ^M Compare what has occurred in this coimtry with what has taken place at MM. Schneider's at Creuzot At MM. Schneider's, ■without the assistance of a Trades- Union, the working-people have obtain- ed, during the last seventeen years, an augmentation of wage of thirty- eight per cent. In England, in the corresponding period, the most pow- erful of all the Trade Societies, with an accumulated fund of £149,000, has found it impossible to secui-e any increase in the earnings of its mem- bers."* How will Mr. Thornton explain the advance of wages at Creuzot ? Trades- Union pressure not being there, will he refer it to the spontaneous benevolence of the iron-masters? A lit- tle reflection will probably suggest to him a means of escape from his own dilemma. § 6. The power of workmen to compel by combination an advance of wages has generally been considered as more or less an open question ; but that capitalists possess the corre- sponding power of keeping wages down by combination has, for the most part, been taken for granted. In a well-known passage Adam Smith observes that employers are in a perma- nent conspiracy to keep wages down, and the context certainly implies the writer's belief that they are generally successful in this object. Nevertheless I must venture to question the as- sumption, even though supported by Adam Smith's authority. I hold that, at least in countries in which the industrial and commercial spirit is strong, the power of capitalists by com- bination to depress wages or to keep them down is not a whit more real than that of workmen by similar means to force them up. Either may, no doubt, effect their object for a time, * "Work and Wages, "pp. 159-161. 234 TBADES-VmONISM.—I. but neither, as I believe, can be permanently successful. The grounds of this opinion will be apparent to those who have followed the argument by which in a former chapter I have endeavored to prove the " determination " toward the Wages- fund of a certain portion of the national wealth.* It is quite true, no doubt, that capitalists, as possessors of wealth, have both the physical and the legal power of emplojnng it as they please. They may, if they choose, withdraw all their capital from investment and squander it in unproductive consumption, or, for that matter, sink it in the sea; and the effect of such proceeding on their part, if this course were extensively adopt- ed, would undoubtedly be to depress wages in the country for a considerable period of time. But I apprehend the real ques- tion is, not whether capitalists have the physical or legal power of doing such things, but whether, their character being such as it is, it is morally possible for them, to adopt these or any other effectual expedients for accomplishing the object thej' no doubt much desire. The whole issue, as I conceive it, turns upon the character of capitalists as a class, and more particu- larly on the balance within them of two qualities of mind — on the one hand, the strength of the accumulative propensity, and, on the other, the taste for luxurious enjoyment, by which the former is constantly counteracted. Supposing these two quali- ties to be so adjusted in the owners of wealth in this country that the prospect of a certain rate of profit, say ten per cent., suffices to cause a certain proportion of the whole national wealth to be turned toward productive investment, this propor- tion will be turned to this destination. It is true, indeed, that those who thus employ their wealth would be very glad to ob- tain from it a larger return than they are likely to receive, and not a few would be only too ready, if they had the power, to force down the rate of wages with this view. But this is pre- Ante, pp. 184-187. CAPITALISTS IN COMBINATION. 235 cisely what they can not do consistently with gratifying the dominant propensity wliich, under the temptation of a cer- tain rate of profit, draws them toward productive investment. Thus, supposing a group of employers to have succeeded, as no doubt would be perfectly possible for them, in temporarily forcing down wages by combination in a particular trade, a portion of their wealth, previously invested, would now be- come free — how would it be employed? I have already traced the consequences of such an occurrence, and need not weary the reader by repeating the deduction here. Suffice it that, though it is impossible to say what might be the course adopted in particular instances — unless we are to suppose the character of a large section of a community to be suddenly changed in a leading attribute, the wealth so withdrawn from wages would, in the end, and before long, be restored to wages. The same motives which led to its investment would lead to its re-investment, and, once re-invested, the interests of those concerned would cause it to be distributed among the several elements of capital in the same proportions as before. In this way covetousness is held in check by covetousness, and the desire for aggrandizement sets limits to its own gratification. My conclusion is that, though combination, whether employed by capitalists or by laborers, may succeed in controlling for a time the price of labor, it is utterly powerless, in the hands of either, to effect a permanent alteration in the market rate of wages as determined by supply and demand. § 7. Throughout the foregoing discussion it has been con- stantly assumed that an advance of wages involves as a con- sequence, cceieris paribus, a fall of profits. I beg to call the reader's attention to the condition here presupposed; for I observe, in some recent publications in which the relation of profits to wages is discussed, that there is an entire omission on the part of the writers to say whether, in challenging the 236 TRADES -VNIONISM.— I. doctrine just stated, they understand it as subject to, or irre- spective of, this qualification. Mr. Brassey, for example, de- votes a chapter to prove that " the cost of labor can not be determined by the rate of wages;" and this enunciation is characterized by Mr. Harrison in the Fortnightly Review as a " striking law of industry, which the book before us boldly formulates and completely proves," and he proceeds to con- trast it with the "professorial dicta of so-called economists, based on the assumption that high wages inevitably imply dear goods and low profits." That any one ever maintained that the cost of labor, prices, or profits were determined simply by the rate of wages irrespective of the efficiency of the labor, is what, I own, I find it hard to believe ; and until Mr. Harrison tells us who the economists are that maintain this enlightened view — as I have never myself happened to meet with a speci- men of the class either in the flesh or in print — I shall be dis- posed to regard them as mythical entities evolved from the moral consciousness of writers more anxious to refute than to understand Political Economy. On the other hand, I find it almost equally difficult to suppose that either Mr. Brassey or Mr. Harrison would advisedly maintain, on the assumption that the efficiency of labor is a constant condition, that the cost of labor, and, as depending on it, the rate of profit, are not determined by the rate of wages. In truth, it is pretty clear that the en- tire controversy on this subject has arisen from some people not taking the trouble to understand what other people say. Eicardo, for example, has laid it down that profits are inverse- ly as wages, but any tolerably careful student of Ricardo would see that by wages he meant "proportional wages" — that is to say, the laborer's share of the product, or, if wages in the ordinary sense, then that the statement was to be received subject to the condition that the efficiency of labor remained the same. Eicardo, however, has not been fortunate in finding careful students ; and scores of writers who have undertaken PROFITS AND WAGES. 237 to refute his doctrine have in reality refuted merely their own misconception of it. And what in effect is this "striking law of industry," now for the first time, according to Mr. Harrison, "boldly formulated and completely proved," and which puts to shame "the professorial dicta of so-called economists?" Why simply this, that it often pays better to employ a good workman at high wages than an inferior one at low. The fact is indubitable, but why it should be called "a striking law of industry " rather than the most common of industrial common- places, still more why it should be represented as a conclusive refutation of all that economists have written on the relation of wages to profits, is what I must confess myself wholly at a loss to discover. It is possible, indeed, that the language I have quoted may refer, .not to the perfectly sound though somewhat trite max- im, that efficient labor is often worth more than inefficient, but to a doctrine suggested, rather than " boldly formulated," in the chapter under consideration. In a passage headed " Uniform Cost of Labor," Mr. Brassey writes as follows : "High wages do not necessarily imply dear labor, just as, on the other hand, low wages do not, of necessity, make labor cheap. On my father's extensive contracts, carried on in al- most every country of the civilized world and in every quarter of the globe, the daily wage of the laborer was fixed at widely different rates; but it was found to be the almost invariable rule that the cost of labor was the same — that for the same sum of money the same amount of work was everywhere per- formed. Superior skill, extra diligence, and a larger devel- opment of physical power, will often compensate the employer who finds himself obliged to pay higher wages than his com- petitors."* Let me here say that I have not the slightest disposition to * "Work and Wages," pp. 74, 75. 238 TRADES-UNIONISM.— I. question the fact of a real connection existing between good wages and efficient work, and still less would I dispute the probability (to refer here to a later position of Mr. Brassey's) that shortened hours of work may up to a certain point find their compensation in the increased energy of the workman. As corroborative of these assumptions, I regard the statement of Mr. Brassey's experience furnished in this work as extreme- ly valuable. But the reader will observe that there is some- thing more in the passage just quoted than a mere statement of specific fact. The words "it was found to be an almost in- variable rule that the cost of labor was the same — that for the same sum of money the same amount of work was everywhere performed," coming under the heading " Uniform Cost of La- bor," seem to point to the existence of an economic law accord- ing to which the efficiency of labor, all the world over, varies with its price. An economic law, indeed, there is which con- nects efficiency of work with payment, but, as I have else- where shown, this operates only within the limits of competi- tion."" Within such limits the tendency very obviously will be to adjust wages in each occupation to efficiency in that oc- cupation, and thus to bring out as the result a uniform cost of labor, or, as I prefer to call it, price of work. But Mr. Bras- sey goes far beyond this, and lays down the rule of uniform cost of labor as " almost invariable in every country of the civ- ilized world and in every quarter of the globe." This, indeed, would have been a "striking law of industry," had our author made the position good ; but it is singularly disappointing to discover, ere we read many pages on, that the so-called law can only be regarded as a rhetorical expression. At page 84 we find that it must be understood as referring to "railway work executed by unskilled labor," while, even as thus lim- ited, it is far from being universally true, failing, as Mr. Bras- * See ante, p. 77, note. COST OF LABOR. 239 sey informs us it does, in the comparison of English labor with the labor of India and of Italy (pp. 87, 90), and, as statistics given elsewhere in the volume show (pp. 38 and 49), in other instances also. That the rule does not hold of the skilled la- bor of different countries is what is implied in nearly every other page of Mr. Brassey's book; the constant moral there enforced being the heavy detriment which Great Britain suf- fers from her dear labor — a detriment so heavy, an economical drawback so serious, that only her great resources in other re- spects enable her to bear up under it against the strain of con- tinental competition. What, then, is the net outcome from Mr. Brassey's facts in their bearing upon the question as to the connection between wages and the cost of labor or price of work? A large por- tion of those facts relate to the wages of laborers in Great Britain in free competition with each other; and so far his statements form a striking and useful illustration of a familiar principle — the tendency of competition, within any given de- partment of industry, to adjust payment to efficiency, so as to render the price of a given piece of work pretty nearly the same whether it is performed by labor of superior or of only moderate and ordinary skill. But where his examples are of broader scope, and exhibit the relative rates of wages in dif- ferent countries and in labor markets not in free competition with each other, their value in relation to the question in hand is of a different kind. What they amount to would seem to be this: in the comparison of different countries, a very low rate of remuneration for labor is generally found to be accom- panied with a very low degree of industrial efficiency, while, as the condition of the laborer improves, his efficiency up to a certain point is found to increase in nearly the same degree. I say "up to a certain point;" for it does not appear that the correspondence between remuneration and efficiency holds good beyond the range of those employments wliich call for 240 TBADES-UNIONISM.—I. mere physical energy and endurance, such as railway work performed by unskilled labor; nor is it found to be universal- ly true even within these limits. When we pass from the ranks of unskilled to those of skilled labor, and when in the latter we confine our attention to those cases in which the re- muneration has risen above the point at which it still contrib- utes to mere physical energy, we find no evidence in the facts adduced by Mr. Brassey of the existence of a uniform cost of labor in different countries. On the contrary, the main tenor of his work goes to establish the opposite position; since, as I have already remarked, the constant moral deduced from his reasonings is the heavy disadvantage which England under- goes from her dear labor in comparison with the cheap labor of the Continent— a disadvantage so great as only, according to Mr. Brassey, to be just compensated by her superior re- sources in machinery, raw material, and coal. It follows most clearly from this that, in Mr. Brassey's opinion, that portion of English work which is performed by labor is more highly paid for here than abroad. And in truth we have only to consider the habits of the great majority of our artisan popu- lation to perceive how very slight the connection can, in the nature of things, be between efficient labor in those classes and the rate of their remuneration. An increase of wages which merely results in an enlarged consumption of beer and spirits is not likely to add much either to the physical powers or to the intelligence and skill of the recipients; and notoriously this is the way in which an increase of wages is, for the most part, taken out in this country. I repeat once again, I have no desire to dispute the existence of a real connection between good pay and efficient work; only let us note well the nature of the connection. It exists so far, and only so far, as the larger pay is applied to sustain the industrial qualities, phys- ical or mental, of the workman. At present it would seem that this is very generally the case while wages are no more MOW FAB UNIFORM. 241 than sufficient to supply the primary animal wants. But where they exceed this limit, the increased pecuniary means placed at the laborer's disposal are quite as often employed to impair as to improve his industrial qualities, and the connec- tion between remuneration and efficiency is at an end, or at most is but a matter of iiccident. I am one of those, however, who live in hope that the rule may not always be thus limit- ed. When artisans shall learn to use their increasing re- sources to help their intellectual and moral progress, instead of, as now, squandering them in brutalizing dissipation, and when improved education shall go hand in hand with a larger com- mand over material well-being, we may hope to see an ap- proximation toward that uniform cost of labor of which Mr. Brassey speaks, but of which, outside the lower grades of la- bor, the indications at present are, it is to be feared, somewhat partial and rare. So much for Mr. Brassey's facts. I fail to discover in them any new "law of industrial life" — indeed it is but right to say that Mr. Brassey disclaims for them any pretensions to this character — still less any thing in the least at variance with the well understood doctrines of Political Economy ; but I find evidence, not always, as it seems to me, very accurately inter- preted, of which a good part is illustrative of a very familiar economic principle, and the rest supports the view of a con- nection pretty widely existing between wages and industrial efficiency in the lower ranks of labor. 16 CHAPTER IV. TRADES - vmomsM.—ii. § 1. The methods by ■which Trades-Unions seek to operate on the rate of wages are numerous ; but they all find a place under one or other of the three following heads: 1. Directly — by calling on employers to raise the rate of wages, or, what comes to the same thing, to reduce the num- ber of working hours, the rate of wages not being proportional- ly reduced — a demand which involves either increased invest- ment of capital in the form of wages ; or — unless so far as the reduction in working hours may be compensated by increased efficiency — a proportionally diminished production from the same investment. 2. Indirectly— by regulations directed toward restricting the supply of labor. 3. Indirectly — -by regulations directed toward increasing the demand for labor by increasing the need for it ; or, as it is otherwise expressed, by increasing the quantity of work to be done. The first of these methods is that which has been considered in the last chapter ; and the reader has seen how far we found it to be efficacious and legitimate. The two remaining methods have now to be considered. § 2. And first, as to that mode of action which seeks to at- tain its end by acting on the supply of labor. In order to form MODE OF ACTING ON SUPPLY. 243 a sound judgment on this portion of Trades-Union policy, it is important to discriminate between two perfectly distinct meth- ods by which the supply of labor may be controlled. It may, in the first place, be controlled at its source by diminishing the number of people born to the calling of labor ; and this is a result which Trades-Unions might in many ways promote — for example, by cultivating among the laboring classes a sounder public opinion on the subject of population than at present prevails, by impressing on parents their responsibility toward their offspring, and generally by encouraging prudence and foresight, which, once established as habits, would affect con- duct in relation to marriage and its consequences, as well as with regard to other aspects of life ; and this influence might be brought to bear either upon the laboring population at large, or upon those sections of the population with which each Trades-Union happened to be immediately in contact. This is one method by which it may be attempted to operate on the labor market through the supply of labor. But the end in view may also be sought by another path, namely, by opposing artificial barriers to the admission of worlvmen to particular trades — for example, by regulations excluding from employ- ment in the protected trades all who have not been regularly apprenticed to them, setting limits at the same time to the num- ber of apprentices which each master-tradesman may receive ; the multiplication of the laboring people as a whole and of each portion of it being left to the influences which at present deter- mine it. Of these two methods of proceeding we may confi- dently pronounce the first to be both sound and legitimate— soTind, because the means adopted are fitted to attain the end in view, and legitimate, because the course pursued would be free from all attempts at coercion, and would be addressed ex- clusively to the reason and conscience of those concerned. We have no occasion here, however, to enter into any further ex- amination of this mode of restricting the supply of labor, since 244 TBADES-UNIONISM.—II. it is not the method which Trades-Unions have adopted. Their action in this direction has been confined exclusively to that other mode .of proceeding which consists in hedging round cer- tain favored trades with artificial obstacles ; and thi^ according- ly is the mode of action we are now called upon to consider. And here it may at once be conceded that the policy in question is capable of being made effectual for accomplishing its immediate purpose — that of raising the rate ofwages in the regulated occupations above the level which in an open labor market it would attain ; but conceding this, the question still remains whether this mode of action is consistent with the best interests either of the laboring people as a whole, or even of that section of them in whose favor the restrictive regulations are imposed. To enable us to form a judgment upon this point, it is important to bear in mind the real nature of the monopoly created by the restrictive rule. That monopoly is not, as might at first be imagined, one in favor of certain natu- ral groups of population— the collection of families, namely, who supply candidates to the highly-paid trades — as opposed to the laboring population at large. It is a monopoly of a much narrower and more artificial sort than this. The line drawn is, not between such natural groups and the rest of the laboring people, but between certain selected members of such groups and all who are not included in the selection. Now this is an important distinction ; because if the purpose were to reserve certain occupations to certain groups of families, say to those who at present fill the occupations in question and their descendants — though such a course would amount to the creation of industrial castes, and would be open to all the ob- jections that apply to a caste system — still it would have one important merit: the end in view — the permanent elevation of wages in the favored occupations above the level prevailing in the country — would need for its attainment something more than the mere exclusion of competitors from other employ- MODE OF ACTma ON SUPPLY. 245 ments: it would require, besides this, a control of population within the protected groups, and consequently could only be accomplished by the cultivation of feelings and habits socially so valuable that they might almost be thought to compensate for the serious evils inherent in every such plan. Such, how- ever, is not the object or character of the policy we are now considering. The thing aimed at is not the permanent eleva- tion of any natural groups of population, but simply the main- tenance of certain individuals who happen to be exercising certain callings in the enjoyment of a state of well-being not permitted to their fellows. Those, therefore, who charge upon Trades-Unions the purpose of creating industrial castes do not seem to have hit the precise weakness leavening the conduct they condemn. The scheme has, in truth, nothing in it so large or liberal as the social idea on which a caste system rests. It is conceived in a far narrower spirit, and is wholly incapa- ble of promoting any end that can properly be called social. Far from comprehending in its aims the general interests of labor, it is not even large enough to embrace those of a single laboring group, or even of the family in its narrowest sense; for, as Mr. Thornton tells us,* " a journeyman is not permitted to teach his own son his own trade, nor, if the lad managed to learn the trade by stealth, would he be permitted to practice it. A master, desiring out of charity to take as apprentice one of the eight destitute orphans of a widowed mother, has been told by his men that if be did they would strike. A brick-layer's as- sistant who by looking on has learned to lay bricks as well as his principal, is generally doomed, nevertheless, to continue a laborer for life. He will never rise to the rank of brick-layer, if those who have already attained that dignity can help it." The rule is thus a purely mechanical one, and operates wholly irrespective of any of the conditions on which indus- * "On Labor," p. 343. a46 TRADES -UNIONISM.— II. trial progress or human well-being depends. No attempt is made to control population within the protected trades, any more than outside them. Nor are the privileges enjoyed con- nected with any qualification which might serve as an edu- cating influence for the people at large. On the contrary, the system presents to them the unedifying spectacle of a portion of their number enjoying exceptional advantages which they have done nothing to deserve, and which they obtain at the expense of others whose natural or moral claim is quite as good as theirs. It thus at once creates privileged classes, and does so in a manner which precludes even such partial advan- tages as might accrue from a regime of privilege. Mr. Thornton, indeed, has offered a plea for these restrictions which, if it could be made good, might go some way toward excusing them. He writes: "The only apology that can be offered to the many is, that without the sacrifices exacted from them the privileges enjoyed by the few could never be pre- served ; and that, moreover, the sacrifices may be only tempo- rary, for that the best chance the whole laboring population have of advancing is by each of its separate sections advancing separately, and that therefore each Trades-Union is best con- sulting the general good by attending in the first instance ex- clusively to its own." It must of course be admitted that the privileges enjoyed by the few under this scheme can only be preserved by imposing sacrifices on the many ; but Mr. Thorn- ton can scarcely have intended this as its justification, since precisely the same can be said for every monopoly that ever existed. The second portion of his plea, that the plan in ques- tion, though confined at present to a favored few, may be made instrumental for gradually elevating the whole laboring population, would be more to the purpose if the fact were as he assumes. But this is precisely what I must deny to be the case. The essential nature of the plan absolutely precludes the possibility of its being applied to any such enlarged pur- HOW FAB JUSTIFIABLE? 247 pose. For on what does its efficacy depend? Let the reader observe that, as I have already pointed out, it makes no pro- vision for the control of population either within or without the protected trades ; and fui'ther, that, while it leaves popula- tion to proceed as the unchecked instincts of its members may determine, it fails equally to take any steps for making labor more productive : indeed, as I shall presently have occasion to point out, there are other portions of the Trades-Union regu- lations which tend directly to limit and even positively to re- duce the productive powers of industry. On what, then, does the efficacy of the arrangement depend? Simply and exclu- sively on the circumstance of the monopoly it creates — on the fact that those within the protected trades are few as compared with those who are outside them. Increase the numbers within the protected trades in relation to the outsiders, or, on the oth- er hand, diminish the number of outsiders in relation to those who are protected, and the virtue of the scheme evaporates, and wages inside and outside return to their natural level. The entire efficacy of the system thus depending upon the fact that it is partially applied, the extension of its privileges to the whole population would be equivalent to their complete abrogation. Such a system, from its very nature, is incapable of the development claimed for it. At the utmost it can only do what it actually accomplishes — secure, that is to say, ex- ceptional advantages for a select few, the condition of their en- joyment being that the same advantages shall not be shared by the many. I grant it is not for the richer or more edu- cated classes to throw stones here at Trades-Unionists; and I have certainly no desire to do so. There is no class that has not shown itself, when opportunity offered, quite capable of sacrificing the most important interests of the community to the aggrandizement, real or imaginary, of its own members ; and the working-classes are in this respect neither better nor worse than others. But if every anti-social regulation is to be 248 TBADES-UNIONISM.—II. sanctioned and upheld among working-men which has ever obtained footing among those who are called their betters, the prospect of social advancement seems but small. Into these class questions, however, I have no wish to enter here. My purpose has been simply to ascertain the real character and bearing of this particular portion of Trades-Union rules ; and this is the result to which I am led : I find it to be in its es- sential character a monopoly of the narrowest kind, capable indeed of accomplishing some small results in favor of a priv- ileged few, but wholly destitute of efficacy as an expedient for helping social improvement; a monopoly, moreover, founded on no principle either of moral desert or of industrial efficiency, but simply on chance or arbitrary selection, and which there- fore can not but exert a demoralizing influence on all who come within its scope ; in all its aspects presenting an ungra- cious contrast to all that is best and most generous in the spirit of modern democracy. " If," says Mr. 5Iill,* " no improvement were to be hoped for in the general circumstances of the Tvorking-classes, the success of a portion of them, however small, in keeping their wages by combination above the market rate, would be wholly a matter of satisfaction. But when the el- evation of the character and condition of the entire body has at last be- come a thing not beyond the reach of rational eifort, it is time that the better paid classes of skilled artisans should seek their own advantage in common with, and not by the exclusion of, their fellow-laborers. AVhile they continue to fix their hopes on hedging themselves in against com- petition, and protecting their own wages by shutting out others from ac- cess to their employment, nothing better can be expected from them than that total absence of any large and generous aims, that almost open dis- regard of all other objects than high wages and little work for their own small body, which were so deplorably evident in the proceedings and manifestoes of the Amalgamated Society of Engineers during their quar- rel with their employers. Success, even if attainable, in raising up a protected class of working-people, would now be a hinderance, instead of a help, to the emancipation of the working-classes at large." * "Principles of Political Economy," vol. ii., pp. 554, 555. "MAKING WORK." 249 § 3. There is yet another line of conduct by which Trades- Unions may and do seek to act upon the rate of wages — a course which is directed neither to augmenting the sura total of wealth applied to the payment of wages, nor yet to restrict- ing the supply of labor, but to enhancing the difiS.culties of production, and thereby increasing the quantity of work need- ed to be done— in a word, it seeks to raise wages by " making work." Now this portion of Trades- Union policy rests upon a view of the wages problem at once so plausible and so fallacious, and withal so pregnant with practical mischief, that I think it will be worth our while, before entering into the particular rules by which it is sought to carry it into effect, to consider briefly the theoretic principle underlying it ; and I am the more disposed to do so, because I find that those who favor this principle are by no means confined to the supporters of Trades-Unions. In point of fact, in the discussions which have lately taken place on the wages problem, the soundness of the view in question has been very generally taken for granted on both sides. In Mr. Thornton's work it is not merely taken for granted : the doctrine is deliberately put forward and formally defended as an indubitable principle of economic science. Mr. Thornton indeed, it is proper to say, while upholding the theo- ry, strongly denounces its practical application in the rules of Trades-Unions; but this logical inconsistency will not deprive his advocacy of the weight which naturally attaches to it ; and I shall therefore make no apology for examining the doctrine as I find it set forth and defended in his work. The character and scope of the principle to which I refer will appear from the following passages. At page 87 Mr. Thornton writes; " The quantity of labor whioti an employer needs depends upon the work he wants to have doue. If there are certain jobs which it is essen- tial to him to get finished within a certain time, he will, if labor be dear, 250 TBADES-UNIONISM.—II. consent to pay pretty high for the quantity needed to complete the jobs within the time. But he will not, merely because labor happens to be cheap instead of dear, hire more than that quantity. If, on Saturday morning, he wants his hay cut or carried before night, and if fewer than ten men would not suffice, he will, perhaps, consent to give ten men 5s. apiece, but he would not engage twenty men for the same service, even if he could get them for Is. a head." Again, at page 103 : " This happens [i. «., the demand for labor is urgent] in new colonies, in which the extent of land to be tilled, and the number of sheep or oxen to be tended, and of meals to be cooked, and floors to be scrubbed, is generally out of all proportion to the number of available hinds and herds, cooks and house-maids." And lastly, I find this more decisive passage at page 339 ; " I am myself unable to understand how mere labor-saving machinery can possibly, if no counteracting cause intervene, fail to diminish the de- mand for labor. If, indeed, the machinery increased the productiveness of labor in a greater ratio than that in which it saved labor, its influence on employment would be different. If, by using improved implements, one man were enabled not merely to do the work of two, but to turn out more produce than the two together had formerly done, the demand for labor might remain unabated, or might increase. If with only half the previous expenditure of labor two ears of wheat were made to grow where but one grew before, or twice as much iron-stone were brought to the pit's mouth, or twice as many herrings were caught, those men ' for whom there was no longer place in the corn-field, or in the mine, or on the fishing-ground, might yet find full employment in making the additional wheat into bread, or in smelting the additional ore, or in curing and packing the additional fish. But if there be no more corn, and no more ore, and no more fish than usual, if the new machinery has created no new work, and has only enabled the old work to be done with fewer hands, thereby causing some old hands to be discharged, how can it be asserted that the field of employment is enlarged ? how denied that it is diminished ?" The theory expressed or implied in these passages is that the demand for labor, in so far as it affects the ivages of labor "MAKING WORK." 251 depends upon and is measured by the quantity of industrial work to be done, which quantity of industrial work, Mr. Thorn- ton tells us, is " at any given time a fixed quantity " (pp. 334, 335); a position from which the direct inference is — an infer- ence partially drawn by Mr. Thornton himself — 'that the in- terests of labor are promoted by whatever tends to increase the quantity of work which society has to do ; while those in- terests are proportionally prejudiced by whatever tends to cur- tail the quantity of needed work. Now there can be no ques- tion as to the very great plausibility of this doctrine. I sup- pose there are very few working-men, and perhaps not a great many outside their ranks, who would not accept it as thus stated. We all see at once that labor will only be employed where there is work to be done ; and again, that the more work there is to, do of a particular kind, the more laborers there will be employed in doing that particular work; while it is also true that, where the work required is of a very urgent kind, employers will be disposed to raise their offer of wages in or- der to attract labor. All this is indisputably sound and true; and the conclusion drawn from these unquestionable premises, that the interest of the laboring classes lies in the work needed by society being as great and as urgent as possible, certainly seems plausible enough. Nevertheless I must make bold to say that, within the range of economic reasoning, no more pro- found fallacy finds a place than is contained in this inference ; nor, I must add, is there one niore pregnant with practical con- sequences of a pernicious kind. Observe some of the conse- quences that flow from it. If the interests of labor require that the quantity of work to be done by labor be as large as possible, then it follows that all labor-saving machines are op- posed to the laborer's interests. Mr. Thornton, as we have seen, admits that this is so whenever the new machinery does not, as in the instances which he adduces, create as much new work as it sets aside of old (p. 339). What proportion of all 252 TRADES-UNIONISM.— II. the machinery employed in helping industry in this country would, under this qualification, escape condemnation, as not injurious to the laborer's interests, I will not attempt to con- jecture — I should expect an exceedingly minute fraction of it; but at least it is evident that so much of it as is used in the later stages of manufacture — certainly all connected with the finishing stages of the process — would fall under the de- scription of machinery which created no new work to take the place of what it superseded ; and would therefore, according to Mr. Thornton's view, be properly characterized as hostile to the interests of labor. Again, by parity of reasoning, separa- tion of employments is opposed to the same interests ; for what else is the purpose of thus organizing industry, but in order to make it more effective; in other words, to abridge the amount of society's work? If every man who took part in pin-mak- ing were compelled to make the entire pin — to draw out the wire, to straighten it, to cut it, to point it, to grind it at the top for receiving the head, to make and put on the head, etc. — the number of men required for the work of pin - making would be indefinitely greater than at present, and, no other work being superseded, the field for the employment of labor would, according to the view we are considering, be greatly e:!Jtended. Division of labor, therefore, which narrows this field, is, according to this principle, plainly opposed to the in- terests of labor. Nor is free trade less clearly condemned by the same doctrine. The international exchange which it pro- motes is merely an example of division of labor on a great scale, and works toward precisely the same end as the more simple forms — the economy of labor in the production of com- modities. But these examples only represent one side of the consequences which may be drawn and have been drawn from this notable principle ; for if the laborer is damnified by what- ever tends to abridge the " work to be done," we may also argue conversely that he must be proportionally benefited by "MAKING WORK." 253 whatever increases it, more particularly if the additional work be of an urgent kind. A hurricane, e. g., which strips our roofs, and smashes our windows, and sweeps away our hag- gards, becomes in the light of this theory a beneficent influ- ence, pregnant with riches for the sons of toil — * " The clouds we so inucli dread Are big with mercy, and shall break In blessings on tTieir head." It increases the quantity of work to be done, and so, as the saying goes, "is all for the good of trade." So also must it be for the good of trade, according to the same doctrine, that thieves and burglars should abound, since does it not create plenty of policeman's work? Does it not compel us to place bolts and bars upon our doors and windows, thus creating work for smiths and carpenters? Further, consider all the work that is rendered imperative by the aggressive instincts and ambitious designs of nations against each other: standing armies, arsenals and fortifications, arms and ammunition — what a vast amount of work to be done do not these things represent! And how would not merely the soldier's, but the productive laborer's occupation be gone, or at all events be seriously abridged, if ever the disastrous consummation should arrive of general disarmament and universal peace ! We are accustomed to laugh at the celebrated petition of the chandlers * That I have not exaggerated the argument will be seen from the following ex- tract from an editorial article in the New York Tribune (October 24, 1871) apro- pos of the burning of Chicago, which I find in Mr. Wells's Essay in the Cobden Club volume: "The money to replace what has been burned will not be sent abroad to enrich foreign manufactures; but, thanks to the wise policy of protec- tion which has built up American industries, it will stimulate our own manufac- tures, set our mills running faster, and give emploi/ment to thousands of idle work- men. Thus in a short time our abundant natural resources will restore what has been lost, and in converting the raw matenal our manufacturing interests will take on a new activity.'' 254 TRADES-UNIONISM.— II. and kmp-manufactarers, recorded by M. Bastiat, for excluding the light of the sun. But the simple object of that petition was to increase the quantity of social work to be performed; and, for my part, I am unable to see how those who accept the theory I am now combating could consistently refuse their signatures. Where, then, is the fallacy in the reasoning which leads to these conclusions? If labor will only be employed where work is to be done, and will be employed more largely in any given work in proportion as there is more of that work to do ; and if again, as the work becomes more urgent, the laborer is more sought ; why is it wrong to say that it is the interest of the laborer that the quantity of work to be done should be as large, and the need for it as urgent, as possible? The answer is twofold: in the first place, what laborers are interested in is not work, but remuneration. People, said Archbishop Whate- ly, go about saying " they want work,'' when what they really want is wages. This sounds like a jest; but the confusion of thought it exposes is precisely the confusion embodied in the argument just stated. Work and wages are there assumed to be, if not strictly convertible terms, at least facts so closely bound together that an increase of the one may be taken as equivalent to an increase of the other. Now, before going further, it may be well to expose the utter groundlessness of this notion as a matter of fact; and a Blue Book recently is- sued by the Government* fortunately supplies me with what is necessary for this purpose. I take the three countries, Germany, England, and Califor- nia: I find that in the first the number of hours in a working day varies between fourteen, for some occupations, and, for the great majority, twelve. In England it is now mostly ten, but, in an increasing number of trades, nine only. In California * " Condition of the "Working-classes in Foreign Countries," 1871. WOEK AND WAGES. 255 ten is the maximum, while in many trades the number is as low as eight. Now it would no doubt be unwarrantable to assume that the work to be done in different countries varied for a given quota of working-people with the number of hours in a working day, inasmuch as one man may put as much work into nine hours as another into fourteen ; but the crite- rion would be correct unless so far as it was affected by the different efiiciency of labor in different countries. Taking ac- count of this, and assuming, what I imagine is quite in excess of the truth, that English labor is more efScient than German in the proportion of fourteen or twelve to ten or nine, it would follow that the work to be done in Germany would bear about the same proportion to her laboring population as the work to be done in England bears to the laboring population of this country. With regard to California, I do not suppose it would be contended that labor there is more efficient than in England, and we may, therefore, assume that the work to be done in the two countries, in its relation to the laboring popu- lation of each, is fairly represented by the respective lengths of their working-day. The result of our comparison then is, that the work to be done in the three countries, Germany, En- gland, and California, bears about the same proportion in each to the number of the laboring population. This being so, if the connection between work and wages be such as the the- ory we are considering assumes, wages in the three countries should be about the same. In point of fact, I need scarcely say wages in California, even after making all due allowance for the difference in the range of local prices here and there, are' at least double what they are in England, and at least four times what they are in Germany. So little connection is there in reality between the quantity of work which a given socie- ty has to perform and the rates of wages prevaihng in that society. This, however, is neither the only, nor the least fallacy in- 256 TRADES -UNIONISM.— 11. volved in the doctrine we are considering. It is a necessary assumption in that doctrine — indeed the position is formally taken by Mr. Thornton — that "the quantity of work to be done " is at any given time a " fixed " quantity. Now this must at once be met by a direct denial. The work which so- ciety has to do is not a fixed quantity. On the contrary, it is absolutely indefinite and practically unlimited: indefinite, as varying with human wants and desires ; and practically un- limited, because always far in excess of what human hands can accomplish. I am speaking now, not of society in its early stages, when human desires, and therefore the work of socie- ty, may, with some truth, be said to be confined within certain narrow and tolerably fixed bounds, but of society as we know it in Western Europe and the United States, after civilization has kindled those insatiable aspirations and created those in- numerable needs which distinguish the civilized from the un- civilized man. In society, when it has reached this stage, there is no practical limit to the desires of human beings, nor therefore to the quantity of work which they would wish to have done; and even though the course of civilization should be, as I trust it may be, toward the adoption of simpler tastes and habits in all that concerns mere physical well-being, the introduction of more simple modes of life, while limiting the range of wants in one direction, would not fail, we may rea- sonably assume, to open the door to new paths of expenditure in others. Benevolence and public spirit, the interests of sci- ence and literature, would become powerful and exigent, as the tastes for mere physical luxury and personal indulgence or aggrandizement declined, and would rapidly create wants to take the place of those which would now be no longer felt. The social work to be done, therefore, though under such a regime as we are contemplating differing much from that which now occupies industry, would still be as indefinite and as prac- tically unlimited as ever. There is thus no practical limit to SOCIAL TTOBK, INDEFINITE. 