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Title: Principles of Political Economy

Author: John Stuart Mill

Editor: J. Laurence Laughlin

Release date: September 27, 2009 [eBook #30107]
Most recently updated: October 4, 2022

Language: English

Other information and formats: www.gutenberg.org/ebooks/30107

*** START OF THE PROJECT GUTENBERG EBOOK PRINCIPLES OF
POLITICAL ECONOMY ***

Principles Of Political Economy
By

John Stuart Mill
Abridged, with Critical, Bibliographical,

and Explanatory Notes, and a Sketch

of the History of Political Economy,

By

J. Laurence Laughlin, Ph. D.

Assistant Professor of Political Economy in Harvard University

A Text-Book For Colleges.

New York:

D. Appleton And Company,

1, 3, and 5 Bond Street.

1885

Contents

Preface.
Introductory.
A Sketch Of The History Of Political Economy.
Books For Consultation (From English, French, And German Authors).
Preliminary Remarks.
Book I. Production.
Chapter I. Of The Requisites Of Production.
§ 1. The requisites of production.
§ 2. The Second Requisite of Production, Labor.
§ 3. Of Capital as a Requisite of Production.
Chapter II. Of Unproductive Labor.
§ 1. Definition of Productive and Unproductive Labor.
§ 2. Productive and Unproductive Consumption.
§ 3. Distinction Between Labor for the Supply of Productive
Consumption and Labor for the Supply of Unproductive
Consumption.
Chapter III. Of Capital.
§ 1. Capital is Wealth Appropriated to Reproductive Employment.
§ 2. More Capital Devoted to Production than Actually Employed
in it.
§ 3. Examination of Cases Illustrative of the Idea of Capital.
Chapter IV. Fundamental Propositions Respecting Capital.

§ 1. Industry is Limited by Capital.
§ 2. Increase of Capital gives Increased Employment to Labor,
Without Assignable Bounds.
§ 3. Capital is the result of Saving, and all Capital is Consumed.
§ 4. Capital is kept up by Perpetual Reproduction, as shown by
the Recovery of Countries from Devastation.
§ 5. Effects of Defraying Government Expenditure by Loans.
§ 6. Demand for Commodities is not Demand for Labor.
Chapter V. On Circulating And Fixed Capital.
§ 1. Fixed and Circulating Capital.
§ 2. Increase of Fixed Capital, when, at the Expense of
Circulating, might be Detrimental to the Laborers.
§ 3. —This seldom, if ever, occurs.
Chapter VI. Of Causes Affecting The Efficiency Of Production.
§ 1. General Causes of Superior Productiveness.
§ 2. Combination and Division of Labor Increase Productiveness.
§ 3. Advantages of Division of Labor.
§ 4. Production on a Large and Production on a Small Scale.
Chapter VII. Of The Law Of The Increase Of Labor.
§ 1. The Law of the Increase of Production Depends on those of
Three Elements—Labor. Capital, and Land.
§ 2. The Law of Population.
§ 3. By what Checks the Increase of Population is Practically
Limited.
Chapter VIII. Of The Law Of The Increase Of Capital.
§ 1. Means for Saving in the Surplus above Necessaries.
§ 2. Motive for Saving in the Surplus above Necessaries.
§ 3. Examples of Deficiency in the Strength of this Desire.
§ 4. Examples of Excess of this Desire.
Chapter IX. Of The Law Of The Increase Of Production From Land.
§ 1. The Law of Production from the Soil, a Law of Diminishing
Return in Proportion to the Increased Application of Labor and
Capital.
§ 2. Antagonist Principle to the Law of Diminishing Return; the
Progress of Improvements in Production.
§ 3. —In Railways.
§ 4. —In Manufactures.

§ 5. Law Holds True of Mining.
Chapter X. Consequences Of The Foregoing Laws.
§ 1. Remedies for Weakness of the Principle of Accumulation.
§ 2. Even where the Desire to Accumulate is Strong, Population
must be Kept within the Limits of Population from Land.
§ 3. Necessity of Restraining Population not superseded by Free
Trade in Food.
§ 4. —Nor by Emigration.
Book II. Distribution.
Chapter I. Of Property.
§ 1. Individual Property and its opponents.
§ 2. The case for Communism against private property presented.
§ 3. The Socialists who appeal to state-help.
§ 4. Of various minor schemes, Communistic and Socialistic.
§ 5. The Socialist objections to the present order of Society
examined.
§ 6. Property in land different from property in Movables.
Chapter II. Of Wages.
§ 1. Of Competition and Custom.
§ 2. The Wages-fund, and the Objections to it Considered.
§ 3. Examination of some popular Opinions respecting Wages.
§ 4. Certain rare Circumstances excepted, High Wages imply
Restraints on Population.
§ 5. Due Restriction of Population the only Safeguard of a
Laboring-Class.
Chapter III. Of Remedies For Low Wages.
§ 1. A Legal or Customary Minimum of Wages, with a Guarantee
of Employment.
§ 2. —Would Require as a Condition Legal Measures for
Repression of Population.
§ 3. Allowances in Aid of Wages and the Standard of Living.
§ 4. Grounds for Expecting Improvement in Public Opinion on
the Subject of Population.
§ 5. Twofold means of Elevating the Habits of the Laboring-
People; by Education, and by Foreign and Home Colonization.
Chapter IV. Of The Differences Of Wages In Different Employments.

§ 1. Differences of Wages Arising from Different Degrees of
Attractiveness in Different Employments.
§ 2. Differences arising from Natural Monopolies.
§ 3. Effect on Wages of the Competition of Persons having other
Means of Support.
§ 4. Wages of Women, why Lower than those of Men.
§ 5. Differences of Wages Arising from Laws, Combinations, or
Customs.
Chapter V. Of Profits.
§ 1. Profits include Interest and Risk; but, correctly speaking, do
not include Wages of Superintendence.
§ 2. The Minimum of Profits; what produces Variations in the
Amount of Profits.
§ 3. General Tendency of Profits to an Equality.
§ 4. The Cause of the Existence of any Profit; the Advances of
Capitalists consist of Wages of Labor.
§ 5. The Rate of Profit depends on the Cost of Labor.
Chapter VI. Of Rent.
§ 1. Rent the Effect of a Natural Monopoly.
§ 2. No Land can pay Rent except Land of such Quality or
Situation as exists in less Quantity than the Demand.
§ 3. The Rent of Land is the Excess of its Return above the
Return to the worst Land in Cultivation.
§ 4. —Or to the Capital employed in the least advantageous
Circumstances.
§ 5. Opposing Views of the Law of Rent.
§ 6. Rent does not enter into the Cost of Production of
Agricultural Produce.
Book III. Exchange.
Chapter I. Of Value.
§ 1. Definitions of Value in Use, Exchange Value, and Price.
§ 2. Conditions of Value: Utility, Difficulty of Attainment, and
Transferableness.
§ 3. Commodities limited in Quantity by the law of Demand and
Supply: General working of this Law.
§ 4. Miscellaneous Cases falling under this Law.

§ 5. Commodities which are Susceptible of Indefinite
Multiplication without Increase of Cost. Law of their Value Cost
of Production.
§ 6. The Value of these Commodities confirm, in the long run, to
their Cost of Production through the operation of Demand and
Supply.
Chapter II. Ultimate Analysis Of Cost Of Production.
§ 1. Of Labor, the principal Element in Cost of Production.
§ 2. Wages affect Values, only if different in different
employments; “non-competing groups.”
§ 3. Profits an element in Cost of Production.
§ 4. Cost of Production properly represented by sacrifice, or cost,
to the Laborer as well as to the Capitalist; the relation of this
conception to the Cost of Labor.
§ 5. When profits vary from Employment to Employment, or are
spread over unequal lengths of Time, they affect Values
accordingly.
§ 6. Occasional Elements in Cost of Production; taxes and
ground-rent.
Chapter III. Of Rent, In Its Relation To Value.
§ 1. Commodities which are susceptible of indefinite
Multiplication, but not without increase of Cost. Law of their
Value, Cost of Production in the most unfavorable existing
circumstances.
§ 2. Such commodities, when Produced in circumstances more
favorable, yield a Rent equal to the difference of Cost.
§ 3. Rent of Mines and Fisheries and ground-rent of Buildings,
and cases of gain analogous to Rent.
§ 4. Résumé of the laws of value of each of the three classes of
commodities.
Chapter IV. Of Money.
§ 1. The three functions of Money—a Common Denominator of
Value, a Medium of Exchange, a “Standard of Value”.
§ 2. Gold and Silver, why fitted for those purposes.
§ 3. Money a mere contrivance for facilitating exchanges, which
does not affect the laws of value.

Chapter V. Of The Value Of Money, As Dependent On Demand And
Supply.
§ 1. Value of Money, an ambiguous expression.
§ 2. The Value of Money depends on its quantity.
§ 3. —Together with the Rapidity of Circulation.
§ 4. Explanations and Limitations of this Principle.
Chapter VI. Of The Value Of Money, As Dependent On Cost Of
Production.
§ 1. The value of Money, in a state of Freedom, conforms to the
value of the Bullion contained in it.
§ 2. —Which is determined by the cost of production.
§ 3. This law, how related to the principle laid down in the
preceding chapter.
Chapter VII. Of A Double Standard And Subsidiary Coins.
§ 1. Objections to a Double Standard.
§ 2. The use of the two metals as money, and the management of
Subsidiary Coins.
§ 3. The experience of the United States with a double standard
from 1792 to 1883.
Chapter VIII. Of Credit, As A Substitute For Money.
§ 1. Credit not a creation but a Transfer of the means of
Production.
§ 2. In what manner it assists Production.
§ 3. Function of Credit in economizing the use of Money.
§ 4. Bills of Exchange.
§ 5. Promissory Notes.
§ 6. Deposits and Checks.
Chapter IX. Influence Of Credit On Prices.
§ 1. What acts on prices is Credit, in whatever shape given.
§ 2. Credit a purchasing Power, similar to Money.
§ 3. Great extensions and contractions of Credit. Phenomena of a
commercial crisis analyzed.
§ 4. Influence of the different forms of Credit on Prices.
§ 5. On what the use of Credit depends.
§ 6. What is essential to the idea of Money?
Chapter X. Of An Inconvertible Paper Currency.
§ 1. What determines the value of an inconvertible paper money?

§ 2. If regulated by the price of Bullion, as inconvertible Currency
might be safe, but not Expedient.
§ 3. Examination of the doctrine that an inconvertible Current is
safe, if representing actual Property.
§ 4. Experiments with paper Money in the United States.
§ 5. Examination of the gain arising from the increase and issue
of paper Currency.
§ 6. Résumé of the subject of money.
Chapter XI. Of Excess Of Supply.
§ 1. The theory of a general Over-Supply of Commodities stated.
§ 2. The supply of commodities in general can not exceed the
power of Purchase.
§ 3. There can never be a lack of Demand arising from lack of
Desire to Consume.
§ 4. Origin and Explanation of the notion of general Over-Supply.
Chapter XII. Of Some Peculiar Cases Of Value.
§ 1. Values of commodities which have a joint cost of production.
§ 2. Values of the different kinds of agricultural produce.
Chapter XIII. Of International Trade.
§ 1. Cost of Production not a regulator of international values.
Extension of the word “international.”
§ 2. Interchange of commodities between distance places
determined by differences not in their absolute, but in the
comparative, costs of production.
§ 3. The direct benefits of commerce consist in increased
Efficiency of the productive powers of the World.
§ 4. —Not in a Vent for exports, nor in the gains of Merchants.
§ 5. Indirect benefits of Commerce, Economical and Moral; still
greater than the Direct.
Chapter XIV. Of International Values.
§ 1. The values of imported commodities depend on the Terms of
international interchange.
§ 2. The values of foreign commodities depend, not upon Cost of
Production, but upon Reciprocal Demand and Supply.
§ 3. —As illustrated by trade in cloth and linen between England
and Germany.

§ 4. The conclusion states in the Equation of International
Demand.
§ 5. The cost to a country of its imports depends not only on the
ratio of exchange, but on the efficiency of its labor.
Chapter XV. Of Money Considered As An Imported Commodity.
§ 1. Money imported on two modes; as a Commodity, and as a
medium of Exchange.
§ 2. As a commodity, it obeys the same laws of Value as other
imported Commodities.
Chapter XVI. Of The Foreign Exchanges.
§ 1. Money passes from country to country as a Medium of
Exchange, through the Exchanges.
§ 2. Distinction between Variations in the Exchanges which are
self-adjusting and those which can only be rectified through
Prices.
Chapter XVII. Of The Distribution Of The Precious Metals Through
The Commercial World.
§ 1. The substitution of money for barter makes no difference in
exports and imports, nor in the Law of international Values.
§ 2. The preceding Theorem further illustrated.
§ 3. The precious metals, as money, are of the same Value, and
distribute themselves according to the same Law, with the
precious metals as a Commodity.
§ 4. International payments entering into the “financial account.”
Chapter XVIII. Influence Of The Currency On The Exchanges And On
Foreign Trade.
§ 1. Variations in the exchange, which originate in the Currency.
§ 2. Effect of a sudden increase of a metallic Currency, or of the
sudden creation of Bank-Notes or other substitutes for Money.
§ 3. Effect of the increase of an inconvertible paper Currency.
Real and nominal exchange.
Chapter XIX. Of The Rate Of Interest.
§ 1. The Rate of Interest depends on the Demand and Supply of
Loans.
§ 2. Circumstances which Determine the Permanent Demand and
Supply of Loans.
§ 3. Circumstances which Determine the Fluctuations.

§ 4. The Rate of Interest not really Connected with the value of
Money, but often confounded with it.
§ 5. The Rate of Interest determines the price of land and of
Securities.
Chapter XX. Of The Competition Of Different Countries In The Same
Market.
§ 1. Causes which enable one Country to undersell another.
§ 2. High wages do not prevent one Country from underselling
another.
§ 3. Low wages enable a Country to undersell another, when
Peculiar to certain branches of Industry.
§ 4. —But not when common to All.
§ 5. Low profits as affecting the carrying Trade.
Chapter XXI. Of Distribution, As Affected By Exchange.
§ 1. Exchange and money make no Difference in the law of
Wages.
§ 2. In the law of Rent.
§ 3. —Nor in the law of Profits.
Book IV. Influence Of The Progress Of Society On Production And
Distribution.
Chapter I. Influence Of The Progress Of Industry And Population On
Values And Prices.
§ 1. Tendency of the progress of society toward increased
Command over the powers of Nature; increased Security, and
increased Capacity of Co-Operation.
§ 2. Tendency to a Decline of the Value and Cost of Production of
all Commodities.
§ 3. —except the products of Agriculture and Mining, which have
a tendency to Rise.
§ 4. —that tendency from time to time Counteracted by
Improvements in Production.
§ 5. Effect of the Progress of Society in moderating fluctuations
of Value.
Chapter II. Influence Of The Progress Of Industry And Population On
Rents, Profits, And Wages.
§ 1. Characteristic features of industrial Progress.

§ 2. First two cases, Population and Capital increasing, the arts of
production stationary.
§ 3. The arts of production advancing, capital and population
stationary.
§ 4. Theoretical results, if all three Elements progressive.
§ 5. Practical Results.
Chapter III. Of The Tendency Of Profits To A Minimum.
§ 1. Different Theories as to the fall of Profits.
§ 2. What determines the minimum rate of Profit?
§ 3. In old and opulent countries, profits habitually near to the
minimum.
§ 4. —prevented from reaching it by commercial revulsions.
§ 5. —by improvements in Production.
§ 6. —by the importation of cheap Necessaries and Implements.
§ 7. —by the emigration of Capital.
Chapter IV. Consequences Of The Tendency Of Profits To A
Minimum, And The Stationary State.
§ 1. Abstraction of Capital not necessarily a national loss.
§ 2. In opulent countries, the extension of machinery not
detrimental but beneficial to Laborers.
§ 3. Stationary state of wealth and population dreaded by some
writers, but not in itself undesirable.
Chapter V. On The Possible Futurity Of The Laboring-Classes.
§ 1. The possibility of improvement while Laborers remain
merely receivers of Wages.
§ 2.—through small holdings, by which the landlord's gain is
shared.
§ 3. —through co-operation, by which the manager's wages are
shared.
§ 4. Distributive Co-operation.
§ 5. Productive Co-Operation.
§ 6. Industrial Partnership.
§ 7. People's Banks.
Book V. On The Influence Of Government.
Chapter I. On The General Principles Of Taxation.
§ 1. Four fundamental rules of Taxation.
§ 2. Grounds of the principle of Equality of Taxation.

§ 3. Should the same percentage be levied on all amounts of
Income?
§ 4. Should the same percentage be levied on Perpetual and on
Terminable Incomes?
§ 5. The increase of the rent of land from natural causes a fit
subject of peculiar Taxation.
§ 6. Taxes falling on Capital not necessarily objectionable.
Chapter II. Of Direct Taxes.
§ 1. Direct taxes either on income or expenditure.
§ 2. Taxes on rent.
§ 3. —on profits.
§ 4. —on Wages.
§ 5. —on Income.
§ 6. A House-Tax.
Chapter III. Of Taxes On Commodities, Or Indirect Taxes.
§ 1. A Tax on all commodities would fall on Profits.
§ 2. Taxes on particular commodities fall on the consumer.
§ 3. Peculiar effects of taxes on Necessaries.
§ 4. —how modified by the tendency of profits to a minimum.
§ 5. Effects of discriminating Duties.
§ 6. Effects produced on international Exchange by Duties on
Exports and on Imports.
Chapter IV. Comparison Between Direct And Indirect Taxation.
§ 1. Arguments for and against direct Taxation.
§ 2. What forms of indirect taxation are most eligible?
§ 3. Practical rules for indirect taxation.
§ 4. Taxation systems of the United States and other Countries.
§ 5. A Résumé of the general principles of taxation.
Chapter V. Of A National Debt.
§ 1. Is it desirable to defray extraordinary public expenses by
loans?
§ 2. Not desirable to redeem a national Debt by a general
Contribution.
§ 3. In what cases desirable to maintain a surplus revenue for the
redemption of Debt.
Chapter VI. Of An Interference Of Government Grounded On
Erroneous Theories.

§ 1. The doctrine of Protection to Native Industry.
§ 2. —had its origin in the Mercantile System.
§ 3. —supported by pleas of national subsistence and national
defense.
§ 4. —on the ground of encouraging young industries; colonial
policy.
§ 5. —on the ground of high wages.
§ 6. —on the ground of creating a diversity of industries.
§ 7. —on the ground that it lowers prices.
Appendix I. Bibliographies.
Appendix II. Examination Questions.
Footnotes

[pg iii]

Preface.

An experience of five years with Mr. Mill's treatise in the class-room not
only convinced me of the great usefulness of what still remains one of the
most lucid and systematic books yet published which cover the whole range
of the study, but I have also been convinced of the need of such additions as
should give the results of later thinking, without militating against the
general tenor of Mr. Mill's system; of such illustrations as should fit it better
for American students, by turning their attention to the application of
principles in the facts around us; of a bibliography which should make it
easier to get at the writers of other schools who offer opposing views on
controverted questions; and of some attempts to lighten those parts of his
work in which Mr. Mill frightened away the reader by an appearance of too
great abstractness, and to render them, if possible, more easy of
comprehension to the student who first approaches Political Economy
through this author. Believing, also, that the omission of much that should
properly be classed under the head of Sociology, or Social Philosophy,
would narrow the field to Political Economy alone, and aid, perhaps, in [pg
iv] clearer ideas, I was led to reduce the two volumes into one, with, of
course, the additional hope that the smaller book would tempt some readers
who might hesitate to attack his larger work. In consonance with the above

plan, I have abridged Mr. Mill's treatise, yet have always retained his own
words; although it should be said that they are not always his consecutive
words. Everything in the larger type on the page is taken literally from Mr.
Mill, and, whenever it has been necessary to use a word to complete the
sense, it has been always inserted in square brackets. All additional matter
introduced by me has been printed in a smaller but distinctive type. The
reader can see at a glance which part of the page is Mr. Mill's and which my
own.

It has seemed necessary to make the most additions to the original treatise
under the subjects of the Wages Question; of Wages of Superintendence; of
Socialism; of Cost of Production; of Bimetallism; of the Paper Money
experiments in this country; of International Values; of the Future of the
Laboring-Classes (in which the chapter was entirely rewritten); and of
Protection. The treatment of Land Tenures has not been entirely omitted, but
it does not appear as a separate subject, because it has at present less value as
an elementary study for American students. The chapters on Land Tenures,
the English currency discussion, and much of Book V, on the Influence of
Government, have been simply omitted. In one case I have changed the
order of the chapters, by inserting Chap. XV of Book III, treating of a
standard of value, under the chapter treating of money and its functions. In
other respects, the same order has been followed as in the original work.

Wherever it has seemed possible, American illustrations have been inserted
instead of English or Continental ones.

[pg v]
To interest the reader in home problems, twenty-four charts have been
scattered throughout the volume, which bear upon our own conditions, with
the expectation, also, that the different methods of graphic representation
here presented would lead students to apply them to other questions. They
are mainly such as I have employed in my class-room. The use and
preparation of such charts ought to be encouraged. The earlier pages of the
volume have been given up to a “Sketch of the History of Political
Economy,” which aims to give the story of how we have arrived at our
present knowledge of economic laws. The student who has completed Mill
will then have a very considerable bibliography of the various schools and
writers from which to select further reading, and to select this reading so that

it may not fall wholly within the range of one class of writers. But, for the
time that Mill is being first studied, I have added a list of the most important
books for consultation. I have also collected, in Appendix I, some brief
bibliographies on the Tariff, on Bimetallism, and on American Shipping,
which may be of use to those who may not have the means of inquiring for
authorities, and in Appendix II a number of questions and problems for the
teacher's use.

In some cases I have omitted Mr. Mill's statement entirely, and put in its
stead a simpler form of the same exposition which I believed would be more
easily grasped by a student. Of such cases, the argument to show that
Demand for Commodities is not Demand for Labor, the Doctrine of
International Values, and the Effect of the Progress of Society on wages,
profits, and rent, are examples. Whether I have succeeded or not, must be
left for the experience of the teacher to determine. Many small figures and
diagrams have been used throughout the text, in order [pg vi] to suggest the
concrete means of getting a clear grasp of a principle.

In conclusion, I wish to acknowledge my indebtedness to several friends for
assistance in the preparation of this volume, among whom are Professor
Charles F. Dunbar, Dr. F. W. Taussig, Dr. A. B. Hart, and Mr. Edward
Atkinson.

J. Laurence Laughlin.
Harvard University, Cambridge, Massachusetts,
September, 1884.

Chart I

Chart II

[pg 001]

Introductory.

A Sketch Of The History Of Political Economy.

General Bibliography.—There is no satisfactory general history of political
economy in English. Blanqui's “Histoire de l'économie politique en Europe”
(Paris, 1837) is disproportioned and superficial, and he labors under the
disadvantage of not understanding the English school of economists. He
studies to give the history of economic facts, rather than of economic laws.
The book has been translated into English (New York, 1880).

Villeneuve-Bargemont, in his “Histoire de l'économie politique” (Paris, 1841),
aims to oppose a “Christian political economy” to the “English” political
economy, and indulges in religious discussions.

Travers Twiss, “View of the Progress of Political Economy in Europe since the
Sixteenth Century” (London, 1847), marked an advance by treating the subject
in the last four centuries, and by separating the history of principles from the
history of facts. It is brief, and only a sketch. Julius Kautz has published in
German the best existing history, “Die geschichtliche Entwickelung der
National-Oekonomie und ihrer Literatur” (Vienna, 1860). (See Cossa, “Guide
to the Study of Political Economy,” page 80.) Cossa in his book has furnished
a vast amount of information about writers, classified by epochs and countries,
and a valuable discussion of the divisions of political economy by various
writers, and its relation to other sciences. It is a very desirable little hand-
book. McCulloch, in his “Introduction to the Wealth of Nations,” gives a brief
sketch of the growth of economic doctrine. The editor begs to acknowledge
his great indebtedness for information to his colleague, Professor Charles F.
Dunbar, of Harvard University.

Systematic study for an understanding of the laws of political economy is to
be found no farther back than the [pg 002] sixteenth century. The history of
political economy is not the history of economic institutions, any more than
the history of mathematics is the history of every object possessing length,
breadth, and thickness. Economic history is the story of the gradual

evolution in the thought of men of an understanding of the laws which to-
day constitute the science we are studying. It is essentially modern.1

Aristotle2 and Xenophon had some comprehension of the theory of money,
and Plato3 had defined its functions with some accuracy. The economic laws
of the Romans were all summed up in the idea of enriching the metropolis at
the expense of the dependencies. During the middle ages no systematic study
was undertaken, and the nature of economic laws was not even suspected.

It is worth notice that the first glimmerings of political economy came to be
seen through the discussions on money, and the extraordinary movements of
gold and silver. About the time of Charles V, the young study was born,
accompanied by the revival of learning, the Reformation, the discovery of
America, and the great fall in the value of gold and silver. Modern society
was just beginning, and had already brought manufactures into existence—
woolens in England, silks in France, Genoa, and Florence; Venice had
become the great commercial city of the world; the Hanseatic League was
carrying goods from the Mediterranean to the Baltic; and the Jews of
Lombardy had by that time brought into use the bill of exchange. While the
supply of the precious metals had been tolerably constant hitherto, the steady
increase of business brought about a fall of prices. From the middle of the
fourteenth to the end of the fifteenth century [pg 003] the purchasing power
of money increased in the ratio of four to ten. Then into this situation came
the great influx of gold and silver from the New World. Prices rose
unequally; the trading and manufacturing classes were flourishing, while
others were depressed. In the sixteenth century the price of wheat tripled, but
wages only doubled; the laboring-classes of England deteriorated, while
others were enriched, producing profound social changes and the well-
known flood of pauperism, together with the rise of the mercantile classes.
Then new channels of trade were opened to the East and West. Of course,
men saw but dimly the operation of these economic causes; although the
books now began to hint at the right understanding of the movements and
the true laws of money.

Even before this time, however, Nicole Orêsme, Bishop of Lisieux (died
1382), had written intelligently on money;4 but, about 1526, the astronomer
Copernicus gave a very good exposition of some of the functions of money.
But he, as well as Latimer,5 while noticing the economic changes, gave no

correct explanation. The Seigneur de Malestroit, a councilor of the King of
France, however, by his errors drew out Jean Bodin6 to say that the rise of
prices was due to the abundance of money brought from America. But he
was in advance of his time, as well as William Stafford,7 the author of the
first English treatise on money, which showed a perfect insight into the
subject. Stafford distinctly grasped [pg 004] the idea that the high prices
brought no loss to merchants, great gain to those who held long leases, and
loss to those who did not buy and sell; that, in reality, commodities were
exchanged when money was passed from hand to hand.

Such was the situation8 which prefaced the first general system destined to
be based on supposed economic considerations, wrongly understood, to be
sure, but vigorously carried out. I refer to the well-known mercantile system
which over-spread Europe.9 Spain, as the first receiver of American gold and
silver, attributed to it abnormal power, and by heavy duties and prohibitions
tried to keep the precious metals to herself. This led to a general belief in the
tenets of the mercantile system, and its adoption by all Europe. 1. It was
maintained that, where gold and silver abounded, there would be found no
lack of the necessaries of life; 2. Therefore governments should do all in
their power to secure an abundance of money. Noting that commerce and
political power seemed to be in the hands of the states having the greatest
quantity of money, men wished mainly to create such a relation of exports
and imports of goods as would bring about an importation of money. The
natural sequence of this was, the policy of creating a favorable “balance of
trade” by increasing exports and diminishing imports, thus implying that the
gain in international trade was not a mutual one. The error consisted in
supposing that a nation could sell without buying, and in overlooking the
instrumental character of money. The errors even went so far as to create
prohibitory legislation, in the hope of shutting out imported goods and
keeping the precious metals at home. The system [pg 005] spread over
Europe, so that France (1544) and England (1552) forbade the export of
specie. But, with the more peaceful conditions at the end of the sixteenth
century, the expansion of commerce, the value of money became steadier,
and prices advanced more slowly.

Italian writers were among the first to discuss the laws of money
intelligently,10 but a number of acute Englishmen enriched the literature of

the subject,11 and it may be said that any modern study of political economy
received its first definite impulse from England and France.

The prohibition of the export of coin was embarrassing to the East India
Company and to merchants; and Mun tried to show that freedom of
exportation would increase the amount of gold and silver in a country, since
the profits in foreign trade would bring back more than went out. It probably
was not clear to them, however, that the export of bullion to the East was
advantageous, because the commodities brought back in return were more
valuable in England than the precious metals. The purpose of the
mercantilists was to increase the amount of gold and silver in the country.
Mun, with some penetration, had even pointed out that too much money was
an evil; but in 1663 the English Parliament removed the restriction on the
exportation of coin. The balance-of-trade heresy, that exports should always
exceed [pg 006] imports (as if merchants would send out goods which, when
paid for in commodities, should be returned in a form of less value than
those sent out!), was the outcome of the mercantile system, and it has
continued in the minds of many men to this day. The policy which aimed at
securing a favorable balance of trade, and the plan of protecting home
industries, had the same origin. If all consumable goods were produced at
home, and none imported, that would increase exports, and bring more gold
and silver into the country. As all the countries of Europe had adopted the
mercantile theory after 1664, retaliatory and prohibitory tariffs were set up
against each other by England, France, Holland, and Germany. Then,
because it was seen that large sums were paid for carrying goods, in order
that no coin should be required to pay foreigners in any branch of industry,
navigation laws were enacted, which required goods to be imported only in
ships belonging to the importing nation. These remnants of the mercantile
system continue to this day in the shipping laws of this and other countries.12

A natural consequence of the navigation acts, and of the mercantile system,
was the so-called colonial policy, by which the colonies were excluded from
all trade except with the mother-country. A plantation like New England,
which produced commodities in competition with England, was looked upon
with disfavor for her enterprise; and all this because of the fallacy, at the
foundation of the mercantile [pg 007] system, that the gain in international
trade is not mutual, but that what one country gains another must lose.13

An exposition of mercantilism would not be complete without a statement of
the form it assumed in France under the guidance of Colbert,14 the great
minister of Louis XIV, from 1661 to 1683. In order to create a favorable
balance of trade, he devoted himself to fostering home productions, by
attempts to abolish vexatious tolls and customs within the country, and by an
extraordinary system of supervision in manufacturing establishments (which
has been the stimulus to paternal government from which France has never
since been able to free herself). Processes were borrowed from England,
Germany, and Sweden, and new establishments for making tapestries and
silk goods sprang up; even the sizes of fabrics were regulated by Colbert,
and looms unsuitable for these sizes destroyed. In 1671 wool-dyers were
given a code of detailed instructions as to the processes and materials that
might be used. Long after, French industry felt the difficulty of struggling
with stereotyped processes. His system, however, naturally resulted in a
series of tariff measures (in 1664 and 1667). Moderate duties on the
exportation of raw materials were first laid on, followed by heavy customs
imposed on the importation of foreign goods. The shipment of coin was
forbidden; but Colbert's criterion of prosperity was the favorable balance of
trade. French agriculture was overlooked. The tariff of 1667 was based on
the theory that foreigners must of necessity buy French wines, lace, and
wheat; that the French could sell, but not buy; but the act of 1667 cut off the
demand for French goods, and Portuguese [pg 008] wines came into the
market. England and Holland retaliated and shut off the foreign markets
from France. The wine and wheat growers of the latter country were ruined,
and the rural population came to the verge of starvation. Colbert's last years
were full of misfortune and disappointment; and a new illustration was given
of the fallacy that the gain from international trade was not mutual.

From this time, economic principles began to be better apprehended. It is to
be noted that the first just observations arose from discussions upon money,
and thence upon international trade. So far England has furnished the most
acute writers: now France became the scene of a new movement. Marshal
Vauban,15 the great soldier, and Boisguillebert16 both began to emphasize the
truth that wealth really consists, not in money alone, but in an abundance of
commodities; that countries which have plenty of gold and silver are not
wealthier than others, and that money is only a medium of exchange. It was
not, however, until 1750 that evidences of any real advance began to appear;
for Law's famous scheme (1716-1720) only served as a drag upon the

growth of economic truth. But in the middle of the eighteenth century an
intellectual revival set in: the “Encyclopædia” was published, Montesquieu
wrote his “l'Ésprit des Lois,” Rousseau was beginning to write, and Voltaire
was at the height of his power. In this movement political economy had an
important share, and there resulted the first school of Economists, termed the
Physiocrats.

The founder and leader of this new body of economic thinkers was François
Quesnay,17 a physician and favorite at [pg 009] the court of Louis XV.
Passing by his ethical basis of a natural order of society, and natural rights of
man, his main doctrine, in brief, was that the cultivation of the soil was the
only source of wealth; that labor in other industries was sterile; and that
freedom of trade was a necessary condition of healthy distribution. While
known as the “Economists,” they were also called the “Physiocrats,”18 or the
“Agricultural School.” Quesnay and his followers distinguished between the
creation of wealth (which could only come from the soil) and the union of
these materials, once created, by labor in other occupations. In the latter case
the laborer did not, in their theory, produce wealth. A natural consequence of
this view appeared in a rule of taxation, by which all the burdens of state
expenditure were laid upon the landed proprietors alone, since they alone
received a surplus of wealth (the famous net produit) above their sustenance
and expenses of production. This position, of course, did not recognize the
old mercantile theory that foreign commerce enriched a nation solely by
increasing the quantity of money. To a physiocrat the wealth of a community
was increased not by money, but by an abundant produce from its own soil.
In fact, Quesnay argued that the right of property included the right to
dispose of it freely at home or abroad, unrestricted by the state. This doctrine
was formulated in the familiar expression, “Laissez faire, laissez passer.”19
Condorcet and Condillac favored the new ideas. The “Economists” became
the fashion in France; and even included in their number Joseph II of
Austria, the Kings of Spain, Poland, Sweden, Naples, Catharine [pg 010] of
Russia, and the Margrave of Baden.20 Agriculture, therefore, received a great
stimulus.

Quesnay had many vigorous supporters, of whom the most conspicuous was
the Marquis de Mirabeau21 (father of him of the Revolution), and the
culmination of their popularity was reached about 1764. A feeling that the
true increase of wealth was not in a mere increase of money, but in the

products of the soil, led them naturally into a reaction against mercantilism,
but also made them dogmatic and overbearing in their one-sided system,
which did not recognize that labor in all industries created wealth. As the
mercantile system found a great minister in Colbert to carry those opinions
into effect on a national scale, so the Physiocrats found in Turgot22 a
minister, under Louis XVI, who gave them a national field in which to try
the doctrines of the new school. Benevolently devoted to bettering the
condition of the people while Intendant of Limoges (1751), he was made
comptroller-general of the finances by Louis XVI in 1774. Turgot had the
ability to separate political economy from politics, law, and ethics. His
system of freeing industry from governmental interference resulted in
abolishing many abuses, securing a freer movement of grain, and in
lightening the taxation. But the rigidity of national prejudices [pg 011] was
too strong to allow him success. He had little tact, and raised many
difficulties in his way. The proposal to abolish the corvées (compulsory
repair of roads by the peasants), and substitute a tax on land, brought his
king into a costly struggle (1776), and attempts to undermine Turgot's power
were successful. With his downfall ended the influence of the Economists.
The last of them was Dupont de Nemours,23 who saw a temporary popularity
of the Physiocrats in the early years of the French Revolution, when the
Constituent Assembly threw the burden of taxes on land. But the fire blazed
up fitfully for a moment, only to die away entirely.

All this, however, was the slow preparation for a newer and greater
movement in political economy than had yet been known, and which laid the
foundation of the modern study as it exists to-day. The previous discussions
on money and the prominence given to agriculture and economic
considerations by the Economists made possible the great achievements of
Adam Smith and the English school. A reaction in England against the
mercantile system produced a complete revolution in political economy.
Vigorous protests against mercantilism had appeared long before,24 and the
true functions of money had come to be rightly understood.25 More [pg 012]
than that, many of the most important doctrines had been either discussed, or
been given to the public in print. It is at least certain that hints of much that
made so astonishing an effect in Adam Smith's “Wealth of Nations” (1776)
had been given to the world before the latter was written. To what sources,
among the minor writers, he was most indebted, it is hard to say. Two, at
least, deserve considerable attention, David Hume and Richard Cantillon.

The former published his “Economic Essays” in 1752, which contained what
even now would be considered enlightened views on money, interest,
balance of trade, commerce, and taxation; and a personal friendship existed
between Hume and Adam Smith dating back as far as 1748, when the latter
was lecturing in Edinburgh on rhetoric. The extent of Cantillon's
acquirements and Adam Smith's possible indebtedness to him have been but
lately recognized. In a recent study26 on Cantillon, the late Professor Jevons
has pointed out that the former anticipated many of the doctrines later
ascribed to Adam Smith, Malthus, and Ricardo. Certain it is that the author
of the “Wealth of Nations” took the truth wherever he found it, received
substantial suggestions from various sources, but, after having devoted
himself in a peculiarly successful way to collecting facts, he wrought out of
all he had gathered the first rounded system of political economy the world
had yet known; which pointed out that labor was at the basis of production,
not merely in agriculture, as the French school would have it, but in all
industries; and which battered down all the defenses of the mediæval
mercantile system. In a marked degree Adam Smith27 combined a logical
precision and a [pg 013] power of generalizing results out of confused data
with a practical and intuitive regard for facts which are absolutely necessary
for great achievements in the science of political economy. At Glasgow
(1751-1764) Adam Smith gave lectures on natural theology, ethical
philosophy, jurisprudence, and political economy, believing that these
subjects were complementary to each other.

A connected and comprehensive grasp of principles was the great
achievement of Adam Smith;28 for, although the “Wealth of Nations” was
naturally not without faults, it has been the basis of all subsequent discussion
and advance in political economy. In Books I and II his own system is
elucidated, while Book IV contains his discussion of the Agricultural School
and the attacks on the mercantile system. Seeing distinctly that labor was the
basis of all production (not merely in agriculture), he shows (Books I and II)
that the wealth of a country depends on the skill with which its labor is
applied, and upon the proportion of productive to unproductive laborers. The
gains from division of labor are explained, and money appears as a
necessary instrument after society has reached such a division. He is then led
to discuss prices (market price) and value; and, since from the price a
distribution takes place among the factors of production, he is brought to
wages, profit, and rent. The functions [pg 014] of capital are explained in

general; the separation of fixed from circulating capital is made; and he
discusses the influence of capital on the distribution of productive and
unproductive labor; the accumulation of capital, money, paper money, and
interest. He, therefore, gets a connected set of ideas on production,
distribution, and exchange. On questions of production not much advance
has been made since his day; and his rules of taxation are now classic. He
attacked vigorously the balance-of-trade theory, and the unnatural diversion
of industry in England by prohibitions, bounties, and the arbitrary colonial
system. In brief, he held that a plan for the regulation of industry by the
Government was indefensible, and that to direct private persons how to
employ their capital was either hurtful or useless. He taught that a country
will be more prosperous if its neighbors are prosperous, and that nations
have no interest in injuring each other. It was, however, but human that his
work should have been somewhat defective.29 A new period in the history of
political [pg 015] economy, however, begins with Adam Smith. As Roscher
says, he stands in the center of economic history.

New writers now appear who add gradually stone after stone to the good
foundation already laid, and raise the edifice to fairer proportions. The first
considerable addition comes from a contribution by a country clergyman,
Thomas Robert Malthus,30 in his “Essay on the Principles of Population”
(1798). Against the view of Pitt that “the man who had a large family was a
benefactor to his country,” Malthus argued conclusively that “a perfectly
happy and virtuous community, by physical law, is constrained to increase
very rapidly.... By nature human food increases in a slow arithmetical ratio;
man himself increases in a quick geometrical ratio, unless want and vice stop
him.” In his second edition (1803), besides the positive check of vice and
want, he gave more importance to the negative check of “self-restraint,
moral and prudential.” The whole theory was crudely stated at first; and it
raised the cry that such a doctrine was inconsistent with the belief in a
benevolent Creator. In its essence, the law of population is simply that a
tendency and ability exist in mankind to increase its numbers faster than
subsistence, and that this result actually will happen unless checks retard it,
or new means of getting subsistence [pg 016] arise. If an undue increase of
population led to vice and misery, in Malthus's theory, he certainly is not to
be charged with unchristian feelings if he urged a self-restraint by which that
evil result should be avoided. Malthus's doctrines excited great discussion:
Godwin says that by 1820 thirty or forty answers to the essay had been

written; and they have continued to appear. The chief contributions have
been by A. H. Everett, “New Ideas on Population” (1823), who believed that
an increase of numbers increased productive power; by M. T. Sadler, “Law
of Population” (1830), who taught that human fertility varied inversely with
numbers, falling off with density of population; by Sir Archibald Alison,
“Principles of Population” (1840), who reasoned inductively that the
material improvement of the human race is a proof that man can produce
more than he consumes, or that in the progress of society preventive checks
necessarily arise; by W. R. Greg, “Enigmas of Life” (1873); and by Herbert
Spencer, “Westminster Review” (April, 1852), and “Principles of Biology,”
(part vi, ch. xii and xiii), who worked out a physiological check, in that with
a mental development out of lower stages there comes an increased demand
upon the nervous energy which causes a diminution of fertility. Since
Darwin's studies it has been very generally admitted that it is the innate
tendency of all organic life to increase until numbers press upon the limit of
food-production; not that population has always done so in every country.31
Malthus's teachings resulted in the modern poor-house system, beginning
with 1834 in England, and they corrected some of the abuses of
indiscriminate charity.

While Adam Smith had formulated very correctly the laws of production, in
his way Malthus was adding to the [pg 017] means by which a better
knowledge of the principles of distribution was to be obtained; and the next
advance, owing to the sharp discussions of the time on the corn laws, was,
by a natural progress, to the law of diminishing returns and rent. An
independent discovery of the law of rent is to be assigned to no less than
four persons,32 but for the full perception of its truth and its connection with
other principles of political economy the credit has been rightly given to
David Ricardo,33 next to Adam Smith without question the greatest
economist of the English school. Curiously enough, although Adam Smith
was immersed in abstract speculations, his “homely sagacity” led him to the
most practical results; but while Ricardo was an experienced and successful
man of business, he it was, above all others, who established the abstract
political economy, in the sense of a body of scientific laws to which concrete
phenomena, in spite of temporary inconsistencies, must in the end conform.
His work, therefore, supplemented that of Adam Smith; and there are very
few doctrines fully worked out to-day of which hints have not been found in
Ricardo's wonderfully compact statements. [pg 018] With no graces of

exposition, his writings seem dry, but are notwithstanding mines of valuable
suggestions.

In the field of distribution and exchange Ricardo made great additions.
Malthus and West had shown that rent was not an element in cost of
production; but both Malthus and Ricardo seemed to have been familiar with
the doctrine of rent long before the former published his book. Ricardo,
however, saw into its connection with other parts of a system of
distribution.34 The Malthusian doctrine of a pressure of population on
subsistence naturally forced a recognition of the law of diminishing returns
from land;35 then as soon as different qualities of land were simultaneously
cultivated, the best necessarily gave larger returns than the poorest; and the
idea that the payment of rent was made for a superior instrument, and in
proportion to its superiority over the poorest instrument which society found
necessary to use, resulted in the law of rent. Ricardo, moreover, carried out
this principle as it affected wages, profits, values, and the fall of profits; but
did not give sufficient importance to the operation of forces in the form of
improvements acting in opposition to the tendency toward lessened returns.
The theory of rent still holds its place, although it has met with no little
opposition.36 A doctrine, quite as important in its effects on free [pg 019]
exchange, was clearly established by Ricardo, under the name of the
doctrine of “Comparative Cost,” which is the reason for the existence of any
and all international trade.

The work of Adam Smith was soon known to other countries, apart from
translations. A most lucid and attractive exposition was given to the French
by J. B. Say, “Traité d'économie politique” (1803), followed, after lecturing
in Paris from 1815-1830, by a more complete treatise,37 “Cours complète
d'économie politique” (1828). While not contributing much that was new,
Say did a great service by popularizing previous results in a happy and lively
style, combined with good arrangement, and many illustrations. The theory
that general demand and supply are identical is his most important
contribution to the study. Although he translated Ricardo's book, he did not
grasp the fact that rent did not enter into price. Say's work was later
supplemented by an Italian, Pellegrino Rossi,38 who, in his “Cours
d'économie politique” (1843-1851), naturalized the doctrines of Malthus and
Ricardo on French soil. His work is of solid value, and he and Say have
given rise to an active school of [pg 020] political economy in France. In

Switzerland, Sismondi expounded Adam Smith's results in his “De la
richesse commerciale” (1803), but was soon led into a new position,
explained in his “Nouveaux principes d'économie politique” (1819). This has
made him the earliest and most distinguished of the humanitarian
economists. Seeing the sufferings caused by readjustments of industries after
the peace, and the warehouses filled with unsold goods, he thought the
excess of production over the power of consumption was permanent, and
attacked division of labor, labor-saving machinery, and competition.
Discoveries which would supersede labor he feared would continue, and the
abolition of patents, together with the limitation of population,39 was urged.
These arguments furnished excellent weapons to the socialistic agitators.
Heinrich Storch40 aimed to spread the views of Adam Smith41 in Russia, by
his “Cours d'économie politique” (1815). Without further developing the
theory of political economy, he produced a book of exceptional merit by
pointing out the application of the principles to Russia, particularly in regard
to the effect of a progress of wealth on agriculture and manufactures; to the
natural steps by which a new country changes from agriculture to a
manufacturing régime; and to finance and currency, with an account of
Russian depreciated paper since Catharine II.

[pg 021]
For the next advance, we must again look to England. Passing by
McCulloch42 and Senior, a gifted writer, the legitimate successor of Ricardo
is John Stuart Mill.43 His father, [pg 022] James Mill,44 introduced him into a
circle of able men, of which Bentham was the ablest, although his father
undoubtedly exercised the chief influence over his training. While yet but
twenty-three, in his first book, “Essays on some Unsettled Questions of
Political Economy” (1829-1830), he gained a high position as an economist.
In one form or another, all his additions to the study are to be found here in a
matured condition. The views on productive and unproductive consumption,
profits, economic methods, and especially his very clever investigation on
international values, were there presented. His “Logic” (1843) contains
(Book VI) a careful statement of the relation of political economy to other
sciences, and of the proper economic method to be adopted in investigations.
Through his “Principles of Political Economy” (1848) he has exercised a
remarkable influence upon men in all lands; not so much because of great
originality, since, in truth, he only put Ricardo's principles in better and more
attractive form, but chiefly by a method of systematic treatment more lucid

and practical than had been hitherto reached, by improving vastly beyond the
dry treatises of his predecessors (including Ricardo, who was concise and
dull), by infusing a human element into his aims, and by illustrations and
practical applications. Even yet, however, some parts of his book show the
tendency to too great a fondness for abstract statement, induced probably by
a dislike to slighting his reasons (due to his early training), and by the limits
of his book, which obliged him to omit many possible illustrations. With a
deep sympathy for the laboring-classes, he was [pg 023] tempted into the
field of sociology in this book, although he saw distinctly that political
economy was but one of the sciences, a knowledge of which was necessary
to a legislator in reaching a decision upon social questions. Mill shows an
advance beyond Ricardo in this treatise, by giving the study a more practical
direction. Although it is usual to credit Mill with originating the laws of
international values, yet they are but a development of Ricardo's doctrine of
international trade, and Mill's discussions of the progress of society toward
the stationary state were also hinted at, although obscurely, by Ricardo. In
the volumes of Mr. Mill the subject is developed as symmetrically as a proof
in geometry. While he held strongly to free trade,45 he gave little space to the
subject in his book. All in all, his book yet remains the best systematic
treatise in the English language, although much has been done since his
day.46

He who has improved upon previous conceptions, and been the only one to
make any very important advance in the science since Mill's day, is J. E.
Cairnes,47 in his “Leading Principles of [pg 024] Political Economy newly
expounded” (1874). Scarcely any previous writer has equaled him in logical
clearness, originality, insight into economic phenomena, and lucidity of
style. He subjected value, supply and demand, cost of production, and
international trade, to a rigid investigation, which has given us actual
additions to our knowledge of the study. The wages-fund theory was re-
examined, and was stated in a new form, although Mr. Mill had given it up.
Cairnes undoubtedly has given it its best statement. His argument on free
trade (Part III, chapter iv) is the ablest and strongest to be found in modern
writers. This volume is, however, not a systematic treatise on all the
principles of political economy; but no student can properly pass by these
great additions for the right understanding of the science. His “Logical
Method of Political Economy” (1875) is a clear and able statement of the
process to be adopted in an economic investigation, and is a book of

exceptional merit and usefulness, especially in view of the rising differences
in the minds of economists as to method.

A group of English writers of ability in this period have written in such a
way as to win for them mention in connection with Cairnes and Mill.
Professor W. Stanley Jevons48 [pg 025] put himself in opposition to the
methods of the men just mentioned, and applied the mathematical process to
political economy, but without reaching new results. His most serviceable
work has been in the study of money, which appears in an excellent form,
“The Money and Mechanism of Exchange” (1875), and in an investigation
which showed a fall of the value of gold since the discoveries of 1849. In
this latter he has furnished a model for any subsequent investigator. Like
Professor Jevons, T. E. Cliffe Leslie49 opposed the older English school (the
so-called “orthodox”), but in the different way of urging with great ability
the use of the historical method, of which more will be said in speaking of
later German writers.50 He also distinguished himself by a study of land
tenures, in his “Land Systems and Industrial [pg 026] Economy of Ireland,
England, and Continental Countries” (1870), which was a brilliant
exposition of the advantages of small holdings.

By far the ablest of the group, both by reason of his natural gifts and his
training as a banker and financial editor, was Walter Bagehot.51 In his
“Economic Studies” (1880) he has discussed with a remarkable economic
insight the postulates of political economy, and the position of Adam Smith,
Ricardo, and Malthus; in his “Lombard Street” (fourth edition, 1873), the
money market is pictured with a vivid distinctness which implies the
possession of rare qualities for financial writing; indeed, it is in this practical
way also, as editor of the London “Economist,”52 that he made his great
reputation.

Of living English economists, Professor Henry Fawcett,53 in his “Manual of
Political Economy” (1865; sixth edition, 1883), is a close follower of Mill,
giving special care to co-operation, silver, nationalization of land, and
trades-unions. He is an exponent of the strict wages-fund theory, and a
vigorous free-trader. Professor J. E. Thorold Rogers, of Oxford, also holds
aloof from the methods of the old school. [pg 027] His greatest contribution
has been a “History of Agriculture and Prices in England,” from 1255 to
1793, in four volumes54 (1866-1882).

Of all the writers55 since Cairnes, it may be said that, while adding to the
data with which political economy has to do, and putting principles to the
test of facts, they have made no actual addition to the existing body of
principles; although questions of distribution and taxation are certainly not
yet fully settled, as is seen by the wide differences of opinion expressed on
subjects falling within these heads by writers of to-day.