257 the quantity of social work to be performed ; and we may now see the true nature of the relation in which all the vari- ous contrivances — machinery, separation of employments, free trade — which tend to economize and abridge human labor, stand to the interests of those whose labor they supersede. Their effect is not to curtail the aggregate amount of social work — that, as I have said, is always far in excess of what hu- man capacity can accomplish^but to alter the nature of that work. So much labor and capital are relieved from the tasks formerly required of them, and set free for the performance of new work, for the satisfaction of cravings hitherto unfelt. I quite admit that the change from one mode of production, or fi-om one system of industry to another, even though that oth- er be a better one, is almost always attended with more or less temporary inconvenience, and sometimes even with consider- able suffering, for those whose occupations have been dis- placed; and this is a good reason for society doing all in its power to alleviate and repair these inevitable but transitory evils. But we have now to do, not with the incidental con- sequences of improvements, but with their essential character and permanent significance as regards the interests of labor ; and I say that, regarding them in this light, their tendency is, not to leave society without occupation, but to alter from time to time the occupations with which society busies itself — to provide for the easier satisfaction of its primary and more pressing wants, and thereby to render possible the further sat- isfaction of numerous secondary wants of a less urgent kind. A limit indeed there is — a very real limit — -to the employment of labor in a limited area of country ; but that limit does not lie in the quantity of social work, but in the productive power of the agents employed in performing it — in other words, in the increasing cost of production. The work is there to do, but the efforts needed to accomplish the work are greater than the product is thought to be worth. Here is the true and 17 258 TRADES-UNIONISM.— IL only limit to the employment of labor; and its removal or ex- tension is to be sought, not in multiplying the obstacles that oppose the satisfaction of human desires, and so " making work," but in precisely the opposite direction — in the removal, as far as may be, of such obstacles, and in freely availing our- selves of all arts and contrivances by which human effort may be rendered productive of larger result. Iilcrease the produc- tive powers of industry, extend the knowledge of the industrial arts which support and comfort mankind, and there is little danger that laborers will ever fail of employment for want of work to do. So much, then, for that view of economic doctrine which identifies human well-being with the maintenance and mul- tiplication of the obstacles to its attainment ; in the words of Bastiat, confounding obstacle with cause, and effort with result. § 4. Let us now observe its practical development in the rules of Trades-Unions. The following examples I take from Mr. Thornton's work : " Some Unions divide the country round them into districts, and will not peiTQit the products of the trades controlled by them to be used, ex- cept within the district in which they have been fabricated. . At Manchester this combination is particularly effective, preventing any bricks made beyond a radius of four miles from entering the city. To enforce the exclusion, paid agents are employed ; every cart of bricks coming toward Manchester is watched, and if the contents be found to have come from without the prescribed boundary the brick-layers at once refuse to work. . . The vagaries of the Lancashire brick-mak- ers are fairly paralleled by the masons of the same county. Stone, when freshly quarried, is softer, and can be more easily cut than later : men habitually employed about any particular quarry better understand the working of its particular stone than men from a distance ; there is great economy, too, in transporting stone dressed instead of in rough blocks. The Yorkshire masons, however, will not allow Yorkshire stone to be SOCIAL WORK, INDEFINITE. 25& brought into their district if worked on more than one side. All the rest of the working, the edging and jointing, they insist on doing them- selves, though they tliereby add thirty-five per cent, to its price A Bradford contractor, requiring for a stair-case some steps of hard delf-stone, a material which Bradford masons so much dislike that they often refuse employment rather than undertake it, got the stcjjs worked at the quarry. But when they arrived ready for setting, his masons in- sisted on their being worked over again, at an expense of from 5s. to 10.«. per step. A master-mason at Ashton obtained some stone ready polished from a quarry near Macclesfield. His men, however, in obedience to the rules of their club, refused to fix it until the polished part had been de- faced and they had polished it again by hand, though not so Y,'ell as at first "In one or two of the northern counties, the associa;ted plasterers and associated plasterers' laborers have come to an understanding, according to which the latter are to abstain from all plasterers' work except simple whitewashing; and the plasterers in return are to do nothing, except pure plasterers' work, that the laborers would like to do for them, inso- much that if a plasterer wants laths or plaster to go on with, he must not go and fetch them himself, but must send a laborer for them. In conse- quence of this agreement, a Mr. Booth, of Bolton, having sent one of his plasterers to bed and point a dozen windows, had to place a laborer with him during the whole of the four days he was engaged on the job, though any body could have brought him all he required in half a day. . • Not besting one's mates' has by several Unions been made the subject of special enactment. ' You are strictly cautioned,' says a by-law of the Bradford Brick -layers' Laborers, ' not to overstep good rules by doing- double work, and causing others to do the same in order to gain a smile from the master. Such fool-hardy and deceitful actions leave a great por- tion of good members out of employment. Certain individuals have been guilty, who will be expelled if they do not refrain.' The Manchester Brick-layers' Association have a rule providing that ' any man found run- ning, or working beyond a regular speed, shall be fined 2s. 6d for the first offense, 5s. for the second, 10s. for the third, and if still persisting shall be dealt with as the committee think proper.' As also shall be ' any man working short-handed, without man for man.' . . At Liv- erpool, a brick-layer's laborer may legally carry as many as twelve bricks at a time. Elsewhere ten is the greatest number allowed. But at Leeds ' any brother in the Union professing to carry more than the common 2B0 TRADES -VmOmSM. II. number, which is eight bricks, shall be fined Is. ;' and any brother ' knowing the sanae without giving the earliest information thereof to the committee of management, shall be fined the same.' .... During the building of the Manchester Law Courts, the brick - layers' laborers struck because they were desired to wheel bricks instead of carrying them on their shoulders." The purpose and general tendency of these regulations can not be mistaken. Their object is, by enforcing uneconomical methods, and proscribing recourse to the facilities offered by nature and circumstances, to create a necessity for work which otherwise would not have existed. The code is, from first to last, an example of that view of Political Economy of which the culminating triumph would be the exclusion of the light of the sun. It must be admitted at once that the method is not devoid of a certain efiScacy. It does tend to cause a larger capital to be invested in certain trades than would otherwise find entrance to them, and thus either to raise the rate of wages in them, or to increase the number of laborers emploj'ed at a given rate. So much must be admitted. But then this end is attained at the cost of diminishing the sum total of re- sult from human industry, so that whatever gain it procures for the individuals or classes who benefit by it is necessarily pur- chased at the cost of inflicting a more than equicalent loss on so- ciety as a whole. I say a more than equivalent loss; for the total return upon industry being diminished by this preposter- ous policy, while the share of certain classes is increased, it is plain that what falls to the remainder will be less, not merely by what the former gain, but by this plus the loss upon the entire social fund. The sort of selfishness, therefore, embodied in these rules of Trades-Unions is not selfishness of the ordi- nary humdrum kind, which merely grasps for one's self what would fairly have gone to another, but that more extreme form of the propensity which is ready to inflict a great evil on anoth- er in order to secure a small good for one's self — to burn down RULES FOE "MAKING WOMK." 261 our neighbor's house in order to roast our own egg. Nor is this the most serious objection to this portion of the Unionist code. It carries the deeper stigma of sinning against the in- terests of civilization itself; for its spirit is antagonistic to all progress and improvement, and, if it did not carry us back, as logically it ought, to a rejection of all the labor-saving contriv- ances and aids which art and science have won for industry, would, at the very least, tend to stereotype industrial operations in their existing forms. The very meaning of industrial prog- ress is the increase of the productive result in proportion to the labor undergone ; while the direct tendency of the rules in question is to increase the labor undergone in proportion to the productive result. I am far, indeed, from desiring to charge these consequences, as a deliberate purpose, on the Unionist leaders, and still less on the workmen who have accepted and acted on their legislation. On the contrary, I am persuaded that the true character of those regulations is either entirely misconceived, or, at the utmost, most inadequately appreciated, by those for whose benefit they are intended. The view which has suggested them, far from being confined to the working- classes, has, as we have seen, found for its champion so able and dispassionate a writer as Mr. Thornton, who, while denouncing in language which certainly leaves nothing to be desired in point of vigor and heartiness those elaborate contrivances for rendering man's position in the world worse than it might be, has himself furnished the theoretical premises which would be quite sufficient, if only they were well founded, to justify the most extravagant of the acts which he reprobates. It must also be frankly confessed, with reference to this as with refer- ence to other parts of the Unionist policy, that the better-off classes of society are by no means entitled to plume themselves at the expense of the workmen. In the practice of the legal profession, e. g., there would, I fancy, be no difficulty iu finding usages, not yet perhaps quite obsolete, conceived in this same 362 TRADES-UNIONISM.— II. spirit of aggrandizing a calling by " making work " for its members. One has only to watch the progress of an ordinary Chancery suit, or to read through an ordinary deed, to find ex- amples which would scarcely lose in lustre by being placed be- side some of the brightest of those furnished by the Manches- ter Brick-layers' Association. What, indeed, is the opposition given to law reform by too large a section of the legal profes- sion but a flagrant example of this, very spirit — a readiness to sacrifice the interests of society at large to those of the legal profession, to arrest the progress of social improvement, in order that work may be found for a few lawyers the more? The notion of aggrandizing' one's order by " making work " for it may assume in Trades-Union codes a somewhat more ex- travagant and grotesque form than elsewhere; but the princi- ple itself is deeply embedded in the practical modes of think- ing and acting of nearly all classes; and it therefore needs all the more to have its true character and tendencies laid bare without reserve, and to be duly stigmatized as the most in- tensely selfish and the most flagrantly anti-social of all the plans' of conduct by which, at various times, different classes of society have attempted, in disregard of the general social weal, to advance their several interests. CHAPTER V. PRACTICAL DEDUCTIONS PROM THE FOREGOING PRINCIPLES. § 1. In the foregoing chapters the theoretical conditions gov- erning the position of the laborer and the rate of his remuner- ation, have, it is to be hoped, been pretty fully set forth. It remains now to consider the practical conclusions, in relation to his actual condition and future prospects, which may be drawn from the premises thus furnished. But at this point an objection would probably be interposed by a certain class of thinkers on social subjects, and I may be challenged to say why, conceding the economic principles af- fecting the subject to be such as I have stated them, the dis- tribution of the produce of industry should be left to be de- termined by those principles; why it should not ratlier be reg- ulated by the laws of justice? In answer to which I must reply, in the first place, that I am unaware of any rule of justice applicable to the problem of distributing the produce of in- dustry ; and, secondly, that any attempt to give effect to what are considered the dictates of justice, which should involve as a means toward that end a disturbance of the fundamental as- sumptions on which economic reasoning is based — -more espe- cially those of the right of private property and the freedom of individual industry — would, in my opinion, putting all other than material considerations aside, be inevitably followed hj the destruction or indefinite curtailment of the fund itself from which the remuneration of all classes is derived. § 2. If justice be the principle according to which the pro- ceeds of industry ought to be distributed, those who advocate •264 PRACTICAL DEDUCTIONS. this mode of distribution are bound to produce some work- ing rule according to which the principle they contend for is to be carried into effect. Several such rules have indeed been propounded, and others may easily be imagined, which would have quite as good a title to the claim of representing natural justice as any that have been advanced by social reformers. For example, it has been held by one social re- former that the rule of distribution required by justice is that indicated by the wants of human beings and the degree of their urgency, in accordance with which view the formula of distributive justice would be — "to each according to his wants." In the opinion of another, distribution ought to be regulated by the degree in which each has contributed by his efforts to the fund available for distribution; the formula of distributive justice becoming in this case — "to each ac- cording to his works." And perhaps as plausible a principle as either might be constructed by founding the rule of distri- bution on the proportional sacrifice undergone by those who take part in the work of productive industry; in which case we should have as our formula — "to each according to his sacrifice." As to the amount of truth or morality which these several maxims embody, I am not concerned here to inquire. My business with them has reference exclusively to their effi- cacy as rules for regulating the distribution of wealth. But in proceeding to examine them with this view, I am anxious to disclaim all desire to disparage the ideals of human life which they suggest, provided they be regarded simply as ideals — as a goal toward which one may work and strive, due consideration being had of the actual circumstances of the external world, and of the character, as hitherto actually developed, of human beings residing upon it: indeed, so far from this, I have no hesitation in admitting that the realization of any one of them would imply a condition of society incomparably superior to an}' that now exists, or is likely for a long time to exist. S<> SOCIALIST MAXIMS. 265 far I am quite prepared to join in socialistic aspirations. Wliere I take issue with the Socialists is as to the present feasibility of their schemes, and as to the means by which the ends they desire are to be promoted. I altogether deny that in the actual circumstances of mankind the distribution of wealth on the principles they contend for is feasible; and I be- lieve that the attempt to carry those principles into effect by invoking for this purpose the powers of the State — which I take to be the essential characteristic of Socialism, and that which broadly distinguishes it from other modes of social spec- ulation* — could only issue in disaster and ruin. * In this I venture to differ from the great man recently taken from among us, whom I am proud to call my friend and teacher. In a remarkable passage of the "Autobiography," Mr. Mill represents himself as properly classed " under the gen- eral designation of Socialists, "because his ideal of ultimate improvement had more in common with that of Socialistic reformers than with the views of those who in contradistinction would be called orthodox. "While we repudiated with the greatest energy that tyranny of society over the individual which most socialistic systems are supposed to involve, we yet looked forward to a time when society will no longer be divided into the idle and the industrious ; when the rule that they who do not work shall not eat will be applied, not to paupers only, but im- partially to all ; when the division of the produce of labor, instead of depending, as in so great a degree it now does, on the accident of birth, will be made by con- cert on an acknowledged principle of justice ; and when it will no longer either be, or be thought to be, impossible for human beings to exert themselves strenuously in procuring benefits which are not to be exclusively their own, but to be shared with the society they belong to." ("Autobiography," pp. 2.31,232.) If to look forward to such a state of things as an ideal to be stiiven for is Socialism, I at once acknowl- edge myself a Sociahst; but it seems to me that the idea which "Socialism ' con- veys to most minds is not that of any particular form of society to be realized at a future time when the character of human beings and the conditions of human life are widely different from what they now are, but rather certain modes of ac- tion — more especially the employment of the powers of the State for the instant accomplishment of ideal schemes, which is the invariable attribute of all projects generally regarded as Socialistic. So entirely is this the case, that it is common to hear any proposal which is thought to involve an undue extension of the powers of the State branded as Socialistic, whatever be the object it may seek to accom- plish. After all, the question is one of nomenclature merely ; but people are so 266 PRACTICAL DEDUCTIONS. § 3. As regards the first of the formulas to which I have referred, which proposes to distribute the wealth of a commu- nity among its members in proportion to their wants, I must frankly acknowledge that I am wholly unable even to con- jecture the method of its application. How are the wants of individuals to be ascertained ? Is it to be left to each to de- scribe his own wants ? And if the funds are not adequate to meet the requirements of all, who is to decide as to which wants are the most urgent ? A man with a large family has greater wants than a man with a small one. Does this consti- tute a title to a proportionally larger share of the proceeds of industry? And if so, what is to keep the population of a country within the necessary limits of the means of subsist- ence ? Such are some of the questions which meet us on the threshold in seeking to apply this formula, every one of which, it seems to me, leads us straight into a cul de sac. I must therefore put aside this particular form of the law of distribu- tive justice as for me utterly unmanageable. The two latter principles, however, of which one would assign wealth to each person in proportion to the work he has accomplished, and the other in proportion to the sacrifice he has undergone, are not at once and obviously impracticable ; and in point of fact both one and the other do exert, under our existing system of in- dustr}', a certain influence in determining the distribution of wealth. For example, wherever the results of industry admit of being measured and compared, as in all work of the same kind, the remuneration of the workman, if only competition is effective, naturally adjusts itself to the results of his work. A workman who in a given time can perform twice as much of a given work as another will in an open market command twice as much wages. But where the results of industry are greatly governed by words that I can not but regret that a philosophy of social life with which I so deeply sympathize should be prejudiced by verbal associations fit- ted, as it seems to me, only to mislead. BULE OF SACRIFICE. 267 different in kind, how is the rule of distribution in proportion to results to be applied? One man in a day produces a coat, another a table, a third superintends a body of workmen — by what standard shall we measure these several results, and say that any of them is greater or less than any other? It is plain that the rule of distribution in proportion to results fails us ut- terly here. Similarly, the principle of distribution in propor- tion to sacrifice has also, under our present regime (as was seen in a former portion of this work), a certain operation in deter- mining the distribution of wealth. It is indeed the ruling prin- ciple of distribution wherever competition among producers is really free. But, as was then pointed out, the field of compe- tition, though large, is far from being co-extensive with the in- dustry of any country, and, in the absence of competition, it is not easy to see how relative sacrifice is to be determined. More particularly does this difficulty become formidable when we come to deal with what may be regarded as the crucial problem of distribution — the distribution of the proceeds of in- dustry between laborer and capitalist. Even could the claims of laborers as among themselves be adjusted, there would still remain this problem, which the least consideration of the facts involved will show to be wholly unamenable to a priori treat- ment, whatever be the form which the rule of justice may assume. Let us suppose, for example, a benevolent despot desirous of applying to this case what we may describe as the principle of efficiency — "to each according to his works." He finds that a house has been built by the combined action of a master- builder and workmen : the former has supplied the materials for the building and the means of supporting the laborers dur- ing the performance of the work, the latter have furnished the labor : how is our despot to determine how much of the house or of its value is to be credited respectively to him who has supplied the capital, and to those who by their labor have con- 268 PRACTICAL DEDUCTIONS. verted this capital into a house? Again, a master-tailor sup- plies a sewing-machine and cloth ; journeymen tailors go to work on these articles, and a suit of clothes is the result — what proportion of the clothes is to be credited respectively to the machine and to the workmen ? It is only necessary to pro- pound such questions to perceive that they are absolutely in- soluble. As well might we seek to determine the proportions in which the oxj'gen, the hydrogen, and the electric flash have contributed to the drop of water which results from their com- bined action. Nor would the standard of relative sacrifice be any more to our purpose here. As I have already remarked, it is not easy to see how relative sacrifice is to be estimated in the absence of competition ; and more particularly is this the case where the sacrifices to be compared take forms so widely different in character as those undergone by laborer and capi- talist. What are those sacrifices? On the one hand, certain physical and mental efforts, involving weariness, exhaustion, and sometimes positive pain ; on the other, a mere abstinence from enjoyment which might have been indulged in, accom- panied with a certain sense of insecurity as to the issue of an undertaking. Who can compare and appraise two such sacri- fices, and undertake to assign to each its due reward? Mani- festly at this point, the principle of sacrifice, no less than that of efficiency, inevitably breaks down. Even could they have solved all other cases, we are forced to confess that, in pres- ence of the most important and pressing of all — the relative claims of labor and capital — both principles are impotent alike. Eight or wrong, therefore, they are inapplicable to the ques- tion in hand, and so will not serve our turn. § 4. I am thus unable to find in the maxims of abstract jus- tice any key to the practical problems of the distribution of wealth; and I am bound to add, that just as little can I dis- cover in the actual results flowing from the action of econom- JUSTICE AND ECONOMIC LAW. 269 ical laws a realization of the principles of abstract justice. There is indeed a school of economists, of whom M. Bastiat may be taken as the prophet, who have persuaded themselves' that such a realization is in fact accomplished, who hold that the distribution of wealth which results from the free play of economic forces is not merely that which the circumstances of the case render inevitable, but also that which justice and nat- ural right prescribe. I must frankly own that I am wholly unable to concur in this view. For when I look into the na- ture of those economic forces on the play of which the actual distribution of wealth in this and other civilized countries de- pends, what do I find? Certain physical, physiological, and mental conditions — on the one hand, a productive capacity in the soil and other natural agents; on the other, certain ele- ments in the character of the people, such as the desire to accumulate wealth and provide for the future, and constant- ly counteracting this, a love of present ease and indulgence ; lastly, the animal propensities which continue. and multiply the race. These are the forces which, coming into play under a regime of private property and freedom of individual indus^ try and enterprise, determine the proportions in which wealth is divided among a people. But what is there in such cir- cumstances to make it necessary that the distribution which results shall be in conformity with what our ideas of justice would require? What is there in the case to secure that the action shall always be in the lines of moral right? The agen- cies in operation are essentially out of the moral sphere ; and if it should in fact happen that the results arising from their free action in any given case prove to be in strict accordance with the claims of moral justice, and with so-called "natural rights," I do not see that we should be justified in regarding the coincidence as other than a fortunate accident. In point of fact, the practical consequences accruing from the condi- tions of industry in this iind other civilized countries are not 270 FBACTICAL DEDUCTIONS. such as, for my part, I should find it easy to reconcile with any standard of right generally accepted among men.* § 5. It seems to follow from these considerations that while, on the one hand, mere standards of abstract justice or natural right are inefficacious as means of solving the actual problems of the distribution of wealth, on the other the solution actual- ly effected of those problems under our existing system of in- dustry is not such as entitles us to claim for it, as a necessary consequence of the agencies through which it is worked out, the character of satisfying the requirements of moral justice. If our present system of industr^"^ is to be justified, it must, ac- cording to my view, find its justification in quite another or- der of ideas than those of abstract right or natural law — name- ly, in the considerations of practical utility ; and more specif- ically in the fact that it secures for the mass of mankind a greater amount of material and moral well-being, and provides more effectually for their progress in civilization, than any oth- er plan that has been yet, or apparently can be, devised. By our present system of industry, let me here explain, I mean simply the industrial arrangements and the mode of distributing wealth which prevail in this and other civilized countries, so far, and so far only, as these result from the rec- ognition of private property and freedom of individual indus- try and enterprise. These latter institutions, it is true, are far from representing fixed and absolute conditions; and the mod- ifications with which they are affected in different countries lead to important differences in the practical outcome accruing from their maintenance. Into the question of such modifica- I may here at least claim Shakspeare as an authority on my side : "Talie physic, Pomp, Expose thyself to feel what wretches feel ; That thou may'st shake the superflnx to them, And show the heavens more just." GROUNDS OF DEFENSE. 271 tions I do not enter here. The issue taken by those who ad- vance socialistic objections, founded on allegations of inequali- ty and injustice, against existing industrial arrangements, has regard to the principles themselves, not to their modifications; and, therefore, in defending these arrangements against such objections, it is with the principles alone that we need con- cern ourselves. Nor, indeed, have I any need here to enter at large into the controversy between Communism and private property. That question may now, I think, be said to be, so far as argument can carry it, sufficiently disposed of: at all events, I could hope to add nothing to what Mr. Mill has so admirably said in his examination of the subject — an exami- nation not less remarkable for its thoroughness than for the candor, and even tenderness toward those whose opinions he opposes, which it displays. But, without entering into the general question, I may venture to point out one capital con- sideration of a purely economic kind which, apart from the reasons, chiefly moral and political, relied on by Mr. Mill, ap- pears to me to justify the opinion in favor of our existing sys- tem of industry in its essential circumstances which I have ventured to express. I take it to be a fundamental and indispensable condition of all progressive human society, that by some means or other a large aggregate capital available for its requirements should be provided. "Without such a fund, accumulated from the products of past toil, division of labor and continuous industr}'' are impossible; population can not attain the degree of density indispensable to civilized existence; nor can that amount of leisure from physical toil be secured for any considerable por- tion of the people, which is required for the cultivation of science and literature. The maintenance, therefore, of an ag- gregate capital capable of providing for these requirements must be regarded as an indispensable condition to be fulfilled by every industrial system which undertakes to promote the 272 PRACTICAL DEDUCTIONS. well-being find progress of mankind. Now cur economic investigations have shown us that this end, the storing up of the products of past industry for the purpose of sustaining and assisting present industry, can only be attained at the cost of certain sacrifices — those sacrifices, namely, implied in foregoing the immediate use of what people have the power of using, and in incurring the risk which attaches in a great- er or less degree to all industrial investment. These sac- rifices may be regarded as trivial or severe; but, as a mat- ter of fact, they will not be undergone without an adequate motive in the form of a compensating reward. Such a mo- tive our present system of industry provides in the mainte- nance of private property and industrial freedom. The pros- pect of profit is the prospect of enjoying as property the results of industrial investment; and this prospect under a system of industrial freedom is thrown open to all who are in possession of wealth. The inducement thus offered to the acquisitive propensity in man constitutes, under the actual system of things, the great spring and support of productive capital, and, in the last resort, the ultimate security for all the results which go to form our material civilization. The feel- ing appealed to may, if you like, be a coarse one, but it is at any rate efficacious ; it does lead to habitual and systematic saving, and furnishes society with the necessary material basis for civilized progress. But this motive every system which annuls private property and freedom of individual industry takes away ; and the question is. What do such systems sup- ply in its place? Two possible substitutes, so far as I know, and two only, have been or can be suggested — benevolence and public spirit. I should be very unwilling to disparage such principles of action, or to deny that they are at present extensively influential in human affairs; but I can not affect to believe that either, or that both together — taking human beings, not as in the progress of human improvement they BEMUNEBATION OF INDVSTRY. 273 may possibly become, but as we now actually find them — could be trusted to supply the place of that desire for individ- ual advancement and well-being to which the institutions of private property and industrial freedom make appeal. I am, therefore, unable to see hojv any system, which relies upon no stronger or more universal elements of human character than these for its support, can fulfill that primary and indispensable condition of all progressive society — the providing of a mate- rial basis for civilization in the form of an accumulated capital. § 6. So much I have thought it well to say in justification of the fundamental bases of our present industrial system : it remains to consider what are the prospects offered by the sys- tem to the working-classes living under it, taking their con- dition to be governed by the economic laws developed in the previous portions of this work. The remuneration of industry, as we there saw, is derived from, and therefore must be limited by, the products which result from its exercise. In this exercise two distinct func- tions are embraced — that performed by labor and that per- formed by capital, each implying a sacrifice and demanding a reward. To the share of the produce to be assigned to the laborer Nature has herself -very obviously set a minimum lim- it in the requirements essential to his existence: it can never permanently be less than will suffice to support, in such phys- ical and mental strength as the work performed calls for, those who carry it on. On the other hand, the capitalist's share also finds a minimum limit in his disposition and character: it must at least be such as shall seem to him a sufficient compensation for the sacrifices which he incurs in investment, and will, there- fore, in a given community be high or low, according as that element of character designated by Mr. Mill " the effective de- sire of accumulation" is weak or strong. It follows from this that, in order to the systematic pro.secution of industry, the 18 274 PRACTICAL DEDUCTIONS. produce resulting must at least be sufficiently great to cover both these requirements — to yield, that is to say, a minimum wage and a minimum profit; if it be not equal to this, either labor will fail for want of support, or capital will cease to be invested for want of adequate inducement. But the produce may be indefinitely greater than this ; and hence arises a mar- o-in of return over and above what the satisfaction of the min- ima of wages and of profits demands. Now it is evident that by the extent of this fund the possibilities of the laborer's po- sition must, under all circumstances, be bounded. Two questions, accordingly, here at once arise; first, as to the possible increase of this margin of return as industry, with the progress of industrial art, becomes more productive ; and, secondly, as to the degree in which the working -classes are likely to appropriate such augmentation as may accrue. As regards the latter point, we have seen that profits in advan- cing communities tend to a minimum, from which we are justi- fied in concluding that, however the gain may for a time be divided between capitalist and laborer, the permanent tend- ency of things will be toward an absorption of the whole by wages. In whatever degree, therefore, the margin of the re- turn on industry, beyond what is needed to satisfy the minima of wages and profits, may increase with the progress of soci- ety, we are warranted in regarding the fund thence arising as available for the improvement of the laborer's condition. The question as to the possibilities of his future — supposing him to remain as at pi-esent a mere receiver of wages — thus turns entirely and simply upon the prospects of increase in this fund. And here I regret to say the outlook of the laborer is by no means so bright as a superficial view of the case might lead us to suppose. Understanding by the rate of wages the real re- muneration of the laborer, and by the rate of profit the ratio of the return upon capital, and bearing in mind that wages and PRODUCTIVENESS OF INVVSTRT. 275 profits are derived from, and in fact represent, the products of industry, it might seem a safe position to assume that the fund available for the augmentation of the rates of wages and profits would increase pan passu with every extension of the power of man in the industrial sphere. Plausible, however, as this position seems, we may easily convince ourselves that it can not possibly be true. Let us consider this fact. Within the last century an enormous increase has taken place in the pro- ductiveness of industry in Great Britain. A given exertion of labor and capital will now produce in a great many directions five, ten, or twenty times, in some instances perhaps one hun- dred times, the result which an equal exertion would have pro- duced a hundred years ago: it is not probable that industry is in any direction whatever less productive now than it was then ; yet the rate of wages, understanding this in the sense defined, as measured by the real well-being of the laborer — though some improvement no doubt has taken place in his condition during this time- -has certainly not advanced in any thing like a corresponding degree ; while it may be doubted if the rate of profit has advanced at all. If we were to take the current rate of interest as a criterion, we should be inclined to say that it had even positively fallen. It is certain, at all events, that neither the rate of wages nor the rate of profits, nor both rates combined, have experienced any increase at all commensurate with that which has occurred in the general pro- ductiveness of industry. Some one, no doubt, has benefited by the enlarged power of man over material nature ; the world is beyond question the richer for it; but what I wish to call at- tention to is that the gain, however realized, does not show itself, at least on the scale of its actual magnitude, either in the real remilneration of the laborer, or yet in the ratio of return upon the capitalist's outlay. What, then, is the relation of the productiveness of industry to these phenomena? and how far can we count upon the prog- 276 PRACTICAL DEDUCTIONS. ress of industrial invention and improvement for enlarging that margin of return out of which all additions to the mini- mum rates of wages and of profits must be made ? The cor- rect answer to this question may, I think, be thus stated: the productiveness of industry only affects the rates of wages and profits in so far as it results in a cheapening of the commodities vjhich enter into the consumption of the laborer. This is a point not in general correctly apprehended, but it will not be diffi- cult to establish its truth. Let us suppose an improvement to take place in the mode of producing an article consumed only by the rich, and leading to a cheapened cost of production — what happens? Assuming that there is no monopoly, and al- lowing time for supply to adjust itself to demand, there will occur a fall in the value of the article in proportion to the fall in its cost of production. A given capital will yield in this particular commodity a larger return, but this increased return will only possess the same value as the smaller return previously obtained. The ratio, therefore, of the value pro- duced to the value expended will remain undisturbed. It follows that an improvement in industry of this descrip- tion, however it may temporarily profit individual producers pending the adjustment of supply to the altered conditions of demand, has no tendency to raise the rate of profit.* And it is sufficiently evident that it will not affect the remunera- tion of labor. Why should it? It has not increased either the capital of the country (for the cheapened article is by hy- pothesis an article of luxurious consumption) or the value of its products. The laborer's wages, measured in money (which we assume to remain constant in value) continue as before, and the only article cheapened is one which by hypothesis he does * This position would require qualification if the article of luxurious consump- tion which I have supposed to he cheapened could be made the means, through an exchange with foreign countries, of obtaining on cheaper terms food or other laborer's commodities. PBODVCTIVENESS OF INDUSTRY. 377 not consume. If I am asked, Who then are the persons who benefit by improvements of this class? I answer, those who consume the commodity. If capitalists are consumers, then they will benefit as consmners, but not in their quality of re- ceivers of profits. They will receive the same rate of return on their investment as before, but the sum resulting from this rate of return will give them a larger command than before over the articles of their consumption. We thus find that im- provements in productive industry, where they apply to com- modities consumed only by the rich, however they may bene- fit the rich, have no tendency to raise the rate of profit ; while they leave the remuneration of the laborer entirely unaffected. But now observe the consequence of improvements of another kind — those, namely, which affect commodities entering into the consumption of the laborer. Here, again, as in the case just considered, the article affected by the improvement would fall in price in proportion to the cheapening of its cost; but one or other of the following consequences would also happen : either the real remuneration of the laborer would increase in proportion to the cheapening of the commodity multiplied by the degree in which it entered into his expenditure; or, failing this, the rate of profit would rise. It is probable that, in the first instance at least, the former result is that which would occur. There is nothing in the cheapening of an arti- cle of the laborer's consumption to diminish the investment of capital or at once to increase the supply of labor. Money wages, therefore (the value of money being assumed to remain constant), would continue as before, and the laborer, in com- mon with other consumers, would reap the benefit of the im- provement in the diminished price of the commodity. If this did not happen — if money wages fell, let us suppose, so as just to neutralize the cheapened cost of the commodity, leaving the laborer's real remuneration unaffected — then the state of things would imply an advance in the rate of profit ; for the price of 278 PKACTICAL DEDUCTIONS. the commodity falling in proportion as its cost nad diminished — that is to say, as the product of a given exertion of industry employed in making it had increased — the value of the aggre- gate return upon industry thus employed would be the same as before; but the value of the outlay upon the same exertion of industry would have declined in consequence of the fall in money wages, and the ratio of the return to the outlay, that is to say, the rate of profit, would therefore have increased. It is thus through a limited class of commodities only that the progress of industry' affects either the rate of profit or the la- borer's well-being; in other directions improvements may oc- cur and commodities be indefinitely cheapened to the advan- tage of consumers, but without extending in the least that mar- gin of return from which augmentations of wages and profits are derived. And now I am in a position to explain the phenomenon to which I have called attention — the fact, namely, that so little impression has been made on the rate of wages and profits by the immense industrial progress of recent times. The expla- nation hes in the following circumstances: 1st, the improve- ments have to a very large extent affected commodities not consumed by the laborer; and, so far as this has been the case, there is, as .we have seen, nothing in the circumstance of an increase in industrial efficiency to cause an advance in either wages or profits; and, 2dly, when the improvement has affect- ed commodities consumed by the laborer, the industrial advan- tage gained has rarely been maintained to its full extent, and frequently after a time has been entirely lost. What has hap- pened has been a temporary improvement of the laborer's con- dition, followed by an increase of population and an enlarged demand for the clieapened commodity. Laborers' commodi- ties, however, are for the most part commodities of raw prod- uce, or in which the raw material constitutes the chief ele- ment of the value (clothing is, in truth, the only important ex- IN EELATION TO RENT. 279 ception) ; and of all such commodities it is the well-known law that an augmentation of quantity can only be obtained, other things being the same, at an increasing proportional cost. Thus it has happened that the gain in productiveness obtained by proved processes has, after a generation, to a great extent been lost — lost, that is to say, for any benefit that can be derived from it in favor of wages or profits; and though our industry is conducted with greater skill than formerly, yet being employ- ed on natural agents of inferior power or of greater remoteness, to which the needs of an increasing population have compelled us to resort, and the cost of the portion of the produce raised from those inferior natural agents being that which governs the price of the whole — it comes to pass that it now yields, capital for capital and effort for effort, no greater, or but a slightly greater, return. Not indeed that the introduction of improved processes into agriculture has been for naught: it has resulted in a large augmentation of the aggregate return obtained from the soil, but without permanently lowering its price, and, therefore, without permanent advantage to either capitalist, or laborer, or to other consumers. The large ad- dition to the wealth of the country has gone neither to profits nor to wages, nor yet to the public at large, but to swell a fund ever growing even while its proprietors sleep — the rent- roll of the owners of the soil. Accordingly we find that, not- withstanding the vast progress of agricultural industry effected within a century, there is scarcely an important agricultural product that is not at least as dear now as it was a hundred years ago — as dear not merely in money price, but in real cost. The aggregate return from the land has immensely increased ; but the cost of the costliest portion of th.e produce, which is that which determines the price of the whole, remains pretty nearly as it was. Profits, therefore, have not risen at all, and the real remuneration of the laborer, taking the whole field of labor, in but a slight degree — at all events in a degree very aSO PRACTICAL DEDUCTIONS. far from commensurate with the general progress of indus- try* The reader will not fail to perceive the intimate bearing of the conclusion just reached upon the question which I have proposed for discussion in this chapter — the prospect of im- provement in the laborer's material condition. It is evident that this condition is by no means so linked to the general progress of industrial improvement that we can count upon an advance in it pari passu with that progress. A very consid- erable proportion of industrial inventions do not affect his well- being at all ; while with regard to those which, by cheapening the commodities of his consumption, do affect his well-being, the condition of permanent advantage to him from this source is that his numbers shall be kept within such limits that the * "How," asks Ml', (now Sir William) H."ircourt, "is the laborer to get high- er wages, and yet the farmer to receive a reasonable profit, without which his bus- iness can not be carried on ? There is only one way in which it can be done, and that is by increasing the productive power of the land, which is the fund out of which both the wages and the profit must be realized. Well, how is the pro- ductive power of the land to be increased? The answer to that, too, is sim- ple enough, and is universally recognized, by applying more capital to the soil" ( Times, Jan. 2, 1873). It does not seem to have occurred to Mr. Harcourt that the process which he advocates has been in operation on a great scale for at least u century, and yet that the agricultural laborer remains pretty nearly where he was before it commenced. Had he turned to Belgium, he would have seen the same experiment in operation with precisely the same result. Nowhere has cap- ital been more liberally applied to the cultivation of the soil than in Belgium, and nowhere is agricultural labor more wretchedly paid (see Laveleye's "L'ficonomie Rurale de la Belgique "). The following passage may be commended to Sir W. Harcourt's notice: "Malgre ces ditfe'rences assez notables, le m.al ge'neral et pro- fond qu'on ne pent se dissimuler, c'est qu'a peu pres partout le salaire des ouvriers agricoles est insufflsant pour faire face aux besoins de leurs families dans un pays oil les denrdes atteignent le plus haut prix des marches europeens. La statistique officielle constate elle-meme que la population rurale de la Belgique est Tune des plus mal nourries du continent. Les produits de I'agriculture, quelque abondants qu'ils soient, ne sufBsant point, avec la re'partition actuelle, pour donner a tous une alimentation convenable " (p. 240). DISCOURAGING FBOSPECTS. 28] necessity of resorting to inferior instruments of production shall not neutralize the gain in industrial efficiency. This, then — the limitation of his numbers — is the circumstance on which, in the last resort, any improvement at all of a perma- nent kind in the laborer's condition turns. For my own part, I can not pretend to discern in the circumstances of the time any solid ground for feeling sanguine on this point, at least so long as laborers remain what they are mainly at present — mere laborers, hired employes depending for each day on the result of the day's work. But I desire to go further than this. I think the considerations which have been adduced show that even a very great change in the habits of the laboring classes as bearing upon the increase of population — a change far great- er than there seems any solid ground for expecting — would be ineffectual, so long as the laborer remains a mere receiver of wages, to accomplish a.ny great improvement in his state — any improvement at all commensurate with what has taken place, and may be expected hereafter to take place, in the lot of those who derive their livelihood from the profits of capital. This is a point which perhaps needs some clearing up. It might seem to result from one doctrine on which I have laid some stress in this work — the tendency of profits to a minimum, while no such tendency can happily be asserted of wages — that the prospects of the laborer in the future of industry, in comparison with his present condition, were actually brighter than those of the receiver of profit. But any such inference from the doctrine in question would imply a very gross mis- apprehension of the facts of the case. It is perhaps as well to point out that the expressions "rate of wages" and "rate of profit " do not denote analogous facts with reference to the recipients of those two kinds of income. The rate of real wages expresses, so far as the laborer derives his income from wages, his actual material condition; but the "rate of profit " gives no clue to the position, in this respect, of the capitalist. 282 PRACTICAL DEDUCTIONS. A very low rate of profit is compatible, and in fact generally co-exists, with very great wealth among those who derive their income from this source. The explanation lies of course in the fact that the income of this class is measured, not by the rate of profit, but by this multiplied by the amount of their capital, and that this last factor may increase to any extent whatever. Nothing, therefore, can be inferred from the tend- ency of profits to a minimum as to any limitation on the growth in wealth of those who live upon profits; while, on the other hand, the limitations on the advance of wages imply limitations on the laborer's well-being. The possibilities of the laborer's position, accordingly — so long as he remains a mere laborer- — must be considered as bounded by the possibilities of an advance in real wages. We have already seen the conditions on which this depends. Prof- its being at the minimum, real wages will advance with the productiveness of industry in producing such real wages — in producing, that is to say, the commodities of the laborer's con- sumption. As T have already remarked, these commodities are mostly commodities of raw produce, of which an augment- ed production always implies a resort to inferior sources of supply. Unless, therefore, the laborer would lose in the re- sort to such sources of supply what he has gained from the increased productiveness of industry, he must be content to impose a steady restraint on the increase of his numbers. And now I will make an extreme supposition on this subject: let us suppose the providence and self denial of the masses of the people to be strengthened to such a point that the demand for food and other articles of their consumption can be satisfied without requiring a resort to any natural agents inferior in point of productiveness to those employed in the United States, what would be the effect on real wages of such an extreme control placed upon the natural tendency of popula- tion to increase? Its effect would be to place laborers in this mSCOVBAGING PBOSPJECTS. 283 country on an equal footing with laborers in the United States ; and this is the very utmost that, on the most extreme supposi- tion with regard to the control of population, could be expect- ed for the laboring classes, assuming them to continue mere laborers. The supposition, I need scarcely say, is absolutely Utopian. Nothing is more certain than that, taking the whole field of labor, real wages in Great Britain will never rise to the standard of remuneration now prevailing in new countries — a standard which after all would form but a sorry consummation as the final goal of improvement for the masses of mankind. We see, then, within what very narrow limits the possibilities of the laborer's lot are confined, so long as he depends for his well-being on the produce of his day's work. Against these barriers Trades-Unions must dash themselves in vain. They are not to be broken through or eluded by any combinations, however universal; for they are the barriers set by Nature herself I commend the consideration to those patrons of the laboring classes who encourage an exclusive reliance on Trades- Unionism, and would advance their interests by confining them to their present rSle. It was the opinion of M. Comte, as it is that of his disciples, that the true ideal of industrial society — the goal toward which all reforming effort should be directed — is a more and more complete and definitive separation of the laboring and the capitalist classes. The proper model for our industrial organization according to them is an army in which the capitalists are as the captains, and the laborers as the rank and file. I do not know whether the apostles of this creed have ever seriously thought out the consequences as regards the distribution of wealth of 'a regime of this kind; but it would be worth their while to master at least so much Polit- ical Economy, before committing themselves to the discour- agement of movements which, so far as appears, offer to the laboring class the sole means of escape from a harsh and hope- less destiny. 284 PRACTICAL DEDVCIIONS. % 7. The conclusion to which I have been led by the line of argument developed above is precisely the opposite of that which the Positivists maintain. It appears to me that the con- dition of any substantial improvement of a permanent kind in the laborer's lot is that the separation of industrial classes into laborers and capitalists which now prevails shall not be main- tained ; that the laborer shall cease to be a mere laborer — in a word, that profits shall be brought to re-enforce the Wages- fund. I have shown that, in order to any improvement at all of a permanent kind, a restraint must be enforced on popula- tion which shall prevent the increased demands for subsistence from neutralizing the gains arising from industrial progress ; and that even a very great change in this respect in the habits of the people — a change far greater than there are any good reasons for anticipating — would still leave them, while they remain mere laborers, in a position not very materially better than at present. But the significance of these considerations becomes much enhanced when they are connected with anoth- er doctrine established in a former chapter of this work. It was there shown that, in the order of economic development, the Wages-fund of a country grows more slowly than its gen- eral capital.* Now the Wages -fund of a country represents the means of the laboring classes as a whole ; the general capi- tal the means of those who live upon profit — we may say broadly of the richer classes. It appears, therefore, that the fund available for those who live by labor tends, in the prog- ress of societ}', while growing actually larger, to become a con- stantly smaller fraction of the entire national wealth. If, then, the means of any one class of society are to be permanently limited to this fund, it is evident, assuming that the progress of its numbers keeps pace with that of other classes, that its material condition in relation to theirs can not but decline. * See ante, pp. 176, 177. SOCIALISTIC SCHEMES. 285 Now, as it would be futile to expect on the part of the poorest and most ignorant of the population self-denial and prudence greater than that actually practiced by the classes above them, the circumstances of whose life are so much more favorable than theirs for the cultivation of these virtues, the conclusion to which I am brought is this, that, unequal as is the distribu- tion of wealth already in this country, the tendency of indus- trial progress — on the supposition that the present separation between industrial classes is maintained — ^is toward an inequal- ity greater still. The rich will be growing richer; and the poor, at least relatively, poorer. It seems to me, apart alto- gether from the question of the laborer's interest, that these are not conditions which furnish a solid basis for a progressive social state ; but, having regard to that interest, I think the considerations adduced show that the first and indispensable step toward any serious amendment of the laborer's lot is that he should be, in one way or other, lifted out of the groove in which he at present works, and placed in a position compatible with his becoming a sharer in equal proportion with others in the general advantages arising from industrial progress. In the conclusion just expressed I believe I shall have the concurrence of many who would probably attach little value to the reasoning by which I have been led to it. In all so- cialistic schemes for the elevation of the working-man, the necessity of raising him from the position of a mere laborer is generally taken for granted. I am, therefore, on this point at one with the Socialists; but while I agree with them so far, I am wholly unable to accept the means which Socialism pro- poses for effecting the required elevation. The leading idea in most schemes of socialistic reform is the notion of raising laborers from dependence on the labor market by throwing on society, in the person of the State, the duty of providing them with capital. Now by whatever means it is sought to give effect to this idea — whether through the mechanism of a State 286 PRACTICAL DEDUCTIONS. bank issuing loans in inconvertible legal-tender notes, or by special taxation directed against the rich, or by advances made to laborers without adequate security or on terms more favor- able than can be obtained in the market* — one and all, they are open to the objection of doing violence to the principle of property, the weight and scope of which objection I have already sufficiently insisted on. But this is not all. Such schemes tend in the most direct way to the demoralization of the laborer himself, by relieving him from the obligation of sacrifices which, in the order of nature, all must undergo as the condition of the rewards which attend on industry, and so placing him in a position of privilege in relation to his fellow- men. If laborers can obtain command of capital by simply asking for it; or if, having failed in their undertakings, they are to be relieved from the consequences of failure, and to be started anew in fresh enterprises, it is idle to expect that they will exhibit the self-denial and providence through the exer- cise of which capital comes to exist and industrial enterprise * It may be said that this principle has already been set aside in favor of other classes than laborers. This is true ; and I am not concerned to defend such vio- lations of the rule of justice and of sound policy. One recent example, however, of the practice of making advances for industrial purposes on terms more favor- able than can be obtained in the market — I refer to what are known as "the Bright clauses" in the Irish Land Act of 1870 — may, I think, be justified on spe- cial grounds. I need not enter into the general argument here ; but it is scarcely likely that any set of workmen, unable from their own resources to start a co-op- erative enterprise, would be capable of furnishing the State with the same security for the money advanced, or with the same evidence of their industrial capacity, which must be furnished by every Irish tenant who is in a position to take ad- vantage of the "Bright clauses." How little any such deviation from sound principle is called for in the present case is strikingly shown in the past history of co-operation. "It can not," says Professor Fawcett, "be too carefully borne in mind that those who have achieved the most striking success in co-operation have not been assisted by any extraneous aid. They have placed their chief reliance in union of effort, in prudence, and in self-denial " (" Manual of Political Econo- my," p. 279). THE PBACTICAL PROBLEM. 287 to succeed. The practice of those virtues would still, indeed, be the condition of attaining the industrial results; but the virtues, if practiced at all when the motives for practicing them bad been taken away, would be practiced by one set of people, and the results reaped by another. Unsatisfactory as may be the actual state of things, I can not believe that this would be an improvement on it. As matters now stand, the progress of the laborer is at least connected with the exercise of industrial virtues; he only reaps where he has sown; but under a sj'stem in which he would find himself supplied at will with capital, the fruits of others' savings, what would there be to develop prudence or self-restraint? What motive for setting bounds to the most reckless self-indulgence. § 8. The problem, therefore, for those who accept the point of view here taken, is to combine the socialistic aim with means for giving it effect consistent with the maintenance of the fundamental bases of our present social state — to help the laborer to emerge from his actual position without doing vio- lence to the piinciple of property, and without weakening in him those qualities of character on which industrial success depends. Keeping this object in view, I think it should at the outset be clearly laid down that there is no royal road to the possession of capital. Capital can only be created by saving, and, where people have not saved themselves, can only be hon- estly obtained by offering to those who have saved an ade- quate inducement in the form of security and interest to pre- vail on them to part with it. If, then, the laborer is to emerge from his present position and become a sharer in the gains of capital, he must in the firsfinstance learn to save. To make saving practicable, it is true, there must be a margin of income beyond what is required for providing the necessaries and de- cencies of life; and I shall perhaps be told that this margin the laborer does not possess. But this is an assertion which 288 PRACTICAL DEDUCTIONS. can not for a moment be maintained in presence of the evi- dence furnished by our Excise returns. From these returns it has been calculated that a sum of no less than £120,000,000 sterling is now spent annually on alcoholic drinks. In what proportion the working-classes take part in this expenditure we have no means of accurately determining; but I imagine it will not be disputed that by much the largest proportion must be set down to their account ; and I am certainly within the mark in assuming that of the money so spent the greater portion — I am sure I might say three-fourths of the whole — so far from conducing in any way to the well-being of those who spend it, is both physically and morally injurious to them. Here, then, is a sum of, let us say, some £60,000,000 sterling which might annually be saved without trenching upon &x\y expenditure which really contributes to the laborer's well-be- ing. The obstacles to this saving are not physical, but moral obstacles ; and supposing laborers had the virtue to overcome them, the first step toward what might be fairly called their industrial emancipation would already have been accomplish- ed. This indeed would be only the first step, and formidable difficulties would still remain. For, the capital being saved, it would need to be invested, and invested in undertakings which would yield at least the existing rate of profit, since we can not suppose that less than this would be regarded as suf- ficient compensation for sacrifices, in the case of the laboring classes, considerably greater than those which the present rate remunerates. To obtain, however, such a rate of return, mere monetary investment — advances, I mean, on loan to persons giving adequate security — manifestly would not suffice. The rate of interest on such loans at present rarely rises much be- yond four or five per cent. With some £60,000,000 annuallj^ thrown upon the market as an addition to our present loan capital, it is probable the rate would fall to one or two per cent.- — a return ridiculously inadequate as compensation for CO-OPEBATION TBE SOLE ESCAPE. 289 the sacrifices which saving would impose on the working-man. It would, therefore, be necessary that the new capital should be invested directly in industrial operations; and here a new difficulty presents itself. The savings of working-men would necessarily in the individual case be small : the capital arising from such savings, therefore, however large in the aggregate, would be held in small portions by a very numerous class. But we know that, for the great majority of industrial under- takings, a large scale of production is the condition of efficiency. How, then, is this condition of efficient industry to be reconciled with the existence of a capital diffused throughout the commu- nity in minute independent portions ? Obviously there is but one way possible : those minute independent portions must be made to coalesce into masses large enough to furnish the means of efficient action. In other words, our reasoning brings us to this conclusion, that what is known as "co-operation"— ;• the contribution by many workmen of their savings toward a com- mon fund which they employ as capital and co-operate in turn- ing to profit — constitutes the one and only solution of our present problem — the sole path by which the laboring classes as a whole, or even in any large number, can emerge from their condition of mere hand-to-mouth living, to share in the gains and honors of advancing civilization. § 9. To say this, however, is by no means to say that the laboring classes, as a whole, are now prepared to enter on this path, or that any very great change in our modes of carrying on industry can soon or easily be effected. I am far, indeed, from thinking so. But here again I desire to point out that the obstacles in the way are not physical, are not even econom- ic, but moral or intellectual ; or, if economic, only in so far as economic results depend on intellectual and moral conditions. What workmen have to overcome in order to engage effect- ively in co-operative industry is, first, the temptation to spend 19 290 PB ACTIO AL DEDUCTIONS. their- means on indulgences generally pernicious, and which at all events may without detriment be dispensed with ; and, secondly, the obstacles incident to their own ignorance and generally low moral condition. In using this language I have ho desire* to underrate the remarkable progress which a con- siderable section of our artisan population have already made toward fitting them for taking part in a system of co-operation ; and in connection with this subject I may refer to the very satisfactory evidence adduced by Professor Fawcett, in the last edition of his " Manual of Political Economy," of the recent progress of the co-operative movement — evidence which fully justifies the opinion he expresses, that '' any one who considers what it has already effected, and what it is capable of doing in the future, must, we think, come to the conclusion that we may look with more confidence to co-operation than to any other economic agency to improve the industrial condition of the country."* There can be no question, therefore, that even at the present moment there is a considerable section of the work- ing population already ripe -for co-operation; though I fear it must be acknowledged that among the best of them there is much still to be learned, more particularly as regards the qual- ities of mutual trust, forbearance, and submission to the guid- ance of those to whom they may assign the management of their joint concerns. With regard to the masses, however, it is but too obvious that every thing has yet to be done. In the first place, habits of saving have to be created, and, in the next, the intelligence, and still more the moral qualifications, required for effective co-operative action have to be developed. The difficulties, I admit, are great, but I can not see that they are insuperable; and this, as Professor Fawcett has shown, is as- -suredly not a time for the friends of co-operation to despair; for though it be true that such success as co-operation has "Mnnual of Political Economy," fourth edition, p. 279, PROSPECTS OF CO-OPEBATION. 291 achieved in this country has been almost exclusively confined to the comparatively simple problems of distributive industry, the experience and training acquired in these tasks will help to qualify for more serious undertakings. Nor is it irrelevant to remark that we have just established, or at least, it is to be hoped, are on the eve of establishing, a system of universal compulsory education, from which it is surely not extravagant to expect that substantial improvement in the laborer's charac- ter will in due time accrue. The all-important point, as it seems to me, is to recognize the direction in which the emancipation of labor from what is called (absurdly enough) the tyranny of capital lies. This I repeat is, and, so far as I see, can only be, that of co-operative industry. It is of course open to any one to question the feasibility of the plan ; to such doubts the only effective an- swer, and it has already to some extent been given, will be actual performance ; but what I think the foregoing argument establishes is that the alternative lies between this plan and none. If workmen do not rise from dependence upon capital by the path of co-operation, then they must remain in depend- ence upon capital ; the margin for the possible improvement of their lot is confined within narrow barriers which can not be passed, and the problem of their elevation is hopeless. As a body, they will not rise at all. A few, more energetic or more fortunate than the rest, will from time to time escape, as they do now, from the ranks of their fellows to the higher walks of industrial life, but the great majority will remain sub- stantially where they are. The remuneration of labor, as such, skilled or unskilled, can never rise much above its present level. § 10. Before quitting the subject of co-operation there is an aspect of the case on which I would offer a few concluding re- marks. It may be asked, supposing a regime of co-operative 292 PRACTICAL DEDUCTIONS. industry established, does it follow that the future of the work- ing-man is assured ? Such a rigime would indeed bring profits to the aid of wages, and thus largely increase the fund availa- ble for his support ; but that fund, after all, would have limits ; the means of subsistence could not be increased as fast as hu- man beings could multiply ; and at bottom the great Malthu- sian difficulty would remain. Could workmen in their altered position be trusted to keep their numbers within the limits which the conditions of prosperous existence inevitably and under all circumstances prescribe? Let me say that I am far from disposed to underrate the gravity of the consideration here adduced ; but, while fully conceding the danger, it seems to me that we may yet find grounds for hopefulness in two circumstances: first, the fund for the laborers' support would, under a regime of co-operation, be derived, not as at present, exclusively from the Wages-capi- tal of a country, but from the general capital in all its forms. Now we have seen that, in progressive communities, the gen- eral capital grows more rapidly than the Wages- capital ; from which it follows that, under a regime of co-operation, the fund from which the laborer derives his support would not only be greatly larger than the corresponding fund under our present system, but would be a more rapidly increasing fund. Al- though, therefore, the necessity for restraining population would continue under co-operation as under all systems of industry, the restraint would not need to be as severe as it is when the laborer's resources are restricted to the most slowly growing portion of the whole national capital. The Malthusian difii- culty, therefore, would not be removed by co-operation, but it would become, under that system, greatly less formidable. But, secondly, as we have seen, successful co-operation requires, and therefore presupposes, qualities of character which are not to be found at present in the masses of the laboring people — a capacity of self-denial, a tendency to look forward, and to AN OBJECTION ANSWERED. 293 attach increased importance to the future as compared with the present — in a word, self-control and prudence. Now these qualities once developed in a human being do not operate ex- clusively in any one direction : they affect his whole character, and will manifest their influence on his conduct in his matri- monial and domestic relations, as well as in every other part of his life. For this reason I am inclined to attach much more importance, as a means of controlling population, to the crea- tion of modes of existence or habits of life in which the pru- dential faculties are called into energetic play, than to any amount of direct Malthusian teaching. No doubt the plain truth on this subject should always be spoken ; but, unless ac- companied with changes in the workman's condition which should at once make his obligations clearer to himself and also fortify him for their performance, I must own I should have little faith in its practical efficacy. As matters stand now — with the mass of the laboring population in absolute depend- ence on the labor market — is it any wonder that Malthusian prophets are as a voice crying in the wilderness? What do the majority of laborers know of the conditions determining the labor market? The demand for labor seems to come and go, like the wind blowing where it listeth, but those whose for- tunes are governed by its changes know as little as they do of the wind, whence it cometh or whither it goeth. Why, they naturally ask in this state of ignorance, should they deny them- selves for the sake of their children ? Is it not all an affair of chance? and will not their children's chances be as good as theirs? Why, then, forego such enjoyment as the present of- fers for the sake of a future which is wrapped in clouds ? " The present moment is their own : The next they never saw." On the other hand, co-operation, while it appeals in the strong- est way to those attributes of character which are concerned in 294 PRACTICAL DEDUCTIONS. the control of population, makes comparatively definite and clear the limits of the laborer's resources. He is now a payer as well as a receiver of wages, and, seeing the wages problem from both sides, is likely to acquire juster views; but, even though wages should still remain a mystery, at least it will be tolerably clear that profits will grow with the growth of capi- tal, and that each man may count on receiving them precisely in proportion to the amount of capital he can command. Sup- posing a workman to have achieved comfortable independence, it will be clear to him that to maintain it he must maintain his capital unimpaired ; and that to incur responsibilities which should compel him to encroach upon his capital to meet cur- rent expenses would be tantamount to a deliberate descent in the scale of well-being. The position of the co-operator would in this respect be analogous to that of the peasant proprietor, who, like him, draws his subsistence from a tolerably definite fund, and generally contrives to keep the expenses of his household within the limits which that fund will support. In these circumstances, it seems to me, there is good ground for hopefulness. Co-operation at once renders less formidable the obstacles to human improvement inevitably incident to our animal propensities, and tends to develop, in those who take part in it, a type of character fitted in a high degree for en- countering them with success. F^RT III. INTERNATIONAL TRADE. Pi^RT III. INTERNATIONAL TRADE. CHAPTER I. DOCTRINE OP COMPAUATITE COST. § 1. It has been usual hitherto in treatises on Political Economy to consider the subject of international trade and international value, apart from the general theory of exchange and exchange value, as a distinct branch of economic doctrine ; but the question has been lately raised whether this methpd of exposition is scientifically warrantable — whether, that is to say, it does not suggest a false view of the phenomena of com- merce by implying a distinction in principle where in reality no such distinction exists. Assuming that the objection thus taken to the separate treatment of international trade is not a mere quibble on the use of the term "international," but in- tended to apply to the substance of economic theory as com- monly expounded, the question raised by it is one as to the nature of the phenomena embraced by international trade, and what we have to decide is whether those phenomena are such as to find their solution in the same theory of exchange which furnishes the explanation of the facts of domestic commerce. In the event of their finding their solution in that theory, it is evident that the objection taken to the ordinary mode of expo- sition is well founded ; while, in the opposite case, it is equally clear that the phenomena of international trade have need of a special theory for their satisfactory elucidation. 298 DOCTRINE OF COMPARATIVE COST. In order to determine this point, it will be well if we en- deavor here to set before oui' minds in the most general way the fundamental circumstances on which trade, or the inter- change of commodities, in all its forms, rests. These funda- mental circumstances are to be found in the consequences aris- ing from division of labor or separation of employments. In order that industry may be carried on upon this plan, and that advantage may be taken of the increased efficiency and econo- my thence resulting, the exchange of products among those carrying on the separated occupations becomes necessary, and in this fact we find the natural basis and explanation of trade. Trade, therefore, is the necessary means of giving effect to the separation of employments, and the advantages arising from it are the advantages incident to this scheme of things. The general nature of these advantages is familiar to all readers of economic works ; but for our present purpose it will be conven- ient to consider them under two leading heads: first, we may consider those advantages which arise from the separation of employments, apart from any special circumstances which may give to this arrangement a peculiar importance ; and, secondly, those which are due to the separation of employments, as fur- nishing the means of developing special faculties of production possessed by particular persons or places. As an example of the former class of advantages we may take the ordinary hand- icraft trades. There is an obvious advantage in having such employments as tailoring, boot-making, hat-making, and the vai'ious callings of blacksmith, locksmith, mason, joiner, etc., separated and carried on as distinct occupations ; but, as most of them require the same, or nearly the same, sort of qualifica- tions for their performance, it makes little difference to which of the group any particular member of the handicraft class de- votes himself A is a tailor, B a shoe-maker, and C a hatter; but if C had been a tailor, A a shoe-maker, and B a hatter, the arrangement would jDrobably have answered equally well. SPECIAL FBOriNCE. 299 Nothing is here gained from the separation of employments beyond the increased dexterity incident to the increased famil- iarity of each workman with his work, together with the sav- ing of so much time as would be wasted if the laborer had oc- casion frequently to change his occupation. This, then, is one description of advantage arising from the separation of employ- ments to the realization of which trade ministers. But, as I have said, this advantage may be combined with advantages of another kind, and this happens where the separation of em- ployments, while promoting the results just noticed, furnishes, at the same time, the means of developing the special capacities or resources possessed by particular individuals or localities. In the examples given above the advantage obtained was derived from the mere fact of the separation of employments, altogether independently of the mode in which the separated employments were distributed among the persons carrying them on, as well as of the places in which they were conduct- ed. But a further gain arises when the employments are of a kind which, in order to their effective performance, call for special capacities in the workman or special natural resources in the scene of operation. There would be a manifest waste of special power in compelling to a mere mechanical or routine pursuit a man who is fitted to excel in a professional career; and similarly, if a branch of industry were established on some site which offered greater facilities to an industry of another sort, a waste, analogous in character, would be incurred. In a word, while a great number of the occupations in which men engage are such as, with proper preparation for them, might equally well be carried on by any of those engaged in them, or in any of the localities in which they are respectively es- tablished, there are others which demand for their effective performance special personal qualifications and special local conditions; and the general effectiveness of productive indus- try will, other things being equal, be proportioned to the com- 300 DOCTRINE OF COMPARATIVE COST. pleteness with which the adaptation is accomplished between occupation on the one hand and individuals and localities on the other. There are thus two distinct kinds of advantage derivable from the separation of employments ; and I have called atten- tion to this circumstance in order to say that it is one only of those sorts of advantage that international trade in the main tends to develop. The great trades of the world are carried on between countries pretty widely removed from each other either in the scale of civilization or in respect to their natural resources and productions, while in proportion as countries ap- proximate to each other in natural resources or in the indus- trial qualities of their inhabitants, the scope for international trade is narrowed : it is even possible that it should fail alto- gether. The reason of this is by no means mysterious. The advantage to be derived from the separation of employments, where this separation is not connected with any special facil- ities of production, are, in countries in which industry has made any considerable progress, in general realized in their full extent by the separation which takes place within the limits of each of those countries. It is only when population is very sparse that the home market is not large enough to secure this result; and where this is so, it generally happens that any gain that might be obtained through a trade with foreign nations in articles in the production of which no spe- cial facilities, positive or comparative, are possessed by the trading countries, is more than counterbalanced by the loss in- cident to an increased cost of carriage. Accordingly in coun- tries or districts which are very sparsely peopled, instead of the separation of employments in the simpler industries being carried out by an interchange with foreign nations, what usu- ally happens is that no separation of employments, or a very imperfect one, takes place, and that things continue in a prim- itive state. International trade may thus be considered as SPECIAL PROVINCE. 301 practically restricted to giving effect to those examples of the separation of employment in which the more ordinary ad- vantages flowing from that principle are combined with those which are due to the adaptation of industrial operations to the special circumstances of persons and places ; while again it is tolerably obvious that, of these two sorts of adaptation, that which relates to places is, in the international sphere, by much the more important. The only case indeed in which personal aptitudes go for much in the commerce of nations is where the nations concerned occupy different grades in the scale of civili- zation. In the trade, for example, between England and In- dia it is probable that the different characters of the two peo- ples, incident to the different stage of social growth to which each has attained, go a considerable way in determining the character and the amount of their commercial dealings. But perhaps the most striking example which the world has ever seen of a foreign trade determined by the peculiar personal qualities of those engaged in ministering to it is that which was furnished by the Southern States of the American Union previous to the abolition of slavery. The effect of that insti- tution was to give a very distinct industrial character to the laboring population of those States, which unfitted them for all but a very limited number of occupations, but gave them a certain special fitness for these. Almost the entire industry of the country was consequently turned to the production of two or three crude commodities, in raising which the indus- try of slaves was found to be effective ; and these were used, through an exchange with foreign countries, as the means of supplying the inhabitants with all other requisites. This is, perhaps, the most noteworthy instance on record of personal aptitudes extensively affecting the external trade of a country. In the main, however, it would seem that this cause does not go for very much in international commerce. The principal condition, to which all others are subordinate, in determining 302 DOCTBINE OF COMPARATIVE COST. the existence and character of foreign trade must be looked for in that other form of adaptation founded on the special ad- vantages, positive or comparative, offered by particular locali- ties for the prosecution of particular industries. Here, then, we have a well-defined characteristic which dis- tinguishes international trade from domestic ; but its presence alone would scarcely suflSce to justify a special theory of the former. To satisfy ourselves on this point, we must advert to another circumstance to which I have now to call attention. One of the principal conditions determining the relative profitableness of particular occupations and the terms on which their products are exchanged consists in the degree of facility which happens to exist for moving capital and la- bor from one to the other. Now this facility is very different in the case of occupations carried on within the limits of a sin- gle country, and those carried on in different countries ; and in this difference is to be found the chief fact discriminating the phenomena of international from those of domestic trade. Let us endeavor to appreciate in a general way the range and the degree of this difference. The assumption commonly made in treatises of Political Economy is that, as between occupations and localities within the same country, the freedom of movement for capital and labor is perfect, while, as between nations, capital and labor move with difficulty or not at all. In strictness neither mem- ber of this assumption can be maintained. Capital, indeed — so long at least as it exists in the form of purchasing power available for productive purposes — moves freely among all occupations and places within the same country; but labor, as we know, encounters impediments at certain points; the laborers belonging to the lower industrial grades being hin- dered by the circumstances of their position from entering into competition with those above them; while even for la- borers occupying the same industrial stratum the obstacles to HINBEBANCES TO LOCOMOTION. 303 migration between distant localities are often very considera- ble, and ,sucb as sometimes to amount to practical prevention. Nor any more is it true, witbout large qualification, tbat labor and capital do not move from country to country. Capital, in a certain sense, is every day becoming less national and more cosmopolitan ; and tbougb labor is far from being equally mo- bile, still witb tbe immense emigration taking place year after year from tbese islands and other countries of Western Eu- rope, and with tbe fact before us tbat even Asiatic popula- tions are now beginning to emigrate, it is impossible to deny tbat labor is capable, under the influence of economic causes, of international movement on a great scale. The assumption, therefore, in the unqualified form in which it is often laid down, can not be maintained either in its afiirmative or in its negative part. But while so muph must be freely admitted, it may still be affirmed that enough of truth remains in the as- sertion, after all due deductions have been made, to warrant the inferences that have been drawn from it, and to justify the distinction contended for. For it is by ho means necessary to the truth of the doctrine, as it has been laid down, for exam- ple, by Eicardo and Mill, that there should be an absolute im- possibility of moving capital and labor from country to coun- try. What the doctrine requires is not this, but such a degree of difficulty in effecting their transference as shall interfere sub- stantially and generally — that is to say, over the whole range of the commodities exchanged — with the action of industrial competition.* The one and sufficient test, as I have pointed * The reader will here bear in mind the sense in which I use the phrase " in- dustrial competition," as expressing the competition which takes place between the prodvcers of different commodities — competition which tends to bring wages and profits into correspondence with the sacrifices undergone, in contradistinction to that which talces place between dealers in the same commodity and which oper- ates toward equality^of price. The latter miglit be called ^''commercial competi- tion." 304 DOCTRINE OF COMPARATIVE COST. out, of the existence of an effective industrial competition, is the correspondence of remuneration with the sacrifices under- gone—a substantial equality, that is to say, making allowance for the different circumstances of different industries, of profits and wages. Such a test, applied to domestic transactions, shows the existence of a very large amountrof effective industrial com- petition operative throughout the various industries carried on within the limits of a single country. The competition of dif- ferent capitals within such limits may be said to be universal- ly efiective; and that of labor, though interrupted at certain points, is effective over large industrial areas. Profits conse- quently within the same country, however great may be the fluctuations, gravitate steadily toward a common level, as like- wise do wages within the limits of the industrial areas to which I have referred. The same test applied to international trans- actions shows an entirely different state of things. For, though capital migrates, it does not do so upon a scale large enough to establish an equality of profits in different countries, and profits consequently remain at a permanently higher level in some countries than in others. Indeed, in spite of all we hear of the international movements of capital, the amount of cap- ital that can be truly called cosmopolitan — disposable for in- vestment in countries other than that to which it properly be- longs — is after all but a mere fraction of the national capital. It is in effect confined to a portion of what is called the " float- ing capital " of a country — that part of the capitalist's funds which he does not mean to superintend himself, and which he offers on loan. All that immensely larger part which the owners are not disposed to part with, but desire to superin- tend and work themselves — all this is practically confined to the capitalist's country. What passes off, though often con- siderable in its positive amount, is thus wholly unequal to producing a sensible impression on the general rate of prof- it in the country to which it goes; and so profits remain HINDEEANCES TO LOCOMOTION. 