It now remains to complete this sketch of the growth of political economy by
a brief account of the writers on the Continent and in the United States,
beginning with France. About the time of the founding of the London
“Economist” (1844) and “The Statistical Journal” (1839) in England, there
was established in Paris the “Journal des Économistes” (1842), which
contains many valuable papers. On the whole, the most popular writer since
J. B. Say has been Bastiat,56 who aspired to be the French Cobden. He
especially urged [pg 028] a new57 view of value, which he defined as the
relation established by an exchange of services; that nature's products are
gratuitous, so that man can not exact anything except for a given service.
Chiefly as a foe of protection, which he regarded as qualified socialism, he
has won a reputation for popular and clever writing; and he was led to
believe in a general harmony of interests between industrial classes; but in
general he can not be said to have much influenced the course of French
thought. On value, rent, and population, he is undoubtedly unsound. A writer
of far greater depth than Bastiat, with uncommon industry and wide
knowledge, was Michel Chevalier,58 easily the first among modern French
economists. He has led in the discussion upon the fall of gold, protection,
banking, and particularly upon money; an ardent free-trader, he had
influence enough to induce France to enter into the commercial treaty of
1860 with England. One of the ablest writers on special topics is [pg 029]
Levasseur,59 who has given us a history of the working-classes before and
since the Revolution, and the best existing monograph on John Law. The
most industrious and reliable of the recent writers is the well-known
statistician, Maurice Block,60 while less profound economists were J. A.
Blanqui61 and Wolowski.62 The latter devoted himself enthusiastically [pg
030] to banks of issue, and bimetallism. A small group gave themselves up
chiefly to studies on agriculture and land-tenures—H. Passy,63 Laveleye, and
Lavergne.64 The latter is by far the most important, as shown by his
“L'économie rurale de la France depuis 1789” (1857), which gives a means
of comparing recent French agriculture with that before the Revolution, as

described in Arthur Young's “Travels in France” (1789). The best systematic
treatise in French is the “Précis de la science économique” (1862), by
Antoine-Élise Cherbuliez,65 a Genevan. The French were the first to produce
an alphabetical encyclopædia of economics, [pg 031] by Coquelin and
Guillaumin, entitled the “Dictionnaire de l'économie politique” (1851-1853,
third edition, 1864). Courcelle-Seneuil,66 by his “Traité théorique et pratique
d'économie politique” (second edition, 1867); and Baudrillart, by a good
compendium. Joseph Garnier, Dunoyer,67 Paul Leroy-Beaulieu,68 Reybaud,69
De Parieu,70 Léon Say,71 Boiteau, and others, have done excellent work in
France, and Walras72 in Switzerland.

As Cobden had an influence on Bastiat, so both had an influence in Germany
in creating what has been styled by opponents the “Manchester school,” led
by Prince-Smith (died 1874). They have worked to secure complete liberty
of [pg 032] commerce and industry, and include in their numbers many men
of ability and learning. Yearly congresses have been organized for the
purpose of disseminating liberal ideas, and an excellent review, the
“Vierteljahrschrift für Volkswirthschaft, Politik, und Kulturgeschichte,”73 has
been established. They have devoted themselves successfully to reforms of
labor-laws, interest, workingmen's dwellings, the money system, and
banking, and strive for the abolition of protective duties. Schulze-Delitzsch
has acquired a deserved reputation for the creation of people's banks, and
other forms of co-operation. The translator of Mill into German, Adolph
Soetbeer,74 is the most eminent living authority on the production of the
precious metals, and a vigorous monometallist. The school is represented in
the “Handwörterbuch der Volkswirthschaftslehre” (1865) of Reutzsch. The
other writers of this group are Von Böhmert,75 Faucher, Braun, Wolff,
Michaelis, Emminghaus,76 Wirth,77 Hertzka, and Von Holtzendorf. The best
known of the German protectionists is Friedrich List, the author of “Das
nationale System der politischen Oekonomie” (1841), whose doctrines are
very similar to those of H. C. Carey in this country.78 An able writer on [pg
033] administrative functions and finance79 is Lorenz Stein, of Vienna.

But German economists are of interest, inasmuch as they have established a
new school who urge the use of the historical method in political economy,
and it is about the question of method that much of the interest of to-day
centers. In 1814 Savigny introduced this method into jurisprudence, and
about 1850 it was applied to political economy. The new school claim that

the English “orthodox” writers begin by an a priori process, and by
deductions reach conclusions which are possibly true of imaginary cases, but
are not true of man as he really acts. They therefore assert that economic
laws can only be truly discovered by induction, or a study of phenomena
first, as the means of reaching a generalization. To them Bagehot80 answers
that scientific bookkeeping, or collections of facts, in themselves give no
results ending in scientific laws; for instance, since the facts of banking
change and vary every day, no one can by induction alone reach any laws of
banking; or, for example, the study of a panic from the concrete phenomena
would be like trying to explain the bursting of a boiler without a theory of
steam. More lately,81 since it seems that the new school claim that induction
does not preclude deduction, and as the old school never intended to
disconnect themselves from “comparing conclusions with external facts,”
there is not such a cause of difference as has previously appeared. Doubtless
the insistence upon the merits of induction will be fruitful of good to
“orthodox” writers, in the more general resort to the collection of statistics
and means of verification. It is suggestive also that the leaders of the new
school in Germany [pg 034] and England have reached no different results
by their new method, and in the main agree with the laws evolved by the old
English school. The economist does not pretend that his assumptions are
descriptions of economic conditions existing at a given time; he simply
considers them as forces (often acting many on one point or occasion) to be
inquired into separately, inasmuch as concrete phenomena are the resultants
of several forces, not to be known until we know the separate operation of
each of the conjoined forces.

The most prominent of the new school is Wilhelm Roscher,82 of Leipsic, who
wrote a systematic treatise, “System der Volkswirthschaft” (1854, sixteenth
edition, 1883), in the first division of which the notes contain a marvelous
collection of facts and authorities. He agrees in results with Adam Smith,
Ricardo, Malthus, and Mill, but does not seem to have known much of
Cairnes. This book, however, is only a first of four treatises eventually
intended to include the political economy of (2) agriculture, (3) industry and
commerce, [pg 035] and (4) the state and commune. The ablest
contemporary of Roscher, who was probably the first to urge the historical
method, is Karl Knies,83 in “Die politische Oekonomie vom Standpunkte der
geschichtlichen Methode” (1853, second edition, 1881-1883). The third of

the group who founded the historical school is Bruno Hildebrand,84 of Jena,
author of “Die Nationalökonomie der Gegenwart und Zukunft” (1848).

The German mind has always been familiar with the interference of the
state, and a class of writers has arisen, not only advocating the inductive
method, but strongly imbued with a belief in a close connection of the state
with industry; and, inasmuch as the essence of modern socialism is a resort
to state-help, this body of men, with Wagner at their head, has received the
name of “Socialists85 of the Chair,” and now wield a wide influence in
Germany. Of these writers,86 Wagner, Engel, Schmoller, Von Scheel,
Brentano, Held, Schönberg, and Schäffle are the most prominent.

The historical school has received the adhesion of Émile [pg 036] de
Laveleye,87 in Belgium, and other economists in England and the United
States. While Cliffe Leslie has been the most vigorous opponent of the
methods of the old school, there have been many others of less distinction.
Indeed, the period, the close of which is marked by J. R. McCulloch's book,
was one in which the old school had seemingly come to an end of its
progress, from too close an adhesion to deductions from assumed premises.
Mill's great merit was that he began the movement to better adapt political
economy to society as it actually existed; and the historical school will
probably give a most desirable impetus to the same results, even though its
exaggerated claims as to the true method88 can not possibly be admitted.

[pg 037]
Italian writers have not received hitherto the attention they deserve. After
1830, besides Rossi, who went to France, there was Romagnosi, who dealt
more with the relations of economics to other studies; Cattanes, who turned
to rural questions and free trade (combating the German, List); Scialoja, at
the University of Turin; and Francesco Ferrara, also at Turin from 1849 to
1858. The latter was a follower of Bastiat and Carey, as regards value and
rent, and at the same time was a radical believer in laissez-faire. Since the
union of Italy there has been a new interest in economic study, as with us
after our war. The most eminent living Italian economist is said to be Angelo
Messedaglia, holding a chair at Padua since 1858. He has excelled in
statistical and financial subjects, and is now engaged on a treatise on money,
“Moneta,” of which one part has been issued (1882). Marco Minghetti and
Fedele Lampertico stand above others, the former for a study of the

connection of political economy [pg 038] with morals, and for his public
career as a statesman; the latter for his studies on paper money and other
subjects. Carlo Ferrais presented a good monograph on “Money and the
Forced Currency” (1879); and Boccardo issued a library of selected works of
the best economists, and a large Dictionary of Political Economy,
“Dizionario universale di Economia Politica e di Commercio” (2 vols.,
second edition, 1875). Luigi Luzzati is a vigorous advocate of co-operation;
and Elia Lattes has made a serious study of the early Venetian banks.

Political economy has gained little from American writers. Of our statesmen
none have made any additions to the science, and only Hamilton and
Gallatin can properly be called economists. Hamilton, in his famous “Report
on Manufactures” (1791), shared in some of the erroneous conceptions of his
day; but this paper, together with his reports on a national bank and the
public credit, are evidences of a real economic power. Gallatin's “Memorial
in Favor of Tariff Reform” (1832) is as able as Hamilton's report on
manufactures, and a strong argument against protection. Both men made a
reputation as practical financiers.

“With few exceptions, the works produced in the United States have been
prepared as text-books89 by authors engaged in college instruction, and
therefore chiefly interested in bringing principles previously worked out by
others within the easy comprehension of undergraduate students.”90 Of these
[pg 039] exceptions, Alexander H. Everett's “New Ideas on Population”91
(1822), forms a valuable part in the discussion which followed the
appearance of Malthus's “Essay.” The writer, however, who has drawn most
attention, at home and abroad, for a vigorous attack on the doctrines of
Ricardo is Henry Charles Carey.92 Beginning with “The Rate of Wages”
(1835), he developed a new theory of value (see “Principles of Political
Economy,” 1837-1840), “which he defined as a measure of the resistance to
be overcome in obtaining things required for use, or the measure of the
power of nature over man. In simpler terms, value is measured by the cost of
reproduction. The value of every article thus declines as the arts advance,
while the general command of commodities constantly increases. This
causes a constant fall in the value of accumulated capital as compared with
the results of present labor, from which is inferred a tendency toward
harmony rather than divergence of interests between capitalist and laborer.”
This theory of value93 he applied to land, and even to man, in his desire to

give it universality. He next claimed to have discovered a law of increasing
production from land in his “Past, Present, and Future” (1848), which was
diametrically opposed to Ricardo's law of diminishing returns. His proof was
an historical one, that in fact the poorer, not the richer lands, were first taken
into cultivation. This, however, did not explain the fact that different grades
of [pg 040] land are simultaneously under cultivation, on which Ricardo's
doctrine of rent is based. The constantly increasing production of land
naturally led Carey to believe in the indefinite increase of population. He,
however, was logically brought to accept the supposed law of an ultimate
limit to numbers suggested by Herbert Spencer, based on a diminution of
human fertility. He tried to identify physical and social laws, and fused his
political economy in a system of “Social Science” (1853), and his “Unity of
Law” (1872). From about 1845 he became a protectionist, and his writings
were vigorously controversial. In his doctrines on money he is distinctly a
mercantilist;94 but, by his earnest attacks on all that has been gained in the
science up to his day, he has done a great service in stimulating inquiry and
causing a better statement of results. While undoubtedly the best known of
American writers, yet, because of a prolix style and an illogical habit of
mind, he has had no extended influence on his countrymen.95

The effect of the civil war is now beginning to show itself in an
unmistakable drift toward the investigation of economic questions, and there
is a distinctly energetic tone which may bring new contributions from
American writers. General Francis A. Walker,96 in his study on “The Wages
Question” (1876), has combated the wages-fund theory, and [pg 041]
proposed in its place a doctrine that wages are paid out of the product, and
not out of accumulated capital. Professor W. G. Sumner97 is a vigorous writer
in the school of Mill and Cairnes, and has done good work in the cause of
sound money doctrines. Both General Walker and Professor Sumner hold to
the method of economic investigation as expounded by Mr. Cairnes;
although several younger economists show the influence of the German
school. Professor A. L. Perry,98 of Williams College, adopted Bastiat's theory
of value. He also accepts the wages-fund theory, rejects the law of Malthus,
and, although believing in the law of diminishing returns from land, regards
rent as the reward for a service rendered. Another writer, Henry George,99
has gained an abnormal prominence by a plausible book, “Progress and
Poverty” (1880), which rejects the doctrine of Malthus, and argues that the
increase of production of any kind augments the [pg 042] demand for land,

and so raises its value. His conclusions lead him to advocate the
nationalization of land. Although in opposition to almost all that political
economy has yet produced, his writing has drawn to him very unusual
notice. The increasing interest in social questions, and the general lack of
economic training, which prevents a right estimate of his reasoning by
people in general, sufficiently account for the wide attention he has received.

Of late, however, new activity has been shown in the establishment of better
facilities for the study of political economy in the principal seats of learning
—Harvard, Yale, Cornell, Columbia, Michigan, and Pennsylvania: and a
“Cyclopædia of Political Science” (1881-1884, three volumes) has been
published by J. J. Lalor, after the example of the French dictionaries.

[pg 043]

Books For Consultation (From English, French, And
German Authors).

General Treatises forming a Parallel Course of Reading with Mill.

Professor Fawcett's “Manual of Political Economy” (London, sixth edition,
1883) is a brief statement of Mill's book, with additional matter on the
precious metals, slavery, trades-unions, co-operation, local taxation, etc.

Antoine-Élise Cherbuliez's “Précis de la science économique” (Paris, 1862,
2 vols.) follows the same arrangement as Mill, and is considered the best
treatise on economic science in the French language. He is methodical,
profound, and clear, and separates pure from applied political economy.

Other excellent books in French are: Courcelle-Seneuil's “Traité théorique et
pratique d'économie politique” (1858), (Paris, second edition, 1867, 2 vols.),
and a compendium by Henri Baudrillart, “Manuel d'économie politique”
(third edition, 1872).

Roscher's “Principles of Political Economy” is a good example of the
German historical method; its notes are crowded with facts; but the English
translation (New York, 1878) is badly done. There is an excellent translation
of it into French by Wolowski.

A desirable elementary work, “The Economics of Industry” (London, 1879),
was prepared by Mr. and Mrs. Marshall.

Professor Jevons wrote a “Primer of Political Economy” (1878), which is a
simple, bird's-eye view of the subject in a very narrow compass.

Important General Works.

Adam Smith's “Wealth of Nations” (1776). The edition of McCulloch is
perhaps more serviceable than that of J. E. T. Rogers.

[pg 044]
Ricardo's “Principles of Political Economy and Taxation” (1817).

J. S. Mill's “Principles of Political Economy” (2 vols., 1848—sixth edition,
1865).

Schönberg's “Handbuch der politischen Oekonomie” (1882). This is a large
co-operative treatise by twenty-one writers from the historical school.

Cairnes's “Leading Principles of Political Economy” (1874); “Logical
Method” (1875), lectures first delivered in Dublin in 1857.

Carey's “Social Science” (1877). This has been abridged in one volume by
Kate McKean.

F. A. Walker's “Political Economy” (1883). This author differs from other
economists, particularly on wages and questions of distribution.

H. George's “Progress and Poverty” (1879). In connection with this, read F.
A. Walker's “Land and Rent” (1884).

Treatises on Special Subjects.

W. T. Thornton's “On Labor” (1869).

McLeod's “Theory and Practice of Banking” (second edition, 1875-1876).

M. Block's “Traité théorique et pratique de statistique” (1878).

Goschen's “Theory of Foreign Exchanges” (eighth edition, 1875).

J. Caird's “Landed Interest” (fourth edition, 1880), treating of English land
and the food-supply.

W. G. Sumner's “History of American Currency” (1874).

John Jay Knox's “United States Notes” (1884).

Jevons's “Money and the Mechanism of Exchange” (1875).

Tooke and Newmarch's “History of Prices” (1837-1856), in six volumes.

Leroy-Beaulieu's “Traité de la science des finances” (1883). This is an
extended work, in two volumes, on taxation and finance; “Essai sur la
répartition des richesses” (second edition, 1883).

F. A. Walker's “The Wages Question” (1876); “Money” (1878).

L. Reybaud's “Études sur les réformateurs contemporains, ou socialistes
modernes” (seventh edition, 1864).

Dictionaries.

McCulloch's “Commercial Dictionary” (new and enlarged edition, 1882).

Lalor's “Cyclopædia of Political Science” (1881-84) is devoted to articles on
political science, political economy, and American history.

Coquelin and Guillaumin's “Dictionnaire de l'économie politique” (1851-
1853, third edition, 1864), in two large volumes.

[pg 045]
Reports and Statistics.

The “Compendiums of the Census” for 1840, 1850, 1860, and 1870, are
desirable. The volumes of the tenth census (1880) are of great value for all
questions; as is also F. A. Walker's “Statistical Atlas” (1874).

The United States Bureau of Statistics issues quarterly statements; and
annually a report on “Commerce and Navigation,” and another on the
“Internal Commerce of the United States.”

The “Statistical Abstract” is an annual publication, by the same department,
compact and useful. It dates only from 1878.

The Director of the Mint issues an annual report dealing with the precious
metals and the circulation. Its tables are important.

The Comptroller of the Currency (especially during the administration of J.
J. Knox) has given important annual reports upon the banking systems of the
United States.

The reports of the Secretary of the Treasury deal with the general finances of
the United States. These, with the two last mentioned, are bound together in
the volume of “Finance Reports,” but often shorn of their tables.

There are valuable special reports to Congress of commissioners on the
tariff, shipping, and other subjects, published by the Government.

The report on the “International Monetary Conference of 1878” contains a
vast quantity of material on monetary questions.

The British parliamentary documents contain several annual “Statistical
Abstracts” of the greatest value, of which the one relating to other European
states is peculiarly convenient and useful. These can always be purchased at
given prices.

A. R. Spofford's “American Almanac” is an annual of great usefulness.

[pg 047]

Preliminary Remarks.

Writers on Political Economy profess to teach, or to investigate, the nature
of Wealth, and the laws of its production and distribution; including, directly
or remotely, the operation of all the causes by which the condition of
mankind, or of any society of human beings, in respect to this universal
object of human desire, is made prosperous or the reverse.

It will be noticed that political economy does not include ethics, legislation, or
the science of government. The results of political economy are offered to the
statesman, who reaches a conclusion after weighing them in connection with
moral and political considerations. Political Economy is distinct from
Sociology; although it is common to include in the former everything which
concerns social life. Some writers distinguish between the pure, or abstract
science, and the applied art, and we can speak of a science of political
economy only in the sense of a body of abstract laws or formulas. This,
however, does not make political economy less practical than physics, for,
after a principle is ascertained, its operation is to be observed in the same way
that we study the force of gravitation in a falling stone, even when retarded by
opposing forces. An economic force, or tendency, can be likewise distinctly
observed, although other influences, working at the same time, prevent the
expected effect from following its cause. It is, in short, the aim of political
economy to investigate the laws which govern the phenomena of material
wealth. (Cf. Cossa, “Guide,” chap. iii.)

While the [Mercantile] system prevailed, it was assumed, either expressly or
tacitly, in the whole policy of nations, [pg 048] that wealth consisted solely
of money; or of the precious metals, which, when not already in the state of
money, are capable of being directly converted into it. According to the
doctrines then prevalent, whatever tended to heap up money or bullion in a
country added to its wealth.

More correctly the Mercantilists (in the sixteenth and seventeenth centuries)
held that where money was most plentiful, there would be found the greatest
100
abundance of the necessaries of life.

Whatever sent the precious metals out of a country impoverished it. If a
country possessed no gold or silver mines, the only industry by which it
could be enriched was foreign trade, being the only one which could bring in
money. Any branch of trade which was supposed to send out more money
than it brought in, however ample and valuable might be the returns in
another shape, was looked upon as a losing trade. Exportation of goods was
favored and encouraged (even by means extremely onerous to the real
resources of the country), because, the exported goods being stipulated to be
paid for in money, it was hoped that the returns would actually be made in
gold and silver. Importation of anything, other than the precious metals, was
regarded as a loss to the nation of the whole price of the things imported;
unless they were brought in to be re-exported at a profit, or unless, being the
materials or instruments of some industry practiced in the country itself, they
gave the power of producing exportable articles at smaller cost, and thereby
effecting a larger exportation. The commerce of the world was looked upon
as a struggle among nations, which could draw to itself the largest share of
the gold and silver in existence; and in this competition no nation could gain
anything, except by making others lose as much, or, at the least, preventing
them from gaining it.

The Mercantile Theory could not fail to be seen in its true character when
men began, even in an imperfect manner, [pg 049] to explore into the
foundations of things. Money, as money, satisfies no want; its worth to any
one consists in its being a convenient shape in which to receive his
incomings of all sorts, which incomings he afterwards, at the times which
suit him best, converts into the forms in which they can be useful to him.
The difference between a country with money, and a country altogether
without it, would be only one of convenience; a saving of time and trouble,
like grinding by water instead of by hand, or (to use Adam Smith's
illustration) like the benefit derived from roads; and to mistake money for
wealth is the same sort of error as to mistake the highway, which may be the
easiest way of getting to your house or lands, for the house and lands
themselves.

Money, being the instrument of an important public and private purpose, is
rightly regarded as wealth; but everything else which serves any human
purpose, and which nature does not afford gratuitously, is wealth also. To be
wealthy is to have a large stock of useful articles, or the means of purchasing
them. Everything forms, therefore, a part of wealth, which has a power of
purchasing; for which anything useful or agreeable would be given in
exchange. Things for which nothing could be obtained in exchange, however
useful or necessary they may be, are not wealth in the sense in which the
term is used in Political Economy. Air, for example, though the most
absolute of necessaries, bears no price in the market, because it can be
obtained gratuitously; to accumulate a stock of it would yield no profit or
advantage to any one; and the laws of its production and distribution are the
subject of a very different study from Political Economy. It is possible to
imagine circumstances in which air would be a part of wealth. If it became
customary to sojourn long in places where the air does not naturally
penetrate, as in diving-bells sunk in the sea, a supply of air artificially
furnished would, like water conveyed into houses, bear a price: and, if from
any revolution in nature the atmosphere became too scanty for the
consumption, [pg 050] or could be monopolized, air might acquire a very
high marketable value. In such a case, the possession of it, beyond his own
wants, would be, to its owner, wealth; and the general wealth of mankind
might at first sight appear to be increased, by what would be so great a
calamity to them. The error would lie in not considering that, however rich
the possessor of air might become at the expense of the rest of the
community, all persons else would be poorer by all that they were compelled
to pay for what they had before obtained without payment.

Wealth, then, may be defined, all useful or agreeable things which possess
exchangeable value; or, in other words, all useful or agreeable things except
those which can be obtained, in the quantity desired, without labor or
sacrifice.

This is the usual definition of wealth. Henry George (see “Progress and
Poverty,” pp. 34-37) regards wealth as consisting “of natural products that
have been secured, moved, combined, separated, or in other ways modified by
human exertion, so as to fit them for the gratification of human desires....
Nothing which Nature supplies to man without his labor is wealth.... All things

which have an exchange value are, therefore, not wealth. Only such things can
be wealth the production of which increases and the destruction of which
decreases the aggregate of wealth.... Increase in land values does not represent
increase in the common wealth, for what land-owners gain by higher prices
the tenants or purchasers who must pay them will lose.” Jevons (“Primer,” p.
13) defines wealth very properly as what is transferable, limited in supply, and
useful. F. A. Walker defines wealth as comprising “all articles of value and
nothing else” (“Political Economy,” p. 5). Levasseur's definition (“Précis,” p.
15) is, “all material objects possessing utility” (i.e., the power to satisfy a
want). (Cf. various definitions in Roscher's “Political Economy,” section 9,
note 3.) Perry (“Political Economy,” p. 99) rejects the term wealth as a clog to
progress in the science, and adopts property in its stead, defining it as that
“which can be bought or sold.” Cherbuliez (“Précis,” p. 70) defines wealth as
the material product of nature appropriated by labor for the wants of man.
Carey (“Social Science,” i, 186) asserts that wealth consists in the power to
command Nature's services, including in wealth such intangible things as
mental qualities.

[pg 053]

Book I. Production.

Chapter I. Of The Requisites Of Production.

§ 1. The Requisites of Production are Two: Labor, and Appropriate Natural
Objects.

There is a third requisite of production, capital (see page 58). Since the limitation to only
two requisites applies solely to a primitive condition of existence, so soon as the element
of time enters into production, then a store of capital becomes necessary; that is, so soon as
production requires such a term that during the operation the laborer can not at the same
time provide himself with subsistence, then capital is a requisite of production. This takes
place also under any general division of labor in a community. When one man is making a
pin-head, he must be supplied with food by some person until the pins are finished and
exchanged.

Labor is either bodily or mental; or, to express the distinction more comprehensively,
either muscular or nervous; and it is necessary to include in the idea, not solely the
exertion itself, but all feelings of a disagreeable kind, all bodily inconvenience or
mental annoyance, connected with the employment of one's thoughts, or muscles, or
both, in a particular occupation.

The word “sacrifice” conveys a just idea of what the laborer undergoes, and it corresponds
to the abstinence of the capitalist.

[pg 054]
Of the other requisite—appropriate natural objects—it is to be remarked that some
objects exist or grow up spontaneously, of a kind suited to the supply of human
wants. There are caves and hollow trees capable of affording shelter; fruits, roots,
wild honey, and other natural products, on which human life can be supported; but
even here a considerable quantity of labor is generally required, not for the purpose of
creating, but of finding and appropriating them.

Of natural powers, some are unlimited, others limited in quantity. By an unlimited
quantity is of course not meant literally, but practically unlimited: a quantity beyond
the use which can in any, or at least in present circumstances, be made of it. Land is,

in some newly settled countries, practically unlimited in quantity: there is more than
can be used by the existing population of the country, or by any accession likely to be
made to it for generations to come. But, even there, land favorably situated with
regard to markets, or means of carriage, is generally limited in quantity: there is not
so much of it as persons would gladly occupy and cultivate, or otherwise turn to use.
In all old countries, land capable of cultivation, land at least of any tolerable fertility,
must be ranked among agents limited in quantity. Coal, metallic ores, and other useful
substances found in the earth, are still more limited than land.

For the present I shall only remark that, so long as the quantity of a natural agent is
practically unlimited, it can not, unless susceptible of artificial monopoly, bear any
value in the market, since no one will give anything for what can be obtained gratis.
But as soon as a limitation becomes practically operative—as soon as there is not so
much of the thing to be had as would be appropriated and used if it could be obtained
for asking—the ownership or use of the natural agent acquires an exchangeable value.

Rich lands in our Western Territories a few years ago could be had practically for the
asking; but now, since railways and an increase of population have brought them nearer to
the markets, they have acquired a distinct exchange value. The value [pg 055] of a
commodity (it may be anticipated) is the quantity of other things for which it can be
exchanged.

When more water-power is wanted in a particular district than there are falls of water
to supply it, persons will give an equivalent for the use of a fall of water. When there
is more land wanted for cultivation than a place possesses, or than it possesses of a
certain quality and certain advantages of situation, land of that quality and situation
may be sold for a price, or let for an annual rent.

§ 2. The Second Requisite of Production, Labor.

It is now our purpose to describe the second requisite of production, labor, and point out
that it can be either direct or indirect. This division and subdivision can be seen from the
classification given below. Under the head of indirect labor are to be arranged all the many
employments subsidiary to the production of any one article, and which, as they furnish
but a small part of labor for the one article (e.g., bread), are subsidiary to the production of
a vast number of other articles; and hence we see the interdependence of one employment
on another, which comes out so conspicuously at the time of a commercial depression.

“We think it little to sit down to a table covered with articles from all quarters of the globe
and from the remotest isles of the sea—with tea from China, coffee from Brazil, spices
from the East, and sugar from the West Indies; knives from Sheffield, made with iron from
Sweden and ivory from Africa; with silver from Mexico and cotton from South Carolina;
all being lighted with oil brought from New Zealand or the Arctic Circle. Still less do we
think of the great number of persons whose united agency is required to bring any one of
these [pg 056] finished products to our homes—of the merchants, insurers, sailors,
ship-builders, cordage and sail makers, astronomical-instrument makers, men of science,
101
and others, before a pound of tea can appear in our market.”

The labor102 which terminates in the production of an article fitted for some human
use is either employed directly about the thing, or in previous operations destined to
facilitate, perhaps essential to the possibility of, the subsequent ones. In making
bread, for example, the labor employed about the thing itself is that of the baker; but
the labor of the miller, though employed directly in the production not of bread but of
flour, is equally part of the aggregate sum of labor by which the bread is produced; as
is also the labor of the sower, and of the reaper. Some may think that all these persons
ought to be considered as employing their labor directly about the thing; the corn, the
flour, and the bread being one substance in three different states. Without disputing
about this question of mere language, there is still the plowman, who prepared the
ground for the seed, and whose labor never came in contact with the substance in any
of its states; and the plow-maker, whose share in the result was still more remote. We
must add yet another kind of labor; that of transporting the produce from the place of
its production to the place of its destined use: the labor of carrying the corn to market,
and from market to the miller's, the flour from the miller's to the baker's, and the
bread from the baker's to the place of its final consumption.

Besides the two classes of indirect laborers here mentioned, those engaged in producing
materials and those in transportation, there are several others who are paid fractions out of
the bread. Subsidiary to the direct labor of the bread-maker is the labor of all those who
make the instruments employed in the process (as, e.g., the oven). Materials are
completely changed in character by one use, as when the coal is burned, or the flour baked
into bread; while an instrument, like an oven, is [pg 057] capable of remaining intact
throughout many operations. The producer of materials and the transporter are paid by the
bread-maker in the price of his coal and flour when left at his door, so that the price of the
loaf is influenced by these payments. Those persons, moreover, who, like the police and
officers of our government, act to protect property and life, are also to be classed as
laborers indirectly aiding in the production of the given article, bread (and by his taxes the
bread-maker helps pay the wages of these officials). Shading off into a more distant,
although essential, connection is another class—that of those laborers who train human
beings in the branches of knowledge necessary to the attainment of proper skill in

managing the processes and instruments of an industry. The acquisition of the rudiments
of education, and, in many cases, the most profound knowledge of chemistry, physics and
recondite studies, are essential to production; and teachers are indirect laborers in
producing almost every article in the market. In this country, especially, are inventors a
class of indirect laborers essential to all ultimate production as it now goes on. The
improvements in the instruments of production are the results of an inventive ability which
has made American machinery known all over the world. They, too, as well as the teacher,
are paid (a small fraction, of course) out of the ultimate result, by an indirect path, and
materially change the ease or difficulty, cheapness or dearness, of production in nearly
every branch of industry. In the particular illustration given they have improved the ovens,
ranges, and stoves, so that the same or better articles are produced at a less cost than
formerly. All these indirect laborers receive, in the way of remuneration, a fraction, some
more, some less (the farther they are removed from the direct process), of the value of the
final result.

§ 3. Of Capital as a Requisite of Production.

But another set of laborers are to be placed in distinct contrast with these, so far as the
grounds on which they receive their remuneration is concerned. These are the men
engaged previously in providing the subsistence, and articles by which the former classes
of labor can carry on their operations.

The previous employment of labor is an indispensable condition to every productive
operation, on any other than the very smallest scale. Except the labor of the hunter
and fisher, there is scarcely any kind of labor to which the returns are immediate.
Productive operations require to be continued a certain time before their fruits are
obtained. Unless the laborer, before commencing his work, possesses a [pg 058] store
of food, or can obtain access to the stores of some one else, in sufficient quantity to
maintain him until the production is completed, he can undertake no labor but such as
can be carried on at odd intervals, concurrently with the pursuit of his subsistence.

The possession of capital is thus a third requisite of production, together with land and
labor, as noted above. Henry George (“Progress and Poverty,” chap. iv) holds an opposite
opinion: “The subsistence of the laborers who built the Pyramids was drawn, not from a
previously hoarded stock” (does he not forget the story of Joseph's store of corn?), “but
from the constantly recurring crops of the Nile Valley.”

He can not obtain food itself in any abundance; for every mode of so obtaining it
requires that there be already food in store. Agriculture only brings forth food after
the lapse of months; and, though the labors of the agriculturist are not necessarily
continuous during the whole period, they must occupy a considerable part of it. Not
only is agriculture impossible without food produced in advance, but there must be a
very great quantity in advance to enable any considerable community to support itself
wholly by agriculture. A country like England or the United States is only able to
carry on the agriculture of the present year because that of past years has provided, in
those countries or somewhere else, sufficient food to support their agricultural
population until the next harvest. They are only enabled to produce so many other
things besides food, because the food which was in store at the close of the last
harvest suffices to maintain not only the agricultural laborers, but a large industrious
population besides.

The claim to remuneration founded on the possession of food, available for the
maintenance of laborers, is of another kind; remuneration for abstinence, not for
labor. If a person has a store of food, he has it in his power to consume it himself in
idleness, or in feeding others to attend on him, or to fight for him, or to sing or dance
for him. If, instead of these things, he gives it to productive laborers to support [pg
059] them during their work, he can, and naturally will, claim a remuneration from
the produce. He will not be content with simple repayment; if he receives merely that,
he is only in the same situation as at first, and has derived no advantage from
delaying to apply his savings to his own benefit or pleasure. He will look for some
equivalent for this forbearance:103 he will expect his advance of food to come back to
him with an increase, called, in the language of business, a profit; and the hope of this
profit will generally have been a part of the inducement which made him accumulate
a stock, by economizing in his own consumption; or, at any rate, which made him
forego the application of it, when accumulated, to his personal ease or satisfaction.

[pg 060]

Chapter II. Of Unproductive Labor.

§ 1. Definition of Productive and Unproductive Labor.

Labor is indispensable to production, but has not always production for its effect.
There is much labor, and of a high order of usefulness, of which production is not the
object. Labor has accordingly been distinguished into Productive and Unproductive.
Productive labor means labor productive of wealth. We are recalled, therefore, to the
question touched upon in our [Preliminary Remarks], what Wealth is.

By Unproductive Labor, on the contrary, will be understood labor which does not
terminate in the creation of material wealth. And all labor, according to our present
definition, must be classed as unproductive, which terminates in a permanent benefit,
however important, provided that an increase of material products forms no part of
that benefit. The labor of saving a friend's life is not productive, unless the friend is a
productive laborer, and produces more than he consumes.

The principle on which the distinction is made is perfectly clear, but in many cases
persons may be misled chiefly in regard to matters of fact. A clergyman may at first sight
be classed as an unproductive laborer; but, until we know the facts, we can not apply the
principle of our definition. Unless we know that no clergyman, by inculcating rules of
morality and self-control, ever caused an idler or wrong-doer to become a steady laborer,
we can not say that a clergyman is a laborer unproductive of material wealth. Likewise the
army, or the officers of our government at Washington, may or may not have aided in
producing material wealth according as they do or do not, in fact, accomplish the
protective purposes for which [pg 061] they exist. So with teachers. There is, however,
no disparagement implied in the word unproductive; it is merely an economic question,
and has to do only with forces affecting the production of wealth.

Unproductive may be as useful as productive labor; it may be more useful, even in
point of permanent advantage; or its use may consist only in pleasurable sensation,
which when gone leaves no trace; or it may not afford even this, but may be absolute
waste. In any case, society or mankind grow no richer by it, but poorer. All material
products consumed by any one while he produces nothing are so much subtracted, for
the time, from the material products which society would otherwise have possessed.

To be wasted, however, is a liability not confined to unproductive labor. Productive
labor may equally be waste, if more of it is expended than really conduces to
production. If defect of skill in laborers, or of judgment in those who direct them,
causes a misapplication of productive industry, labor is wasted. Productive labor may
render a nation poorer, if the wealth it produces, that is, the increase it makes in the
stock of useful or agreeable things, be of a kind not immediately wanted: as when a
commodity is unsalable, because produced in a quantity beyond the present demand;
or when speculators build docks and warehouses before there is any trade.

§ 2. Productive and Unproductive Consumption.

The distinction of Productive and Unproductive is applicable to Consumption as well
as to Labor. All the members of the community are not laborers, but all are
consumers, and consume either unproductively or productively. Whoever contributes
nothing directly or indirectly to production is an unproductive consumer. The only
productive consumers are productive laborers; the labor of direction being of course
included, as well as that of execution. But the consumption even of productive
laborers is not all of it Productive Consumption. There is unproductive consumption
by productive consumers. What they consume in keeping up or improving their
health, strength, and capacities [pg 062] of work, or in rearing other productive
laborers to succeed them, is Productive Consumption. But consumption on pleasures
or luxuries, whether by the idle or by the industrious, since production is neither its
object nor is in any way advanced by it, must be reckoned Unproductive: with a
reservation, perhaps, of a certain quantum of enjoyment which may be classed among
necessaries, since anything short of it would not be consistent with the greatest
efficiency of labor. That alone is productive consumption which goes to maintain and
increase the productive powers of the community; either those residing in its soil, in
its materials, in the number and efficiency of its instruments of production, or in its
people.

I grant that no labor really tends to the enrichment of society, which is employed in
producing things for the use of unproductive consumers. The tailor who makes a coat
for a man who produces nothing is a productive laborer; but in a few weeks or
months the coat is worn out, while the wearer has not produced anything to replace it,
and the community is then no richer by the labor of the tailor than if the same sum
had been paid for a stall at the opera. Nevertheless, society has been richer by the
labor while the coat lasted. These things also [such as lace and pine-apples] are
wealth until they have been consumed.

§ 3. Distinction Between Labor for the Supply of Productive Consumption
and Labor for the Supply of Unproductive Consumption.

We see, however, by this, that there is a distinction more important to the wealth of a
community than even that between productive and unproductive labor; the
distinction, namely, between labor for the supply of productive, and for the supply of
unproductive, consumption; between labor employed in keeping up or in adding to
the productive resources of the country, and that which is employed otherwise. Of the
produce of the country, a part only is destined to be consumed productively; the
remainder supplies the unproductive consumption of producers, and the entire
consumption of the unproductive class. Suppose that the proportion of the annual
produce applied to the first purpose amounts to half; then one half the productive
laborers of the country [pg 063] are all that are employed in the operations on which
the permanent wealth of the country depends. The other half are occupied from year
to year and from generation to generation in producing things which are consumed
and disappear without return; and whatever this half consume is as completely lost, as
to any permanent effect on the national resources, as if it were consumed
unproductively. Suppose that this second half of the laboring population ceased to
work, and that the government maintained them in idleness for a whole year: the first
half would suffice to produce, as they had done before, their own necessaries and the
necessaries of the second half, and to keep the stock of materials and implements
undiminished: the unproductive classes, indeed, would be either starved or obliged to
produce their own subsistence, and the whole community would be reduced during a
year to bare necessaries; but the sources of production would be unimpaired, and the
next year there would not necessarily be a smaller produce than if no such interval of
inactivity had occurred; while if the case had been reversed, if the first half of the
laborers had suspended their accustomed occupations, and the second half had
continued theirs, the country at the end of the twelvemonth would have been entirely
impoverished. It would be a great error to regret the large proportion of the annual
produce, which in an opulent country goes to supply unproductive consumption. That
so great a surplus should be available for such purposes, and that it should be applied
to them, can only be a subject of congratulation.

This principle may be seen by the following classification:

(A) Idlers; or unproductive laborers—e.g., actors.
(B) Productive laborers—e.g., farmers.
(C) Producing wealth for productive consumption, one half the annual produce.
(D) Producing wealth for unproductive consumption (A), one half the annual
produce.

[pg 064]
Group D are productive laborers, and their own necessaries are productively
consumed, but they are supplied by C, who keep themselves and D in existence. So
long as C work, both C and D can go on producing. If D stopped working, they could
be still subsisted as before by C; but A would be forced to produce for themselves.
But, if C stopped working, D and C would be left without the necessaries of life, and
would be obliged to cease their usual work. In this way it may be seen how much
more important to the increase of material wealth C are than D, who labor “for the
supply of unproductive consumption.” Of course, group D are desirable on other than
economic grounds, because their labor represents what can be enjoyed beyond the
necessities of life.

[pg 065]

Chapter III. Of Capital.

§ 1. Capital is Wealth Appropriated to Reproductive Employment.

It has been seen in the preceding chapters that besides the primary and universal
requisites of production, labor and natural agents, there is another requisite without
which no productive operations beyond the rude and scanty beginnings of primitive
industry are possible—namely, a stock, previously accumulated, of the products of
former labor. This accumulated stock of the produce of labor is termed Capital. What
capital does for production is, to afford the shelter, protection, tools, and materials
which the work requires, and to feed and otherwise maintain the laborers during the
process. These are the services which present labor requires from past, and from the
produce of past, labor. Whatever things are destined for this use—destined to supply
productive labor with these various prerequisites—are Capital.

Professor Fawcett, “Manual” (chap. ii), says: “Since the laborer must be fed by previously
accumulated food, ... some of the results of past labor are required to be set aside to
sustain the laborer while producing. The third requisite of production, therefore, is a fund
reserved from consumption, and devoted to sustain those engaged in future production....
Capital is not confined to the food which feeds the laborers, but includes machinery,
buildings, and, in fact, every product due to man's labor which can be applied to assist his
industry” (chap. iv). General Walker (“Political Economy,” pages 68-70) defines capital as
that portion of wealth (excluding unimproved land and natural agents) which is employed
in the production of new forms of wealth. Henry George (“Progress and Poverty,” page
41) returns to Adam Smith's definition: [pg 066] “That part of a man's stock which he
expects to yield him a revenue is called his capital.” Cherbuliez (“Précis,” page 70) points
out the increasing interdependence of industrial operations as society increases in wealth,
and that there is not a single industry which does not demand the use of products obtained
by previous labor. “These auxiliary products accumulated with a view to the production to
which they are subservient” form what is called capital. Carey (“Social Science,” iii, page
48) regards as capital all things which in any way form the machinery by which society
obtains wealth. Roscher's definition is, “Every product laid by for purposes of further
104
production.” (“Political Economy,” section 42.) By some, labor is regarded as capital.

A manufacturer, for example, has one part of his capital in the form of buildings,
fitted and destined for carrying on this branch of manufacture. Another part he has in
the form of machinery. A third consists, if he be a spinner, of raw cotton, flax, or
wool; if a weaver, of flaxen, woolen, silk, or cotton thread; and the like, according to
the nature of the manufacture. Food and clothing for his operatives it is not the
custom of the present age that he should directly provide; and few capitalists, except
the producers of food or clothing, have any portion worth mentioning of their capital
in that shape. Instead of this, each capitalist has money, which he pays to his work-
people, and so enables them to supply themselves. What, then, is his capital?
Precisely that part of his possessions, whatever it be, which he designs to employ in
carrying on fresh production. It is of no consequence that a part, or even the whole of
it, is in a form in which it can not directly supply the wants of laborers.

Care should be taken to distinguish between wealth, capital, and money. Capital may be
succinctly defined as saved wealth devoted to reproduction, and the relations of the three
terms mentioned may be illustrated by the following figure: The area of the circle, A,
represents the wealth of a country; the area of the inscribed circle, B, the quantity out of
the whole wealth which is saved and devoted to reproduction and called capital. But
money is only one part of capital, as shown by the area of circle C. Wherefore, it can be
plainly [pg 067] seen that not all capital, B, is money; that not all wealth, A, is capital,
although all capital is necessarily wealth as included within it. It is not always understood
that money is merely a convenient article by which other forms of wealth are exchanged
against each other, and that a man may have capital without ever having any actual money
in his possession. In times of commercial depression, that which is capital to-day may not
to-morrow satisfy any desires (i.e., not be in demand), and so for the time it may, so to
speak, drop entirely out of our circles above. For the moment, not having an exchange
value, it can not be wealth, and so can the less be capital.

Suppose, for instance, that the capitalist is a hardware manufacturer, and that his
stock in trade, over and above his machinery, consists at present wholly in iron goods.
Iron goods can not feed laborers. Nevertheless, by a mere change of the destination of
the iron goods, he can cause laborers to be fed. Suppose that [the capitalist changed
into wages what he had before spent] in buying plate and jewels; and, in order to
render the effect perceptible, let us suppose that the change takes place on a
considerable scale, and that a large sum is diverted from buying plate and jewels to
employing productive laborers, whom we shall suppose to have been previously, like
the Irish peasantry, only half employed and half fed. The laborers, on receiving their
increased wages, will not lay them out in plate and jewels, but in food. There is not,
however, additional food in the country; nor any unproductive laborers or animals, as
in the former case, whose food is set free for productive purposes. Food will therefore
be imported if possible; if not possible, the laborers will remain for a season on their
short allowance: but the consequence of this change in the demand for commodities,
occasioned by the change in the expenditure of capitalists from unproductive to
productive, is that next year more food will be produced, and less plate and jewelry.
So that again, without having had anything to do with the food of [pg 068] the
laborers directly, the conversion by individuals of a portion of their property, no
matter of what sort, from an unproductive destination to a productive, has had the
effect of causing more food to be appropriated to the consumption of productive
laborers. The distinction, then, between Capital and Not-capital, does not lie in the
kind of commodities, but in the mind of the capitalist—in his will to employ them for

one purpose rather than another; and all property, however ill adapted in itself for the
use of laborers, is a part of capital, so soon as it, or the value to be received from it, is
set apart for productive reinvestment.

§ 2. More Capital Devoted to Production than Actually Employed in it.

As whatever of the produce of the country is devoted to production is capital, so,
conversely, the whole of the capital of the country is devoted to production. This
second proposition, however, must be taken with some limitations and explanations.
(1) A fund may be seeking for productive employment, and find none adapted to the
inclinations of its possessor: it then is capital still, but unemployed capital. (2) Or the
stock may consist of unsold goods, not susceptible of direct application to productive
uses, and not, at the moment, marketable: these, until sold, are in the condition of
unemployed capital.

This is not an important distinction. The goods are doubtless marketable at some price, if
offered low enough. If no one wants them, then, by definition, they are not wealth so long
as that condition exists.

(3) [Or] suppose that the Government lays a tax on the production in one of its earlier
stages, as, for instance, by taxing the material. The manufacturer has to advance the
tax, before commencing the manufacture, and is therefore under a necessity of having
a larger accumulated fund than is required for, or is actually employed in, the
production which he carries on. He must have a larger capital to maintain the same
quantity of productive labor; or (what is equivalent) with a given capital he maintains
less labor. (4) For another example: a farmer may enter on his farm at such a time of
the year that he may be required to pay one, two, or even [pg 069] three quarters' rent
before obtaining any return from the produce. This, therefore, must be paid out of his
capital.

(5) Finally, that large portion of the productive capital of a country which is employed
in paying the wages and salaries of laborers, evidently is not, all of it, strictly and
indispensably necessary for production. As much of it as exceeds the actual
necessaries of life and health (an excess which in the case of skilled laborers is
usually considerable) is not expended in supporting labor, but in remunerating it, and
the laborers could wait for this part of their remuneration until the production is
completed.

The previous accumulation of commodities requisite for production must inevitably be
large enough to cover necessaries, but need not be more, if the laborer is willing to wait
for the additional amount of his wages (the amount of his unproductive consumption) until
the completion of the industrial operation. In fact, however, the accumulation must be
sufficient to pay the laborer all his wages from week to week, by force of custom
(wherever there is any considerable division of labor), and also sufficient to purchase tools
and materials. The various elements of capital are materials, instruments, and subsistence,
giving “instruments” its wide signification which includes money (the tool of exchange),
and other necessary appliances of each special kind of production.

In truth, it is only after an abundant capital had already been accumulated that the
practice of paying in advance any remuneration of labor beyond a bare subsistence
could possibly have arisen: since whatever is so paid is not really applied to
production, but to the unproductive consumption of productive laborers, indicating a
fund for production sufficiently ample to admit of habitually diverting a part of it to a
mere convenience.

It will be observed that I have assumed that the laborers are always subsisted from
capital:105 and this is obviously the fact, though the capital need not necessarily be
furnished by a person called a capitalist.

[pg 070]
The peasant does not subsist this year on the produce of this year's harvest, but on that
of the last. The artisan is not living on the proceeds of the work he has in hand, but on
those of work previously executed and disposed of. Each is supported by a small
capital of his own, which he periodically replaces from the produce of his labor. The
large capitalist is, in like manner, maintained from funds provided in advance.

§ 3. Examination of Cases Illustrative of the Idea of Capital.

That which is virtually capital to the individual is or is not capital to the nation,
according as the fund which by the supposition he has not dissipated has or has not
been dissipated by somebody else.

Let the reader consider, in the four following suppositions, whether or not the given
capital has wholly dropped out of the circle in the diagram, page 67. In (3) and (4) the
wealth is entirely dissipated; as it can not longer be in circle A, it can not, of course, be in
circle B.

(1.) For example, let property of the value of ten thousand pounds, belonging to A, be
lent to B, a farmer or manufacturer, and employed profitably in B's occupation. It is
as much capital as if it belonged to B. A is really a farmer or manufacturer, not
personally, but in respect of his property. Capital worth ten thousand pounds is
employed in production—in maintaining laborers and providing tools and materials—
which capital belongs to A, while B takes the trouble of employing it, and receives for
his remuneration the difference between the profit which it yields and the interest he
pays to A. This is the simplest case.

(2.) Suppose next that A's ten thousand pounds, instead of being lent to B, are lent on
mortgage to C, a landed proprietor, by whom they are employed in improving the
productive powers of his estate, by fencing, draining, road-making, or permanent
manures. This is productive employment. The ten thousand pounds are sunk, but not
[pg 071] dissipated. They yield a permanent return; the land now affords an increase
of produce, sufficient in a few years, if the outlay has been judicious, to replace the
amount, and in time to multiply it manifold. Here, then, is a value of ten thousand
pounds, employed in increasing the produce of the country. This constitutes a capital,
for which C, if he lets his land, receives the returns in the nominal form of increased
rent; and the mortgage entitles A to receive from these returns, in the shape of
interest, such annual sum as has been agreed on.

(3.) Suppose, however, that C, the borrowing landlord, is a spendthrift, who burdens
his land not to increase his fortune but to squander it, expending the amount in
equipages and entertainments. In a year or two it is dissipated, and without return. A
is as rich as before; he has no longer his ten thousand pounds, but he has a lien on the
land, which he could still sell for that amount. C, however, is ten thousand pounds
poorer than formerly; and nobody is richer. It may be said that those are richer who
have made profit out of the money while it was being spent. No doubt if C lost it by
gaming, or was cheated of it by his servants, that is a mere transfer, not a destruction,
and those who have gained the amount may employ it productively. But if C has
received the fair value for his expenditure in articles of subsistence or luxury, which
he has consumed on himself, or by means of his servants or guests, these articles have
ceased to exist, and nothing has been produced to replace them: while if the same
sum had been employed in farming or manufacturing, the consumption which would
have taken place would have been more than balanced at the end of the year by new
products, created by the labor of those who would in that case have been the
consumers. By C's prodigality, that which would have been consumed with a return is
consumed without return. C's tradesmen may have made a profit during the process;
but, if the capital had been expended productively, an equivalent profit would have
been made by builders, fencers, tool-makers, and the tradespeople [pg 072] who
supply the consumption of the laboring-classes; while, at the expiration of the time
(to say nothing of an increase), C would have had the ten thousand pounds or its

value replaced to him, which now he has not. There is, therefore, on the general
result, a difference, to the disadvantage of the community, of at least ten thousand
pounds, being the amount of C's unproductive expenditure. To A, the difference is not
material, since his income is secured to him, and while the security is good, and the
market rate of interest the same, he can always sell the mortgage at its original value.
To A, therefore, the lien of ten thousand pounds on C's estate is virtually a capital of
that amount; but is it so in reference to the community? It is not. A had a capital of ten
thousand pounds, but this has been extinguished—dissipated and destroyed by C's
prodigality. A now receives his income, not from the produce of his capital, but from
some other source of income belonging to C, probably from the rent of his land, that
is, from payments made to him by farmers out of the produce of their capital.

(4.) Let us now vary the hypothesis still further, and suppose that the money is
borrowed, not by a landlord, but by the state. A lends his capital to Government to
carry on a war: he buys from the state what are called government securities; that is,
obligations on the Government to pay a certain annual income. If the Government
employed the money in making a railroad, this might be a productive employment,
and A's property would still be used as capital; but since it is employed in war, that is,
in the pay of officers and soldiers who produce nothing, and in destroying a quantity
of gunpowder and bullets without return, the Government is in the situation of C, the
spendthrift landlord, and A's ten thousand pounds are so much national capital which
once existed, but exists no longer—virtually thrown into the sea, as wealth or
production is concerned; though for other reasons the employment of it may have
been justifiable. A's subsequent income is derived, not from the produce of his own
capital, but from taxes drawn from the produce [pg 073] of the remaining capital of
the community; to whom his capital is not yielding any return, to indemnify them for
the payment; it is all lost and gone, and what he now possesses is a claim on the
returns to other people's capital and industry.

The breach in the capital of the country was made when the Government spent A's
money: whereby a value of ten thousand pounds was withdrawn or withheld from
productive employment, placed in the fund for unproductive consumption, and
destroyed without equivalent.

The United States had borrowed in the late civil war, by August 31, 1865, $2,845,907,626;
and, to June 30, 1881, the Government had paid in interest on its bonds, “from taxes
drawn from the produce of the remaining capital,” $1,270,596,784, as an income to
bondholders. From this can be seen the enormous waste of wealth to the United States
during the war, and consequently the less existing capital to-day in this country; since,
under the same inducements to save, the smaller the outside circle (wealth), the less the
inside circle (capital) must be.

[pg 074]

Chapter IV. Fundamental Propositions Respecting Capital.

§ 1. Industry is Limited by Capital.

The first of these propositions is, that industry is limited by capital. To employ labor
in a manufacture is to invest capital in the manufacture. This implies that industry can
not be employed to any greater extent than there is capital to invest. The proposition,
indeed, must be assented to as soon as it is distinctly apprehended. The expression
“applying capital” is of course metaphorical: what is really applied is labor; capital
being an indispensable condition. The food of laborers and the materials of
production have no productive power; but labor can not exert its productive power
unless provided with them. There can be no more industry than is supplied with
materials to work up and food to eat. Self-evident as the thing is, it is often forgotten
that the people of a country are maintained and have their wants supplied, not by the
produce of present labor, but of past.

Therefore, as capital increases, more labor can be employed. When the Pittsburg rioters, in
1877, destroyed property, or the product of past labor, they did not realize then that that
property might, but now could never again, be employed for productive purposes, and
thereby support laborers.

They consume what has been produced, not what is about to be produced. Now, of
what has been produced, a part only is allotted to the support of productive labor; and
there will not and can not be more of that labor than the portion [pg 075] so allotted
(which is the capital of the country) can feed, and provide with the materials and
instruments of production.

Because industry is limited by capital, we are not, however, to infer that it always
reaches that limit. There may not be as many laborers obtainable as the capital would
maintain and employ. This has been known to occur in new colonies, where capital
has sometimes perished uselessly for want of labor.

In the farming districts of our Middle and Western States, in harvest-time, crops have been
often of late years ruined because farm-hands could not be obtained. In earlier days,

President John Adams was unable to hire a man in Washington to cut wood in the
surrounding forests with which to warm the White House.

The unproductive consumption of productive laborers, the whole of which is now
supplied by capital, might cease, or be postponed, until the produce came in; and
additional productive laborers might be maintained with the amount.

[Governments] can create capital. They may lay on taxes, and employ the amount
productively. They may do what is nearly equivalent: they may lay taxes on income
or expenditure, and apply the proceeds toward paying off the public debts. The fund-
holder, when paid off, would still desire to draw an income from his property, most of
which, therefore, would find its way into productive employment, while a great part
of it would have been drawn from the fund for unproductive expenditure, since
people do not wholly pay their taxes from what they would have saved, but partly, if
not chiefly, from what they would have spent.

§ 2. Increase of Capital gives Increased Employment to Labor, Without
Assignable Bounds.

While, on the one hand, industry is limited by capital, so, on the other, every increase
of capital gives, or is capable of giving, additional employment to industry; and this
without assignable limit. I do not mean to deny that the capital, or part of it, may be
so employed as not to support laborers, being fixed in machinery, buildings,
improvement of land, and the like. In any large increase of capital a considerable
portion will generally be thus employed, and will only co-operate with laborers, not
maintain them.

[pg 076]

It will be remembered, however, that subsistence is but one part or element of capital; that
instruments and materials form a large part of capital. But still the question of mere
maintenance is rightfully discussed, because it is asserted to-day that, while the rich are
growing richer, the poor lack even the food to keep them alive; and throughout this
discussion Mr. Mill has in view the fact that laborers may exist in the community either
“half fed or unemployed.”

What I do intend to assert is, that the portion which is destined to their maintenance
may (supposing no alteration in anything else) be indefinitely increased, without
creating an impossibility of finding the employment: in other words, that if there are
human beings capable of work, and food to feed them, they may always be employed
in producing something. It is very much opposed to common doctrines.106 There is not
an opinion more general among mankind than this, that the unproductive expenditure
of the rich is necessary to the employment of the poor.

It is to be noticed that, in fact, after the arts have so far advanced in a community that
mankind can obtain by their exertion more than the amount of the mere necessaries of life
sufficient on the average for the subsistence of all, any further production rendered
possible to the human race by new discoveries and processes is naturally unproductively
consumed, and that consequently a demand for labor for unproductive consumption is
essential for the employment of all existing laborers. This, however, can be done, because
enough capital has been brought into existence to create the demand for the labor. Yet it is
clear that it is not expenditure, but capital, by which employment is given to the poor.

Suppose that every capitalist came to be of opinion that, not being more meritorious
than a well-conducted laborer, he ought not to fare better; and accordingly laid by,
from conscientious motives, the surplus of his profits; unproductive expenditure is
now reduced to its lowest limit: and it is asked, How is the increased capital to find
employment? [pg 077] Who is to buy the goods which it will produce? There are no
longer customers even for those which were produced before. The goods, therefore (it
is said), will remain unsold; they will perish in the warehouses, until capital is
brought down to what it was originally, or rather to as much less as the demand of the
customers has lessened. But this is seeing only one half of the matter. In the case
supposed, there would no longer be any demand for luxuries on the part of capitalists
and land-owners. But, when these classes turn their income into capital, they do not
thereby annihilate their power of consumption; they do but transfer it from
themselves to the laborers to whom they give employment. Now, there are two
possible suppositions in regard to the laborers: either there is, or there is not, an
increase of their numbers proportional to the increase of capital. (1.) If there is, the
case offers no difficulty. The production of necessaries for the new population takes
the place of the production of luxuries for a portion of the old, and supplies exactly
the amount of employment which has been lost. (2.) But suppose that there is no
increase of population. The whole of what was previously expended in luxuries, by
capitalists and landlords, is distributed among the existing laborers, in the form of
additional wages. We will assume them to be already sufficiently supplied with
necessaries.

What follows? That the laborers become consumers of luxuries; and the capital
previously employed in the production of luxuries is still able to employ itself in the
same manner; the difference being, that the luxuries are shared among the community
generally, instead of being confined to a few, supposing that the power of their labor
were physically sufficient to produce all this amount of indulgences for their whole
number. Thus the limit of wealth is never deficiency of consumers, but of producers
and productive power. Every addition to capital gives to labor either additional
employment or additional remuneration.

That laborers should get more (a) by capitalists abstaining from unproductive expenditure
than (b) by expenditure [pg 078] in articles unproductively consumed is a question
difficult for many to comprehend, and needs all the elucidation possible. To start with, no
one ever knew of a community all of whose wants were satisfied: in fact, civilization is
constantly leading us into new fields of enjoyment, and results in a constant differentiation
of new desires. To satisfy these wants is the spring to nearly all production and industry.
There can, therefore, be no stop to production arising from lack of desire for commodities.
“The limit of wealth is never deficiency of consumers,” but of productive power.

Now, in supposition (2) of the text, remember that the laborers are supposed not to be
employed up to their full productive power. If all capitalists abstain from unproductive
consumption, and devote that amount of wealth to production, then, since there can be no
production without labor, the same number of laborers have offered to them in the
aggregate a larger sum of articles for their exertions, which is equivalent to saying they
receive additional wages.

But some persons want to see the process in the concrete, and the same principle may be
illustrated by a practical case. It is supposed that all laborers have the necessaries of life
only, but none of the comforts, decencies, and luxuries. Let A be a farmer in New York,
who can also weave carpets, and B a lumberman in Maine. A begins to want a better
house, and B wishes a carpet, both having food, clothing, and shelter. One of the
capitalists abstaining from unproductive consumption, as above, is X, who, knowing the
two desires of A and B, presents himself as a middle-man (i.e., he gives a market for both
men, as is found in every center of trade, as well as in a country store), furnishing A the
tools, materials, etc., and giving him the promise of lumber if he will create the carpet, and
promising B the carpet if he will likewise produce the additional lumber. To be more
matter of fact, X buys the carpet of A, and sells it to B for the lumber. Thus two new
articles have been created, and for their exertions A has received additional wages (either
in the form of lumber, or of the money paid him for the carpet), and B has received
additional wages (either in the form of a carpet, or the money paid him by X for the
lumber). If A and B are regarded as typifying all the laborers, and X all the above
capitalists, in the multiplicity of actual exchanges, it will be seen that A and B are creating
new articles to satisfy their own demand, instead of meeting the demands of X. If their

primary wants are already supplied, then they take their additional wages in the form of
comforts and decencies. When Class X forego their consumption, but add that amount to
capital, they do not give up their title to that capital, but they transfer the use of [pg
079] it, or their consuming power, to others for the time being. This question will be
more fully discussed in § 6.

§ 3. Capital is the result of Saving, and all Capital is Consumed.

A second fundamental theorem respecting capital relates to the source from which it
is derived. It is the result of saving.

If all persons were to expend in personal indulgences all that they produce, and all the
income that they receive from what is produced by others, capital could not increase.
Some saving, therefore, there must have been, even in the simplest of all states of
economical relations; people must have produced more than they used, or used less
than they produced. Still more must they do so before they can employ other laborers,
or increase their production beyond what can be accomplished by the work of their
own hands. If it were said, for instance, that the only way to accelerate the increase of
capital is by increase of saving, the idea would probably be suggested of greater
abstinence and increased privation. But it is obvious that whatever increases the
productive power of labor, creates an additional fund to make savings from, and
enables capital to be enlarged, not only without additional privation, but concurrently
with an increase of personal consumption. Nevertheless, there is here an increase of
saving, in the scientific sense. Though there is more consumed, there is also more
spared. There is a greater excess of production over consumption. To consume less
than is produced is saving; and that is the process by which capital is increased; not
necessarily by consuming less, absolutely.

The economic idea of saving involves, of course, the intention of using the wealth in
reproduction. Saving, without this meaning, results only in hoarding of wealth, and while
hoarded this amount is not capital. To explain the process by which capital comes into
existence, Bastiat has given the well-known illustration of the plane in his “Sophisms of
107
Protection.”

A fundamental theorem respecting capital, closely connected with the one last
discussed, is, that although saved, [pg 080] and the result of saving, it is nevertheless
consumed. The word saving does not imply that what is saved is not consumed, nor
even necessarily that its consumption is deferred; but only that, if consumed

immediately, it is not consumed by the person who saves it. If merely laid by for
future use, it is said to be hoarded; and, while hoarded, is not consumed at all. But, if
employed as capital, it is all consumed, though not by the capitalist. Part is exchanged
for tools or machinery, which are worn out by use; part for seed or materials, which
are destroyed as such by being sown or wrought up, and destroyed altogether by the
consumption of the ultimate product. The remainder is paid in wages to productive
laborers, who consume it for their daily wants; or if they in their turn save any part,
this also is not, generally speaking, hoarded, but (through savings-banks, benefit
clubs, or some other channel) re-employed as capital, and consumed. To the vulgar, it
is not at all apparent that what is saved is consumed. To them, every one who saves
appears in the light of a person who hoards. The person who expends his fortune in
unproductive consumption is looked upon as diffusing benefits all around, and is an
object of so much favor, that some portion of the same popularity attaches even to
him who spends what does not belong to him; who not only destroys his own capital,
if he ever had any, but, under pretense of borrowing, and on promise of repayment,
possesses himself of capital belonging to others, and destroys that likewise.

This popular error comes from attending to a small portion only of the consequences
that flow from the saving or the spending; all the effects of either, which are out of
sight, being out of mind. There is, in the one case, a wearing out of tools, a
destruction of material, and a quantity of food and clothing supplied to laborers,
which they destroy by use; in the other case, there is a consumption, that is to say, a
destruction, of wines, equipages, and furniture. Thus far, the consequence to the
national wealth has been much the same; an equivalent quantity of it has been
destroyed in [pg 081] both cases. But in the spending, this first stage is also the final
stage; that particular amount of the produce of labor has disappeared, and there is
nothing left; while, on the contrary, the saving person, during the whole time that the
destruction was going on, has had laborers at work repairing it; who are ultimately
found to have replaced, with an increase, the equivalent of what has been consumed.

Almost all expenditure being carried on by means of money, the money comes to be
looked upon as the main feature in the transaction; and since that does not perish, but
only changes hands, people overlook the destruction which takes place in the case of
unproductive expenditure. The money being merely transferred, they think the wealth
also has only been handed over from the spendthrift to other people. But this is
simply confounding money with wealth. The wealth which has been destroyed was
not the money, but the wines, equipages, and furniture which the money purchased;
and, these having been destroyed without return, society collectively is poorer by the
amount. In proportion as any class is improvident or luxurious, the industry of the
country takes the direction of producing luxuries for their use; while not only the
employment for productive laborers is diminished, but the subsistence and

instruments which are the means of such employment do actually exist in smaller
quantity.

§ 4. Capital is kept up by Perpetual Reproduction, as shown by the
Recovery of Countries from Devastation.

To return to our fundamental theorem. Everything which is produced is consumed—
both what is saved and what is said to be spent—and the former quite as rapidly as
the latter. All the ordinary forms of language tend to disguise this. When people talk
of the ancient wealth of a country, of riches inherited from ancestors, and similar
expressions, the idea suggested is, that the riches so transmitted were produced long
ago, at the time when they are said to have been first acquired, and that no portion of
the capital of the country was produced this year, except as much as may have been
this year added to the total amount. The fact is far otherwise. The greater part, in
value, of the [pg 082] wealth now existing [in the United States] has been produced
by human hands within the last twelve months.

“In the State of Massachusetts it is estimated that the capital, on the average, belonging to
each individual does not exceed $600, and that the average annual product per capita is
108
about $200; so that the total capital is the product of only two or three years' labor.”

The land subsists, and the land is almost the only thing that subsists. Everything
which is produced perishes, and most things very quickly. Most kinds of capital are
not fitted by their nature to be long preserved. Westminster Abbey has lasted many
centuries, with occasional repairs; some Grecian sculptures have existed above two
thousand years; the Pyramids perhaps double or treble that time. But these were
objects devoted to unproductive use. Capital is kept in existence from age to age not
by preservation, but by perpetual reproduction; every part of it is used and destroyed,
generally very soon after it is produced, but those who consume it are employed
meanwhile in producing more. The growth of capital is similar to the growth of
population. Every individual who is born, dies, but in each year the number born
exceeds the number who die; the population, therefore, always increases, though not
one person of those composing it was alive until a very recent date.

This perpetual consumption and reproduction of capital afford the explanation of
what has so often excited wonder, the great rapidity with which countries recover
from a state of devastation. The possibility of a rapid repair of their disasters mainly
depends on whether the country has been depopulated. If its effective population have

not been extirpated at the time, and are not starved afterward, then, with the same
skill and knowledge which they had before, with their land and its permanent
improvements undestroyed, and the more durable buildings probably unimpaired, or
only partially injured, they have nearly all the requisites for their [pg 083] former
amount of production. If there is as much of food left to them, or of valuables to buy
food, as enables them by any amount of privation to remain alive and in working
condition, they will, in a short time, have raised as great a produce, and acquired
collectively as great wealth and as great a capital, as before, by the mere continuance
of that ordinary amount of exertion which they are accustomed to employ in their
occupations. Nor does this evince any strength in the principle of saving, in the
popular sense of the term, since what takes place is not intentional abstinence, but
involuntary privation.

The world has at any given period the power, under existing conditions of production and
skill, to create a certain amount of wealth, as represented by the inner rectangle, W. Each
increased power of production arising from conquests over Nature's forces, as the use of
steam and labor-saving machinery, permits the total wealth to be enlarged, as, in the
figure, to rectangle W'. For the production of wealth are required labor, capital, and land;
therefore, if the labor and land are not destroyed by war, there need not necessarily be in
existence all the previous capital. If there are the necessaries for all, and only sufficient
tools to accomplish the work, they will, in a few years, again recreate all the wealth that
formerly existed, regain the same position as before, and go on slowly increasing the total
wealth just as fast as improvements in the arts of production render it possible.

§ 5. Effects of Defraying Government Expenditure by Loans.

[An application of this truth has been made to the question of raising government
supplies for war purposes.] Loans, being drawn from capital (in lieu of taxes, which
would generally have been paid from income, and made up in part or altogether by
increased economy), must, according to the principles we have laid down, tend to
impoverish the country: yet the years in which expenditure of this sort has been on
the greatest scale have often been years of great apparent prosperity: the wealth and
resources of the country, instead of diminishing, have given every sign of [pg 084]
rapid increase during the process, and of greatly expanded dimensions after its close.

During our civil war, at the same time that wealth was being destroyed on an enormous
scale, there was a very general feeling that trade was good, and large fortunes were made.
At the close of the war a period of speculation and overtrading continued until it was
brought to a disastrous close by the panic of 1873. Much of this speculation, however, was
due to an inflated paper currency.

We will suppose the most unfavorable case possible: that the whole amount borrowed
and destroyed by the Government was abstracted by the lender from a productive
employment in which it had actually been invested. The capital, therefore, of the
country, is this year diminished by so much. But, unless the amount abstracted is
something enormous, there is no reason in the nature of the case why next year the
national capital should not be as great as ever. The loan can not have been taken from
that portion of the capital of the country which consists of tools, machinery, and
buildings. It must have been wholly drawn from the portion employed in paying
laborers: and the laborers will suffer accordingly. But if none of them are starved, if
their wages can bear such an amount of reduction, or if charity interposes between
them and absolute destitution, there is no reason that their labor should produce less
in the next year than in the year before. If they produce as much as usual, having been
paid less by so many millions sterling, these millions are gained by their employers.
The breach made in the capital of the country is thus instantly repaired, but repaired
by the privations and often the real misery of the laboring-class.

As Mr. Mill points out, during the Napoleonic wars, in France the withdrawal of laborers
from industry into the army was so large that it caused a rise of wages, and a fall in the
profits of capital; while in England, inasmuch as capital, rather than men, was sent to the
Continent in the war, the very reverse took place: the diversion of “hundreds of millions of
capital from productive employment” caused a fall of wages, [pg 085] and the
prosperity of the capitalist class, while the permanent productive resources did not fall off.

This leads to the vexed question to which Dr. Chalmers has very particularly
adverted: whether the funds required by a government for extraordinary unproductive
expenditure are best raised by loans, the interest only being provided by taxes, or
whether taxes should be at once laid on to the whole amount; which is called, in the
financial vocabulary, raising the whole of the supplies within the year. Dr. Chalmers
is strongly for the latter method. He says the common notion is that, in calling for the
whole amount in one year, you require what is either impossible, or very
inconvenient; that the people can not, without great hardship, pay the whole at once
out of their yearly income; and that it is much better to require of them a small
payment every year in the shape of interest, than so great a sacrifice once for all. To
which his answer is, that the sacrifice is made equally in either case. Whatever is
spent can not but be drawn from yearly income. The whole and every part of the
wealth produced in the country forms, or helps to form, the yearly income of
somebody. The privation which it is supposed must result from taking the amount in
the shape of taxes is not avoided by taking it in a loan. The suffering is not averted,
but only thrown upon the laboring-classes, the least able, and who least ought, to bear
it: while all the inconveniences, physical, moral, and political, produced by
maintaining taxes for the perpetual payment of the interest, are incurred in pure loss.
Whenever capital is withdrawn from production, or from the fund destined for
production, to be lent to the state and expended unproductively, that whole sum is
withheld from the laboring-classes: the loan, therefore, is in truth paid off the same
year; the whole of the sacrifice necessary for paying it off is actually made: only it is
paid to the wrong persons, and therefore does not extinguish the claim; and paid by
the very worst of taxes, a tax exclusively on the laboring-class. And, after having, in
this most painful and unjust of ways, gone through [pg 086] the whole effort
necessary for extinguishing the debt, the country remains charged with it, and with
the payment of its interest in perpetuity.

The United States, for example, borrows capital from A, with which it buys stores from B.
If the loan all comes from within the country, A's capital is borrowed, when the United
States should have taken that amount outright by taxation. When the money is borrowed
of A, the laborers undergo the sacrifice, the title to the whole sum remains in A's hands,
and the claim against the Government by A still exists; while, if the amount were taken by
taxation, the title to the sum raised is in the state, and it is paid to the right person.

The experience of the United States during the civil war is an illustration of this principle.
It is asserted that, as a matter of fact, the total expenses of the war were defrayed by the
Northern States, during the four years of its continuance, out of surplus earnings; and yet
at the close of the conflict a debt of $2,800,000,000 was saddled on the country.

The United States borrowed $2,400,000,000
Revenue during that time 1,700,000,000

Total cost of the war $4,100,000,000

In reality we borrowed only about $1,500,000,000 instead of $2,400,000,000, since (1) the
Government issued paper which depreciated, and yet received it at par in subscriptions for
loans. Moreover, the total cost would have been much reduced had we issued no paper and
(2) thereby not increased the prices of goods to the state, and (3) if no interest account had
been created by borrowing. But could the country have raised the whole sum each year by
taxation? In the first fiscal year after the war the United States paid in war taxes
$650,000,000. At the beginning of the struggle, to June 30, 1862, the expenditure was
$515,000,000, and by June 30, 1863, it had amounted to $1,098,000,000; so that
$600,000,000 of taxes a year would have paid the war expenses, and left us free of debt at
the close.

A confirmatory experience is that of England during the Continental wars, 1793-1817:

Total war expenditures £1,060,000,000
Interest charge on the existing debt 235,000,000
Total amount required £1,295,000,000
Revenue for that period 1,145,000,000
Deficit £150,000,000

To provide for this deficit, the Government actually increased [pg 087] its debt by
£600,000,000. A slight additional exertion would have provided £150,000,000 more of
109
revenue, and saved £450,000,000 to the taxpayers.

The practical state of the case, however, seldom exactly corresponds with this
supposition. The loans of the less wealthy countries are made chiefly with foreign
capital, which would not, perhaps, have been brought in to be invested on any less
security than that of the Government: while those of rich and prosperous countries are
generally made, not with funds withdrawn from productive employment, but with the
new accumulations constantly making from income, and often with a part of them
which, if not so taken, would have migrated to colonies, or sought other investments
abroad.

§ 6. Demand for Commodities is not Demand for Labor.

Mr. Mill's statement of the theorem respecting capital, discussed in the argument that
“demand for commodities is not demand for labor,” needs some simplification. For this
purpose represent by the letters of the alphabet, A, B, C, ... X, Y, Z, the different kinds of

commodities produced in the world which are exchanged against each other in the process
of reaching the consumers. This exchange of commodities for each other, it need hardly be
said, does not increase the number or quantity of commodities already in existence; since
their production, as we have seen, requires labor and capital in connection with natural
agents. Mere exchange does not alter the quantity of commodities produced.

To produce a plow, for example, the maker must have capital (in the form of subsistence,
tools, and materials) of which some one has foregone the use by a process of saving in
order that something else, in this case a plow, may be produced. This saving must be
accomplished first to an amount sufficient to keep production going on from day to day.
This capital is all consumed, but in a longer or shorter term (depending on the particular
industrial operation) it is reproduced in new forms adapted to the existing wants of man.
Moreover, without any new exertion of abstinence, this amount of capital may be again
consumed and reproduced, and so go on forever, after once being saved (if never
destroyed in the mean while, thereby passing out of the category not only of capital, but
also of wealth). The total capital of the country, then, is not the sum [pg 088] of one
year's capital added to that of another; but that of last year reproduced in a new form this
year, plus a fractional increase arising from new savings. But, once saved, capital can go
on constantly aiding in production forever. This plow when made is exchanged (if a plow
is wanted, and the production is properly adjusted to meet desires) for such other products,
food, means for repairing tools, etc., as give back to the plow-maker all the commodities
consumed in its manufacture (with an increase, called profit).

Returning to our illustration of the alphabet, it is evident that a certain amount of capital
united with labor (constituting what may be called a productive engine) lies behind the
production of A (such as the plow, for example), and to which its existence is due. The
same is true of Z. Suppose that 5,000 of Z is produced, of which 4,000 is enough to
reimburse the capital used up by labor in the operation, and that the owner of commodity
Z spends the remaining 1,000 Z in exchange for 1,000 of commodity A. It is evident (no
money being used as yet) that this exchange of goods is regulated entirely by the desires of
the two parties to the transaction. No more goods are created simply by the exchange; the
simple process of exchange does not keep the laborers engaged on A occupied. And yet the
owner of Z had a demand for commodity A; his demand was worthless, except through the
fact of his production, which gave him actual wealth, or purchasing power, in the form of
Z. His demand for commodity A was not the thing which employed the laborers engaged
in producing A, although the demand (if known beforehand) would cause them to produce
A rather than some other article—that is, the demand of one quantity of wealth for a
certain thing determines the direction taken by the owner of capital A. But, since the
exchange is merely the form in which the demand manifests itself, it is clear that the
demand does not add to production, and so of itself does not employ labor. Of course, if
there were no desires, there would be no demand, and so no production and employment
of labor. But we may conclude by formulating the proposition, that wealth (Z) offered for

commodities (A) necessitates the use of other wealth (than Z) as capital to support the
operation by which those commodities (A) are produced. It makes no difference to the
existing employment of labor what want is supplied by the producers of A, whether it is
velvet (intended for unproductive consumption) or plows (intended for productive
consumption). Even if Z is no longer offered in exchange for A, and if then A is no longer
to be made, the laborers formerly occupied in producing A—if warning is given of the
coming change; if not, loss results—having the plant, can produce something else wanted
by the owner of Z.

[pg 089]
Now into a community, as here pictured, all laborers supposed to be occupied, and all
capital employed in producing A, B, C, ... X, Y, Z, imagine the coming of a shipwrecked
crew. Instead of exchanging Z for A, as before, the owner of Z may offer his wealth to the
crew to dance for him. The essential question is, Is more employment offered to labor by
this action than the former exchange for A? That is, it is a question merely of distribution
of wealth among the members of a community. The labor engaged on A is not thrown out
of employment (if they have warning). There is no more wealth in existence, but it is
differently distributed than before: the crew, instead of the former owner, now have 1,000
of Z. So far as the question of employment is concerned, it makes no difference on what
terms the crew got it: they might have been hired to stand in a row and admire the owner
of Z when he goes out. But yet it may naturally be assumed that the crew were employed
productively. In this case, after they have consumed the wealth Z, they have brought into
existence articles in the place of those they consumed. But, although this last operation is
economically more desirable for the future growth of wealth, yet no more laborers for the
time were employed than if the crew had merely danced. The advantages or disadvantages
of productive consumption are not to be discussed here. It is intended, however, to
establish the proposition that wealth paid out in wages, or advanced to producers, itself
supports labor; that wealth offered directly to laborers in this way employs more labor
than when merely offered in exchange for other goods, or, in other words, by a demand for
commodities; that an increased demand for commodities does not involve an increased
demand for labor, since this can only be created by capital. The essential difference is, that
the owner of Z in one case, by exchanging goods for A, did not forego his consuming
power; in the other case, by giving Z to the unemployed crew, he actually went through
the process of saving by foregoing his personal consumption, and handing it over to the
crew. If the crew use it unproductively, it is in the end the same as if the owner of Z had
done it; but meanwhile the additional laborers were employed. If the crew be employed
productively, then the saving once made will go on forever, as explained above, and the
world will be the richer by the wealth this additional capital can create.

It may now be objected that, if A is no longer in demand, the laborers in that industry will
be thrown out of employment. Out of that employment certainly, but not out of every
other. One thousand of Z was able to purchase certain results of labor and capital in

industry A, when in the hands of its former owner; and now when in the hands of the crew
it will [pg 090] control, as purchasing power, equivalent results of labor and capital.
The crew may not want the same articles as the former owner of Z, but they will want the
equivalents of 1,000 of Z in something, and that something will be produced now instead
of A. The whole process may be represented by this diagram.

1. Z is exchanged against A, and the crew remain unemployed.

2. Here the crew possess Z, and they themselves exchange Z for whatever A may produce
in satisfaction of their wants, and the crew are then employed.

It is possible that the intervention of money blinds some minds to a proper understanding
of the operations described above. The supposition, as given, applies to a condition of
110
barter, but is equally true if money is used. Imagine a display of all the industries of the
world, A, B, C, ... X, Y, Z, presented within sight on one large field, and at the central spot
the producer of gold and silver. When Z is produced, it is taken to the gold-counter, and

exchanged for money; when A is produced, the same is done. Then the former money is
given for A, and the latter for Z, so that in truth A is exchanged against Z through the
medium of money, just as before money was considered. Now, it may be said by an
objector, “If A is not wanted, after it is produced, and can not be sold, because the demand
from Z has been withdrawn, then the capital used for A will not be returned, and the
laborers in A will be thrown out of employment.” The answer is, of course, that the state of
things here contemplated is a permanent and normal one wherein production is correctly
adapted to human desires. If A is found not to be wanted, after the production of it, an
industrial blunder has been committed, and wealth is wasted just as when burned up. It is
ill-assorted production. The trouble is not in a lack of demand for what A may produce (of
something else), but with the producers of A in not making that for which there were
desires, from ignorance or lack of early information of the disposition of wealth Z. In
practice, however, it will be found that most goods are made upon “orders,” and, except
under peculiar circumstances, [pg 091] not actually produced unless a market is
foreseen. Indeed, as every man knows, the most important function of a successful
business man is the adaptation of production to the market, that is, to the desires of
consumers.

One other form of this question needs brief mention. It is truly remarked that a large
portion of industrial activity is engaged to-day, not in supplying productive consumption,
such as food, shelter, and clothing, but in supplying the comforts and luxuries of low and
high alike, or unproductive consumption; now, if there were not a demand for luxuries and
comforts, many vast industries would cease to exist, and labor would be thrown out of
employment. Is not a demand for such commodities, then, a cause of the present
employment of labor? No, it is not. Luxuries and comforts are of course the objects of
human wants; but a desire alone, without purchasing power, can not either buy or produce
these commodities. To obtain a piano, one must produce goods, and this implies the
possession of capital, by which to bring into existence goods, or purchasing power, to be
offered for a piano. Nor is this sufficient. Even after a man, A, for example, offers
purchasing power, he will not get a piano unless there exists an accumulation of
unemployed capital, together with labor ready to manufacture the instrument. If capital
were all previously occupied, no piano could be made, although A stood offering an
equivalent in valuable goods. It may be said that A himself has the means. He has the
wealth, and if he is willing to forego the use of this wealth, or, in other words, save it by
devoting it to reproduction in the piano industry—that is, create the capital necessary for
the purpose—then the piano can be made. But this shows again that, not a mere desire, but
the existence of capital, is necessary to the production, and so to the employment of labor.
An increased demand for commodities, therefore, does not give additional employment to
labor, unless there be capital to support the labor.

Some important corollaries result from this proposition: (a.) When a country by legislation
creates a home demand for commodities, that does not of itself give additional

employment to labor. If the goods had before been purchased abroad, under free
discretion, then if produced at home they must require more capital and labor, or they
would not have been brought from foreign countries. If produced at home, it would
require, to purchase them, more of what was formerly sent abroad; or some must do
without. The legislation can not, ipso facto, create capital, and only by an increase of
capital can more employment result. It is possible, however, that legislation might cause a
more effective use of existing capital; but that must be a question of fact, to be settled by
circumstances [pg 092] in each particular case. It is not a thing to be governed by
principles.

(b.) It follows from the above proposition also that taxes levied on the rich, and paid by a
saving from their consumption of luxuries, do not fall on the poor because of a lessened
demand for commodities; since, as we have seen, that demand does not create or diminish
the demand for labor. But, if the taxes levied on the rich are paid by savings from what the
rich would have expended in wages, then if the Government spends the amount of revenue
thus taken in the direct purchase of labor, as of soldiers and sailors, the tax does not fall on
the laboring-class taken as a whole. When the Government takes that wealth which was
formerly capital, burns it up, or dissipates it in war, it ceases to exist any longer as a means
of again producing wealth, or of employing labor.

[pg 093]

Chapter V. On Circulating And Fixed Capital.

§ 1. Fixed and Circulating Capital.

Of the capital engaged in the production of any commodity, there is a part which,
after being once used, exists no longer as capital; is no longer capable of rendering
service to production, or at least not the same service, nor to the same sort of
production. Such, for example, is the portion of capital which consists of materials.
The tallow and alkali of which soap is made, once used in the manufacture, are
destroyed as alkali and tallow. In the same division must be placed the portion of
capital which is paid as the wages, or consumed as the subsistence, of laborers. That
part of the capital of a cotton-spinner which he pays away to his work-people, once so
paid, exists no longer as his capital, or as a cotton-spinner's capital. Capital which in
this manner fulfills the whole of its office in the production in which it is engaged, by
a single use, is called Circulating Capital. The term, which is not very appropriate, is
derived from the circumstance that this portion of capital requires to be constantly
renewed by the sale of the finished product, and when renewed is perpetually parted
with in buying materials and paying wages; so that it does its work, not by being kept,
but by changing hands.

Another large portion of capital, however, consists in instruments of production, of a
more or less permanent character; which produce their effect not by being parted
with, but by being kept; and the efficacy of which is not exhausted by a single use. To
this class belong buildings, [pg 094] machinery, and all or most things known by the
name of implements or tools. The durability of some of these is considerable, and
their function as productive instruments is prolonged through many repetitions of the
productive operation. In this class must likewise be included capital sunk (as the
expression is) in permanent improvements of land. So also the capital expended once
for all, in the commencement of an undertaking, to prepare the way for subsequent
operations: the expense of opening a mine, for example; of cutting canals, of making
roads or docks. Other examples might be added, but these are sufficient. Capital
which exists in any of these durable shapes, and the return to which is spread over a
period of corresponding duration, is called Fixed Capital.

Of fixed capital, some kinds require to be occasionally or periodically renewed. Such
are all implements and buildings: they require, at intervals, partial renewal by means

of repairs, and are at last entirely worn out. In other cases the capital does not, unless
as a consequence of some unusual accident, require entire renewal. A dock or a canal,
once made, does not require, like a machine, to be made again, unless purposely
destroyed. The most permanent of all kinds of fixed capital is that employed in giving
increased productiveness to a natural agent, such as land.

To return to the theoretical distinction between fixed and circulating capital. Since all
wealth which is destined to be employed for reproduction comes within the
designation of capital, there are parts of capital which do not agree with the definition
of either species of it; for instance, the stock of finished goods which a manufacturer
or dealer at any time possesses unsold in his warehouses. But this, though capital as
to its destination, is not yet capital in actual exercise; it is not engaged in production,
but has first to be sold or exchanged, that is, converted into an equivalent value of
some other commodities, and therefore is not yet either fixed or circulating capital,
but will become either one or the other, or be eventually divided between them.

[pg 095]

§ 2. Increase of Fixed Capital, when, at the Expense of Circulating, might
be Detrimental to the Laborers.

There is a great difference between the effects of circulating and those of fixed
capital, on the amount of the gross produce of the country. Circulating capital being
destroyed as such, the result of a single use must be a reproduction equal to the whole
amount of the circulating capital used, and a profit besides. This, however, is by no
means necessary in the case of fixed capital. Since machinery, for example, is not
wholly consumed by one use, it is not necessary that it should be wholly replaced
from the product of that use. The machine answers the purpose of its owner if it
brings in, during each interval of time, enough to cover the expense of repairs, and
the deterioration in value which the machine has sustained during the same time, with
a surplus sufficient to yield the ordinary profit on the entire value of the machine.

From this it follows that all increase of fixed capital, when taking place at the expense
of circulating, must be, at least temporarily, prejudicial to the interests of the laborers.
This is true, not of machinery alone, but of all improvements by which capital is
sunk; that is, rendered permanently incapable of being applied to the maintenance and
remuneration of labor.

It is highly probable that in the twenty-five years preceding the panic of 1873, owing to
the progress of invention, those industries in the United States employing much machinery
were unduly stimulated in comparison with other industries, and that the readjustment was
a slow and painful process. After the collapse vast numbers left the manufacturing to enter
the extractive industries.

The argument relied on by most of those who contend that machinery can never be
injurious to the laboring-class is, that by cheapening production it creates such an
increased demand for the commodity as enables, ere long, a greater number of
persons than ever to find employment in producing it. The argument does not seem to
me to have the weight commonly ascribed to it. The fact, though too broadly stated,
is, no doubt, often true. The copyists who were thrown out of employment by the
invention of printing [pg 096] were doubtless soon outnumbered by the compositors
and pressmen who took their place; and the number of laboring persons now
employed in the cotton manufacture is many times greater than were so occupied
previously to the inventions of Hargreaves and Arkwright, which shows that, besides
the enormous fixed capital now embarked in the manufacture, it also employs a far
larger circulating capital than at any former time. But if this capital was drawn from
other employments, if the funds which took the place of the capital sunk in costly
machinery were supplied not by any additional saving consequent on the
improvements, but by drafts on the general capital of the community, what better are
the laboring-classes for the mere transfer?

There is a machine used for sizing the cotton yarn to prepare it for weaving, by which it is
dried over a steam cylinder, the wages for attendance on which were only two dollars per
day, as compared with an expenditure for labor of fourteen dollars per day to accomplish
the same ends before the machine was invented.

All attempts to make out that the laboring-classes as a collective body can not suffer
temporarily by the introduction of machinery, or by the sinking of capital in
permanent improvements, are, I conceive, necessarily fallacious.111 That they would
suffer in the particular department of industry to which the change applies is
generally admitted, and obvious to common sense; but it is often said that, though
employment is withdrawn from labor in one department, an exactly equivalent
employment is opened for it in others, because what the consumers save in the
increased cheapness of one particular article enables them to augment their
consumption of others, thereby increasing the demand for other kinds of labor. This is
plausible, but, as was shown in the last chapter, involves a fallacy; demand for
commodities being a totally different thing from demand [pg 097] for labor. It is true,
the consumers have now additional means of buying other things; but this will not

create the other things, unless there is capital to produce them, and the improvement
has not set at liberty any capital, even if it has not absorbed some from other
employments.

If the improvement has lowered the cost of production, it has often required less capital (as
well as less labor) to produce the same quantity of goods; or, what is the same thing, an
increased product with the same capital.

§ 3. —This seldom, if ever, occurs.

Nevertheless, I do not believe that, as things are actually transacted, improvements in
production are often, if ever, injurious, even temporarily, to the laboring-classes in the
aggregate. They would be so if they took place suddenly to a great amount, because
much of the capital sunk must necessarily in that case be provided from funds already
employed as circulating capital. But improvements are always introduced very
gradually, and are seldom or never made by withdrawing circulating capital from
actual production, but are made by the employment of the annual increase. I doubt if
there would be found a single example of a great increase of fixed capital, at a time
and place where circulating capital was not rapidly increasing likewise.

In the United States, while the cost per yard of the manufactured goods has decreased, and
so made accessible to poorer classes than before, the capital engaged in manufactures has
increased so as to allow a vastly greater number of persons to be employed, as will be seen
by the following comparison of 1860 with 1880 taken from the last census returns.
(Compendium, 1880, pp. 928, 930.)

Average Total amount
Number of Capital number of paid in wages
establishments. (Thousands). hands during the
employed. year.
1860 140,433 $1,009,855 1,311,246 $378,878,966
1880 253,852 2,790,272 2,732,595 947,953,795

“A hundred years ago, one person in every family of five or six must have been absolutely
needed to spin and weave by [pg 098] hand the fabrics required for the scanty clothing
of the people; now one person in two hundred or two hundred and fifty only need work in

the factory to produce the cotton and woolen fabrics of the most amply clothed nation of
112
the world.”

To these considerations must be added, that, even if improvements did for a time
decrease the aggregate produce and the circulating capital of the community, they
would not the less tend in the long run to augment both. This tendency of
improvements in production to cause increased accumulation, and thereby ultimately
to increase the gross produce, even if temporarily diminishing it, will assume a still
more decided character if it should appear that there are assignable limits both to the
accumulation of capital and to the increase of production from the land, which limits
once attained, all further increase of produce must stop; but that improvements in
production, whatever may be their other effects, tend to throw one or both of these
limits farther off. Now, these are truths which will appear in the clearest light in a
subsequent stage of our investigation. It will be seen that the quantity of capital which
will, or even which can, be accumulated in any country, and the amount of gross
produce which will, or even which can, be raised, bear a proportion to the state of the
arts of production there existing; and that every improvement, even if for the time it
diminish the circulating capital and the gross produce, ultimately makes room for a
larger amount of both than could possibly have existed otherwise. It is this which is
the conclusive answer to the objections against machinery; and the proof thence
arising of the ultimate benefit to laborers of mechanical inventions, even in the
existing state of society, will hereafter be seen to be conclusive.113

[pg 099]

Chapter VI. Of Causes Affecting The Efficiency Of
Production.

§ 1. General Causes of Superior Productiveness.

The most evident cause of superior productiveness is what are called natural
advantages. These are various. Fertility of soil is one of the principal. The influence
of climate [is another advantage, and] consists in lessening the physical requirements
of the producers.

In spinning very fine cotton thread, England's natural climate gives in some parts of the
country such advantages in proper moisture and electric conditions that the operation can
be carried on out-of-doors; while in the United States it is generally necessary to create an
artificial atmosphere. In ordinary spinning in our country more is accomplished when the
wind is in one quarter than in another. The dry northwest wind in New England reduces
the amount of product, while the dry northeast wind in England has a similar effect, and it
is said has practically driven the cotton-spinners from Manchester to Oldham, where the
climate is more equably moist. The full reasons for these facts are not yet ascertained.

Experts in the woolen industry, also, explain that the quality and fiber of wool depend
upon the soil and climate where the sheep are pastured. When Ohio sheep are transferred
to Texas, in a few years their wool loses the distinctive quality it formerly possessed, and
takes on a new character belonging to the breeds of Texas. The wool produced by one set
of climatic conditions is quite different from that of another set, and is used by the
manufacturers for different purposes.

In hot regions, mankind can exist in comfort with less perfect housing, less clothing;
fuel, that absolute necessary of life in cold climates, they can almost dispense with,
except for industrial uses. They also require less aliment. Among natural advantages,
besides soil and climate, must be [pg 100] mentioned abundance of mineral
productions, in convenient situations, and capable of being worked with moderate
labor. Such are the coal-fields of Great Britain, which do so much to compensate its
inhabitants for the disadvantages of climate; and the scarcely inferior resource
possessed by this country and the United States, in a copious supply of an easily
reduced iron-ore, at no great depth below the earth's surface, and in close proximity to

coal-deposits available for working it. But perhaps a greater advantage than all these
is a maritime situation, especially when accompanied with good natural harbors; and,
next to it, great navigable rivers. These advantages consist indeed wholly in saving of
cost of carriage. But few, who have not considered the subject, have any adequate
notion how great an extent of economical advantage this comprises.

As the second of the [general] causes of superior productiveness, we may rank the
greater energy of labor. By this is not to be understood occasional, but regular and
habitual energy. The third element which determines the productiveness of the labor
of a community is the skill and knowledge therein existing, whether it be the skill and
knowledge of the laborers themselves or of those who direct their labor. That the
productiveness of the labor of a people is limited by their knowledge of the arts of life
is self-evident, and that any progress in those arts, any improved application of the
objects or powers of nature to industrial uses, enables the same quantity and intensity
of labor to raise a greater produce. One principal department of these improvements
consists in the invention and use of tools and machinery.114

The deficiency of practical good sense, which renders the majority of the laboring-
class such bad calculators—which makes, for instance, their domestic economy so
improvident, lax, and irregular—must disqualify them for any but a low grade of
intelligent labor, and render their industry far less productive than with equal energy
it otherwise might be. [pg 101] The moral qualities of the laborers are fully as
important to the efficiency and worth of their labor as the intellectual. Independently
of the effects of intemperance upon their bodily and mental faculties, and of flighty,
unsteady habits upon the energy and continuity of their work (points so easily
understood as not to require being insisted upon), it is well worthy of meditation how
much of the aggregate effect of their labor depends on their trustworthiness.

Among the secondary causes which determine the productiveness of productive
agents, the most important is Security. By security I mean the completeness of the
protection which society affords to its members.

§ 2. Combination and Division of Labor Increase Productiveness.

In the enumeration of the circumstances which promote the productiveness of labor,
we have left one untouched, which is co-operation, or the combined action of
numbers. Of this great aid to production, a single department, known by the name of
Division of Labor, has engaged a large share of the attention of political economists;
most deservedly, indeed, but to the exclusion of other cases and exemplifications of

the same comprehensive law. In the lifting of heavy weights, for example, in the
felling of trees, in the sawing of timber, in the gathering of much hay or corn during a
short period of fine weather, in draining a large extent of land during the short season
when such a work may be properly conducted, in the pulling of ropes on board ship,
in the rowing of large boats, in some mining operations, in the erection of a
scaffolding for building, and in the breaking of stones for the repair of a road, so that
the whole of the road shall always be kept in good order: in all these simple
operations, and thousands more, it is absolutely necessary that many persons should
work together, at the same time, in the same place, and in the same way. [But] in the
present state of society, the breeding and feeding of sheep is the occupation of one set
of people; dressing the wool to prepare it for the spinner is that of another; spinning it
into thread, of a third; weaving the thread into broadcloth, of a fourth; dyeing the
cloth, of a fifth; making it into a coat, of a sixth; without [pg 102] counting the
multitude of carriers, merchants, factors, and retailers put in requisition at the
successive stages of this progress.

Without some separation of employments, very few things would be produced at all.
Suppose a set of persons, or a number of families, all employed precisely in the same
manner; each family settled on a piece of its own land, on which it grows by its labor
the food required for its own sustenance, and, as there are no persons to buy any
surplus produce where all are producers, each family has to produce within itself
whatever other articles it consumes. In such circumstances, if the soil was tolerably
fertile, and population did not tread too closely on the heels of subsistence, there
would be, no doubt, some kind of domestic manufactures; clothing for the family
might, perhaps, be spun and woven within it, by the labor, probably, of the women (a
first step in the separation of employments); and a dwelling of some sort would be
erected and kept in repair by their united labor. But beyond simple food (precarious,
too, from the variations of the seasons), coarse clothing, and very imperfect lodging,
it would be scarcely possible that the family should produce anything more.

Suppose that a company of artificers, provided with tools, and with food sufficient to
maintain them for a year, arrive in the country and establish themselves in the midst
of the population. These new settlers occupy themselves in producing articles of use
or ornament adapted to the taste of a simple people; and before their food is
exhausted they have produced these in considerable quantity, and are ready to
exchange them for more food. The economical position of the landed population is
now most materially altered. They have an opportunity given them of acquiring
comforts and luxuries. Things which, while they depended solely upon their own
labor, they never could have obtained, because they could not have produced, are now
accessible to them if they can succeed in producing an additional quantity of food and
necessaries. They are thus incited to increase the productiveness [pg 103] of their
industry. The new settlers constitute what is called a market for surplus agricultural

produce; and their arrival has enriched the settlement, not only by the manufactured
articles which they produce, but by the food which would not have been produced
unless they had been there to consume it.

There is no inconsistency between this doctrine and the proposition we before
maintained,115 that a market for commodities does not constitute employment for
labor. The labor of the agriculturists was already provided with employment; they are
not indebted to the demand of the new-comers for being able to maintain themselves.
What that demand does for them is to call their labor into increased vigor and
efficiency; to stimulate them, by new motives, to new exertions.

From these considerations it appears that a country will seldom have a productive
agriculture unless it has a large town population, or, the only available substitute, a
large export trade in agricultural produce to supply a population elsewhere. I use the
phrase “town population” for shortness, to imply a population non-agricultural.

It is found that the productive power of labor is increased by carrying the separation
further and further; by breaking down more and more every process of industry into
parts, so that each laborer shall confine himself to an ever smaller number of simple
operations. And thus, in time, arise those remarkable cases of what is called the
division of labor, with which all readers on subjects of this nature are familiar. Adam
Smith's illustration from pin-making, though so well known, is so much to the point
that I will venture once more to transcribe it: “The business of making a pin is
divided into about eighteen distinct operations. One man draws out the wire, another
straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the
head; to make the head requires two or three distinct operations; to put it on, is a
peculiar business; [pg 104] to whiten the pins is another; it is even a trade by itself to
put them into the paper.... I have seen a small manufactory where ten men only were
employed, and where some of them, consequently, performed two or three distinct
operations. But though they were very poor, and therefore but indifferently
accommodated with the necessary machinery, they could, when they exerted
themselves, make among them about twelve pounds of pins in a day. There are in a
pound upward of four thousand pins of a middling size. Those ten persons, therefore,
could make among them upward of forty-eight thousand pins in a day. Each person,
therefore, making a tenth part of forty-eight thousand pins, might be considered as
making four thousand eight hundred pins in a day. But if they had all wrought
separately and independently, and without any of them having been educated to this
peculiar business, they certainly could not each of them have made twenty, perhaps
not one pin in a day.”

§ 3. Advantages of Division of Labor.

The causes of the increased efficiency given to labor by the division of employments
are some of them too familiar to require specification; but it is worth while to attempt
a complete enumeration of them. By Adam Smith they are reduced to three: “First,
the increase of dexterity in every particular workman; secondly, the saving of the time
which is commonly lost in passing from one species of work to another; and, lastly,
the invention of a great number of machines which facilitate and abridge labor, and
enable one man to do the work of many.”

(1.) Of these, the increase of dexterity of the individual workman is the most obvious
and universal. It does not follow that because a thing has been done oftener it will be
done better. That depends on the intelligence of the workman, and on the degree in
which his mind works along with his hands. But it will be done more easily. This is as
true of mental operations as of bodily. Even a child, after much practice, sums up a
column of figures with a rapidity which resembles intuition. The act of speaking any
language, of [pg 105] reading fluently, of playing music at sight, are cases as
remarkable as they are familiar. Among bodily acts, dancing, gymnastic exercises,
ease and brilliancy of execution on a musical instrument, are examples of the rapidity
and facility acquired by repetition. In simpler manual operations the effect is, of
course, still sooner produced.

(2.) The second advantage enumerated by Adam Smith as arising from the division of
labor is one on which I can not help thinking that more stress is laid by him and
others than it deserves. To do full justice to his opinion, I will quote his own
exposition of it: “It is impossible to pass very quickly from one kind of work to
another, that is carried on in a different place, and with quite different tools. A country
weaver, who cultivates a small farm, must lose a good deal of time in passing from
his loom to the field, and from the field to his loom. When the two trades can be
carried on in the same workhouse, the loss of time is no doubt much less. It is even in
this case, however, very considerable. A man commonly saunters a little in turning his
hand from one sort of employment to another.” I am very far from implying that these
considerations are of no weight; but I think there are counter-considerations which are
overlooked. If one kind of muscular or mental labor is different from another, for that
very reason it is to some extent a rest from that other; and if the greatest vigor is not
at once obtained in the second occupation, neither could the first have been
indefinitely prolonged without some relaxation of energy. It is a matter of common
experience that a change of occupation will often afford relief where complete repose
would otherwise be necessary, and that a person can work many more hours without
fatigue at a succession of occupations, than if confined during the whole time to
one.116 Different occupations employ different muscles, or different energies of the

mind, some of which rest and are refreshed while [pg 106] others work. Bodily labor
itself rests from mental, and conversely. The variety itself has an invigorating effect
on what, for want of a more philosophical appellation, we must term the animal
spirits—so important to the efficiency of all work not mechanical, and not
unimportant even to that.

(3.) The third advantage attributed by Adam Smith to the division of labor is, to a
certain extent, real. Inventions tending to save labor in a particular operation are more
likely to occur to any one in proportion as his thoughts are intensely directed to that
occupation, and continually employed upon it.

This also can not be wholly true. “The founder of the cotton manufacture was a barber.
The inventor of the power-loom was a clergyman. A farmer devised the application of the
screw-propeller. A fancy-goods shopkeeper is one of the most enterprising
experimentalists in agriculture. The most remarkable architectural design of our day has
been furnished by a gardener. The first person who supplied London with water was a
goldsmith. The first extensive maker of English roads was a blind man, bred to no trade.
The father of English inland navigation was a duke, and his engineer was a millwright.
The first great builder of iron bridges was a stone-mason, and the greatest railway
117
engineer commenced his life as a colliery engineer.”