305 pei-mariently at different levels in different countries. And just as little has an equilibrium in the rates of wages been brought about by the international movements of labor. Great as has been the emigration from Europe to the United States, it may be doubted if, outside the range of a few towns on the eastern coast, any appreciable effect has been produced on the rates of wages in the latter countrjr. Throughout the Union wages remain in all occupations verj'- considerably higher than in the corresponding occupations in this country. Nor do they show any sign of declining. It thus appears, alike with regard to labor and capital, that notwithstanding a certain amount of international mobility in these instruments of production, the impediments to their transference from country to country are yet sufficiently great to prevent effective competition from tak- ing place between the industries of different countries, such as is really operative in each separate country over a very large proportion of its domestic industry. And this, and no more than this, is all that is assumed by economists — all at least that is essential to the validity of their arguments — -when they con- tend for the necessity of separating the facts of international from those of domestic trade. § 2. It will aid us in giving the due circumscription to the facts with which we have to deal if, before developing the con- sequences involved in the state of things just described, we note briefly the nature of 'the obstacles which impede the move- ments of labor and capital in the international sphere. The most importantof these are the following: 1. Geographical dis- tance; 2. Difference in political institutions; 3. Difference in language, religion, and social customs — in a word, in forms of civilization. Each of these circumstances is capable of hinder- ing, and does in fact, to a greater or less extent, hinder the free movement of labor and capital. As regards their relative im- portance, the social and political causes are probably, in the 20 306 DOCTRINE OF COMPARATIVE COST. present state of the world, more powerful than the physical, more particularly when the former happened to be connected with differences of race ; while geographical distance is appar- ently that which exerts the least obstructive force. These being the principal obstacles to the movements of la- bor and capital from place to place, it will be at once apparent that the line of demarkation which would result from their interference, though largely coincident with that indicated by the words "international" and "domestic," is by no means strictly so. Australia and Canada, for example, are portions of a single political system, but the geographical obstacles of- fered to trade between those places, or between either of them and England, are far greater than those which exist in the trade of many independent nations ; and the same may be said of the trade between the Atlantic and the Pacific States of the American Union. Similarly, we find within the same country differences of race, of language, and of religion, and to some extent of social tastes and habits. It is thus clear that no hard and fast line can be drawn between domestic and international trade founded on the character of the obstacles presented to the movements of labor and capital; and it must, therefore, be owned that the terms "international" and "domestic'' do not accurately express the distinction which it is designed to mark. "What we want is a term which would cover all that portion of the trade of mankind carried on between localities sufficient- ly separated from each other, whether by moral or physical obstacles, to prevent the action, as between producers in the trading localities, of effective industrial competition, and which would exclude the trade carried on under those more favorable conditions where industrial competition is effective. So far as I know, there is no one word that accurately meets this require- ment. " International " is that which perhaps comes most near- ly to what we want. In the intercourse of independent nations, all or most of the obstacles I have noted come into operation, CONSEQUENCES WHICH RESULT. 307 and in tteir combination offer a substantial impediment to the free movement of capital and labor ; while, as among different localities in the same country, they do not exist in the same number or in the same degree of intensity, and, where they do exist and operate, they are always counteracted and largely neutralized by the powerfully assimilating influence of a single central government. In the case of colonies, however, the po- litical causes tending to facilitate the movements of capital and labor are, on the whole, overborne by the geographical, cli- matic, and physical circumstances which obstruct those move- ments ; and therefore, for the purposes of economic theory, we must include colonial under "international" trade. Our eco- nomic nomenclature in this part of our subject is thus not free from objection; but, having noted its imperfection, we shall not be likely to be misled by it. § 3. We have now ascertained the grounds in the facts of the case for the distinction between "international" and "do- mestic " trade, and the sense in which these terms are to be understood. It remains that we endeavor to trace the conse- quences which result in the trade of nations from the circum- stances, such as they have been shown to be, under which it takes place. First among these consequences we may note the following: A trade may arise between two independent countries and be profitable for each under conditions in which it would not arise if the trading localities were within the range of a single country, that is to say, if they were so situated that labor and capital moved freely between them. To perceive the grounds of this statement, we may consider the following case. Sup- pose a trade between North Wales on the one side and Lan- cashire and Yorkshire on the other, the articles exchanged be- ing slates on the part of North Wales against woolen and cot- ton manufactures on the side of the English counties. North :;08 DOCTRINE OF COMPARATIVE COST. Wales has evidently a great and unquestionable advantage over Yorkshire and Lancashire in the production of slates; and it is probable that Yorkshire and Lancashire have an ad- vantage, less decided, but still real, over North Wales in the production of their staple products. Of one thing at all events we may be sure : neither district is under a positive disadvan- tage, as compared with the other, in raising or manufacturing the product which forms the staple of its trade ; for, were this so, the product in question would no longer be produced in that locality : the capital and labor employed in the business would migrate thence to the other locality, which offered greater advantage for the production of this article, and the trade between tbe places would cease.. In a word, a migration of the instruments of production would take the place of a trade in the products. This is what would happen when the trading districts are situated within the same country, and la- bor and capital move freely between them. But now suppose the trading localities to be situated in different countries, be- tween which labor and capital move with difficulty, or not at all. Under such circumstances either might have an advan- tage over the other in respect of all the staples of their trade — in the case supposed in respect to textile fabrics as well as to slates— and the trade might nevertheless go on ; for, though it is true that here too, as in the case just considered, there would be a gain in productive efficiency if the people and capital of the less favored district were to transfer themselves bodily to the other, yet, as in point of fact this transference, for very sufficient reasons, does not take place, the question arises what, under these circumstances, will be most for the interests of the two countries in supplying their needs by means of industry ? A very little consideration is needed to show that, under the circumstances supposed — the superiority in productive power lying in the case of every branch of industry on the side of one country — it may yet be for the interest of both to satisf}' MODE OF ITS ACTION. 309 their wants by engaging in trade, jjrovided only that the advan- tage enjoyed by the country possessing the superior industrial re- sources he not equally great in each instance; in other words, provided that each country possesses, in respect to the other, a greater advantage or a less disadvantage in the production of some than in that of other commodities. If, for example, it happened that North Wales and the manufacturing districts of England were situated in independent countries between which labor and capital refused to pass, under these circum- stances North Wales might have an advantage over the En- glish counties both in the production of slates and also in the production of textile fabrics ; but if her superiority was not the same in both — if it were greater in the case of one than in that of the other class of commodity — greater, say, in the case of slates than in that of cloths, it would still be for the inter- est of the two districts to trade in those articles; for Wales, by devoting her industry to the production of slates, in which her superiority was greater than in the production of cloths, and using her slates as the means through trade of procuring cloths, would get them cheaper — with less realcost of labor and abstinence — than if she produced them; while, on the other hand, Yorkshire and Lancashire would get their slates cheaper by employing their industry in the production of fabrics in which their disadvantage was less, and using these as the means of obtaining their slates from Wales, than by attempting to pro- duce slates or any substitute for them directly for themselves. It thus appears that a trade may take place between two dis- tricts, as independent countries, under circumstances in which no trade would occur, were those districts situated within the limits of a single country, and capital and labor free to move between them. This, I say, is a possible case, and, as will pres- ently appear, in actual experience, a very common one ; indeed, it may be said to be typical of a large proportion of the entire trade carried on between independent countries. We are thus 310 DOCTRINE OF COMPARATIVE COST. brought, in the domain of international trade, into contact with a phenomenon of which the theory of trade in its simpler cases furnishes no explanation, for which therefore a special theory is needed. The writer who first detected the fact, and sup- plied the theory, was Eicardo ; and the theory involved in the foregoing exposition is in effect that which he gave. It may be thus stated : In order to the existence of a trade between different countries, the essential and also the sufficient condi- tion is, that there should be in those countries a difference in the comparative cost of producing the commodities which are the subject of the trade. The commodity forming the- staple of a trading country may be, -and frequently is, more cheaply produced in that country than in the country which imports it, but this is not necessary to the existence of the trade ; and a trade between nations may be carried on where the superior- ity in point of productive power with respect to all articles which form the subject of the trade is upon the side of one of them. On the other hand, a difference in the absolute cost of producing commodities in different countries does not neces- sarily render a trade between them possible, since, if the dif- ference were the same in the case of each article, there would be no motive for an exchange. The one condition, therefore, at once essential to, and also sufficient for, the existence of in- ternational trade, is a difference in the comparative, as contra- distinguished from the absolute, cost of producing the com- modities exchanged.* Such is the theory of international trade as it was left by Ricardo, and expounded, but not substantially altered, by Mill.f It can not be doubted that it sounds the depths of the * Eicardo's Works (M'CuUoeh's edition), chap. vii. ; Mill's "Principles of Po- litical Economy," book iii., chap. xvii. t I say, the theory of international trade was not substantially altered by Mill : the theory of international values was ; Mill having here supplied an important condition overlooked by Kicardo. EXPLANATION OF TEMMS. 311 problem, n,nd embraces in its scope all the most important — certainly all the most conspicuous — facts in the sphere of in- ternational dealings. Nevertheless, as I shall presently at- tempt to show, the doctrine as it stands is not absolutely com- plete, and in fact fails to take account of certain international exchanges, not perhaps very extensive in their range, but still of considerable importance. Such criticisms, however, as I have to make upon this point will be more conveniently re- served for another chapter. For the present I shall confine myself to a few further remarks in elucidation of the doctrine as it has been stated above. And, first, it must be observed that by '' cost of production," as employed in the foregoing context, the reader is to under- stand the actual difficulties of production as measured by the sacrifices which production requires, not the amount of wages and profits, whether measured in money or produce, comprised in the capitalist's outlay and return. It was in the former sense that Ricardo, who first discovered the truth in question, understood the words, and, notwithstanding that Mr. Mill has in his chapters on Value adopted the latter conception of cost of production, it is in the same sense that he has employed it in his exposition of the doctrine of international trade.* In- deed, it may be doubted if the theory of comparative cost of production as the ruling principle of international trade could ever have been worked out from the point of view which re- gards cost as consisting in wages and profits ; and, however this may be, it is at least quite certain, as I shall hereafter demonstrate, that the theory of international values, adopted * The only sacrifice taken account of by either Eicardo or Mill in working out the theory of international trade is that of labor, the cost being always reckoned in so many days' labor of so many men. Abstinence is entirely overlooked. The omission, however, does not seriously affect the reasoning, since labor and absti- nence being each alike a sacrifice, the considerations applicable to the one are, so far as the argument is concerned, for the most part applicable also to the other. 312 DOCTRINE OF COMPARATIVE COST. alike by Mill and Eicardo, is absolutely irreconcilable with that view. Secondly, when it is said that international trade depends on a difference in the comparative, not in the absolute, cost of producing commodities, the costs compared, it must be care- fully noted, are the costs in each country of the commodities which are the subjects of exchange, not the different costs of the same commodity in the exchanging countries. Thus, if coal and wine be the subjects of a trade between England and France, the comparative costs on which the trade depends are the comparative costs of coal and wine in France as compared with the comparative costs of the same articles in England. England might be able to raise coal at one-half the amount of labor and abstinence needed in France ; but this alone would not render it profitable for France to obtain her coal from En- gland. If her disadvantage in producing other commodities was as great as in producing coal, she would gain nothing by an exchange of products, and the conditions for a trade be- tween the two countries would not exist. But supposing she was, in the case of some other commodity, under a less disad- vantage than in that of coal, still more if she had with regard to that other — as in wine — a positive advantage, it would at once become her interest to employ this commodity as a means of obtaining through trade her coal from England, instead of producing coal directly from her own mines. So much in the way of explanation of terms. Let me now endeavor to set before the reader a few examples of the prac- tical working of the principle of comparative cost in the act- ual commerce of the world. For this purpose I shall take, in the first place, a case to which I have both in this and in for- mer publications frequently referred — the external trade of the principal Australian colonies before and since the discovery of the gold-fields. Previous to that discovery, which occurred in 1851, no gold being produced in the country, the cost to the PRACTICAL EXAMPLES. 313 colony of such gold as circulated there would consist in the cost — by which the reader will bear in mind I mean the labor and abstinence — incident to the production of those articles by the exchange of which with foreign countries Australia ob- tained her gold. Certain quantities of wool, tallow, and hides were exported, and sold in foreign countries for certain sums of the precious metals, and these, or their equivalents in value, came back to the Australian producers, to whom they became wages and profits. These wages and profits, therefore, meas- ured in the precious metals, or, let us say, in gold, which was the standard of value in the colony, would be the return upon the labor and abstinence employed in producing the commod- ities through the sale of which they were obtained. In pro- portion as they were great, the cost of obtaining gold would be small ; in proportion as they were small, the cost of obtain- ing gold would be great ; in a word, the cost of obtaining gold would vary inversely with the money rates of wages and prof- its prevailing in the colony. Supposing, for example, that 4s. a day was the wages of unskilled labor in the colony in 1850, and ten per cent, per annum the ordinary return upon capital, then the cost of gold, so far as it consisted of labor, would be a day's unskilled labor for 4s. worth of gold, and, so far as it consisted of abstinence, a year's abstinence from the enjoyment obtainable by means of £100 for £10. For simplicity of illus- tration, as labor is so much the principal element in the case, we may confine our attention to it exclusively, and say brief- ly that the cost of gold in Australia previous to the gold dis- coveries was represented by a day's labor for as much gold as could be purchased with 4s. Under these circumstances the gold discoveries took place; and now mark what happened. At once the same workman who previously by a day's labor could earn but 4s. worth of gold could now by washing the auriferous sands earn from 15s. to 20s. worth. The same ex- ertion could now procure for him four or five times as much 314 DOCTBINE OF COMPARATIVE COST. gold as formerly; in other words, the cost of gold had fallen in the proportion of from four or five to one. But while the cost of gold in the colony was thus reduced, no change had taken place there in the cost of producing other things. A given exertion of labor and abstinence would still procure the same quantity as before of corn, of meat, of wool, of tallow. It followed that the comparative cost of producing gold and other things had been altered in the immense proportion indi- cated by the reduction in the positive cost of producing gold ; in other words, the conditions were realized under which, ac- cording to the theory of Eicardo, an immense change ought to take place in the external trade of the colony ; and this was precisely what happened. From that time until the condi- tions of trade were again modified, partly through the gradual exhaustion of the richer gold deposits, and partly through the advance of prices in foreign markets, a period of some four or five years, Australia became an importer of every thing that from its nature admitted of being imported ; and, what is especially to be noted, among the things thus imported were many which she could have produced herself at far less cost, with far less labor and abstinence, than they were pro- duced at in the countries from which they were brought. For example, timber was imported from the Baltic, although there were forests in Australia capable of yielding timber quite good enough at least for the mining purposes for which timber was mostly required. Butter was largely imported from Ireland, and I believe also from England and Holland, though the advantages possessed by Australia for dairy farm- ing in her unrivaled pastures and abundant cattle were excep- tionally great. Similarly, with unlimited areas of fine agricul- tural land, she imported nearly all her food; and with the ma- terials of leather cheaper than in any other part of the world, she imported all her shoes. What was the explanation of these facts ? In all cases one and the same : it was to be found EXPERIMENTAL VElilFICATIONS. 315 in the principle of comparative cost. Australia had consider- able advantages over other countries in respect to timber, but- ter, food, and shoes; but she had a greater advantage still in respect to gold ; and so it became her interest to obtain the former things by means of the latter. I have always regarded the commercial results of the Australian and Californian dis- coveries (for things in California followed a very similar course) as one of the most striking experimental verifications which a purely abstract doctrine has ever received. Eicardo was considered, and is still considered by some people, a dream- er of dreams, a spinner of abstract fancies ; but his dreams and abstractions, when brought to the test of experiment, as com- monly happens with the dreams and abstractions of men of genius, have proved to be far more practical, far more closely in accordance with actual occurrences, than the prognostics of so-called "practical men," based though these may have been upon one knows not what collections of carefully tabulated statistics. Compare the facts which I have stated in connec- tion with the Australian trade, as illustrating his doctrine of " comparative cost," with the speculations of some of our lead- ing bankers and actuaries at the time of the occurrence of the gold discoveries, as to the probable effects of those events on the course of the money market — speculations in which one writer confidently predicts that the increased abundance of gold must lead to a fall in its price; another, that it would lead to a fall in the rate of interest; a third, that the exporta- tion of gold from Australia would cease to be profitable, and would therefore cease to be carried on, as soon as the price of gold in Sydney rose to the London level ! All these, and many more absurdities no less glaring, are to be found in pamphlets, and even in pretentious volumes, published soon after the epoch of the gold discoveries, by commercial men who piqued themselves upon their knowledge of practical bus- iness and their contempt for abstract speculation. 316 DOCTRINE OF COMPARATIVE COST. The external trade of the gold countries presents, in a some- what exaggerated shape, the action of the principle of compar- ative cost. The superiority of productive power was here, in almost every instance, on the side of one of the exchanging parties — the Australian colonies. The reader will not, how- ever, suppose that, in order to the existence of a trade between nations, there is any necessity that this particular state of things should occur. In point of fact, it is probable that the more frequent case is that in which the superiority of productive power is divided between the trading countries, each having a positive as well as a comparative advantage over the other in respect of the commodities which form its own staples. Still it would be a mistake to suppose that the Australian ex- ample represents a purely exceptional case. So far from this, I am inclined to believe that in a large portion of the trade of the world — in most of the trade, for example, carried on be- tween tropical and temperate regions, as well as in the trade between old and new countries — the condition which we found so prominent in the Australian commerce — a superiority of productive power in respect to the staples on both sides pos- sessed by one of the exchanging parties — will also be found to obtain. One instance, which I find in the work of Mr. Bowen, an American economist, may here be given.* It occurs in the case of the trade between the State of New York and some adjoining districts and the Island of Baibados. The trade consists chiefly of an exchange of breadstuflps and meat on the side of the former country against various kinds of tropical produce furnished by the latter. As will be readily under- stood, Barbados has an immense advantage over the State of New York in the raising of tropical products, such as sug- ar, coffee, spices, etc. ; but Mr. Bowen informs us that it has also a decided advantage over the same regions in the produc- ■ Bowen's "Political Economy," p. 460. OBSCURED BY FAVLIY THEORY. 317 tion of food — that a given exertion of industry employed for a given time in raising food in Barbados would be attended with a larger result than the same exertion employed for the same time in the United States. The advantage, therefore, in respect to both the staples of the trade is on the side of Bar- bados, and the phenomenon of the Australian trade is here repeated. The explanation, of course, lies once more in the law of comparative cost. Barbados and the United States find their account in developing those of their resources in which either possesses the greatest comparative superiority, or the least comparative inferiority, in respect of the other, em- ploying the products thus obtained as the means of. supplying themselves, through trade, with others in the production of which the advantage of either is relatively less pronounced, or its disadvantage greater. I have said that this is by no means an exceptional case, but rather the rule, in certain great depart- ments of cosmopolitan trade. It is probable, for example, that in a large portion of the trade carried on between the United States and Europe the advantage of production in respect to the staples on both sides lies with the United States ; but this fact is kept out of sight through the misty conception ordina- rily prevailing as to the nature of cost of production. Thus, in comparing the costs of production of different commodities in, say this country and the United States, people allow their thoughts to run off on questions of comparative wages and profits; and finding wages and profits higher in the United States than here, they are apt to jump to the conclusion that this is evidence of higher cost of production in the former country. In truth, so far as wages and profits are indications of cost of production at all — a point to which I shall hereafter recur — high wages and profits are indications of a low cost of production, since they are indications — being in fact the direct results of — high industrial productiveness ; and accordingly, if wages and profits are higher in the United States than here, it 318 DOCTRINE OP COMPARATIVE COST. is because those things in which wages and profits consist are more easily obtained — that is to say, are obtained at less cost — there than here. The prevailing theory, which makes cost of production consist in wages and profits, has thus thrown a dense haze over the working of the principle on which the in- terchange of commodities between different nations is carried on. Indeed, as I shall hereafter show, the doctrine in question is answerable for some of the most plausible fallacies of the Protectionist school. For the moment, however, I am merely concerned to point out how this erroneous notion of cost tends to conceal the true nature of no small portion of the trade of the world. CHAPTER II. INTERNATIONAL TSADE IN ITS RELATION TO THE RATE OF WAGES. § 1. I HAVE endeavored in the foregoing chapter to set forth the theory of international trade, as it was first thought out by Ricardo, and subsequently expounded by Mill. In doing so, I remarked that the doctrine, though undoubtedly comprising the more fundamental conditions determining the interchange of nations, is, nevertheless, in certain respects defective. It remains for me now to point out wherein consists the short- comings then referred to. In the first place, I must observe that cost of production, though it may be, and generally is, the ultimate condition gov- erning international exchange, is never in any case the proxi- mate or immediate cause. That proximate or immediate cause is not cost, but price. The ordinary merchant whose business leads him into foreign trade knows nothing of "cost of pro- duction," as consisting of labor and abstinence, and still less does he know of " comparative cost of production." The con- siderations which determine his conduct are far more simple. He attends, not to the cost — the expenditure of labor and ab- stinence — at which commodities may be produced, but to the prices at which they may be bought and sold, and the only comparison he enters into is a comparison of the prices of the articles he deals in as they are in his own country and in the foreign market with which he trades. When the state of prices in these different localities is such as to render it prof- itable to transport commodities from one to the other for the 320 WAGES AND FOREIGN TRADE. purpose of sale, he engages in this operation and looks no far- ther : when the state of prices does not admit of this, he ceases to operate. Further, as Eicardo himself pertinently reminds us, "every transaction in commerce is an independent transac- tion ;" and if there be a prospect of profit on the export or im- port of any single commodity, that commodity will be export- ed or imported wholly irrespective of what may be the state of the markets as regards other commodities. How are these facts to be reconciled with the theory expounded in the last chapter, that international trade is governed by comparative cost of production ? Eicardo's answer would run in some such form as this : first, he would say, by virtue of the fact that relative prices within each country correspond to, and vary with, the relative costs of commodities produced within that country ; so that a state of relative prices which would make it profitable to export certain commodities and import others would indicate a corresponding condition of the relative costs of production of the commodities thus exchanged. And, secondly, he would meet the difficulty as to the independent character of each commercial transaction by showing that, though independent, in the sense of being undertaken with- out reference to any transaction beyond itself, each commer- cial transaction nevertheless entails consequences which con- nect it with subsequent commercial transactions. The case may be illustrated by a hypothetical example. Suppose the price of some commodity suitable for international commerce to be lower in country A than in country B — I assume the difference in price to be sufficient to yield a profit on the in- vestment during the period between purchase and sale, and I put aside, for simplicity of illustration, the element of cost of transport — nothing more than this is necessary in order that the commodity should be sent from the former to the latter country. It will accordingly be sent; and the merchant who undertakes the transaction will get his profit. But this is not PROXIMATE CONDITIONS. 321 the end. The commodity being sold, its value must be trans- mitted from country B, in which the sale took place, to coun- try A. The question arises, in what form will it be sent ? If it be sent in the form of some commodity produced in country B, the price of this commodity, to make the transaction profit- able, will need to be lowgr in country B than in country A. The former commodity was lower in country A than in coun- try B : the latter will be lower in country B than in country A. The comparative prices of the two commodities will therefore be different in the two countries, and, prices being ruled by costs, the transaction will only be profitable when the comparative costs are different. But country B might pay for its import, not by the export of a commodity of its own produce, but by remitting gold. Let us consider this case. There are two suppositions possible. Country B either pro- duces gold or it does not. If, taking the former supposition, and assuming therefore that gold is for country B a staple of merchandise, the gold price of the imported commodity is high- er in country B than in country A — this proves that the cost of obtaining gold is lower relatively to the cost of the commodity in the former than in the latter country. There is thus a dif- ference in the comparative costs of gold and of the commodity in the two countries, and the trade would be carried on by an exchange of one for the other in strict conformity with Ricar- do's doctrine. But now take the other supposition. Gold, we will suppose, is not a product of country B. Under these cir- cumstances, and assuming further, for simplicity of illustration, that the two countries trade exclusively with one another, it is evident that the trade can not be carried on permanently upon the terms of an exchange of a commodity on the side of coun- try A against gold on that of country B ; for the continued transference of gold from the latter to the former country would sooner or later act upon prices in the two places, lower- ing them in B and raising them in A ; and then one of two 21 322 WAGES AND FOREIGN TRADE. things would happen : either the commodity which formed the subject of the trade would rise in price in country A till it be- came no longer profitable to export it, and then the trade would come to an end ; or before this occurred, the price of some commodity in country B would be brought below the level of its price in country A; and this commodity would become then for B the means of paying for its import. There would thus be established a difference in the comparative prices of the exchanged commodities in the two countries ; and, prices with- in the limits of each country being governed by cost of pro- duction, this would imply a corresponding difference in their comparative costs. Under all circumstances, therefore, it would be concluded, notwithstanding that prices are the immediate consideration, and notwithstanding that each commercial trans- action, so to speak, stands upon its own merits, the fundament- al condition underlying the whole, supplying the motives and determining the result, is the comparative costs of producing commodities. The logic of the foregoing argument, which is in substance the argument employed in Eicardo's exposition of the doctrine, appears to me to be without flaw. But to one of the premises involved in it I have already taken exception, and, unless my reasoning is fallacious, it can no longer be admitted. It is as- sumed throughout that the relative prices of commodities with- in the limits of each country are universally — or at least so generally that the exceptions are not worth noticing — governed by the relative costs of their production. Now I have endeav- ored to show in an early chapter of this work* that this as- sumption is not well founded. Cost of production, as a princi- ple regulating value, is only operative within the limits of ef- fective competition ; and, though this condition is largely real- ized in this and most civilized countries, and still more exten- * Part i. , chap. iii. PROPOSED EMENDATIONS. 323 sively in new communities like our Australian colonies and some American States, it is yet far from being universal, and, especially in countries in wiiich, as in England, the social structure is very complex and of long standing, suffers numer- ous and serious checks. The consequence is, that cost of pro- duction, though the principal influence in the case, is not the only one. To a considerable extent in countries of old civiliza- tion, to a less extent in new communities, Eeciprocal Demand takes the place of Cost of Production as the regulator of do- mestic prices. In all those exchanges, for example, carried on between what I have called non-competing industrial groups, the law governing such exchanges, and therefore governing the relative prices of the products proceeding from such groups, is that furnished by the former, not that furnished by the latter principle. But prices, as we have seen, are the proximate con- ditions determining international exchange. It follows, there- fore, that international exchange is sometimes determined, not merely proximately but ultimately by other conditions than cost of production ; and that the theory of that branch of trade, as left us by Eicardo, is by no means as complete and ex- haustive as he and his most distinguished successors have regarded it. § 2. It remains, then, that we endeavor to bring the theory into correspondence with the facts such as we have found them to be; and in order to this it will be necessary to subject it to some such modification as the following : The proximate con- dition determining international exchange is the state of com- parative prices in the exchanging countries as regards the com- modities which form the subject of the trade. But compara- tive prices within the limits of each country are determined by two distinct principles — within the range of effective indus- trial competition, by Cost of Production ; outside that range, by Eeciprocal Demand. The ultimate conditions, therefore. 324 WAGES AND FOREIGN TRADE. on which international trade depends are, where the commodi- ties are produced in each country under a regime of competi- tion, a difference in the comparative costs of producing them ; where effective competition does not obtain such a state of Re- ciprocal Demand among non-competing groups as shall issue in a difference, in the exchanging countries, in the comparative prices of the products proceeding from such groups. § 3. And now, in order to exhibit the practical consequences involved in the modification of the received doctrine just pro- posed, and to satisfy the reader that the point raised is some- thing more than a mere formal and barren criticism, I will ask his attention to a question which has been of late a good deal discussed — the connection, namely, between the rate of wages prevailing in a country and the course and character of its ex- ternal trade. It is a very general opinion among commercial men in this country that, if not the most important, at least at the present time the most urgent, condition required for promoting the de- velopment of British commerce, is that the rate of wages should generally be reduced, or, at the least, should not be permitted to rise above its present level. " Dear labor," says Mr. Brassey, expressing an opinion which has since been echoed in many a leading column, " is the great obstacle to the extension of Brit- ish trade." Nor is this opinion by any means confined to Great Britain. Ask a New England merchant why the United States are unable to compete with Great Britain in the manu- facture of cotton fabrics, and it is one hundred to one be will tell you it is owing to the high price of labor in the Union as compared with the low rates prevailing on this side of the At- lantic. Ask, again, a Melbourne merchant why Victoria, not- withstanding her fine agricultural resources, still continues to import a portion of her food, and the answer will be similar : the higher price of labor in Victoria than in the other Aus- THE COMMERCIAL VIEW. 325 tralian colonies, or in the districts of South America from which corn may be obtained, will be considered as telling us all it is needful to know in order to a full comprehension of the fact. Such is the nearly universal opinion on this subject among commercial men ; and yet it needs but little consideration to show that it is in direct conflict with the received economic doctrine, as expounded by Eicardo, as to the causes governing foreign trade. For it must be remembered that by cost of pro- duction, at all events in connection with the theory of foreign trade, both Eicardo and Mill understood what I have maintain- ed to be in all cases the proper signification of the phrase — namely, cost as measured in number of days^ labor and absti- nence; and it is by comparative cost as thus measured that, according to the theory, international trade is governed. But inasmuch as a rise or fall in the rate of wages has no effect on the comparative quantities of labor required for the production of different commodities, it is evident that if the received theo- ry be true, this circumstance must be incapable of altering in any way the course of foreign trade ; and this was undoubted- ly Eicardo's opinion. Indeed it was a leading doctrine in his scheme of ideas, on which he insisted with reiterated emphasis, that high wages do not make high prices — a position which of itself involves the negative of the prevailing view. There can be no question, therefore, that the opinion so widely entertain- ed as to the effect of wages on foreign trade finds no sanction whatever in the theory of Eicardo. I have already, however, shown reasons for regarding that theory as imperfect. As I view the case, external trade is governed proximately by rela- tive prices, and relative prices are, in some instances, not in- deed determined by wages, but so intimately connected with wages that the movements of the two phenomena are steadi- ly coincident. The theory of international trade, therefore, as I hold it, does not exclude the possibility of its course being 326 WAGES AND FOBEIGN TRADE. affected by movements in the rate of wages : at the same time I believe that what may be described as the commercial view of this subject is almost wholly erroneous. Let us consider the sort of argument by which it may be supposed the opinion in question would be supported. It would, I apprehend, run in some such form as the following : taking, for example, the case of wheat imported into Victoria from South Australia or from the nearest South American ports, it would be argued that this was owing to the inability of Victoria to compete with these latter countries, owing to the high price of her labor. Let the price of labor in Victoria only fall to the same level as in the countries from which it imports its wheat, it would be plausibly urged, and it will at once become profitable to raise wheat in Victoria from soils from which it can not now be raised with profit. What would be the reply of Eicardo to this argument? He would answer that if wages fell in agriculture, they would also fall in gold- mining, in sheep-farming, and in all the other industries of the colony. The relative attractiveness of the several occupations, as investments for capital, would not be altered, and there would be no reason that capital should be distributed among them in other proportions than at present. It is true indeed that, with a reduced rate of wages, the cultivation of wheat would yield a profit where it would not yield one now, but that is not the question. The question is, would it yield the rate of profit current in the colony ? Now it must not be for- gotten that the change which we suppose to have taken place — a fall in general wages while the conditions of production remain in other respects unaffected — -would imply a rise in general profits. Australian farmers, therefore, would not be satisfied with the rate of profit which they now receive ; they would expect as high a return upon their capital as — allow- ance made for the special circumstances of different pursuits — could be got in other occupations ; and this they could only TBE COMMEBCIJL VIEW. 327 obtain by confining their operations to lands of equal fertility with those which they now cultivate. In a word, the change in the rate of wages being general, and affecting all occupa- tions alike,* there would be no more reason for extending the employment of capital in agriculture than for doing so in any other branch of production. The capital at the disposal of the colony, under a low, as under a high, rate of wages, would, therefore, continue to be distributed among the various indus- tries pretty much as it now is ; and Victoria would have pre- cisely the same reasons as at present for importing a portion of her food.f It need scarcely be added that this reply, what- ever its merit, would be not less valid against the same argu- ment whether urged in Melbourne, New York, or London. § 4. It is evident that the reply which I have attributed to * As has been pointed out by Eicardo and others, it is not strictly trae that a fall or rise in general wages would aiFect all industries alike. Industries in which fixed capital was largely employed would be less aifected by the change than those in which the outlay consisted mainly of wages, and the result would be made man- ifest by a change in the relative values of the products of the respective industries. These are details, however, into which it is scarcely necessaiy to enter in arguing the general question of the effect of wages on foreign trade. So far as they took effect, however, the course of foreign trade would no doubt undergo more or less modification, but by no means necessarily in the direction which the common opinion supposes. A fall in wages, for example, might easily have the effect of checking instead of promoting the exportation of an article if it happened to be one in the production of which fixed capital was largely employed ; as, on the other hand, a rise in wages might lead to the exportation of a commodity which it had not previously been profitable to export. In the particular instance dis- cussed in the text the circumstance in question would have scarcely any practical operation, the industries of a new country like Australia standing pretty much on the same footing as regards tlie use of fixed capital. 1 1 shall be told, perhaps, that for some time past Victoria has, as a matter of fact, year after year extended her agriculture and curtailed her importation of food from abroad ; and that this has been synchronous with a fall of wages in the colony. The fact is so, and I shall presently have occasion to point out the real connection between the two phenomena. 328 WAGES AND FOREIGN TRADE. Eicardo is valid on the assumption which he constantly makes, that industrial competition is effective over the entire range of a country's industry; but it is equally plain that it ceases to be cogent just in the degree in which this assumption ceases to be true in fact. In old countries like England, as I have pointed out, the regime of industrial monopoly covers a con- siderable area, but even in new communities like the Austra- lian colonies competition is not quite universal. I shall now advert to an example of this failure of industrial competition furnished by the industry of Australia which will set the point at issue in a clear light As all the world knows, the colonies of Australia have been mainly peopled by immigrants from this country and their descendants. Among the population as thus constituted in- dustrial competition would, I should apprehend, be nearly, if not quite universally, effective. No one would be excluded by law, by social circumstances, or, after he had been a short time in the colony, by want of means, from taking part as a laborer in any industrial occupation. If this be so, wages throughout the principal industries of the country would fol- low the law which apportions remuneration to sacrifice, as as- sumed by Eicardo ; and a rise or fall of wages would conse- quently within this range have no effect upon the distribution of capital among the various industries, nor, therefore, upon its foreign trade. But into the ordinary population a sms^ll infusion of alien races has found entrance ; in particular, the Chinese have found their way into Victoria and New South Wales, and for some years a considerable importation of Poly- nesian laborers into Queensland has been in progress. These people do not take part in the general industrial competition of the country; but partly through the prejudices existing against them, partly through physical or intellectual inability, are confined to a few of the simple and cruder industries. It results that the rate of remuneration in their case fails to fol- ILLUSTRATIVE EXAMPLES. 