(4.) The greatest advantage (next to the dexterity of the workmen) derived from the
minute division of labor which takes place in modern manufacturing industry, is one
not mentioned by Adam Smith, but to which attention has been drawn by Mr.
Babbage: the more economical distribution of labor by classing the work-people
according to their capacity. Different parts of the same series of operations require
unequal degrees of skill and bodily strength; and those who have skill enough for the
most difficult, or strength enough for the hardest parts of the labor, are made much
more useful by being employed solely in them; the operations which everybody is
capable of being left to those who are fit for no others.

[pg 107]
The division of labor, as all writers on the subject have remarked, is limited by the
extent of the market. If, by the separation of pin-making into ten distinct
employments, forty-eight thousand pins can be made in a day, this separation will
only be advisable if the number of accessible consumers is such as to require, every
day, something like forty-eight thousand pins. If there is only a demand for twenty-
four thousand, the division of labor can only be advantageously carried to the extent
which will every day produce that smaller number. The increase of the general riches
of the world, when accompanied with freedom of commercial intercourse,
improvements in navigation, and inland communication by roads, canals, or railways,

tends to give increased productiveness to the labor of every nation in particular, by
enabling each locality to supply with its special products so much larger a market that
a great extension of the division of labor in their production is an ordinary
consequence. The division of labor is also limited, in many cases, by the nature of the
employment. Agriculture, for example, is not susceptible of so great a division of
occupations as many branches of manufactures, because its different operations can
not possibly be simultaneous.

(5.) “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 conducted. 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 established, there are others which demand for
[pg 108] their effective performance special personal qualifications and special local
conditions; and the general effectiveness of productive industry will, other things being
equal, be proportioned to the completeness with which the adaptation is accomplished
118
between occupation on the one hand and individuals and localities on the other.”

§ 4. Production on a Large and Production on a Small Scale.

Whenever it is essential to the greatest efficiency of labor that many laborers should
combine, the scale of the enterprise must be such as to bring many laborers together,
and the capital must be large enough to maintain them. Still more needful is this when
the nature of the employment allows, and the extent of the possible market
encourages, a considerable division of labor. The larger the enterprise the further the
division of labor may be carried. This is one of the principal causes of large
manufactories. Every increase of business would enable the whole to be carried on
with a proportionally smaller amount of labor.

As a general rule, the expenses of a business do not increase by any means
proportionally to the quantity of business. Let us take as an example a set of

operations which we are accustomed to see carried on by one great establishment,
that of the Post-Office. Suppose that the business, let us say only of the letter-post,
instead of being centralized in a single concern, were divided among five or six
competing companies. Each of these would be obliged to maintain almost as large an
establishment as is now sufficient for the whole. Since each must arrange for
receiving and delivering letters in all parts of the town, each must send letter-carriers
into every street, and almost every alley, and this, too, as many times in the day as is
now done by the Post-Office, if the service is to be as well performed. Each must
have an office for receiving letters in every neighborhood, with all subsidiary
arrangements for collecting the letters from the different offices and redistributing
them. To this must be added the much greater number of superior officers [pg 109]
who would be required to check and control the subordinates, implying not only a
greater cost in salaries for such responsible officers, but the necessity, perhaps, of
being satisfied in many instances with an inferior standard of qualification, and so
failing in the object.

Whether or not the advantages obtained by operating on a large scale preponderate in
any particular case over the more watchful attention and greater regard to minor gains
and losses usually found in small establishments, can be ascertained, in a state of free
competition, by an unfailing test. Wherever there are large and small establishments
in the same business, that one of the two which in existing circumstances carries on
the production at greatest advantage will be able to undersell the other. The power of
permanently underselling can only, generally speaking, be derived from increased
effectiveness of labor; and this, when obtained by a more extended division of
employment, or by a classification tending to a better economy of skill, always
implies a greater produce from the same labor, and not merely the same produce from
less labor; it increases not the surplus only, but the gross produce of industry. If an
increased quantity of the particular article is not required, and part of the laborers in
consequence lose their employment, the capital which maintained and employed them
is also set at liberty, and the general produce of the country is increased by some other
application of their labor.

A considerable part of the saving of labor effected by substituting the large system of
production for the small, is the saving in the labor of the capitalists themselves. If a
hundred producers with small capitals carry on separately the same business, the
superintendence of each concern will probably require the whole attention of the
person conducting it, sufficiently, at least, to hinder his time or thoughts from being
disposable for anything else; while a single manufacturer possessing a capital equal to
the sum of theirs, with ten or a dozen clerks, could conduct the whole of their amount
of business, and have leisure, too, for other occupations.

[pg 110]

Production on a large scale is greatly promoted by the practice of forming a large
capital by the combination of many small contributions; or, in other words, by the
formation of stock companies. The advantages of the principle are important, [since]
(1) many undertakings require an amount of capital beyond the means of the richest
individual or private partnership. [Of course] the Government can alone be looked to
for any of those works for which a great combination of means is requisite, because it
can obtain those means by compulsory taxation, and is already accustomed to the
conduct of large operations. For reasons, however, which are tolerably well known,
government agency for the conduct of industrial operations is generally one of the
least eligible of resources when any other is available. Of [the advantages referred to
above] one of the most important is (2) that which relates to the intellectual and active
qualifications of the directing head. The stimulus of individual interest is some
security for exertion, but exertion is of little avail if the intelligence exerted is of an
inferior order, which it must necessarily be in the majority of concerns carried on by
the persons chiefly interested in them. Where the concern is large, and can afford a
remuneration sufficient to attract a class of candidates superior to the common
average, it is possible to select for the general management, and for all the skilled
employments of a subordinate kind, persons of a degree of acquirement and
cultivated intelligence which more than compensates for their inferior interest in the
result. It must be further remarked that it is not a necessary consequence of joint-
stock management that the persons employed, whether in superior or in subordinate
offices, should be paid wholly by fixed salaries. In the case of the managers of joint-
stock companies, and of the superintending and controlling officers in many private
establishments, it is a common enough practice to connect their pecuniary interest
with the interest of their employers, by giving them part of their remuneration in the
form of a percentage on the profits.

[pg 111]
The possibility of substituting the large system of production for the small depends,
of course, in the first place, on the extent of the market. The large system can only be
advantageous when a large amount of business is to be done: it implies, therefore,
either a populous and flourishing community, or a great opening for exportation.

In the countries in which there are the largest markets, the widest diffusion of
commercial confidence and enterprise, the greatest annual increase of capital, and the
greatest number of large capitals owned by individuals, there is a tendency to
substitute more and more, in one branch of industry after another, large
establishments for small ones. These are almost always able to undersell the smaller
tradesmen, partly, it is understood, by means of division of labor, and the economy
occasioned by limiting the employment of skilled agency to cases where skill is
required; and partly, no doubt, by the saving of labor arising from the great scale of
the transactions; as it costs no more time, and not much more exertion of mind, to

make a large purchase, for example, than a small one, and very much less than to
make a number of small ones. With a view merely to production, and to the greatest
efficiency of labor, this change is wholly beneficial.

A single large company very often, instead of being a monopoly, is generally better than
two large companies; for there is little likelihood of competition and lower prices when the
competitors are so few as to be able to agree not to compete. As Mr. Mill says in regard to
parallel railroads: “No one can desire to see the enormous waste of capital and land (not to
speak of increased nuisance) involved in the construction of a second railway to connect
the same places already united by an existing one; while the two would not do the work
better than it could be done by one, and after a short time would probably be
amalgamated.” The actual tendency of charges to diminish on the railways, before the
matter of parallel railways was suggested is clearly seen by reference to Chart V (p. 137).

[pg 112]

Chapter VII. Of The Law Of The Increase Of Labor.

§ 1. The Law of the Increase of Production Depends on those of Three
Elements—Labor. Capital, and Land.

Production is not a fixed but an increasing thing. When not kept back by bad
institutions, or a low state of the arts of life, the produce of industry has usually
tended to increase; stimulated not only by the desire of the producers to augment their
means of consumption, but by the increasing number of the consumers.

We have seen that the essential requisites of production are three—labor, capital, and
natural agents; the term capital including all external and physical requisites which
are products of labor, the term natural agents all those which are not. The increase of
production, therefore, depends on the properties of these elements. It is a result of the
increase either of the elements themselves, or of their productiveness. We proceed to
consider the three elements successively, with reference to this effect; or, in other
words, the law of the increase of production, viewed in respect of its dependence, first
on Labor, secondly on Capital, and lastly on Land.

§ 2. The Law of Population.

The increase of labor is the increase of mankind; of population. The power of
multiplication inherent in all organic life may be regarded as infinite. There are many
species of vegetables of which a single plant will produce in one year the germs of a
thousand; if only two come to maturity, in fourteen years the two will have multiplied
to sixteen thousand and more. It is but a moderate case of fecundity in animals to be
capable of quadrupling their numbers in a single year; if they only do as much in half
a century, [pg 113] ten thousand will have swelled within two centuries to upward to
two millions and a half. The capacity of increase is necessarily in a geometrical
progression: the numerical ratio alone is different.

To this property of organized beings, the human species forms no exception. Its
power of increase is indefinite, and the actual multiplication would be extraordinarily

rapid, if the power were exercised to the utmost. It never is exercised to the utmost,
and yet, in the most favorable circumstances known to exist, which are those of a
fertile region colonized from an industrious and civilized community, population has
continued, for several generations, independently of fresh immigration, to double
itself in not much more than twenty years.

Years. Population. Food.
25 11 mills x
25 22 mills 2x
25 44 mills 3x
25 88 mills 4x
25 176 mills 5x

By this table it will be seen that if population can double itself in twenty-five years, and if
food can only be increased by as much as x (the subsistence of eleven millions) by
additional application of another equal quantity of labor on the same land in each period,
then at the end of one hundred years there would be the disproportion of one hundred and
seventy-six millions of people, with subsistence for only fifty-five millions. Of course, this
is prevented either by checking population to the amount of the subsistence; by sending
off the surplus population; or by bringing in food from new lands.

In the United States to 1860 population has doubled itself about every twenty years, while
in France there is practically no increase of population. It is stated that the white
population of the United States between 1790 and 1840 increased 400.4 per cent,
deducting immigration. The extraordinary advance of population with us, where
subsistence is easily attainable, is to be seen in the chart on the next page (No. III), which
shows the striking rapidity of increase in the United States when compared with the older
countries of Europe. The steady demand for land can be seen by the gradual westward
movement of the center of population, as seen in chart No. IV (p. 116), and by the rapid
settlement of the distant parts of our country, as shown by the two charts (frontispieces),
which represent to the eye by heavier colors the areas of the more densely settled districts
in 1830 and in 1880.

[pg 114]

Chart III: Population of European Countries, XIXth Century.

[pg 115]

§ 3. By what Checks the Increase of Population is Practically Limited.

The obstacle to a just understanding of the subject arises from too confused a notion
of the causes which, at most times and places, keep the actual increase of mankind so
far behind the capacity.

The conduct of human creatures is more or less influenced by foresight of
consequences, and by some impulses superior to mere animal instincts; and they do
not, therefore, propagate like swine, but are capable, though in very unequal degrees,
of being withheld by prudence, or by the social affections, from giving existence to
beings born only to misery and premature death.

Malthus found an explanation of the anomaly that in the Swiss villages, with the longest
average duration of life, there were the fewest births, by noting that no one married until a
cow-herd's cottage became vacant, and precisely because the tenants lived so long were
the new-comers long kept out of a place.

In proportion as mankind rise above the condition of the beast, population is
restrained by the fear of want, rather than by want itself. Even where there is no
question of starvation, many are similarly acted upon by the apprehension of losing
what have come to be regarded as the decencies of their situation in life. Among the
middle classes, in many individual instances, there is an additional restraint exercised
from the desire of doing more than maintaining their circumstances—of improving
them; but such a desire is rarely found, or rarely has that effect, in the laboring-
classes. If they can bring up a family as they were themselves brought up, even the
prudent among them are usually satisfied. Too often they do not think even of that,
but rely on fortune, or on the resources to be found in legal or voluntary charity.

Chart IV: Westward Movement of Center of Population.

This, in effect, is the well-known Malthusian doctrine. The thorough reader will also
119
consult the original “Essay” of Malthus. Mr. Bowen and other writers oppose it, saying
it has [pg 116] “no relation to the times in which we live, or to any which are near at
hand.” He thinks the productive power of the whole world prevents the necessity of
considering the pressure of population upon subsistence as an actuality now or in the
future. This, however, does not deny the existence of Malthus's principles, but opposes
120
them only on the methods of their action. Mr. Rickards holds that man's food—as, e.g.,
wheat—has the power to increase geometrically faster than man; but he omits to consider
that for the growth of this food land is demanded; that land is not capable of such
geometrical increase; and that without it the food can not be grown. Of course, any
extension of the land area, as happened when England abolished the corn laws and drew
her food from our prairies, removes the previous pressure of population on subsistence.
No believer in the Malthusian doctrine is so absurd as to hold that the growth of
population actually exceeds subsistence, but that there is a “constant tendency in all
animated life to increase beyond the nourishment prepared for it,” no one can possibly
doubt. This is not inconsistent with the fact that subsistence has at any time increased
faster than population. It is as if a block of wood on the floor were acted on by two
opposing forces, one tending to move it forward, one backward: if it moves backward, that
does not prove the absence of any force working to move it forward, but only that the
other force is the stronger of the two, [pg 117] and that the final motion is the resultant
of the two forces. It is only near-sighted generalization to say that since the block moves
121
forward, there is therefore no opposing force to its advance. Mr. Doubleday maintains
that, as people become better fed, they become unprolific. Mr. Mill's answer, referring to
122
the large families of the English peerage, is unfortunate. In Sweden the increase of the
peasantry is six times that of the middle classes, and fourteen times that of the nobility.
The diminishing fertility of New England families gives a truer explanation, when it is
seen that with the progress in material wealth later marriages are the rule. When New-
Englanders emigrate to the Western States, where labor is in demand and where it is less
123
burdensome to have large families, there is no question as to their fertility.

(1.) In a very backward state of society, like that of Europe in the middle ages, and
many parts of Asia at present, population is kept down by actual starvation. The
starvation does not take place in ordinary years, but in seasons of scarcity, which in
those states of society are much more frequent and more extreme than Europe is now
accustomed to. (2.) In a more improved state, few, even among the poorest of the
people, are limited to actual necessaries, and to a bare sufficiency of those: and the
increase is kept within bounds, not by excess of deaths, but by limitation of births.124
The limitation is brought about in various ways. In some countries, it is the result of
prudent or conscientious self-restraint. There is a condition to which the laboring-
people are habituated; they perceive that, by having too numerous families, they must

sink below that condition, or fail to transmit it to their children; and this they do not
choose to submit to.

There are other cases in which the prudence and forethought, which perhaps might
not be exercised by the people [pg 118] themselves, are exercised by the state for
their benefit; marriage not being permitted until the contracting parties can show that
they have the prospect of a comfortable support. There are places, again, in which the
restraining cause seems to be not so much individual prudence, as some general and
perhaps even accidental habit of the country. In the rural districts of England, during
the last century, the growth of population was very effectually repressed by the
difficulty of obtaining a cottage to live in. It was the custom for unmarried laborers to
lodge and board with their employers; it was the custom for married laborers to have
a cottage: and the rule of the English poor-laws, by which a parish was charged with
the support of its unemployed poor, rendered land-owners averse to promote
marriage. About the end of the century, the great demand for men in war and
manufactures made it be thought a patriotic thing to encourage population: and about
the same time the growing inclination of farmers to live like rich people, favored as it
was by a long period of high prices, made them desirous of keeping inferiors at a
greater distance, and, pecuniary motives arising from abuses of the poor-laws being
superadded, they gradually drove their laborers into cottages, which the landowners
now no longer refused permission to build.

It is but rarely that improvements in the condition of the laboring-classes do anything
more than give a temporary margin, speedily filled up by an increase of their
numbers. Unless, either by their general improvement in intellectual and moral
culture, or at least by raising their habitual standard of comfortable living, they can be
taught to make a better use of favorable circumstances, nothing permanent can be
done for them; the most promising schemes end only in having a more numerous but
not a happier people. There is no doubt that [the standard] is gradually, though slowly,
rising in the more advanced countries of Western Europe.125 [pg 119] Subsistence and
employment in England have never increased more rapidly than in the last forty
years, but every census since 1821 showed a smaller proportional increase of
population than that of the period preceding; and the produce of French agriculture
and industry is increasing in a progressive ratio, while the population exhibits, in
every quinquennial census, a smaller proportion of births to the population.

This brings forward the near connection between land-tenures and population. France is
pre-eminently a country of small holdings, and it is undoubtedly true that the system has
checked the thoughtless increase of numbers. On his few hectares, the French peasant sees
in the size of his farm and the amount of its produce the limit of subsistence for himself
and his family; as in no other way does he see beforehand the results of any lack of food
126
from his lack of prudence. From 1790 to 1815 the average yearly increase of population

was 120,000; from 1815 to 1846, the golden age of French agriculture, 200,000; from
1846 to 1856, when agriculture was not prosperous, 60,000; from 1856 to 1880 the
increase has been not more than 36,000 yearly. In France the question shapes itself to the
peasant proprietor, How many can be subsisted by the amount of produce, not on an
unlimited area of land in other parts of the world, but on this particular property of a small
size? While in England there are ten births to six deaths, in France there are about ten
127
births to every nine deaths. In no country has the doctrine of Malthus been more
attacked than in France, and yet in no other country has there been a more marked
obedience to its principles in actual practice. Since the French are practically not at all an
emigrating people, population has strictly adapted itself to subsistence. For the relative
increase of population in France and the United States, see also the movement of lines
indicating the increase of population in chart No. III (p. 114).

[pg 120]

Chapter VIII. Of The Law Of The Increase Of Capital.

§ 1. Means for Saving in the Surplus above Necessaries.

The requisites of production being labor, capital, and land, it has been seen from the
preceding chapter that the impediments to the increase of production do not arise
from the first of these elements. But production has other requisites, and, of these, the
one which we shall next consider is Capital. There can not be more people in any
country, or in the world, than can be supported from the produce of past labor until
that of present labor comes in [although it is not to be supposed that capital consists
wholly of food]. We have next, therefore, to inquire into the conditions of the increase
of capital: the causes by which the rapidity of its increase is determined, and the
necessary limitations of that increase.

Since all capital is the product of saving, that is, of abstinence from present
consumption for the sake of a future good, the increase of capital must depend upon
two things—the amount of the fund from which saving can be made, and the strength
of the dispositions which prompt to it.

[pg 121]
(1.) The fund from which saving can be made is the surplus of the produce of labor,
after supplying the necessaries of life to all concerned in the production (including
those employed in replacing the materials, and keeping the fixed capital in repair).
More than this surplus can not be saved under any circumstances. As much as this,
though it never is saved, always might be. This surplus is the fund from which the
enjoyments, as distinguished from the necessaries of the producers, are provided; it is
the fund from which all are subsisted who are not themselves engaged in production,
and from which all additions are made to capital. The capital of the employer forms
the revenue of the laborers, and, if this exceeds the necessaries of life, it gives them a
surplus which they may either expend in enjoyments or save.

It is evident that the whole unproductive consumption of the laborer can be saved. When it
is considered how enormous a sum is spent by the working-classes in drink alone (and
also in the great reserves of the Trades-Unions collected for purposes of strikes), it is
indisputable that the laborers have the margin from which savings can be made, and by
which they themselves may become capitalists. The great accumulations in the savings-

banks by small depositors in the United States also show somewhat how much is actually
saved. In 1882-1883 there were 2,876,438 persons who had deposited in the savings-banks
of the United States $1,024,856,787, with an average to each depositor of $356.29. The
unproductive consumption, however, of all classes—not merely that of the working-men
—is the possible fund which may be saved. That being the amount which can be saved,
how much will be saved depends on the strength of the desire to save.

The greater the produce of labor after supporting the laborers, the more there is which
can be saved. The same thing also partly contributes to determine how much will be
saved. A part of the motive to saving consists in the prospect of deriving an income
from savings; in the fact that capital, employed in production, is capable of not only
reproducing itself but yielding an increase. The greater the profit that can be made
from capital, the stronger is the motive to its accumulation.

[pg 122]

§ 2. Motive for Saving in the Surplus above Necessaries.

But the disposition to save does not wholly depend on the external inducement to it;
on the amount of profit to be made from savings. With the same pecuniary
inducement, the inclination is very different, in different persons, and in different
communities.

(2.) All accumulation involves the sacrifice of a present, for the sake of a future good.

This is the fundamental motive underlying the effective desire of accumulation, and is far
more important than any other. It is, in short, the test of civilization. In order to induce the
laboring-classes to improve their condition and save capital, it is absolutely necessary to
excite in them (by education or religion) a belief in a future gain greater than the present
sacrifice. It is, to be sure, the whole problem of creating character, and belongs to
sociology and ethics rather than to political economy.

In weighing the future against the present, the uncertainty of all things future is a
leading element; and that uncertainty is of very different degrees. “All
circumstances,” therefore, “increasing the probability of the provision we make for
futurity being enjoyed by ourselves or others, tend” justly and reasonably “to give

strength to the effective desire of accumulation. Thus a healthy climate or occupation,
by increasing the probability of life, has a tendency to add to this desire. When
engaged in safe occupations and living in healthy countries, men are much more apt
to be frugal, than in unhealthy or hazardous occupations and in climates pernicious to
human life. Sailors and soldiers are prodigals. In the West Indies, New Orleans, the
East Indies, the expenditure of the inhabitants is profuse. The same people, coming to
reside in the healthy parts of Europe, and not getting into the vortex of extravagant
fashion, live economically. War and pestilence have always waste and luxury among
the other evils that follow in their train. For similar reasons, whatever gives security
to the affairs of the community is favorable to the strength of this principle. In this
respect the general prevalence of law and [pg 123] order and the prospect of the
continuance of peace and tranquillity have considerable influence.”128

It is asserted that the prevalence of homicide in certain parts of the United States has had a
vital influence in retarding the material growth of those sections. The Southern States have
received but a very small fraction (from ten to thirteen per cent) of foreign immigration.
“A country where law and order prevail to perfection may find its material prosperity
checked by a deadly and fatal climate; or, on the other hand, a people may destroy all the
advantages accruing from matchless natural resources and climate by persistent disregard
of life and property. A rather startling confirmation of this economic truth is afforded by
the fact that homicide has been as destructive of life in the South as yellow fever.
Although there have been forty thousand deaths from yellow fever since the war, the
129
deaths from homicide, for the same period, have been even greater.” The influence of
the old slave régime, and its still existing influences, in checking foreign immigration into
the South can be seen by the colored chart, No. VIII, showing the relative density of
foreign-born inhabitants in the several parts of the United States. The deeper color shows
the greater foreign-born population.

The more perfect the security, the greater will be the effective strength of the desire of
accumulation. Where property is less safe, or the vicissitudes ruinous to fortunes are
more frequent and severe, fewer persons will save at all, and, of those who do, many
will require the inducement of a higher rate of profit on capital to make them prefer a
doubtful future to the temptation of present enjoyment.

In the circumstances, for example, of a hunting tribe, “man may be said to be
necessarily improvident, and regardless of futurity, because, in this state, the future
presents nothing which can be with certainty either foreseen or governed.... Besides a
want of the motives exciting to provide for the needs of futurity through means of the
abilities of the present, there is a want of the habits of perception [pg 124] and action,
leading to a constant connection in the mind of those distant points, and of the series
of events serving to unite them. Even, therefore, if motives be awakened capable of

producing the exertion necessary to effect this connection, there remains the task of
training the mind to think and act so as to establish it.”

§ 3. Examples of Deficiency in the Strength of this Desire.

For instance: “Upon the banks of the St. Lawrence there are several little Indian
villages. The cleared land is rarely, I may almost say never, cultivated, nor are any
inroads made in the forest for such a purpose. The soil is, nevertheless, fertile, and,
were it not, manure lies in heaps by their houses. Were every family to inclose half an
acre of ground, till it, and plant it in potatoes and maize, it would yield a sufficiency
to support them one half the year. They suffer, too, every now and then, extreme
want, insomuch that, joined to occasional intemperance, it is rapidly reducing their
numbers. This, to us, so strange apathy proceeds not, in any great degree, from
repugnance to labor; on the contrary, they apply very diligently to it when its reward
is immediate. It is evidently not the necessary labor that is the obstacle to more
extended culture, but the distant return from that labor. I am assured, indeed, that
among some of the more remote tribes, the labor thus expended much exceeds that
given by the whites. On the Indian, succeeding years are too distant to make sufficient
impression; though, to obtain what labor may bring about in the course of a few
months, he toils even more assiduously than the white man.”

This view of things is confirmed by the experience of the Jesuits, in their interesting
efforts to civilize the Indians of Paraguay. The real difficulty was the improvidence of
the people; their inability to think for the future; and the necessity accordingly of the
most unremitting and minute superintendence on the part of their instructors. “Thus at
first, if these gave up to them the care of the oxen with which they plowed, their
indolent thoughtlessness would probably leave them at evening still yoked to the
implement. Worse than this, instances occurred where they cut them up [pg 125] for
supper, thinking, when reprehended, that they sufficiently excused themselves by
saying they were hungry.”

As an example intermediate, in the strength of the effective desire of accumulation,
between the state of things thus depicted and that of modern Europe, the case of the
Chinese deserves attention. “Durability is one of the chief qualities, marking a high
degree of the effective desire of accumulation. The testimony of travelers ascribes to
the instruments formed by the Chinese a very inferior durability to similar
instruments constructed by Europeans. The houses, we are told, unless of the higher
ranks, are in general of unburnt bricks, of clay, or of hurdles plastered with earth; the
roofs, of reeds fastened to laths. A greater degree of strength in the effective desire of

accumulation would cause them to be constructed of materials requiring a greater
present expenditure, but being far more durable. From the same cause, much land,
that in other countries would be cultivated, lies waste. All travelers take notice of
large tracts of lands, chiefly swamps, which continue in a state of nature. To bring a
swamp into tillage is generally a process to complete which requires several years. It
must be previously drained, the surface long exposed to the sun, and many operations
performed, before it can be made capable of bearing a crop. Though yielding,
probably, a very considerable return for the labor bestowed on it, that return is not
made until a long time has elapsed. The cultivation of such land implies a greater
strength of the effective desire of accumulation than exists in the empire. The amount
of self-denial would seem to be small. It is their great deficiency in forethought and
frugality in this respect which is the cause of the scarcities and famines that
frequently occur.”

That it is defect of providence, not defect of industry, that limits production among
the Chinese, is still more obvious than in the case of the semi-agriculturized Indians.
“Where the returns are quick, where the instruments formed require but little time to
bring the events for which they were formed to an issue,” it is well known that “the
great [pg 126] progress which has been made in the knowledge of the arts suited to
the nature of the country and the wants of its inhabitants” makes industry energetic
and effective. “What marks the readiness with which labor is forced to form the most
difficult materials into instruments, where these instruments soon bring to an issue the
events for which they are formed, is the frequent occurrence, on many of their lakes
and rivers, of structures resembling the floating gardens of the Peruvians, rafts
covered with vegetable soil and cultivated. Labor in this way draws from the
materials on which it acts very speedy returns. Nothing can exceed the luxuriance of
vegetation when the quickening powers of a genial sun are ministered to by a rich soil
and abundant moisture. It is otherwise, as we have seen, in cases where the return,
though copious, is distant. European travelers are surprised at meeting these little
floating farms by the side of swamps which only require draining to render them
tillable.”

When a country has carried production as far as in the existing state of knowledge it
can be carried with an amount of return corresponding to the average strength of the
effective desire of accumulation in that country, it has reached what is called the
stationary state; the state in which no further addition will be made to capital, unless
there takes place either some improvement in the arts of production, or an increase in
the strength of the desire to accumulate. In the stationary state, though capital does
not on the whole increase, some persons grow richer and others poorer. Those whose
degree of providence is below the usual standard become impoverished, their capital
perishes, and makes room for the savings of those whose effective desire of
accumulation exceeds the average. These become the natural purchasers of the lands,

manufactories, and other instruments of production owned by their less provident
countrymen.

In China, if that country has really attained, as it is supposed to have done, the
stationary state, accumulation has stopped when the returns to capital are still as high
as is indicated by a rate of interest legally twelve per cent, and practically [pg 127]
varying (it is said) between eighteen and thirty-six. It is to be presumed, therefore,
that no greater amount of capital than the country already possesses can find
employment at this high rate of profit, and that any lower rate does not hold out to a
Chinese sufficient temptation to induce him to abstain from present enjoyment. What
a contrast with Holland, where, during the most flourishing period of its history, the
government was able habitually to borrow at two per cent, and private individuals, on
good security, at three!

§ 4. Examples of Excess of this Desire.

In [the United States and] the more prosperous countries of Europe, there are to be
found abundance of prodigals: still, in a very numerous portion of the community, the
professional, manufacturing, and trading classes, being those who, generally
speaking, unite more of the means with more of the motives for saving than any other
class, the spirit of accumulation is so strong that the signs of rapidly increasing wealth
meet every eye: and the great amount of capital seeking investment excites
astonishment, whenever peculiar circumstances turning much of it into some one
channel, such as railway construction or foreign speculative adventure, bring the
largeness of the total amount into evidence.

There are many circumstances which, in England, give a peculiar force to the
accumulating propensity. The long exemption of the country from the ravages of war
and the far earlier period than elsewhere at which property was secure from military
violence or arbitrary spoliation have produced a long-standing and hereditary
confidence in the safety of funds when trusted out of the owner's hands, which in
most other countries is of much more recent origin, and less firmly established.

The growth of deposit-banking in Great Britain, therefore, advances with enormous
strides, while in Continental countries it makes very little headway. The disturbed
condition of the country in France, owing to wars, leads the thrifty to hoard instead of
depositing their savings. But in the United States the same growth is seen as among the
English. The net deposits of the national banks of the United States in 1871 were
$636,000,000, but in 1883 they had increased more than 83 [pg 128] per cent to

$1,168,000,000. Deposit accounts are the rule even with small tradesmen; and the savings-
banks of Massachusetts alone show deposits in 1882-1883 of $241,311,362, and those of
New York of $412,147,213. The United States also escapes from the heavy taxation which
in Europe is imposed to maintain an extravagant army and navy chest. The effect of
institutions, moreover, in stimulating the growth of material prosperity is far more true of
the United States than of England, for the barriers raised against the movement from lower
to higher social classes in the latter country are non-existent here, and consequently there
is more stimulus toward acquiring the means of bettering a man's social condition.

The geographical causes which have made industry rather than war the natural source
of power and importance to Great Britain [and the United States] have turned an
unusual proportion of the most enterprising and energetic characters into the direction
of manufactures and commerce; into supplying their wants and gratifying their
ambition by producing and saving, rather than by appropriating what has been
produced and saved. Much also depended on the better political institutions of this
country, which, by the scope they have allowed to individual freedom of action, have
encouraged personal activity and self-reliance, while, by the liberty they confer of
association and combination, they facilitate industrial enterprise on a large scale. The
same institutions, in another of their aspects, give a most direct and potent stimulus to
the desire of acquiring wealth. The earlier decline of feudalism [in England] having
removed or much weakened invidious distinctions between the originally trading
classes and those who had been accustomed to despise them, and a polity having
grown up which made wealth the real source of political influence, its acquisition was
invested with a factitious value independent of its intrinsic utility. And, inasmuch as
to be rich without industry has always hitherto constituted a step in the social scale
above those who are rich by means of industry, it becomes the object of ambition to
save not merely as much as will afford a large income while in business, but enough
to retire from business and live in affluence on realized gains.

[pg 129]
In [the United States,] England, and Holland, then, for a long time past, and now in
most other countries in Europe, the second requisite of increased production, increase
of capital, shows no tendency to become deficient. So far as that element is
concerned, production is susceptible of an increase without any assignable bounds.
The limitation to production, not consisting in any necessary limit to the increase of
the other two elements, labor and capital, must turn upon the properties of the only
element which is inherently, and in itself, limited in quantity. It must depend on the
properties of land.

[pg 130]

Chapter IX. Of The Law Of The Increase Of Production
From Land.

§ 1. The Law of Production from the Soil, a Law of Diminishing Return in
Proportion to the Increased Application of Labor and Capital.

Land differs from the other elements of production, labor, and capital, in not being
susceptible of indefinite increase. Its extent is limited, and the extent of the more
productive kinds of it more limited still. It is also evident that the quantity of produce
capable of being raised on any given piece of land is not indefinite. This limited
quantity of land and limited productiveness of it are the real limits to the increase of
production.

The limitation to production from the properties of the soil is not like the obstacle
opposed by a wall, which stands immovable in one particular spot, and offers no
hindrance to motion short of stopping it entirely. We may rather compare it to a
highly elastic and extensible band, which is hardly ever so violently stretched that it
could not possibly be stretched any more, yet the pressure of which is felt long before
the final limit is reached, and felt more severely the nearer that limit is approached.

After a certain, and not very advanced, stage in the progress of agriculture—as soon,
in fact, as mankind have applied themselves to cultivation with any energy, and have
brought to it any tolerable tools—from that time it is the law of production from the
land, that in any given state of agricultural skill and knowledge, by increasing the
labor, the produce is not increased in an equal degree; doubling the labor does not
double the produce; or, to express the same thing in other words, every increase of
produce is obtained [pg 131] by a more than proportional increase in the application
of labor to the land. This general law of agricultural industry is the most important
proposition in political economy. Were the law different, nearly all the phenomena of
the production and distribution of wealth would be other than they are.

It is not generally considered that in the United States, where in many sparsely settled
parts of the country new land is constantly being brought into cultivation, an additional
population under existing conditions of agricultural skill can be maintained with
constantly increasing returns up to a certain point before the law of diminishing returns

begins to operate. Where more laborers are necessary, and more capital wanted, to co-
operate in a new country before all the land can give its maximum product, in such a stage
of cultivation it can not be said that the law of diminishing returns has yet practically set
in.

When, for the purpose of raising an increase of produce, recourse is had to inferior
land, it is evident that, so far, the produce does not increase in the same proportion
with the labor. The very meaning of inferior land is land which with equal labor
returns a smaller amount of produce. Land may be inferior either in fertility or in
situation. The one requires a greater proportional amount of labor for growing the
produce, the other for carrying it to market. If the land A yields a thousand quarters of
wheat to a given outlay in wages, manure, etc., and, in order to raise another
thousand, recourse must be had to the land B, which is either less fertile or more
distant from the market, the two thousand quarters will cost more than twice as much
labor as the original thousand, and the produce of agriculture will be increased in a
less ratio than the labor employed in procuring it.

Instead of cultivating the land B, it would be possible, by higher cultivation, to make
the land A produce more. It might be plowed or harrowed twice instead of once, or
three times instead of twice; it might be dug instead of being plowed; after plowing, it
might be gone over with a hoe instead of a harrow, and the soil more completely
pulverized; it might be oftener or more thoroughly weeded; [pg 132] the implements
used might be of higher finish, or more elaborate construction; a greater quantity or
more expensive kinds of manure might be applied, or, when applied, they might be
more carefully mixed and incorporated with the soil.

The example of market-gardens in the vicinity of great cities and towns shows how the
intensive culture permits an increase of labor and capital with larger returns. These lands,
by their situation, are superior lands for this particular purpose, although they might be
inferior lands as regards absolute productiveness when compared with the rich wheat-
lands of Dakota. New England and New Jersey farms, generally speaking, no longer
attempt the culture of grains, but (when driven out of that culture by the great railway lines
which have opened up the West) they have arranged themselves in a scale of adaptability
for stock, grass, fruit, dairy, or vegetable farming; and have thereby given greater profits to
their owners than the same land did under the old régime. Even on lands where any grain
can still be grown, corn, buckwheat, barley, oats, and rye, cover the cultivated areas
instead of wheat.

Inferior lands, or lands at a greater distance from the market, of course yield an
inferior return, and an increasing demand can not be supplied from them unless at an

augmentation of cost, and therefore of price. If the additional demand could continue
to be supplied from the superior lands, by applying additional labor and capital, at no
greater proportional cost than that at which they yield the quantity first demanded of
them, the owners or farmers of those lands could undersell all others, and engross the
whole market. Lands of a lower degree of fertility or in a more remote situation might
indeed be cultivated by their proprietors, for the sake of subsistence or independence;
but it never could be the interest of any one to farm them for profit. That a profit can
be made from them, sufficient to attract capital to such an investment, is a proof that
cultivation on the more eligible lands has reached a point beyond which any greater
application of labor and capital would yield, at the best, no greater return than can be
obtained at the same expense from less fertile or less favorably situated lands.

[pg 133]
“It is long,” says a late traveler in the United States,130 “before an English eye
becomes reconciled to the lightness of the crops and the careless farming (as we
should call it) which is apparent. One forgets that, where land is so plentiful and labor
so dear as it is here, a totally different principle must be pursued from that which
prevails in populous countries, and that the consequence will of course be a want of
tidiness, as it were, and finish, about everything which requires labor.” Of the two
causes mentioned, the plentifulness of land seems to me the true explanation, rather
than the dearness of labor; for, however dear labor may be, when food is wanted,
labor will always be applied to producing it in preference to anything else. But this
labor is more effective for its end by being applied to fresh soil than if it were
employed in bringing the soil already occupied into higher cultivation.

The Western movement of what might be called the “wheat-center” is quite perceptible.
Until recently Minnesota has been a great wheat-producing State, and vast tracts of land
were there planted with that grain when the soil was first broken. The profits on the first
few crops have been enormous, but it is now said to be more desirable for wheat-growers
to move onward to newer lands, and to sell the land to cultivators of a different class (of
fruit and varied products), who produce for a denser population. So that (in 1884) Dakota,
131
instead of Minnesota, has become the district of the greatest wheat production.

Only when no soils remain to be broken up, but such as either from distance or
inferior quality require a considerable rise of price to render their cultivation
profitable, can it become advantageous to apply the high farming of Europe to any
American lands; except, perhaps, in the immediate vicinity of towns, where saving in
cost of carriage may compensate for great inferiority in the return from the soil itself.

[pg 134]

The principle which has now been stated must be received, no doubt, with certain
explanations and limitations. Even after the land is so highly cultivated that the mere
application of additional labor, or of an additional amount of ordinary dressing, would
yield no return proportioned to the expense, it may still happen that the application of
a much greater additional labor and capital to improving the soil itself, by draining or
permanent manures, would be as liberally remunerated by the produce as any portion
of the labor and capital already employed. It would sometimes be much more amply
remunerated. This could not be, if capital always sought and found the most
advantageous employment.

§ 2. Antagonist Principle to the Law of Diminishing Return; the Progress of
Improvements in Production.

That the produce of land increases, cæteris paribus, in a diminishing ratio to the
increase in the labor employed, is, as we have said (allowing for occasional and
temporary exceptions), the universal law of agricultural industry. This principle,
however, has been denied. So much so, indeed, that (it is affirmed) the worst land
now in cultivation produces as much food per acre, and even as much to a given
amount of labor, as our ancestors contrived to extract from the richest soils in
England.

The law of diminishing returns is the physical fact upon which the economic doctrine of
rent is based, and requires careful attention. Carey asserts, instead, that there is a law of
increasing productiveness, since, as men grow in numbers and intelligence, there arises an
132
ability to get more from the soil. Some objectors even deny that different grades of land
are cultivated, and that there is no need of taking inferior soils into cultivation. If this were
133
true, why would not one half an acre of land be as good as a whole State? Johnston
says: “In a country and among poor settlers ... poor land is a relative term. Land is called
poor which is not suitable to a poor man, which on mere clearing and burning will not
yield good first crops. Thus that which is poor land for a poor man may prove rich land to
134
a rich man.” Moreover, as is constantly the case in our country, it often happens that a
railway may bring new lands into competition with old lands in a given [pg 135]
market; of which the most conspicuous example is the competition of Western grain-fields
with the Eastern farms. In these older districts, before the competition came, there was a
given series of grades in the cultivated land; after the railway was built there was a
disarrangement of the old series, some going out of cultivation, some remaining, and some
of the new lands entering the list. The result is a new series of grades better suited to
satisfy the wants of men.

This, however, does not prove that the law of which we have been speaking does not
exist, but only that there is some antagonizing principle at work, capable for a time of
making head against the law. Such an agency there is, in habitual antagonism to the
law of diminishing return from land; and to the consideration of this we shall now
proceed. It is no other than the progress of civilization. The most obvious [part of it]
is the progress of agricultural knowledge, skill, and invention. Improved processes of
agriculture are of two kinds: (1) some enable the land to yield a greater absolute
produce, without an equivalent increase of labor; (2) others have not the power of
increasing the produce, but have that of diminishing the labor and expense by which
it is obtained. (1.) Among the first are to be reckoned the disuse of fallows, by means
of the rotation of crops; and the introduction of new articles of cultivation capable of
entering advantageously into the rotation. The change made in agriculture toward the
close of the last century, by the introduction of turnip-husbandry, is spoken of as
amounting to a revolution. Next in order comes the introduction of new articles of
food, containing a greater amount of sustenance, like the potato, or more productive
species or varieties of the same plant, such as the Swedish turnip. In the same class of
improvements must be placed a better knowledge of the properties of manures, and of
the most effectual modes of applying them; the introduction of new and more
powerful fertilizing agents, such as guano, and the conversion to the same purpose of
substances previously wasted; inventions like subsoil-plowing or tile-draining, by
which the produce of some kinds of lands is so greatly multiplied; improvements in
the breed or feeding of [pg 136] laboring cattle; augmented stock, of the animals
which consume and convert into human food what would otherwise be wasted; and
the like. (2.) The other sort of improvements, those which diminish labor, but without
increasing the capacity of the land to produce, are such as the improved construction
of tools; the introduction of new instruments which spare manual labor, as the
winnowing and thrashing machines. These improvements do not add to the
productiveness of the land, but they are equally calculated with the former to
counteract the tendency in the cost of production of agricultural produce, to rise with
the progress of population and demand.

§ 3. —In Railways.

Analogous in effect to this second class of agricultural improvements are improved
means of communication. Good roads are equivalent to good tools. It is of no
consequence whether the economy of labor takes place in extracting the produce from
the soil, or in conveying it to the place where it is to be consumed.

The functions performed by railways in the system of production is highly important.
They are among the most influential causes affecting the cost of producing commodities,
particularly those which satisfy the primary wants of man, of which food is the chief. The
amount of tonnage carried is enormous; and the cost of this service to the producers and
consumers of the United States is a question of very great magnitude. The serious
reduction in the cost of transportation on the railways will be a surprise to all who have
not followed the matter very closely; the more so, that it has been brought about by natural
causes, and independent of legislation. Corn, meat, and dairy products form, it is said, at
least 50 per cent, and coal and timber about 30 per cent, of the tonnage moved on all the
railways of the United States. If a lowered cost of transportation has come about, it has
then cost less to move the main articles of immediate necessity. Had the charge in 1880
remained as high even as it was from 1866 to 1869, the number of tons carried in 1880
would have cost the United States from $500,000,000 to $800,000,000 more than the
charge actually made, owing to the reductions by the railways. It seems, however, that this
process of reduction culminated about 1879. In order to show the facts of this process,
note the changes in the following chart, No. V. The railways of the State of New York are
taken, but the same is also true of those of Ohio:

[pg 137]

Chart V.

Cost of 20 Barrels of Flour, 10 Beef, 10 Pork, 100 Bushels Wheat, 100 Corn, 100 Oats,
100 Pounds Butter, 100 Lard, and 100 Fleece Wool, in New York City, at the Average of
each Year, Compiled by Months, in Gold; Compared Graphically with the Decrease in the
Charge per Ton per Mile, on all the Railroads of the State of New York, during the Same
Period.

Decrease in
Price in gold Charge for
Decrease in the profits of
of staple carrying
the railroad the railroads
Year. farm one ton one
expenses per for carrying
products. mile.
ton. (Cents) one ton.
(Dollars) (Cents)
(Cents)
1870 776.02 1.7016 1.1471 .5545
1871 735.33 1.7005 1.1450 .5555
1872 675.92 1.6645 1.1490 .5155
1873 662.50 1.6000 1.0864 .5136
1874 748.54 1.4480 .9730 .4750
1875 696.40 1.3039 .9587 .3452
1876 651.74 1.1604 .8561 .3043

1877 751.95 1.0590 .7740 .2850
1878 569.81 .9994 .6900 .3094
1879 568.34 .8082 .5847 .2295
1880 631.32 .9220 .6030 .3190
1881 703.10 .8390 .5880 .2510
1882 776.12 .8170 .6010 .2160
1883 662.11 .8990 .6490 .2500

In 1855 the charge per ton per mile was 3.27 cents, as compared with 0.89 in 1883.

Tons moved 1 m. in 1883 by railroads of N.Y. 9,286,216,628
At rate of 1855, would cost $303,659,283
Actual cost in 1883 83,464,919
Saving to the State $220,194,364

[pg 138]
135
The explanation of this reduced cost is given by Mr. Edward Atkinson as (1) the
competition of water-ways, (2) the competition of one railway with another, and (3) the
competition of other countries, which forces our railways to try to lay our staple products
down in foreign markets at a price which will warrant continued shipment. Besides these
reasons, much ought also (4) to be assigned to the progress of inventions and the reduced
cost of steel and all appliances necessary to the railways.

The large importance of the railways shows itself in an influence on general business
prosperity, and as a place for large investments of a rapidly growing capital. The building
of railways, however, has been going on, at some times with greater speed than at others.
Instead of 33,908 miles of railways at the close of our war, we have now (1884) over
120,000 miles. How the additional mileage has been built year by year, with two distinct
eras of increased building—one from 1869 to 1873, and another from 1879 to 1884—may
be seen by the shorter lines of the subjoined chart, No. VI.

That speculation has been excited at different times by the opening up of our Western
country, there can be no doubt. And if a comparison be made with Chart No. XVII (Book
IV, Chap. III), which gives the total grain-crops of the United States, it will be seen that
since 1879, although our population has increased from 12-½ per cent to 14 per cent, our
grain-crops only 5 per cent, yet our railway mileage has increased 40 per cent.

The extent to which the United States has carried railway-building, as compared with
European countries, although we have a very much greater area, is distinctly shown by
Chart No. VII. This application of one form of improvement to oppose the law of
diminishing returns in the United States has produced extraordinary results, especially
when we consider that we are probably not yet using all our best lands, or, in other words,
that we have not yet felt the law of diminishing returns in some large districts.

Chart VI.

Miles of Railroad in Operation on the 1st January in each Year, and the Miles added
in the Year Ensuing.

Year. Miles of Railroad. Miles added.
1865 33,908 1,177
1866 35,085 1,716
1867 36,801 2,449
1868 39,250 2,979
1869 42,229 4,615
1870 46,844 6,070
1871 52,914 7,379
1872 60,293 5,878
1873 66,171 4,107
1874 70,278 2,105
1875 72,383 1,713
1876 74,096 2,712
1877 76,808 2,281
1878 79,089 2,687
1879 81,776 4,721
1880 86,497 7,048
1881 93,545 9,789
1882 103,334 11,591
1883 114,925 6,618

Railways and canals are virtually a diminution of the cost of production of all things
sent to market by them; and literally so of all those the appliances and aids for
producing which they serve to transmit. By their means land can be [pg 140]
cultivated, which would not otherwise have remunerated the cultivators without a rise
of price. Improvements in navigation have, with respect to food or materials brought
from beyond sea, a corresponding effect.

§ 4. —In Manufactures.

From similar considerations, it appears that many purely mechanical improvements,
which have, apparently, at least, no peculiar connection with agriculture, nevertheless
enable a given amount of food to be obtained with a smaller expenditure of labor. A
great improvement in the process of smelting iron would tend to cheapen agricultural

implements, diminish the cost of railroads, of wagons and carts, ships, and perhaps
buildings, and many other things to which iron is not at present applied, because it is
too costly; and would thence diminish the cost of production of food. The same effect
would follow from an improvement in those processes of what may be termed
manufacture, to which the material of food is subjected after it is separated from the
ground. The first application of wind or water power to grind corn tended to cheapen
bread as much as a very important discovery in agriculture would have done; and any
great improvement in the construction of corn-mills would have, in proportion, a
similar influence.

Those manufacturing improvements which can not be made instrumental to facilitate,
in any of its stages, the actual production of food, and therefore do not help to
counteract or retard the diminution of the proportional return to labor from the soil,
have, however, another effect, which is practically equivalent. What they do not
prevent, they yet, in some degree, compensate for.136

Chart VII.

Ratio of Miles of Railroad to the Areas of States and Countries—United States and
Europe. The relative proportion is 1 Mile Railroad to 4 Square Miles of Area.

No. Name. Rank in Size. Relative.
1 Massachusetts 67 98
2 Belgium 62 96
3 England and Wales 29 88
4 New Jersey 62 81
5 Connecticut 68 80
6 Rhode Island 71 65
7 Ohio 44 60
8 Illinois 32 59
9 Pennsylvania 40 55
10 Delaware 69 53
11 Indiana 50 52
12 New Hampshire 65 45
13 Switzerland 59 44
14 New York 39 41
15 Iowa 33 39
16 German Empire 4 38
17 Scotland 52 37
18 Maryland 63 36
19 Vermont 64 35
20 Ireland 51 29

21 Michigan 31 28
22 France 5 27
23 Denmark 60 26
24 Netherlands 57 25
25 Missouri 26 24
26 Wisconsin 34 23
27 Austrian Empire 3 21
28 Virginia 45 19
29 Italy 13 18
30 Georgia 30 17
31 Kansas 22 16
32 Kentucky 46 15
33 South Carolina 49 14
34 Tennessee 42 14
35 Minnesota 21 13
36 Alabama 36 13
37 West Virginia 55 12
38 Roumania 41 12
39 North Carolina 37 12
40 Maine 48 12
41 Nebraska 23 10
42 Mississippi 38 9
43 Spain 6 9
44 Portugal 47 9
45 Sweden 7 9
46 Arkansas 35 8
47 Louisiana 43 8
48 Colorado 16 8
49 California 8 7
50 Turkey 27 7
51 Texas 2 7
52 Utah 20 6
53 Florida 28 6
54 Dakota 7 6
55 Russia in Europe 1 5
56 Nevada 15 5
57 Norway 11 5
58 Oregon 18 4
59 Bulgaria 54 4
60 New Mexico 12 3
61 Wyoming 17 2
62 Indian Territory 25 2

63 Washington 24 1
64 Arizona 14 1
65 Idaho 19 1
66 Greece 58 0
67 Montana 10 0
68 Bosnia and Herzegovina 53 0
69 Servia 56 0
70 Eastern Roumelia 61 0
71 Montenegro 70 0
72 Andorra 72 0

(The United States have substantially one mile of railway to each 540 inhabitants.
Europe has one mile to each 3,000 inhabitants, if Russia be included; about one mile
to each 2,540, exclusive of Russia.)

The materials of manufactures being all drawn from the land, and many of them from
agriculture, which supplies in particular the entire material of clothing, the general
law of production from the land, the law of diminishing return, must in the last resort
be applicable to manufacturing as well as to agricultural history. As population
increases, and [pg 142] the power of the land to yield increased produce is strained
harder and harder, any additional supply of material, as well as of food, must be
obtained by a more than proportionally increasing expenditure of labor. But the cost
of the material forming generally a very small portion of the entire cost of the
manufacture, the agricultural labor concerned in the production of manufactured
goods is but a small fraction of the whole labor worked up in the commodity.

137
Mr. Babbage gives an interesting illustration of this principle. Bar-iron of the value of
£1 became worth, when manufactured into—

£
Slit-iron, for nails 1.10
Natural steel 1.42
Horseshoes 2.55
Gun-barrels, ordinary 9.10
Wood-saws 14.28
Scissors, best 446.94
Penknife-blades 657.14
Sword-handles, polished steel 972.82

It can not, however, be said of such manufactures as coarse cotton cloth, wherein the
increased cost of raw cotton causes an immediate effect upon the price of the cloth, that
138
the cost of the materials forms but a small portion of the cost of the manufacture.

All the labor [not engaged in preparing materials] tends constantly and strongly
toward diminution, as the amount of production increases. Manufactures are vastly
more susceptible than agriculture of mechanical improvements and contrivances for
saving labor. In manufactures, accordingly, the causes tending to increase the
productiveness of industry preponderate greatly over the one cause which tends to
diminish it; and the increase of production, called forth by the progress of society,
takes place, not at an increasing, but at a continually diminishing proportional cost.
This fact has manifested itself in the progressive fall of the prices and values of
almost every kind of manufactured goods during two centuries past; a fall accelerated
by the mechanical inventions of the last seventy or eighty years, and susceptible [pg
143] of being prolonged and extended beyond any limit which it would be safe to
specify. The benefit might even extend to the poorest class. The increased cheapness
of clothing and lodging might make up to them for the augmented cost of their food.

There is, thus, no possible improvement in the arts of production which does not in
one or another mode exercise an antagonistic influence to the law of diminishing
return to agricultural labor. Nor is it only industrial improvements which have this
effect. Improvements in government, and almost every kind of moral and social
advancement, operate in the same manner. We may say the same of improvements in
education. The intelligence of the workman is a most important element in the
productiveness of labor. The carefulness, economy, and general trustworthiness of
laborers are as important as their intelligence. Friendly relations and a community of
interest and feeling between laborers and employers are eminently so. In the rich and
idle classes, increased mental energy, more solid instruction, and stronger feelings of
conscience, public spirit, or philanthropy, would qualify them to originate and
promote the most valuable improvements, both in the economical resources of their
country and in its institutions and customs.

§ 5. Law Holds True of Mining.

We must observe that what we have said of agriculture is true, with little variation, of
the other occupations which it represents; of all the arts which extract materials from
the globe. Mining industry, for example, usually yields an increase of produce at a
more than proportional increase of expense.

It does worse, for even its customary annual produce requires to be extracted by a
greater and greater expenditure of labor and capital. As a mine does not reproduce the
coal or ore taken from it, not only are all mines at last exhausted, but even when they
as yet show no signs of exhaustion they must be worked at a continually increasing

cost; shafts must be sunk deeper, galleries driven farther, greater power applied to
keep them clear of water; the produce must be [pg 144] lifted from a greater depth, or
conveyed a greater distance. The law of diminishing return applies therefore to
mining in a still more unqualified sense than to agriculture; but the antagonizing
agency, that of improvements in production, also applies in a still greater degree.
Mining operations are more susceptible of mechanical improvements than
agricultural: the first great application of the steam-engine was to mining; and there
are unlimited possibilities of improvement in the chemical processes by which the
metals are extracted. There is another contingency, of no unfrequent occurrence,
which avails to counterbalance the progress of all existing mines toward exhaustion:
this is, the discovery of new ones, equal or superior in richness.

139
Professor Jevons has applied this economic law to the industrial situation of England.
While explaining that the supply of cheap coal is the basis of English manufacturing
prosperity, yet he insists that, if the demand for coal is constantly increasing, the point
must inevitably be reached in the future when the increased supply can be obtained only at
a higher cost. When coal costs England as much as it does any other nation, then her
exclusive industrial advantage will cease to exist. In the United States the outlying iron
deposits of Lake Superior, Lake Champlain, and Pennsylvania, so geologists tell us, will
find competition arising from the new grades of greater productiveness in the richer
deposits of States like Alabama. In that case we shall be going from poorer to better grades
of iron-mines, but after the change is made a series of different grades of productiveness
will be established as before.

To resume: all natural agents which are limited in quantity are not only limited in
their ultimate productive power, but, long before that power is stretched to the utmost,
they yield to any additional demands on progressively harder terms. This law may,
however, be suspended, or temporarily controlled, by whatever adds to the general
power of mankind over nature, and especially by any extension of their knowledge,
and their consequent command, of the properties and powers of natural agents.

[pg 145]

Chapter X. Consequences Of The Foregoing Laws.

§ 1. Remedies for Weakness of the Principle of Accumulation.

From the preceding exposition it appears that the limit to the increase of production is
twofold: from deficiency of capital, or of land. Production comes to a pause, either
because the effective desire of accumulation is not sufficient to give rise to any
further increase of capital, or because, however disposed the possessors of surplus
income may be to save a portion of it, the limited land at the disposal of the
community does not permit additional capital to be employed with such a return as
would be an equivalent to them for their abstinence.

In countries where the principle of accumulation is as weak as it is in the various
nations of Asia, the desideratum economically considered is an increase of industry,
and of the effective desire of accumulation. The means are, first, a better government:
more complete security of property; moderate taxes, and freedom from arbitrary
exaction under the name of taxes; a more permanent and more advantageous tenure of
land, securing to the cultivator as far as possible the undivided benefits of the
industry, skill, and economy he may exert. Secondly, improvement of the public
intelligence. Thirdly, the introduction of foreign arts, which raise the returns derivable
from additional capital to a rate corresponding to the low strength of the desire of
accumulation.

An excellent example of what might be done by this process is to be seen under our very
eyes in the present development of Mexico, to which American capital and enterprise have
been [pg 146] so prominently drawn of late. All these proposed remedies, if put into use
in Mexico, would undoubtedly result in a striking increase of wealth.

§ 2. Even where the Desire to Accumulate is Strong, Population must be
Kept within the Limits of Population from Land.

But there are other countries, and England [and the United States are] at the head of
them, in which neither the spirit of industry nor the effective desire of accumulation
need any encouragement. In these countries there would never be any deficiency of
capital, if its increase were never checked or brought to a stand by too great a
diminution of its returns. It is the tendency of the returns to a progressive diminution
which causes the increase of production to be often attended with a deterioration in
the condition of the producers; and this tendency, which would in time put an end to
increase of production altogether, is a result of the necessary and inherent conditions
of production from the land.

This, of course, is based on the supposition that no new lands, such as those of the United
States, can be opened for cultivation. If there is no prohibition to the importation of
cheaper food, new and richer land in any part of the world, within reach of the given
country, is an influence which works against the tendency. Yet the tendency, or economic
law, is there all the same, forever working.

In all countries which have passed beyond a very early stage in the progress of
agriculture, every increase in the demand for food, occasioned by increased
population, will always, unless there is a simultaneous improvement in production,
diminish the share which on a fair division would fall to each individual. An
increased production, in default of unoccupied tracts of fertile land, or of fresh
improvements tending to cheapen commodities, can never be obtained but by
increasing the labor in more than the same proportion. The population must either
work harder or eat less, or obtain their usual food by sacrificing a part of their other
customary comforts. Whenever this necessity is postponed, it is because the
improvements which facilitate production continue progressive; because the
contrivances of mankind for making their labor more effective keep up an [pg 147]
equal struggle with Nature, and extort fresh resources from her reluctant powers as
fast as human necessities occupy and engross the old.

From this results the important corollary, that the necessity of restraining population
is not, as many persons believe, peculiar to a condition of great inequality of property.
A greater number of people can not, in any given state of civilization, be collectively
so well provided for as a smaller. The niggardliness of nature,140 not the injustice of
society, is the cause of the penalty attached to over-population. An unjust distribution
of wealth does not even aggravate the evil, but, at most, causes it to be somewhat
earlier felt. It is in vain to say that all mouths which the increase of mankind calls into
existence bring with them hands. The new mouths require as much food as the old
ones, and the hands do not produce as much.

After a degree of density has been attained, sufficient to allow the principal benefits
of combination of labor, all further increase tends in itself to mischief, so far as
regards the average condition of the people; but the progress of improvement has a
counteracting operation, and allows of increased numbers without any deterioration,
and even consistently with a higher average of comfort. Improvement must here be
understood in a wide sense, including not only new industrial inventions, or an
extended use of those already known, but improvements in institutions, education,
opinions, and human affairs generally, provided they tend, as almost all
improvements do, to give new motives or new facilities to production.

The increase in the population of the United States has been enormous, as already seen,
but the increase of production has been still greater, owing to the fertility of our land, to
improvements in the arts, and to our great genius for invention, as may be seen by the
141
following table (amounts in the second [pg 148] column are given in millions). The
steady increase of the valuation of our wealth goes on faster than the increase of
population, so that it manifests itself in a larger average wealth to each inhabitant.

Per cent Per cent Per
Decades. Valuation. of Population. of capital
increase. increase. valuation.
1800 $1,742 .. 5,308,483 .. $328
1810 2,382 37 7,239,881 36 329
1820 3,734 57 9,633,882 33 386
1830 4,328 16 12,866,020 34 336
1840 6,124 41 17,069,453 33 359
1850 8,800 44 23,191,876 36 379
1860 16,160 84 31,443,321 35 514
1870 30,068 86 38,558,371 23 780
1880 40,000 33 50,155,783 30 798

If the productive powers of the country increase as rapidly as advancing numbers call
for an augmentation of produce, it is not necessary to obtain that augmentation by the
cultivation of soils more sterile than the worst already under culture, or by applying
additional labor to the old soils at a diminished advantage; or at all events this loss of
power is compensated by the increased efficiency with which, in the progress of
improvement, labor is employed in manufactures. In one way or the other, the
increased population is provided for, and all are as well off as before. But if the
growth of human power over nature is suspended or slackened, and population does
not slacken its increase; if, with only the existing command over natural agencies,
those agencies are called upon for an increased produce; this greater produce will not
be afforded to the increased population, without either demanding on the average a

greater effort from each, or on the average reducing each to a smaller ration out of the
aggregate produce.

Ever since the great mechanical inventions of Watt, Arkwright, and their
contemporaries, the return to labor has probably increased as fast as the population;
and would [pg 149] even have outstripped it, if that very augmentation of return had
not called forth an additional portion of the inherent power of multiplication in the
human species. During the twenty or thirty years last elapsed, so rapid has been the
extension of improved processes of agriculture [in England], that even the land yields
a greater produce in proportion to the labor employed; the average price of corn had
become decidedly lower, even before the repeal of the corn laws had so materially
lightened, for the time being, the pressure of population upon production. But though
improvement may during a certain space of time keep up with, or even surpass, the
actual increase of population, it assuredly never comes up to the rate of increase of
which population is capable: and nothing could have prevented a general
deterioration in the condition of the human race, were it not that population has in
fact been restrained. Had it been restrained still more, and the same improvements
taken place, there would have been a larger dividend than there now is, for the nation
or the species at large. The new ground wrung from nature by the improvements
would not have been all tied up in the support of mere numbers. Though the gross
produce would not have been so great, there would have been a greater produce per
head of the population.

§ 3. Necessity of Restraining Population not superseded by Free Trade in
Food.

When the growth of numbers outstrips the progress of improvement, and a country is
driven to obtain the means of subsistence on terms more and more unfavorable, by
the inability of its land to meet additional demands except on more onerous
conditions, there are two expedients, by which it may hope to mitigate that
disagreeable necessity, even though no change should take place in the habits of the
people with respect to their rate of increase. One of these expedients is the
importation of food from abroad. The other is emigration.

The admission of cheaper food from a foreign country is equivalent to an agricultural
invention by which food could be raised at a similarly diminished cost at home. It
equally increases the productive power of labor. The return was [pg 150] before, so
much food for so much labor employed in the growth of food: the return is now, a
greater quantity of food for the same labor employed in producing cottons or

hardware, or some other commodity to be given in exchange for food. The one
improvement, like the other, throws back the decline of the productive power of labor
by a certain distance: but in the one case, as in the other, it immediately resumes its
course; the tide which has receded, instantly begins to readvance. It might seem,
indeed, that, when a country draws its supply of food from so wide a surface as the
whole habitable globe, so little impression can be produced on that great expanse by
any increase of mouths in one small corner of it that the inhabitants of the country
may double and treble their numbers without feeling the effect in any increased
tension of the springs of production, or any enhancement of the price of food
throughout the world. But in this calculation several things are overlooked.

In the first place, the foreign regions from which corn can be imported do not
comprise the whole globe, but those parts of it almost alone which are in the
immediate neighborhood of coasts or navigable rivers; and of such there is not, in the
productive regions of the earth, so great a multitude as to suffice during an indefinite
time for a rapidly growing demand, without an increasing strain on the productive
powers of the soil.

In the next place, even if the supply were drawn from the whole instead of a small
part of the surface of the exporting countries, the quantity of food would still be
limited, which could be obtained from them without an increase of the proportional
cost. The countries which export food may be divided into two classes: those in
which the effective desire of accumulation is strong, and those in which it is weak. In
Australia and the United States of America, the effective desire of accumulation is
strong; capital increases fast, and the production of food might be very rapidly
extended. But in such countries population [pg 151] also increases with extraordinary
rapidity. Their agriculture has to provide for their own expanding numbers, as well as
for those of the importing countries. They must, therefore, from the nature of the case,
be rapidly driven, if not to less fertile, at least what is equivalent, to remoter and less
accessible lands, and to modes of cultivation like those of old countries, less
productive in proportion to the labor and expense.

The extraordinary resources of the United States are scarcely understood even by
Americans. Chart No. XVIII (see Book IV, Chap. III) may give some idea of the
agricultural possibilities of our land. It will be seen from this that the quantity of fertile
land in but one of our States—Texas—is greater than that of Austria-Hungary.

But the countries which have at the same time cheap food and great industrial
prosperity are few, being only those in which the arts of civilized life have been
transferred full-grown to a rich and uncultivated soil. Among old countries, those
which are able to export food, are able only because their industry is in a very

backward state, because capital, and hence population, have never increased
sufficiently to make food rise to a higher price. Such countries are Russia, Poland,
and Hungary.

The law, therefore, of diminishing return to industry, whenever population makes a
more rapid progress than improvement, is not solely applicable to countries which are
fed from their own soil, but in substance applies quite as much to those which are
willing to draw their food from any accessible quarter that can afford it cheapest.

§ 4. —Nor by Emigration.

Besides the importation of corn, there is another resource which can be invoked by a
nation whose increasing numbers press hard, not against their capital, but against the
productive capacity of their land: I mean Emigration, especially in the form of
Colonization. Of this remedy the efficacy as far as it goes is real, since it consists in
seeking elsewhere those unoccupied tracts of fertile land which, if they existed at
home, would enable the demand of an increasing [pg 152] population to be met
without any falling off in the productiveness of labor. Accordingly, when the region to
be colonized is near at hand, and the habits and tastes of the people sufficiently
migratory, this remedy is completely effectual. The migration from the older parts of
the American Confederation to the new Territories, which is to all intents and
purposes colonization, is what enables population to go on unchecked throughout the
Union without having yet diminished the return to industry, or increased the difficulty
of earning a subsistence.

How strictly true this is may be seen by examining the map given in the last census
142
returns, showing the residence of the natives of the State of New York. The greater or
less frequency of natives of New York, residing in other States, is shown by different
degrees of shading on the map. A large district westward as far as the Mississippi shows a
density of natives of New York of from two to six to a square mile, and a lesser density
from Minnesota to Indian Territory, on the other side of the Mississippi. The same is
shown of other older States. The explanation of the movement can not be anything else
than the same as that for the larger movement from Europe to America.

There is no probability that even under the most enlightened arrangements (in older
countries) a permanent stream of emigration could be kept up, sufficient to take off,
as in America, all that portion of the annual increase (when proceeding at its greatest
rapidity) which, being in excess of the progress made during the same short period in

the arts of life, tends to render living more difficult for every averagely situated
individual in the community. And, unless this can be done, emigration can not, even
in an economical point of view, dispense with the necessity of checks to population.

The influence of immigration to the United States from European countries, in
lessening the tension in the relation between food and numbers, is one of the most
marked events in this century. The United States has received about one fourth of its
total population in 1880 from abroad since the foundation of the republic, as will be
seen by this table:

[pg 153]
Total Immigration Into The United States.

Periods. Numbers.
From 1789-1820 250,000143
1820-1830 151,824
1831-1840 599,125
1841-1850 1,713,251
1851-1860 2,598,214
1861-1870 2,491,451
1871-1880 2,812,191
1881-1883 2,061,745
Total 12,677,801

Of this number, 5,333,991 came from the British Isles, of which 3,367,624 were Irish.

There came 3,860,624 Germans, 593,021 Scandinavians, and 334,064 French. (See
United States “Statistical Abstract,” 1878, 1880, 1883.)

The causes operating on this movement of men—a movement unequaled in history—
are undoubtedly economic. Like the migration of the early Teutonic races from the
Baltic to Southern Europe, it is due to the pressure of numbers on subsistence.

A still more interesting study is that of the causes which attempt to explain the
direction of this stream after it has reached our shores. It is a definite fact that the old
slave States have hitherto received practically none of this vast foreign
immigration.144 The actual distribution of the foreign born in the United States is to be
seen in a most interesting way by aid of the colored map, Chart No. VIII, giving the
different densities of foreign-born population in different parts of the Union. It seems
almost certain that the general belief hitherto in the insecurity of life and property in
the old slave States has worked against the material prosperity of that section.

The different ages of the native- and foreign-born inhabitants of the United States
may be seen from the accompanying diagrams145 comparing the aggregate population
of the United States with the foreign-born. This may profitably be compared with a
similar diagram relating to the Chinese in the United States (Book II, Chap. III, § 3).

Aggregate: 1870. The figures give the number of thousands of each sex.

Decade of Life. Males. Females.
1 136 132
2 115 114
3 87 90
4 62 63
5 47 44
6 31 27
7 17 15
8 7 7
9 2 2

Foreign: 1870.

Decade of Life. Males. Females.
1 24 23
2 48 49
3 128 114
4 134 113
5 107 84
6 60 44
7 27 23
8 9 9
9 2 2

[pg 155]

Book II. Distribution.

Chapter I. Of Property.

§ 1. Individual Property and its opponents.

The laws and conditions of the Production of Wealth partake of the character of physical truths. There is nothing
optional or arbitrary in them. It is not so with the Distribution of Wealth. That is a matter of human institution
solely. The things once there, mankind, individually or collectively, can do with them as they like. They can place
them at the disposal of whomsoever they please, and on whatever terms. The Distribution of Wealth depends on
the laws and customs of society. The rules by which it is determined are what the opinions and feelings of the
ruling portion of the community make them, and are very different in different ages and countries; and might be
still more different, if mankind so chose. We have here to consider, not the causes, but the consequences, of the
rules according to which wealth may be distributed. Those, at least, are as little arbitrary, and have as much the
character of physical laws, as the laws of production.

We proceed, then, to the consideration of the different modes of distributing the produce of land and labor, which
have been adopted in practice, or may be conceived in theory. Among these, our attention is first claimed by that
primary and fundamental institution, on which, unless in [pg 156] some exceptional and very limited cases, the
economical arrangements of society have always rested, though in its secondary features it has varied, and is liable
to vary. I mean, of course, the institution of individual property.

Private property, as an institution, did not owe its origin to any of those considerations of utility which plead for
the maintenance of it when established. Enough is known of rude ages, both from history and from analogous
states of society in our own time, to show that tribunals (which always precede laws) were originally established,
not to determine rights, but to repress violence and terminate quarrels. With this object chiefly in view, they
naturally enough gave legal effect to first occupancy, by treating as the aggressor the person who first commenced
violence, by turning, or attempting to turn, another out of possession.

In considering the institution of property as a question in social philosophy, we must leave out of consideration its
actual origin in any of the existing nations of Europe. We may suppose a community unhampered by any previous
possession; a body of colonists, occupying for the first time an uninhabited country. (1.) If private property were
adopted, we must presume that it would be accompanied by none of the initial inequalities and injustice which
obstruct the beneficial operation of the principle in old society. Every full-grown man or woman, we must suppose,
would be secured in the unfettered use and disposal of his or her bodily and mental faculties; and the instruments
of production, the land and tools, would be divided fairly among them, so that all might start, in respect to outward
appliances, on equal terms. It is possible also to conceive that, in this original apportionment, compensation might
be made for the injuries of nature, and the balance redressed by assigning to the less robust members of the
community advantages in the distribution, sufficient to put them on a par with the rest. But the division, once
made, would not again be interfered with; individuals would be left to their own exertions and to the [pg 157]
ordinary chances for making an advantageous use of what was assigned to them. (2.) If individual property, on the
contrary, were excluded, the plan which must be adopted would be to hold the land and all instruments of
production as the joint property of the community, and to carry on the operations of industry on the common
account. The direction of the labor of the community would devolve upon a magistrate or magistrates, whom we
may suppose elected by the suffrages of the community, and whom we must assume to be voluntarily obeyed by
them. The division of the produce would in like manner be a public act. The principle might either be that of
complete equality, or of apportionment to the necessities or deserts of individuals, in whatever manner might be
conformable to the ideas of justice or policy prevailing in the community.

The assailants of the principle of individual property may be divided into two classes: (1) those whose scheme
implies absolute equality in the distribution of the physical means of life and enjoyment, and (2) those who admit
inequality, but grounded on some principle, or supposed principle, of justice or general expediency, and not, like so
many of the existing social inequalities, dependent on accident alone. The characteristic name for this [first]

economical system is Communism, a word of Continental origin, only of late introduced into this country. The
word Socialism, which originated among the English Communists, and was assumed by them as a name to
designate their own doctrine, is now, on the Continent, employed in a larger sense; not necessarily implying
Communism, or the entire abolition of private property, but applied to any system which requires that the land and
the instruments of production should be the property, not of individuals, but of communities, or associations, or of
the government.

It should be said, moreover, that Socialism is to-day used in the distinct sense of a system which abolishes private property, and
places the control of the capital, labor, and combined industries of the country in the hands of the state. The essence [pg 158]
of modern socialism is the appeal to state-help and the weakening of individual self-help. Collectivism is also a term now used
by German and French writers to describe an organization of the industries of a country under a collective instead of an
individual management. Collectivism is but the French expression for the system of state socialism.

§ 2. The case for Communism against private property presented.

The objection ordinarily made to a system of community of property and equal distribution of the produce, that
each person would be incessantly occupied in evading his fair share of the work, points, undoubtedly, to a real
difficulty. But those who urge this objection forget to how great an extent the same difficulty exists under the
system on which nine tenths of the business of society is now conducted. And though the “master's eye,” when the
master is vigilant and intelligent, is of proverbial value, it must be remembered that, in a Socialist farm or
manufactory, each laborer would be under the eye, not of one master, but of the whole community. If Communistic
labor might be less vigorous than that of a peasant proprietor, or a workman laboring on his own account, it would
probably be more energetic than that of a laborer for hire, who has no personal interest in the matter at all.

Another of the objections to Communism is that if every member of the community were assured of subsistence
for himself and any number of children, on the sole condition of willingness to work, prudential restraint on the
multiplication of mankind would be at an end, and population would start forward at a rate which would reduce the
community through successive stages of increasing discomfort to actual starvation. But Communism is precisely
the state of things in which opinion might be expected to declare itself with greatest intensity against this kind of
selfish intemperance. An augmentation of numbers which diminished the comfort or increased the toil of the mass
would then cause (which now it does not) immediate and unmistakable inconvenience to every individual in the
association; inconvenience which could not then be imputed to the avarice of employers, or the unjust privileges of
the rich.

[pg 159]
A more real difficulty is that of fairly apportioning the labor of the community among its members. There are
many kinds of work, and by what standard are they to be measured one against another? Who is to judge how
much cotton-spinning, or distributing goods from the stores, or brick-laying, or chimney-sweeping, is equivalent to
so much plowing? Besides, even in the same kind of work, nominal equality of labor would be so great a real
inequality that the feeling of justice would revolt against its being enforced. All persons are not equally fit for all
labor; and the same quantity of labor is an unequal burden on the weak and the strong, the hardy and the delicate,
the quick and the slow, the dull and the intelligent.146

If, therefore, the choice were to be made between Communism with all its chances and the present state of society
with all its sufferings and injustices, all the difficulties, great or small, of Communism, would be but as dust in the
balance. But, to make the comparison applicable, we must compare Communism at its best with the régime of
individual property, not as it is, but as it might be made. The laws of property have never yet conformed to the
principles on which the justification of private property rests. They have made property of things which never
ought to be property, and absolute property where only a qualified property ought to exist. Private property, in
every defense made of it, is supposed to mean the guarantee to individuals of the fruits of their own labor and
abstinence. The guarantee to them of the fruits of the labor and abstinence of others, transmitted to them without
any merit or exertion of their own, is not of the essence of the institution, but a mere incidental consequence,
which, when it reaches a certain height, does not promote, but conflicts with the ends which render private

property legitimate. To judge of the final destination of the institution of property, we must suppose everything [pg
160] rectified which causes the institution to work in a manner opposed to that equitable principle, of proportion
between remuneration and exertion, on which, in every vindication of it that will bear the light, it is assumed to be
grounded. We must also suppose two conditions realized, without which neither Communism nor any other laws or
institutions could make the condition of the mass of mankind other than degraded and miserable. One of these
conditions is, universal education; the other, a due limitation of the numbers of the community. With these, there
could be no poverty, even under the present social institutions: and, these being supposed, the question of
socialism is not, as generally stated by Socialists, a question of flying to the sole refuge against the evils which
now bear down humanity, but a mere question of comparative advantages, which futurity must determine. We are
too ignorant either of what individual agency in its best form, or socialism in its best form, can accomplish, to be
qualified to decide which of the two will be the ultimate form of human society.

If a conjecture may be hazarded, the decision will probably depend mainly on one consideration, viz., which of the
two systems is consistent with the greatest amount of human liberty and spontaneity. It is yet to be ascertained
whether the communistic scheme would be consistent with that multiform development of human nature, those
manifold unlikenesses, that diversity of tastes and talents, and variety of intellectual points of view, which not only
form a great part of the interest of human life, but, by bringing intellects into stimulating collision and by
presenting to each innumerable notions that he would not have conceived of himself, are the mainspring of mental
and moral progression.

§ 3. The Socialists who appeal to state-help.

For general purposes, a clearer understanding of the various schemes may be gained by observing that (1) one class of socialists
intend to include the state itself within their plan, and (2) another class aim to form separate communities inside the state, and
under its protection.

Of this first system there are no present examples; but the object of most of the socialistic organizations in the United [pg 161]
147
States and Europe is to strive for the assumption by the state of the production and distribution of wealth. At present the most
148 149
active Socialists are to be found in Germany. The origin of this influence, however, is to be traced to France. Louis Blanc,
in his “Organisation du Travail,” considers property the great scourge of society. The Government, he asserts, should regulate
production; raise money to be appropriated without interest for creating state workshops, in which the workmen should elect their
own overseers, and all receive the same wages; and the sums needed should be raised from the abolition of collateral inheritance.
The important practical part of his scheme was that the great state workshops, aided by the Government, would make private
competition in those industries impossible, and thus bring about the change from the private to the socialistic system.

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The founder of modern German socialism was Karl Marx, and almost the only Socialist who pretended to economic
knowledge. He aimed his attack on the present social system against the question of value, by asserting that the amount of labor
necessary for the production of an article is the sole measure of its exchange value. It follows from this that the [pg 162] right
of property in the article vests wholly in the laborer, while the capitalist, if he claims a share of the product, is nothing less than a
robber. No just system, he avers, can properly exist so long as the rate of wages is fixed by free contract between the employer
and laborer; therefore the only remedy is the nationalization of all the elements of production, land, tools, materials, and all
existing appliances, which involves, of course, the destruction of the institution of private property. An obvious weakness in this
scheme is the provision that the Government should determine what goods are to be produced, and that every one is bound to
perform that work which is assigned by the state. In this there is no choice of work, and the tyranny of one master would be
supplanted by the tyranny of a greater multiplex master in the officers of Government. Moreover, it can not be admitted that
exchange value is determined by the quantity of labor alone. Every one knows that the result of ten days' labor of a skilled watch-
maker does not exchange for the result of ten days' labor of an unskilled hodman. Of two men making shoes, one may produce a
good the other a poor article, although both may work the same length of time; so that their exchange value ought not to be
determined by the mere quantity of labor expended. Above all, Marx would extend the equality of wages for the same time to the
manager and superintendent also. In other words, he proposes to take away all the incentives to the acquirement or exercise of
superior and signal ability in every work of life, the result of which would inevitably lead to a deadening extension of mediocrity.

This system gained an undue attention because it was made the instrument of a socialist propaganda under the leadership of
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Ferdinand Lassalle. This active leader, in 1863, founded the German “Workingmen's Union,” a year earlier than the

152
“International Association.” In 1869 Liebknecht and his friends established the “Social Democratic Workingmen's Party,”
which after some difficulties absorbed the followers of Lassalle in a congress at Gotha in 1875, and form the [pg 163] present
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Socialist party in Germany. Their programme, as announced at Gotha, is as follows:

I. Labor is the source of all riches and of all culture. As general profitable labor can only be done by the human society, the whole
product of labor belongs to society—i.e., to all its members—who have the same duties and the same right to work, each
according to his reasonable wants.

In the present society the means of work are the monopoly of the class of capitalists. The class of workingmen thus become
dependent on them, and consequently are given over to all degrees of misery and servitude.

In order to emancipate labor it is requisite that the means of work be transformed into the common property of society, that all
production be regulated by associations, and that the entire product of labor be turned over to society and justly distributed for
the benefit of all.

None but the working-class itself can emancipate labor, as in relation to it all other classes are only a reactionary mass.

II. Led by these principles, the German Social Workingmen's party, by all legal means, strives for a free state and society, the
breaking down of the iron laws of wages by abolishing the system of hired workingmen, by abolishing exploitation in every
shape, and doing away with all social and political inequality.

The German Social Workingmen's party, although first working within its national confines, is fully conscious of the
international character of the general workingmen's movement, and is resolved to fulfill all duties which it imposes on each
workingman in order to realize the fraternity of all men.

The German Social Workingmen's party, for the purpose of preparing the way, and for the solution of the social problem,
demands the creation of social productive associations, to be supported by the state government, and under the control of the
working-people. The productive associations are to be founded in such numbers that the social organization of the whole
production can be effected by them.

The German Social Workingmen's party requires as the basis of state government:

1. Universal, equal, direct, and secret suffrage, which, beginning with the twentieth year, obliges all citizens to vote in all State,
county, and town elections. Election-day must be a Sunday or a holiday.

2. Direct legislation by the people; decision as to war and peace by the people.

[pg 164]
3. General capability of bearing arms; popular defense in place of standing armies.

4. Abolition of all exceptional laws, especially those relating to the press, public meetings, and associations—in short, of all laws
which hinder the free expression of ideas and thought.

5. Gratuitous administration of justice by the people.

6. General and equal, popular and gratuitous education by the Government in all classes and institutes of learning; general duty to
attend school; religion to be declared a private affair.

The German Social Workingmen's party insists on realizing in the present state of society:

1. The largest possible extension of political rights and freedom in conformity to the above six demands.

2. A single progressive income-tax for State, counties, and towns, instead of those which are imposed at present, and in place of
indirect taxes, which unequally burden the people.

3. Unlimited right of combination.

4. A normal working-day corresponding with the wants of society; prohibition of Sunday labor.

5. Prohibition of children's work and of women's work, so far as it injures their health and morality.

6. Protective laws for the life and health of workingmen; sanitary control of their dwellings; superintendence of mines, factories,
industry, and home work by officers chosen by the workingmen; an effectual law guaranteeing the responsibility of employers.

7. Regulation of prison-work.

8. Unrestricted self-government of all banks established for the mutual assistance of workingmen.

The above scheme also represents very well the character of the Socialist agitators in the United States, who are themselves
chiefly foreigners, and have foreign conceptions of socialism. On this form of socialism it is interesting to have Mr. Mill's later
154
opinions in his own words.

“Among those who call themselves Socialists, two kinds of persons may be distinguished. There are, in the first
place, (1) those whose plans for a new order of society, in which private property and individual competition are to
be superseded and other motives to action substituted, are on the scale of a village community or township, and
would be applied to an entire country by the multiplication of such [pg 165] self-acting units; of this character are
the systems of Owen, of Fourier, and the more thoughtful and philosophic Socialists generally. The other class (2)
who are more a product of the Continent than of Great Britain, and may be called the revolutionary Socialists,
propose to themselves a much bolder stroke. Their scheme is the management of the whole productive resources of
the country by one central authority, the general Government. And with this view some of them avow as their
purpose that the working-classes, or somebody in their behalf, should take possession of all the property of the
country, and administer it for the general benefit. The aim of that is to substitute the new rule for the old at a single
stroke, and to exchange the amount of good realized under the present system, and its large possibilities of
improvement, for a plunge without any preparation into the most extreme form of the problem of carrying on the
whole round of the operations of social life without the motive power which has always hitherto worked the social
machinery. It must be acknowledged that those who would play this game on the strength of their own private
opinion, unconfirmed as yet by any experimental verification, must have a serene confidence in their own wisdom
on the one hand, and a recklessness of people's sufferings on the other, which Robespierre and St. Just, hitherto the
typical instances of those united attributes, scarcely came up to.”

§ 4. Of various minor schemes, Communistic and Socialistic.

[Of the schemes to be tried within a state], the two elaborate forms of non-communistic Socialism known as Saint-
Simonism and Fourierism are totally free from the objections usually urged against Communism. The Saint-
Simonian155 scheme does not contemplate an equal, but an [pg 166] unequal division of the produce; it does not
propose that all should be occupied alike, but differently, according to their vocation or capacity; the function of
each being assigned, like grades in a regiment, by the choice of the directing authority, and the remuneration being
by salary, proportioned to the importance, in the eyes of that authority, of the function itself, and the merits of the
person who fulfills it. But to suppose that one or a few human beings, howsoever selected, could, by whatever
machinery of subordinate agency, be qualified to adapt each person's work to his capacity, and proportion each
person's remuneration to his merits, is a supposition almost too chimerical to be reasoned against.156

The most skillfully combined, and with the greatest foresight of objections, of all the forms of Socialism is that
commonly known as Fourierism.157 This system does not contemplate the abolition of private property, nor even of
inheritance: on the contrary, it avowedly takes into consideration, as an element in the distribution of the produce,
capital as well as labor. It proposes that the operations of industry should be carried on by associations of about
two thousand members, combining their labor on a district of about a square league in extent, under the guidance
of chiefs selected by themselves (the “phalanstery”). In the distribution a certain minimum is first assigned for the
subsistence of every member of the community, whether capable or not of labor. The remainder of the produce is
shared in certain proportions, to be determined beforehand, among the three elements, Labor, Capital, and Talent.
[pg 167] The capital of the community may be owned in unequal shares by different members, who would in that
case receive, as in any other joint-stock company, proportional dividends. The claim of each person on the share of
the produce apportioned to talent is estimated by the grade or rank which the individual occupies in the several
groups of laborers to which he or she belongs, these grades being in all cases conferred by the choice of his or her

companions. The remuneration, when received, would not of necessity be expended or enjoyed in common; there
would be separate ménages for all who preferred them, and no other community of living is contemplated than that
all the members of the association should reside in the same pile of buildings; for saving of labor and expense, not
only in building, but in every branch of domestic economy; and in order that, the whole buying and selling
operations of the community being performed by a single agent, the enormous portion of the produce of industry
now carried off by the profits of mere distributors might be reduced to the smallest amount possible.

Fourierism was tried in West Virginia by American disciples, and it was advocated by Horace Greeley. A modified form appeared
in the famous community at Brook Farm (near Dedham, Massachusetts), which drew there George Ripley, Margaret Fuller, and
even George William Curtis and Nathaniel Hawthorne.

There have been many smaller communities established in the United States, but it can not be said that they have been successful
from the point of view either of numbers or material prosperity. The followers of Rapp, or the Harmonists, in Pennsylvania and
158
Indiana; the Owenites, in Indiana; the community of Zoar, in Ohio; the Inspirationists, in New York [pg 168] and Iowa; the
Perfectionists, at Oneida and Wallingford—are all evidently suffering from the difficulties due to the absence of family life, from
159
the increasing spirit of personal independence which carries away the younger members of the organizations, and the want of
that executive ability which distinguishes the successful manager in private enterprises.

§ 5. The Socialist objections to the present order of Society examined.

“The attacks160 on the present social order are vigorous and earnest, but open to the charge of exaggeration.

“In the first place, it is unhappily true that the wages of ordinary labor, in all the countries of Europe, are
wretchedly insufficient to supply the physical and moral necessities of the population in any tolerable measure. But
when it is further alleged that even this insufficient remuneration has a tendency to diminish; that there is, in the
words of M. Louis Blanc, une baisse continue des salaires; the assertion is in opposition to all accurate
information, and to many notorious facts. It has yet to be proved that there is any country in the civilized world
where the ordinary wages of labor, estimated either in money or in articles of consumption, are declining; while in
many they are, on the whole, on the increase; and an increase which is becoming, not slower, but more rapid.
There are, occasionally, branches of industry which are being gradually superseded by something else, and in
those, until production accommodates itself to demand, wages are depressed.

“M. Louis Blanc appears to have fallen into the same error which was at first committed by Malthus and his
followers, that of supposing because population has a greater power of [pg 169] increase than subsistence, its
pressure upon subsistence must be always growing more severe. It is a great point gained for truth when it comes
to be seen that the tendency to over-population is a fact which Communism, as well as the existing order of
society, would have to deal with. However this may be, experience shows that in the existing state of society the
pressure of population on subsistence, which is the principal cause of low wages, though a great, is not an
increasing evil; on the contrary, the progress of all that is called civilization has a tendency to diminish it, partly by
the more rapid increase of the means of employing and maintaining labor, partly by the increased facilities opened
to labor for transporting itself to new countries and unoccupied fields of employment, and partly by a general
improvement in the intelligence and prudence of the population. It is, of course, open to discussion what form of
society has the greatest power of dealing successfully with the pressure of population on subsistence, and on this
question there is much to be said for Socialism; but it has no just claim to be considered as the sole means of
preventing the general and growing degradation of the mass of mankind through the peculiar tendency of poverty
to produce over-population.

“Next, it must be observed that Socialists generally, and even the most enlightened of them, have a very imperfect
and one-sided notion of the operation of competition. They see half its effects, and overlook the other half. They
forget that competition is a cause of high prices and values as well as of low; that the buyers of labor and of
commodities compete with one another as well as the sellers; and that, if it is competition which keeps the prices
of labor and commodities as low as they are, it is competition which keeps them from falling still lower. To meet
this consideration, Socialists are reduced to affirm that, when the richest competitor has got rid of all his rivals, he

commands the market and can demand any price he pleases. But in the ordinary branches of industry no one rich
competitor has it in his power to drive [pg 170] out all the smaller ones. Some businesses show a tendency to pass
out of the hands of small producers or dealers into a smaller number of larger ones; but the cases in which this
happens are those in which the possession of a larger capital permits the adoption of more powerful machinery,
more efficient by more expensive processes, or a better organized and more economical mode of carrying on
business, and this enables the large dealer legitimately and permanently to supply the commodity cheaper than can
be done on the small scale; to the great advantage of the consumers, and therefore of the laboring-classes, and
diminishing, pro tanto, that waste of the resources of the community so much complained of by Socialists, the
unnecessary multiplication of mere distributors, and of the various other classes whom Fourier calls the parasites
of industry.

“Another point on which there is much misapprehension on the part of Socialists, as well as of trades-unionists and
other partisans of labor against capital, relates to the proportion in which the produce of the country is really
shared and the amount of what is actually diverted from those who produce it, to enrich other persons. When, for
instance, a capitalist invests £20,000 in his business, and draws from it an income of (suppose) £2,000 a year, the
common impression is as if he were the beneficial owner both of the £20,000 and of the £2,000, while the laborers
own nothing but their wages. The truth, however, is that he only obtains the £2,000 on condition of applying no
part of the £20,000 to his own use. He has the legal control over it, and might squander it if he chose, but if he did
he would not have the £2,000 a year also. For all personal purposes they have the capital and he has but the profits,
which it only yields to him on condition that the capital itself is employed in satisfying not his own wants, but
those of laborers. Even of his own share a small part only belongs to him as the owner of capital. The portion of
the produce which falls to capital merely as capital is measured by the interest of money, since that is all that the
owner of capital obtains [pg 171] when he contributes to production nothing except the capital itself.

“The result of our review of the various difficulties of Socialism has led us to the conclusion that the various
schemes for managing the productive resources of the country by public instead of private agency have a case for a
trial, and some of them may eventually establish their claims to preference over the existing order of things, but
that they are at present workable only by the élite of mankind, and have yet to prove their power of training
mankind at large to the state of improvement which they presuppose.”

§ 6. Property in land different from property in Movables.

It is next to be considered what is included in the idea of private property and by what considerations the
application of the principle should be bounded.

The institution of property, when limited to its essential elements, consists in the recognition, in each person, of a
right to the exclusive disposal of what he or she have produced by their own exertions, or received either by gift or
by fair agreement, without force or fraud, from those who produced it. The foundation of the whole is, the right of
producers to what they themselves have produced. Nothing is implied in property but the right of each to his (or
her) own faculties, to what he can produce by them, and to whatever he can get for them in a fair market: together
with his right to give this to any other person if he chooses, and the right of that other to receive and enjoy it.

It follows, therefore, that although the right of bequest, or gift after death, forms part of the idea of private
property, the right of inheritance, as distinguished from bequest, does not. That the property of persons who have
made no disposition of it during their lifetime should pass first to their children, and, failing them, to the nearest
relations, may be a proper arrangement or not, but is no consequence of the principle of private property. I see no
reason why collateral inheritance should exist at all. Mr. Bentham long ago proposed, and other high authorities
have agreed in the opinion, that, if there are no heirs either in the descending or in the [pg 172] ascending line, the
property, in case of intestacy, should escheat to the state. The parent owes to society to endeavor to make the child
a good and valuable member of it, and owes to the children to provide, so far as depends on him, such education,
and such appliances and means, as will enable them to start with a fair chance of achieving by their own exertions
a successful life. To this every child has a claim; and I can not admit that as a child he has a claim to more.

The essential principle of property being to assure to all persons what they have produced by their labor and
accumulated by their abstinence, this principle can not apply to what is not the produce of labor, the raw material
of the earth. If the land derived its productive power wholly from nature, and not at all from industry, or if there
were any means of discriminating what is derived from each source, it not only would not be necessary, but it
would be the height of injustice, to let the gift of nature be engrossed by individuals. [But] the use of the land in
agriculture must indeed, for the time being, be of necessity exclusive; the same person who has plowed and sown
must be permitted to reap.

But though land is not the produce of industry, most of its valuable qualities are so. Labor is not only requisite for
using, but almost equally so for fashioning, the instrument. Considerable labor is often required at the
commencement, to clear the land for cultivation. In many cases, even when cleared, its productiveness is wholly
the effect of labor and art. One of the barrenest soils in the world, composed of the material of the Goodwin Sands,
the Pays de Waes in Flanders, has been so fertilized by industry as to have become one of the most productive in
Europe. Cultivation also requires buildings and fences, which are wholly the produce of labor. The fruits of this
industry can not be reaped in a short period. The labor and outlay are immediate, the benefit is spread over many
years, perhaps over all future time. A holder will not incur this labor and outlay when strangers and not himself
will be benefited by it. If he [pg 173] undertakes such improvements, he must have a sufficient period before him
in which to profit by them; and he is in no way so sure of having always a sufficient period as when his tenure is
perpetual.

These are the reasons which form the justification, in an economical point of view, of property in land. It is seen
that they are only valid in so far as the proprietor of land is its improver. Whenever, in any country, the proprietor,
generally speaking, ceases to be the improver, political economy has nothing to say in defense of landed property,
as there established.

When the “sacredness of property” is talked of, it should always be remembered that any such sacredness does not
belong in the same degree to landed property. No man made the land. It is the original inheritance of the whole
species. Its appropriation is wholly a question of general expediency. When private property in land is not
expedient, it is unjust. The reverse is the case with property in movables, and in all things the product of labor:
over these, the owner's power both of use and of exclusion should be absolute, except where positive evil to others
would result from it; but, in the case of land, no exclusive right should be permitted in any individual which can
not be shown to be productive of positive good. To be allowed any exclusive right at all, over a portion of the
common inheritance, while there are others who have no portion, is already a privilege. No quantity of movable
goods which a person can acquire by his labor prevents others from acquiring the like by the same means; but,
from the very nature of the case, whoever owns land keeps others out of the enjoyment of it. When land is not
intended to be cultivated, no good reason can in general be given for its being private property at all. Even in the
case of cultivated land, a man whom, though only one among millions, the law permits to hold thousands of acres
as his single share, is not entitled to think that all this is given to him to use and abuse, and deal with as if it
concerned nobody but himself. [pg 174] The rents or profits which he can obtain from it are at his sole disposal;
but with regard to the land, in everything which he does with it, and in everything which he abstains from doing,
he is morally bound, and should, whenever the case admits, be legally compelled to make his interest and pleasure
consistent with the public good.

[pg 175]

Chapter II. Of Wages.

§ 1. Of Competition and Custom.

Political economists generally, and English political economists above others, have been accustomed to lay almost
exclusive stress upon the first of [two] agencies [competition and custom]; to exaggerate the effect of competition,
and to take into little account the other and conflicting principle. They are apt to express themselves as if they
thought that competition actually does, in all cases, whatever it can be shown to be the tendency of competition to
do. This is partly intelligible, if we consider that only through the principle of competition has political economy
any pretension to the character of a science. So far as rents, profits, wages, prices, are determined by competition,
laws may be assigned for them. Assume competition to be their exclusive regulator, and principles of broad
generality and scientific precision may be laid down, according to which they will be regulated. The political
economist justly deems this his proper business: and, as an abstract or hypothetical science, political economy can
not be required to do, and indeed can not do, anything more. But it would be a great misconception of the actual
course of human affairs to suppose that competition exercises in fact this unlimited sway. I am not speaking of
monopolies, either natural or artificial, or of any interferences of authority with the liberty of production or
exchange. Such disturbing causes have always been allowed for by political economists. I speak of cases in which
there is nothing to restrain competition; no hindrance [pg 176] to it either in the nature of the case or in artificial
obstacles; yet in which the result is not determined by competition, but by custom or usage; competition either not
taking place at all, or producing its effect in quite a different manner from that which is ordinarily assumed to be
natural to it.

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As stated by Mr. Cairnes, political economy is a science just as is any recognized physical science—astronomy, chemistry,
physiology. The economic “facts we find existing are the results of causes, between which and them the connection is constant
and invariable. It is, then, the constant relations exhibited in economic phenomena that we have in view when we speak of the
laws of the phenomena of wealth; and in the exposition of these laws consists the science of political economy.” It is to be
remembered that economic laws are tendencies, not actual descriptions of any given conditions in this or that place.

Competition, in fact, has only become in any considerable degree the governing principle of contracts, at a
comparatively modern period. The further we look back into history, the more we see all transactions and
engagements under the influence of fixed customs. The relations, more especially between the land-owner and the
cultivator, and the payments made by the latter to the former, are, in all states of society but the most modern,
determined by the usage of the country. The custom of the country is the universal rule; nobody thinks of raising or
lowering rents, or of letting land, on other than the customary conditions. Competition, as a regulator of rent, has
no existence.

Prices, whenever there was no monopoly, came earlier under the influence of competition, and are much more
universally subject to it, than rents. The wholesale trade, in the great articles of commerce, is really under the
dominion of competition. But retail price, the price paid by the actual consumer, seems to feel very slowly and
imperfectly the effect of competition; and, when competition does exist, [pg 177] it often, instead of lowering
prices, merely divides the gains of the high price among a greater number of dealers. The influence of competition
is making itself felt more and more through the principal branches of retail trade in the large towns.

All professional remuneration is regulated by custom. The fees of physicians, surgeons, and barristers, the charges
of attorneys, are nearly invariable. Not certainly for want of abundant competition in those professions, but
because the competition operates by diminishing each competitor's chance of fees, not by lowering the fees
themselves.

These observations must be received as a general correction to be applied whenever relevant, whether expressly
mentioned or not, to the conclusions contained in the subsequent portions of this treatise. Our reasonings must, in
general, proceed as if the known and natural effects of competition were actually produced by it, in all cases in
which it is not restrained by some positive obstacle. Where competition, though free to exist, does not exist, or
where it exists, but has its natural consequences overruled by any other agency, the conclusions will fail more or
less of being applicable. To escape error, we ought, in applying the conclusions of political economy to the actual
affairs of life, to consider not only what will happen supposing the maximum of competition, but how far the result
will be affected if competition falls short of the maximum.

§ 2. The Wages-fund, and the Objections to it Considered.

Under the head of Wages are to be considered, first, the causes which determine or influence the wages of labor
generally, and secondly, the differences that exist between the wages of different employments. It is convenient to
keep these two classes of considerations separate; and in discussing the law of wages, to proceed in the first
instance as if there were no other kind of labor than common unskilled labor, of the average degree of hardness
and disagreeableness.

Competition, however, must be regarded, in the present state of society, as the principal regulator of wages, and
custom [pg 178] or individual character only as a modifying circumstance, and that in a comparatively slight
degree.

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 circulating capital, and not even the whole of that, but the part which
is expended in the direct purchase of labor. To this, however, must be added all funds which, without forming a
part of capital, are paid in exchange for labor, such as the wages of soldiers, domestic servants, and all other
unproductive laborers. There is unfortunately no mode of expressing, by one familiar term, the aggregate of what
may be called the wages-fund of a country: and, as the wages of productive labor form nearly the whole of that
fund, 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.

With these limitations of the terms, wages not only depend upon the relative amount of capital and population, but
can not, under the rule of competition, be affected by anything else. Wages (meaning, of course, the general rate)
can not rise, but by an increase of the aggregate funds employed in hiring laborers, or a diminution in the number
of the competitors for hire; nor fall, except either by a diminution of the funds devoted to paying labor, or by an
increase in the number of laborers to be paid.