329 low the same rule which holds among the Anglo-Saxon popu- lation. A rise or fall of wages may occur among those alien races without affecting wages generally in the colony, and con- sequently may affect the relative attractiveness, as investments for capital, of the particular industries in which they are em- ployed." In this way the course of foreign trade may come to depend upon the price at which a particular kind of labor may be obtained. The most decisive example in point is that of the Polynesian laborers in Queensland. Sugar cultivation has been started in that colony, and it is asserted — so far as I can gather, with good reason — that the prosperity and even the continuance of the industry depends upon the possibility of obtaining cheap labor from Polynesia. The immigrant from this country is but ill fitted to endure the exposure to the extreme heat of that region which labor in the sugar fields demands, and consequently can not be drawn to that work unless by the inducement of a proportionally high reward. But the Polynesian can expose himself without detriment to a tropical climate ; the processes of sugar cultivation are of a simple mechanical sort such as the rudest laborer may per- form; and, his expectation of reward not being pitched high, he is easily induced, for a rate of pay considerably under that prevailing in the colony, to hire himself for the work. On the other hand, the Polynesian is unfitted, from his habits, and to some extent from his inferior physique, for taking part, ex- cept in a quite subordinate way, in the ordinary raining, pas- toral, and agricultural occupations. It results from all this that the possibility of cultivating sugar in Queensland with the ordinary profits of the place depends almost entirely on the presence there of these Polynesian laborers ; and sugar be- ing mainly used as an article of export, it comes to pass that the course of foreign trade in this article turns almost entirely upon a question of wages. The case I have taken for illustration affords a somewhat 330 WAGES AND FOREIGN TRADE. exaggerated example of the consequences which may arise in the foreign trade of a country from an interruption to the free play of industrial competition. But though the results may be less conspicuous, they are in character and principle the same, wherever a similar interruption, in whatever degree, is experienced. In Australia the obstacle to free competition lies in difference of race. In Great Britain the impediments are of a social and material kind; but the economic effects are identical. In each case alike partial and limited movements in the wages of labor are rendered possible ; and, in the man- ner I have explained in a former chapter,* such partial and limited movements are always attended by corresponding changes in the relative prices of commodities. But, as we have seen, the relative prices of commodities are the proxi- mate condition on which the course of foreign trade depends. So far, therefore, the theory of foreign trade, modified in the manner I have proposed, finds room for the common notion, at least to the extent of admitting the existence of cases in which international trade may be affected by changes in the rate of wages — a view which the theory, as it came from the hands of Eicardo, absolutely excludes. The nature and ex- tent, however, of the results which may accrue from occur- rences of this kind are by no means of that simple and obvi- ous character which is commonly supposed. It will serve to clear our ideas upon this point if we consider the possible con- sequences involved in the following hypothetical case. Let us suppose a fall of wages to take place in some leading branch of English manufacture — say Sheffield cutlery — what would be the effect of this on the external trade of England? It has been alreadj' seen that, if the change supposed were ac- companied by a corresponding change over the whole field of English industry, the effect would be nil upon the distribution * Part ii., chap. ii. ILLUSTRATIVE EXAMPLES. 331 of capital in tlie country, and therefore upon the course of our external trade ; but the same conclusion may easily be reached by another path. For example, the common notion is that a general fall of wages would lead to a general fall of prices, and this again to an immense extension of the export trade of the country. Now, supposing this result to happen, it is at least evident that there would be nothing in the case to cause a cor- responding extension of our import trade. Observe then what would ensue. Foreign nations would become heavily our debt- ors, and a great flow of gold would set in from all quarters to- ward England, which, becoming the basis of new creations of credit, would quickly reproduce the former state of wages and prices, when our export trade would at once return to its for- mer limits. We are thus, though by a different route, con- ducted to the same conclusion as before, that a movement of wages, where it is general, can have no effect upon foreign trade. Let us now consider what the result would be, sup- posing the fall in wages not to extend beyond the group of trades in effective competition with the principal industries of Sheffield. It is evident that it is only in so far as the fall in wages is followed by a fall in prices that it can affect foreign trade at all. I will assume, then, that the prices of Sheffield manufactures fall in proportion to the fall in Sheffield wages; and on this assumption any of three possible consequences might ensue. The increased demand of foreign countries for Sheffield wares might be in proportion to their increased cheap- ness, or it might be in less proportion or in greater. In the first case, while sending a greater quantity of cutlery abroad, we should only send the same value : foreign nations would be in our debt as regards this item in the international account to no greater extent than now, and — no change having occurred in the price of foreign commodities — we should consequently receive from them the same quantity of the produce of their industry, neither more nor less, than they now send us. The 332 WAGES AND FOREIGN TRADE. net result, therefore, of what had happened would be a gain for all consumers of Sheffield wares, whether living in this country or abroad, obtained at the expense of the workmen of Sheffield. Sheffield employers might reap some temporary gains, but competition would quickly reduce their profits to the usual rate: as a permanent result, they would be no bet- ter off than before ; while the foreign trade of England would not be extended. Take now the second case, and let us sup- pose that the increased demand from abroad is less than in proportion to the fall in price of Sheffield wares. In this case, also, the consumers of those wares would everywhere be ben- efited, but the foreign trade of the country, so far as Sheffield contributed to it, would, at least in the first instance, be pos- itively curtailed. This, however, would be merely the initial effect. The reader must remember that, by hypothesis, the export of Sheffield manufactures, though greater in point of quantity, has, through the fall in price, become smaller in value than formerly. It follows that our exports — assuming the state of things previously in existence to have been one of commer- cial equilibrium, and that other things remain the same — would be insufficient to discharge our foreign liabilities. An efflux of gold from England to foreign countries would, therefore, set in, and would continue so long as prices here and in foreign coun- tries remained at the same relative level which had rendered the drain necessary. This, however, could not be for long. The transfer of gold from England to foreign countries would, in the usual way, lead to a re-adjustment of relative prices, and, as a consequence of this, to a re-adjustment of reciprocal demand. What the exact character of this re-adjustment would be it is impossible a priori to say. English demand for foreign products might fall off, which would imply a contrac- tion of English foreign trade, or foreign demand for English products might increase, which would imply an augmentation ; or both consequences might in different degrees be realized, ILLUSTRATIVE EXAMPLES. 333 which would be consistent with either diminution or increase. All that is certain is that, in the definitive result, commercial equilibrium would be restored — the exports of England, that is to say, would be brought into due relation to her foreign li- abilities.* The third possible case is that the foreign demand for Sheffield wares should increase in a proportion beyond that of their cheapness. In this event foreign nations would, in the first instance, become our debtors to a greater extent than the proceeds of their ordinary trade would cover. An efflux of gold would now set in from them to us ; and the necessity would again arise of a change in the reciprocal demand of En- gland and foreign nations. Commercial equilibrium would here, too, ultimately be re-established; but, as in the former case, the end might be reached by any of the same three methods, and the definitive result would be equally compati- ble with a contraction or an expansion of international trade. In the foregoing example I have argued on the assumption of a fall in wages occurring in some leading branch of English industry. If instead of a fall we supposed a rise, and this rise to be confined to some particular departments of trade, we should find ourselves conducted, by a similar course of reason- ing, to precisely the same conclusion. In the first instance the advance in price would check foreign demand for the English commodities which had risen, but this would lead to a re-dis- tribution of the precious metals between England and the countries with which she traded, and this again to a change in relative prices, which would issue in a restoration of the equilibrium of trade — a result, in this case also, compatible alike with augmentation or decrease. We may, then, sum up the results of this part of our in- vestigation : Partial, as opposed to general, movements in the * I am here obliged to anticipate a portion of the theory of international values to be set forth in the next chapter. 334 . WAGES AND FOREIGN TRADE. wages of labor affect the foreign trade of a country, but it is impossible to say a priori in what direction, whether of expan- sion or of contraction. To know this it would be necessary to know what the definitive result would be as regards rela- tive prices in the country in which the change of wages had occurred, and those with which it trades. If this were, on the whole, to augment the difference in relative prices in the two places, an extension of international trade would be the conse- quence; but in the contrary event, which is equally possible and probable, the opposite effect — a contraction of trade — is that which would be realized. § 5. Let me now state the point to which the general argu- ment has been carried. I have endeavored to show that a rise or fall of wages in a country, so far forth as it is general, has no tendency to affect the course of foreign trade : a fall in the general rate does not tend to an extension of foreign trade, any more than a rise in that rate necessitates a contraction. On the other hand, I have pointed out that, where, owing to the existence of impediments to the action of free industrial com- petition, partial movements in the rate of wages occur, inas- much as these issue in a change of relative prices, the course of foreign trade is in this case affected, though it is impossible, previous to experience, to say in what direction the change may take place. So far the argument has been carried. I desire now to consider a problem which, except upon its nega- tive side, has not yet, so far as I know, received the attention of economists — I mean the nature of the connection that exists between general wages and foreign trade. We have seen that that connection is not one of cause and effect ; but we have vet to discover what its nature is. General wages do not determine foreign trade, but it by no means follows that the two phenom- ena are not intimately connected ; and this we shall find to be, in point of fact, the case. FLUCTUATION IN PRICE OF LABOR. 335 I recur once again to that rich repertory of economical expe- rience, the recent history of our Australian colonies. As we have already seen, the discovery of gold in those colonies in 1851 was the signal for a sudden and extraordinary develop- ment of foreign trade, which was accompanied by an equal- ly sudden and extraordinary advance in the wages of labor. This remarkable movement reached its culmination about the year 1852 or 1853, when the rate of wages in the rough work of gold mining was, for some time, maintained at the very high point of 205. a day. We have unfortunately no exact commercial statistics previous to 1856 ; but in that year the total external trade of the principal gold colony, Victoria, amounted to over £30,000,000 sterling. From 1856 to the present time the history of the colony has been one of extraor- dinary prosperity; but coincidently with this prosperity we notice two remarkable facts — a pretty steady decline through- out the whole of the period at once in the wages of labor and in the dimensions of external trade. As I have just said, that trade in 1856 had attained the large aggregate of £30,000,000 sterling. In 1870, after fourteen years of such prosperity as I have referred to, it stood at less than £25,000,000. The fall in wages has not been less striking. It had risen to 20s. a day : it has now fallen for the same mining labor to about half that rate. Wages and foreign trade have thus declined pari passu; every step in the descent of wages having been accompanied by the dropping off of some former import, and, as a consequence of this, a corresponding extension of domestic industry in the colony. The facts, it will be observed, nega- tive most decisively the prevalent commercial opinion on the subject under consideration. Dear labor in 1852 did not pre- vent the sudden and extraordinary expansion of Victorian trade, any more than comparatively cheap labor in 1870 has been able to prevent its contraction. On the other hand, it must be allowed that the power of Victoria to compete with 336 WAGES AND FOBEIGN TRADE. foreign nations, evidenced as this has been by an extension of her domestic industry which has been coincident with a fall in the price of labor, seems to furnish corroboration of the popu- lar notion at the root of the commercial doctrine. It is indeed very evident that all three facts — the decline of foreign trade, the fall in the rate of wages, and the extension of domestic production — are intimately connected; but the question is, what is the nature of the tie that binds them ? The true an- swer is to be found in the fact that the several occurrences are co-ordinate effects of a common cause ; that cause being the gradual exhaustion of the richer and more accessible gold de- posits. As industry became less productive in raising gold, the amount to be divided between laborer and capitalist be- came less, and money wages therefore fell. As gold, with the increased difficulty of production, became more costly, it be- came, just in the same degree, a less profitable means of ob- taining the various commodities which Victoria required : she ceased, therefore, to employ this means to the same extent as formerly, and began instead to produce commodities directly from her own resources: in other words, her foreign trade un- derwent contraction, and her domestic industry was extended. And as these results have been the consequence of a decline in the productiveness of the gold mines, so, it might be confident- ly predicted, a new discovery of auriferous deposits equal in abundance and richness to those of the earlier period would have the effect of reversing the present course of development, and by a single stroke send up money wages, give a fresh im- pulse to external trade, and arrest the extension of miscellane- ous industries in the colony. Such is the nature of the con- nection between the rate of wages in a country and the course of its external trade and domestic industry. They are co-or- dinate effects of a common cause, and are consequently symp- toms and indications of each other. In the illustration just given the condition on which the sev- ILLVSTBATIVE EXAMPLES. 337 eral results depended was the changing cost of gold ; and — the change being great in point of degree, and gold being also the material of money — the results have been more palpable and striking than they would have been had the cheapened com- modity been one of ordinary consumption. But the effect, though less palpable, would not really be different in this lat- ter case — provided only the article affected were of a kind in tolerably extensive demand and suited for exportation to for- eign countries. I am unfortunately unacquainted with any- actual occurrence sufficiently simple and decisive to enable me to exhibit, in a perfectly unequivocal light, the operation of the principle in this more general form, and I must, therefore, have recourse for this purpose to hypothesis. I will then sup- pose that, as the result of some mechanical invention not known to other nations, a great improvement has been effected in the manufacture of woolen goods' in England — an improvement which would reduce the cost of manufacturing this class of goods in as great a proportion as the cost of gold in Australia was reduced by the discovery of gold — what would be the ef- fect of such an occurrence on the external trade of England and on the remuneration of labor in the country ? In the first instance, it is evident, there would be an extensive diversion of English capital into the branch of manufacture thus benefi- cially affected ; and the increased production of woolen goods would lead to a fall in their price, which would only stop when brought into the usual relation with their now diminished cost of production. With the fall in price a large increase would take place in the foreign demand for English woolens. As, however, there would be nothing in the case to cause a corre- sponding increase in the demand of England for the commodi- ties of foreign countries, a transfer of gold from the latter to the former in payment of the enlarged exportations would be necessary, and this would continue until, through a rise of prices in England and a fall of prices abroad, the equilibrium 22 338 WAGES AND FOREIGN TRADE. of trade was re-established. At this point many articles which had formerly been produced in England, and perhaps produced for exportation, would now be selling at lower prices in foreign countries. Such articles would cease to be produced in England, or at all events to be produced on the same scale as formerly, and would in greater or less quantity begin to be imported from abroad. Ultimately we should arrive at this definitive result : a larger proportion than formerly of the ag- gregate capital of England would be devoted to the production of woolen goods, a smaller proportion to her other miscellane- ous industries ; while the things formerly produced by the dis- placed industries would now be obtained from abroad through an exchange for woolen goods. In other words, England would avail herself of her great comparative superiority in the production of woolens for the purpose of obtaining more cheaply than before all commodities in the production of which her superiority was relatively less. The result, so far as foreign trade was concerned, would thus be exactly anal- ogous to what happened on the discovery of gold in Austra- lia. But I shall' be asked how as regards the wages of labor? The gold discoveries, as we saw, had the effect of raising the rate of money wages in Australia in proportion to the fall in the cost of money. Would a similar consequence follow on the hypothesis we are now considering? Beyond ques- tion, yes ; that is to say, as wages in Australia rose, measured in the commodity of which the cost had been cheapened, so wages in England would, in the supposed case, rise, and in a corresponding proportion, measured in the commodity similar- ly affected. In the one case that commodity was gold, in the other woolen goods. English laborers, so far as they were consumers of woolen goods, would, in the supposed case, ob- tain that commodity more cheaply, so far as they were con- sumers of foreign goods, procured through an exchange for woolens, would also obtain those commodities more cheaply; CO-OBDINATE PBENOMENA. 339 SO far, again, as they were consumers of commodities produced in England other than woolen goods, would gain nothing by what had occurred. It may be added that those other com- modities of English production, inasmuch as they were not af- fected by the same cause which had cheapened English wool- ens, would be represented in exchange by a larger quantity of the cheapened article than before, just as the products of Aus- tralia were represented by higher gold prices in proportion as the cost of gold fell. To state the result in a single phrase, the wages of English laborers, measured in woolen goods, would rise in proportion as the cost of those goods had fallen ; in ex- act analogy with what happened in Australia. Here, then, we find, in the case of a commodity of general consumption, as we had before found in the case of gold, the course of foreign trade and the rate of wages intimately bound together through the link of a common cause in the state of productive indus- try. It is rare indeed that changes in the cost of production take place on so great a scale as that realized or assumed in our illustrations; but where such changes do occur, be the scale large or small, the results which follow, though different in point of magnitude, are in character such as I have described. Every new invention, every happy discovery, that cheapens the cost of producing particular commodities, and so alters their comparative cost, sets in action forces which operate in the directions I have indicated, however slight and even im- perceptible may be the actual results which flow from each. The real nature of the connection between the rate of wages prevailing in a country and the character and course of its ex- ternal trade ought now, I think, to be tolerably clear. They are co-ordinate effects of a common cause, that cause being the degree and direction in which a nation's industry happens to be productive, "Whatever be the articles with respect to which the industry of a nation is specially productive, these are the articles which will form the staple of its external trade. 340 WAGES AND FOREIGN TRADE. and, vieasured in these, the wages of labor will be high. If wages are high, measured in money, this will indicate either rich mines of gold or silver, or a high productiveness of indus- try in some commodities in large demand abroad with which gold or silver may be purchased on favorable terms. If they be high, measured in food, clothing, and other necessaries and comforts, we may infer similarly a high productiveness of in- dustry, direct or indirect, with regard to those commodities. Thus the commodities, whatever they are, measured in which wages are high, will either form the staples of her foreign trade, or will be such as may be obtained at small cost through those staples The notion, therefore, which prevails both here and in the United States that the high rate of general wages ob- taining in each country is a hinderance to the extension of its foreign trade must be pronounced to be absolutely without foundation. Supposing a fall in wages to occur in either coun- try, the other conditions of production remaining as at present, and supposing the fall to be general, this circumstance would not, as I have shown, affect the relative attractiveness of the different branches of industry as investments for capital. Cap- ital would, therefore, be distributed among them as at present, and nothing would occur to alter the course of its foreign trade. The sole result would be a general rise of profits : capitalists would gain what laborers had lost. A fall of gen- eral wages, on any other assumption, would inevitably imply diminished productiveness in some of the great departments of productive industry; and such diminished productiveness involving, as it would, changes in the comparative cost of com- modities, would no doubt entail changes in external commerce. But the point to be borne in mind is that the latter result though coincident with, would not be the effect of the fall in general wages, but that both would be co-ordinate effects of the decline in the productiveness of industry; and further, that the changes in external commerce, occurring under the cir- CO-OBDINATE PHENOMENA. 341 cumstances supposed, would not necessarily be in the direction of extended trade. Quite as probably in either case, in the case of the United States much more probably, the movement would involve a contraction of dealings with foreign countries. Thus, supposing a general fall of wages in the United States, measured, let us say, in gold and provisions, or, what comes to the same thing, supposing money wages to fall, the prices of provisions remaining as at present, let us consider what this would imply. Would it not imply that industry in the United States was less productive than it now is in procuring the com- modities in question ; and, therefore, more nearly on a par than at present, in the case of such products, with industry in other countries? "Would it not, in a word, imply that the compara- tive cost of producing commodities there and elsewhere had been brought into closer approximation, and that consequent- ly the possible field for international exchange bad been nar- rowed? The rate of wages and the course of foreign trade are thus intimately connected; but that connection (except within the limited range within which reciprocal demand gov- erns domestic values) is not one of cause and effect, but of co- ordinate phenomena depending upon identical conditions. CHAPTER III. INTERNATIONAL VALUES. § 1. We have now ascertained the circumstances under which international trade arises, and the nature of the advan- tages that flow from it. These advantages, as we have seen, are such as result from a more effective distribution of the pro- ductive forces of the world. Supposing a universal freedom of trade, it would not indeed follow that every product of in- dustry would be raised precisely in that part of the world in which it could be raised with greatest advantage; for this would require that population and capital should be distributed with no other view than to economical gain. The course of population and capital, however, it is needless to say, is influ- enced by many other considerations as well ; and what inter- national trade, so far as it is allowed free scope, accomplishes for mankind is, that the industry of the world is carried on, not indeed with the utmost possible advantage, but with the utmost advantage practicable, regard being had to the manner in which the world is peopled and to the condition of its in- habitants. Such is the nature of the gain ; but here another question arises : On what principle is the increase of wealth which re- sults shared among the nations which co-operate in producing it? To put the same point in a different form — What causes determine the proportions in which trading nations exchange their products? These proportions may conceivably be such as to give all the advantage to one only of the exchanging parties, or such as to share it among a few to the exclusion of STATEMENT OF THE PROBLEM. 343 the rest, or such, again, as to distribute it in any ratio what- ever among them all. According as one result or the other is attained, will be the quantum of advantage which each nation derives from its commercial dealings with others. We are thus conducted by the course of our investigation from the doctrine of international trade to the special problem of inter- national values. § 2. It may be well, perhaps, to remind the reader that the subject of our present inquiry is normal, not market, values — the proportions in which nations exchange their products as a rule, or when trade is in a state of equilibrium, not those in which the exchange may take place on a particular occasion, or under the influence of exceptional conditions. JSTow we have already seen that normal values depend on one or other of two principles: where industrial competition prevails, on cost of production ; and in the absence of effective industrial competition, on reciprocal demand. Inasmuch, however, as the condition of effective industrial competition (in the sense de- fined) is not satisfied in "the intercourse of independent nations, it is at once evident that the ruling principle of international values is not cost of production, and can only be that other in- fluence which prevails in the absence of effective competition. So much is recognized in the received text-books of Political Economy. But here I must call attention to an inconsistency in which those text-books are involved, to which, indeed, in- cidental reference has been already made. It will be remem- bered that in a former portion of this work I criticised at some length the received doctrine of Cost of Production, which, as expounded by Mr. Mill and others, is represented as consisting in, and varying with, the wages and profits of producers. I stated then that this conception of cost was not reconcilable with the doctrine of international values upheld by the same authorities, which refers these phenomena, not to cost of pro- 344 INTERNATIONAL VALUES. duction, but to the reciprocal demand of exchanging nations. I now propose to justify that criticism by showing that, re- garding cost of production in the sense assigned to it, inter- national values do, in point of fact, in all cases correspond with this principle ; in other words, that, while they are said not to be governed by cost, they nevertheless invariably conform to it. A simple illustration will enable me to make good this position. Let us suppose two commodities, one the product of English industry, the other produced in the United States, and selling for the same sum of money, say £1000 each. These commod- ities will (cost of carriage being omitted on both sides) ex- change for each other, and will, therefore, represent equal values in international trade. This being so, how stands the case as to their respective costs of production? Assuming these to consist in wages and profits, the answer must be that their costs of production are equal also; for, as I have else- where shown) the wages and profits of producers are, where in- dustry is continuous, in effect the outcome of the values they produce. The former, therefore, must be constantly propor- tional to the latter ; and accordingly, where the values of com- modities are equal, as these values resolve themselves into wages and profits, the wages and profits of their producers — that is to say, according to the view we are now considering, their costs of production — must be equal. Now it is obvious that this argument admits of being applied to every instance whatever of international exchange;* and we are thus con- fronted with this singular result, that, while cost of production, according to our text-books, has no place in determining inter- national values, international values, nevertheless, according to principles supplied by the same authorities, invariably corre- * It will be seen that the case would not be altered if, instead of money, we take any other article, the subject of international exchange, for example food, as the measure of cost and value. INCONSISTENT POSITIONS. 345 spond to it. I must leave those who accept both doctrines of the received Political Economy to reconcile the two positions as they best can. On the other hand, if we take as our conception of cost that view of it for which I have contended, according to which it consists in labor and abstinence, the truth of the accepted doc- trine on its negative side follows as a matter of course. To establish this we need not go beyond the illustration just given. Two commodities respectively of English and American pro- duction, each worth £1000, exchange for each other, and there- fore represent equal values in international trade. Further, as I have just pointed out, their values being equal, they consti- tute equal aggregates of wages and profits for the producers on each side. The American scale of remuneration, however, is much more liberal than the English, and the proceeds of those equal values will therefore be distributed in higher wages and larger profits on one side than on the other. It follows that they will not be distributed in proportion to the labor and ab- stinence remunerated : in other words, the costs, to which they correspond, will not be equal. The sacrifice will be less on the American than on the English side. English and Ameri- can commodities, therefore, do not exchange for each other in proportion to their costs of production, as consisting in the real sacrifices undergone by the producers. The negative side of the received doctrine respecting international values is thus found to be true, but only on the condition of understanding cost of production in the sense for which I have contended. § 3. The argument just stated brings into view a principle already more than once referred to in these pages, which, as it will be found to have important bearings on some problems of international value, may conveniently be set forth with some distinctness here. The principle to which I refer is, that the relative rates of wages and profits in the different branches of 346 INTERNATIONAL VALUES. industry afford an indication, in an inverse sense, of the relation in which the exchange values of the commodities, proceeding from such branches of industry, stand to their costs of produc- tion. It will of course be'understood that I use the term •' cost of production" here in the sense which I hold to be the right one. Thus, to revert to a former illustration, supposing that in the manufacture of scientific instruments wages and profits ranged considerably higher than in ordinary handicraft trades, let us say, carpentry, the fact would show that, in the exchange of the products of the former for those of the latter industry, the sacrifices involved in the production of mathematical in- struments bore a smaller proportion to the values of those in- struments than the sacrifices involved in producing common tables and chairs, for example, bore to their values. The cost would be low relatively to the value in the trades in which wages and profits were high, high in the trades in which they were low, while the relation would be one of equality where the rates of wages- and profits were equal on each side. We are thus furnished with an easy means of determining the re- lation in which the exchange values of any two compared com- modities stand to their costs of production. If the rates of wages and profits obtained by the respective producers of the two commodities be equal — that is to say, in proportion to the sacrifices undergone — it is matter of demonstration that the commodities in question exchange in proportion to their costs. If they are unequal, the contrary conclusion not less certainly follows ; and further, the difference in the relative rates of re- muneration will indicate the degree in which the exchange values of the commodities deviate from the proportion existing between their costs of production. Bat this simple criterion may be made simpler still. For practical purposes, we shall not lose appreciably in point of accuracy if, instead of making it consist in wages and profits, we confine our attention to wages alone. Profits form but a small element in the value PRACTICAL CmXEBION. 347 of most commodities, and the divergence of the rates of profit in different occupations and in different countries is (owing to the greater mobility of capital than labor) much less consider- able than that of the rates of wages. We may, therefore, with- out danger of serious error, substitute " wages " for " wages and profits," and we are at once provided with an easy means of determining the relation of exchange value to cost of pro- duction in all cases whatever. To give now some examples of the application of our cri- terion to the transactions of international trade, I find that, ac- cording to investigations made by Mr. Wells,* the United States Commissioner, which on the whole have been confirmed by the Eeports lately received from our agents in foreign countries, the relative rates of wages for similar kinds of labor in the leading manufacturing industries in the United States, England, Belgium, France, and Germany range nearly as fol- lows : As compared with England, wages in the United States are from 25 to 50 per cent, higher ; as compared with Belgi- um, from 48 to 70 per cent, higher; while, as compared with France and Germany, the difference rises to nearly 100 per cent.f I need hardly say that if the comparison were extend- ed so as to include Oriental states, for example, India and * See his Report for 1868, pp. 67-69. t It is true that the returns quoted represent the rates of wages per day ; and a day's labor, eTen in the same occupations, does not always represent equal exer- tion undergone, since men work harder and longer in some countries than in oth- ers. This consideration, however, if taken account of, as no doubt it should be, would only have the effect of strengthening the grounds of the argument in the text — at all events so long as the comparison is confined to the United States and Europe ; for from the parliamentary reports recently published upon this subject it appears to be almost a rule that, comparing different countries, the laboring day is long nearly in proportion as the rate of wages is low. Thus it is generally shorter in the United States than in England, in England than in Belgium and France, and in Belgium and France than in Germany ; the rates of wages in these several countries, as we have seen, declining in a corresponding order. 348 INTEBNATIONAL VALUES. China, the differences in the scales of remuneration would be- come still more striking, the remuneration of a day's labor in the United States being probably equivalent to that of four or five in the latter countries. Now what, according to our cri- terion, do these differences indicate as regards the terms of in- ternational exchange ? They indicate this — in the first place, that the several nations named do not exchange their products with the United States in proportion to their costs of produc- tion ; and, secondly, that the pi'oportion in which the exchange takes place deviates from the principle of cost in the degree marked by the differences between the rates of wages in each country and in the United States; in other words, our crite- rion shows us this — that, in the commercial dealings of those several nations, the product of a day's labor in the United States enables the workman to command the product, in round numbers, of a day and a third's labor in Great Britain, the product of a day and a half's labor in Belgium, the product of from one and three-quarters to nearly two days' labor in France and Germany; while it probably would command the product of four or five days' labor in China and India. Such, or nearly such, are the proportions, measured by the standard of cost, in which the leading commercial nations of the world, at the present time, exchange their productions ; and so very far is it from being true that international values, in the actual dealings of commerce, correspond with that standard.* § 4. So far as to the negative side of our argument. The * The position liere contended for is very clearly, though incidentally, establish- ed in Mr. Senior's essay on the " Cost of obtaining Money," and by the applica- tion of the same criterion. Mr. Senior, nevertheless, held the current doctrine as to cost of production ; for though defining it in his treatise as consisting of " labor and abstinence," he at once abandons this definition, and substitutes for it "wages and profits," as equivalent and more convenient expressions! In the essay just referred to he speaks of tlie question as one of nomenclature. INDUSTMIAL MONOPOLIES. 349 products of trading nations do not exchange for each other in proportion to their costs of production. There is no reason that they should do so, inasmuch as industrial competition is not effective in the intercourse of nations; and the evidence just adduced proves that they do not do so in point of fact. The principle, therefore, which determines international values must be that one which operates in the absence of effective in- dustrial competition, namely, Eeciprocal Demand ; and this, as I have already said, is the received doctrine of Political Econ- omy. But though Cost of Production is not in this case the determining cause, it does, nevertheless, exercise an important influence in international trade by controlling the aberrations of value which are possible under a regime where monoply is the presiding principle. This, indeed, is implied in the ordi- nary expositions of the doctrine ; but I do not think the fact has hitherto been brought out with as much distinctness and prominence as it deserves. To aid toward this result, it may be observed that industrial monopoly may exist under various conditions involving a cor- responding variety in the results which flow from it. It may exist, in the first place, in an absolute form, as where an indi- vidual or a nation possesses the exclusive power of producing certain commodities ; or, secondly, it may be qualified, spring- ino- from the possession of certain special facilities of produc- tion not shared by others, as in the case of those peculiarities of soil and climate which give an advantage to some districts and countries over others in the production of certain articles, which it is still possible for the latter to produce, though under less favorable conditions ; while again, in commercial dealings, monopoly may be either one-sided or reciprocal — confined to one of the. trading parties, or extending to both with regard to their respective staples. Examples of monopoly in all these forms will be found in international trade, and the power of reciprocal demand over value will be greater or less, accord- 350 INTERNATIONAL VALUES. ing to the form w-hich the monopoly in any given case may assume. For example, where the monopoly is at once strict and re- ciprocal — a case not frequent in international trade, but which sometimes does occur, as in the traffic which takes place be- tween the tropical and the frozen zones, in the exchange, sup- pose, of spices for ice — in this case the influence of reciprocal demand on value is unqualified and absolute, since under such circumstances there is nothing but the desires on each side, supported by such means as are available to give them effect, to determine the bargain. A more frequent and important case is that in which the monopoly is strict, but one-sided, or, if existing on both sides, only strict on one side, while it is qualified on the other. This species of monopoly is largely exemplified in the trade between tropical and temperate countries, and again in that between the gold-producing districts of the earth and the countries which trade with them. Eeciprocal demand here operates, but sub- ject to a limit on the side of the country which has the power of producing both the commodities, or classes of commodities, forming the subject of exchange. To give an example : in the trade between England and Australia (for simplicity of illus- tration, I suppose all other gold countries to be excluded from the commerce) there is no limit to the possible rise which might take place in the value of gold — to the possible quan- tity, that is, of her products which England might give in ex- change for gold — save in the desire of England for gold and her ability to pay for it ; but, on the other hand, the fall in the value of gold — the price in gold which Australia will consent to pay us for our goods — has a very definite limit short of Australian needs for what we produce — the limit, namely, set by the cost at which Australia can produce those articles for herself So soon as prices in gold have reached the point at which Australia can satisfy her requirements more easily by INDUSTRIAL MONOPOLIES. 351 the direct production of the commodity than by producing gold to be exchanged for it, the fall of gold, in relation to that commodity, has reached its limit, and no increasing require- ments on the Australian side will have any further effect on its international value. But again, there is a third case, the most frequent and im- portant of all in international trade — that, namely, in which monopoly exists on both sides, but is qualified on both. This occurs when each of the trading nations is in the possession, not of an exclusive power of production, but of a comparative superiority (in the sense in which this phrase has been explain- ed) with reference to the articles which constitute its staples in the trade. Here reciprocal demand still determines inter- national values, but the range of its influence finds a limit on both sides. This, I say, is the most frequent and important case of all in international commerce. It is largely exemplified in the trade between the various countries of Europe, and still more strikingly in that between Europe and North America. In the exchange, for example, of wheat for cotton yarn, or of timber for iron, each of the exchanging countries has a compar- ative advantage in its own staple ; and any terms of interna- tional exchange which are within the limits of that advantage will imply a gain, though not necessarily an equal gain, for both countries. Within these limits, therefore, reciprocal de- mand will operate to determine what the precise terms of the exchange shall be ; but beyond those limits on either side in- ternational values can not permanently remain, since the mo- ment the limits thus set are transcended the resources of the country so placed at disadvantage can be brought into requisi- tion, and the motive for the trade ceases. These limitations on the action of reciprocal demand in in- ternational exchange are such as would exist if each countrj'- only traded with one other. But when we take into account the actual state of things, and consider that the external trade 352 INTERNATIONAL VALUES. of each country comprises dealings with many others, we find that the limits to the deviations of value under the action of demand are considerably narrower than we might at first have supposed. For example, reverting to the illustration already given of the trade between certain parts of the United States and Barbados, it is probable that the difference in the compar- ative costs of sugar and flour in those two countries is very con- siderable ; and that consequently a very considerable latitude would exist for possible variations in the terms on which the staples are exchanged under the influence of American demand for sugar and Barbadian demand for flour. But before the ex- treme limit could be reached on either side, the resources of other countries would come into requisition. Any considera- ble advance of sugar in relation to flour, or of flour in relation to sugar, or, let us say (since money is the medium through which the transactions would be effected), any considerable ad- vance of United States prices in relation to prices in Barba- dos, or the reverse, would bring other countries into the field, and make their resources available for controlling the advan- cing price, on whichever side it might happen to be. The ce- real capacities of Canada and South America would control the aberrations on the side favorable to the United States ; while these on the side favorable to Barbados would be kept in check by the competition of the sugar producers of Jamaica and Cuba. It thus appears that it is not the difference in the comparative costs of production in each pair of trading countries that fixes the limits to the possible variations of international values un- der the influence of reciprocal demand, but, among all coun- tries mutually accessible for commercial intercourse, the differ- ence of comparative costs, as it exists in the particular coun- tries in which that difference is least. The limits of variation are thus set by the minimum, not by the maximum, difference in comparative cost among the various exchanging and com- peting countries. CONTROLLED BY COST. 353 Such is the nature of the influence exercised respectively by reciprocal demand and by cost of production in international exchange. The former determines; the latter only controls. The distinction between these two functions will be made clear by comparing the action of cost, as just described, with its action in domestic trade. In domestic trade cost of pro- duction, within the limits of effective competition, not merely controls, but determines normal value — not merely sets limits to the variations, but establishes a point toward which they converge. It has accordingly been aptly represented by Adam Smith as a central point about which rnarket values move, and toward which they gravitate. In the instance of international trade, the correct figure by which to. describe its action would be, not a point about which values move, but a circle within which they move. Accordingly, it must be carefully remark- ed that, even in those cases in which its influence is operative, there is no correspondence — at all events no necessary corre- spondence — between values and costs. The examples I have already given of the relative rates of remuneration prevailing in different countries sufficiently establish this point. § 5. As regards the mode of operation by which interna- tional values are determined under the action of international demand, I do not propose to attempt any detailed illustration here. The subject will be found very fully treated in text- books in every one's hands. There is one point, however, on which it seems to me the correct doctrine has not been quite clearly laid down, and on this it may be well here to attempt a few remarks. The transactions of international trade are of course carried on through the medium of money — that is to say, of gold and silver; and Eicardo has shown that the effect of the play of international demand is to produce such a distribution of the precious metals, and such a relative scale of prices in commer- 2a 354 INTEBNATIONAL VALUES. cial countries, as on the whole to cause the trade of each coun- try with all others to be carried on upon the same terms as it would be if conducted bj barter. When this state of things is realized, the precious metals (so far as they are employed as a medium of exchange, and not as a staple of commerce) cease to pass from country to country ; and international trade is in a condition of equilibrium.* The point I desire now to call attention to is the condition of international demand which is- sues in this result. The solution commonly given of this problem is that com- mercial equilibrium is attained when the value of the imports into a country, measured in gold or silver, the universal mon- ey of commerce, is equal to the value of the exports from that country. In the language of Mr. Mill, "the produce of a coun- try exchanges for the produce of other countries at such values as are required in order that the whole of her exports may exactly pay for the whole of her imports."f Now, as a mat- ter of fact, it very rarely happens that the whole exports of a country, even if we take an average of many years, exactly pay for the whole of its imports; nor can it be truly said that there is any tendency in the dealings of nations toward this result. The evidence of this is to be found in any statistical * The equilibrium of commerce may, accordingly, be defined for all countries, not being themselves producers of the precious metals, as that state of trade which results in maintaining the real exchanges, one year with another, at par. Where it happens,' however, that a country produces gold or silver for export, a premium on the exchange is, in this case, the normal state of things. Dui-ing the last twen- ty years the commercial eqnihbrium has been extensively disturbed in most coun- tries — the necessary consequence of the large additions now being made to om- stock of money. + In a later passage at the end of the chapter on the "Distribution of the Pre- cious Metals," Mr. Mill recognizes that there are other causes than commercial which aifect the relation of imports and exports, and the equilibrium of commerce. But the recognition, only introduced at the end of the discussion, and in quite a summary way, seems scarcely adequate to the requirements of the case. COMMERCIAL EQUILIBBWM. 355 table showing the exports and imports of diiferent countries. An examination of such a table will show that there are coun- tries which constantly, and as a normal state of things, import largely in excess of their exportations, while there are others of which the exports as regularly exceed the imports. In other cases, again, the imports will be found for a time to have exceeded the exports, after which the relation is inverted, and the exports begin to outstrip the imports. With such facts before us we can not easily admit that an equalization of im- ports and exports is the necessary condition of a staple trade ; and this being so, we have to consider what that condition is. To elucidate this, a better example can not be found than the external trade of the United Kingdom. I take it as set forth in the Statistical Abstract for the years between 1856 and 1870 inclusive. During the whole of this time the im- ports remained constantly and largely in excess of the exports. At the commencement of the period the exports stood at, in round numbers, £115,000,000, the imports at £172,000,000 ; the imports thus exceeding the exports by the amount of £57,000,000 sterling. At the end, that is to say in the year 1870, the exports were £199,000,000, while the imports reach- ed £303,000,000, showing a difference in favor of imports of £104,000,000 ; and the returns of the intervening years ex- hibit a constant predominance on the same side, and nearly in the same proportion. The question arises. How has this large excess of imports been paid for? The answer is, to a small extent it has been paid for in services, principally in the serv- ices of our mercantile marine, performing as it does a large proportion of the carrying trade of the world, but, in the main, it has not been paid for at all. It came to us from foreign na- tions, as all our imports have come, in the ordinary course of trade, but the proceeds on sale have never been returned in any form to those from whom the goods came: they were applied instead to the discharge of debts owing to us — debts. 356 INTERNATIONAL VALUES. however, incurred on account of transactions wholly apart from our export trade. In point of fact, what has happened has been this : Great Britain has for a long time occupied the position of a lender of capital to other nations ; she has invest- ed her capital freely in her own colonies ; she has lent money to many countries for industrial undertakings, and has been a large purchaser of foreign stocks. On all these accounts for- eign nations, including under this term our own colonies, have become her debtors, and, in discharge of their obligations ac- cruing in the form of profits, interest, and dividends on stock, are compelled to send her, year by year, value to a large ex- tent for which no payment in return is required. Here we find the explanation of the large normal excess of our imports over our exports. But an examination of the facts will fur- ther evince that this excess is, in the case of Great Britain, the indispensable condition of commercial equilibrium; that under any other circumstances the present relation of prices between her and foreign countries, or, what amounts to the same thing, the present proportion in which they exchange their products, could not be maintained. This will be evident if we consider what would be the consequence of an equali- ty of value being established between British imports and ex- ports, the financial relations of the country with the rest of the world being such as they are. Foreign nations would have to pay us, as now, for what we export, and for this, bills drawn against the goods they send us, that is, our imports, would exactly suffice. But they owe us besides, say a hun- dred millions, on account of dividends, interest, and other obli- gations. How are they to discharge this latter liability ? It is evident they could do so only in one way, namely, by send- ing us gold to the value of the amount in question. An ex- tensive influx of gold from foreign countries to Great Britain would thus set in, and — so long as the state of international prices, and therefore of international demand, remained at the COMMEBCIAL EQUILIBRIUM. 357 point which had produced the equahty of imports and exports — would continue. It is plain, however, that international prices and demand could not long remain steady under the cir- cumstances supposed. The large and continued influx of gold into England would necessarily be attended by a rise of prices here, and a fall in foreign countries; and this would quickly lead to a change in the demand of England and of foreign countries for their respective products. England, in possession of enlarged monetary resources, and finding prices falling abroad, would extend her demand for foreign commodities ; while, for precisely opposite reasons, foreign countries would curtail their demand for the commodities of England. En- glish imports would thus increase, and English exports dimin- ish; and this would go on, year by year, so long as gold con- tinued to flow. But the question arises at what point would the process terminate, and trade find its equilibrium? The answer is : precisely when the excess of imports over exports had attained its present dimensions — when the former, that is to say, had exceeded the latter by a hundred millions sterling ; for it would only be then that foreign countries could discharge all their liabilities to us without remitting gold. Gold would, therefore, at this point cease to flow, and prices would remain at the level they had reached. In a word, the trade between England and the world would once more have attained equi- librium. And now we are enabled to answer the question propound- ed a few pages back. The answer may be formulated thus: The state of international demand which results in commercial equilibrium is realized when the reciprocal demand of trading countries produces such a relation of imports and exports among them as enables each country by means of her exports to discharge all her foreign liabilities — a position from which the following corollary may be deduced, that all payments, due from one country to another or to other countries on other ac- 358 INTERNATIONAL VALUES. counts than that of imports, of a permanent character — for ex- ample, an annual tribute, interest on borrowed capital, divi- dends on stock, and so forth — and in excess of similar pay- ments due from these latter to the former, will be i-epresented in the foreign trade of that country by an excess of exports over imports ; while, conversely, an excess of payments of this character to be received over payments due will find its com- mercial expression in an excess of imports over exports. This is, in truth, merely to say that the foreign trade of each coun- try will adapt itself to the pecuniary requirements of that country in relation to the countries with which it trades. If a country has been a large borrower of foreign capital, and so is indebted to foreign nations in annual interest, or if, again, her people are much given to traveling in foreign coun tries, and so have occasion to remit annually large sums abroad for which no return is required, under such circumstances her exports will tend to exceed her imports ; while, under an opposite state of things, that is to say, if a country has been a large foreign lender, or if it be the scene of travel for the inhabitants of oth- er countries — the imports will tend to exceed the exports. With many, indeed with most countries, it will happen that they are debtors to foreign countries upon one score and creditors upon another ; and the state of the import and export trade will be such as the state of the balance in each case may prescribe. For example, Grreat Britain makes large remittances abroad every year to meet the expenses of Englishmen residing or traveling in foreign countries. This would tend to make her exports exceed her imports, and would actually produce this effect, if it were not that the debts due on this account to for- eign nations are more than balanced by larger debts due on other accounts by them to us. The balance of such non-com- mercial payments being, on the whole, largely in favor of Great Britain, it results, as we have seen, that her imports are, as a rule, largely in excess of her exports. An illustration of the COMMERCIAL EQVILIBIiWM. 359 same principle in an opposite sense is afforded by the foreign trade of the United States previous to 1860. As all the world knows, the people of the United States had long been, as they are still, much addicted to foreign travel : they had also for a long time been extensive borrowers in European money mar- kets. Both these practices combined to place them under the necessity of remitting annually large sums to Europe over and above what they owed on commercial account; and this obli- gation was discharged in the only way, in the long run, pos- sible, namely, through the medium of United States products exported. Accordingly, if we turn to the Eeports on the ex- ternal trade of the United States for the period previous to 1860, we find, as the normal state of things in that trade, a pretty steady excess of exports over imports — an excess which in her dealings with Europe assumes very large proportions.* § 6. The foregoing examples show the effects of internation- al lending and borrowing on the external trade of nations after these practices have issued in monetary relations of a defini- tive kind. At the commencement, however, and for so long as the process of incurring debt is still in actual operation, the effect of such practices on the foreign trade of a country is ex- actly the reverse of that which is subsequently realized. The nations which have engaged to lend are, during this period, those which have pecuniary obligations to discharge ; the na- * The total excess of exports over imports on the aggregate external trade of the United States in the ten years from 1851 to 1860 (inclusive) was 60, 200, 000 dol- lars, that is to say, an annual average of about 6,020,000 dollars ; but the excess of that portion of it which was carried on with Europe was immensely greater. The excess of exports over imports, for example, in the trade with Great Britain for the single year 1860, amounted to 57,600,000 dollars. This large excess, however, was compensated by an excess the other way in her trade with several countries, chiefly American, in reference to whicli she holds much the same posi- tion financially which Great Britain holds toward her. (See "Wells's Essay:" "Cobden Club Essays," pp. 513 and 515.) 360 INTERNATIONAL VALUES. tions which borrow, those which are entitled to receive pay- ments in excess of what is due to them on their ordinary trade; and for a time the external trade of both tends to adapt itself to this state of things. The subject is perhaps of sufficient im- portance to deserve some detailed illustration. Let us, then, suppose an industrial colony, starting on its career, to become a borrower of capital from its mother-coun- try; and, for simplicity of illustration, we will assume that neither is a producer of the precious metals, which, therefore, would only pass between them in discharge of pecuniary debts. The amount which the mother-country undertakes to lend, and the colony to receive, we will set down at one million sterling annually. This being the position of affairs, it becomes neces- sary that the sum to be lent should be remitted each year from the mother-country to the colony, and this, it is manifest, can only be done, either by a remittance of gold to the amount re- quired, or by an exportation, in addition to that ordinarily taking place, of commodities to the same value, or by a com- bination of both these methods. If the colony is content to take the entire amount, or any portion of it, in commodities, this would imply a corresponding increase in colonial imports over colonial exports ; for it would only be in the event of the increased importation being unbalanced by exports from the colony to the mother-country that the proceeds arising from it would be available for the mother-country in discharge of the loan, and there would obviously be nothing in what had oc- curred to lead the latter to increase her demand for colonial products. But it is probable that at least a portion of the loan would be sent in gold ; and this would operate indirectly to- ward the same result. For the flow of gold into the colony year by year would necessarily raise colonial prices, while it would tend in the opposite direction in the mother-country; and this, through a play of forces I have already more than once described, would be followed by an increase of colonial LENDING AND BORROWING. 361 importations, and a corresponding decline in the exportation of colonial products — a process which would 'manifestly con- tinue, until at length the excess of commodities sent from the mother-country to the colony over those received from thence would enable the former to pay the whole annual loan by means of her commodities alone. At this point the trade be- tween them would be in equilibrio; the exportations from the mother-country having become sufiicient to enable her to dis- charge by this means all her liabilities to the colony. Up to this stage, then, the effect of foreign borrowing on the colony would, so far as we have yet traced it, tend toward an excess in her importations from the mother-country over her expor- tations thither. This would be the initial effect.* But dur- ing the continuance of the process just described, the grounds of an opposite state of things would be steadily developed. With every million sterling annually remitted, the colony would become indebted to the mother-country for the interest Qn the amount. Supposing the rate of interest to be five per cent, per annum, at the end of the first year the debt of the colony to the mother-country would be £50,000: consequent- ly, in making her next remittance on account of capital, the mother-country would only need to send value to the amount, whether in commodities or gold, of £950,000. In the follow- ing year, the colony would owe on account of interest £100,000, which, still supposing the same amount of capital to be lent, would reduce the liabilities of the mother - country on this score to £900,000, and this process of gradual diminution of the mother-country's extra commercial liabilities to the colony would, at the end of twenty years, issue in this result, that the sum due by the colony on account of interest would equal the * If the reader desires to verify the soundness of the position thus far, he has only to turn to the. statistics of the external trade of some of the leading colonies of Great Britain, in which the imports will be found steadily and systematically to exceed the exports. 362 INTEBNAIIONAL VALUES. entire amount of the annual loan. What would be the effect on the external trade of the colony of this growing indebted- ness to the mother- country ? Manifestly to neutralize that pro- duced by the operation of the influences developed in the ear- ly stages of these transactions. The obligation of the mother- country to remit value to the colony, in addition to what she owed on account of goods imported thence, gave an impulse to her export trade, and caused the importations of the colony to exceed her exportations. The obligation of the colony to discharge its (growing liability to the mother-country would now, year by year, operate to reduce the excess, until at length the liabilities incident to the loans on each side balancing each other, the equilibrium of trade would be found in such a rela- tion of exports and imports as would balance their remainirig ob- ligations — on the supposition that these latter should consist ex- clusively of commercial debts, then in an equality of imports and exports. This state of things, however, would be but momentary. We have supposed the colony to have continued borrowing at the rate of £1,000,000 sterling annually for twenty years. At this stage, let us make the supposition that she suddenly ceases to borrow, and observe what, on this hypothesis, would be her financial position in relation to the mother-country. In the first place, she would be bound to pay £1,000,000 sterling annually on account of interest; but, no longer receiving the proceeds of the loan as formerly, she could not set off one obli- gation against the other. It would, therefore, be necessary for her to remit value to the amount required — in other words, her position relatively to the mother-country at this stage of affairs would be financially identical with that of the mother- country toward her at the outset, with this difference, that no new indebtedness would be growing up on the side of the mother-country to neutralize the permanent obligations incur- red by the colony. The financial conditions of the case be- ing thus changed, the external commerce of the two countries LENDING AND BOBSOWINa. 363 would adapt itself to the altered state of their reciprocal liabil- ities. Gold would once again begin to flow, but the tide would this time be directed from the colony to the mother-country, and it would be followed by a series of effects similar in char- acter, though opposite in direction, to what we have already traced. Year by year the exports from the colony to the mother-country would exceed its imports thence, until at length the excess became sufficient to enable the former to discharge its financial liability in the products of its own industry. The ef&ux of gold would at this point cease, and the trade between the two countries would be in equilibrio once more. We may make yet another supposition. The colony, in- stead of suddenly ceasing to borrow at the end of the twentieth year, might continue her borrowings on the former scale of £1,000,000 annually. On this supposition, her debt to the mother-country, on account of interest, at the end of the twen- ty-first year would be £1,050,000 ; but £1,000,000 of this could now be set off against the annual loan. In other words, the net balance due to the mother-country would be £50,000 ; but, on the supposition that the borrowing continued, this balance would grow year by year in arithmetical proportion, and would act upon her external trade, in proportion to its amount, in the manner already shown. In course of time we may assume that, as wealth increased in the colony, she would have less need of foreign capital, and would borrow less or not at all, but she would still be liable to send abroad value in excess of her commercial obligations to the amount of the interest due on all debts previously incurred. The normal state of the ex- ternal trade of the colony would, therefore, under the circum- stances supposed, be one in which her exports largely exceed- ed her imports ; and such it would continue to be until either the original debt was paid off, or the colony herself had be- come a lender, and by this means imposed a similar tribute upon other countries 364 INTERNATIONAL VALUES. § 7. Such is the nature of the influences, immediate and re- mote, exerted on the external trade of countries by the practice of foreign borrowing. In order to render the principle clear, it was necessarj', in the first place, to exhibit its operation un- der very simple conditions; and I, therefore, had recourse to a hypothetical case. But so much, it is hoped, having now been accomplished, it may be well to turn from our imaginary moth- er-country and colony to an actual instance of international lending and borrowing on a vast scale. During the last thir- teen years the financial transactions of the United States with Europe have far exceeded all former examples of the same kind, and the effects which they have produced, both on her external trade up to the present time, and still more on her commercial and financial position with reference to the future, have been of a magnitude correspondingly great. As furnish- ing, therefore, a striking practical illustration of the principles we have been considering, and in particular of the modes in which international settlements on a great scale are effected, it will, I think, be profitable to consider here in some detail the character and scope of those transactions. It has been already seen that previous to 1860 the normal condition of the external trade of the United States was one in which the exports steadily exceeded the imports, this being the natural commercial outcome from the state of her finan- cial relations with Europe. But the advent of the Civil War brought with it a series of events, each of potent influence, and which in their combination have sufficed to shake American trade to its centre, and to render the financial position of the Union in presence of Europe unprecedented and critical in the extreme. Of these events the most important were (1), the enactment of the Morrill tariff in 1861, by which the United States passed from what was substantially a free trade com- mercial regime to one of high protection; (2), the sudden ces- sation of cotton cultivation, and, as a consequence of this and TRADE OF THE UNITED STATES. 365 of the Civil War, the temporary collapse of the cotton trade with Europe ; (3), the creation of an enormous national debt, simultaneously with considerable additions made to State and other debts previously contracted, a large proportion of the funds in both cases being furnished by foreigners ; and, lastly, the issue of an inconvertible paper currency to take the place of the mixed system of coin and convertible credit which formerly prevailed. The passing of the Morrill tariff and the present rigidly protective system of the United States will be the subject of special examination in a future chapter. For our present purpose it will be sufficient if we attend to the three last of the occurrences named, and mainly to the conse- quences involved in the sudden increase in foreign indebted- ness, taken in connection with the collapse of the cotton trade. Let us first observe the scale on which the new debt was created. It amounted — we may say in round numbers — to about five hundred millions sterling, of which some two hun- dred millions were taken by foreigners.* In addition to this, numerous other loans were effected on State, railway, mining, and other securities, reaching in the aggregate a very large sum, of which the amount that found its way to Europe was, according to Mr. Wells, not less than one hundred millions sterling. These transactions were spread over several years— we may say broadly, over the last three years of the war, and the two or three immediately succeeding. Eegarding them as they affected the financial relations of Europe and the United States, the result may be thus stated : Europe undertook to send immediately, that is to say, as fast as the several obliga- tions were incurred, some £300,000,000 sterling to the United States; while the United States on her side engaged to pay the interest on this sum to Europe for all time, or until the principal was discharged. The transactions, as I have said. * See Wells's Report, 1869. 366 INTERNATIONAL VALUES. were spread over some five or six years, and, making allow- ance for the dividends which would be accruing on the invest- ments from the time they were effected, and which might be used as a set-off against the principal sums still becoming due as new investments were made, the amount required to be sent from Europe to the United States during the period under re- view would not be less than some £40,000,000 sterling annu- ally. Under ordinary circumstances — in such a state of ex- ternal trade, for example, as had existed previous to 1860 — so' enormous and sudden an increase of payments from one con- tinent to the other could only have been effected through the medium of bullion. The ordinary flow of gold from New York to Europe would have been suddenly checked, and a counter-current would have set in from Europe to New York — operations which could not fail to produce a profound fer- ment in the money markets of the two continents. As it was. however, the settlement of these vast transactions occasioned very little disturbance of any kind. The explanation is main- ly to be found in another of the circumstances to which I have called attention, the collapse of the cotton crop ; for the effect of this was suddenly to leave the United States without the means of paying Europe for her ordinary importations thence, swollen as these had recently been by large purchases of ma- terial of war. In the result the United States stood largely a debtor to Europe on commercial account; while on financial account the balance was not less decidedly against Europe; and, the amounts on both sides nearly corresponding, the set- tlement of the complex transactions became possible by the simple expedient of setting off one class of obligations against the other. This, in effect, is what was done. The reciprocal obligations of Europe and the United States were thus adjust- ed for the time, though by a sort of financial coup de main that could not well be repeated ; and now I invite the reader to contemplate the state of things which has supervened. TRADE OF TBE UNITED STATES. 367 § 8. On the termination of the war the cultivation of cotton was, of course, resumed, and already that staple, as an article in the trade of the United States with Europe, has attained its former proportions, if not in quantity at least in value. On her other domestic exports (in which, be it remembered, specie is included) there has been an increase, though not a large one, and only during the last two years. But while this has been the case as regards exports, her imports have risen from 335,200,000 dollars, at which they stood in 1860, the year pre- vious to the war, to 617,000,000 dollars, their amount accord- ing to the latest returns.* The reader will remember that previous to the war the exports of the United States had, as a normal state of things, exceeded the imports ; the excess on this account during the ten years between 1851 and 1860 (in- clusive) having amounted to an average sum of 6,000,000 dol- lars annually. Now, however, the balance is on the other side. It is the imports which are in excess of the exports. In the * The following table shows the state of the external trade in the years immedi- ately preceding the Civil War, and will enable the reader to compare the import and export trade of that time with the import and export trade of the five years ending 1872. The earlier figures I have taken from Mr. Wells's Essay in the Cobden Club volume : for the later, I am indebted to the kindness of my friend Mr. Horace White, of Chicago : Imports (less re-exports). Domestic exports (including specie). 1858 $251,700,000 $293,700,000 1859 317,800,000 335,800,000 1860 335,200,000 373,100,000 1868 851,200,000 352,700,000 1869 412,200,000 318,000,000 1870 431,900,000 420,500,000 1871 513,100,000 513,000,000 1872 617,600,000 501,100,000 ^"""''^^^"•■'n $465,200,000 $421,060,000 of last 6 years ) Average annual excess of imports over exports during last 5 years, $44,140,000. 368 INTERNATIONAL VALUES. five years, 1868-1872 (inclusive), the excess amounted on an average to 44,000,000 dollars annually ; while in the last year of the period (1872) it grew to no less a sum than 116,000,000 dollars. Now, from the explanations already given, the reader will understand that such a state of external trade, assuming it be sound and normal, would imply a state of financial relations between the United States and Europe in which the former country was largely a creditor of the latter; for it is only on this supposition that a large excess of imports over exports could continue consistently with national solvency. So far, however, from the facts being in accordance with this supposi- tion, they are exactly the reverse of this. The United States is largely a debtor to Europe on financial account, while her exports are not even sufficient to cover her commercial liabili- ties. It will be worth while to consider this position of affairs somewhat more in detail. As I learn from figures given by Mr. Wells in his Eeport for 1868, the dividends due to European holders of United States stocks of various kinds amounted in that year to 80,000,000 dollars. This, however, is but a portion of her ex- tra commercial obligations to Europe. Her remittances to for- eign countries to meet the expenses of her citizens residing or traveling abroad reached in the same year, according to the same authority, so large a sum as 25,000,000 dollars, and it does not appear that there was any thing exceptional in this expenditure. Lastly, we learn from Mr. Wells that an annual debt to foreign countries of 24,000,000 dollars more is incur- red on account of freights carried in foreign bottoms. The ag- gregate of these various sums is 129,000,000 dollars, in round numbers we may say about £26,000,000 sterling; and this sum the United States has to pay annually to foreign coun- tries, over and above what she owes on account of her impor- tations. Now, as I have already explained, there is but one means by which a nation can in the last resort discharge her TBADE OF THE UNITED STATES. 369 liabilities to other nations — namely, through the value of her products exported. We have seen, however, that the exports of the United States, as things now stand, far from being ad- equate to the liquidation of her annual aggregate liabilities, are insufficient to meet those incurred on commercial account alone ; the deficiency, taking the average of the last five years, having, as I have just shown, reached the large sum of 44,000,000 dollars — let us say in round numbers about £9,000,000 sterling. We have thus a balance of £9,000,000 on commercial account, plus a further sum of £26,000,000 on extra-commercial account — in all £35,000,000 sterling — due, year by year, by the United States to foreign countries, in ex- cess of what the value of her exported goods enables her to discharge. The question arises. How is this liability to be met ? How it has been met up to the present time I have no means of accurately determining; but one expedient, we know, has been brought extensively into requisition. During the period since the war the sale of American securities in the markets of Great Britain and the Continent has been large and increas- ing. The United States has ceased, indeed, to add to her pub- lic debt, and has even made some progress in reducing it, but it is probable that the proportion of this debt in the hands of Eu- ropean holders has of late increased, and it is certain that the amount of European capital which now finds its way to private investment in America is immensely greater than it has ever- been at any former period. Here, then, is a resource which, so far as it goes, and so long as it lasts, the United States may employ in liquidation of her uncovered liabilities; the sums payable by Europe in purchase of American securities being as much available in discbarge of American debts as if they were obtained in payment of exports.* Whether those sums * The mechanism through which these international transactions are carried into effect is the Foi-eign Exchanges. I have not, however, thought it necessary to enter into this part of the suhject, as it has been already so fully and lucidly 24 370 INTERNATIONAL VALUES. have hitherto proved sufficient for the purpose required, must, for the moment, remain matter for conjecture, but it may be confidently asserted that, in any case, they can only be regard- ed as a temporary make-shift. No nation can continue to pay its foreign debts by the process of incurring new debts to meet a balance yearly accruing against it; yet this, in truth, is the nature of the financial operation by which of late years the United States has contrived to settle accounts with the rest of the world. Even on the supposition that European invest- ment is to continue on its present scale, the interest upon it would, as I have shown, come in time to exceed the principal annually invested; while the balance uncovered by exports would still remain absolutely unprovided for. These consid- erations lead me to the conclusion that the present condition of the external trade of the United States is essentially abnor- mal and temporary. If that country is to continue to discharge her liabilities to foreigners, the relation which at present ob- tains between exports and imports in her external trade must be inverted. Her exports must once again, as previous to 1860, be made to exceed her imports, and this by an amount greater than the excess of that former time in proportion as her finan- cial obligations to foreign countries have in the interval in- creased. This, it seems to me, is a result which may be pre- dicted with the utmost confidence. The end may be reached either by an extension of exportation, or by a curtailment of importation, or by combining both these processes, but by one means or other reached it will need to be. It is simply the condition of her remaining a solvent nation. The people of that country may, therefore, if I am right in this speculation, look forward to witnessing a result for which the promoters of their present commercial policy have often sighed — they expounded by Mr. Goschen in his work on the "Foreign Exchanges," to which the reader is referred. TRADE OF THE UNITED STATES. 371 may. expect, before many years, to see United States com- modities selling in foreign countries in vastly greater quanti- ties than the commodities of foreign countries in the markets of the United States. How far their estimate of this condition of their trade will be affected by the circumstance that a large proportion of the proceeds from those augmented foreign sales will find its way into European pockets, is a point on which it 'would be scarcely becoming in the present writer to offer an opinion.* The conclusion just stated suggests a further reflection. A change in the relation of exports and imports in the trade of a country can only be effected through a change in relative prices (measured in gold or silver) as they exist in that coun- try and in those with which it trades. To establish, therefore, an excess of exports over imports in the trade of the United States, in lieu of the balance the other way which now exists, prices there must be lowered in relation to prices in Europe. This may be accomplished partly by an advance in prices here not shared by the United States, as in fact has already happened in the case of some important commodities; but it * 111 the Times's Philadelphia Correspondent's letter of October 17, 1873, it is stated that the imports from the United States had at that time begun to decline, the diminution for the first nine months of 1873, as compared with the same pe- riod for 1872, having amounted to nearly $35,000,000. On the other hand, it is observed that the exports from New York during the same time have increased by $32,000,000. The writer goes on to remark : " This decrease in imports and in- crease in exports shows a balance of trade in our favor, and explains the decline in sterling exchange. The New York Journal of Commerce is jubilant at the prospect ; declares that the tide of gold must flow toward America, and announces that the balance of trade being in our favor the ' sovereigns of Great Britain must melt their pride in the crucibles of the American mint.'" The New York Jour- nal of Commerce is overhasty in its conclusions. In its exultation it overlooks the circumstance that the favorable balance will be all too small to discharge the liabilities of the United States to Europe on account of interest and dividends on American securities held on this side. The sovereigns of Great Britain, there- fore, will have no need to melt their pride in American crucibles for the present. 372 INTERNATIONAL VALUES. is probable that the end will be reached mainly through a de- cline of prices on the other side. A considerable fall of gen- eral prices, however, is a remedy to which manufacturers and merchants will only submit when pushed to extremity. It will, therefore, only come when credit has been strained to the utmost, and a catastrophe is , seen to be inevitable; and then it will probably come with a crash. For these reasons I should be disposed to look forward to the immediate future of American trade as a period of much disturbance and fluctu- ation, culminating, it is possible, from time to time in commer- cial crises.* In offering these remarks on the prospective character of the external commerce of the United States, I have deliberately abstained from adverting to some contingencies, and in partic- ular to two, which can not fail, more or less seriously, to affect it — I mean the course that country may adopt with, regard to Protection, as well as with regard to the redemption of her pa- per money. I have thus far avoided these topics, because I do not conceive that any decision she may come to with reference to either — -powerfully operative as no doubt it will be on her future commercial fortunes in various directions — can possibly affect the particular issue to which the preceding remarks have been addressed. A persistent policy of Protection will, no doubt, have the effect of preventing the due expansion of her external trade in the future as it has done in the past, if it does not lead to its positive curtailment; while the adoption of free trade would as certainly tend to its rapid development, and thus greatly relieve the extreme tension of the situation. But, under all circumstances, if the United States is to remain a * As I write, the news of the commercial crisis in New York (19th Septemher, 1873) has reached me. From the accounts we have yet received it would seem to have had its immediate origin in railway speculation : how far the collapse mav be connected with the causes to which I have been calling attention, the sequel will probably show. TRADE OF THE UNITED STATES. 373 solvent nation, she must contrive to send a larger value out of the country than is received into it, and this larger value can take no other form than the products of her industry. Free- trader or protectionist, therefore, an excess of exports over im- ports in her foreign trade, sufficient in amount to discharge her international liabilities, is a condition she can not evade. I may venture on a further remark. It appears to me that the influence, attributed by many able writers in the United States to the depreciation of the paper currency as regards its effects on the foreign trade of the country, is, in a great degree, purely imaginary, founded, as I conceive it to be, upon an erro- neous view of the circumstances which determine international demand. An advance in the scale of prices, measured m gold, in a country, if not shared by other countries, will at once af- fect its foreign trade, giving an impulse to importations, and checking the exportation of all commodities other than gold. A similar effect is very generally attributed by American writers to the action on prices of the greenback inconvertible currency. But it may be easily shown that this is a complete illusion. Foreigners do not send their products to the United States to take back greenbacks in exchange. The return which they look for is either gold or the commodities of the country ; and if these have risen in price in proportion as the paper money has been depreciated, how should the advance in paper prices constitute an inducement for them to send their goods thither? The nominal gain in greenbacks on the importation is exactly balanced by the nominal loss when those greenbacks come to be converted into gold or commodities. To put the argument in a still more practical shape: Whatever the im- porting merchant gains in the increased price at which he sells his goods, precisely the same amount he looses when he comes to purchase a bill by which to remit the proceeds of the sale to the country whence the goods came. The nominal premium on the bill will just neutralize what he had appeared to gain 374 INTERNATIONAL VALUES. on the sale through the depreciation of the paper money. It is true the gain may, in particular cases, exceed the loss, but if it does, the loss will also, in other cases, exceed the gain. On the whole, and on an average, they can not but be the equiva- lents of each other. In making these remarks the reader will not understand me as contending that a depreciated currency is absolutely without influence on the foreign trade of a coun- try. So far as it introduces uncertainty and risk into commer- cial transactions it no doubt affects foreign as well as domestic trade, and affects both injuriously ; but this is an entirely dif- ferent thing from acting as an encouragement to importation, and a check upon exportation — the effect attributed to a de- preciated currency by the writers to whose views I have re- ferred. CHAPTER IV. FREE TRADE AND PBOTEGTION. % 1. The foregoing discussions have exhibited the conditions under which international trade arises, and the nature of the advantages that flow from it. It has been seen that nations only trade with one another when by doing so they can satisfy their desires at smaller sacrifice or cost than by direct pro- duction of the commodities which minister to them. The es- tablishment of this position is the justification of the doctrine of free trade ; since it is manifest that, if nations only engage in trade when an advantage arises from their doing so, any in- terference with their free action in trading can only have the effect of debarring them from an advantage. For those, there- fore, who accept the economic theory of international trade, no further proof of the essential soundness of this fundamental principle of commercial policy is needed. Nevertheless, I am unwilling to leave the subject of these chapters without some fuller consideration than has yet been given to it of the great controversy, not yet, unfortunately, extinct, of Free Trade ver- sus Protection. I have said, "not yet extinct: perhaps I should rather have said, even now active and glowing with something of its pristine fervor; for we have only to turn our eyes to France, or to the United States, not to speak of our own col- onies, to see with what vigor, and I regret to say with what success, the venerable sophism still maintains itself, alike in the public press and in national legislatures. Under such circum- stances an examination of the specific doctrine of Protection will even yet, perhaps, not seem altogether out of date ; and. 376 FREE TRADE AND PBOTECTIOX. thanks to Mr. Wells, the United States Commissioner, we are not without abundant illustrations of the recent working of the principle, which have only to be duly pondered in the light of economic theory, to teach a lesson such that he who runs may read. § 2. The system of Protection naturally grew out of the sys- tem of the Balance of Trade. They were not, indeed, so much distinct systems as different aspects of the same system. As the Balance of Trade doctrine began to give way, that of Pro- tection was gradually inserted in its place, as it were to under- pin the tottering edifice. The aim of the former was to enrich the country by drawing to it the precious metals; that of the latter to do so by encouraging native industry ; but the means adopted were identical, as was also the point of view from which the supporters of the two theories regarded commercial problems.