This is the simple statement of the well-known Wages-Fund Theory, which has given rise to no little animated discussion. Few
economists now assent to this doctrine when stated as above, and without changes. The first attack on this explanation of the rate
of wages came from what is now a very scarce pamphlet, written by F. D. Longe, entitled “A Refutation of the Wage-Fund
Theory of Modern Political Economy” (1866). Because laborers do not really compete with each other, he [pg 179] regarded
the idea of average wages as absurd as the idea of an average price of ships and cloth; he declared that there was no
predetermined wages-fund necessarily expended on labor; and that “demand for commodities” determined the amount of wealth
devoted to paying wages (p. 46). While the so-called wages-fund limits the total amount which the laborers can receive, the
employer would try to get his workmen at as much less than that amount as possible, so that the aggregate fund would have no
bearing on the actual amount paid in wages. The quantity of work to be done, he asserts, determines the quantity of labor to be
employed. About the same time (but unknown to Mr. Longe), W. T. Thornton was studying the same subject, and attracted
considerable attention by his publication, “On Labor” (1868), which in Book II, Chap. I, contained an extended argument to
show that demand and supply (i.e., the proportion between wages-fund and laborers) did not regulate wages, and denied the
existence of a predetermined wages-fund fixed in amount. His attack, however, assumes a very different conception of an
economic law from that which we think right to insist upon. The character of mankind being what it is, it will be for their interest
to invest so much and no more in labor, and we must believe that in this sense there is a predetermination of wealth to be paid in
wages. In order to make good investments, a certain amount must, if capitalists follow their best interests, go to the payment of
162 163
labor. Mr. Thornton's argument attracted the more attention because Mr. Mill admitted that Mr. Thornton had induced him
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to abandon his Wages-Fund Theory. The subject was, however, taken up, re-examined by Mr. Cairnes, and stated in a truer
form. (1.) The total wealth of a country (circle A in the diagram) is the outside limit of its capital. How much capital will be saved
out of this depends upon the effective desire of accumulation in the community (as set forth in Book I, Chap. VIII). The size of
circle B within circle A, therefore, depends on the character of the people. The wages-fund, then, depends ultimately on the
extent of A, and proximately on the extent of B. It can never [pg 180] be larger than B. So far, at least, its amount is
“predetermined” in the economic sense by general laws regarding the accumulation of capital and the expectation of profit.
Circle B contracts and expands under influences which have nothing to do with the immediate bargains between capitalists and
laborers. (2.) Another influence now comes in to affect the amount of capital actually paid as wages, one also governed by
general causes outside the reach of laborer or capitalist, that is, the state of the arts of production. In production, the particular
conditions of each industry will determine how much capital is to be set apart for raw material, how much for machinery,
buildings, and all forms of fixed capital, and how many laborers will be assigned to a given machine for a given amount of
material. With some kinds of hand-made goods the largest share of capital goes to wages, a less amount for materials, and a very

small proportion for machinery and tools. In many branches of agriculture and small farming this holds true. The converse,
however, is true in many manufactures, where machinery is largely used. No two industries will maintain the same proportion
between the three elements. The nature of the industry, therefore, will determine whether a greater or a less share of capital will
be spent in wages. It is needless to say that this condition of things is not one to be changed at the demand of either of the two
parties to production, Labor and Capital; it responds only to the advance of mechanical science or general intelligence. It is
impossible, then, to escape the conclusion that general causes restrict the amount which will, under any normal investment, go to
the payment of wages. Only within the limits set by these forces can any further expansion or contraction take place. (3.) Within
these limits, of course, minor changes may take place, so that the fund can not be said to be “fixed” or “absolutely
predetermined”; but these changes must take place within such narrow limits that they do not much affect the practical side of the
question. How these changes act, may be seen in a part of the following illustration of the above principles:

Suppose a cotton-mill established in one of the valleys of Vermont, for the management of which the owner has $140,000 of
capital. Of this, $100,000 is given for buildings, machinery, and plant. If he turns over his remaining capital ($40,000) each
month, we will suppose that $28,000 spent in raw materials will keep five hundred men occupied at a monthly expenditure of
$12,000. The present state of cotton-manufacture itself settles the relation between a given quantity of raw cotton and a certain
amount of machinery. A fixed amount of cotton, no more, no less, can be spun by each spindle and woven by each loom; and the
nature of the process determines [pg 181] the number of laborers to each machine. This proportion is something which an
owner must obey, if he expects to compete with other manufacturers: the relationship is fixed for, not by, him. Now, each of the
five hundred laborers being supposed to receive on an average $1.00 a day, imagine an influx of a body of French Canadians who
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offer to work, on an average, for eighty cents a day. The five hundred men will now receive but $9,600 monthly instead of
$12,000, as before, as a wages-fund; the monthly payment for wages now is nearly seven per cent, while formerly it was nearly
nine per cent of the total capital invested ($140,000). Thus it will be seen that the wages-fund can change with a change in the
supply of labor: but the point to be noticed is that it is a change in the subdivision, $12,000, of the total $140,000. That is, this
alteration can take place only within the limits set by the nature of the industry. Now, if this $2,400 (i.e., $12,000 less $9,600)
saved out of the wages-fund were to be reinvested, it must necessarily be divided between raw materials, fixed capital, and wages
in the existing relations, that is, only seven per cent of the new $2,400 would be added to the wages-fund. It is worth while
calling attention to this, if for no other reason than to show that in this way a change can be readily made in the wages-fund by
natural movements; and that no one can be so absurd as to say that it is absolutely fixed in amount. But it certainly is
“predetermined” in the economic sense, in that any reinvestments, as well as former funds, must necessarily be distributed
according to the above general principles, independent of the “higgling” in the labor market. The following is Mr. Cairnes's
statement of the amount and “predetermination” of the wages-fund:

“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 employment for at
that rate of profit which satisfies English commercial expectation. Further, I believe that, investment thus taking 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
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again ‘determine’ the proportion of the whole capital which shall be paid as [pg 182] wages to laborers.” In this excellent
and masterly conception, the doctrine of a wages-fund is not open to the objections usually urged against it. Indeed, with the
exception of Professor Fawcett, scarcely any economist believes in an absolutely fixed wages-fund. In this sense, then, and in
view of the above explanation, it will be understood what is meant by saying that wages depend upon the proportion of the
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wages-fund to the number of the wage-receivers.

In applying these principles to the question of strikes, it is evident enough that if they result in an actual expansion of the whole
circle B, by forcing saving from unproductive expenditure, a real addition, of some extent, may be made to the wages-fund; but
only by increasing the total capital. If, however, they attempt to increase one of the elements of capital, the wages-fund, without
also adding to the other elements, fixed capital and materials, in the proportion fixed by the nature of the industry, they will
destroy all possibility of continuing that production in the normal way, and the capitalist must withdraw from the enterprise.

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Francis A. Walker has also offered a solution of this problem in his “Wages Question” (1876), in which he holds that “wages
are, in a philosophical view of the subject, paid out of the product of present industry, and hence that production furnishes the
true measure of wages” (p. 128). “It is the prospect of a profit in production which determines the employer to hire laborers; it is
the anticipated value of the product which determines how much he can pay him” (p. 144). No doubt wages can be (and often
are) paid out of the current product; but what amount? What is the principle of distribution? Wherever the incoming product is a
moral certainty (and, unless this is true, in no case could wages be paid out of the future product), saving is as effective upon it as
upon the actual accumulations of the past; and the amount of the coming product which will be saved and used as capital is

determined by the same principles which govern the saving of past products. An increase of circle A by a larger production makes
possible an increase of circle B, but whether it will be enlarged [pg 183] or not depends on the principle of accumulation. The
larger the total production of wealth, the greater the possible wages, all must admit; but it does not seem clear that General
Walker has given us a solution of the real question at issue. The larger the house you build, the larger the rooms may be; but it
does not follow that the rooms will be necessarily large—as any inmate of a summer hotel will testify.

§ 3. Examination of some popular Opinions respecting Wages.

There are, however, some facts in apparent contradiction to this [the Wages-Fund] doctrine, which it is incumbent
on us to consider and explain.

1. For instance, it is a common saying that wages are high when trade is good. The demand for labor in any
particular employment is more pressing, and higher wages are paid, when there is a brisk demand for the
commodity produced; and the contrary when there is what is called a stagnation: then work-people are dismissed,
and those who are retained must submit to a reduction of wages; though in these cases there is neither more nor
less capital than before. This is true; and is one of those complications in the concrete phenomena which obscure
and disguise the operation of general causes; but it is not really inconsistent with the principles laid down. Capital
which the owner does not employ in purchasing labor, but keeps idle in his hands, is the same thing to the laborers,
for the time being, as if it did not exist. All capital is, from the variations of trade, occasionally in this state. A
manufacturer, finding a slack demand for his commodity, forbears to employ laborers in increasing a stock which
he finds it difficult to dispose of; or if he goes on until all his capital is locked up in unsold goods, then at least he
must of necessity pause until he can get paid for some of them. But no one expects either of these states to be
permanent; if he did, he would at the first opportunity remove his capital to some other occupation, in which it
would still continue to employ labor. The capital remains unemployed for a time, during which the labor market is
overstocked, and wages fall. Afterward the demand revives, and perhaps becomes unusually brisk, enabling the
manufacturer to sell his commodity [pg 184] even faster than he can produce it; his whole capital is then brought
into complete efficiency, and, if he is able, he borrows capital in addition, which would otherwise have gone into
some other employment. These, however, are but temporary fluctuations: the capital now lying idle will next year
be in active employment, that which is this year unable to keep up with the demand will in its turn be locked up in
crowded warehouses; and wages in these several departments will ebb and flow accordingly: but nothing can
permanently alter general wages, except an increase or a diminution of capital itself (always meaning by the term,
the funds of all sorts, destined for the payment of labor) compared with the quantity of labor offering itself to be
hired.

2. Again, it is another common notion that high prices make high wages; because the producers and dealers, being
better off, can afford to pay more to their laborers. I have already said that a brisk demand, which causes
temporary high prices, causes also temporary high wages. But high prices, in themselves, can only raise wages if
the dealers, receiving more, are induced to save more, and make an addition to their capital, or at least to their
purchases of labor. Wages will probably be temporarily higher in the employment in which prices have risen, and
somewhat lower in other employments: in which case, while the first half of the phenomenon excites notice, the
other is generally overlooked, or, if observed, is not ascribed to the cause which really produced it. Nor will the
partial rise of wages last long: for, though the dealers in that one employment gain more, it does not follow that
there is room to employ a greater amount of savings in their own business: their increasing capital will probably
flow over into other employments, and there counterbalance the diminution previously made in the demand for
labor by the diminished savings of other classes.

A clear distinction must be made between real wages and money wages; the former is of importance to the laborer as being his
real receipts. The quantity of commodities satisfying [pg 185] his desires which the laborer receives for his exertion
constitutes his real wages. The mere amount of money he receives for his exertions, irrespective of what the money will
exchange for, forms his money wages. Since the functions of money have not yet been explained, it is difficult to discuss the
relation between prices and money wages here. But, as the total value of the products in a certain industry is the sum out of
which both money wages and profits are paid, this total will rise or fall (efficiency of labor remaining the same) with the price of
the particular article. If the price rises, profits will be greater than elsewhere, and more capital will be invested in that one

business; that is, the capital will be a demand for more labor, and, until equalization is accomplished in all trades between wages
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and profits, money wages will be higher in some trades than in others.

When reference is had to the connection between real wages and prices, the question is a different one. General high prices
would not change general real wages. But if high prices cause higher money wages in particular branches of trade, then, because
the movement is not general, there will accrue, to those receiving more money, the means to buy more of real wages. And, as in
practice, changes in prices which arise from an increased demand are partial, and not general, it often happens that high prices
produce high real wages (not general high wages) in some, not in all employments. (For a further study of this relation between
prices and wages the reader is advised to recall this discussion in connection with that in a later part of the volume, Book III,
Chaps. XX and XXI.)

3. Another opinion often maintained is, that wages (meaning of course money wages) vary with the price of food;
rising when it rises, and falling when it falls. This opinion is, I conceive, only partially true; and, in so far as true,
in no way affects the dependence of wages on the proportion between capital and labor: since the price of food,
when it affects wages at all, affects them through that law. Dear or cheap food caused by variety of seasons does
not affect wages (unless they are artificially adjusted to it by law or charity): or rather, it has some tendency to
affect them in the contrary way to that supposed; since in times of scarcity people generally compete more
violently for employment, and lower the labor market against themselves. But dearness [pg 186] or cheapness of
food, when of a permanent character, and capable of being calculated on beforehand, may affect wages. (1.) In the
first place, if the laborers have, as is often the case, no more than enough to keep them in working condition and
enable them barely to support the ordinary number of children, it follows that, if food grows permanently dearer
without a rise of wages, a greater number of the children will prematurely die; and thus wages will ultimately be
higher, but only because the number of people will be smaller, than if food had remained cheap. (2.) But, secondly,
even though wages were high enough to admit of food's becoming more costly without depriving the laborers and
their families of necessaries; though they could bear, physically speaking, to be worse off, perhaps they would not
consent to be so. They might have habits of comfort which were to them as necessaries, and sooner than forego
which, they would put an additional restraint on their power of multiplication; so that wages would rise, not by
increase of deaths but by diminution of births. In these cases, then, wages do adapt themselves to the price of food,
though after an interval of almost a generation.170 If wages were previously so high that they could bear reduction,
to which the obstacle was a high standard of comfort habitual among the laborers, a rise of the price of food, or
any other disadvantageous change in their circumstances, may operate in two ways: (a) it may correct itself by a
rise of wages, brought about through a gradual effect on the prudential check to population; or (b) it may
permanently lower the standard of living of the class, in case their previous habits in respect of population prove
stronger than their previous habits in respect of comfort. In that case the injury done to them will be permanent,
and their deteriorated condition will become a new minimum, tending to perpetuate [pg 187] itself as the more
ample minimum did before. It is to be feared that, of the two modes in which the cause may operate, the last (b) is
the most frequent, or at all events sufficiently so to render all propositions, ascribing a self-repairing quality to the
calamities which befall the laboring-classes, practically of no validity.

The converse case occurs when, by improvements in agriculture, the repeal of corn laws, or other such causes, the
necessaries of the laborers are cheapened, and they are enabled with the same [money] wages to command greater
comforts than before. Wages will not fall immediately: it is even possible that they may rise; but they will fall at
last, so as to leave the laborers no better off than before, unless during this interval of prosperity the standard of
comfort regarded as indispensable by the class is permanently raised. Unfortunately this salutary effect is by no
means to be counted upon: it is a much more difficult thing to raise, than to lower, the scale of living which the
laborers will consider as more indispensable than marrying and having a family. According to all experience, a
great increase invariably takes place in the number of marriages in seasons of cheap food and full employment.

This is to be seen by some brief statistics of marriages in Vermont and Massachusetts.

Year. Vermont Massachusetts
1860 2,179 12,404
1861 2,188 10,972
1862 1,962 11,014
1863 2,007 10,873

1864 1,804 12,513
1865 2,569 13,052
1866 3,001 14,428
1867 2,857 14,451

In Vermont, while the average number of marriages was reached in 1860 and 1861, it fell off on the breaking out of the war; rose
in 1863, under the fair progress of the Northern arms; again fell off in 1864, during the period of discouragement; and since 1865
has kept a steadily higher average. In manufacturing Massachusetts the number fell earlier than in agricultural Vermont, at the
beginning of the difficulties.

1856, July to Jan. 6,418
1857, Jan. to July 5,803
1857, July to Jan. 5,936
1858, Jan. to July 4,917
1858, July to Jan. 5,610

The effects of the financial panic of 1857, in Massachusetts, [pg 188] show a similar movement in the number of marriages.
The crisis came in October, 1857. In the three months following that date there were 400 less marriages.

To produce permanent advantage, the temporary cause operating upon them must be sufficient to make a great
change in their condition—a change such as will be felt for many years, notwithstanding any stimulus which it
may give during one generation to the increase of people. When, indeed, the improvement is of this signal
character, and a generation grows up which has always been used to an improved scale of comfort, the habits of
this new generation in respect to population become formed upon a higher minimum, and the improvement in their
condition becomes permanent.

§ 4. Certain rare Circumstances excepted, High Wages imply Restraints on Population.

Wages depend, then, on the proportion between the number of the laboring population and the capital or other
funds devoted to the purchase of labor; we will say, for shortness, the capital. If wages are higher at one time or
place than at another, if the subsistence and comfort of the class of hired laborers are more ample, it is for no other
reason than because capital bears a greater proportion to population. It is not the absolute amount of accumulation
or of production that is of importance to the laboring-class; it is not the amount even of the funds destined for
distribution among the laborers; it is the proportion between those funds and the numbers among whom they are
shared. The condition of the class can be bettered in no other way than by altering that proportion to their
advantage: and every scheme for their benefit which does not proceed on this as its foundation is, for all permanent
purposes, a delusion.

In countries like North America and the Australian colonies, where the knowledge and arts of civilized life and a
high effective desire of accumulation coexist with a boundless extent of unoccupied land, the growth of capital
easily keeps pace with the utmost possible increase of population, and is chiefly retarded by the impracticability of
obtaining laborers enough. All, therefore, who can possibly be born can find employment without overstocking the
market: every [pg 189] laboring family enjoys in abundance the necessaries, many of the comforts, and some of
the luxuries of life; and, unless in case of individual misconduct, or actual inability to work, poverty does not, and
dependence need not, exist. [In England] so gigantic has been the progress of the cotton manufacture since the
inventions of Watt and Arkwright, that the capital engaged in it has probably quadrupled in the time which
population requires for doubling. While, therefore, it has attracted from other employments nearly all the hands
which geographical circumstances and the habits or inclinations of the people rendered available; and while the
demand it created for infant labor has enlisted the immediate pecuniary interest of the operatives in favor of
promoting, instead of restraining, the increase of population; nevertheless wages in the great seats of the
manufacture are still so high that the collective earnings of a family amount, on an average of years, to a very
satisfactory sum; and there is as yet no sign of decrease, while the effect has also been felt in raising the general
standard of agricultural wages in the counties adjoining.

But those circumstances of a country, or of an occupation, in which population can with impunity increase at its
utmost rate, are rare and transitory. Very few are the countries presenting the needful union of conditions. Either
the industrial arts are backward and stationary, and capital therefore increases slowly, or, the effective desire of
accumulation being low, the increase soon reaches its limit; or, even though both these elements are at their highest
known degree, the increase of capital is checked, because there is not fresh land to be resorted to of as good quality
as that already occupied. Though capital should for a time double itself simultaneously with population, if all this
capital and population are to find employment on the same land, they can not, without an unexampled succession
of agricultural inventions, continue doubling the produce; therefore, if wages do not fall, profits must; and, when
profits fall, increase of capital is slackened.

Except, therefore, in the very peculiar cases which I have [pg 190] just noticed, of which the only one of any
practical importance is that of a new colony, or a country in circumstances equivalent to it, it is impossible that
population should increase at its utmost rate without lowering wages. In no old country does population increase at
anything like its utmost rate; in most, at a very moderate rate: in some countries, not at all. These facts are only to
be accounted for in two ways. Either the whole number of births which nature admits of, and which happen in
some circumstances, do not take place; or, if they do, a large proportion of those who are born, die. The retardation
of increase results either from mortality or prudence; from Mr. Malthus's positive, or from his preventive check:
and one or the other of these must and does exist, and very powerfully too, in all old societies. Wherever
population is not kept down by the prudence either of individuals or of the state, it is kept down by starvation or
disease.

§ 5. Due Restriction of Population the only Safeguard of a Laboring-Class.

Where a laboring-class who have no property but their daily wages, and no hope of acquiring it, refrain from over-
rapid multiplication, the cause, I believe, has always hitherto been, either actual legal restraint, or a custom of
some sort which, without intention on their part, insensibly molds their conduct, or affords immediate inducements
not to marry. It is not generally known in how many countries of Europe direct legal obstacles are opposed to
improvident marriages.

Where there is no general law restrictive of marriage, there are often customs equivalent to it. When the guilds or
trade corporations of the middle ages were in vigor, their by-laws or regulations were conceived with a very
vigilant eye to the advantage which the trade derived from limiting competition; and they made it very effectually
the interest of artisans not to marry until after passing through the two stages of apprentice and journeyman, and
attaining the rank of master.

Unhappily, sentimentality rather than common sense usually presides over the discussions of these subjects.
Discussions [pg 191] on the condition of the laborers, lamentations over its wretchedness, denunciations of all who
are supposed to be indifferent to it, projects of one kind or another for improving it, were in no country and in no
time of the world so rife as in the present generation; but there is a tacit agreement to ignore totally the law of
wages, or to dismiss it in a parenthesis, with such terms as “hard-hearted Malthusianism”; as if it were not a
thousand times more hard-hearted to tell human beings that they may, than that they may not, call into existence
swarms of creatures who are sure to be miserable, and most likely to be depraved!

I ask, then, is it true or not, that if their numbers were fewer they would obtain higher wages? This is the question,
and no other: and it is idle to divert attention from it, by attacking any incidental position of Malthus or some other
writer, and pretending that to refute that is to disprove the principle of population. Some, for instance, have
achieved an easy victory over a passing remark of Mr. Malthus, hazarded chiefly by way of illustration, that the
increase of food may perhaps be assumed to take place in an arithmetical ratio, while population increases in a
geometrical: when every candid reader knows that Mr. Malthus laid no stress on this unlucky attempt to give
numerical precision to things which do not admit of it, and every person capable of reasoning must see that it is
wholly superfluous to his argument. Others have attached immense importance to a correction which more recent
political economists have made in the mere language of the earlier followers of Mr. Malthus. Several writers had
said that it is the tendency of population to increase faster than the means of subsistence. The assertion was true in
the sense in which they meant it, namely, that population would in most circumstances increase faster than the

means of subsistence, if it were not checked either by mortality or by prudence. But inasmuch as these checks act
with unequal force at different times and places, it was possible to interpret the language of these writers as if they
had meant that population is usually [pg 192] gaining ground upon subsistence, and the poverty of the people
becoming greater. Under this interpretation of their meaning, it was urged that the reverse is the truth: that as
civilization advances, the prudential check tends to become stronger, and population to slacken its rate of increase,
relatively to subsistence; and that it is an error to maintain that population, in any improving community, tends to
increase faster than, or even so fast as, subsistence.171 The word tendency172 is here used in a totally different sense
from that of the writers who affirmed the proposition; but waiving the verbal question, is it not allowed, on both
sides, that in old countries population presses too closely upon the means of subsistence?

[pg 193]

Chapter III. Of Remedies For Low Wages.

§ 1. A Legal or Customary Minimum of Wages, with a Guarantee of Employment.

The simplest expedient which can be imagined for keeping the wages of labor up to the desirable point would be to
fix them by law; and this is virtually the object aimed at in a variety of plans which have at different times been, or
still are, current, for remodeling the relation between laborers and employers. No one, probably, ever suggested
that wages should be absolutely fixed, since the interests of all concerned often require that they should be
variable; but some have proposed to fix a minimum of wages, leaving the variations above that point to be adjusted
by competition. Another plan, which has found many advocates among the leaders of the operatives, is that
councils should be formed, which in England have been called local boards of trade, in France “conseils de
prud'hommes,” and other names; consisting of delegates from the work-people and from the employers, who,
meeting in conference, should agree upon a rate of wages, and promulgate it from authority, to be binding
generally on employers and workmen; the ground of decision being, not the state of the labor market, but natural
equity; to provide that the workmen shall have reasonable wages, and the capitalist reasonable profits.

The one expedient most suggested by politicians and labor-reformers in the United States is an eight-hour law, mandatory upon
all employers. It is to be remembered, however, that in very many industries piece-work exists, and if a diminution of hours is
enforced, that will mean a serious reduction in the amount of wages which can be possibly earned in a day. [pg 194] Even if
all industries were alike in the matter of arranging their work, this plan means higher wages for the same work, or the same
wages for less work, and so an increased cost of labor. This would, then, take its effect on profits at once; and the effects would
be probably seen in a withdrawal of capital from many industries, where, as now, the profits are very low. It must be recalled,
however, that in the United States there has been, under the influence of natural causes, unaided by legislation, a very marked
reduction in the hours of labor, accompanied by an increase of wages. For example, in 1840, Rhode Island operatives in the
carding-room of the cotton-mills worked fourteen hours a day for $3.28 a week, while in 1884 they work eleven hours and
receive $5.40 a week. This result is most probably due to the gain arising from the invention of labor-saving machinery.

Others again (but these are rather philanthropists interesting themselves for the laboring-classes, than the laboring
people themselves) are shy of admitting the interference of authority in contracts for labor: they fear that if law
intervened, it would intervene rashly and ignorantly; they are convinced that two parties, with opposite interests,
attempting to adjust those interests by negotiation through their representatives on principles of equity, when no
rule could be laid down to determine what was equitable, would merely exasperate their differences instead of
healing them; but what it is useless to attempt by the legal sanction, these persons desire to compass by the moral.
Every employer, they think, ought to give sufficient wages; and if he does it not willingly, should be compelled to
it by general opinion; the test of sufficient wages being their own feelings, or what they suppose to be those of the
public. This is, I think, a fair representation of a considerable body of existing opinion on the subject.

I desire to confine my remarks to the principle involved in all these suggestions, without taking into account
practical difficulties, serious as these must at once be seen to be. I shall suppose that by one or other of these
contrivances wages could be kept above the point to which they would be brought by competition. This is as much
as to say, above the highest rate which can be afforded by the existing capital [pg 195] consistently with employing
all the laborers. For it is a mistake to suppose that competition merely keeps down wages. It is equally the means
by which they are kept up. When there are any laborers unemployed, these, unless maintained by charity, become
competitors for hire, and wages fall; but when all who were out of work have found employment, wages will not,
under the freest system of competition, fall lower. There are strange notions afloat concerning the nature of
competition. Some people seem to imagine that its effect is something indefinite; that the competition of sellers
may lower prices, and the competition of laborers may lower wages, down to zero, or some unassignable
minimum. Nothing can be more unfounded. Goods can only be lowered in price by competition to the point which
calls forth buyers sufficient to take them off; and wages can only be lowered by competition until room is made to

admit all the laborers to a share in the distribution of the wages-fund. If they fell below this point, a portion of
capital would remain unemployed for want of laborers; a counter-competition would commence on the side of
capitalists, and wages would rise.

The assumption in the last chapter in regard to competition and custom should be kept in mind in all this reasoning. As a matter
of fact, there is not that mobility of labor which insures so free an operation of competition that equality of payment always
exists. In reality there is no competition at all between the lower grades of laborers and the higher classes of skilled labor. Of
course, the tendency is as explained by Mr. Mill, and as time goes on there is a distinctly greater mobility of labor visible. Vast
numbers pass from Scandinavia and other countries of Europe to the United States, or from England to Australia, urged by the
desire to go from a community of low to one of higher wages.

Since, therefore, the rate of wages which results from competition distributes the whole wages-fund among the
whole laboring population, if law or opinion succeeds in fixing wages above this rate, some laborers are kept out
of employment; and as it is not the intention of the philanthropists that these should starve, they must be provided
for [pg 196] by a forced increase of the wages-fund—by a compulsory saving. It is nothing to fix a minimum of
wages unless there be a provision that work, or wages at least, be found for all who apply for it. This, accordingly,
is always part of the scheme, and is consistent with the ideas of more people than would approve of either a legal
or a moral minimum of wages. Popular sentiment looks upon it as the duty of the rich, or of the state, to find
employment for all the poor. If the moral influence of opinion does not induce the rich to spare from their
consumption enough to set all the poor at work at “reasonable wages,” it is supposed to be incumbent on the state
to lay on taxes for the purpose, either by local rates or votes of public money. The proportion between labor and
the wages-fund would thus be modified to the advantage of the laborers, not by restriction of population, but by an
increase of capital.

§ 2. —Would Require as a Condition Legal Measures for Repression of Population.

If this claim on society could be limited to the existing generation; if nothing more were necessary than a
compulsory accumulation, sufficient to provide permanent employment at ample wages for the existing numbers
of the people; such a proposition would have no more strenuous supporter than myself. Society mainly consists of
those who live by bodily labor; and if society, that is, if the laborers, lend their physical force to protect individuals
in the enjoyment of superfluities, they are entitled to do so, and have always done so, with the reservation of a
power to tax those superfluities for purposes of public utility; among which purposes the subsistence of the people
is the foremost. Since no one is responsible for having been born, no pecuniary sacrifice is too great to be made by
those who have more than enough, for the purpose of securing enough to all persons already in existence.

But it is another thing altogether when those who have produced and accumulated are called upon to abstain from
consuming until they have given food and clothing, not only to all who now exist, but to all whom these or their
descendants may think fit to call into existence. Such an obligation [pg 197] acknowledged and acted upon, would
suspend all checks, both positive and preventive; there would be nothing to hinder population from starting
forward at its rapidest rate; and as the natural increase of capital would, at the best, not be more rapid than before,
taxation, to make up the growing deficiency, must advance with the same gigantic strides. But let them work ever
so efficiently, the increasing population could not, as we have so often shown, increase the produce proportionally;
the surplus, after all were fed, would bear a less and less proportion to the whole produce and to the population:
and the increase of people going on in a constant ratio, while the increase of produce went on in a diminishing
ratio, the surplus would in time be wholly absorbed; taxation for the support of the poor would engross the whole
income of the country; the payers and the receivers would be melted down into one mass.

It would be possible for the state to guarantee employment at ample wages to all who are born. But if it does this, it
is bound in self-protection, and for the sake of every purpose for which government exists, to provide that no
person shall be born without its consent. To give profusely to the people, whether under the name of charity or of
employment, without placing them under such influences that prudential motives shall act powerfully upon them,
is to lavish the means of benefiting mankind without attaining the object. But remove the regulation of their wages

from their own control; guarantee to them a certain payment, either by law or by the feeding of the community;
and no amount of comfort that you can give them will make either them or their descendants look to their own
self-restraint as the proper means for preserving them in that state.

The famous poor-laws of Elizabeth, enacted in 1601, were at first intended to relieve the destitute poor, sick, aged, and impotent,
but in their administration a share was given to all who begged it. Employers, of course, found it cheaper to hire labor partly paid
for by the parish, and the independent farm-laborer who would not go on the parish found his own wages lowered by this kind of
competition. This continued a crying [pg 198] evil until it reached the proportions described by May: “As the cost of
pauperism, thus encouraged, was increasing, the poorer rate-payers were themselves reduced to poverty. The soil was ill-
cultivated by pauper labor, and its rental consumed by parish rates. In a period of fifty years, the poor-rates were quadrupled, and
had reached, in 1833, the enormous amount of £8,600,000. In many parishes they were approaching the annual value of the land
173
itself.” The old poor-laws were repealed, and there went into effect in 1834 the workhouse system, which, while not denying
subsistence to all those born, required that the giving of aid should be made as disagreeable as possible, in order to stimulate
among the poor a feeling of repugnance to all aid from the community. This is also the general idea of poor-relief in the United
States.

The cultivation of the principle of self-help in each laborer is certainly the right object at which to aim. In the United States
voluntary charitable organizations have associated together, in some cities, in order to scrutinize all cases of poverty through a
number of visitors in each district, who advise and counsel the unfortunate, but never give money. This system has been very
successful, and, by basing its operations on the principle of self-help, has given the best proof of its right to an increasing
influence.

§ 3. Allowances in Aid of Wages and the Standard of Living.

Next to the attempts to regulate wages, and provide artificially that all who are willing to work shall receive an
adequate price for their labor, we have to consider another class of popular remedies, which do not profess to
interfere with freedom of contract; which leave wages to be fixed by the competition of the market, but, when they
are considered insufficient, endeavor by some subsidiary resource to make up to the laborers for the insufficiency.
Of this nature was the allowance system. The principle of this scheme being avowedly that of adapting the means
of every family to its necessities, it was a natural consequence that more should be given to the married than to the
single, and to those who had large families than to those who had not: in fact, an allowance was usually granted for
every child. It is obvious that this is merely another mode of fixing a minimum of wages.

There is a rate of wages, either the lowest on which the [pg 199] people can, or the lowest on which they will
consent, to live. We will suppose this to be seven shillings a week. Shocked at the wretchedness of this pittance,
the parish authorities humanely make it up to ten. But the laborers are accustomed to seven, and though they would
gladly have more, will live on that (as the fact proves) rather than restrain the instinct of multiplication. Their
habits will not be altered for the better by giving them parish pay. Receiving three shillings from the parish, they
will be as well off as before, though they should increase sufficiently to bring down wages to four shillings. They
will accordingly people down to that point; or, perhaps, without waiting for an increase of numbers, there are
unemployed laborers enough in the workhouse to produce the effect at once. It is well known that the allowance
system did practically operate in the mode described, and that under its influence wages sank to a lower rate than
had been known in England before.

The operation of a low standard upon the wages of those in the community who have a higher one, has been seen in the United
States to a certain extent by the landing on our shores of Chinese laborers, who maintain a decidedly lower standard of living
than either their American or Irish competitors. If they come in such numbers as to retain their lower standard by forming a group
by themselves, and are thereby not assimilated into the body of laborers who have a higher standard of comfort, they can, to the
extent of their ability to do work, drive other laborers out of employment. This, moreover, is exactly what was done by the Irish,
who drove Americans out of the mills of New England, and who are now being driven out, probably, by the French Canadians,
with a standard lower than the Irish. The Chinese come here now without their families, as may be seen by the accompanying

diagram, in which the shaded side represents the males on the left, and the unshaded the females on the right, of the
perpendicular line.

Decade. Males. Females.
1 6 4
2 106 12
3 351 37
4 283 15
5 139 3
6 32 1
7 10 0
8 1 0
9 0 0

[pg 200]
The horizontal lines show the ages, the largest number being about thirty years of age. It will be noted how many come in the
prime of life, and how few children and females there are.

It need hardly be said that the economic side of a question is here discussed, which requires for its solution many ethical and
political considerations besides.

§ 4. Grounds for Expecting Improvement in Public Opinion on the Subject of Population.

By what means, then, is poverty to be contended against? How is the evil of low wages to be remedied? If the
expedients usually recommended for the purpose are not adapted to it, can no others be thought of? Is the problem
incapable of solution? Can political economy do nothing, but only object to everything, and demonstrate that
nothing can be done? Those who think it hopeless that the laboring-classes should be induced to practice a
sufficient degree of prudence in regard to the increase of their families, because they have hitherto stopped short of
that point, show an inability to estimate the ordinary principles of human action. Nothing more would probably be
necessary to secure that result, than an opinion generally diffused that it was desirable.

But let us try to imagine what would happen if the idea became general among the laboring-class that the
competition of too great numbers was the principal cause of their poverty. We are often told that the most thorough
perception of the dependence of wages on population will not influence the conduct of a laboring-man, because it
is not the children he himself can have that will produce any effect in generally depressing the labor market. True,
and it is also true that one soldier's running away will not lose the battle; accordingly, it is not that consideration
which keeps each soldier in his rank: it is the disgrace which naturally and inevitably attends on conduct by any
one individual which, if pursued by a majority, everybody can see would be fatal. Men are seldom found to brave
the general opinion of their class, unless supported either by some principle higher than regard for opinion, or by
some strong body of opinion elsewhere.

If the opinion were once generally established among the [pg 201] laboring-class that their welfare required a due
regulation of the numbers of families, the respectable and well-conducted of the body would conform to the
prescription, and only those would exempt themselves from it who were in the habit of making light of social
obligations generally; and there would be then an evident justification for converting the moral obligation against
bringing children into the world, who are a burden to the community, into a legal one; just as in many other cases
of the progress of opinion, the law ends by enforcing against recalcitrant minorities obligations which, to be useful,
must be general, and which, from a sense of their utility, a large majority have voluntarily consented to take upon
themselves.

The dependence of wages on the number of the competitors for employment is so far from hard of comprehension,
or unintelligible to the laboring-classes, that by great bodies of them it is already recognized and habitually acted
on. It is familiar to all trades-unions: every successful combination to keep up wages owes its success to
contrivances for restricting the number of competitors; all skilled trades are anxious to keep down their own

numbers, and many impose, or endeavor to impose, as a condition upon employers, that they shall not take more
than a prescribed number of apprentices. There is, of course, a great difference between limiting their numbers by
excluding other people, and doing the same thing by a restraint imposed on themselves; but the one as much as the
other shows a clear perception of the relation between their numbers and their remuneration. The principle is
understood in its application to any one employment, but not to the general mass of employment. For this there are
several reasons: first, the operation of causes is more easily and distinctly seen in the more circumscribed field;
secondly, skilled artisans are a more intelligent class than ordinary manual laborers; and the habit of concert, and
of passing in review their general condition as a trade, keeps up a better understanding of their collective interests;
thirdly and lastly, they are the most [pg 202] provident, because they are the best off, and have the most to
preserve.

§ 5. Twofold means of Elevating the Habits of the Laboring-People; by Education, and by Foreign
and Home Colonization.

For the purpose, therefore, of altering the habits of the laboring people, there is need of a twofold action, directed
simultaneously upon their intelligence and their poverty. An effective national education of the children of the
laboring-class is the first thing needful; and, coincidently with this, a system of measures which shall (as the
Revolution did in France) extinguish extreme poverty for one whole generation. Without entering into disputable
points, it may be asserted without scruple that the aim of all intellectual training for the mass of the people should
be to cultivate common sense; to qualify them for forming a sound practical judgment of the circumstances by
which they are surrounded. [But] education is not compatible with extreme poverty. It is impossible effectually to
teach an indigent population. Toward effecting this object there are two resources available, without wrong to any
one, without any of the liabilities of mischief attendant on voluntary or legal charity, and not only without
weakening, but on the contrary strengthening, every incentive to industry, and every motive to forethought.

The first is a great national measure of colonization. I mean, a grant of public money, sufficient to remove at once,
and establish in the colonies, a considerable fraction of the youthful agricultural population. It has been shown by
others that colonization on an adequate scale might be so conducted as to cost the country nothing, or nothing that
would not be certainly repaid; and that the funds required, even by way of advance, would not be drawn from the
capital employed in maintaining labor, but from that surplus which can not find employment at such profit as
constitutes an adequate remuneration for the abstinence of the possessor, and which is therefore sent abroad for
investment, or wasted at home in reckless speculations.

The second resource would be to devote all common land, hereafter brought into cultivation, to raising a class of
[pg 203] small proprietors. What I would propose is, that common land should be divided into sections of five
acres or thereabout, to be conferred in absolute property on individuals of the laboring-class who would reclaim
and bring them into cultivation by their own labor.

This suggestion works to the same purpose as the proposal that our Government should retain its public lands and aid in the
formation of a great number of small farmers, rather than, by huge grants, to foster large holdings in the Western States and
174
Territories.

The preference should be given to such laborers, and there are many of them, as had saved enough to maintain
them until their first crop was got in, or whose character was such as to induce some responsible person to advance
to them the requisite amount on their personal security. The tools, the manure, and in some cases the subsistence
also, might be supplied by the parish, or by the state; interest for the advance, at the rate yielded by the public
funds, being laid on as a perpetual quitrent, with power to the peasant to redeem it at any time for a moderate
number of years' purchase. These little landed estates might, if it were thought necessary, be indivisible by law;
though, if the plan worked in the manner designed, I should not apprehend any objectionable degree of
subdivision. In case of intestacy, and in default of amicable arrangement among the heirs, they might be bought by
government at their value, and re-granted to some other laborer who could give security for the price. The desire to
possess one of these small properties would probably become, as on the Continent, an inducement to prudence and

economy pervading the whole laboring population; and that great desideratum among a people of hired laborers
would be provided, an intermediate class between them and their employers; affording them the double advantage
of an object for their hopes, and, as there would be good reason to anticipate, an example for their imitation.

[pg 204]
It would, however, be of little avail that either or both of these measures of relief should be adopted, unless on such
a scale as would enable the whole body of hired laborers remaining on the soil to obtain not merely employment,
but a large addition to the present wages—such an addition as would enable them to live and bring up their
children in a degree of comfort and independence to which they have hitherto been strangers.

[pg 205]

Chapter IV. Of The Differences Of Wages In Different Employments.

§ 1. Differences of Wages Arising from Different Degrees of Attractiveness in Different
Employments.

In treating of wages, we have hitherto confined ourselves to the causes which operate on them generally, and en
masse; the laws which govern the remuneration of ordinary or average labor, without reference to the existence of
different kinds of work which are habitually paid at different rates, depending in some degree on different laws.
We will now take into consideration these differences, and examine in what manner they affect or are affected by
the conclusions already established.

The differences, says [Adam Smith], arise partly “from certain circumstances in the employments themselves,
which either really, or at least in the imaginations of men, make up for a small pecuniary gain in some, and
counterbalance a great one in others.” These circumstances he considers to be: “First, the agreeableness or
disagreeableness of the employments themselves; secondly, the easiness and cheapness, or the difficulty and
expense of learning them; thirdly, the constancy or inconstancy of employment in them; fourthly, the small or great
trust which must be reposed in those who exercise them; and, fifthly, the probability or improbability of success in
them.”

(1.) “The wages of labor vary with the ease or hardship, the cleanliness or dirtiness, the honorableness or
dishonorableness of the employment. A journeyman blacksmith, though an artificer, seldom earns so much in
twelve hours as a collier, who is only a laborer, does in eight. His work [pg 206] is not quite so dirty, is less
dangerous, and is carried on in daylight and above ground. Honor makes a great part of the reward of all honorable
professions. In point of pecuniary gain, all things considered,” their recompense is, in his opinion, below the
average. “Disgrace has the contrary effect. The trade of a butcher is a brutal and an odious business; but it is in
most places more profitable than the greater part of common trades. The most detestable of all employments, that
of the public executioner, is, in proportion to the quantity of work done, better paid than any common trade
whatever.”

(2.) “Employment is much more constant,” continues Adam Smith, “in some trades than in others. In the greater
part of manufactures, a journeyman may be pretty sure of employment almost every day in the year that he is able
to work. A mason or brick-layer, on the contrary, can work neither in hard frost nor in foul weather, and his
employment at all other times depends upon the occasional calls of his customers. He is liable, in consequence, to
be frequently without any. What he earns, therefore, while he is employed, must not only maintain him while he is
idle, but make him some compensation for those anxious and desponding moments which the thought of so
precarious a situation must sometimes occasion.”

“When (1) the inconstancy of the employment is combined with (2) the hardship, disagreeableness, and dirtiness
of the work, it sometimes raises the wages of the most common labor above those of the most skillful artificers. A
collier working by the piece is supposed, at Newcastle, to earn commonly about double, and in many parts of
Scotland about three times, the wages of common labor. His high wages arise altogether from the hardship,
disagreeableness, and dirtiness of his work. His employment may, upon most occasions, be as constant as he
pleases. The coal-heavers in London exercise a trade which in hardship, dirtiness, and disagreeableness almost
equals that of colliers; and from the unavoidable irregularity in the arrivals of coal-ships, the [pg 207] employment
of the greater part of them is necessarily very inconstant. If colliers, therefore, commonly earn double and triple
the wages of common labor, it ought not to seem unreasonable that coal-heavers should sometimes earn four or
five times those wages. In the inquiry made into their condition a few years ago, it was found that, at the rate at
which they were then paid, they could earn about four times the wages of common labor in London.”

These inequalities of remuneration, which are supposed to compensate for the disagreeable circumstances of
particular employments, would, under certain conditions, be natural consequences of perfectly free competition:
and as between employments of about the same grade, and filled by nearly the same description of people, they
are, no doubt, for the most part, realized in practice.

But it is altogether a false view of the state of facts to present this as the relation which generally exists between
agreeable and disagreeable employments. The really exhausting and the really repulsive labors, instead of being
better paid than others, are almost invariably paid the worst of all, because performed by those who have no
choice. If the laborers in the aggregate, instead of exceeding, fell short of the amount of employment, work which
was generally disliked would not be undertaken, except for more than ordinary wages. But when the supply of
labor so far exceeds the demand that to find employment at all is an uncertainty, and to be offered it on any terms a
favor, the case is totally the reverse. Partly from this cause, and partly from the natural and artificial monopolies,
which will be spoken of presently, the inequalities of wages are generally in an opposite direction to the equitable
principle of compensation, erroneously represented by Adam Smith as the general law of the remuneration of
labor.

(3.) One of the points best illustrated by Adam Smith is the influence exercised on the remuneration of an
employment by the uncertainty of success in it. If the chances are great of total failure, the reward in case of
success must be [pg 208] sufficient to make up, in the general estimation, for those adverse chances. Put your son
apprentice to a shoemaker, there is little doubt of his learning to make a pair of shoes; but send him to study the
law, it is at least twenty to one if ever he makes such proficiency as will enable him to live by the business. In a
perfectly fair lottery, those who draw the prizes ought to gain all that is lost by those who draw the blanks. In a
profession where twenty fail for one that succeeds, that one ought to gain all that should have been gained by the
unsuccessful twenty. How extravagant soever the fees of counselors-at-law may sometimes appear, their real
retribution is never equal to this.

§ 2. Differences arising from Natural Monopolies.

The preceding are cases in which inequality of remuneration is necessary to produce equality of attractiveness, and
are examples of the equalizing effect of free competition. The following are cases of real inequality, and arise from
a different principle.

(4.) “The wages of labor vary according to the small or great trust which must be reposed in the workmen. The
wages of goldsmiths and jewelers are everywhere superior to those of many other workmen, not only of equal but
of much superior ingenuity, on account of the precious materials with which they are intrusted.” The superiority of
reward is not here the consequence of competition, but of its absence: not a compensation for disadvantages
inherent in the employment, but an extra advantage; a kind of monopoly price, the effect not of a legal, but of what
has been termed a natural monopoly. If all laborers were trustworthy, it would not be necessary to give extra pay to
working goldsmiths on account of the trust. The degree of integrity required being supposed to be uncommon,
those who can make it appear that they possess it are able to take advantage of the peculiarity, and obtain higher
pay in proportion to its rarity.

This same explanation of a natural monopoly applies exactly to the causes which give able executive managers, who watch over
productive operations, the usually high rewards for [pg 209] labor under the name of “wages of superintendence.” If
successful managers of cotton or woolen mills were as plentiful, in proportion to the demand for them, as ordinary artisans, in
proportion to the demand for them, then the former would get no higher rewards than the latter. Able executive and business
managers secure high wages solely on the ground—as explained above—of monopoly; that is, because their numbers, owing to
natural causes, are few relatively to the demand for them in every industry in the land.

(5.) Some employments require a much longer time to learn, and a much more expensive course of instruction,
than others; and to this extent there is, as explained by Adam Smith, an inherent reason for their being more highly
remunerated. Wages, consequently, must yield, over and above the ordinary amount, an annuity sufficient to repay

these sums, with the common rate of profit, within the number of years [the laborer] can expect to live and be in
working condition.

But, independently of these or any other artificial monopolies, there is a natural monopoly in favor of skilled
laborers against the unskilled, which makes the difference of reward exceed, sometimes in a manifold proportion,
what is sufficient merely to equalize their advantages. But the fact that a course of instruction is required, of even a
low degree of costliness, or that the laborer must be maintained for a considerable time from other sources, suffices
everywhere to exclude the great body of the laboring people from the possibility of any such competition. Until
lately, all employments which required even the humble education of reading and writing could be recruited only
from a select class, the majority having had no opportunity of acquiring those attainments.

175
Here is found the germ of the idea, which has been elaborately worked out by Mr. Cairnes in his theory of non-competing
groups of laborers: “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 [pg 210]
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.” (Mr. Mill certainly understood this fully, and stated it clearly again in Book
III, Chap. II, § 2.)

The changes, however, now so rapidly taking place in usages and ideas, are undermining all these distinctions; the
habits or disabilities which chained people to their hereditary condition are fast wearing away, and every class is
exposed to increased and increasing competition from at least the class immediately below it. The general
relaxation of conventional barriers, and the increased facilities of education which already are, and will be in a
much greater degree, brought within the reach of all, tend to produce, among many excellent effects, one which is
the reverse: they tend to bring down the wages of skilled labor.

§ 3. Effect on Wages of the Competition of Persons having other Means of Support.

A modifying circumstance still remains to be noticed, which interferes to some extent with the operation of the
principles thus far brought to view. While it is true, as a general rule, that the earnings of skilled labor, and
especially of any labor which requires school education, are at a monopoly rate, from the impossibility, to the mass
of the people, of obtaining that education, it is also true that the policy of nations, or the bounty of individuals,
formerly did much to counteract the effect of this limitation of competition, by offering eleemosynary instruction
to a much larger class of persons than could have obtained the same advantages by paying their price.

[Adam Smith has pointed out that] “whenever the law has attempted to regulate the wages of workmen, it has
always been rather to lower them than to raise them. But the law has upon many occasions attempted to raise the
wages of curates, and, for the dignity of the Church, to oblige the rectors of parishes to give them more than the
wretched maintenance which they themselves might be willing to accept of. And in both cases the law seems to
have been equally ineffectual, and has never been either able to raise [pg 211] the wages of curates or to sink those
of laborers to the degree that was intended, because it has never been able to hinder either the one from being
willing to accept of less than the legal allowance, on account of the indigence of their situation and the multitude
of their competitors, or the other from receiving more, on account of the contrary competition of those who
expected to derive either profit or pleasure from employing them.”

Although the highest pecuniary prizes of successful authorship are incomparably greater than at any former period,
yet on any rational calculation of the chances, in the existing competition, scarcely any writer can hope to gain a
living by books, and to do so by magazines and reviews becomes daily more difficult. It is only the more
troublesome and disagreeable kinds of literary labor, and those which confer no personal celebrity, such as most of
those connected with newspapers, or with the smaller periodicals, on which an educated person can now rely for
subsistence. Of these, the remuneration is, on the whole, decidedly high; because, though exposed to the
competition of what used to be called “poor scholars” (persons who have received a learned education from some

public or private charity), they are exempt from that of amateurs, those who have other means of support being
seldom candidates for such employments.

When an occupation is carried on chiefly by persons who derive the main portion of their subsistence from other
sources, its remuneration may be lower almost to any extent than the wages of equally severe labor in other
employments. The principal example of the kind is domestic manufactures. When spinning and knitting were
carried on in every cottage, by families deriving their principal support from agriculture, the price at which their
produce was sold (which constituted the remuneration of their labor) was often so low that there would have been
required great perfection of machinery to undersell it. The amount of the remuneration in such a case depends
chiefly upon whether the quantity of the commodity produced by this description of labor [pg 212] suffices to
supply the whole of the demand. If it does not, and there is consequently a necessity for some laborers who devote
themselves entirely to the employment, the price of the article must be sufficient to pay those laborers at the
ordinary rate, and to reward, therefore, very handsomely the domestic producers. But if the demand is so limited
that the domestic manufacture can do more than satisfy it, the price is naturally kept down to the lowest rate at
which peasant families think it worth while to continue the production. Thus far, as to the remuneration of the
subsidiary employment; but the effect to the laborers of having this additional resource is almost certain to be
(unless peculiar counteracting causes intervene) a proportional diminution of the wages of their main occupation.

For the same reason it is found that, cæteris paribus, those trades are generally the worst paid in which the wife
and children of the artisan aid in the work. The income which the habits of the class demand, and down to which
they are almost sure to multiply, is made up in those trades by the earnings of the whole family, while in others the
same income must be obtained by the labor of the man alone. It is even probable that their collective earnings will
amount to a smaller sum than those of the man alone in other trades, because the prudential restraint on marriage is
unusually weak when the only consequence immediately felt is an improvement of circumstances, the joint
earnings of the two going further in their domestic economy after marriage than before.

176
This statement seems to be borne out by the statistics of wages both in England and the United States. In our cotton-mills,
where women do certain kinds of work equally well with men, the wages of the men are lower than in outside employments into
which women can not enter.

Blacksmiths, per week: $16.74
Family of four: Drawers-in, cotton-mill—man, per week: $5.50
Family of four: Drawers-in, cotton-mill—woman, per week: $5.50
Family of four: Tenders, two boys: $4.50
Total: $15.50

[pg 213]
In this case the family of four all together receive only about the same as the wages of the single blacksmith alone.

§ 4. Wages of Women, why Lower than those of Men.

Where men and women work at the same employment, if it be one for which they are equally fitted in point of
physical power, they are not always unequally paid. Women in factories sometimes earn as much as men; and so
they do in hand-loom weaving, which, being paid by the piece, brings their efficiency to a sure test. When the
efficiency is equal, but the pay unequal, the only explanation that can be given is custom. But the principal
question relates to the peculiar employments of women. The remuneration of these is always, I believe, greatly
below that of employments of equal skill and equal disagreeableness carried on by men. In some of these cases the
explanation is evidently that already given: as in the case of domestic servants, whose wages, speaking generally,
are not determined by competition, but are greatly in excess of the market value of the labor, and in this excess, as
in almost all things which are regulated by custom, the male sex obtains by far the largest share. In the occupations
in which employers take full advantage of competition, the low wages of women, as compared with the ordinary
earnings of men, are a proof that the employments are overstocked: that although so much smaller a number of

women than of men support themselves by wages, the occupations which law and usage make accessible to them
are comparatively so few that the field of their employment is still more overcrowded.

Yet within the employments open to women, such as millinery and dress-making, certain women are able to charge excessively
high prices for work, because, having obtained a reputation for especial skill and taste, they can exact in the high prices of their
articles what is really their high wages. Within these employments women are unable to earn a living not so much by the lack of
work, as by not bringing to their occupation that amount of skill and those business qualities (owing, of course, to their being
brought up unaccustomed to business methods) which are requisite for the success of any one, either man or woman.

[pg 214]
It must be observed that, as matters now stand, a sufficient degree of overcrowding may depress the wages of
women to a much lower minimum than those of men. The wages, at least of single women, must be equal to their
support, but need not be more than equal to it; the minimum, in their case, is the pittance absolutely requisite for
the sustenance of one human being. Now the lowest point to which the most superabundant competition can
permanently depress the wages of a man is always somewhat more than this. Where the wife of a laboring-man
does not by general custom contribute to his earnings, the man's wages must be at least sufficient to support
himself, a wife, and a number of children adequate to keep up the population, since, if it were less, the population
would not be kept up.

§ 5. Differences of Wages Arising from Laws, Combinations, or Customs.

Thus far we have, throughout this discussion, proceeded on the supposition that competition is free, so far as
regards human interference; being limited only by natural causes, or by the unintended effect of general social
circumstances. But law or custom may interfere to limit competition. If apprentice laws, or the regulations of
corporate bodies, make the access to a particular employment slow, costly, or difficult, the wages of that
employment may be kept much above their natural proportion to the wages of common labor. In some trades,
however, and to some extent, the combinations of workmen produce a similar effect. Those combinations always
fail to uphold wages at an artificial rate unless they also limit the number of competitors. Putting aside the
atrocities sometimes committed by workmen in the way of personal outrage or intimidation, which can not be too
rigidly repressed, if the present state of the general habits of the people were to remain forever unimproved, these
partial combinations, in so far as they do succeed in keeping up the wages of any trade by limiting its numbers,
might be looked upon as simply intrenching round a particular spot against the inroads of over-population, and
making the wages of the class depend upon their own rate of [pg 215] increase, instead of depending on that of a
more reckless and improvident class than themselves.