* Consistently carried out, the Balance of Trade * And I may add the criterion by which they tested results. This has been quite unequivocally evinced by the recent controversies in France. In a statement made before a commission of inquiry, appointed just before the war, M. Pouyer- Quertier maintained that French agriculture in a period of twelve years, from lSr)8 to 1869, had suifered a loss of 300,000,000 francs. And what was the process of reasoning by which he arrived at this conclusion ? Simply this. It appeared that during the period in question French imports had exceeded French exports by the amount stated, and from tliis fact M. Pouyer-Quertier drew the inference that France was a loser to this amount on her foreign trade. Why he supposes the loss to have fallen exclusively on agriculture I do not quite perceive. A reply to this statement was made by M. De Kergolay in a speech delivered by him a few months since as President of the French Central Agricultural Society. That re- ply is perhaps sufficiently conclusive as against SI. Pouyer-Quertier, but coming as it does from a free-trader certainly does not give one a high idea of the present state of economic science in France. M. De Kergolay first objects to the period selected by the protectionist advocate for comparison ; he next challenges the cor- rectness of the calculations on which the result is based; lastly, he asks what does the fact prove. "The importation of products foreign to the soil can not be re- garded as a loss to the country. Coffee and cocoa, tea and spices, woods for dye- MODIFIED DEMANDS. 377 system must have extinguished foreign trade, since it is demon- strable that the permanently favorable balance which it aimed at producing is not capable of realization ; and consistently carried out, Protectionism would put an end, if not to all for- eign trade, at least to all such as furnished us with commodities capable of being produced in the protected country ; for the essence of the doctrine is, to encourage native industry by ex- cluding the products of foreign industry, wherever these come into competition with commodities which native industry can produce. Protectionists, however, rarely now attempt to carry out their doctrine in its rigor, and, instead of requiring an ab- solute exclusion of foreign products, are commonly content to demand such a measure of protection as, to borrow their lan- guage, shall put the home producer on a footing of equality with his foreign rival. If the latter possesses no advantage over the former, then the trade, as the phrase goes, "can stand alone," and no protective duty is asked for ; but if the foreign- er possesses an advantage, this must be neutralized by a coun-. tervailing duty. The reader who has followed the foregoing exposition of the grounds of international trade will perceive that this more modest form of the doctrine would, in its prac- tical issue, be entirely tantamount to the former, since, as was there shown, the existence of international trade rests on the different productive capacities with respect to particular com- modities of different countries : if, therefore, each nation is to ing 01" working purposes, are not indigenous to the soil of France. They must be imported, but how can the necessary cost be set down as a national loss ?" Ap- parently, if the imported articles were indigenous, the validity of the protectionist's conclusion would be admitted by this champion of free trade. As I have shown in the last chapter, the relation of imports to exports is determined by causes quite independent of the character of the tariff. Protection will indeed diminish the aggregate amount of exports and imports taken together, but, whatever be the commercial regime, the relation between them will be such as the position of the country, taking all her international credits and obligations into account, shall re- quire. — See Times, September 18, 1873. 378 FREE TRADE AND PliOTECTION. set itself to neutralize this difference, wherever it appears, by- means of countervailing duties, it is plain that the triumph of the system would be the annihilation of foreign trade. If in- deed equality in productive conditions could be attained by what might be described as a process of " leveling up ;" if Protection could contrive that every commodity should be pro- duced in every country with the same facility with which it is produced on the spot of the globe most suitable to its produc- tion — tlioicgh even so it would annihilate foreign trade — there would yet be something to be said for this mode of attain- ing equality. It may, however, be doubted if the gain which might accrue in material comforts from the increased produc- tiveness of the earth would not be more than counterbalanced by the intellectual and moral loss which would result from the withdrawal of the principal motive to the intercourse of man- kind. Protectionists, however, not being able to "level up," propose to " level down," and. aim at reaching equality by, so to speak, handicapping commercial countries against each oth- er, making each carry weight in the markets of the others ex- actly suiiicient to counterpoise its special advantages. Such is the theory of trade which now, it seems, finds favor on the oth- er side of the Atlantic* In the proposal, however, to sacrifice the very ends of industry and commerce in order to promote equality, we may, perhaps, detect the savor rather of a French than of an American origin. A theory essentially the same was propounded a few years ago by M. Alby, in the Revue des Deux Mondes, in an essay written with much elaboration and parade of scientific precision, and, it must be presumed, with skill and effect, since the exposition was accepted by protec- tionists in the United States as a triumphant statement of their argument, and met with consideration from even free -trade journals in that country. Under these circumstances I shall * See Mr. Wells's Eepovts and Essays passim. M. ALBT'S IHEOnr. 379 make no apology for devoting a brief space to the considera- tion of the protectionist case as stated by M. Alby. § 3. The position taken by M. Alby in his article in the Revue des Deux Mondes* is, that the doctrine of Protection is in theory sound, though he admits that in old countries like France it is not possible fairly to carry it into effect. For this reason he is in favor of a modified free trade for France in her actual circumstances. But, while taking this line as a practi- cal politician, he strenuously contends for the theoretic sound- ness of the protectionist's view. According to M. Alby, the apparent triumph which free-traders commonly gain over their opponents arises from the imperfect way in which the protec- tionist case is put. Free-traders attack the system in detail, joining issue on each particular duty ; whereas the strength of the protectionist case lies in its ensemble, in its completeness as a whole. " Let us take, for instance," says M. Alby, " the case of mining indus- try. Every one needs iron, and iron is produced in France by a very re- stricted number of fiimaces ; and here is the way free-traders put the case. ' The price of iron,' say they, ' is raised by the customs' duty on foreign iron. Is it just that thirty-eight millions of Frenchmen should pay more for iron than, in the absence of duty, it is worth, in order to enrich a few iron-masters ?' If we go no further than this — ^if the case remains isolated, only one answer is possible. "With the exception of the iron - masters, every one will exclaim, 'No, it is not just, it is an odious monopoly !' Very good ; but let us put a similar case for another indus- try, the manufacture of cloth. The answer will be the same. Only this time the cloth manufacturer will turn round on the iron-master and say, 'Where is your grievance? I pay more for your iron than I should have to pay for foreign iron if it entered free. Is it not just that you pay me a higher price for my cloth than it might be purchased at abroad ?' The argument is unanswerable. The iron-master will be forced to ac- knowledge this. As we run successively the entire circle of industrial * See the number for 15th October, 1869. 380 FBEE TRADE AND PBOTECTION. and agricultural production, with each new industry that we take ac- count of, the area of the apparent injustice will be continually narrowing till we end by finding ourselves in presence of a series of people paying dearer for what they purchase, but making others pay dearer for what they sell. They have no ground for mutual reproach. Well, such," con- tinues M. Alby, " is the system of Protection in its ensemble. It is a sort of mutual assurance against foreign competition, an associative pact which embraces the entire country. Each consents to pay for all the products he requires a price augmented by the customs' tariff, on the condition of obtaining for his own products in the home market a price equally augmented by the same means, so that they shall return him a profit." M. Alby apparently overlooks the fact that it is only those industries which are carried on under a relative disadvantage that stand in need of protection ; and that consequently — since in no country are all industries equally favored by nature — the consummation he contemplates with so much satisfaction is incapable of realization in any part of the world, during any stage of commercial progress. How, for example, could the . wine-growers or silk- weavers of France, or again, how could the Western farmers or Southern cotton-planters of the United States, be compensated, under M. Alby's system, for the price they pay for foreign imports in consequence of a protective tariff? By obtaining in return, forsooth, a protective duty, in Prance on wine and silk, and in the United States on wheat and cotton ! But passing by this " little rift within the lute," let us, in order to exhibit the radical absurdity of this pretty theory, assume that all branches of production in France stand equally in need of protection. The argument is, that, provided each person receives in his capacity of producer a price for his commodity as much higher than its price under free trade as that which he pays in his capacity of consumer for what he requires, no harm will be done. Accepting this view, a per- 'fect system of Protection might seem to be tantamount simply to a general depreciation of money. All persons would re- M. ALBY'S THEORY. 381 ceive higher money remuneration than under free trade, and would pay this away in higher prices — a consummation, the advantage of which to native industry is not apparent. This mode of conceiving the case, however, implies a most inade- quate appreciation of the consequences involved in M. Alby's scheme. M. Alby fails to perceive that the high price which Protection secures is rendered necessary in consequence of the more onerous conditions under which native industry, tempted by its inducements, is encouraged to work. Frenchmen are encouraged to produce iron from ores of inferior quality by the high price secured to them through their protective tariff. In the absence of Protection they would obtain their iron on more favorable terms — at a smaller sacrifice of labor and ab- stinence — by exchanging for it their wines and silks with En- gland. A similar remark applies to every protective duty that is really effective for its purpose. It necessarily implies production carried on under more onerous conditions. On the supposition, therefore, that M. Alby's system were feasible, the practical result would be, not simply a general rise of prices, but an increase in the cost — cost, be it remembered, in the sense not of mere money outlay, but of actual difficulty, of real sacrifice — of producing every article the creation of French industry. All Frenchmen would be compelled to labor half as hard again, and to save half as much again, in order to procure every necessary and comfort they enjoy. But then equality and justice would be realized. No doubt, just as they might be realized by compelling every one to move about with a weight attached to his leg. The weight would, indeed, be an impediment to locomotion, but provided it were in each case exactly proportioned to the strength of the limb which drew it, no one, according to M. Alby's way of looking at things, would have any reason to complain. No one would walk as fast as if bis limbs were free, but then his neighbor would be equally fettered, and if it took him twice as long to 382 FBEE TBADE AND PROTECTION. reach his destination as before, he would at least have com- pany on his journey. Strange that such speculation should find acceptance in the country of Say and Bastiat! § 4. Such is the theory of Protection in its most general form, as set forth by one of its latest expositors, and accepted in the country in which its influence is at present supreme, al- most to the degree of absolutely controlling legislation. But it will be instructive to enter into the argument in somewhat more of detail. As I have said, the position taken in the United States is, that Protection is only needed and only asked for where American industry is placed under a disadvantage as compared with the industry of foreign countries. What, then, we have to ask, in the first place, is the criterion by which the alleged disadvantage attaching to American industry is es- tablished? As we learn from Mr. Wells,* the criterion taken is the cost of production of the articles claiming protection, which again, he informs us, is estimated almost exclusively by refer- ence to the money price of labor. The rates of wages meas- ured in money are higher in the United States than in Europe, and therefore, it is argued, the cost of producing commodities is higher there than here. It is strange that those who em- ploy this argument should not have perceived that it proves too much. The high rates of wages in the United States are not peculiar to any branch of industry, but are universal throughout its whole range. If, therefore, a high rate of wages * " In most of the tariff discussions that have taken place of late in the United States, the question of the necessity and extent of Protection is made to turn al- most wholly upon the difference in the cost [price] of labor employed in domestic as compared with foreign industry — which differences, as already shown, are cer- tainly very considerable. And it is also vei-y generally taken for granted in such discussions that the nominal rate paid for wages, of itself alone, or at least in » very great degree, determines both the cost of production and the social condition and prosperity of the laborer." (Wells's Beport for 1868, pp. 69, 70.) COST OF FMODUCTION. 383 proves a high cost of production, and a "high cost of produc- tion proves a need for Protection, it follows that the farmers of Illinois and the cotton-planters of the Southern States stand in as much need of fostering legislation as the cotton-spinners of New England or the iron-masters of Pennsylvania! A cri- terion which leads to such results must, I think, be regarded as sufficiently condemned. The fallacy is, in truth, the same as that which so awkwardly marred the pretty theory of M. Alby, who, as we saw, in carrying the boon of Protection with impartial hand round the wbole circle of the industries, unfor- tunately overlooked the trifling circumstance that all indus- tries are not in each country equally favored or disfavored by nature, and have not, therefore, equal need of his protecting care. If American protectionists are not prepared to demand protective duties in favor of the Illinois farmer against the competition of his English rival, they are bound to admit ei- ther that a high cost of production is not incompatible with ef- fective competition, or else that a high rate of wages does not prove a high cost of production ; and. if this is not so in Illi- nois, then I wish to know why the case should be different in Pennsylvania or in New England. If a high rate of wages in the first of these States be consistent with a low cost of produ- cing corn, why may not a high rate of wages in Pennsylvania be consistent with a low cost of producing coal and iron? or a high rate of wages in New England be consistent with a low cost of producing calico ? I must own that Mr. Wells's treat- ment of this branch of the argument is, to my mind, eminently unsatisfactory. It is true he objects to the protectionist cri- terion of cost of production — money wages, but only on the ground that it fails to take account of the varying efficiency of labor, and of the varying purchasing power of money in re- lation to the laborer's requirements.* The fallacy, however, * See his Repoi't for 1868, page 70. I must acknowledge, too, that his reply 384 FBEE TRADE AND PROTECTION. involved in that criterion goes far deeper than this, and is only fully exposed when exhibited as inverting the real rela- tion of facts. As I have already proved,* the rate of wages, whether measured in money or in the real remuneration of the laborer, affords an approximate criterion of the cost of produc- tion, either of money or of the commodities that enter into the laborer's real remuneration, hut in a sense the inverse of that in which it is understood in the argument under consideration: in other words, a high rate of wages indicates not a high but a low cost of production for all commodities, measured in which the rate of wages is high ; as, on the other hand, a low rate of wages indicates a high cost for all, measured in which the rate is low. Thus in the United States the rate of wages is high, whether measured in gold or in the most important articles of the laborer's consumption — a fact which proves that the cost of producing gold, as well as that of producing those other com- modities, is low in the United States. On the other hand, the rates of wages in Europe measured by the same standards are — at least as compared with rates in the United States — low, founded on these exceptions wholly fails, in my judgment, to meet the protection- ist argument. What he shows is that labor in England, though much higher priced than in most European countries, and in particular than in Russia, is still so much more efficient here than there, that the high English rates are practically cheaper for the English capitalist than the lower Continental rates for the capi- talist of the Continent. What is the bearing of this upon the American demand for protection against England? AVill Mr. Wells maintain that, as the efficiency of English labor is to that of Russian, so is the efficiency of American labor to that of English ? If not, how does his objection to the protectionist criterion of cost, founded on the different degrees of industrial efficiency, affect the argument ? And as little does he seem to me to make good the pertinency of his objection on the other ground taken. It is possible that in a few manufacturing districts in the United States the rent of an artisan's dwelling is higher tlian in some manufactur- ing districts in England, but in the most important articles of the laborer's con- sumption, in the whole list of "provisions," for example, the advantage in respect to price is unquestionably with the American consumer. * See ante, p. 336, et seq., and pp. 345-347. AS MEASURED BY WAGES. 385 which again merely proves that the cost of producing the com- modities constituting those standards is high in Europe, as com- pared with their cost in the United States. This elementary truth is so far from being generally appreciated that I should not be surprised if its simple statement should appear to some persons, and possibly even to some economists, as paradoxical.* I would ask such to consider what are the true causes of the high remuneration of American industry. It will surely be admitted that, in the last resort, these resolve themselves into the one great fact of its high productive power. Capitalists and laborers receive large remuneration in America because their industry produces largely. That is the simple and patent fact which all must acknowledge. But what is the meaning of a highly productive industry, if it be not a liberal industrial return as compared with the sacrifice undergone? And what, again, does this mean if not a low cost in relation to the thing produced? I must, therefore, contend that the high scale of industrial remuneration in America, instead of being evidence of a high cost of production in that country, is distinctly evi- dence of a low cost of production — of a low cost of production, that is to say, in the first place, of gold, and, in the next, of the commodities which mainly constitute the real wages of labor — a description which embraces at once the most important raw materials of industry and the most important articles of general consumption. As regards commodities not included in this description, the criterion of wages stands in no constant rela- tion of any kind to their cost, and is, therefore, simply irrele- vant to the point at issue. And now we may see what this claim for protection to American industry, founded on the high scale of American remuneration, really comes to : it is a demand for special legislative aid in consideration of the pos- * And yet it ought not to do so. The doctrine was very clearly enunciated nearly half a century ago in Mr. Senior's Essay, already frequently referred to, on the "Cost of obtaining Money.'' 25 386 FBME TRADE AND PROTECTION. session of special industrial facilities — a complaint, in short, against the exceptional bounty of nature. § 5. Perhaps I shall here be asked how, if the case be so — if the high rate of industrial remuneration in America be only evidence of a low cost of production — the fact is to be explain- ed, since fact it undoubtedly is, that the people of the United States are unable to compete in neutral markets, in the sale of certain important wares, with England and other European countries. No one will say that the people of New England, New York, and Pennsylvania are deficient in any industrial qualities possessed by the workmen of any country in the world. How happens it, then, that, enjoying industrial ad- vantages superior to other countries, they are yet unable to hold their own against them in the general markets of com- merce? I shall endeavor to meet this objection fairly, and, in the first place, let me state what my contention is with regard to cost of production in America. I do not contend that it is low in the case of all commodities capable of being produced in the country, but ovAj in that of a large, very important, but still limited group. With regard to commodities lying outside this group, I hold that the rate of wages is simply no evidence as to the cost of their production, one way or the other. But, secondly, I beg the reader to consider what is meant by the alleged "inability" of New England and Penn- sylvania to compete, let us sa}', with Manchester and Sheffield in the manufacture of calico and cutlery. What it means, and what it only can mean, is that they are unable to do so consist- ently with obtaining that rate of remuneration on their industry which is current in the United States. If only American laborers and capitalists would be content with the wages and profits cur- rent in Great Britain, there is nothing that I know of to prevent them from holding their own in any markets to which Man- chester and Sheffield send their wares. And this brings us to EUROPEAN COMPETITION. 387 the heart of the question. Over a large portion of the great field of industry the people of the United States enjoy, as compared with those of Europe, advantages of a very ex- ceptional kind; over the rest the advantage is less decided, or they stand on a par with Europeans, or possibly they are, in some instances, at a disadvantage. Engaging in the branches of industry in which their advantage over Europe is great, they reap industrial returns proportionately great; and, so long as they confine themselves to these occupations, they can compete in neutral markets against all the world, and still secure the high rewards accruing from their ex- ceptionally rich resources. But the people of the Union decline to confine themselves within these liberal bounds. They would cover the whole domain of industrial activity, and think it hard that they should not reap the same rich harvests from every part of the field. They must descend into the arena with Shefiield and Manchester, and yet secure the rewards of Chicago and St. Louis. They must employ Eu- . ropean conditions of production, and obtain American results. What is this but to quarrel with the laws of nature ? These laws have assigned to an extensive range of industries carried on in the United States a high scale of return, far in excess of what Europe can command, to a few others a return on a scale not exceeding the European" proportion. American enterprise would engage in all departments alike, and obtain upon all the high rewards which nature has assigned only to some. Here we find the real meaning of the "inability" of Americaiis to compete with the " pauper labor " of Europe. They can not do so, and at the same time secure the American rate of return on their work. The inability no doubt exists, but it is one created, not by the drawbacks, but by the exceptional advan- tages of their position. It is as if a skilled artisan should com- plain that he could not compete with the hedger and ditcher. Let him only be content with the hedger and ditcher's rate of 388 FBEE TRADE AND PROTECTION. pay, and there will be nothing to prevent him from entering the lists even against this rival. The end here proposed by American enterprise is, it must be owned, unattainable under free trade ; for free trade is con- tent to turn natural laws to the best account : it does not seek to transcend them. But, though unattainable under free trade, protectionists assure us that the thing may be done by means of their system. It is only necessary, say these authorities, to exclude foreign competition by laying high import duties on the products in which American superiority over Europe is not assured, and the same high returns which attend on Ameri- can industry in its most productive fields will — the laws of na- ture notwithstanding — be realized throughout its entire range. And this is, in fact, the undertaking in which those who guide the commercial policy of the Union have been engaged since 1861. Let us for a moment pause and consider how this bold attempt to override the laws of nature has fared. § 6. And here we are confronted at once with the difficul; ty of interpreting an industrial experiment. The system of American Protection, in its present exaggerated form, may be regarded as dating from 1861, when the Morrill tariff became law. If all the other conditions of the case had remained sub- stantially the same since that time, we might now, by a mere inspection of results, pronounce without besitation on the ef- fect of the policy then inaugurated ; but instead of this observe how the facts stand. In the same year the great Civil War commenced, in the course of which the destruction of human life and of wealth in every form probably exceeded any thing which had before occurred within the same time in the history of human affairs. This was soon followed by the creation of an immense national debt, entailing a large permanent increase of taxation, and by the issue of an inconvertible paper curren- cy, circulating throughout the Union, and affecting alike prices A TEN YEABS' EXPERIMENT. 389 and wages in every branch of trade. On the other hand, oc- currences of a very different kind marked the course of the pe- riod under review. Mineral resources were discovered which are now yielding vast wealth, and oil springs which have be- come the source of an entirely new and rapidly increasing trade. Eailway enterprise, again, during the same time ap- pears to have taken on a new activity, while the progress of invention in the mechanical arts has never for a moment flag- ged. In presence of influences so numerous, so novel, and so vast, each affecting industry in its own fashion so powerfully, who shall say what portion of what we now find existing can properly be attributed- to any one of them? The problem, in its mere stateme];it, brings into striking relief the utter futil- ity of that so-called "inductive method" which some writers hold to be the proper one in social and economic inquiries — the method, that is to say, which would proceed by drawing general conclusions as to the operation of particular causes from the summarized results of statistical tables. For, assum- ing that we have taken accurate stock of the present industrial condition of the United States, as well as of tbat which was in existence previous to 1861, so long as we confine our view to the mere statistical aspect of the case, what warrant have we for attributing any portion of the change that has taken place to one cause rather than to another? Manifestly we have none ; nor can we advance a single step toward the solution of any problem involved in the facts, till we pass from the mere tabulation of results to an examination of the nature and tend- encies of the causes in operation. When we have ascertained these, and shown by deductive reasoning from them the effects they are fitted to produce, we are then for the first time in a position to attempt an interpretation of the varied and com-- plex phenomena. Now this is the vantage ground on which a student of Po- litical Economy in dealing with such a problem stands. He 390 FREE TRADE AND FBOTECTJOK has ascertained the direction in which the various industrial forces, operating in the iield of the experiment, work ; he Ifnows, for example, that in the present instance the destruc- tion caused by the Civil War must have left a large gap in the then existing wealth of the United States ;* but he knows also, what is not so obvious, the extraordinary rapidity with which countries devastated by war, but in which the indus- trial habits of the people have not been broken through, so soon as peace and security are restored, recover from the havoc which war has made. He knows, again, that the meaning of a national debt is the necessity of submitting, so long as it remains uhpaid, to a known amount of taxation, tantamount in its effects to an equivalent deduction from the general earn- ings of the community. He knows, further, the consequences likely to flow from the issue of an inconvertible currency; that, once depreciated below the par of gold, it results in a scale of nominal prices, having for its effect to derange the monetary relations of the community, to relieve debtors from- their obligations at the expense of their creditors, and to intro- duce much risk and uncertainty into general business, but not, as is commonly supposed, to affect in any serious manner the external trade of a country. -f- At the same time, the econo- mist can take account of the immense addition made to the material resources of the United States, by those mineral and other discoveries to which reference has been made, as well as by the progress of mechanical invention, the extension of the * This, one would think, would be sufficiently obvious, but in arguing with pro- tectionists it is difficult to know, what to take for granted. According to the ex- treme zealots of the protectionist school the Civil War, it seems, is to be regarded as among the most potent causes of the recent prosperity of the Union. "The conclusion," says Mr. Wells, "was pointed at by some, and even soberly main- tained on the floor of Congress by the advocates of the system of high I'rotection, that the war, regarded from a merely material point of view, was in reality a blessing.'' (" Cobden Club Essays," Second Series, p. 487.) t This point has been dealt with ante, p. 373. A TEN YEABS' EXPERIMENT. 391 railway system, and the other industrial improvements which have marked recent years. Now these — putting aside for a moment the protectionist tariff— are the main and capital oc- currences affecting the economic career of the United States since 1861 ; and, in order to judge experimentally of the ac- tion of Protectionism on the interests of the country since that date, it becomes necessary to effect some rough elimination of so much of the general result as may properly be attributed to those other causes. In other words, we must endeavor to de- termine in what direction, on the whole, has been the net bear- ing of their influence ; whether in the direction of an abridg- ment of the productive power and commercial res()urces of the United States, or in that of their enlargement. For my part, I have no hesitation in accepting upon this point what appears to be the nearly universal opinion of Americans, that, the pe- riod of actual warfare once passed, the influences favoring in- dustrial progress have, on the whole, largely preponderated over those tending to retard it; and that consequently, if there were nothing else in the matter, we should be justified in expect- ing, at all events since 1866, a more rapid expansion of Amer- ican commerce, and a more liberal return on American indus- try, than prevailed in the period previous to 1861. Well, how do the facts tally with this reasonable expecta- tion ? I will allow Mr. Wells to answer this question. In his two Eeports to Congress, and in his Cobden Club Essay, he has gone very fully and in great detail into the whole subject, and those who desire particulars must be referred to those writings. It suffices here to state in summary the results of his investigations; and these are to the effect that, comparing the decade 1860-70 with the previous decade, the commercial progress of the United States has, in the later period, suffered a serious check ; that the commercial tonnage has during the same period positively declined; that the business of ship- building has undergone an almost complete collapse; that the 392 FREE TRADE AND PROTECTION. rate of increase in the external trade which during the de- cade 1850-60 had been represented by eighty-one per cent, on the trade of the preceding decade, has fallen to one rep- resented by nineteen per cent. ; and, lastly, and on this point I am content to rest the entire case, that — having regard, on the one hand, to the nominal rise in wages reckoned in a depreciated currency, and, on the other, to the nominal rise of prices measured in the same medium — the real remunera- tion of the United States laborer in all the leading depart- ments of industry has during the nine years ending 1868 pos- itively fallen in a proportion not less than twenty per cent, on his previous earnings.* These are singular results to have accrued from a still unlimited command of rich virgin soil, from enlarged mineral resources, ever progressing mechanical invention, and an industrial energy and enterprise which have certainly suffered no abatement. To what cause are they to be ascribed, and more particularly how are we to account for this lowered rate of return upon American industry? It is possible the ravages of the war may not even yet have been wholly repaired ; the gap made in the national capital may not be even now quite filled up. The increased taxation certainly remains, and constitutes a deduction, let us say of some five or six per cent.f from American earnings. The depreciated cur-' * On this point Mr. Wells's conclusion is as follows: while "the average in- crease of all the elements which constitute the food, clothing, and shelter of a family has been about seventy-eight per cent., as compared with the standard prices of '60-'61,"the increase which took place during the same time in wages was only in the proportion, "for unskilled labor of fifty per cent., for skilled me- chanical labor of sixty per cent." .... (Report for 1868, pp. 14, 15.) With- out knowing the proportions in which the several enhanced articles enter into the laborer's consumption, accurate deductions as to the effect of this change on his well-being can not of course he made ; but it is at least certain that the facts stated imply a deterioration and a considerable one in his condition. In stating it at about twenty per cent, it seems to me that I am well within the mark. t The revenue of the United States before the war stood at about £12,000,000-. A TEN YEARS' EXPERIMENT. 393 rency has, no doubt, caused much individual hardship, and in- troduced more or less derangement into commercial affairs. But who will say that any of these occurrences, or all of them taken together, suffice to account for .the facts which Mr. Wells has brought to light — the slackened rate of progress, the ar- rested commercial growth, and, above all, the diminished re- ward for the workman ? The problem, I must own, is for me insoluble, until I take account of that one influence which, for the moment, I had put aside. I turn to the Morrill tariff, and to the aggravations of that code which have since been enacted. I find there duties amounting, on an average, to forty -seven per cent, ad valorem, imposed on nearly all articles* of any im- portance imported into the United States ; on such raw prod- ucts as coal, timber, iron, hides, and sugar ; on such manufac- tures as clothing in every form, cottons, woolens, and every kind of textile fabric, on manufactured iron — in a word, on nearly all the raw materials of industry, and many of the most important articles of general consumption. And with these facts before me, the slackened rate of progress, the arrested commercial growth, and the workman's diminished reward be- come at once intelligible ; for these are the precise results which such a system of protection is fitted to engender. With such a barrier as duties amounting to forty-seven per cent, ad va- lorem erected against foreign importation, what else could hap- its amount since the war has fluctuated between £65,000,000 and £70,000,000: the increase, therefore, has been, we may say in round numbers, some £55,000,000, representing so much of the produce of the land and labor of the country, former- ly left with the producers, now taken for the purposes of the State. According to Mr. Wells's estimate (Report for 1869, p. xiii.), the value of the total annual pro- duction of the United States in 1868 amounted to £1,365,000,000, from, which ii deduction of £55,000,000 would represent a proportion of about four per cent. To this there would have to be added the increase of the local taxation of the sev- eral States, of which I have no statistics. * So nearly so, that if we substitute for ' ' articles paying duty " the entire im- ports, the proportion is only reduced to forty-four per cent. 394 FEEE TBABE AND PROTECTION. pen than a retardation of the growth of external trade ? While i coal, timber, iron are loaded with heavy duties, can ship-build- ing be expected to prosper? and, as with ship-building, so with some scores of other trades, the details of whose decline will be found in Mr. Wells's repertory. But I prefer to rest the case upon the simple fact of the reduced real wages of the work- men ; for here the symptom may be regarded as specific. As I have already had occasion to explain, the direct effect of a protective duty, when it is really operative, is to compel, on the part of the community employing this expedient, a resort to more onerous conditions of production for the protected article. Every article, therefore, produced in the United States, wbich would not have been produced there but for the protective tariff, represents an expenditure of labor and capital greater than would have been necessary to obtain the same article had it been obtained under free trade. In a word, American labor and capital, as a whole, have, effort for effort and outlay for outlay, been producing smaller results since 1861 than former- ly ; and this being so, what other explanation do we need of the actual facts which we encounter — of diminished returns on American industry, of a fall in the real wages of labor? But, say the protectionists, though measured in products the returns on the protected industries may be less, we, by exclud- ing foreign competition, secure for the producers a proportion- ally higher price ; the effect of which is that, though working at a disadvantage, they nevertheless obtain the rate of profit current in the country. Let us observe the precise significance of this reply. It may be conceded that a small return upon industry in the form of products may be compensated to the producers by a proportional increase in the price ; but then it is at the expense of those who pay the increased price ; and the -question remains, by whom are the higher prices paid in the present instance? There is only one possible answer — by the citizens of the United States. In effect these higher prices THIS POLITICAL ARGUMENT. 395 are the machinery through which the real rewards of Ameri- can industry have been reduced. Consider, for example, the case of an Illinois farmer : it is tolerably plain that if, pro- ducing corn under the same conditions as previous to 1861, and getting for it the same price in foreign markets, he has to pay a higher price for every article of his clothing, and for ev- ery article into the composition of which coal, timber, iron, or hides enter, his real remuneration can not but Vie considerably less than if all these things could be obtained at free-trade prices. And the case of the farmer is not isolated : it is that of the workers in every department of industry, and exhibits unequivocally the net outcome of the protectionist experiment which commenced with the passing of the Morrill tariff. Pro- tectionists then undertook to secure for the protected interests of their country as high industrial rewards as are reaped in the most flourishing branches of United States production — and, it may be allowed, they have succeeded in their venturous en- terprise. -But how ? Simply by lowering universally the level of those rewards ; by enforcing, through the medium of arti- ficially enhanced prices, a huge deduction from the income of the community at large, and handing over the proceeds to the protected trades. Such is the upshot of this notable attempt to transcend physical laws, and to secure by legislation what nature has denied. § 7. In the foregoing examination of the working of Pro- tection in the United States, the argument has been. confined to what may be considered its purely economic side. It is not uncommon, however, to hear the system defended on social and political grounds ; and it may, therefore, be • well, before taking leave of the subject, to make some brief reference to this other aspect of the case. For example, the position is sometimes taken that, admitting all that can be urged econom- ically in favor of free trade, a nation has yet other interests to 396 FREE TRADE AND PROTECTION. take account of than the production and distribution of wealth; it has to consider its moral, social, and political advancement — ends to which the working of free trade, it is alleged, is not always favorable. For the tendency of free trade, even on the showing of its supporters, it is argued, is to turn the industry of a nation mainly into a few channels — those channels, name- ly, in which it happens to enjoy, in relation to competing na- tions, exceptional advantages, so that, in the practical result, the nation adopting it is compelled to confine its industry within comparatively narrow bounds. Free trade thus tends to cir- cumscribe industrial experience ; and, by doing so, to interfere with that practical education which a nation derives from the prosecution of industry. Far better, it is urged, deliberately to sacrifice some of the results of material prosperity, if by this means we can secure scope for a wider and more diversified cultivation, such as is furnished by an industry branching in numerous directions and offering to enterprise a varied field. I can not deny that there is a certain basis of truth in the considerations just stated ; and that circumstances may even be imagined in which they would possess real cogency. In- deed, the United States themselves at one time presented the world with a remarkable example in point. Free trade, as I had once occasion to point out, constituted undoubtedly one of the main supports of slavery in the South ; for by its means Southern slave - masters were enabled, while employing their thralls in the few crude industries in which alone their labor was efficient, to command all the comforts and luxuries of civ- ilized existence. Free trade thus undoubtedly favored, and rendered possible, the low state of civilization which up to 1860 was characteristic of the southern portion of the United States. Had that part of the country been dependent exclusively or mainly on its own industry for the direct supply of its material wants, a greater variety of industrial occupations would have been necessary. At the least a considerable portion of the THE POLITICAL ARGUMENT. 