To conclude this subject, I must repeat an observation already made, that there are kinds of labor of which the
wages are fixed by custom, and not by competition. Such are the fees or charges of professional persons—of
physicians, surgeons, barristers, and even attorneys.

[pg 216]

Chapter V. Of Profits.

§ 1. Profits include Interest and Risk; but, correctly speaking, do not include Wages of
Superintendence.

Having treated of the laborer's share of the produce, we next proceed to the share of the capitalist; the profits of
capital or stock; the gains of the person who advances the expenses of production—who, from funds in his
possession, pays the wages of the laborers, or supports them during the work; who supplies the requisite buildings,
materials, and tools or machinery; and to whom, by the usual terms of the contract, the produce belongs, to be
disposed of at his pleasure. After indemnifying him for his outlay, there commonly remains a surplus, which is his
profit; the net income from his capital [and skill]; the amount which he can afford to expend in necessaries or
pleasures, or from which by further saving he can add to his wealth.

As the wages of the laborer are the remuneration of labor, so [a part of] the profits of the capitalist are properly,
according to Mr. Senior's well-chosen expression, the remuneration of abstinence. They are what he gains by
forbearing to consume his capital for his own uses, and allowing it to be consumed by productive laborers for their
uses. For this forbearance he requires a recompense.

Of the gains, however, which the possession of a capital enables a person to make, (1) a part only is properly an
equivalent for the use of the capital itself; namely, as much as a solvent person would be willing to pay for the loan
of it. This, which as everybody knows is called interest, is all that a person is enabled to get by merely abstaining
from the [pg 217] immediate consumption of his capital, and allowing it to be used for productive purposes by
others. The remuneration which is obtained in any country for mere abstinence is measured by the current rate of
interest on the best security; such security as precludes any appreciable chance of losing the principal. What a
person expects to gain, who superintends the employment of his own capital, is always more, and generally much
more, than this. The rate of profit greatly exceeds the rate of interest. (2.) The surplus is partly compensation for
risk. By lending his capital on unexceptionable security he runs little or no risk. But if he embarks in business on
his own account, he always exposes his capital to some, and in many cases to very great, danger of partial or total
loss. For this danger he must be compensated, otherwise he will not incur it. (3.) He must likewise be remunerated
for the devotion of his time and labor. The control of the operations of industry usually belongs to the person who
supplies the whole or the greatest part of the funds by which they are carried on, and who, according to the
ordinary arrangement, is either alone interested, or is the person most interested (at least directly), in the result. To
exercise this control with efficiency, if the concern is large and complicated, requires great assiduity, and often no
ordinary skill. This assiduity and skill must be remunerated.

The gross profits from capital, the gains returned to those who supply the funds for production, must suffice for
these three purposes; and the three parts into which profit may be considered as resolving itself may be described
respectively as interest, insurance, and wages of superintendence.

Inasmuch as risk is the cause affecting the rate of interest, it would be much simpler to consider the whole reward for abstinence
as interest, the rate of which is affected by the risk; and to carefully exclude from the profits of capital the payment for “assiduity
and skill,” which is distinctly wages of labor. The “wages of superintendence,” as every one on a moment's reflection must admit,
have no necessary connection whatever with the possession of capital. The thing with which the laborer is occupied does not give
the reason for associating his [pg 218] wages with the name of that thing; because a highly-qualified manager supervises the
operations of capital, it does not follow that he has capital, or should be regarded as being paid for the possession of capital. The
man who shovels ashes is not paid wages of ashes, any more than a man who superintends other people's capital is paid the
reward of capital. The payment for services, in the one case as in the other, depends upon the skill of the manager, just as it does
with an ordinary mechanic, rising or falling with his fitness for the peculiar work. Skill as a manager is the cause; the amount of
the remuneration is the consequence. If so, then the wages of superintendence have no logical connection, in the economic sense,
with capital as the thing which determines the amount of its reward, any more than it affects the wages of any and all labor. The

payment for the use of capital, simply as capital, may be seen by the amount which a widow who is not engaged in active
business receives from her property invested as trust funds. Moreover, it is less and less true that the manager of the operations of
industry is necessarily the capitalist. To see this, mark the executive managers (called “treasurers” by custom) of cotton and
woolen mills, who receive a remuneration entirely distinct from any capital they may have invested in the shares of the
corporation; and the officials of the great mutual insurance companies, who receive the wages of managers, but for managing the
capital of others. A large—by far the largest—part of what is usually called profit, therefore, should be treated as wages, and the
forces which govern its amount are the same as those affecting the amounts of all other kinds of wages, such as are discussed in
the preceding chapter. The acknowledgment of this distinction is of extreme importance, and affects, in a profound way, the
whole question of distribution. To include “wages of superintendence” in profits of capital is to unnecessarily complicate one of
the most serious economic questions—namely, the relations of capital and labor.

§ 2. The Minimum of Profits; what produces Variations in the Amount of Profits.

The lowest rate of profit that can permanently exist is that which is barely adequate, at the given place and time, to
afford an equivalent for the abstinence, risk, and exertion implied in the employment of capital. From the gross
profit has first to be deducted as much as will form a fund sufficient on the average to cover all losses incident to
the employment. Next, it must afford such an equivalent to the owner of the capital for forbearing to consume it as
is then and there a sufficient motive to him to persist in his abstinence. How much will be required to form this
equivalent depends [pg 219] on the comparative value placed, in the given society, upon the present and the future
(in the words formerly used): on the strength of the effective desire of accumulation. Further, after covering all
losses, and remunerating the owner for forbearing to consume, there must be something left to recompense the
labor and skill of the person who devotes his time to the business.

Such, then, is the minimum of profits: but that minimum is exceedingly variable, and at some times and places
extremely low, on account of the great variableness of two out of its three elements. That the rate of necessary
remuneration for abstinence, or in other words the effective desire of accumulation, differs widely in different
states of society and civilization, has been seen in a former chapter. There is a still wider difference in the element
which consists in compensation for risk.

The remuneration of capital in different employments, much more than the remuneration of labor, varies according
to the circumstances which render one employment more attractive or more repulsive than another. The profits, for
example, of retail trade, in proportion to the capital employed, exceed those of wholesale dealers or manufacturers,
for this reason among others, that there is less consideration attached to the employment. The greatest, however, of
these differences, is that caused by difference of risk. The profits of a gunpowder-manufacturer must be
considerably greater than the average, to make up for the peculiar risks to which he and his property are constantly
exposed. When, however, as in the case of marine adventure, the peculiar risks are capable of being, and
commonly are, commuted for a fixed payment, the premium of insurance takes its regular place among the charges
of production, and the compensation which the owner of the ship or cargo receives for that payment does not
appear in the estimate of his profits, but is included in the replacement of his capital.

The minimum of profits can not properly include wages of superintendence, nor is it so included, practically, in Mr. Mill's [pg
220] discussions on the minimum of profits in a later part of this volume. The operation of the various elements in changing the
amount of profits might be expressed as follows: As between different countries and communities, who have a different effective
desire of accumulation, profits may vary with the element of interest and risk; within the same district, where interest is generally
the same on the same security, profits may vary with the risk attached to different industries; and, within the same occupations,
interest and risk being given, the wages of superintendence may make a greater variation than either of the other two causes—
since a skillful manager may make a large return, a poor one none at all. Or between two employments, interest and risk
remaining the same, wages of superintendence sometimes produce a wide difference.

The portion, too, of the gross profit, which forms the remuneration for the labor and skill of the dealer or producer,
is very different in different employments. This is the explanation always given of the extraordinary rate of
apothecaries' profit. There are cases, again, in which a considerable amount of labor and skill is required to

conduct a business necessarily of limited extent. In such cases a higher than common rate of profit is necessary to
yield only the common rate of remuneration.

All the natural monopolies (meaning thereby those which are created by circumstances, and not by law) which
produce or aggravate the disparities in the remuneration of different kinds of labor, operate similarly between
different employments of capital.

In this passage Mr. Mill points out distinctly that the movement up and down in the wages of a manager are governed by the
same laws as those which regulate differences in the different rewards of labor, but yet he connects it improperly with capital. It
will be seen that Mr. Mill uses the term “gross profit” on the next page in order to avoid the difficulty, which rises unconsciously
in his mind, of the anomalous presence of the wages of the manager in the question of profit.

§ 3. General Tendency of Profits to an Equality.

After due allowance is made for these various causes of inequality, namely, difference in the risk or agreeableness
of different employments, and natural or artificial monopolies [which give greater or less wages of
superintendence], [pg 221] the rate of profit on capital in all employments tends to an equality. That portion of
profit which is properly interest, and which forms the real remuneration for abstinence, is strictly the same at the
same time and place, whatever be the employment. The rate of interest, on equally good security, does not vary
according to the destination of the principal, though it does vary from time to time very much, according to the
circumstances of the market.

It is far otherwise with gross profit, which, though (as will presently be seen) it does not vary much from
employment to employment, varies very greatly from individual to individual, and can scarcely be in any two
cases the same. It depends on the knowledge, talents, economy, and energy of the capitalist himself, or of the
agents whom he employs; on the accidents of personal connection; and even on chance. Hardly any two dealers in
the same trade, even if their commodities are equally good and equally cheap, carry on their business at the same
expense, or turn over their capital in the same time. That equal capitals give equal profits, as a general maxim of
trade, would be as false as that equal age or size gives equal bodily strength, or that equal reading or experience
gives equal knowledge. The effect depends as much upon twenty other things as upon the single cause specified.
On an average (whatever may be the occasional fluctuations) the various employments of capital are on such a
footing as to hold out, not equal profits, but equal expectations of profit, to persons of average abilities and
advantages. By equal, I mean after making compensation for any inferiority in the agreeableness or safety of an
employment. If the case were not so; if there were, evidently, and to common experience, more favorable chances
of pecuniary success in one business than in others, more persons would engage their capital in the business. If, on
the contrary, a business is not considered thriving; if the chances of profit in it are thought to be inferior to those in
other employments; capital gradually leaves it, or at least new capital is not attracted to it; and by this change in
the distribution of [pg 222] capital between the less profitable and the more profitable employments, a sort of
balance is restored.

This may be easily shown by a diagram in which the capital in one employment is represented by A B, and which exceeds C D,
that in another employment, by the amount of A F. It is not necessary that the whole of the excess, A F should be transferred to C
D to make the two capitals equal, but only A E, which, added to C D, brings C D to an equality with E B.

This equalizing process, commonly described as the transfer of capital from one employment to another, is not
necessarily the onerous, slow, and almost impracticable operation which it is very often represented to be. In the
first place, it does not always imply the actual removal of capital already embarked in an employment. In a rapidly
progressive state of capital, the adjustment often takes place by means of the new accumulations of each year,
which direct themselves in preference toward the more thriving trades. Even when a real transfer of capital is
necessary, it is by no means implied that any of those who are engaged in the unprofitable employment relinquish
business and break up their establishments. The numerous and multifarious channels of credit through which, in
commercial nations, unemployed capital diffuses itself over the field of employment, flowing over in greater
abundance to the lower levels, are the means by which the equalization is accomplished. The process consists in a
limitation by one class of dealers or producers and an extension by the other of that portion of their business which
is carried on with borrowed capital.

“Political economists say that capital sets toward the most profitable trades, and that it rapidly leaves the less profitable and non-
paying trades. But in ordinary countries this is a slow process, and some persons, who want to have ocular demonstrations of
abstract truths, have been inclined to doubt it because they could not see it. The process would be visible enough if you could
only see the books of the bill-brokers and the bankers. If the iron-trade ceases to be as profitable as [pg 223] usual, less iron is
sold; the fewer the sales the fewer the bills; and in consequence the number of iron bills [at the banks] is diminished. On the other
hand, if, in consequence of a bad harvest, the corn trade becomes on a sudden profitable, immediately ‘corn bills’ are created in
large numbers, and, if good, are discounted [at the banks]. Thus capital runs as surely and instantly where it is most wanted, and
177
where there is most to be made of it, as water runs to find its level.”

In the case of an altogether declining trade, in which it is necessary that the production should be, not occasionally
varied, but greatly and permanently diminished, or perhaps stopped altogether, the process of extricating the
capital is, no doubt, tardy and difficult, and almost always attended with considerable loss; much of the capital
fixed in machinery, buildings, permanent works, etc., being either not applicable to any other purpose, or only
applicable after expensive alterations; and time being seldom given for effecting the change in the mode in which

it would be effected with least loss, namely, by not replacing the fixed capital as it wears out. There is besides, in
totally changing the destination of a capital, so great a sacrifice of established connection, and of acquired skill and
experience, that people are always very slow in resolving upon it, and hardly ever do so until long after a change of
fortune has become hopeless.

In general, then, although profits are very different to different individuals, and to the same individual in different
years, there can not be much diversity at the same time and place in the average profits of different employments
(other than the standing differences necessary to compensate for difference of attractiveness), except for short
periods, or when some great permanent revulsion has overtaken a particular trade. It is true that, to persons with
the same amount of original means, there is more chance of making a large fortune in some employments than in
others. But it would be found that in those same employments bankruptcies also are more frequent, and that the
chance of greater success is balanced by a greater probability of complete failure.

[pg 224]

§ 4. The Cause of the Existence of any Profit; the Advances of Capitalists consist of Wages of Labor.

The preceding remarks have, I hope, sufficiently elucidated what is meant by the common phrase, “the ordinary
rate of profit,” and the sense in which, and the limitations under which, this ordinary rate has a real existence. It
now remains to consider what causes determine its amount.

The cause of profit is, that labor produces more than is required for its support; the reason why capital yields a
profit is, because food, clothing, materials, and tools last longer than the time which is required to produce them;
so that if a capitalist supplies a party of laborers with these things, on condition of receiving all they produce, they
will, in addition to reproducing their own necessaries and instruments, have a portion of their time remaining, to
work for the capitalist. We thus see that profit arises, not from the incident of exchange, but from the productive
power of labor; and the general profit of the country is always what the productive power of labor makes it,
whether any exchange takes place or not. I proceed, in expansion of the considerations thus briefly indicated, to
exhibit more minutely the mode in which the rate of profit is determined.

I assume, throughout, the state of things which, where the laborers and capitalists are separate classes, prevails,
with few exceptions, universally; namely, that the capitalist advances the whole expenses, including the entire
remuneration of the laborer. That he should do so is not a matter of inherent necessity; the laborer might wait until
the production is complete for all that part of his wages which exceeds mere necessaries, and even for the whole, if
he has funds in hand sufficient for his temporary support. But in the latter case the laborer is to that extent really a
capitalist, investing capital in the concern, by supplying a portion of the funds necessary for carrying it on; and
even in the former case he may be looked upon in the same light, since, contributing his labor at less than the
market price, he may be regarded as lending the difference to his employer, and receiving it back with interest (on
whatever principle computed) from the proceeds of the enterprise.

[pg 225]
The capitalist, then, may be assumed to make all the advances and receive all the produce. His profit consists of
the excess of the produce above the advances; his rate of profit is the ratio which that excess bears to the amount
advanced.

For example, if A advances 8,000 bushels of corn to laborers in return for 10,000 yards of cloth (and if one bushel of corn sells
for the same sum as one yard of cloth), his profit consists of 2,000 yards of cloth. The ratio of the excess, 2,000, to 8,000, the
outlay, or 25 per cent, is the rate of profit. It is not the ratio of 2,000 to 10,000.

But what do the advances consist of? It is, for the present, necessary to suppose that the capitalist does not pay any
rent; has not to purchase the use of any appropriated natural agent. The nature of rent, however, we have not yet

taken into consideration; and it will hereafter appear that no practical error, on the question we are now examining,
is produced by disregarding it.

If, then, leaving rent out of the question, we inquire in what it is that the advances of the capitalist, for purposes of
production, consist, we shall find that they consist of wages of labor.

A large portion of the expenditure of every capitalist consists in the direct payment of wages. What does not
consist of this is composed of materials and implements, including buildings. But materials and implements are
produced by labor; and as our supposed capitalist is not meant to represent a single employment, but to be a type
of the productive industry of the whole country, we may suppose that he makes his own tools and raises his own
materials. He does this by means of previous advances, which, again, consist wholly of wages. If we suppose him
to buy the materials and tools instead of producing them, the case is not altered: he then repays to a previous
producer the wages which that previous producer has paid. It is true he repays it to him with a profit; and, if he had
produced the things himself, he himself must have had that profit on this part of his outlay [pg 226] as well as on
every other part. The fact, however, remains, that in the whole process of production, beginning with the materials
and tools and ending with the finished product, all the advances have consisted of nothing but wages, except that
certain of the capitalists concerned have, for the sake of general convenience, had their share of profit paid to them
before the operation was completed.

This idea may be more clear, perhaps, if we imagine a large corporation, not only making woolen cloth, but owning sheep-
ranches, where the raw materials are produced; the shops where all machinery is made; and who even produce on their own
property all the food, clothing, shelter, and consumption of the laborers employed by them. A line of division may be passed
through the returns in all these branches of the industry, separating what is wages from what is profit. Then it can be easily
imagined that all the returns on one side, representing profits, go to capitalists, no matter whether they are thousands in number,
or only one capitalist typifying the rest, or a single corporation acting for many small capitalists.

§ 5. The Rate of Profit depends on the Cost of Labor.

It thus appears that the two elements on which, and which alone, the gains of the capitalists depend, are, first, the
magnitude of the produce, in other words, the productive power of labor; and secondly, the proportion of that
produce obtained by the laborers themselves; the ratio which the remuneration of the laborers bears to the amount
they produce.

We thus arrive at the conclusion of Ricardo and others, that the rate of profits depends upon wages; rising as wages
fall, and falling as wages rise. In adopting, however, this doctrine, I must insist upon making a most necessary
alteration in its wording. Instead of saying that profits depend on wages, let us say (what Ricardo really meant) that
they depend on the cost of labor.

This is an entirely different question from that concerning the rate of wages before discussed (Book II, Chap. II). That had to do
with the amount of the capital which each laborer, on an average, received as real wages, and this average rate was affected by
the number of competitors for labor, as compared with the existing capital, taking into account the nature of the industries in a
country. An increase of population, bringing more laborers to compete for employment, will lower [pg 227] the average
amount of real wages received by each one; and a decrease of population will bring about the reverse. The rate of wages,
however, now that we are considering the matter from the point of view of the capitalist, is but one of the things to be considered
affecting cost of labor. The former question was one as to the distribution of capital; the latter is one as to the amount by which
the total production is greater than the total capital advanced. Since all capital consists of advances to labor, the present inquiry is
one in regard to the quantity of advances compared with the quantity returned; that is, the relation of the total capital to the total
production arising from the use of that capital. In the diagram before used (p. 179) the question is not how the contents of circle
B are to be distributed, but the relative size of circle B to circle A. In order to produce circle A, it is necessary to advance what is
represented by circle B.

Wages and the cost of labor; what labor brings in to the laborer and what it costs to the capitalist are ideas quite
distinct, and which it is of the utmost importance to keep so. For this purpose it is essential not to designate them,
as is almost always done, by the same name. Wages, in public discussions, both oral and printed, being looked
upon from the same point of view of the payers, much oftener than from that of the receivers, nothing is more
common than to say that wages are high or low, meaning only that the cost of labor [to the capitalist] is high or
low. The reverse of this would be oftener the truth: the cost of labor is frequently at its highest where wages are
lowest. This may arise from two causes. (1.) In the first place, the labor, though cheap, may be inefficient.

178
The facts presented by Mr. Brassey very fully illustrate this principle. Although French workmen in their ship-yards receive
less wages for the same kind of work than the English workmen in English yards, yet it costs less per ton to build ships in
England than in France. The same correspondence between high wages and efficient work was found to be true of railway
construction in different parts of the world. With different character, varying amounts of industrial energy, varying intelligence,
and endurance, different people do not have the same efficiency of labor. It is ascertained that inefficiency is, as a rule,
accompanied by low wages. Even though wages paid for ordinary labor in constructing railways were in India [pg 228] only
from nine to twelve cents a day, and in England from seventy-five to eighty-seven cents a day, yet it cost as much to build a mile
of railway in India as in England. The English laborer gave a full equivalent for his higher wages. Moreover, while an English
weaver tends from two to three times as many looms as his Russian competitor, the workman in the United States, it is said, will
tend even more than the Englishman. In American sailing-vessels, also, a less number of sailors, relatively to the tonnage, is
required than in English sailing-ships. Mr. Brassey, besides, came to the conclusion that the working power, or efficiency, of
ordinary English laborers was to the French as five to three.

(2.) The other cause which renders wages and the cost of labor no real criteria of one another is the varying
costliness of the articles which the laborer consumes. If these are cheap, wages, in the sense which is of
importance to the laborer, may be high, and yet the cost of labor may be low; if dear, the laborer may be
wretchedly off, though his labor may cost much to the capitalist. This last is the condition of a country over-
peopled in relation to its land; in which, food being dear, the poorness of the laborer's real reward does not prevent
labor from costing much to the purchaser, and low wages and low profits coexist. The opposite case is exemplified
in the United States of America. The laborer there enjoys a greater abundance of comforts than in any other
country of the world, except some of the newest colonies; but owing to the cheap price at which these comforts can
be obtained (combined with the great efficiency of the labor), the cost of labor to the capitalist is considerably
lower than in Europe. It must be so, since the rate of profit is higher; as indicated by the rate of interest, which is
six per cent at New York when it is three or three and a quarter per cent in London.

The cost of labor, then, is, in the language of mathematics, a function of three variables: (1) the efficiency of labor;
(2) the wages of labor (meaning thereby the real reward [or real wages] of the laborer); and (3) the greater or less
cost179 [pg 229] at which the articles composing that real reward can be produced or purchased. It is plain that the
cost of labor to the capitalist must be influenced by each of these three circumstances, and by no others. These,
therefore, are also the circumstances which determine the rate of profit; and it can not be in any way affected
except through one or other of them.

The efficiency of labor, in this connection, is highly important in its practical aspects, and as affecting the labor question, because
as a function of cost of labor, that is, as an element affecting the quantity of things advanced to the laborers in comparison with
the quantity of things returned to the employer, it includes the whole influence of machinery, labor-saving devices, and the results
of invention. The quantity of produce depends, for a given advance, on the kind of machinery, the speed with which it is run, and
on the general state of the arts and industrial inventions. The extent to which the productive capacity of a single laborer has been
increased in the United States has been almost incredible. Instead of weaving cloth by hand, as was done a hundred years ago,
“one operative in Lowell, working one year, can produce the cotton fabric needed for the year's supply of 1,500 to 1,800
Chinese.” Moreover, there is no question as to the fact that no nation in the world compares with ours in the power to invent,
construct, and manage the most ingenious and complicated machinery. The inventive faculty belongs to every class in our
country; and, in studying cost of labor, it must be well borne in mind that the efficiency of American labor, particularly as
combined with mechanical appliances, is one of the great causes of our enormous production. The result of this, for instance, has
been that, without lowering profits, although the price of cloth has been greatly reduced, employers have been able to raise the
wages of operatives, and shorten their hours of labor, because machinery has so vastly increased the production for a given

outlay. As one of a few facts showing this tendency in the last fifty years, note the following table, taken from the books of the
Namquit cotton-mill in Bristol, Rhode Island:

Kind Of Labor. 1841. 1884.
Card-room help, per week $3.28 $5.40
Card-strippers, per week 4.98 6.00
Weavers, per week 4.75 6.00
Carding-room overseer, per week 7.00 13.50

The hours per week have decreased in the same time from 84 to 66, while the product of the mill in pounds has increased 25 per
cent. It may be unnecessary, perhaps, to say that these figures represent the current wages in [pg 230] other mills at the same
periods; and that these facts can be sustained by the records of other mills.

In its economic effect we must also consider, under efficiency, the whole question of natural advantages of soil, climate, and
natural resources. Laborers of the same skill, paid the same real wages, of the same cost, will produce a vastly greater amount of
wheat in Dakota than in Vermont or England. This is the chief reason why profits are so high in the United States. In many
industries we have very marked natural advantages, which permits a high reward to labor, and yet yields a high profit to the
capitalist. This applies not merely to agriculture, but to all the extractive industries, such as the production of petroleum, wood,
copper, etc.

In short, the whole matter of ease and difficulty of production, of high or low cost of production, taking it in the sense of great or
little sacrifice (compare carefully Book III, Chap. II, § 4), comes in under the element of efficiency, in cost of labor. The reader
can not be too strongly urged to connect different parts of the economic system together. And the questions of Cost of Labor and
Cost of Production are of paramount importance to a proper understanding of political economy.

If labor generally became more efficient, without being more highly rewarded; if, without its becoming less
efficient, its remuneration fell, no increase taking place in the cost of the articles composing that remuneration; or
if those articles became less costly, without the laborers obtaining more of them; in any one of these three cases,
profits would rise. If, on the contrary, labor became less efficient (as it might do from diminished bodily vigor in
the people, destruction of fixed capital, or deteriorated education); or if the laborer obtained a higher remuneration,
without any increased cheapness in the things composing it; or if, without his obtaining more, that which he did
obtain became more costly; profits, in all these cases, would suffer a diminution. And there is no other combination
of circumstances in which the general rate of profit of a country, in all employments indifferently, can either fall or
rise.

The connection of profit with the three constituents of cost of labor may probably be better seen by aid of the following
illustration; it being premised that as yet money is not used, [pg 231] and that the laborers are paid in the articles which their
money wages would have bought had money been used. For simplicity we will suppose that all articles of the laborer's
consumption are represented by corn. Imagine a large woolen-mill employing 500 men, and paying them in corn; and suppose
that one yard of woolen cloth exchanges for one bushel of corn in the open market. In the beginning, with a given condition of
efficiency, suppose that each man produces on an average 1,200 yards of cloth, for which he is paid 1,000 bushels of corn:

500 men, each producing 1,200 yards, give a total product of 600,000 yards.
500 men, each paid 1,000 bushels, cause an outlay of 500,000 yards.
Profit: 100,000 yards.

(1.) Now suppose a change increasing the efficiency of labor to such an extent that each laborer produces 1,300 instead of 1,200
yards, then the account will stand, if the other elements remain unchanged:

500 men, each producing 1,300 yards, give a total product of 650,000 yards.
500 men, each paid 1,000 bushels, cause an outlay of 500,000 yards.
Profit: 150,000 yards.

(2.) If efficiency and the cost of producing food remain the same as at first, suppose a change to occur which raises the quantity
of corn each laborer receives from 1,000 to 1,100, or, as it is called, increases his real wages—then the account will be:

500 men, each producing 1,200 yards, give a total product of 600,000 yards.
500 men, each paid 1,100 bushels, cause an outlay of 550,000 yards.
Profit: 50,000 yards.

(3.) If efficiency and real wages remain the same, suppose such an increase in the cost to the employers of obtaining corn that
they are obliged to give one and one tenth yard of their goods for one bushel of corn (1,000 bushels of corn costing them 1,100
yards of cloth), then the statement will read:

500 men, each producing 1,200 yards, give a total product of 600,000 yards.
500 men, each paid 1,000 bushels, cause an outlay of 550,000 yards.
Profit: 50,000 yards.

[pg 232]

Chapter VI. Of Rent.

§ 1. Rent the Effect of a Natural Monopoly.

The requisites of production being labor, capital, and natural agents, the only person, besides the laborer and the
capitalist, whose consent is necessary to production, and who can claim a share of the produce as the price of that
consent, is the person who, by the arrangements of society, possesses exclusive power over some natural agent.
The land is the principal of the natural agents which are capable of being appropriated, and the consideration paid
for its use is called rent. Landed proprietors are the only class, of any numbers or importance, who have a claim to
a share in the distribution of the produce, through their ownership of something which neither they nor any one
else have produced. If there be any other cases of a similar nature, they will be easily understood, when the nature
and laws of rent are comprehended.

It is at once evident that rent is the effect of a monopoly. The reason why land-owners are able to require rent for
their land is, that it is a commodity which many want, and which no one can obtain but from them. If all the land
of the country belonged to one person, he could fix the rent at his pleasure. This case, however, is nowhere known
to exist; and the only remaining supposition is that of free competition; the land-owners being supposed to be, as in
fact they are, too numerous to combine.

The ratio of the land to the cultivators shows the limited quantity of land. It is very desirable to keep the connection [pg 233]
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of one part of the subject with another wherever possible. “Agricultural rent, as it actually exists,” says Mr. Cairnes, truly, “is
not a consequence of the monopoly of the soil, but of its diminishing productiveness.” The doctrine of rent depends upon the law
of diminishing returns; and it is only by the pressure of population upon land that the lessened productiveness of land, whether
because of poorer qualities or poorer situations, is made apparent. Or, to take things in their natural sequence, an increase of
population necessitates more food; and this implies a resort to more expensive methods, or poorer soils, so soon as land is pushed
to the extent that it will not yield an increased crop for the same application of labor and capital as formerly. Different qualities of
land, then, being in cultivation at the same time, the better qualities must, of course, yield a greater return than the poorer, and the
conditions then exist under which land pays rent. Those, therefore, who admit the law of diminishing returns are inevitably led to
the doctrine of rent.

§ 2. No Land can pay Rent except Land of such Quality or Situation as exists in less Quantity than the
Demand.

A thing which is limited in quantity, even though its possessors do not act in concert, is still a monopolized article.
But even when monopolized, a thing which is the gift of nature, and requires no labor or outlay as the condition of
its existence, will, if there be competition among the holders of it, command a price only if it exist in less quantity
than the demand.

If the whole land of a country were required for cultivation, all of it might yield a rent. But in no country of any
extent do the wants of the population require that all the land, which is capable of cultivation, should be cultivated.
The food and other agricultural produce which the people need, and which they are willing and able to pay for at a
price which remunerates the grower, may always be obtained without cultivating all the land; sometimes without
cultivating more than a small part of it; the more fertile lands, or those in the more convenient situations, being of
course preferred. There is always, therefore, some land which can not, in existing circumstances, pay any rent; and
no land ever pays rent unless, in point of fertility or situation, it belongs to those superior kinds which exist in less
quantity [pg 234] than the demand—which can not be made to yield all the produce required for the community,
unless on terms still less advantageous than the resort to less favored soils. (1.) The worst land which can be

cultivated as a means of subsistence is that which will just replace the seed and the food of the laborers employed
on it, together with what Dr. Chalmers calls their secondaries; that is, the laborers required for supplying them with
tools, and with the remaining necessaries of life. Whether any given land is capable of doing more than this is not a
question of political economy, but of physical fact. The supposition leaves nothing for profits, nor anything for the
laborers except necessaries: the land, therefore, can only be cultivated by the laborers themselves, or else at a
pecuniary loss; and, a fortiori, can not in any contingency afford a rent. (2.) The worst land which can be
cultivated as an investment for capital is that which, after replacing the seed, not only feeds the agricultural
laborers and their secondaries, but affords them the current rate of wages, which may extend to much more than
mere necessaries, and leaves, for those who have advanced the wages of these two classes of laborers, a surplus
equal to the profit they could have expected from any other employment of their capital. (3.) Whether any given
land can do more than this is not merely a physical question, but depends partly on the market value of agricultural
produce. What the land can do for the laborers and for the capitalist, beyond feeding all whom it directly or
indirectly employs, of course depends upon what the remainder of the produce can be sold for. The higher the
market value of produce, the lower are the soils to which cultivation can descend, consistently with affording to the
capital employed the ordinary rate of profit.

As, however, differences of fertility slide into one another by insensible gradations; and differences of
accessibility, that is, of distance from markets do the same; and since there is land so barren that it could not pay
for its cultivation at any price; it is evident that, whatever the [pg 235] price may be, there must in any extensive
region be some land which at that price will just pay the wages of the cultivators, and yield to the capital employed
the ordinary profit, and no more. Until, therefore, the price rises higher, or until some improvement raises that
particular land to a higher place in the scale of fertility, it can not pay any rent. It is evident, however, that the
community needs the produce of this quality of land; since, if the lands more fertile or better situated than it could
have sufficed to supply the wants of society, the price would not have risen so high as to render its cultivation
profitable. This land, therefore, will be cultivated; and we may lay it down as a principle that, so long as any of the
land of a country which is fit for cultivation, and not withheld from it by legal or other factitious obstacles, is not
cultivated, the worst land in actual cultivation (in point of fertility and situation together) pays no rent.

§ 3. The Rent of Land is the Excess of its Return above the Return to the worst Land in Cultivation.

If, then, of the land in cultivation, the part which yields least return to the labor and capital employed on it gives
only the ordinary profit of capital, without leaving anything for rent, a standard [i.e., the “margin of cultivation”] is
afforded for estimating the amount of rent which will be yielded by all other land. Any land yields just as much
more than the ordinary profits of stock as it yields more than what is returned by the worst land in cultivation. The
surplus is what the farmer can afford to pay as rent to the landlord; and since, if he did not so pay it, he would
receive more than the ordinary rate of profit, the competition of other capitalists, that competition which equalizes
the profits of different capitals, will enable the landlord to appropriate it. The rent, therefore, which any land will
yield, is the excess of its produce, beyond what would be returned to the same capital if employed on the worst
land in cultivation.

It has been denied that there can be any land in cultivation which pays no rent, because landlords (it is contended)
would not allow their land to be occupied without payment. [pg 236] Inferior land, however, does not usually
occupy, without interruption, many square miles of ground; it is dispersed here and there, with patches of better
land intermixed, and the same person who rents the better land obtains along with it the inferior soils which
alternate with it. He pays a rent, nominally for the whole farm, but calculated on the produce of those parts alone
(however small a portion of the whole) which are capable of returning more than the common rate of profit. It is
thus scientifically true that the remaining parts pay no rent.

This point seems to need some illustration. Suppose that all the lands in a community are of five different grades of
productiveness. When the price of agricultural produce was such that grades one, two, and three all came into cultivation, lands
of poorer quality would not be cultivated. When a man rents a farm, he always gets land of varying degrees of fertility within its
limits. Now, in determining what he ought to pay as rent, the farmer will agree to give that which will still leave him a profit on
his working capital; if in his fields he finds land which would not enter into the question of rental, because it did not yield more

than the profit on working it, after he rented the farm he would find it to his interest to cultivate it, simply because it yielded him
a profit, and because he was not obliged to pay rent upon it; if required to pay rent for it, he would lose the ordinary rate of profit,
would have no reason for cultivating it, of course, and would throw it out of cultivation. Moreover, suppose that lands down to
grade three paid rent when A took the farm; now, if the price of produce rises slightly, grade four may pay something, but
possibly not enough to warrant any rent going to a landlord. A will put capital on it for this return, but certainly not until the price
warrants it; that is, not until the price will return him at least the cost of working the land, plus the profit on his outlay. But the
community needed this land, or the price would not have gone up to the point which makes possible its cultivation even for a
profit, without rent. There must always be somewhere some land affected in just this way.

§ 4. —Or to the Capital employed in the least advantageous Circumstances.

Let us, however, suppose that there were a validity in this objection, which can by no means be conceded to it;
that, when the demand of the community had forced up food to such a price as would remunerate the expense of
producing it from a certain quality of soil, it happened nevertheless [pg 237] that all the soil of that quality was
withheld from cultivation, the increase of produce, which the wants of society required, would for the time be
obtained wholly (as it always is partially), not by an extension of cultivation, but by an increased application of
labor and capital to land already cultivated.

Now we have already seen that this increased application of capital, other things being unaltered, is always
attended with a smaller proportional return. The rise of price enables measures to be taken for increasing the
produce, which could not have been taken with profit at the previous price. The farmer uses more expensive
manures, or manures land which he formerly left to nature; or procures lime or marl from a distance, as a dressing
for the soil; or pulverizes or weeds it more thoroughly; or drains, irrigates, or subsoils portions of it, which at
former prices would not have paid the cost of the operation; and so forth. The farmer or improver will only
consider whether the outlay he makes for the purpose will be returned to him with the ordinary profit, and not
whether any surplus will remain for rent. Even, therefore, if it were the fact that there is never any land taken into
cultivation, for which rent, and that too of an amount worth taking into consideration, was not paid, it would be
true, nevertheless, that there is always some agricultural capital which pays no rent, because it returns nothing
beyond the ordinary rate of profit: this capital being the portion of capital last applied—that to which the last
addition to the produce was due; or (to express the essentials of the case in one phrase) that which is applied in the
least favorable circumstances. But the same amount of demand and the same price, which enable this least
productive portion of capital barely to replace itself with the ordinary profit, enable every other portion to yield a
surplus proportioned to the advantage it possesses. And this surplus it is which competition enables the landlord to
appropriate.

If land were all occupied, and of only one grade, the first installment of labor and capital produced, we will say, twenty bushels
of wheat; when the price of wheat rose, and it became [pg 238] profitable to resort to greater expense on the soil, a second
installment of the same amount of labor and capital when applied, however, only yielded fifteen bushels more; a third, ten
bushels more; and a fourth, five bushels more. The soil now gives fifty bushels only under the highest pressure. But, if it was
profitable to invest the same installment of labor and capital simply for the five bushels that at first had received a return of
twenty bushels, the price must have gone up so that five bushels should sell for as much as the twenty did formerly; so, mutatis
mutandis, of installments second and third. So that if the demand is such as to require all of the fifty bushels, the agricultural
capital which produced the five bushels will be the standard according to which the rent of the capital, which grew twenty,
fifteen, and ten bushels respectively, is measured. The principle is exactly the same as if equal installments of capital and labor
were invested on four different grades of land returning twenty, fifteen, ten, and five bushels for each installment. Or, as if in the
table on page 240, A, B, C, and D each represented different installments of the same amount of labor and capital put upon the
same spot of ground, instead of being, as there, put upon different grades of land.

The rent of all land is measured by the excess of the return to the whole capital employed on it above what is
necessary to replace the capital with the ordinary rate of profit, or, in other words, above what the same capital
would yield if it were all employed in as disadvantageous circumstances as the least productive portion of it:
whether that least productive portion of capital is rendered so by being employed on the worst soil, or by being

expended in extorting more produce from land which already yielded as much as it could be made to part with on
easier terms.

It will be true that the farmer requires the ordinary rate of profit on the whole of his capital; that whatever it returns
to him beyond this he is obliged to pay to the landlord, but will not consent to pay more; that there is a portion of
capital applied to agriculture in such circumstances of productiveness as to yield only the ordinary profits; and that
the difference between the produce of this and of any other capital of similar amount is the measure of the tribute
which that other capital can and will pay, under the name of rent, to the landlord. This constitutes a law of rent, as
near the [pg 239] truth as such a law can possibly be; though of course modified or disturbed, in individual cases,
by pending contracts, individual miscalculations, the influence of habit, and even the particular feelings and
dispositions of the persons concerned.

The law of rent, in the economic sense, operates in the United States as truly as elsewhere, although there is no separate class of
landlords here. With us, almost all land is owned by the cultivator; so that two functions, those of the landlord and farmer, are
both united in one person. Although one payment is made, it is still just as distinctly made up of two parts, one of which is a
payment to the owner for the superior quality of his soil, and the other a payment (to the same person, if the owner is the
cultivator) of profit on the farmer's working capital. Land which in the United States will only return enough to pay a profit on
this capital can not pay any rent. And land which can pay more than a profit on this working capital, returns that excess as rent,
even if the farmer is also the owner and landlord. The principle which regulates the amount of that excess—which is the essential
point—is the principle which determines the amount of economic rent, and it holds true in the United States or Finland, provided
only that different grades of land are called into cultivation. The governing principle is the same, no matter whether a payment is
made to one man as profit and to another as rent, or whether the two payments are made to the same man in two capacities. It has
been urged that the law of rent does not hold in the United States, because “the price of grain and other agricultural produce has
not risen in proportion to the increase of our numbers, as it ought to have done if Ricardo's theory were true, but has fallen, since
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1830, though since that time our population has been more than tripled.” This overlooks the fact that we have not even yet
taken up all our best agricultural lands, so that for some products the law of diminishing productiveness has not yet shown itself.
The reason is, that the extension of our railway system has only of late years brought the really good grain-lands into cultivation.
The fact that there has been no rise in agricultural products is due to the enormous extent of marvelously fertile grain-lands in the
West, and to the cheapness of transportation from those districts to the seaboard.

For a general understanding of the law of rent the following table will show how, under constant increase of population
(represented by four different advances of population, in the [pg 240] first column), first the best and then the poorer lands are
brought into cultivation. We will suppose (1) that the most fertile land, A, at first pays no rent; then (2), when more food is
wanted than land A can supply, it will be profitable to till land B, but which, as yet, pays no rent. But if eighteen bushels are a
sufficient return to a given amount of labor and capital, then when an equal amount of labor and capital engaged on A returns
twenty-four bushels, six of that are beyond the ordinary profit, and form the rent on land A, and so on; C will next be the line of
comparison, and then D; as the poorer soils are cultivated, the rent of A increases:

Population
A B C D
Increase.
24 18 12 6
bushels bushels bushels bushels
Total Rent in Total Rent in Total Rent in Total Rent in
product Bushels product Bushels product Bushels product Bushels
I. 24 0 .. .. .. .. .. ..
II. 24 6 18 0 .. .. .. ..
III. 24 12 18 6 12 0 .. ..
IV. 24 18 18 12 12 6 6 0

§ 5. Opposing Views of the Law of Rent.

Under the name of rent, many payments are commonly included, which are not a remuneration for the original
powers of the land itself, but for capital expended on it. The buildings are as distinct a thing from the farm as the
stock or the timber on it; and what is paid for them can no more be called rent of land than a payment for cattle
would be, if it were the custom that the landlord should stock the farm for the tenant. The buildings, like the cattle,
are not land, but capital, regularly consumed and reproduced; and all payments made in consideration for them are
properly interest.

But with regard to capital actually sunk in improvements, and not requiring periodical renewal, but spent once for
all in giving the land a permanent increase of productiveness, it appears to me that the return made to such capital
loses altogether the character of profits, and is governed by the principles of rent. It is true that a landlord will not
expend capital in improving his estate unless he expects from the improvement an increase of income surpassing
the interest [pg 241] of his outlay. Prospectively, this increase of income may be regarded as profit; but, when the
expense has been incurred and the improvement made, the rent of the improved land is governed by the same rules
as that of the unimproved.

Mr. Carey (as well as Bastiat) has declared that there is a law of increasing returns from land. He points out that everything now
existing could be reproduced to-day at a less cost than that involved in its original production, owing to our advance in skill,
knowledge, and all the arts of production; that, for example, it costs less to make an axe now than it did five hundred years ago;
so also with a farm, since a farm of a given amount of productiveness can be brought into cultivation at less cost to-day than that
originally spent upon it. The gain of society has, we all admit, been such that we produce almost everything at a less cost now
than long ago; but to class a farm and an axe together overlooks, in the most remarkable way, the fact that land can not be created
by labor and capital, while axes can, and that too indefinitely. Nor can the produce from the land be increased indefinitely at a
diminishing cost. This is sometimes denied by the appeal to facts: “It can be abundantly proved that, if we take any two periods
sufficiently distant to afford a fair test, whether fifty or one hundred or five hundred years, the production of the land relatively to
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the labor employed upon it has progressively become greater and greater.” But this does not prove that an existing tendency to
diminishing returns has not been more than offset by the progress of the arts and improvements. “The advance of a ship against
wind and tide is [no] proof that there is no wind and tide.”

In a work entitled “The Past, the Present, and the Future,” Mr. Carey takes [a] ground of objection to the Ricardo
theory of rent, namely, that in point of historical fact the lands first brought under cultivation are not the most
fertile, but the barren lands. “We find the settler invariably occupying the high and thin lands requiring little
clearing and no drainage. With the growth of population and wealth, other soils yielding a larger return to labor are
always brought into activity, with a constantly increasing return to the labor expended upon them.”

In whatever order the lands come into cultivation, those [pg 242] which when cultivated yield the least return, in
proportion to the labor required for their culture, will always regulate the price of agricultural produce; and all
other lands will pay a rent simply equivalent to the excess of their produce over this minimum. Whatever
unguarded expressions may have been occasionally used in describing the law of rent, these two propositions are
all that was ever intended by it. If, indeed, Mr. Carey could show that the return to labor from the land, agricultural
skill and science being supposed the same, is not a diminishing return, he would overthrow a principle much more
fundamental than any law of rent. But in this he has wholly failed.

Another objection taken against the law of diminishing returns, and so against the law of rent, is that the potential increase of
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food, e.g., of a grain of wheat, is far greater than that of man. No one disputes the fact that one grain of wheat can reproduce
itself more times than man, and that too in a geometric increase; but not without land. A grain of wheat needs land in which it can
multiply itself, and this necessary element of its increase is limited; and it is the very thing which limits the multiplication of the
grains of wheat. On the same piece of land, one can not get more than what comes from one act of reproduction in the grain. If
one grain produces 100 of its kind, doubling the capital will not repeatedly cause a geometric increase in the ratio of reproduction
of each grain on this same land, so that one grain, by one process, produces of its kind 200, 400, 800, or 1,600, because you can
not multiply the land in any such ratio as would accompany this potential reduplication of the grain. This objection would not
seem worth answering, were it not that it furnishes some difficulty to really honest inquirers.

Others, again, allege as an objection against Ricardo, that if all land were of equal fertility it might still yield a rent.
But Ricardo says precisely the same. It is also distinctly a portion of Ricardo's doctrine that, even apart from

differences of situation, the land of a country supposed to be of uniform fertility would, all of it, on a certain
supposition, pay rent, namely, if the demand of the community required [pg 243] that it should all be cultivated,
and cultivated beyond the point at which a further application of capital begins to be attended with a smaller
proportional return.

This is simply the question, before discussed, whether, if only one class of land were cultivated, some agricultural capital would
pay rent or not. It all depends on the fact whether population—and so the demand for food—has increased to the point where it
calls out a recognition of the diminishing productiveness of the soil. In that case different capitals would be invested, so that there
would be different returns to the same amount of capital; and the prior or more advantageous investments of capital on the land
would yield more than the ordinary rate of profit, which could be claimed as rent.

184
A. L. Perry admits the law of diminishing returns, but holds that, “as land is capital, and as every form of capital may be
loaned or rented, and thus become fruitful in the hands of another, the rent of land does not differ essentially in its nature from
the rent of buildings in cities, or from the interest of money.” Henry George admits Ricardo's law of rent to its full extent, but
very curiously says: “Irrespective of the increase of population, the effect of improvements in methods of production and
exchange is to increase rent.... The effect of labor-saving improvements will be to increase the production of wealth. Now, for the
production of wealth, two things are required, labor and land. Therefore, the effect of labor-saving improvements will be to
extend the demand for land, and, wherever the limit of the quality of land in use is reached, to bring into cultivation lands of less
natural productiveness, or to extend cultivation on the same lands to a point of lower natural productiveness. And thus, while the
primary effect of labor-saving improvements is to increase the power of labor, the secondary effect is to extend cultivation, and,
185 186
where this lowers the margin of cultivation, to increase rent.” Francis Bowen rejects Ricardo's law, and says, “Rent
depends, not on the increase, but on the distribution, of the population”—asserting that the existence of large cities and towns
187
determines the amount of rent paid by neighboring land.

[pg 244]

§ 6. Rent does not enter into the Cost of Production of Agricultural Produce.

Rent does not really form any part of the expenses of [agricultural] production, or of the advances of the capitalist.
The grounds on which this assertion was made are now apparent. It is true that all tenant-farmers, and many other
classes of producers, pay rent. But we have now seen that whoever cultivates land, paying a rent for it, gets in
return for his rent an instrument of superior power to other instruments of the same kind for which no rent is paid.
The superiority of the instrument is in exact proportion to the rent paid for it. If a few persons had steam-engines
of superior power to all others in existence, but limited by physical laws to a number short of the demand, the rent
which a manufacturer would be willing to pay for one of these steam-engines could not be looked upon as an
addition to his outlay, because by the use of it he would save in his other expenses the equivalent of what it cost
him: without it he could not do the same quantity of work, unless at an additional expense equal to the rent. The
same thing is true of land. The real expenses of production are those incurred on the worst land, or by the capital
employed in the least favorable circumstances. This land or capital pays, as we have seen, no rent, but the expenses
to which it is subject cause all other land or agricultural capital to be subjected to an equivalent expense in the
form of rent. Whoever does pay rent gets back its full value in extra advantages, and the rent which he pays does
not place him in a worse position than, but only in the same position as, his fellow-producer who pays no rent, but
whose instrument is one of inferior efficiency.

Soils are of every grade: some, which if cultivated, might replace the capital, but give no profit; some give a slight but not an
ordinary profit; some, the ordinary profit. That is, “there is a point up to which it is profitable to cultivate, and beyond which it is
not profitable to cultivate. The price of corn will not, for any long time, remain at a higher rate than is sufficient to cover with
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ordinary profit the cost of that portion of the general crop which is raised at greatest expense.” For similar reasons the price
will not remain at a [pg 245] lower rate. If, then, the cost of production of grain is determined by that land which replaces the
capital, yields only the ordinary profit, and pays no rent, rent forms no part of this cost, since that land does not and can not pay

189
any rent. McLeod, however, says it is not the cost of production which regulates the value of agricultural produce, but the
value which regulates the cost.

[pg 249]

Book III. Exchange.

Chapter I. Of Value.

§ 1. Definitions of Value in Use, Exchange Value, and Price.

It is evident that, of the two great departments of Political Economy, the production of wealth and
its distribution, the consideration of Value has to do with the latter alone; and with that only so far
as competition, and not usage or custom, is the distributing agency.

The use of a thing, in political economy, means its capacity to satisfy a desire, or serve a purpose.
Diamonds have this capacity in a high degree, and, unless they had it, would not bear any price.
Value in use, or, as Mr. De Quincey calls it, teleologic value, is the extreme limit of value in
exchange. The exchange value of a thing may fall short, to any amount, of its value in use; but that
it can ever exceed the value in use implies a contradiction; it supposes that persons will give, to
possess a thing, more than the utmost value which they themselves put upon it, as a means of
gratifying their inclinations.

The word Value, when used without adjunct, always means, in political economy, value in
exchange.

Exchange value requires to be distinguished from Price. Writers have employed Price to express the
value of a thing in relation to money—the quantity of money for which it will exchange. By the
price of a thing, therefore, we shall [pg 250] henceforth understand its value in money; by the value,
or exchange value of a thing, its general power of purchasing; the command which its possession
gives over purchasable commodities in general. What is meant by command over commodities in
general? The same thing exchanges for a greater quantity of some commodities, and for a very
small quantity of others. A coat may exchange for less bread this year than last, if the harvest has
been bad, but for more glass or iron, if a tax has been taken off those commodities, or an
improvement made in their manufacture. Has the value of the coat, under these circumstances,
fallen or risen? It is impossible to say: all that can be said is, that it has fallen in relation to one
thing, and risen in respect to another. Suppose, for example, that an invention has been made in
machinery, by which broadcloth could be woven at half the former cost. The effect of this would be
to lower the value of a coat, and, if lowered by this cause, it would be lowered not in relation to
bread only or to glass only, but to all purchasable things, except such as happened to be affected at
the very time by a similar depressing cause. Those [changes] which originate in the commodities
with which we compare it affect its value in relation to those commodities; but those which
originate in itself affect its value in relation to all commodities.

There is such a thing as a general rise of prices. All commodities may rise in their money price. But
there can not be a general rise of values. It is a contradiction in terms. A can only rise in value by
exchanging for a greater quantity of B and C; in which case these must exchange for a smaller
quantity of A. All things can not rise relatively to one another. If one half of the commodities in the
market rise in exchange value, the very terms imply a fall of the other half; and, reciprocally, the fall
implies a rise. Things which are exchanged for one another can no more all fall, or all rise, than a

dozen runners can each outrun all the rest, or a hundred trees all overtop one another. A general rise
or a general fall of prices is merely tantamount to an alteration [pg 251] in the value of money, and
is a matter of complete indifference, save in so far as it affects existing contracts for receiving and
paying fixed pecuniary amounts.