397 negro population must have been educated and trained to me- chanical pursuits, and a foundation would thus have been laid for social progress. It must be owned, therefore, that the line of argument we are considering is not without a certain sup- port in the facts of past experience ; an admission, however, which amounts to no more than this, that barbarism and tyran- ny have sometimes gained in strength by availing themselves of the expedients of civilization. But the practical question is, not whether under extraordinary and exceptional circum- stances free trade may be made to serve the purposes of des- potism, but whether in a country, such as the United States, of great and varied resources, peopled by free men in posses- sion of all the most advanced industrial knowledge and trained in the usages of civilization — whether in such a country, arti- ficial restraint upon the freedom of trade is needed, in order to secure for the people that variety of occupations which, it may be freely conceded, is favorable to national development. And here, in the first place, it must be remernbered that the capacity possessed by a country of yielding. particular elements of wealth is never of a uniform character, but exists in general in very great variety, according to the fertility, accessibility, or other incidents of the natural agents from which such elements are derived. As a consequence of this, commodities obtained directly from natural agents, that is to say, raw products, are raised in all countries at various costs, and as, in conformity with the well-known economic principle, it is the cost of the most costly portion raised that governs the price of the whole, it follows that the actual price at which a commodity of this description sells, depends not simply on the inherent fertility of the sources of supply, but on this taken in connection with the total quantity of the commodity produced in the country. As the richest and most accessible natural agents are those which are first resorted to, the -supply, up to a certain point, is obtained at the lowest cost at which the country, in the act- 398 FREE TRADE AND PROTECTION. ual state of its industry, can yield it; but as the requirements of the community increase, recourse is had to natural agents of inferior capacity, and, as population progresses, to agents of capacity inferior still; the cost of production rising with each extension of the area of cultivation, and the price with the cost of production. Now, from this law governing the cost of raw products, it results that, however superior one country may be to others in its natural capacity of yielding particular elements of wealth, it yet rarely happens that these latter are not able to encounter its competition in raising even those products in respect to which its capacity is greatest, and this under the most perfect freedom of trade. Great Britain, for example, would be said to have a natural superiority over the United States in the production of coal and iron, just as the United States would be said to have a natural superiority over Great Britain in producing corn; but in neither case is the superiority of a kind to cause the United States, under a per- fectly free trade, to give up producing iron and coal, any more than to cause Great Britain to give up producing corn. The effect of free- trade would not be to extinguish any of those branches of production in either country, but merely to alter the proportions in which they are carried on. Great Britain would continue, as she does now, to produce corn so far as it was profitable for her to do so, and would satisfy her remain- ing requirements by .importation, while the United States would follow a like course in the case of iron and coal. And so also it would be with such products as lumber and leather. It may be that Canada has in these products greater resources than the United States ; and it is probable that the abolition of the high import duties now imposed by the latter country would lead to some more or less considerable re-adjustment of the proportions in which the industries they occasion are now carried on ; but this is a very different thing from the extinc- tion of those industries. Probably the utmost that under the THE POLITICAL ARGUMENT. 399 freest tariff would occur is the abandonment in the United States of some of the least productive sources of supply, com- bined with a corresponding extension of the area of production in Canada, while the capital now employed in the United States in developing resources which would be better reserved for another day would not be slow in finding employment in more profitable channels. It is unnecessary to pursue further this line of illustration. The same argument, it is evident, may be applied in turn to every branch of production employ- ed in extracting commodities directly from the store-house of nature. Within this circle of industries, at all events, it may be confidently asserted that Protection does not maintain in the United States a single one which would not exist equally under free trade. It is only when her people, not content, with cultivating their magnificent resources in the degree in which nature has endowed them, seek to disturb the natural proportion and to push enterprise in certain directions beyond the profitable point, that the need arises for artificial support. The tendency of Protection, therefore, at least within this par- ticular department of industrial activity, is not to create new industries, not to diversify industrial pursuits, but to disturb the natural development of the country, and to turn capital from profitable to unprofitable fields. So far, however, the argument applies only to the industries of raw produce — as they are called, the "extractive indus- tries;" and, it will be urged, that it is especially in manufac- tures that scope would be sought for the cultivation of indus- trial "intelligence and skill. Carried, however, even thus far, I may observe, the argument at least suffices to destroy the rai- son d^etre, so far as it rests on the ground we are now consid- ering, of a large portion of the present tariff of the United States, which makes no distinction between raw and manu- factured products, but loads alike both classes with heavy du- ties. But though the particular considerations that are appli- 400 FMEE TRADE AND PROTECTION. cable to the industries of raw produce do not apply to those of manufacture, it will not be difficult to show that here also the policy of Protection is wholly unnecessary as a means of se- curing for a nation that help to its general progress which is furnished by variety in its industry. At the utmost, it must be remembered, all that Protection can do for producers is to secure for them a monopoly of the home market. But, in supplying the home market, manufac- turers in a country like the United States, or in any new coun- try rich in varieties of raw material, have, for a large circle of productions, very substantial advantages, even when matched against countries of long established and highly organized in- dustry such as Great Britain. In the first place, most kinds of raw material will in the former class of countries be cheap, much cheaper for the most part than in old countries — suppos- ing, that is to say, that the price is not artificially raised by protective tariffs. In the next, the manufacturer is close to the source of supply, and is thus saved the cost of transport on the raw material, always a considerable item ; and, lastly, he is also saved the cost of transport, which falls on his foreign com- petitor, in sending to market the manufactured article. On all these accounts, manufacturers in old countries like those of "Western Europe lie under heavy disadvantages in competing in the home markets of countries like the United States — dis- advantages which constitute for the latter countries a sort of natural protection, which can not fail to secure for them under all circumstances a considerable field for the cultivation of manufacturing industry. But it will be urged that, the disadvantages in question not- withstanding, experience has proved that, over a considerable area of manufacturing industry, European manufacturers are capable, under free trade, of underselling those of the United States even in their own home markets. The fact is undenia- ble; and I can only meet the objection founded on it bv ask- TEE POLITICAL ARGUMENT. 401 ing those who urge it, whether their object is to produce a state of things in which foreign nations shall be. excluded from the markets of the United States in the sale of all commodities whatever; for if this be their object, its attainment must, let them well understand, be tantamount to the extinction of the foreign trade of their country. If foreign merchants can find a sale for no product whatever, raised in the countries from which they come, in United States markets, they are deprived of the means by which a trade with that country is permanent- ly possible. It must be remembered that the point we are now considering is the utility of Protection as a means of helping the social and political progress of peoples, and supposing, those who advocate this view are prepared to go the lengths just de- scribed, it comes to this, that their scheme for promoting civ- ilization amounts to a plan for putting an end to international trade — putting an end to the chief occasion, and main and most enduring motive, for the intercourse of mankind ! Now it must b>3 freely admitted that this mode of advancing human interests is not compatible with the maintenance of free trade — nay, that it is precisely on the ground of its tendency to pro- mote the interchange of commodities among nations that free trade claims for itself the credit of being one of the principal and most powerful of civilizing agencies. It can not, there- fore, be denied that under free trade American manufacturers would not improbably have to undergo the patriotic anguish of finding themselves undersold in some kinds of goods by foreign merchants in their own markets. But there would be no need for them, therefore, to despair. It by no means fol- lows that the range of their manufacturing industry would suffer contraction : it is even exceedingly probable— I am in- clined to add, certain— that it would, on the whole, be large- ly extended. Particular branches of manufacture now car- ried on would probably be brought within narrower limits, or might altogether disappear ; but on the other hand, others, 26 402 FREE TRADE AND PBOTECTIOK. now barely existing, would quite certainly take fresh root, and in all probability become the staples of a new export trade; for, be it well observed. Protection is not less effica- cious — I would say, is far more efficacious — to circumscribe and crush, than to sustain and encourage. Once recognized as governing the policy of a country, every industry which can make out a plausible case becomes entitled to its supposed benefits, and industries engaged in raising raw material are as anxious to be protected as others. Accordingly, in the United States, as we have seen, coal, iron, lumber, and leather are all loaded with heavy import duties. But what is the conse- quence ? Just this, that American manufacturers are thus de- prived of the advantage they would naturally possess of ob- taining their raw material cheap. They are placed at a dis- advantage in relation to manufacturers in Europe precisely where under free trade their position would be strongest: a necessity for Protection is created which could never arise under natural conditions of trade: in this way Protection in the end becomes its own Nemesis, and the vicious circle is complete. I have now, I trust, shown that, at all events in such coun- tries as the United States, Protection is not needed to secure an extensive diversity in the national industries. And when we further take account of an influence to which I have not yet referred — an influence inseparable from the maintenance of a protective system — I think I may even venture to ques- tion whether a single industry of importance is kept alive by Protection in the United States which would not equally ex- ist there in a healthier condition in its absence. I refer now to the effect of Protection on the morale of industry. When once the industrial classes of a country have been taught to look to the legislature to secure them against the competition of rivals, they are apt to trust more and more to this support and less and less to their own skill, ingenuity, and economy in TBE POLITICAL ARGUMENT. 403 conducting their business. The inevitable result is that indus- try becomes unprogressive wherever it is highly protected.* It was so in France in the days previous to the commercial treaty, and it is so now in the United States, as may be learn- ed from Mr. Wells's Eeports. " The French manufacturers," says M. Chevalier, " if not all, at least a large number of them, had, anterior to the treaty of commerce, a serious disadvantage — that of old and defective machinery, which augmented the cost of production. This was due to prohibition, which pre- vented the manufacturers from feeling the spur of foreign competition, and dispensed them from the necessity of perfect- ing indefinitely, and without delay, their machinery and their processes. The treaty of commerce aroused them from this apathy as if an alarm-bell had sounded. There was a general * This is the conclusive reply to the plea sometimes urged in favor of Protec- tion in young communities as supplying a shelter to nascent industries until they have struck root and are able to endure foreign competition. We all know the passage in which Mr. Mill has given a sanction to Protection when employed under such circumstances, and the use that has been made of it in some of our colonies. It would have been well at least if those who had relied on this ohiter dictum of a great writer had taken note of the strict limitations with which he ac- companied its utterance. With or without such limitations, however, I can not but think that the position is untenable. If Protection tended to develop indus- trial virtues, and thus to qualify for independence, one could understand that it might be usefully employed for a time under the strict limitations laid down by Mr. Mill ; but inasmuch as its tendency is exactly the reverse of this, inasmuch as Protection invariably begets a need for Protection, it is not easy to see how its adoption could under any circumstances forward the object in view. How little those in the United States who have once placed themselves in the leading-strings of Protection are inclined to dispense with these helps may be seen from the fol- lowing remark of Mr. Wells : " There has never been an instance in the history of the countiy where the representatives of such [infant] industries, who have en- joyed Protection for a long series of years, have been willing to submit to a re- duction of the tariff, or have proposed it. But, on the contrary, their demands for still higher and higher duties are insatiable and never intermitted." And he pro- ceeds to illustrate his remark by some striking examples. (" Cobden Club Es- says," Second Series, p. 533.) 404 FREE TBAVE AND PIWTECTION. renewing of macbinery in the numerous factories which were badly or imperfectly furnished. Bach wished to place himself in this respect on a level with England. The treaty of com- merce encouraged this renovation by the lowering of duties upon every thing which enters into the composition of work- shop machinery ; and the Treasury even advanced to a certain number of establishments considerable sums, in all 40,000,000 of francs, or §8,000,000. French industry has drawn from this transformation of its machinery {inaterieT) a new force, of which it makes proof every day, and this is a reason why to- day, face to face with foreign competition, it has a confidence which it did not know before."* To this statement of M. Chevalier's I will only add a single example, taken from Mr. Wells's Report: "In the summer of 1867, while studying the industries of Europe, the Commis- sioner visited a factory the products of which had for many years found an extensive market in the United States. The product being staple, and the industry one that it was exceed- ingly desirable should be extended in the United States, the Commissioner studied the process of manufacture with great care, from the selection of the raw material to the packing of the finished product; the rates of wages; the intelligence of the operatives, and the hours of labor. When his investiga- tion was completed, the Commissioner said to the foreign man- ufacturer — a man whose name is a household word in his own country for integrity and philanthropy — 'The duty on the im- port of these articles into the United States is, respectively, 35 per cent, ad valorem, and 30 per cent, ad valorem and 20 cents per pound ; if you have given me your prices, products of ma- chinery, and cost of labor correctly, I do not well see how you could export your fabrics to the United States, even if there was substantially no duty, as the advantage of raw material is * Quoted fiiom a letter in the New York World, November 28 1873. THE POLITICAL ARGUMENT. 405 mainly upon our side.' 'I am sometimes at a loss myself to account for the course of trade,' was the reply ; ' but perhaps it will help you to a conclusion if I tell you that some time ago, finding ourselves pressed with German competition, we threw out our old machinery, and replaced it with a new and improved pattern ; and the machinery by us rejected was sold to go to the United States.' To complete the story, it is only necessary for the Commissioner to add tliat the owners of this second-hand machinery have since its importation demanded and received an increased protection on its products."* I may now sum up the general result of this latter portion of my argument: (1) As regards the industries of raw prod- uce, Protection does not call into existence a single branch of production which would not equally have existed under free trade ; it merely alters the proportions in which such indus- tries are carried on, hindering their natural and healthy devel- opment: (2) in the domain of manufacturing industry it is equally inefficacious as a means of creating variety in industri- al pursuits ; for if on the one hand it secures a precarious exist- ence for certain kinds of manufactures, on the other, by artifi- cially enhancing the price of raw material, it discourages other kinds which in its absence would grow and flourish : while (3) over and above all these injurious effects, it vitiates the indus- trial atmosphere by engendering lethargy, routine, and a reli- ance on legislative expedients, to the great discouragement of those qualities on which, above all, successful industry mainly depends— energy, economy, and enterprise. To conclude, having regard to the geographical position, extent of territory, and extraordinary natural resources of the United States, as well as to the character of its people, trained in all the arts of civilization, and distinguished beyond others by their eminent mechanical and business talents, there seems * Mr. Wells's Report for 1868, p. 74. 406 FREE TRADE AND PROTECTION. no reason that they should not take a position of commanding influence in the world of commerce — a position to which no other people on earth could aspire. But, to do this, they must eschew the miserable and childish jealousy of foreign competi- tion which is now the animating principle of their commercial policy. If they desire to command a market for their products in all quarters of the world, they must be prepared to admit the products of other countries freely to their own markets, and must learn to seek the benefits of international trade, not in the vain ambition of underselling other countries, and so making them pay tribute in gold and silver to tbe United States, but in that which constitutes its proper end and only rational purpose — the greater cheapening of commodities and the increased abundance and comfort which result to the whole family of mankind. CHAPTER V. ON SOME MINOB TOPICS. § 1. I PROPOSE to devote this concluding chapter on Inter- national Trade to the consideration of some topics which seem to fall more easily under this than under other headings — topics more or less involved, and in general tacitly decided in one sense or another, in most commercial and monetary dis- cussions, but the current ideas respecting which are by no means in accordance with the main principles of international trade as these have been developed in the foregoing pages. The first of those questions to which I would ask the read- er's attention is the following : What is the interest of a coun- try in the scale of its general prices? Is it for the advantage of the people, as a whole, that the scale should be high or low? and, assuming that they have an interest in either alternative, what is the nature of the advantage, and what are its limits? A moment's reflection will enable us to take at least one step toward the solution of our problem : the interest involved, whatever be its character and extent, can only be real so far forth as the high or low scale of prices is not universal — so far forth, that is to say, as it is not shared in the same degree by all countries. A country can have no permanent interest in an advance, or in a fall of prices, which embraces the whole commercial world. Such a change leaves the purchasing power of each country in relation to every other precisely where it was before ; reciprocal demand, therefore, would con- tinue unaffected, and, by consequence, international values, and all interests that depend on that relation. But where the 408 ON SOME MINOS TOPICS. advance or fall is not general— where the high or low scale of prices is confined to one, or to a few countries — it is not at once apparent how it may affect the interest of those concerned. I ought here, perhaps, to refer to a maxim advanced by some writers on monetary questions which, if well founded, would seem to preclude the existence of the phenomenon, the character of which I propose to discuss. It is held by the writers to whom I refer that the value of gold is, and must ever be, "the same all the world over."* Now if this be so, as the value of gold is merely another expression for the gold prices of commodities, it must follow that a high or a low scale of general prices existing in any country, and not shared by every other, is an impossible occurrence. As there is no local value of gold, so there can be no local scale of prices. I have no hesitation, however, in expressing my opinion that the doctrine in question, with whatever confidence advanced, is absolutely destitute of foundation.-)- The truth on the subject * It is probable that by "the value of gold" the writers in question mean to designate its value on loan as well as its exchange value. But a reference to the rates of interest prevailing at any given time in the principal money markets of the world will suiBce at once to refute this part of the doctrine. t It has certainly no support from any writer of authority. Eicardo says broadly: "The value of money is never the same in any two countries, depend- ing as it does on relative taxation, on manufacturing skill, on the advantages of climate, natural productions, and many other causes.'' He adds — and the re- mark may possibly help to clear up the confusion of thought in which the maxim I am combating has originated — "This higher value of money [in a country ex- celling in manufactures] will not be indicated by the exchange ; bills may con- tinue to be negotiated at par, although the prices of corn and labor should be 10. 20, or 30 per cent, higher in one country than in another When each country has precisely the quantity of money which it ought to have, money will not, indeed, be of the same v.nlue in each, for with respect to many commodities it may differ 5, 10, or even 20 per cent., but the exchange will be at par. One hundred pounds in England, or the silver which is in £100, will purchase a bill of £100, or an equal quantity of silver in France, Spain, or Holland." — " Ricar- do's Works," pp. 81-84. HIGS AND LOW PMICE8. 409 seems to me to be as follows: among countries commercially connected there is a large class of commodities — all those, namely, which constitute the great staples of commerce, such as corn, flour, tea, sugar, metals, and most raw materials of industry — of which the prices can not vary much in different localities. As a rule the difference of prices will not be great- er than the cost of carriage between the countries of produc- tion and consumption, always, of course, excepting the case where such articles come under the operation of local fiscal laws. In the exchange for commodities of this description, the value of gold, though not the same all the world over, does' not greatly vary within the range of general commerce. But besides the commodities which form the staples of commerce, there are those which, through unsuitableness for distant traf fie, or owing to same other obstacle, do not enter into inter- national trade. With regard to these, there is nothing to pre- vent the widest divergence in their gold prices, or, therefore, in the value of gold in relation to them, not merely in remote quarters of the world, but sometimes even in localities within the same country ; and the class of goods to which this descrip- tion applies — it will vary in extent with the situation of each country and the means of communication at its command — far from being insignificant, must under all circumstances include some of the most important articles of general consumption. To perceive this, it is only necessary to remember that the group includes the items of house accommodation, meat, and a large proportion of those things which fall under the head of "provisions" — a list which would have to be greatly enlarged if we had to deal with countries lying aside from the leading thoroughfares of commerce, or in which the means of commu- nication have been imperfectly developed. It is not true, therefore, that gold is of the same value " all the world over." On the contrary, it varies in value in differ- ent countries, and sometimes in different localities within the 410 ON SOME MINOR TOPICS. same country, in some degree in relation to almost all com- modities, but, in relation to a numerous and important class of commodities, in a very considerable degree, and this, not mere- ly as a temporary fluctuation, but permanently, as a normal state of things ; and the problem we have now to consider is, whether, the case being so, it is advantageous for the inhabit- ants of a country that the scale of its prices, within the possible limits of permanent divergence, should be high or low in rela- tion to the cosmopolitan level. The majority of those who write or speak on commercial questions would, I imagine, have little hesitation in pronoun- cing in favor of the former alternative ; and plainly the most obvious appearances support this view. A high scale of prices and large accumulated wealth for the most part go together, while low prices are the incident of districts remote from the main current of civilization, and in general poor and barbar- ous. If we inquire, however, as to the nature of the connection between the phenomena in each case, the answer does not by any means lie upon the surface. Let it be remembered that a difference in local prices, if considerable and permanent, can only exist in the case of commodities which can not be made the subject of foreign commerce. High prices, therefore, can not serve us in our dealings with foreign nations, and it is not by any means clear how the people of a country can be profit- ed by exchanging their goods among themselves on a high pecuniary scale. Moreover it is evident that, with regard to those commodities which do enter into foreign commerce, it is the interest of each competing nation that their prices should be relatively as low as possible; this being the condition of commanding a sale for them in neutral markets. Granting, therefore, that high prices and accumulated wealth on the one hand, and low prices and poverty on the other, are generally coincident phenomena, we have yet to discover wherein con- sists the bond that connects them. CHEAP GOLD. 411 The solution of tlie problem is contained in the following statement : What a nation is interested in is, not in having its prices high or low, but in having its gold cheap — understand- ing by cheapness* not low value, but low cost — a small sacri- fice of ease and comfort ; and it generally happens that cheap gold is accompanied by a high scale of prices. I say "gener- ally happens," because it by no means follows as a necessary consequence that the two phenomena should go together. Gold may be cheap, and price?, at the same time, low, as a lit- tle reflection will easily convince us. The range of prices that actually prevails in a country is, speaking broadly, the result- ant of two conditions — the cost at which that country produces or obtains its gold, and the cost at which it produces or obtains commodities. Fluctuations and disturbing causes apart, the gold and the commodities will exchange for each other in pro- portion to their costs ; and cheap gold, therefore, will be the concomitant of high prices, only in so far as the cheapness in- cident to the gold is not shared by the other products of in- dustry. The cheapness of gold, for example, in Australia does not occasion a high price of meat, of flour, of wool, of tallow, of hides, or of many other articles in that country, because the cost of producing those articles there is also very low. Any of them can be purchased in Australia at as low a price as in Europe : many of them, meat and wool, for example, at consid- erably lower prices. It is thus evident that cheap gold is no necessary concomitant of a high scale of prices. We must, therefore, distinguish between the two things ; and, so distin- guishing, I have now to show that the interest of a nation lies, * This is, I admit, a departure from ordinary usage, "cheap" being more com- monly applied to price or value than to cost of production. But we much need a word to express low cost as distinguished from low price or value, and it seems to me that " cheapness " may conveniently be appropriated to this purpose. At all events, having had notice of the sense in which I use the word, the reader will not be misled. 412 ON SOME MINOR TOPICS. not in having its prices high, but in having its gold cheap ; and that it is only in so far as high prices are an indication of cheap gold, and low prices an indication of dear gold, that ei- ther can be considered as furnishing any presumption wheth- er in favor of or against the wealth or well-being of a com- munity. As I remarked just now, the problem we are considering can only arise with reference to relative prices. A rise or fall of prices shared by all nations equally can not affect the inter- est of any ; and similarly the cheapness or dearness of gold — considered in the capacity in which we are now regarding it, as the instrument of general commerce, not as a commodity intended for consumption — is only of importance in so far as it is not universal. Gold cheapened everywhere and in the same degree, would mean, other things being the same, an equal and universal rise of prices, and there would obviously be no advantage in obtaining our gold at a lower cost if we were compelled to give proportionally more of it for all that we required. But assuming — what is simple matter of fact — that the cost at which different nations obtain their gold is dif- ferent — that the cost may be reduced in some countries with- out undergoing a corresponding reduction in others — then a manifest advantage arises to a nation from the cheapness of its gold; for just in proportion as it obtains its gold at small cost —by a small expenditure of labor and abstinence — it will ob- tain at small cost all its imported commodities. The advantage would, indeed, be confined to its foreign trade. In domestic exchanges prices would adapt themselves to the cheapened cost of money, and in this field of its activity neither good nor evil would result for the nation as a whole; but in its deal- ings with foreign nations it would be otherwise. In relation to them, its position, as commanding gold on terms of exception- al cheapness, would be one of vantage, and would enable it through this cheapened medium to obtain from them, on terms CHEAP GOLD. 413 correspondingly advantageous, all that they are capable of sup- plying. Such is the nature of the advantage which a country derives from the relative cheapness of its gold ; and, as I have already remarked, in old countries cheap gold is generally accom- panied by a high scale of prices for all commodities not fall- ing within the range of. international trade. To exhibit the grounds of this connection we may take the case of Great Britain. The cost of gold is lower in Great Britain than in any country in Europe, or, we may say broadly, than in any in the world, America and Australia excepted. The evidence of this is to be found in the scale of our industrial remunera- tion measured in gold.* To what is the fact to be attributed? To this, that we possess in our coal, iron, and other mineral fields, combined with the skill and energy of our inhabitants, superior resources to those possessed by other countries for the production of certain manufactures in extensive demand throughout the world. Producing such manufactures at less cost than they can be produced at by other nations, and find- ing for them an extensive demand throughout the world, we are enabled at once to undersell other nations in neutral mar- kets, and yet at the same time to obtain for our products a price which bears a larger proportion to their cost of produc- tion — to the labor and abstinence employed in producing them — than the price obtained by foreign nations for their products bears to the cost of such products. A given expenditure of labor and abstinence in this country thus enables us to com- mand a larger result in gold than the same expenditure would enable foreign nations to command. In other words, we ob- tain our gold cheaper, while, as involved in this result, the scale of industrial remuneration, measured in gold, is higher * This part of the problem has been ably worked out by Mr. Senior, in his well- known Essay, already referred to, "On the Cost of obtaining Money." 414 02f SOME MINOR TOPICS. with US than with them. All this, I say, is the consequence of the great and exceptional advantages possessed by this coun- try in certain departments of industry. We have here the explanation of our cheap gold, but not of our high scale of prices.* The explanation of the latter phenomenon lies in the fact that those industrial advantages are not general, but con- fined to a few departments of production. Supposing that they extended over the whole, or the greater portion, of our industrial field, our position would resemble that of some of the Australian colonies ; and we should, along with cheap gold, have a low scale of general prices. In fact, however, the case is otherwise. We are in the position of an old country. Our land has all long since been appropriated, and, to sup- ply us with food, even very inferior qualities of soil have been brought under the plow, and are cultivated at high cost. Food and provisions of all sorts, consequently, are dear ; so also is house accommodation, and in general all those things which can not easily be made the subject of international commerce. In these respects we enjoy no special advantages over other nations : in obtaining gold, however, as has been shown, we do possess such advantages. Gold, therefore, with us exchanges in larger proportion against all this class of commodities than in other countries ; but this is only in other words to say that the scale of prices over this area of exchange is higher here than in them. High prices, thus, in England are a conse- quence of cheap gold ; and our cheap gold enables us to com- mand, on terms proportionally favorable, the products of other countries. But we should equally enjoy this advantage, while we should also enjoy others in addition, if, having our gold as cheap as now, our scale of prices was at the same time as low as in other countries ; for this would imply that our industry * Points which Mr. Senior omitted to discriminate, as Mr. Mill has pointed out. See "Principles of Political Economy," vol. ii., p. 157. GAIN ON FOREIGN TBADK 415 was as productive in all its departments as in those through which we obtain our gold. It can not, therefore, be said that high prices are in themselves advantageous to a country : nevertheless, in so far as they are an indication of cheap gold, they are an evidence that the country in which they exist oc- cupies a position of vantage in the world of commerce, and high prices will therefore, under such circumstances, generally be accompanied with commercial prosperity and large accumu- lated wealth. There is just one exception to this statement. It occurs where the scale of prices is raised through the oper- ation of a protective tariff. Gold might, in this case, be cheap, and yet none of the advantages of cheap gold would follow ; for, as I have explained, it is only through foreign trade that those advantages are realized, and just in so far as Protection is operative, the country maintaining it will be excluded from foreign trade. Countries, therefore, in which prices are kept high by Protection, are in the singular position of securing cheap gold, subject to the condition that it shall not be spent in the only market where advantage would arise from its cheapness. § 2. So much I have thought it worth while to say on the subject of high and low prices. I now turn to another topic, also much implicated in commercial discussions, and on which some strange notions would seem to be afloat. That a nation is enriched by its foreign trade is mostly taken for granted, and with good reason ; but what is the nature of the gain ? and by what standard are we to measure its amount ? We are all familiar with the doctrine of the Balance of Trade, according to which celebrated theory the gain on foreign trade was measured by the excess of exports over imports, and con- sisted in the gold and silver which were supposed to come from foreign countries in liquidation of the balance. That view is ,now, I suppose, pretty generally abandoned. But I 416 ON SOME MINOR TOPICS. have observed of late, both in the press and among parlia- mentary speakers, a curious modern inversion of the ancient doctrine. I have seen it laid down, with much exultation over the ignorance of our ancestors, that the gain in our foreign commerce, instead of being measured, as was formerly thought, by the excess of exports over imports, is, on the contrary, meas- ured by the excess of imports over exports. A contributor to an important provincial paper, writing some time since un- der the influence of this notion, calculated that the gain of En- gland from her foreign trade amounted to about £100,000,000 sterling; this being about the amount by which her impoi'ts in that year exceeded her exports. If I mistake not, it was a part of the doctrine that this sum represented the profits of our merchants engaged in foreign trade. The reader who has fol- lowed the explanations given in a former chapter of the causes governing the relation of exports and imports in the external trade of countries will not need any further refutation of this extravagant notion. I may just add, as a sufficient reductio ad dbsurduni, that, inasmuch as the external trade of many pros- perous communities exhibits a constant excess of exports over imports, it would follow from this view that all such communi- ties are undergoing a steady course of impoverishment, and that those of their inhabitants who engage in foreign trade only incur losses on their investments. Such speculations show how little the Political Economy of some among us is in advance of the ideas of the seventeenth century. Another method by which it is frequently attempted to es- timate the gain on foreign trade proceeds on the assumption that such gain is identical with the mercantile profits accruing upon the capital thus invested. This view is only less absurd than the former in not identifying the amount of mercantile profit with the balance on the external trade. According to it, if we suppose the total capital embarked in the foreign trade of Great Britain to be £500,000,000, and the rate of profit £10 GAIN ON FOREIGN TRADE. 417 per cent., it would follow that the gain to the country upon her foreign trade would be represented by £50,000,000 ster- ling. This way of regarding the subject is, I imagine, suffi- ciently prevalent among our mercantile classes ; but it only af- fords a proof the more how very little those classes have yet contrived to appropriate of the elementary truths of the sci- ence in whose name they so often speak. The notion betrays a fundamental misconception of the nature, not merely of for- eign trade, but of all trade, and of the end and purpose for which it exists. " Consumption," says Adam Smith, "is the end and purpose of all production." . . . . " The maxim," he observes, " is so perfectly self-evident that it would be absurd to attempt to prove it." Not less self-evident is it that the end and purpose of all trade is to cheapen production, and so to minister more effectually to the ultimate end — the need of the consumer. But the gain upon trade must surely consist in the degree in which it fulfills its proper end — must, therefore, con- sist, not in the profits of traders, but in the advantage which it brings to those for whose behoof the trader exists. It is true the trader's motive when engaging in trade is to make a profit ; but not the less is his raison d^etre as a trader to minister to the wants of others. He must have his profit, or he will cease to trade ; but his profit, though an incident of the good resulting from his office, is not the measure of it. The measure of the service which he renders — of the importance of his function — is not this, but the benefit he confers on the community whose servant he is; and this benefit is great in proportion to his success in serving the consumer ; in other words, in cheapening commodities — in diminishing the obstacles which exist to the satisfaction of human wants. Nothing, therefore, can betray a more profound misconception of the true nature of trade and the purpose for which it exists than to represent the advan- tages derivable from it as measured by the profits of the agents who carry it on. It would be just as reasonable to represent 27 418 OxV SOMi: MINOR TOPICS. the advantages of learning as measured by the salaries of teachers. What, then, is the true criterion of the gain on foreign trade? I reply, the degree in which it cheapens* commodities, and ren- ders them more abundant. Foreign trade not merely supplies us with commodities more cheaply than we could produce them from our own resources, but supplies us with many com- modities which, without it, we could not obtain at all. The de- gree in which it does this is the true criterion and measure of the gain, but it is a measure which palpably does not admit of being applied in practice. To determine the amount or extent of the advantage derivable from foreign trade is, and, I venture to say, must ever be, an absolutely insoluble problem — a truth which will be sufficiently apparent if we advert to some of the data on which its solution depends. As I have just said, one portion of the gain derived from foreign trade consists in the supply it yields us of commodities not capable of being produced in our own country. Great Britain, for example, obtains in this way her tea and sugar; and it will, perhaps, be thought that the satisfaction derived from the consumption of these articles constitutes the gain to the British consumer upon so much of our foreign trade. Even if this were so, it is pretty evident that the satisfaction in question is not capable of quantitative measurement. But, in point of fact, the problem is far more complicated than such a solution supposes; for it must not be forgotten that, in the event of our being excluded from the countries which furnish us with tea and sugar, we should have at our disposal all the capital now employed in producing the commodities in ex- change for which tea and sugar are now obtained. This capi- tal would then be available for the production of substitutes, * The reader will bear in mind the sense in which I use "cheapen" — viz., as equivalent to lowering cost, to reducing the sacrifices involved in procuring a com- modity. GAIN ON FOREIGN TRADE. 419 or, in case none were forthcoming, for the production of other things ; and the gain upon this portion of our foreign trade would be represented by the difference between the advantage conferred on the community by its present supply of tea and sugar, and that which it would receive from the substitutes, or other things, whatever these might be, which, in their absence, we might produce from our own resources. But, as we have no means of measuring accurately the satisfactions which we at present enjoy from the consumption of the articles in ques- tion, and still less of measuring those which we might derive from such things as in their absence we might provide our- selves with, it is evident that an accurate, or even an approxi- mate, determination of the advantages accruing to us from our foreign commerce, so far a,t least as its function is to furnish us with articles we can not ourselves produce, is absolutely be- yond our reach. All we can say with confidence is that the tastes and wants which are now satisfied through this service of foreign commerce are of a more imperious kind than any which our labor and capital, employed upon the materials fur- nished to us by our own country, are capable of satisfying; since, if it were not so, so much of our foreign trade as it rep- resents would not exist. We are thus justified in concluding that there is a real gain, but beyond this our data do not car- ry us. We are absolutely without the means of estimating its amount. So much for one portion of our foreign trade. With regard to that more important part of it, of which the function is, not to supply us with commodities which we are incapable of producing, but to cheapen those which we might produce, the case might here seem to be more manageable. In order to as- certain the gain on this part of our trade, the data necessary would be, first, a determination of the cost at which we actual- ly obtain our imported articles of the class under consideration ; and, secondly, a determination of that at which we could pro- 420 ON SOME MINOB TOPICS. duce them if thrown upon our own resources. The difference would represent what we gain by importation, and the data might seem to be not beyond our reach. When, however, we come to look closely at the problem, we find ourselves once more estopped by insuperable difficulties ; for, to take a sim- ple illustration — on the supposition that we import from for- eign countries 10,000,000 quarters of wheat, how are we to estimate the gain which the nation derives from obtaining so much of its food in this way ? We know, indeed, or we may ascertain, at least approximately, the cost in labor and absti- nence of the 10,000,000 quarters of wheat which we import. It would be represented by the cost of the commodities which we export to pay for them. We know again, or we may as- certain, the cost at which wheat is now raised in this country, when grown under conditions which determine its average selling price. But what we do not know, and what we have no possible means of ascertaining, is the cost at whicb an addi- tion of 10,0*00,000 quarters to our present home supply could be produced from the soil of Great Britain. Inasmuch as, in order to produce this quantity, it would be necessary to bring- under cultivation for wheat soils far inferior to any now de- voted to that purpose, we may be quite confident that the cost would be immensely greater than any portion of our home supply is now raised at ; immensely greater, therefore,* than that at which we obtain the quantity now imported; but by how much greater we are absolutely without the means of de- termining — I might almost say, of conjecturing ; and it is evi- dent that the same argument applies with equal force to every article of raw produce that we import. It follows that, with regard to commodities capable of being produced in the coun- * Home and imported wheat, quality for quality, selling in the same market at the same price, and the average price of home wheat heing governed by the cost (if producing the most costly portion, it follows that this cost will represent to us the cost of the imported portion of our wheat supply. GAIN ON FOREIGN TRADE. 421 try, no less than with regard to those which can only be ob- tained from foreign sources, the data for ascertaining the quan- tum of gain accruing to us from foreign trade are absolutely wanting. We know the nature of the gain : it consists in ex- tending the range of our satisfactions, and in cheapening the cost at which such as in its absence would not be beyond our reach are obtained; and we know that the amount which it brings to us under each of these categories can not but be very great ; but beyond this indefinite and vague result our data do not enable us to pass. THE END. 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