Before commencing the inquiry into the laws of value and price, I have one further observation to
make. I must give warning, once for all, that the cases I contemplate are those in which values and
prices are determined by competition alone. In so far only as they are thus determined, can they be
reduced to any assignable law. The buyers must be supposed as studious to buy cheap as the sellers
to sell dear.

190
The reader is advised to study the definitions of value given by other writers. Cairnes defines value as “the
191
ratio in which commodities in open market are exchanged against each other.” F. A. Walker holds that
“value is the power which an article confers upon its possessor, irrespective of legal authority or personal
192
sentiments, of commanding, in exchange for itself, the labor, or the products of the labor, of others.” Carey
says, “Value is the measure of the resistance to be overcome in obtaining those commodities or things
required for our purposes—of the power of nature over man.” Value is thus, with him, the antithesis of
wealth, which is (according to Carey) the power of man over nature. In this school, value is the service
193
rendered by any one who supplies the article for the use of another. This is also Bastiat's idea, “le rapport
194
de deux services échangés.” Following Bastiat, A. L. Perry defines value as “always and everywhere the
195
relation of mutual purchase established between two services by their exchange.” Roscher explains
exchange value as “the quality which makes them exchangeable against other goods.” He also makes a
distinction between utility and value in use: “Utility is a quality of things themselves, in relation, it is true, to
human wants. Value in use is a quality imputed to them, the result of man's thought, or his view of them.
Thus, for instance, in a beleaguered city, the stores of food do not increase in utility, but their value in use
196
does.” Levasseur regards value as “the relation resulting from exchange”—le rapport resultant de
197
l'échange. Cherbuliez asserts that “the value of a product or [pg 252] of a service can be expressed only
as the products or services which it obtains in exchange.... If I exchange the thing A against B, A is the value
198
of B, B is the value of A.” Jevons defines value as “proportion in exchange.”

§ 2. Conditions of Value: Utility, Difficulty of Attainment, and Transferableness.

That a thing may have any value in exchange, two conditions are necessary. 1. It must be of some
use; that is (as already explained), it must conduce to some purpose, satisfy some desire. No one
will pay a price, or part with anything which serves some of his purposes, to obtain a thing which
serves none of them. 2. But, secondly, the thing must not only have some utility, there must also be
some difficulty in its attainment.

199
The question is one as to the conditions essential to the existence of any value. Very justly Cairnes adds
also a third condition, “the possibility of transferring the possession of the articles which are the subject of
the exchange.” For instance, a cargo of wheat at the bottom of the sea has value in use and difficulty of
attainment, but it is not transferable. Jevons (following J. B. Say) maintains that “value depends entirely on
utility.” If utility means the power to satisfy a desire, things which merely have utility and no difficulty of
200 201
attainment could have no exchange value. F. A. Walker believes that “value depends wholly on the
202
relation between demand and supply.” Carey holds that value depends merely on the cost of reproduction

203
of the given article. Roscher finds that exchange value is “based on a combination of value in use with
204
cost value.” Cherbuliez calls the conditions of value two, “the ability to give satisfaction, and inability of
attainment without effort. The first element is subjective; it is determined wholly by the needs or desires of
the parties to the exchange. The second is objective; it depends upon material considerations, which are the
conditions of the existence of the thing, and upon which the needs of the persons exchanging have no
205
influence whatever.” It is, as usual, one of Cherbuliez's clear expositions. A. L. Perry states that, “while
value always takes its rise in the desires of men, it is never realized except through the efforts of men, and
through these efforts as mutually exchanged.”

[pg 253]
The difficulty of attainment which determines value is not always the same kind of difficulty: (1.) It
sometimes consists in an absolute limitation of the supply. There are things of which it is physically
impossible to increase the quantity beyond certain narrow limits. Such are those wines which can be
grown only in peculiar circumstances of soil, climate, and exposure. Such also are ancient
sculptures; pictures by the old masters; rare books or coins, or other articles of antiquarian curiosity.
Among such may also be reckoned houses and building-ground, in a town of definite extent.

206
De Quincey has presented some ingenious diagrams to represent the operations of the two constituents of
value in each of the three following cases: U represents the power of the article to satisfy some desire, and D
difficulty of attainment. In the first case, exchange value is not hindered by D from going up to any height,
and so it rises and falls entirely according to the force of U. D being practically infinite, the horizontal line,
exchange value, is not kept down by D, but it rises just as far as U, the desires of purchasers, may carry it.

(2.) But there is another category (embracing the majority of all things that are bought and sold), in
which the obstacle to attainment consists only in the labor and expense requisite to produce the
commodity. Without a certain labor and expense it can not be had; but, when any one is willing to
incur these, there needs be no limit to the multiplication of the product. If there were laborers

enough and machinery enough, cottons, woolens, or linens might be produced by thousands of
yards for every single yard now manufactured.

In case (2) the horizontal line, representing exchange value, follows the force of D entirely. The utility of the
article is very great, but the value is only limited by the difficulty of obtaining it. So far as U is concerned,
exchange value can go up a great distance, but will go no higher than the point where the article can be [pg
254] obtained. The dotted lines underneath the horizontal line indicate that the exchange value of articles in
this class tend to fall in value.

(3.) There is a third case, intermediate between the two preceding, and rather more complex, which
I shall at present merely indicate, but the importance of which in political economy is extremely
great. There are commodities which can be multiplied to an indefinite extent by labor and
expenditure, but not by a fixed amount of labor and expenditure. Only a limited quantity can be
produced at a given cost; if more is wanted, it must be produced at a greater cost. To this class, as
has been often repeated, agricultural produce belongs, and generally all the rude produce of the
earth; and this peculiarity is a source of very important consequences; one of which is the necessity
of a limit to population; and another, the payment of rent.

In case (3) articles like agricultural produce have a very great power to satisfy desires, and if scarce would
have a high value. So far as U is concerned, here also, as in case (2), exchange value might mount upward to
almost any height, but it can go no higher than D permits. In commodities of this class, affected by the law of
diminishing returns, the tendency is for D to increase, and so for exchange value to rise, as indicated by the
dotted lines above that of the exchange value.

§ 3. Commodities limited in Quantity by the law of Demand and Supply: General
working of this Law.

These being the three classes, in one or other of which all things that are bought and sold must take
their place, we shall consider them in their order. And first, of things absolutely limited in quantity,
such as ancient sculptures or pictures.

Of such things it is commonly said that their value depends on their scarcity; others say that the
value depends on the demand and supply. But this statement requires much explanation. The supply
of a commodity is an intelligible expression: it means the quantity offered for sale; the quantity that
is to be had, at a given time and place, by those who wish to purchase it. But what is meant by the
demand? Not the mere desire for the commodity. A beggar [pg 255] may desire a diamond; but his
desire, however great, will have no influence on the price. Writers have therefore given a more
limited sense to demand, and have defined it, the wish to possess, combined with the power of
purchasing.207 To distinguish demand in this technical sense from the demand which is synonymous
with desire, they call the former effectual demand.

General supply consists in the commodities offered in exchange for other commodities; general demand
likewise, if no money exists, consists in the commodities offered as purchasing power in exchange for other
commodities. That is, one can not increase the demand for certain things without increasing the supply of
some articles which will be received in exchange for the desired commodities. Demand is based upon the
production of articles having exchange value, in its economic sense; and the measure of this demand is
necessarily the quantity of commodities offered in exchange for the desired goods. General demand and
supply are thus reciprocal to each other. But as soon as money, or general purchasing power, is introduced,
208
Mr. Cairnes defines “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 purchasing power, seeking its end by an offer
of specific commodities or services.” But many persons find a difficulty because they insist upon separating
the idea of supply from that of demand, owing to the fact that producers seem to be a distinct class in the

community, different from consumers. That they are in reality the same persons can be easily explained by
the following statement: “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, C, 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, whereas they consist of precisely the
same persons.”

But in regard to demand and supply of particular commodities (not general demand and supply), the increase
of the demand [pg 256] is not necessarily followed by an increased supply, or vice versa. Out of the total
production (which constitutes general demand) a varying amount, sometimes more, sometimes less, may be
directed by the desires of men to the purchase of some given thing. This should be borne in mind, in
connection with the future discussion of over-production. The identity of general demand with general supply
shows there can be no general over-production: but so long as there exists the possibility that the demand for
a particular commodity may diminish without a corresponding effect being thereby produced on the supply of
that commodity, by a necessary connection, we see that there may be over-production of particular
commodities; that is, a production in excess of the demand.

The proper mathematical analogy [between demand and supply] is that of an equation. If unequal at
any moment, competition equalizes them, and the manner in which this is done is by an adjustment
of the value. If the demand increases, the value rises; if the demand diminishes, the value falls;
again, if the supply falls off, the value rises; and falls, if the supply is increased. The rise or the fall
continues until the demand and supply are again equal to one another: and the value which a
commodity will bring in any market is no other than the value which, in that market, gives a
demand just sufficient to carry off the existing or expected supply.

Mr. Cairnes209 finally defined market value as the price “which is sufficient, and no more than
sufficient, to carry the existing supply over, with such a surplus as circumstances may render
advisable, to meet the new supplies forthcoming,” which is nothing more than a paraphrase of the
words “existing or expected supply” just used by Mr. Mill. It seems unnecessary, therefore, that Mr.
Cairnes should have added: “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. To this price the actual market price will, according to my
view, approximate, in proportion to the intelligence and knowledge of the dealers.”

[pg 257]
Adam Smith, who introduced the expression “effectual demand,” employed it to denote the demand
of those who are willing and able to give for the commodity what he calls its natural price—that is,
the price which will enable it to be permanently produced and brought to market.210

This, then, is the Law of Value, with respect to all commodities not susceptible of being multiplied
at pleasure.

§ 4. Miscellaneous Cases falling under this Law.

There are but few commodities which are naturally and necessarily limited in supply. But any
commodity whatever may be artificially so. The monopolist can fix the value as high as he pleases,
short of what the consumer either could not or would not pay; but he can only do so by limiting the
supply. Monopoly value, therefore, does not depend on any peculiar principle, but is a mere variety
of the ordinary case of demand and supply.

Again, though there are few commodities which are at all times and forever unsusceptible of
increase of supply, any commodity whatever may be temporarily so; and with some commodities
this is habitually the case. Agricultural produce, for example, can not be increased in quantity before
the next harvest; the quantity of corn already existing in the world is all that can be had for
sometimes a year to come. During that interval, corn is practically assimilated to things of which the
quantity can not be increased. In the case of most commodities, it requires a certain time to increase
their quantity; and if the demand increases, then, until a corresponding supply can be brought
forward, that is, until the supply can accommodate itself to the demand, the value will so rise as to
accommodate the demand to the supply.

There is another case the exact converse of this. There are some articles of which the supply may be
indefinitely increased, but can not be rapidly diminished. There are things so durable that the
quantity in existence is at all times very great in comparison with the annual produce. Gold [pg 258]
and the more durable metals are things of this sort, and also houses. The supply of such things
might be at once diminished by destroying them; but to do this could only be the interest of the
possessor if he had a monopoly of the article, and could repay himself for the destruction of a part
by the increased value of the remainder. The value, therefore, of such things may continue for a
long time so low, either from excess of supply or falling off in the demand, as to put a complete stop
to further production; the diminution of supply by wearing out being so slow a process that a long
time is requisite, even under a total suspension of production, to restore the original value. During
that interval the value will be regulated solely by supply and demand, and will rise very gradually as
the existing stock wears out, until there is again a remunerating value, and production resumes its
course.

The total value of gold and silver in the world is variously estimated at from $10,000,000,000 to
211
$14,000,000,000; while the annual production of both gold and silver in the world during 1882 was only
$212,000,000. The loss of gold by abrasion is about 1/1000 annually, and of silver about 1/700, but much
depends on the size of the coin. A change in the annual production of the precious metals can have a
perceptible effect on their value only after such a time as will permit the change to affect the existing quantity
in a way somewhat comparable with its previous amount. The quantity, however, of wheat produced is nearly
all consumed between harvests; and the annual supply bears a very large ratio to the existing quantity.
Consequently the price of wheat will be very seriously affected by the quantity coming from the annual
product.

Finally, there are commodities of which, though capable of being increased or diminished to a great
and even an unlimited extent, the value never depends upon anything but demand and supply. This
is the case, in particular, with the commodity Labor, of the value of which we have treated
copiously in the preceding book; and there are many cases besides in which we shall find it
necessary to call in this [pg 259] principle to solve difficult questions of exchange value. This will
be particularly exemplified when we treat of International Values; that is, of the terms of
interchange between things produced in different countries, or, to speak more generally, in distant
places.

§ 5. Commodities which are Susceptible of Indefinite Multiplication without Increase of
Cost. Law of their Value Cost of Production.

When the production of a commodity is the effect of labor and expenditure, whether the commodity
is susceptible of unlimited multiplication or not, there is a minimum value which is the essential
condition of its being permanently produced. The value at any particular time is the result of supply
and demand, and is always that which is necessary to create a market for the existing supply. But
unless that value is sufficient to repay the Cost of Production, and to afford, besides, the ordinary
expectation of profit, the commodity will not continue to be produced. Capitalists will not go on
permanently producing at a loss. When such profit is evidently not to be had, if people do not
actually withdraw their capital, they at least abstain from replacing it when consumed. The cost of
production, together with the ordinary profit, may, therefore, be called the necessary price or value
of all things made by labor and capital. Nobody willingly produces in the prospect of loss.

When a commodity is not only made by labor and capital, but can be made by them in indefinite
quantity, this Necessary Value, the minimum with which the producers will be content, is also, if
competition is free and active, the maximum which they can expect. If the value of a commodity is
such that it repays the cost of production not only with the customary but with a higher rate of
profit, capital rushes to share in this extra gain, and, by increasing the supply of the article, reduces
its value. This is not a mere supposition or surmise, but a fact familiar to those conversant with
commercial operations. Whenever a new line of business presents itself, offering a hope of unusual
profits, and whenever any established trade or manufacture is believed to be yielding a greater profit
than customary, there is sure to be in a short time so large a production or importation of [pg 260]
the commodity as not only destroys the extra profit, but generally goes beyond the mark, and sinks
the value as much too low as it had before been raised too high, until the over-supply is corrected by
a total or partial suspension of further production. As already intimated,212 these variations in the
quantity produced do not presuppose or require that any person should change his employment.
Those whose business is thriving, increase their produce by availing themselves more largely of
their credit, while those who are not making the ordinary profit, restrict their operations, and (in
manufacturing phrase) work short time. In this mode is surely and speedily effected the
equalization, not of profits, perhaps, but of the expectations of profit, in different occupations.

As a general rule, then, things tend to exchange for one another at such values as will enable each
producer to be repaid the cost of production with the ordinary profit; in other words, such as will
give to all producers the same rate of profit on their outlay. But in order that the profit may be equal
where the outlay, that is, the cost of production, is equal, things must on the average exchange for
one another in the ratio of their cost of production; things of which the cost of production is the
same, must be of the same value.

Mr. Mill has here used cost of production almost exactly in the sense of cost of labor, and as excluding profit
(while in the next chapter he includes some part of profit in the analysis). It will be well, for the sake of
definiteness, to collect the phrases above in which he describes cost of production: “Unless that value is
sufficient to repay the cost of production, and to afford, besides, the ordinary expectation of profit, the
commodity will not continue to be produced”; “the cost of production, together with the ordinary profit, may
therefore be called the necessary price, or value”; “it repays the cost of production, not only with the
customary, but with a higher rate of profit”; “the cost of production with the ordinary profit—in other words,
such as will give to all producers the same rate of profit on their outlay”; “that the profit may be [pg 261]

equal where the outlay, that is, the cost of production, is equal.” This is a view which distinctly uses cost of
production in the sense of the outlay to the capitalist, or cost of labor. In no other way can profit vary with
“cost of production” than in the sense that it is what a given article “costs to the capitalist”; but that is Mr.
Mill's definition of cost of labor (p. 227). It is, however, very puzzling when in the next section he speaks of
“the natural value, that is, the cost of production.” Above, value included cost of production and profit also.
Having thus pointed out what is Mr. Mill's conception of cost of production, it will remain for us in the next
chapter to consider whether any other view of it is more satisfactory.

Adam Smith and Ricardo have called that value of a thing which is proportional to its cost of
production, its Natural Value (or its Natural Price). They meant by this, the point about which the
value oscillates, and to which it always tends to return; the center value, toward which, as Adam
Smith expresses it, the market value of a thing is constantly gravitating; and any deviation from
which is but a temporary irregularity which, the moment it exists, sets forces in motion tending to
correct it. On an average of years sufficient to enable the oscillations on one side of the central line
to be compensated by those on the other, the market value agrees with the natural value; but it very
seldom coincides exactly with it at any particular time. The sea everywhere tends to a level, but it
never is at an exact level; its surface is always ruffled by waves, and often agitated by storms. It is
enough that no point, at least in the open sea, is permanently higher than another. Each place is
alternately elevated and depressed; but the ocean preserves its level.

§ 6. The Value of these Commodities confirm, in the long run, to their Cost of
Production through the operation of Demand and Supply.

The latent influence by which the values of things are made to conform in the long run to the cost of
production is the variation that would otherwise take place in the supply of the commodity. The
supply would be increased if the thing continued to sell above the ratio of its cost of production, and
would be diminished if it fell below that ratio.

If one dollar covers the expense of making one spade, then when a spade, by virtue of a sudden demand, rises
in value to one [pg 262] dollar and ten cents, the manufacturers get an extra profit of ten cents. This could
not long remain so, because other capital would enter this industry, and so increase the supply that one spade
would sell for only one dollar; then all would receive the average profit. If, owing to a cessation of demand
for spades, the price fell to ninety cents, then the manufacturers would lose ten cents on each one made and
sold. Thereupon they would cease to do a losing business, capital would be withdrawn, and spades would not
be made until the supply was suited to the necessary expense of making them (one dollar). In this way,
whenever there is a departure of the value from the normal cost, there is set in motion ipso facto a series of
forces which automatically restores the value to that cost. So here again we see the nature of an economic
law: the value may not often correspond exactly with cost of production, but there is a tendency in all values
to conform to that cost, and this tendency they irresistibly obey. A body possessing weight does not move
downward under all circumstances (stones may be thrown upward), but the law of gravitation holds true,
nevertheless.

There is no need that there should be any actual alteration of supply; and when there is, the
alteration, if permanent, is not the cause but the consequence of the alteration in value. If, indeed,

the supply could not be increased, no diminution in the cost of production would lower the value;
but there is by no means any necessity that it should. The mere possibility often suffices; the dealers
are aware of what would happen, and their mutual competition makes them anticipate the result by
lowering the price.

Before the electric light was yet known as a feasible means of lighting (in 1878), the mere rumor of Edison's
invention, before it was made public, and long before it became practicable, caused a serious fall in the price
of gas stocks.

It is, therefore, strictly correct to say that the value of things which can be increased in quantity at
pleasure does not depend (except accidentally, and during the time necessary for production to
adjust itself) upon demand and supply; on the contrary, demand and supply depend upon it. There is
a demand for a certain quantity of the commodity at its natural or cost value, and to that the supply
in the long run endeavors to conform.

[pg 263]

213
Mr. Cairnes fitly says: “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.”

When at any time it fails of so conforming, it is either from miscalculation, or from a change in
some of the elements of the problem; either in the natural value, that is, in the cost of production, or
in the demand, from an alteration in public taste, or in the number or wealth of the consumers. If a
value different from the natural value be necessary to make the demand equal to the supply, the
market value will deviate from the natural value; but only for a time, for the permanent tendency of
supply is to conform itself to the demand which is found by experience to exist for the commodity
when selling at its natural value. If the supply is either more or less than this, it is so accidentally,
and affords either more or less than the ordinary rate of profit, which, under free and active
competition, can not long continue to be the case.

To recapitulate: demand and supply govern the value of all things which can not be indefinitely
increased; except that even for them, when produced by industry, there is a minimum value,
determined by the cost of production. But in all things which admit of indefinite multiplication,
demand and supply only determine the perturbations of value during a period which can not exceed
the length of time necessary for altering the supply. While thus ruling the oscillations of value, they
themselves obey a superior force, which makes value gravitate toward Cost of Production, and
which would settle it and keep it there, if fresh disturbing influences were not continually arising to
make it again deviate.

[pg 264]

Chapter II. Ultimate Analysis Of Cost Of Production.

§ 1. Of Labor, the principal Element in Cost of Production.

The component elements of Cost of Production have been set forth in the First Part of this
inquiry.214 The principal of them, and so much the principal as to be nearly the sole, was found to be
Labor. 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 be replaced by the word Wages: what the produce costs to him, is the wages which
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 spinners 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 contract price of erecting his factory. It partly consists
of the wages of machine-makers, iron-founders, and miners. And to these must be added the wages
of the carriers who transported any of [pg 265] the means and appliances 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.

Confirmation is here given, in the above words, of the opinion that, in Mr. Mill's mind, Cost of Production
was looked at wholly from the stand-point of the capitalist, and was identical with Cost of Labor to the
capitalist.

The value of commodities, therefore, depends principally (we shall presently see whether it depends
solely) on the quantity of labor required for their production, including in the idea of production that
of conveyance to the market. But since the cost of production to the capitalist is not labor but
wages, and since wages may be either greater or less, the quantity of labor being the same, it would
seem that the value of the product can not be determined solely by the quantity of labor, but by the
quantity together with the remuneration, and that values must partly depend on wages.

Now the relation of one thing to another can not be altered by any cause which affects them both
alike. A rise or fall of general wages is a fact which affects all commodities in the same manner, and
therefore affords no reason why they should exchange for each other in one rather than in another
proportion. Though there is no such thing as a general rise of values, there is such a thing as a
general rise of prices. As soon as we form distinctly the idea of values, we see that high or low
wages can have nothing to do with them; but that high wages make high prices, is a popular and
widely spread opinion. The whole amount of error involved in this proposition can only be seen
thoroughly when we come to the theory of money; at present we need only say that if it be true,
there can be no such thing as a real rise of wages; for if wages could not rise without a proportional

rise of the price of everything, they could not, for any substantial purpose, rise at all. It must be
remembered, too, that general high prices, even supposing them to exist, can be of no use to a
producer or dealer, considered as such; for, if they increase his money returns, they increase in the
same degree [pg 266] all his expenses. There is no mode in which capitalists can compensate
themselves for a high cost of labor, through any action on values or prices. It can not be prevented
from taking its effect in low profits. If the laborers really get more, that is, get the produce of more
labor, a smaller percentage must remain for profit.

§ 2. Wages affect Values, only if different in different employments; “non-competing
groups.”

Although, however, general wages, whether high or low, do not affect values, yet if wages are
higher in one employment than another, or if they rise or fall permanently in one employment
without doing so in others, these inequalities do really operate upon values. Things, for example,
which are made by skilled labor, exchange for the produce of a much greater quantity of unskilled
labor, for no reason but because the labor is more highly paid. We have before remarked that the
difficulty of passing from one class of employments to a class greatly superior has hitherto caused
the wages of all those classes of laborers who are separated from one another by any very marked
barrier to depend more than might be supposed upon the increase of the population of each class
considered separately, and that the inequalities in the remuneration of labor are much greater than
could exist if the competition of the laboring people generally could be brought practically to bear
on each particular employment. It follows from this that wages in different employments do not rise
or fall simultaneously, but are, for short and sometimes even for long periods, nearly independent of
one another. All such disparities evidently alter the relative cost of production of different
commodities, and will therefore be completely represented in their natural or average value.

215
This is again a clear recognition of the influence of Mr. Cairnes's theory of “non-competing groups.”

Wages do enter into value. The relative wages of the labor necessary for producing different
commodities affect their value just as much as the relative quantities of labor. [pg 267] It is true, the
absolute wages paid have no effect upon values; but neither has the absolute quantity of labor. If
that were to vary simultaneously and equally in all commodities, values would not be affected. If,
for instance, the general efficiency of all labor were increased, so that all things without exception
could be produced in the same quantity as before with a smaller amount of labor, no trace of this
general diminution of cost of production would show itself in the values of commodities.

§ 3. Profits an element in Cost of Production.

Thus far of labor 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 abstinence of all the persons by

whom the remuneration of the different classes of laborers was advanced. The return from
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 grower, 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 along with them
the profits of a fresh set of machine-makers, and of the miners and iron-workers who supplied them
with their metallic material. All these advances form part of the cost of production of linen. Profits,
therefore, as well as wages, enter into the cost of production which determines the value of the
produce.

§ 4. Cost of Production properly represented by sacrifice, or cost, to the Laborer as well
as to the Capitalist; the relation of this conception to the Cost of Labor.

In discussing Cost of Labor (supra, pp. 225, 226), Mr. Mill found that the advances of the immediate
producer consisted [pg 268] not only of wages, but also of tools, materials, etc., in the price of which he
was including the profits of an auxiliary capitalist who advanced the capital for making these tools, etc. But,
then, if a line of division were to be passed down through all these advances, separating wages from profits,
he urged that, if all the capitalists (auxiliary and immediate both) were one, all the advances of the capitalist
might be considered as wages. Profits did not form a part of the outlay to the capitalists in the former
analysis. And this seems correct enough. Now, however, he suggests that the outlay of the immediate
producers should include the profit of the auxiliary capitalist. More than this, Mr. Mill now includes in cost to
the capitalist the profit of the immediate capitalist. For example, in his illustration of the manufacture of
linen, he includes not merely the profit of the auxiliary capital engaged in spinning and weaving, but the
profit of the immediate and last capitalist, the linen-manufacturer, also. This includes in the cost of producing
an article a profit not realized until after the commodity is produced.

It is now time to give a more correct idea of cost of production. Every one admits, for example, that the “cost
of production” of wheat is less in the United States than in England. If, for instance, three men with a capital
of one hundred dollars may on a plot of ground, A, in the United States produce one hundred bushels of
wheat, it will happen that the same men and capital will only produce sixty bushels on ground, B, in England.

In ordinary language, then, we say that the cost of production is greater in England than in the United States,
because the same labor and capital here produce one hundred bushels for sixty in England; or, what amounts
to the same thing, that less labor and capital could produce sixty bushels in the United States than sixty
bushels in England. If we suppose that one fourth of the crop is profit, and three fourths is assigned to wages
in both countries, then in the United States the one hundred dollars of capital receives twenty-five bushels of
profit, while in England it receives only fifteen; and the three men receive as wages in the United States
twenty-five bushels each, while in England they receive only fifteen bushels each. The first important
induction to be made is that where cost of production [pg 269] is low, wages and profits are high. The high
productiveness of extractive industries in the United States is the reason why wages and profits are higher
here than in older countries.

Now the second important question is, Is cost of production made up of wages and profits, and is it true that
the cost rises with a rise of wages and profits? Certainly not. Wages and profits are both higher in the United
States than in England, but no one is so absurd as to say that the cost of production of wheat (as above
explained) is higher here than there. It is exactly because cost of production of wheat is lower in the United
States that wages and profits measured in wheat are higher here than in England. Therefore, it can not be
granted, as Mr. Mill expounds the doctrine, that cost of production is made up of wages and profits. When we
speak of an increased cost of production of a given article, we mean that its production requires more labor
and capital than before; and of a decrease in cost of production, that it requires less labor and capital than
before; meaning by “more labor” that a given quality of labor is exerted for a longer or shorter time, and by
“more capital” that a greater or less quantity of wealth abstained from is employed for a longer or shorter
time; or, in other words, that laborers and capitalists undergo more or less sacrifice in exertion and
abstinence, respectively, to attain a given result. This is the contribution to cost of production made by Mr.
Cairnes, and briefly defined as follows: “In the case of labor, the cost of producing a given commodity will
be represented by the number of average laborers employed 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 abstinence, the principle is analogous; the sacrifice will be measured by the quantity of wealth
abstained from, taken in connection with the risk incurred, and multiplied by the duration of the
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abstinence.”

This view of cost of production takes into consideration, in the act of production, what Mr. Mill does not
include, the cost, or real sacrifice, to the laborer as well as to the capitalist. It may, then, be well to state the
relations of cost of production, taken in this better sense, to value.

Within competing groups, where there is free choice for labor and capital to select the most remunerative
occupations, the hardest and most disagreeable employments will be best paid, and the wages and profits will
be in proportion to the sacrifice involved in each case. If so, the amount paid in wages and profits represents
the sacrifices in each case. [pg 270] Now, the aggregate product of an industry is the source from which is
drawn its wages and profits: the aggregate wages and profits, therefore, must vary with the value of the total
product. If the total value depart from the sum hitherto sufficient to pay the given wages and profits, then
some will be paid proportionally less than their sacrifice. The value of a commodity, therefore, within the
competing group, must conform to the costs of production. If, for example (a), the value at any time were
such as not to give the laborer the usual equivalent for his sacrifice, he would change his employment to
another within the group where he could get it; if (b) the share of the capitalist were at any time insufficient
to give him the usual reward for his abstinence, he would change the investment of his capital. Therefore,
within such limits as allow a free competition of labor and capital, value must conform itself to cost of
production.

Not so, however, with the products of non-competing industrial groups. As shown by Mr. Mill, labor does not
pass freely from one employment to another; and it must be said that capital does not either, although vastly

more ready to move than labor. In a large and thinly settled country capital does not move freely over the
whole area of industry; if it did, different rates of profit would not prevail, as we all know they do, in the
United States. Now, as before stated, the total value of the commodities resulting from the exertions of each
group of producers is the source from which wages and profits are drawn. The aggregate wages and profits in
each industry will vary with the value of the aggregate products. But this total value depends upon what it
will exchange for of the products of other groups; that is, this value depends on the reciprocal demand of one
group for the commodities of the other groups, as compared with the demand of the other groups for its
products. For example, although cost of production is low in group A, if the demand from outside groups
were to be strong, the exchange value of A's products would rise, and A would get more of other goods in
exchange; that is, the total produce is large, but a second increment, arising from a higher exchange value, is
to be shared among A's laborers and capitalists. A few years ago, about 1878-1879, the value of wheat in the
United States rose because of the increased demand from Europe, where the harvests had been unusually
deficient. There had been no falling off in the productiveness of the farming industry of the United States to
cause the increased price; but the relative demand of other industrial groups for wheat, the product of the
farming industry, raised the exchange value of wheat, and so increased the industrial rewards of those
engaged as laborers and capitalists in farming. So [pg 271] it is to be concluded that since there is no free
movement of labor and capital between non-competing groups, wages and profits may constantly remain at
rates which are not in correspondence with the actual sacrifice, or cost, to labor and capital in different
groups; hence, their products do not exchange for each other in proportion to their costs of production.
Reciprocal demand is the law of their value.

It will be said, at once, that the foregoing conception of cost of production is entirely opposed to the language
of practical men of affairs. They constantly speak of higher or lower wages as increasing their cost of
production, or as affecting their ability to compete with foreigners. So universal a usage implies a foundation
of truth which demands attention. Wages do represent cost to the capitalist, that is, the chief part of the outlay
he makes in order to get a given return; but we have already seen this, and, in the language of Political
Economy, termed it “cost of labor” to the capitalist. When the business world use the phrase cost of
production, they use it in the sense of cost of labor, as hitherto explained. When they are obliged by strikers
to pay more wages, they say that it increases their “cost of production,” meaning the cost to them of getting
their product, and that it affects their profits. This, then, will show that there is no objection to be urged, in its
true sense, against the phrase cost of production, arising from its misuse in the common language of business.

The real connection between the proper conception of cost of production and cost of labor is, however, worth
attention. It touches cost of labor through that one of its elements called “efficiency of labor.” The more
productive an industry is, the higher its wages and profits may be, and it is exactly at this point that more
attention should be given to the relations of labor and capital. If productiveness can be increased, higher
wages as well as higher profits are possible. The proper understanding of the idea that where cost of
production is low wages and profits are high, throws a flood of light on many industrial questions in the
United States. In the connection in which it stands, as I have shown, to cost of labor, it means that if
commodities can be produced at a less sacrifice to labor and capital by the use of machinery and new
processes, higher wages are consistent with a lower price of the given product. It explains the fact that, owing
to skill or natural resources, labor, although paid much higher rates, can produce articles cheaper than
217
laborers who are less highly paid. Mr. Brassey has pointed out that English wages are higher than on the
Continent; and yet England, through low cost of production, [pg 272] owing to skill, natural resources,
etc., can produce so much more of commodities for a given outlay that (while keeping her usual rate of
profit) she can generally undersell her competitors who employ cheaper labor. The same observations apply
to the United States; but the question of foreign competition will be further discussed (Book III, Chap. XX)
after we have studied international trade and values.

“And here it may be well to state precisely what is to be understood by a ‘fluctuation of the market,’ as
distinguished from those changes of normal price which we have been considering. Normal price, as we have
seen, is governed, according to the circumstances of the case [as to whether there is free industrial
competition or not], by one or other of two causes—cost of production and reciprocal demand. 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—remains
constant, the normal price must be considered as remaining 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 relation to the particular article) may undergo a change—may deviate, that is to say,
either upward or downward from the normal level. Such changes of price, occurring while the permanent
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 therefore be properly described as
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‘fluctuations of the market.’ ”

§ 5. When profits vary from Employment to Employment, or are spread over unequal
lengths of Time, they affect Values accordingly.

Value, however, being purely relative, can not depend upon absolute profits, no more than upon
absolute wages, but upon relative profits only. High general profits can not, any more than high
general wages, be a cause of high values, because high general values are an absurdity and a
contradiction. In so far as profits enter into the cost of production of all things, they can not affect
the value of any. It is only by entering in a greater degree into the cost of production of some things
than of others, that they can have any influence on value.

Profits, however, may enter more largely into the conditions of production of one commodity than
of another, even [pg 273] though there be no difference in the rate of profit between the two
employments. The one commodity may be called upon to yield a profit during a longer period of
time than the other. The example by which this case is usually illustrated 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. Suppose 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 plus something else—
unless, indeed, for the sake of generality in the expression, we include the profit which the wine-
merchant foregoes during 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.

Regarding cost of production as the amounts of labor and abstinence required in production, and not as Mr.
Mill regards it, as the amounts of wages and profits, the above is simply a case where, in the production of
wine, there is a longer duration of the abstinence than in the production of cloth. If there is a free movement
of labor and capital between the two industries, they will exchange for each other in proportion to the

sacrifices involved; so that the wine would exchange for more of cloth, because there was more sacrifice
undergone. The same explanation also holds good in the following illustration:

All commodities made by machinery are assimilated, at least approximately, to the wine in the
preceding example. In comparison with things made wholly by immediate labor, profits enter more
largely into their cost of production. Suppose two commodities, A and B, each requiring a year for
its production, by means of a capital which we will on [pg 274] this occasion denote by money, and
suppose it to be £1,000. A is made wholly by immediate labor, the whole £1,000 being expended
directly in wages. B is made by means of labor which cost £500 and a machine which cost £500,
and the machine is worn out by one year's use. The two commodities will be of exactly the same
value, which, if computed in money, and if profits are 20 per cent per annum, will be £1,200. But of
this £1,200, in the case of A, only £200, or one sixth, is profit; while in the case of B there is not
only the £200, but as much of £500 (the price of the machine) as consisted of the profits of the
machine-maker; which, if we suppose the machine also to have taken a year for its production, is
again one sixth. So that in the case of A only one sixth of the entire return is profit, while in B the
element of profit comprises not only a sixth of the whole, but an additional sixth of a large part.

From the unequal proportion in which, in different employments, profits enter into the advances of
the capitalist, and therefore into the returns required by him, two consequences follow in regard to
value. (1). One is, that commodities do not exchange in the ratio simply of the quantities of labor
required to produce them; not even if we allow for the unequal rates at which different kinds of
labor are permanently remunerated.

(2.) A second consequence is, that every rise or fall of general profits will have an effect on values.
Not, indeed, by raising or lowering them generally (which, as we have so often said, is a
contradiction and an impossibility), but by altering the proportion in which the values of things are
affected by the unequal lengths of time for which profit is due. When two things, though made by
equal labor, are of unequal value because the one is called upon to yield profit for a greater number
of years or months than the other, this difference of value will be greater when profits are greater,
and less when they are less. The wine which has to yield five years' profit more than the cloth will
surpass it in value much more if profits are forty per cent than if they are only twenty.

[pg 275]
It follows from this that even a general rise of wages, when it involves a real increase in the cost of
labor, does in some degree influence values. It does not affect them in the manner vulgarly
supposed, by raising them universally; but an increase in the cost of labor lowers profits, and
therefore lowers in natural values the things into which profits enter in a greater proportion than the
average, and raises those into which they enter in a less proportion than the average. All
commodities in the production of which machinery bears a large part, especially if the machinery is
very durable, are lowered in their relative value when profits fall; or, what is equivalent, other
things are raised in value relatively to them. This truth is sometimes expressed in a phraseology
more plausible than sound, by saying that a rise of wages raises the value of things made by labor in
comparison with those made by machinery. But things made by machinery, just as much as any
other things, are made by labor—namely, the labor which made the machinery itself—the only
difference being that profits enter somewhat more largely into the production of things for which
machinery is used, though the principal item of the outlay is still labor.

§ 6. Occasional Elements in Cost of Production; taxes and ground-rent.

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 capital. The occasional elements are taxes, and any extra cost occasioned by a scarcity value
of some of the requisites. Besides the natural and necessary elements in cost of production—labor
and profits—there are others which are artificial and casual, as, for instance, a tax. The taxes on
hops and malt are as much a part of the cost of production of those articles as the wages of the
laborers. The expenses which the law imposes, as well as those which the nature of things imposes,
must be reimbursed with the ordinary profit from the value of the produce, or the things will not
continue to be produced. But the influence of taxation on value is subject to the same conditions as
the influence of wages and of profits. It is not [pg 276] general taxation, but differential taxation,
that produces the effect. If all productions were taxed so as to take an equal percentage from all
profits, relative values would be in no way disturbed. If only a few commodities were taxed, their
value would rise; and if only a few were left untaxed, their value would fall.

But the case in which scarcity value chiefly operates in adding to cost of production is the case of
natural agents. These, when unappropriated, and to be had for the taking, do not enter into the cost
of production, save to the extent of the labor which may be necessary to fit them for use. Even when
appropriated, they do not (as we have already seen) bear a value from the mere fact of the
appropriation, but only from scarcity—that is, from limitation of supply. But it is equally certain
that they often do bear a scarcity value.

No one can deny that rent sometimes enters into cost of production [of other than agricultural
products]. If I buy or rent a piece of ground, and build a cloth-manufactory on it, the ground-rent
forms legitimately a part of my expenses of production, which must be repaid by the product. And
since all factories are built on ground, and most of them in places where ground is peculiarly
valuable, the rent paid for it must, on the average, be compensated in the values of all things made
in factories. In what sense it is true that rent does not enter into the cost of production or affect the
value of agricultural produce will be shown in the succeeding chapter.

These occasional elements in cost of production, such as taxes, insurance, ground-rent, etc., are to be
considered as just so much of an increase in the quantity of capital required for the operation involved in the
particular production, and, consequently, result in an increased cost of production, because there is either
more abstinence, or abstinence for a longer time, to be rewarded. These elements, therefore, if they are not
universal (or common to all articles), will affect the exchange value of commodities, wherever there is a free
competition.

[pg 277]

Chapter III. Of Rent, In Its Relation To Value.

§ 1. Commodities which are susceptible of indefinite Multiplication, but not without
increase of Cost. Law of their Value, Cost of Production in the most unfavorable existing
circumstances.

We have investigated the laws which determine the value of two classes of commodities—the small
class which, being limited to a definite quantity, have their value entirely determined by demand
and supply, save that their cost of production (if they have any) constitutes a minimum below which
they can not permanently fall; and the large class, which can be multiplied ad libitum by labor and
capital, and of which the cost of production fixes the maximum as well as the minimum at which
they can permanently exchange [if there be free competition]. But there is still a third kind of
commodities to be considered—those which have, not one, but several costs of production; which
can always be increased in quantity by labor and capital, but not by the same amount of labor and
capital; of which so much may be produced at a given cost, but a further quantity not without a
greater cost. These commodities form an intermediate class, partaking of the character of both the
others. The principal of them is agricultural produce. We have already made abundant reference to
the fundamental truth that in agriculture, the state of the art being given, doubling the labor does not
double the produce; that, if an increased quantity of produce is required, the additional supply is
obtained at a greater cost than the first. Where a hundred quarters of corn are all that is at present
required from the lands of a given village, if the growth of population made it necessary to raise a
hundred more, either by breaking up worse land now uncultivated, or by a more elaborate
cultivation of the land already under the plow, the additional hundred, or some part of them, at least,
might cost double or treble as much per quarter as the former supply.

[pg 278]
If the first hundred quarters were all raised at the same expense (only the best land being
cultivated), and if that expense would be remunerated with the ordinary profit by a price of 20s. the
quarter, the natural price of wheat, so long as no more than that quantity was required, would be
20s.; and it could only rise above or fall below that price from vicissitudes of seasons, or other
casual variations in supply. But if the population of the district advanced, a time would arrive when
more than a hundred quarters would be necessary to feed it. We must suppose that there is no access
to any foreign supply. By the hypothesis, no more than a hundred quarters can be produced in the
district, unless by either bringing worse land into cultivation, or altering the system of culture to a
more expensive one. Neither of these things will be done without a rise in price. This rise of price
will gradually be brought about by the increasing demand. So long as the price has risen, but not
risen enough to repay with the ordinary profit the cost of producing an additional quantity, the
increased value of the limited supply partakes of the nature of a scarcity value. Suppose that it will
not answer to cultivate the second best land, or land of the second degree of remoteness, for a less
return than 25s. the quarter; and that this price is also necessary to remunerate the expensive
operations by which an increased produce might be raised from land of the first quality. If so, the
price will rise, through the increased demand, until it reaches 25s. That will now be the natural
price; being the price without which the quantity, for which society has a demand at that price, will

not be produced. At that price, however, society can go on for some time longer; could go on
perhaps forever, if population did not increase. The price, having attained that point, will not again
permanently recede (though it may fall temporarily from accidental abundance); nor will it advance
further, so long as society can obtain the supply it requires without a second increase of the cost of
production.

In the case supposed, different portions of the supply of [pg 279] corn have different costs of
production. Though the twenty, or fifty, or one hundred and fifty quarters additional have been
produced at a cost proportional to 25s., the original hundred quarters per annum are still produced at
a cost only proportional to 20s. This is self-evident, if the original and the additional supply are
produced on different qualities of land. It is equally true if they are produced on the same land.
Suppose that land of the best quality, which produced one hundred quarters at 20s., has been made
to produce one hundred and fifty by an expensive process, which it would not answer to undertake
without a price of 25s. The cost which requires 25s. is incurred for the sake of fifty quarters alone:
the first hundred might have continued forever to be produced at the original cost, and with the
benefit, on that quantity, of the whole rise of price caused by the increased demand: no one,
therefore, will incur the additional expense for the sake of the additional fifty, unless they alone will
pay for the whole of it. The fifty, therefore, will be produced at their natural price, proportioned to
the cost of their production; while the other hundred will now bring in 5s. a quarter more than their
natural price—than the price corresponding to, and sufficing to remunerate, their lower cost of
production.

If the production of any, even the smallest, portion of the supply requires as a necessary condition a
certain price, that price will be obtained for all the rest. We are not able to buy one loaf cheaper than
another because the corn from which it was made, being grown on a richer soil, has cost less to the
grower. The value, therefore, of an article (meaning its natural, which is the same with its average
value) is determined by the cost of that portion of the supply which is produced and brought to
market at the greatest expense. This is the Law of Value of the third of the three classes into which
all commodities are divided.

§ 2. Such commodities, when Produced in circumstances more favorable, yield a Rent
equal to the difference of Cost.

If the portion of produce raised in the most unfavorable circumstances obtains a value proportioned
to its cost of production; all the portions raised in more favorable circumstances, [pg 280] selling as
they must do at the same value, obtain a value more than proportioned to their cost of production.

The owners, however, of those portions of the produce enjoy a privilege; they obtain a value which
yields them more than the ordinary profit. The advantage depends on the possession of a natural
agent of peculiar quality, as, for instance, of more fertile land than that which determines the general
value of the commodity; and when this natural agent is not owned by themselves, the person who
does own it is able to exact from them, in the form of rent, the whole extra gain derived from its
use. We are thus brought by another road to the Law of Rent, investigated in the concluding chapter
of the Second Book. Rent, we again see, is the difference between the unequal returns to different
parts of the capital employed on the soil. Whatever surplus any portion of agricultural capital
produces, beyond what is produced by the same amount of capital on the worst soil, or under the

most expensive mode of cultivation, which the existing demands of society compel a recourse to,
that surplus will naturally be paid as rent from that capital, to the owner of the land on which it is
employed.

The discussion of rent is here followed wholly from the point of view of value, while before (Book II, Chap.
VI) the law of rent was reached through a limitation of the quantity of land due to the influence of population.
In the former case the rent and produce were stated in bushels. By introducing price now (as the convenient
symbol of value), instead of the separate increased demands of population in our illustration than used (p.
240), it will be seen how the same operation, looking at it solely in respect to value, brings us to the same
law:

Price
per A B C D
Bushel.
24 18 12 6
bushels bushels bushels bushels
Total Total Total Total
value of Rent. value of Rent. value of Rent. value of
product. product. product. product.
$1.00 $24.00 $0.00 .... .... .... .... ....
$1.33 $32.00 $8.00 $24.00 $0.00 .... .... ....
$2.00 $48.00 $24.00 $36.00 $12.00 $24.00 $0.00 ....
$4.00 $96.00 $72.00 $72.00 $48.00 $48.00 $24.00 $24.00

[pg 281]
It was long thought by political economists, among the rest even by Adam Smith, that the produce
of land is always at a monopoly value, because (they said), in addition to the ordinary rate of profit,
it always yields something further for rent. This we now see to be erroneous. A thing can not be at a
monopoly value when its supply can be increased to an indefinite extent if we are only willing to
incur the cost. As long as there is any land fit for cultivation, which at the existing price can not be
profitably cultivated at all, there must be some land a little better, which will yield the ordinary
profit, but allow nothing for rent: and that land, if within the boundary of a farm, will be cultivated
by the farmer; if not so, probably by the proprietor, or by some other person on sufferance. Some
such land at least, under cultivation, there can scarcely fail to be.

Rent, therefore, forms no part of the cost of production which determines the value of agricultural
produce. The land or the capital most unfavorably circumstanced among those actually employed,
pays no rent, and that land or capital determines the cost of production which regulates the value of
the whole produce. Thus rent is, as we have already seen, no cause of value, but the price of the
privilege which the inequality of the returns to different portions of agricultural produce confers on
all except the least favored portion.

Rent, in short, merely equalizes the profits of different farming capitals, by enabling the landlord to
appropriate all extra gains occasioned by superiority of natural advantages. If all landlords were
unanimously to forego their rent, they would but transfer it to the farmers, without benefiting the
consumer; for the existing price of corn would still be an indispensable condition of the production
of part of the existing supply, and if a part obtained that price the whole would obtain it. Rent,
therefore, unless artificially increased by restrictive laws, is no burden on the consumer: it does not

raise the price of corn, and is no otherwise a detriment to the public than inasmuch as if the [pg 282]
state had retained it, or imposed an equivalent in the shape of a land-tax, it would then have been a
fund applicable to general instead of private advantage.

The nationalization of the land, consequently, would not benefit the laboring-classes a whit through lowering
the price to them, or any consumer, of food or agricultural produce.

§ 3. Rent of Mines and Fisheries and ground-rent of Buildings, and cases of gain
analogous to Rent.

Agricultural productions are not the only commodities which have several different costs of
production at once, and which, in consequence of that difference, and in proportion to it, afford a
rent. Mines are also an instance. Almost all kinds of raw material extracted from the interior of the
earth—metals, coals, precious stones, etc.—are obtained from mines differing considerably in
fertility—that is, yielding very different quantities of the product to the same quantity of labor and
capital. There are, perhaps, cases in which it is impossible to extract from a particular vein, in a
given time, more than a certain quantity of ore, because there is only a limited surface of the vein
exposed, on which more than a certain number of laborers can not be simultaneously employed. But
this is not true of all mines. In collieries, for example, some other cause of limitation must be sought
for. In some instances the owners limit the quantity raised, in order not too rapidly to exhaust the
mine; in others there are said to be combinations of owners, to keep up a monopoly price by
limiting the production. Whatever be the causes, it is a fact that mines of different degrees of
richness are in operation, and since the value of the produce must be proportional to the cost of
production at the worst mine (fertility and situation taken together), it is more than proportional to
that of the best. All mines superior in produce to the worst actually worked will yield, therefore, a
rent equal to the excess. They may yield more; and the worst mine may itself yield a rent. Mines
being comparatively few, their qualities do not graduate gently into one another, as the qualities of
land do; and the demand may be such as to keep the value of the produce considerably above the
cost of production at the worst mine now worked, without [pg 283] being sufficient to bring into
operation a still worse. During the interval, the produce is really at a scarcity value.

Fisheries are another example. Fisheries in the open sea are not appropriated, but fisheries in lakes
or rivers almost always are so, and likewise oyster-beds or other particular fishing-grounds on
coasts. We may take salmon-fisheries as an example of the whole class. Some rivers are far more
productive in salmon than others. None, however, without being exhausted, can supply more than a
very limited demand. All others, therefore, will, if appropriated, afford a rent equal to the value of
their superiority.

Both in the case of mines and of fisheries, the natural order of events is liable to be interrupted by
the opening of a new mine, or a new fishery, of superior quality to some of those already in use. In
this case, when things have permanently adjusted themselves, the result will be that the scale of
qualities which supply the market will have been cut short at the lower end, while a new insertion
will have been made in the scale at some point higher up; and the worst mine or fishery in use—the
one which regulates the rents of the superior qualities and the value of the commodity—will be a
mine or fishery of better quality than that by which they were previously regulated.

The ground-rent of a building, and the rent of a garden or park attached to it, will not be less than
the rent which the same land would afford in agriculture, but may be greater than this to an
indefinite amount; the surplus being either in consideration of beauty or of convenience, the
convenience often consisting in superior facilities for pecuniary gain. Sites of remarkable beauty are
generally limited in supply, and therefore, if in great demand, are at a scarcity value. Sites superior
only in convenience are governed as to their value by the ordinary principles of rent. The ground-
rent of a house in a small village is but little higher than the rent of a similar patch of ground in the
open fields.

Suppose the various kinds of land to be represented by the alphabet; that those below O pay no agricultural
rent, and that [pg 284] all lands increase in fertility and situation as we approach the beginning of the
alphabet, but which, as far up as K, are used in agriculture; that higher than K all are more profitably used for
building purposes, viz.:

A, B, C, ... | K, L, M, N, O, | ... X, Y, Z.

Now it will happen that land is chosen for building purposes irrespective of its fertility for agricultural
purposes. It will not be true, as some may think, that no land will be used for building until it will pay a
ground-rent greater than the greatest agricultural rent paid by any piece of land. It is not true, for example, if
N be selected for a building-lot, that it must pay a ground-rent as high as the agricultural rent of K, the most
fertile land cultivated in agriculture. It must pay a ground-rent higher only than it itself would pay, if
cultivated. It is only necessary that it pay more than the same (not better) land would pay as rent if used only
in agriculture.

The rents of wharfage, dock, and harbor room, water-power, and many other privileges, may be
analyzed on similar principles. Take the case, for example, of a patent or exclusive privilege for the
use of a process by which the cost of production is lessened. If the value of the product continues to
be regulated by what it costs to those who are obliged to persist in the old process, the patentee will
make an extra profit equal to the advantage which his process possesses over theirs. This extra
profit is essentially similar to rent, and sometimes even assumes the form of it, the patentee
allowing to other producers the use of his privilege in consideration of an annual payment.

The extra gains which any producer or dealer obtains through superior talents for business, or
superior business arrangements, are very much of a similar kind. If all his competitors had the same
advantages, and used them, the benefit would be transferred to their customers through the
diminished value of the article; he only retains it for himself because he is able to bring his
commodity to market at a lower cost, while its value is determined by a higher.219

[pg 285]

§ 4. Résumé of the laws of value of each of the three classes of commodities.

A general résumé of the laws of value, where a free movement of labor and capital exists, may now
be briefly made in the following form: