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Title: On The Principles of Political Economy, and Taxation

Author: David Ricardo

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Most recently updated: January 6, 2021

Language: English

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ON

THE PRINCIPLES
OF

POLITICAL ECONOMY,
AND

TAXATION.

By DAVID RICARDO, Esq.

LONDON:

JOHN MURRAY, ALBEMARLE-STREET

1817.

J. M cCreery. Printer,
Black Horse Court, London.

PREFACE.

The produce of the earth—all that is derived from its surface by the united
application of labour, machinery, and capital, is divided among three classes
of the community; namely, the proprietor of the land, the owner of the stock
or capital necessary for its cultivation, and the labourers by whose industry
it is cultivated.
But in different stages of society, the proportions of the whole produce of
the earth which will be allotted to each of these classes, under the names of
rent, profit, and wages, will be essentially different; depending mainly on
the actual fertility of the soil, on the accumulation of capital and population,
and on the skill, ingenuity, and instruments employed in agriculture.
To determine the laws which regulate this distribution, is the principal
problem in Political Economy: much as the science has been improved by
the writings of Turgot, Stuart, Smith, Say, Sismondi, and others, they afford
very little satisfactory information respecting the natural course of rent,
profit, and wages.
In 1815, Mr. Malthus in his "Inquiry into the Nature and Progress of Rent,"
and a Fellow of University College, Oxford, in his "Essay on the
Application of Capital to Land," presented to the world, nearly at the same
moment, the true doctrine of rent; without a knowledge of which it is
impossible to understand the effect of the progress of wealth on profits and
wages, or to trace satisfactorily the influence of taxation on different classes
of the community, particularly when the commodities taxed are the
productions immediately derived from the surface of the earth. Adam
Smith, and the other able writers to whom I have alluded, not having
viewed correctly the principles of rent, have, it appears to me, overlooked
many important truths, which can only be discovered after the subject of
rent is thoroughly understood.
To supply this deficiency, abilities are required of a far superior cast to any
possessed by the writer of the following pages; yet after having given to this
subject his best consideration—after the aid which he has derived from the
works of the above-mentioned eminent writers—and after the valuable
experience which a few late years, abounding in facts, have yielded to the
present generation—it will not, he trusts, be deemed presumptuous in him
to state his opinions on the laws of profits and wages, and on the operation

of taxes. If the principles which he deems correct should be found to be so,
it will be for others more able than himself to trace them to all their
important consequences.
The writer, in combating received opinions, has found it necessary to advert
more particularly to those passages in the writings of Adam Smith from
which he sees reason to differ; but he hopes it will not on that account be
suspected that he does not, in common with all those who acknowledge the
importance of the science of Political Economy, participate in the
admiration which the profound work of this celebrated author so justly
excites.
The same remark may be applied to the excellent works of M. Say, who not
only was the first, or among the first, of continental writers, who justly
appreciated and applied the principles of Smith, and who has done more
than all other continental writers taken together, to recommend the
principles of that enlightened and beneficial system to the nations of
Europe; but who has succeeded in placing the science in a more logical, and
more instructive order; and has enriched it by several discussions, original,
accurate, and profound.1 The respect, however, which the author entertains
for the writings of this gentleman, has not prevented him from commenting
with that freedom which he thinks the interests of science require, on such
passages of the "Economie Politique," as appeared at variance with his own
ideas.

CONTENTS.

CHAP. Page
I. On Value 1
II. On Rent 49
III. On the Rent of Mines 77
IV. On Natural and Market Price 82
V. On Wages 90
V*. On Profits 116
VI. On Foreign Trade 146
VII. On Taxes 186
VIII. Taxes on Raw Produce 194
VIII*. Taxes on Rent 221

IX. Tithes 225
X. Land-Tax 232
XI. Taxes on Gold 247
XII. Taxes on Houses 262
XIII. Taxes on Profits 269
XIV. Taxes on Wages 285
XV. Taxes on other Commodities than Raw Produce 330
XVI. Poor Rates 354
XVII. On Sudden Changes in the Channels of Trade 363
XVIII. Value and Riches, their Distinctive Properties 377
XIX. Effects of Accumulation on Profits and Interest 398
XX. Bounties on Exportation, and Prohibitions of Importation 417
XXI. On Bounties on Production 449
XXII. Doctrine of Adam Smith concerning the Rent of Land 458
XXIII. On Colonial Trade 476
XXIV. On Gross and Net Revenue 491
XXV. On Currency and Banks 499
On the comparative Value of Gold, Corn, and Labour, in Rich and in Poor
XXVI.
Countries 527
XXVII. Taxes paid by the Producer 538
XXVIII. On the Influence of Demand and Supply on Prices 542
XXIX. Mr. Malthus's Opinions on Rent 549

CHAPTER I.

ON VALUE.

It has been observed by Adam Smith, that "the word Value has two
different meanings, and sometimes expresses the utility of some particular
object, and sometimes the power of purchasing other goods which the
possession of that object conveys. The one may be called value in use; the
other, value in exchange. The things," he continues, "which have the
greatest value in use, have frequently little or no value in exchange; and, on
the contrary, those which have the greatest value in exchange, have little or
no value in use." Water and air are abundantly useful; they are indeed
indispensable to existence, yet, under ordinary circumstances, nothing can
be obtained in exchange for them. Gold, on the contrary, though of little use

compared with air or water, will exchange for a great quantity of other
goods.
Utility then is not the measure of exchangeable value, although it is
absolutely essential to it. If a commodity were in no way useful,—in other
words, if it could in no way contribute to our gratification,—it would be
destitute of exchangeable value, however scarce it might be, or whatever
quantity of labour might be necessary to procure it.
Possessing utility, commodities derive their exchangeable value from two
sources: from their scarcity, and from the quantity of labour required to
obtain them.
There are some commodities, the value of which is determined by their
scarcity alone. No labour can increase the quantity of such goods, and
therefore their value cannot be lowered by an increased supply. Some rare
statues and pictures, scarce books and coins, wines of a peculiar quality,
which can be made only from grapes grown on a particular soil, of which
there is a very limited quantity, are all of this description. Their value is
wholly independent of the quantity of labour originally necessary to
produce them, and varies with the varying wealth and inclinations of those
who are desirous to possess them.
These commodities, however, form a very small part of the mass of
commodities daily exchanged in the market. By far the greatest part of
those goods which are the objects of desire, are procured by labour; and
they may be multiplied, not in one country alone, but in many, almost
without any assignable limit, if we are disposed to bestow the labour
necessary to obtain them.
In speaking then of commodities, of their exchangeable value, and of the
laws which regulate their relative prices, we mean always such
commodities only as can be increased in quantity by the exertion of human
industry, and on the production of which competition operates without
restraint.
In the early stages of society, the exchangeable value of these commodities,
or the rule which determines how much of one shall be given in exchange

for another, depends solely on the comparative quantity of labour expended
on each.
"The real price of every thing," says Adam Smith, "what every thing really
costs to the man who wants to acquire it, is the toil and trouble of acquiring
it. What every thing is really worth to the man who has acquired it, and who
wants to dispose of it, or exchange it for something else, is the toil and
trouble which it can save to himself, and which it can impose upon other
people." "Labour was the first price—the original purchase-money that was
paid for all things." Again, "in that early and rude state of society, which
precedes both the accumulation of stock and the appropriation of land, the
proportion between the quantities of labour necessary for acquiring
different objects, seems to be the only circumstance which can afford any
rule for exchanging them for one another. If among a nation of hunters, for
example, it usually cost twice the labour to kill a beaver which it does to
kill a deer, one beaver should naturally exchange for, or be worth two deer.
It is natural that what is usually the produce of two days', or two hours'
labour, should be worth double of what is usually the produce of one day's,
or one hour's labour."2
That this is really the foundation of the exchangeable value of all things,
excepting those which cannot be increased by human industry, is a doctrine
of the utmost importance in political economy; for from no source do so
many errors, and so much difference of opinion in that science proceed, as
from the vague ideas, which are attached to the word value.
If the quantity of labour realized in commodities, regulate their
exchangeable value, every increase of the quantity of labour must augment
the value of that commodity on which it is exercised, as every diminution
must lower it.
Adam Smith, who so accurately defined the original source of exchangeable
value, and who was bound in consistency to maintain, that all things
became more or less valuable in proportion as more or less labour was
bestowed on their production, has himself erected another standard measure
of value, and speaks of things being more or less valuable, in proportion as
they will exchange for more or less of this standard measure. Sometimes he
speaks of corn, at other times of labour, as a standard measure; not the

quantity of labour bestowed on the production of any object, but the
quantity which it can command in the market: as if these were two
equivalent expressions, and as if because a man's labour had become doubly
efficient, and he could therefore produce twice the quantity of a commodity,
he would necessarily receive twice the former quantity in exchange for it.
If this indeed were true, if the reward of the labourer were always in
proportion to what he produced, the quantity of labour bestowed on a
commodity, and the quantity of labour which that commodity would
purchase, would be equal, and either might accurately measure the
variations of other things: but they are not equal; the first is under many
circumstances an invariable standard, indicating correctly the variations of
other things; the latter is subject to as many fluctuations as the commodities
compared with it. Adam Smith, after most ably shewing the insufficiency of
a variable medium, such as gold and silver, for the purpose of determining
the varying value of other things, has himself, by fixing on corn or labour,
chosen a medium no less variable.
Gold and silver are no doubt subject to fluctuations, from the discovery of
new and more abundant mines; but such discoveries are rare, and their
effects, though powerful, are limited to periods of comparatively short
duration. They are subject also to fluctuation, from improvements in the
skill and machinery with which the mines may be worked; as in
consequence of such improvements, a greater quantity may be obtained
with the same labour. They are further subject to fluctuation from the
decreasing produce of the mines, after they have yielded a supply to the
world, for a succession of ages. But from which of these sources of
fluctuation is corn exempted? Does not that also vary, on one hand, from
improvements in agriculture, from improved machinery and implements
used in husbandry, as well as from the discovery of new tracts of fertile
land, which in other countries may be taken into cultivation, and which will
affect the value of corn in every market where importation is free? Is it not
on the other hand subject to be enhanced in value from prohibitions of
importation, from increasing population and wealth, and the greater
difficulty of obtaining the increased supplies, on account of the additional
quantity of labour which the cultivation of inferior lands requires? Is not the
value of labour equally variable; being not only affected, as all other things
are, by the proportion between the supply and demand, which uniformly

varies with every change in the condition of the community, but also by the
varying price of food and other necessaries, on which the wages of labour
are expended?
In the same country double the quantity of labour may be required to
produce a given quantity of food and necessaries at one time, that may be
necessary at another, and a distant time; yet the labourer's reward may
possibly be very little diminished. If the labourer's wages at the former
period, were a certain quantity of food and necessaries, he probably could
not have subsisted if that quantity had been reduced. Food and necessaries
in this case will have risen 100 per cent. if estimated by the quantity of
labour necessary to their production, while they will scarcely have
increased in value, if measured by the quantity of labour for which they will
exchange.
The same remark may be made respecting two or more countries. In
America and Poland, a year's labour will produce much more corn than in
England. Now, supposing all other necessaries to be equally cheap in those
three countries, would it not be a great mistake to conclude, that the
quantity of corn awarded to the labourer, would in each country be in
proportion to the facility of production?
If the shoes and clothing of the labourer, could, by improvements in
machinery, be produced by one fourth of the labour now necessary to their
production, they would probably fall 75 per cent.; but so far is it from being
true, that the labourer would thereby be enabled permanently to consume
four coats, or four pair of shoes, instead of one, that his wages would in no
long time be adjusted by the effects of competition, and the stimulus to
population, to the new value of the necessaries on which they were
expended. If these improvements extended to all the objects of the
labourer's consumption, we should find him probably at the end of a very
few years, in possession of only a small, if any, addition to his enjoyments,
although the exchangeable value of those commodities, compared with any
other commodity, in the manufacture of which no such improvement were
made, had sustained a very considerable reduction; and though they were
the produce of a very considerably diminished quantity of labour.

It cannot then be correct, to say with Adam Smith, "that as labour may
sometimes purchase a greater, and sometimes a smaller quantity of goods, it
is their value which varies, not that of the labour which purchases them;"
and therefore, "that labour alone never varying in its own value, is alone the
ultimate and real standard by which the value of all commodities can at all
times and places be estimated and compared;"—but it is correct to say, as
Adam Smith had previously said, "that the proportion between the
quantities of labour necessary for acquiring different objects, seems to be
the only circumstance which can afford any rule for exchanging them for
one another;" or in other words, that it is the comparative quantity of
commodities which labour will produce, that determines their present or
past relative value, and not the comparative quantities of commodities,
which are given to the labourer in exchange for his labour.
If any one commodity could be found, which now and at all times required
precisely the same quantity of labour to produce it, that commodity would
be of an unvarying value, and would be eminently useful as a standard by
which the variations of other things might be measured. Of such a
commodity we have no knowledge, and consequently are unable to fix on
any standard of value. It is, however, of considerable use towards attaining
a correct theory, to ascertain what the essential qualities of a standard are,
that we may know the causes of the variation in the relative value of
commodities, and that we may be enabled to calculate the degree in which
they are likely to operate.

In speaking however of labour, as being the foundation of all value, and the
relative quantity of labour as determining the relative value of commodities,
I must not be supposed to be inattentive to the different qualities of labour,
and the difficulty of comparing an hour's, or a day's labour, in one
employment, with the same duration of labour in another. The estimation in
which different qualities of labour are held, comes soon to be adjusted in
the market with sufficient precision for all practical purposes, and depends
much on the comparative skill of the labourer, and intensity of the labour
performed. The scale, when once formed, is liable to little variation. If a
day's labour of a working jeweller be more valuable than a day's labour of a

common labourer, it has long ago been adjusted, and placed in its proper
position in the scale of value.3
In comparing therefore the value of the same commodity, at different
periods of time, the consideration of the comparative skill and intensity of
labour, required for that particular commodity, needs scarcely to be attended
to, as it operates equally at both periods. One description of labour at one
time is compared with the same description of labour at another; if a tenth, a
fifth, or a fourth, has been added or taken away, an effect proportioned to
the cause will be produced on the relative value of the commodity.
If a piece of cloth be now of the value of two pieces of linen, and if, in ten
years hence, the ordinary value of a piece of cloth should be four pieces of
linen, we may safely conclude, that either more labour is required to make
the cloth, or less to make the linen, or that both causes have operated.
As the inquiry to which I wish to draw the reader's attention, relates to the
effect of the variations in the relative value of commodities, and not in their
absolute value, it will be of little importance to examine into the
comparative degree of estimation in which the different kinds of human
labour are held. We may fairly conclude, that whatever inequality there
might originally have been in them, whatever the ingenuity, skill, or time
necessary for the acquirement of one species of manual dexterity more than
another, it continues nearly the same from one generation to another; or at
least, that the variation is very inconsiderable from year to year, and
therefore, can have little effect for short periods on the relative value of
commodities.
"The proportion between the different rates both of wages and profit in the
different employments of labour and stock, seems not to be much affected,
as has already been observed, by the riches or poverty, the advancing,
stationary, or declining state of the society. Such revolutions in the public
welfare, though they affect the general rates both of wages and profit, must
in the end affect them equally in all different employments. The proportion
between them therefore must remain the same, and cannot well be altered,
at least for any considerable time, by any such revolutions."4

It will be seen by the extract which I have made in page 4, from the "Wealth
of Nations," that though Adam Smith fully recognized the principle, that the
proportion between the quantities of labour necessary for acquiring
different objects, is the only circumstance which can afford any rule for our
exchanging them for one another, yet he limits its application to "that early
and rude state of society, which precedes both the accumulation of stock
and the appropriation of land;" as if, when profits and rent were to be paid,
they would have some influence on the relative value of commodities,
independent of the mere quantity of labour that was necessary to their
production.
Adam Smith, however, has no where analyzed the effects of the
accumulation of capital, and the appropriation of land, on relative value. It
is of importance, therefore, to determine how far the effects which are
avowedly produced on the exchangeable value of commodities, by the
comparative quantity of labour bestowed on their production, are modified
or altered by the accumulation of capital and the payment of rent.
First, as to the accumulation of capital. Even in that early state to which
Adam Smith refers, some capital, though possibly made and accumulated
by the hunter himself would be necessary to enable him to kill his game.
Without some weapon, neither the beaver nor the deer could be destroyed,
and therefore the value of these animals would be regulated, not solely by
the time and labour necessary to their destruction, but also by the time and
labour necessary for providing the hunter's capital, the weapon, by the aid
of which their destruction was effected.
Suppose the weapon necessary to kill the beaver, were constructed with
much more labour than that necessary to kill the deer, on account of the
greater difficulty of approaching near to the former animal, and the
consequent necessity of its being more true to its mark; one beaver would
naturally be of more value than two deer, and precisely for this reason, that
more labour would on the whole be necessary to its destruction.
All the implements necessary to kill the beaver and deer might belong to
one class of men, and the labour employed in their destruction might be
furnished by another class; still, their comparative prices would be in
proportion to the actual labour bestowed, both on the formation of the

capital, and on the destruction of the animals. Under different circumstances
of plenty or scarcity of capital, as compared with labour, under different
circumstances of plenty or scarcity of the food and necessaries essential to
the support of men, those who furnished an equal value of capital for either
one employment or for the other, might have a half, a fourth, or an eighth of
the produce obtained, the remainder being paid as wages to those who
furnished the labour; yet this division could not affect the relative value of
these commodities, since whether the profits of capital were greater or less,
whether they were 50, 20, or 10 per cent., or whether the wages of labour
were high or low, they would operate equally on both employments.
If we suppose the occupations of the society extended, that some provide
canoes and tackle necessary for fishing, others the seed and rude machinery
first used in agriculture, still the same principle would hold true, that the
exchangeable value of the commodities produced would be in proportion to
the labour bestowed on their production; not on their immediate production
only, but on all those implements or machines required to give effect to the
particular labour to which they were applied.
If we look to a state of society in which greater improvements have been
made, and in which arts and commerce flourish, we shall still find that
commodities vary in value conformably with this principle: in estimating
the exchangeable value of stockings, for example, we shall find that their
value, comparatively with other things, depends on the total quantity of
labour necessary to manufacture them, and bring them to market. First,
there is the labour necessary to cultivate the land on which the raw cotton is
grown; secondly, the labour of conveying the cotton to the country where
the stockings are to be manufactured, which includes a portion of the labour
bestowed in building the ship in which it is conveyed, and which is charged
in the freight of the goods; thirdly, the labour of the spinner and weaver;
fourthly, a portion of the labour of the engineer, smith, and carpenter, who
erected the buildings and machinery, by the help of which they are made;
fifthly, the labour of the retail dealer, and of many others, whom it is
unnecessary further to particularize. The aggregate sum of these various
kinds of labour, determines the quantity of other things for which these
stockings will exchange, while the same consideration of the various
quantities of labour which have been bestowed on those other things, will
equally govern the portion of them which will be given for the stockings.

To convince ourselves that this is the real foundation of exchangeable value,
let us suppose any improvement to be made in the means of abridging
labour in any one of the various processes through which the raw cotton
must pass, before the manufactured stockings come to the market, to be
exchanged for other things; and observe the effects which will follow. If
fewer men were required to cultivate the raw cotton, or if fewer sailors were
employed in navigating, or shipwrights in constructing the ship, in which it
was conveyed to us; if fewer hands were employed in raising the buildings
and machinery, or if these when raised, were rendered more efficient, the
stockings would inevitably fall in value, and consequently command less of
other things. They would fall, because a less quantity of labour was
necessary to their production, and would therefore exchange for a smaller
quantity of those things in which no such abridgment of labour had been
made.
Economy in the use of labour never fails to reduce the relative value of a
commodity, whether the saving be in the labour necessary to the
manufacture of the commodity itself, or in that necessary to the formation
of the capital, by the aid of which it is produced. In either case the price of
stockings would fall, whether there were fewer men employed as bleachers,
spinners, and weavers, persons immediately necessary to their manufacture;
or as sailors, carriers, engineers, and smiths, persons more indirectly
concerned. In the one case, the whole saving of labour would fall on the
stockings, because that portion of labour was wholly confined to the
stockings; in the other, a portion only would fall on the stockings, the
remainder being applied to all those other commodities, to the production of
which the buildings, machinery, and carriage, were subservient.
In every society the capital which is employed in production, is necessarily
of limited durability. The food and clothing consumed by the labourer, the
buildings in which he works, the implements with which his labour is
assisted, are all of a perishable nature. There is however a vast difference in
the time for which these different capitals will endure: a steam-engine will
last longer than a ship, a ship than the clothing of the labourer, and the
clothing of the labourer longer than the food which he consumes.
According as capital is rapidly perishable, and requires to be frequently
reproduced, or is of slow consumption, it is classed under the heads of

circulating, or of fixed capital. A brewer, whose buildings and machinery
are valuable and durable, is said to employ a large portion of fixed capital:
on the contrary, a shoemaker, whose capital is chiefly employed in the
payment of wages, which are expended on food and clothing, commodities
more perishable than buildings and machinery, is said to employ a large
proportion of his capital as circulating capital.
Two trades then may employ the same amount of capital; but it may be very
differently divided with respect to the portion which is fixed, and that which
is circulating.
Again two manufacturers may employ the same amount of fixed, and the
same amount of circulating capital; but the durability of their fixed capitals
may be very unequal. One may have steam engines of the value of 10,000l.
the other, ships of the same value.
Besides the alteration in the relative value of commodities, occasioned by
more or less labour being required to produce them, they are also subject to
fluctuations from a rise of wages, and consequent fall of profits, if the fixed
capitals employed be either of unequal value, or of unequal duration.
Suppose that in the early stages of society, the bows and arrows of the
hunter were of equal value, and of equal durability, with the canoe and
implements of the fisherman, both being the produce of the same quantity
of labour. Under such circumstances the value of the deer, the produce of
the hunter's day's labour, would be exactly equal to the value of the fish, the
produce of the fisherman's day's labour. The comparative value of the fish
and the game, would be entirely regulated by the quantity of labour realised
in each; whatever might be the quantity of production, or however high or
low general wages or profits might be. If for example the canoes and
implements of the fisherman were of the value of 100l. and were calculated
to last for ten years, and he employed ten men, whose annual labour cost
100l. and who in one day obtained by their labour twenty salmon: If the
weapons employed by the hunter were also of 100l. value and calculated to
last ten years, and if he also employed ten men, whose annual labour cost
100l. and who in one day procured him ten deer; then the natural price of a
deer would be two salmon, whether the proportion of the whole produce
bestowed on the men who obtained it, were large or small. The proportion

which might be paid for wages, is of the utmost importance in the question
of profits; for it must at once be seen, that profits would be high or low,
exactly in proportion as wages were low or high; but it could not in the least
affect the relative value of fish and game, as wages would be high or low at
the same time in both occupations. If the hunter urged the plea of his paying
a large proportion, or the value of a large proportion of his game for wages,
as an inducement to the fisherman to give him more fish in exchange for his
game, the latter would state that he was equally affected by the same cause;
and therefore under all variations of wages and profits, under all the effects
of accumulation of capital, as long as they continued by a day's labour to
obtain respectively the same quantity of fish, and the same quantity of
game, the natural rate of exchange would be, one deer for two salmon.
If with the same quantity of labour a less quantity of fish, or a greater
quantity of game were obtained, the value of fish would rise in comparison
with that of game. If, on the contrary, with the same quantity of labour a
less quantity of game, or a greater quantity of fish was obtained, game
would rise in comparison with fish.
If there were any other commodity which was invariable in its value,
requiring at all times, and under all circumstances, precisely the same
quantity of labour to obtain it, we should be able to ascertain, by comparing
the value of fish and game with this commodity, how much of the variation
was to be attributed to a cause which affected the value of fish, and how
much to a cause which affected the value of game.
Suppose money to be that commodity. If a salmon were worth 1l. and a deer
2l. one deer would be worth two salmon. But a deer might become of the
value of three salmon, for more labour might be required to obtain the deer,
or less to get the salmon, or both these causes might operate at the same
time. If we had this invariable standard, we might easily ascertain in what
degree either of these causes operated. If salmon continued to sell for 1l.
whilst deer rose to 3l. we might conclude that more labour was required to
obtain the deer. If deer continued at the same price of 2l. and salmon sold
for 13s. 4d. we might then be sure that less labour was required to obtain
the salmon; and if deer rose to 2l. 10s. and salmon fell to 16s. 8d. we should
be convinced that both causes had operated in producing the alteration of
the relative value of these commodities.

No alteration in the wages of labour could produce any alteration in the
relative value of these commodities; for if profits were 10 per cent., then to
replace the 100l. circulating capital with 10 per cent. profit, there must be a
return of 110l.: to replace the equal portion of fixed capital, when profits are
at the rate of 10 per cent. there should be annually received 16.27l.; for, the
present value of an annuity of 16.27l. for ten years, when money is at 10 per
cent., is 100l.; consequently all the game of the hunter should annually sell
for 126.27l. But the capital of the fisherman being the same in quantity, and
divided in the same proportion into fixed and circulating capital, and being
also of the same durability, he, to obtain the same profits, must sell his
goods for the same value. If wages rose 10 per cent. and consequently 10
per cent. more circulating capital were required in each trade, it would
equally affect both employments. In both, 210l. instead of 200l. would be
required in order to produce the former quantity of commodities; and these
would sell precisely for the same money, namely 126.27l.: they would
therefore be at the same relative value, and profits would be equally
reduced in both trades.
The prices of the commodities would not rise, because the money in which
they are valued is by the supposition of an invariable value, always
requiring the same quantity of labour to produce it.
If the gold mine from which money was obtained were in the same country,
in that case, after the rise of wages, 210l. might be necessary to be
employed, as capital, to obtain the same quantity of metal that 200l.
obtained before: for the same reason that the hunter and fisherman required
10l. in addition to their capitals, the miner would require an equal addition
to his. No greater quantity of labour would be required in any of these
occupations, but it would be paid for at a higher price, and the same reasons
which should make the hunter and fisherman endeavour to raise the value
of their game and fish, would cause the owner of the mine to raise the value
of his gold. This inducement acting with the same force on all these three
occupations, and the relative situation of those engaged in them being the
same before and after the rise of wages, the relative value of game, fish, and
gold, would continue unaltered. Wages might rise twenty per cent., and
profits consequently fall in a greater or less proportion, without occasioning
the least alteration in the relative value of these commodities.

Now suppose, that with the same labour and fixed capital, more fish could
be produced, but no more gold or game, the relative value of fish would fall
in comparison with gold or game. If, instead of twenty salmon, twenty-five
were the produce of one day's labour, the price of a salmon would be
sixteen shillings instead of a pound, and two salmon and a half, instead of
two salmon, would be given in exchange for one deer, but the price of deer
would continue at 2l. as before. In the same manner, if fewer fish could be
obtained with the same capital and labour, fish would rise in comparative
value. Fish then would rise or fall in exchangeable value, only because
more or less labour was required to obtain a given quantity; and it never
could rise or fall beyond the proportion of the increased or diminished
quantity of labour required.
If we had then an invariable standard, by which we could measure the
variation in other commodities, we should find that the utmost limit to
which they could permanently rise, was proportioned to the additional
quantity of labour required for their production; and that unless more labour
were required for their production, they could not rise in any degree
whatever. A rise of wages would not raise them in money value, nor
relatively to any other commodities, the production of which required no
additional quantity of labour, which employed the same proportion of fixed
and circulating capital, and fixed capital of the same durability. If more or
less labour were required in the production of the other commodity, we
have already stated that this will immediately occasion an alteration in its
relative value, but such alteration is owing to the altered quantity of
requisite labour, and not to the rise of wages.
If the fixed and circulating capitals were in different proportions, or if the
fixed capital were of different durability, then the relative value of the
commodities produced, would be altered in consequence of a rise of wages.
First, when the fixed and circulating capitals were in different proportions,
suppose that instead of 100l. fixed capital and 100l. circulating capital, the
hunter should employ 150l. fixed capital and 50l. circulating capital, and
that the fisherman should on the contrary employ only 50l. fixed capital and
150l. circulating capital.

If profits be 10 per cent., the hunter must sell his goods for 79l. 8s. For,

To replace his circulating capital of 50l. with a
profit of 10 per cent. would require a value of 55l.
To replace his fixed capital with 10 per cent. profit,
the present value of an annuity for ten years of
24.4l. at 10 per cent. being 150l. 24.4l.
——
79.4l.

If profits be 10 per cent., the fisherman must sell his goods for 173l. 2s. 7d.
To replace his circulating capital of 150l. with a
profit of 10 per cent. would require a value of 165l.
To replace his fixed capital with 10 per cent. profit,
one-third of the hunter' 8.13
———
173.13l.

Now if wages rise, although neither of these commodities should require
more labour for their production, yet their relative value will be altered.
Suppose wages to rise 6 per cent., the hunter would not require more than
an increase of 3l. to his capital, to employ the same number of men, and
obtain the same quantity of game; the fisherman would require three times
that sum, or 9l. The profits of stock would fall to 4 per cent., the hunter
would be obliged to sell his game for 73l. 12s. 2d.

To replace his circulating capital of 53l. with a
profit of 4 per cent. 55.12l.
To replace fixed capital, annually wasted, the
present value of an annuity of 18.49l. for ten years,
being 150l. 18.49
——
£73.61
——
The fisherman would sell his fish for 171l. 11s. 5d.
viz.

To replace his circulating capital of 159l. with a
profit of 4 per cent. £165.360
To replace fixed capital annually wasted, the present
value of an annuity of 6.163l., for ten years at 4 per
cent., being 50l. 6.163
————
£171.523

Game was to fish before as 100 to 218.
It would now be as 100 to 233.

Thus we see, that with every rise of wages, in proportion as the capital
employed in any occupation consists of circulating capital, its produce will
be of greater relative value than the goods produced in another occupation,
where a less proportion of circulating, and a greater proportion of fixed
capital are employed.
Secondly, suppose the proportions of fixed capital to be the same; but of
different degrees of durability. In proportion as fixed capital is less durable,
it approaches to the nature of circulating capital. It will be consumed in a
shorter time, and its value reproduced in order to preserve the capital of the
manufacturer. We have just seen, that in proportion as circulating capital
preponderates in a manufacture, when wages rise, the value of commodities
produced in that manufacture, is relatively higher than that of commodities
produced in manufactures where fixed capital preponderates. In proportion
to the less durability of fixed capital, and its approach to the nature of
circulating capital, the same effect will be produced by the same cause.
Suppose that an engine is made, which will last for a hundred years, and
that its value is 20,000l.. Suppose too, that this machine, without any labour
whatever, could produce a certain quantity of commodities annually, and
that profits were 10 per cent.: the whole value of the goods produced would
be annually 2,000l. 2s. 11d.; for the profit of 20,000l.

at 10 per cent. per annum, isat 10 per cent. per
annum, is £2,000

And an annuity of 2s. 11d. will, at the end of that
period, replace a capital of 20,000l. 2 11
———
Consequently the goods must sell for £2000 2 11

If the same amount of capital, viz. 20,000l., be employed in supporting
productive labour, and be annually consumed and reproduced, as it is when
employed in paying wages, then to give an equal profit of 10 per cent. on
20,000l. the commodities produced must sell for 22,000l. Now suppose
labour so to rise, that instead of 20,000l. being sufficient to pay the wages
of those employed in producing the latter commodities, 20,952l. is required;
then profits will fall to 5 per cent.: for as these commodities would sell for
no more than before,

viz. £22,000
and to produce them £20,952 would be requisite,
———
there would remain no more than £1,048

on a capital of 20,952l. If labour so rose, that 21,153l. were required, profits
would fall to 4 per cent. and if it rose, so that 21,359l. was employed,
profits would fall to 3 per cent.
But, as no wages would be paid by the owner of the machine, which would
last 100 years, when profits fell to 5 per cent. the price of his goods must
fall to 1007l. 13s. 8d. viz. 1000l. to pay his profits, and 7l. 13s. 8d. to
accumulate for 100 years at 5 per cent. to replace his capital of 20,000l.
When profits fell to 4 per cent. his goods must sell for 816l. 3s. 2d., and
when at 3 per cent. for 632l. 16s. 7d. By a rise in the price of labour then,
under 7 per cent., which has no effect on the prices of commodities wholly
produced by labour, a fall of no less than 68 per cent. is effected on those
commodities wholly produced by machinery. If the proprietor of the
machine sold his goods for more than 632l. 16s. 7d., he would get more
than 3 per cent., the general profit of stock; and as others could furnish
themselves with machines at the same price of 20,000l. they would be so
multiplied, that he would be inevitably obliged to sink the price of his
goods, till they afforded only the usual and general profits of stock.

In proportion as this machine were less durable, prices would be less
affected by the fall of profit, and the rise of wages. If, for example, the
machine would last only ten years, when profits were at 10 per cent.

the goods should sell for £3254
when at 5 per cent. 2590
4 per cent. 2465
3 per cent. 2344

for such are the sums requisite to place his profits on a par with others, and
to replace his capital at the end of ten years; or, which is the same thing,
such are the annuities which 20,000l. would purchase for ten years at those
rates. If the machine would last only three years, when profits were 10 per
cent.

the price of the goods would be £8042
at 5 per cent. 7344
4 per cent. 7206
3 per cent. 7070

If it would last only one year, when profits were 10 per cent.

the goods would sell for £22,000
at 5 per cent. 21,000
4 per cent. 20,800
3 per cent. 20,600

therefore when profits fell from 10 to 3 per cent. the goods, which were
produced with equal capitals, would fall
68 per cent. if the machine would last 100 years.
28 per cent. if the machine would last 10 years.
13 per cent. if the machine would last 3 years.
And little more than 6 per cent. if it would last only 1 year.

These results are of such importance to the science of political economy, yet
accord so little with some of its received doctrines, which maintain that

every rise in wages is necessarily transferred to the price of commodities,
that it may not be superfluous to elucidate the subject still further.
A manufacturer of hats employs a hundred men at an annual expense of 50l.
each, who produce him commodities of the value of 8000l. A machine
calculated to last precisely a year, and to do equally well the same work as
the 100 men, is offered to him for 5000l., the sum, exactly, that he is
expending on wages. It will be a matter of indifference to the manufacturer,
whether he purchase the machine, or continue to employ the men. Now if
the wages of labour rise 10 per cent. and an additional capital of 500l. be
consequently required to enable him to employ the same labour, whilst his
commodities continue to sell for 8000l., he will no longer hesitate, but will
at once purchase the machine, and will do the same annually, while wages
continue above the original 5000l. But will he be able now to purchase the
machine at the former price? will not its value be increased, in consequence
of the rise of labour? It would be increased, if there were no stock employed
in its construction, and no profits to be paid to the maker of it. If, for
example, the machine were produced by 100 men working one year upon it
with wages of 50l. each, and its price were 5000l., should those wages rise
to 55l. its price would be 5500l.: but this cannot be the case; less than 100
men are employed, or it could not be sold for 5000l.; for out of the 5000l.
must be paid the profits of the stock which employed the men. Suppose
then that only eighty-five men were employed at an expense of 4250l. per
annum, and that the 750l., which the sale of the machine would produce
over and above the wages advanced to the men, constituted the profits of
the engineer's stock. When wages rose 10 per cent., he would be obliged to
employ an additional capital of 425l., and would therefore employ 4675l.,
instead of 4250l., on which capital he would only get a profit of 325l. if he
continued to sell his machine for 5000l.; but this is precisely the case of all
manufacturers and capitalists; the rise of wages affects them all. If therefore
the maker of the machine should raise the price of his machine in
consequence of a rise of wages, an unusual quantity of capital would be
employed in the construction of such machines, till their price afforded only
the usual profits. The manufacturer of hats, by the employment of the
machine, if he sells his hats for 8000l., is precisely in the same situation as
before; he employs no more capital, and obtains the same profits. The
competition of trade would not long allow this; for as capital would flow to

the most profitable employment, he would be obliged to lower the price of
hats, till his profits had sunk to the general level. Thus then is the public
benefited by machinery: these mute agents are always the produce of much
less labour than that which they displace, even when they are of the same
money value. Through their influence, an increase in the price of provisions
which raises wages, will affect fewer persons: it will reach, as in the above
instance, eighty-five men instead of a hundred; and the saving which is the
consequence, shews itself in the reduced price of the commodity
manufactured. Neither machines nor any other commodities are raised in
price, but all commodities which are made by machines fall, and fall in
proportion to their durability.
It appears, then, that in proportion to the quantity and the durability of the
fixed capital employed in any kind of production, the relative prices of
those commodities on which such capital is employed, will vary inversely
as wages; they will fall as wages rise. It appears too that no commodities
whatever are raised in absolute price, merely because wages rise; that they
never rise unless additional labour be bestowed on them; but that all
commodities in the production of which fixed capital enters, not only do not
rise with a rise of wages, but absolutely fall; fall too as much as 68 per
cent., with a rise of seven per cent. in wages, if fixed capital be exclusively
employed, and be of the duration of 100 years.
The above statement, which asserts the compatibility of a rise of wages,
with a fall of prices, has, I know, the disadvantage of novelty, and must trust
to its own merits for advocates; whilst it has for its opponents, writers of
distinguished and deserved reputation. It should however be carefully
remembered, that in this whole argument I am supposing money to be of an
invariable value; in other words, to be always the produce of the same
quantity of unassisted labour. Money, however, is a variable commodity;
and the rise of wages as well as of commodities, is frequently occasioned
by a fall in the value of money. A rise of wages from this cause will indeed
be invariably accompanied by a rise in the price of commodities: but in
such cases, it will be found that labour and all commodities have not varied
in regard to each other, and that the variation has been confined to money.
Money, from its being a commodity obtained from a foreign country, from
its being the general medium of exchange between all civilized countries,

and from its being also distributed among those countries in proportions
which are ever changing with every improvement in commerce and
machinery, and with every increasing difficulty of obtaining food and
necessaries for an increasing population, is subject to incessant variations.
In stating the principles which regulate exchangeable value and price, we
should carefully distinguish between those variations which belong to the
commodity itself, and those which are occasioned by a variation in the
medium in which value is estimated, or price expressed.
A rise in wages, from an alteration in the value of money, produces a
general effect on price, and for that reason it produces no real effect
whatever on profits. On the contrary, a rise of wages, from the circumstance
of the labourer being more liberally rewarded, or from a difficulty of
procuring the necessaries on which wages are expended, does not produce
the effect of raising price, but has a great effect in lowering profits. In the
one case, no greater proportion of the annual labour of the country is
devoted to the support of the labourers, in the other case, a larger portion is
so devoted.
It is according to the division of the whole produce of the land and labour of
the country, between the three classes of landlords, capitalists, and
labourers, that we are to judge of rent, profit, and wages, and not according
to the value at which that produce may be estimated in a medium which is
confessedly variable.
It is not by the absolute quantity of produce obtained by either class, that we
can correctly judge of the rate of profit, rent, and wages, but by the quantity
of labour required to obtain that produce. By improvements in machinery
and agriculture, the whole produce may be doubled; but if wages, rent, and
profit, be also doubled, these three will bear the same proportions to one
another, and neither could be said to have relatively varied. But if wages
partook not of the whole of this increase; if they, instead of being doubled,
were only increased one half, if rent, instead of being doubled, were only
increased three-fourths, and the remaining increase went to profit, it would,
I apprehend, be correct for me to say, that rent and wages had fallen, while
profits had risen; for if we had an invariable standard, by which to measure
the value of this produce, we should find that a less value had fallen to the
class of labourers and landlords, and a greater to the class of capitalists,

than had been given before. We might find for example, that though the
absolute quantity of commodities had been doubled, they were the produce
of precisely the former quantity of labour. Of every hundred hats, coats, and
quarters of corn produced,

if the labourers had 25
The landlords 25
And the capitalists 25
——
100

And if, after these commodities were doubled in quantity, of every 100

The labourers had only 22
The landlords 22
And the capitalists 22
——
100

In that case I should say, that wages and rent had fallen, and profits risen;
though in consequence of the abundance of commodities, the quantity paid
to the labourer and landlord would have increased in the proportion of 25 to
44. Wages are to be estimated by their real value, viz. by the quantity of
labour and capital employed in producing them, and not by their nominal
value either in coats, hats, money, or corn. Under the circumstances I have
just supposed, commodities would have fallen to half their former value;
and, if money had not varied, to half their former price also. If then in this
medium, which had not varied in value, the wages of the labourer should be
found to have fallen, it will not the less be a real fall, because they might
furnish him with a greater quantity of cheap commodities, than his former
wages.
The variation in the value of money, however great, makes no difference in
the rate of profits; for suppose the goods of the manufacturer to rise from
1000l. to 2000l., or 100 per cent., if his capital, on which the variations of
money have as much effect as on the value of produce, if his machinery,
buildings, and stock in trade rise more than 100 per cent., his rate of profits

has fallen, and he has a proportionably less quantity of the produce of the
labour of the country at his command.
If, with capital of a given value, he double the quantity of produce, its value
falls one half, and then it will bear the same proportion to the capital which
produced it, as it did before.
If at the same time that he doubles the quantity of produce by the
employment of the same capital, the value of money is by any accident
lowered one half, the produce will sell for twice the money value that it did
before; but the capital employed to produce it, will also be of twice its
former money value; and therefore in this case too, the value of the produce
will bear the same proportion to the value of the capital as it did before; and
although the produce be doubled, rent, wages, and profits will only vary as
the proportions vary, in which this double produce may be divided among
the three classes that share it.
It appears then that the accumulation of capital, by occasioning different
proportions of fixed and circulating capital to be employed in different
trades, and by giving different degrees of durability to such fixed capital,
introduces a considerable modification to the rule, which is of universal
application in the early states of society.
Commodities, though they continue to rise and fall, in proportion as more
or less labour is necessary to their production, are also affected in their
relative value by a rise or fall of profits, since equal profits may be derived
from goods which sell for 2,000l. and from those which sell for 10,000l.;
and consequently the variations of those profits, independently of any
increased or diminished quantity of labour required for the goods in
question, must affect their prices in different proportions.
It appears too, that commodities may be lowered in value in consequence of
a real rise of wages, but they never can be raised from that cause. On the
other hand, they may rise from a fall of wages, as they then lose the peculiar
advantages of production, which high wages afforded them.

CHAPTER II.

ON RENT.

It remains however to be considered, whether the appropriation of land,
and the consequent creation of rent, will occasion any variation in the
relative value of commodities, independently of the quantity of labour
necessary to production. In order to understand this part of the subject, we
must inquire into the nature of rent, and the laws by which its rise or fall is
regulated. Rent is that portion of the produce of the earth, which is paid to
the landlord for the use of the original and indestructible powers of the soil.
It is often however confounded with the interest and profit of capital, and in
popular language the term is applied to whatever is annually paid by a
farmer to his landlord. If, of two adjoining farms of the same extent, and of
the same natural fertility, one had all the conveniences of farming buildings,
were, besides, properly drained and manured, and advantageously divided
by hedges, fences, and walls, while the other had none of these advantages,
more remuneration would naturally be paid for the use of one, than for the
use of the other; yet in both cases this remuneration would be called rent.
But it is evident, that a portion only of the money annually to be paid for the
improved farm, would be given for the original and indestructible powers of
the soil; the other portion would be paid for the use of the capital which had
been employed in ameliorating the quality of the land, and in erecting such
buildings as were necessary to secure and preserve the produce. Adam
Smith sometimes speaks of rent, in the strict sense to which I am desirous
of confining it, but more often in the popular sense, in which the term is
usually employed. He tells us, that the demand for timber, and its
consequent high price, in the more southern countries of Europe, caused a
rent to be paid for forests in Norway, which could before afford no rent. Is it
not however evident, that the person who paid, what he thus calls rent, paid
it in consideration of the valuable commodity which was then standing on
the land, and that he actually repaid himself with a profit, by the sale of the
timber? If, indeed, after the timber was removed, any compensation were
paid to the landlord for the use of the land, for the purpose of growing
timber or any other produce, with a view to future demand, such
compensation might justly be called rent, because it would be paid for the
productive powers of the land; but in the case stated by Adam Smith, the
compensation was paid for the liberty of removing and selling the timber,
and not for the liberty of growing it. He speaks also of the rent of coal

mines, and of stone quarries, to which the same observation applies—that
the compensation given for the mine or quarry, is paid for the value of the
coal or stone which can be removed from them, and has no connexion with
the original and indestructible powers of the land. This is a distinction of
great importance, in an inquiry concerning rent and profits; for it is found,
that the laws which regulate the progress of rent, are widely different from
those which regulate the progress of profits, and seldom operate in the same
direction. In all improved countries, that which is annually paid to the
landlord, partaking of both characters, rent and profit, is sometimes kept
stationary by the effects of opposing causes, at other times advances or
recedes, as one or other of these causes preponderates. In the future pages
of this work, then, whenever I speak of the rent of land, I wish to be
understood as speaking of that compensation, which is paid to the owner of
land for the use of its original and indestructible powers.
On the first settling of a country, in which there is an abundance of rich and
fertile land, a very small proportion of which is required to be cultivated for
the support of the actual population, or indeed can be cultivated with the
capital which the population can command, there will be no rent; for no one
would pay for the use of land, when there was an abundant quantity not yet
appropriated, and therefore at the disposal of whosoever might choose to
cultivate it.
On the common principles of supply and demand, no rent could be paid for
such land, for the reason stated, why nothing is given for the use of air and
water, or for any other of the gifts of nature which exist in boundless
quantity. With a given quantity of materials, and with the assistance of the
pressure of the atmosphere, and the elasticity of steam, engines may
perform work, and abridge human labour to a very great extent; but no
charge is made for the use of these natural aids, because they are
inexhaustible, and at every man's disposal. In the same manner the brewer,
the distiller, the dyer, make incessant use of the air and water for the
production of their commodities; but as the supply is boundless, it bears no
price.5 If all land had the same properties, if it were boundless in quantity,
and uniform in quality, no charge could be made for its use, unless where it
possessed peculiar advantages of situation. It is only then because land is of
different qualities with respect to its productive powers, and because in the
progress of population, land of an inferior quality, or less advantageously

situated, is called into cultivation, that rent is ever paid for the use of it.
When, in the progress of society, land of the second degree of fertility is
taken into cultivation, rent immediately commences on that of the first
quality, and the amount of that rent will depend on the difference in the
quality of these two portions of land.
When land of the third quality is taken into cultivation, rent immediately
commences on the second, and it is regulated as before, by the difference in
their productive powers. At the same time, the rent of the first quality will
rise, for that must always be above the rent of the second, by the difference
between the produce which they yield with a given quantity of capital and
labour. With every step in the progress of population, which shall oblige a
country to have recourse to land of a worse quality, to enable it to raise its
supply of food, rent, on all the more fertile land, will rise.
Thus suppose land—No. 1, 2, 3,—to yield, with an equal employment of
capital and labour, a net produce of 100, 90, and 80 quarters of corn. In a
new country, where there is an abundance of fertile land compared with the
population, and where therefore it is only necessary to cultivate No. 1, the
whole net produce will belong to the cultivator, and will be the profits of
the stock which he advances. As soon as population had so far increased as
to make it necessary to cultivate No. 2, from which ninety quarters only can
be obtained after supporting the labourers, rent would commence on No. 1;
for either there must be two rates of profit on agricultural capital, or ten
quarters, or the value of ten quarters must be withdrawn from the produce
of No. 1, for some other purpose. Whether the proprietor of the land, or any
other person, cultivated No. 1, these ten quarters would equally constitute
rent; for the cultivator of No. 2 would get the same result with his capital,
whether he cultivated No. 1, paying ten quarters for rent, or continued to
cultivate No. 2, paying no rent. In the same manner it might be shewn that
when No. 3 is brought into cultivation, the rent of No. 2 must be ten
quarters, or the value of ten quarters, whilst the rent of No. 1 would rise to
twenty quarters; for the cultivator of No. 3 would have the same profits
whether he paid twenty quarters for the rent of No. 1, ten quarters for the
rent of No. 2, or cultivated No. 3 free of all rent.
It often, and indeed commonly happens that before No. 2, 3, 4, or 5, or the
inferior lands are cultivated, capital can be employed more productively on

those lands which are already in cultivation. It may perhaps be found, that
by doubling the original capital employed on No. 1, though the produce will
not be doubled, will not be increased by 100 quarters, it may be increased
by eighty-five quarters, and that this quantity exceeds what could be
obtained by employing the same capital on land, No. 3.
In such case, capital will be preferably employed on the old land, and will
equally create a rent; for rent is always the difference between the produce
obtained by the employment of two equal quantities of capital and labour. If
with a capital of 1000l. a tenant obtain 100 quarters of wheat from his land,
and by the employment of a second capital of 1000l., he obtain a further
return of eighty-five, his landlord would have the power at the expiration of
his lease, of obliging him to pay fifteen quarters, or an equivalent value, for
additional rent; for there cannot be two rates of profit. If he is satisfied with
a diminution of fifteen quarters in the return for his second 1000l., it is
because no employment more profitable can be found for it. The common
rate of profit would be in that proportion, and if the original tenant refused,
some other person would be found willing to give all which exceeded that
rate of profit to the owner of the land from which he derived it.
In this case, as well as in the other, the capital last employed pays no rent.
For the greater productive powers of the first 1000l., fifteen quarters is paid
for rent, for the employment of the second 1000l. no rent whatever is paid.
If a third 1000l. be employed on the same land, with a return of seventy-
five quarters, rent will then be paid for the second 1000l. and will be equal
to the difference between the produce of these two, or ten quarters; and at
the same time the rent of the first 1000l. will rise from fifteen to twenty-five
quarters; while the last 1000l. will pay no rent whatever.
If then good land existed in a quantity much more abundant than the
production of food for an increasing population required, or if capital could
be indefinitely employed without a diminished return on the old land, there
could be no rise of rent; for rent invariably proceeds from the employment
of an additional quantity of labour with a proportionally less return.
The most fertile, and most favourably situated land will be first cultivated,
and the exchangeable value of its produce will be adjusted in the same
manner as the exchangeable value of all other commodities, by the total

quantity of labour necessary in various forms, from first to last, to produce
it, and bring it to market. When land of an inferior quality is taken into
cultivation, the exchangeable value of raw produce will rise, because more
labour is required to produce it.
The exchangeable value of all commodities, whether they be manufactured,
or the produce of the mines, or the produce of land, is always regulated, not
by the less quantity of labour that will suffice for their production under
circumstances highly favourable, and exclusively enjoyed by those who
have peculiar facilities of production; but by the greater quantity of labour
necessarily bestowed on their production by those who have no such
facilities; by those who continue to produce them under the most
unfavourable circumstances; meaning—by the most unfavourable
circumstances, the most unfavourable under which the quantity of produce
required renders it necessary to carry on the production.
Thus, in a charitable institution, where the poor are set to work with the
funds of benefactors, the general prices of the commodities, which are the
produce of such work, will not be governed by the peculiar facilities
afforded to these workmen, but by the common, usual, and natural
difficulties, which every other manufacturer will have to encounter. The
manufacturer enjoying none of these facilities might indeed be driven
altogether from the market, if the supply afforded by these favoured
workmen were equal to all the wants of the community; but if he continued
the trade, it would be only on condition that he should derive from it the
usual and general rate of profits on stock; and that could only happen when
his commodity sold for a price proportioned to the quantity of labour
bestowed on its production.6
It is true, that on the best land, the same produce would still be obtained
with the same labour as before, but its value would be enhanced in
consequence of the diminished returns obtained by those who employed
fresh labour and stock on the less fertile land. Notwithstanding then, that
the advantages of fertile over inferior lands are in no case lost, but only
transferred from the cultivator, or consumer, to the landlord, yet since more
labour is required on the inferior lands, and since it is from such land only
that we are enabled to furnish ourselves with the additional supply of raw
produce, the comparative value of that produce will continue permanently

above its former level, and make it exchange for more hats, cloth, shoes,
&c. &c. in the production of which no such additional quantity of labour is
required.
The reason then, why raw produce rises in comparative value, is because
more labour is employed in the production of the last portion obtained, and
not because a rent is paid to the landlord. The value of corn is regulated by
the quantity of labour bestowed on its production on that quality of land, or
with that portion of capital, which pays no rent. Corn is not high because a
rent is paid, but a rent is paid because corn is high; and it has been justly
observed, that no reduction would take place in the price of corn, although
landlords should forego the whole of their rent. Such a measure would only
enable some farmers to live like gentlemen, but would not diminish the
quantity of labour necessary to raise raw produce on the least productive
land in cultivation.
Nothing is more common than to hear of the advantages which the land
possesses over every other source of useful produce, on account of the
surplus which it yields in the form of rent. Yet when land is most abundant,
when most productive, and most fertile, it yields no rent; and it is only
when its powers decay, and less is yielded in return for labour, that a share
of the original produce of the more fertile portions is set apart for rent. It is
singular that this quality in the land, which should have been noticed as an
imperfection, compared with the natural agents by which manufacturers are
assisted, should have been pointed out as constituting its peculiar pre-
eminence. If air, water, the elasticity of steam, and the pressure of the
atmosphere, were of various qualities; if they could be appropriated, and
each quality existed only in moderate abundance, they as well as the land
would afford a rent, as the successive qualities were brought into use. With
every worse quality employed, the value of the commodities in the
manufacture of which they were used would rise, because equal quantities
of labour would be less productive. Man would do more by the sweat of his
brow, and nature perform less; and the land would be no longer pre-eminent
for its limited powers.
If the surplus produce which land affords in the form of rent be an
advantage, it is desirable that, every year, the machinery newly constructed
should be less efficient than the old, as that would undoubtedly give a

greater exchangeable value to the goods manufactured, not only by that
machinery, but by all the other machinery in the kingdom; and a rent would
be paid to all those who possessed the most productive machinery.7
The rise of rent is always the effect of the increasing wealth of the country,
and of the difficulty of providing food for its augmented population. It is a
symptom, but it is never a cause of wealth; for wealth often increases most
rapidly while rent is either stationary, or even falling. Rent increases most
rapidly, as the disposable land decreases in its productive powers. Wealth
increases most rapidly in those countries where the disposable land is most
fertile, where importation is least restricted, and where through agricultural
improvements, productions can be multiplied without any increase in the
proportional quantity of labour, and where consequently the progress of rent
is slow.
If the high price of corn were the effect, and not the cause of rent, price
would be proportionally influenced as rents were high or low, and rent
would be a component part of price. But that corn which is produced with
the greatest quantity of labour is the regulator of the price of corn, and rent
does not and cannot enter in the least degree as a component part of its
price. Adam Smith, therefore, cannot be correct in supposing that the
original rule which regulated the exchangeable value of commodities,
namely the comparative quantity of labour by which they were produced,
can be at all altered by the appropriation of land and the payment of rent.
Raw material enters into the composition of most commodities, but the
value of that raw material as well as corn, is regulated by the
productiveness of the portion of capital last employed on the land, and
paying no rent; and therefore rent is not a component part of the price of
commodities.
We have been hitherto considering the effects of the natural progress of
wealth and population on rent, in a country in which the land is of variously
productive powers; and we have seen, that with every portion of additional
capital which it becomes necessary to employ on the land with a less
productive return, rent would rise. It follows from the same principles, that
any circumstances in the society which should make it unnecessary to
employ the same amount of capital on the land, and which should therefore
make the portion last employed more productive, would lower rent. Any

great reduction in the capital of a country, which should materially diminish
the funds destined for the maintenance of labour, would naturally have this
effect. Population regulates itself by the funds which are to employ it, and
therefore always increases or diminishes with the increase or diminution of
capital. Every reduction of capital is therefore necessarily followed by a
less effective demand for corn, by a fall of price, and by diminished
cultivation. In the reverse order to that in which the accumulation of capital
raises rent, will the diminution of it lower rent. Land of a less unproductive
quality will be in succession relinquished, the exchangeable value of
produce will fall, and land of a superior quality will be the land last
cultivated, and that which will then pay no rent.
The same effects may however be produced when the wealth and
population of a country are increased, if that increase is accompanied by
such marked improvements in agriculture, as shall have the same effect of
diminishing the necessity of cultivating the poorer lands, or of expending
the same amount of capital on the cultivation of the more fertile portions.
If a million of quarters of corn be necessary for the support of a given
population, and it be raised on land of the qualities of No. 1, 2, 3; and if an
improvement be afterwards discovered by which it can be raised on No. 1
and 2, without employing No. 3, it is evident that the immediate effect must
be a fall of rent; for No. 2, instead of No. 3, will then be cultivated without
paying any rent; and the rent of No. 1, instead of being the difference
between the produce of No. 3 and No. 1, will be the difference only
between No. 2 and 1. With the same population, and no more, there can be
no demand for any additional quantity of corn; the capital and labour
employed on No. 3, will be devoted to the production of other commodities
desirable to the community, and can have no effect in raising rent unless the
raw material from which they are made cannot be obtained without
employing capital less advantageously on the land, in which case No. 3
must again be cultivated.
It is undoubtedly true, that the fall in the relative price of raw produce, in
consequence of the improvement in agriculture, or rather in consequence of
less labour being bestowed on its production, would naturally lead to
increased accumulation; for the profits of stock would be greatly
augmented. This accumulation would lead to an increased demand for

labour, to higher wages, to an increased population, to a further demand for
raw produce, and to an increased cultivation. It is only, however, after the
increase in the population, that rent would be as high as before; that is to
say, after No. 3 was taken into cultivation. A considerable period would
have elapsed, attended with a positive diminution of rent.
But improvements in agriculture are of two kinds: those which increase the
productive powers of the land, and those which enable us to obtain its
produce with less labour. They both lead to a fall in the price of raw
produce; they both affect rent, but they do not affect it equally. If they did
not occasion a fall in the price of raw produce, they would not be
improvements; for it is the essential quality of an improvement to diminish
the quantity of labour before required to produce a commodity; and this
diminution cannot take place without a fall of its price or relative value.
The improvements which increase the productive powers of the land, are
such as the more skilful rotation of crops, or the better choice of manure.
These improvements absolutely enable us to obtain the same produce from
a smaller quantity of land. If, by the introduction of a course of turnips, I
can feed my sheep besides raising my corn, the land on which the sheep
were fed becomes unnecessary, and the same quantity of raw produce is
raised by the employment of a less quantity of land. If I discover a manure
which will enable me to make a piece of land produce 20 per cent. more
corn, I may withdraw at least a portion of my capital from the most
unproductive part of my farm. But, as I have before observed, it is not
necessary that land should be thrown out of cultivation, in order to reduce
rent: to produce this effect, it is sufficient that successive portions of capital
are employed on the same land with different results, and that the portion
which gives the least result should be withdrawn. If, by the introduction of
the turnip husbandry, or by the use of a more invigorating manure, I can
obtain the same produce with less capital, and without disturbing the
difference between the productive powers of the successive portions of
capital, I shall lower rent; for a different and more productive portion will
be that which will form the standard from which every other will be
reckoned. If, for example, the successive portions of capital yielded 100,
90, 80, 70; whilst I employed these four portions, my rent would be 60, or
the difference between

70 and 100 = 30 100
70 and 90 = 20 90
70 and 80 = 10 whilst the produce 80
— would be 340 70
60 ——
340

and while I employed these portions, the rent would remain the same,
although the produce of each should have an equal augmentation. If, instead
of 100, 90, 80, 70, the produce should be increased to 125, 115, 105, 95, the
rent would still be 60, or the difference between

95 and 125 = 30 125
95 and 115 = 20 115
95 and 105 = 10 whilst the produce 105
would be increased to
— 95
440
60 ——
440

But with such an increase of produce, without an increase of demand, there
could be no motive for employing so much capital on the land; one portion
would be withdrawn, and consequently the last portion of capital would
yield 105 instead of 95, and rent would fall to 30, or the difference between

105 and 125 = 20 whilst the produce 125
105 and 115 = 10 would be still adequate 115
— to the wants of the 105
30 population, for it would ——
be 345 quarters, or 345

the demand being only for 340 quarters.—But there are improvements
which may lower the relative value of produce without lowering the corn
rent, though they will lower the money rent of land. Such improvements do
not increase the productive powers of the land, but they enable us to obtain
its produce with less labour. They are rather directed to the formation of the
capital applied to the land, than to the cultivation of the land itself.

Improvements in agricultural implements, such as the plough and the
threshing machine, economy in the use of horses employed in husbandry,
and a better knowledge of the veterinary art, are of this nature. Less capital,
which is the same thing as less labour, will be employed on the land; but to
obtain the same produce, less land cannot be cultivated. Whether
improvements of this kind, however, affect corn rent, must depend on the
question, whether the difference between the produce obtained by the
employment of different portions of capital be increased, stationary, or
diminished. If four portions of capital, 50, 60, 70, 80, be employed on the
land, giving each the same results, and any improvement in the formation of
such capital should enable me to withdraw 5 from each, so that they should
be 45, 55, 65, and 75, no alteration would take place in the corn rent; but if
the improvements were such as to enable me to make the whole saving on
the largest portion of capital, that portion which is least productively
employed, corn rent would immediately fall, because the difference
between the capital most productive and the capital least productive would
be diminished; and it is this difference which constitutes rent.
Without multiplying instances, I hope enough has been said to shew, that
whatever diminishes the inequality in the produce obtained from successive
portions of capital employed on the same or on new land, tends to lower
rent; and that whatever increases that inequality, necessarily produces an
opposite effect, and tends to raise it.
In speaking of the rent of the landlord, we have rather considered it as the
proportion of the whole produce, without any reference to its exchangeable
value; but since the same cause, the difficulty of production, raises the
exchangeable value of raw produce, and raises also the proportion of raw
produce paid to the landlord for rent, it is obvious that the landlord is
doubly benefited by difficulty of production. First he obtains a greater
share, and secondly the commodity in which he is paid is of greater value.8

CHAPTER III.

ON THE RENT OF MINES.

The metals, like other things, are obtained by labour. Nature, indeed,
produces them; but it is the labour of man which extracts them from the
bowels of the earth, and prepares them for our service.
Mines, as well as land, generally pay a rent to their owner; and this rent, as
well as the rent of land, is the effect, and never the cause of the high value
of their produce.
If there were abundance of equally fertile mines, which any one might
appropriate, they could yield no rent; the value of their produce would
depend on the quantity of labour necessary to extract the metal from the
mine and bring it to market.
But there are mines of various qualities, affording very different results,
with equal quantities of labour. The metal produced from the poorest mine
that is worked, must at least have an exchangeable value, not only sufficient
to procure all the clothes, food, and other necessaries consumed by those
employed in working it, and bringing the produce to market, but also to
afford the common and ordinary profits to him who advances the stock
necessary to carry on the undertaking. The return for capital from the
poorest mine paying no rent, would regulate the rent of all the other more
productive mines. This mine is supposed to yield the usual profits of stock.
All that the other mines produce more than this, will necessarily be paid to
the owners for rent. Since this principle is precisely the same as that which
we have already laid down respecting land, it will not be necessary further
to enlarge on it.
It will be sufficient to remark, that the same general rule which regulates the
value of raw produce and manufactured commodities, is applicable also to
the metals; their value depending not on the rate of profits, nor on the rate
of wages, nor on the rent paid for mines, but on the total quantity of labour
necessary to obtain the metal, and to bring it to market.
Like every other commodity, the value of the metals is subject to variation.
Improvements may be made in the implements and machinery used in
mining, which may considerably abridge labour; new and more productive
mines may be discovered, in which, with the same labour, more metal may
be obtained; or the facilities of bringing it to market may be increased. In
either of these cases the metals would fall in value, and would therefore

exchange for a less quantity of other things. On the other hand, from the
increasing difficulty of obtaining the metal, occasioned by the greater depth
at which the mine must be worked, and the accumulation of water, or any
other contingency, its value, compared with that of other things, might be
considerably increased.
It has therefore been justly observed, that however honestly the coin of a
country may conform to its standard, money made of gold and silver is still
liable to fluctuations in value, not only to accidental and temporary, but to
permanent and natural variations, in the same manner as other commodities.
By the discovery of America and the rich mines in which it abounds, a very
great effect was produced on the natural price of the precious metals. This
effect is by many supposed not yet to have terminated. It is probable
however that all the effects on the value of the metals, resulting from the
discovery of America have long ceased, and if any fall has of late years
taken place in their value, it is to be attributed to improvements in the mode
of working the mines.
From whatever cause it may have proceeded, the effect has been so slow
and gradual, that little practical inconvenience has been felt from gold and
silver being the general medium in which the value of all other things is
estimated. Though undoubtedly a variable measure of value, there is
probably no commodity subject to fewer variations. This and the other
advantages which these metals possess, such as their hardness, their
malleability, their divisibility, and many more, have justly secured the
preference every where given to them, as a standard for the money of
civilized countries.
Having acknowledged the imperfections to which money made of gold and
silver is liable as a measure of value, from the greater or less quantity of
labour which may, under varying circumstances, be necessary for the
production of those metals, we may be permitted to make the supposition
that all these imperfections were removed, and that equal quantities of
labour could at all times obtain, from that mine which paid no rent, equal
quantities of gold. Gold would then be an invariable measure of value. The
quantity indeed would enlarge with the demand, but its value would be
invariable, and it would be eminently well calculated to measure the

varying value of all other things. I have already in a former part of this
work considered gold as endowed with this uniformity, and in the following
chapter I shall continue the supposition. In speaking therefore of varying
price, the variation will be always considered as being in the commodity,
and never in the medium in which it is estimated.

CHAPTER IV.

ON NATURAL AND MARKET PRICE.

In making labour the foundation of the value of commodities, and the
comparative quantity of labour which is necessary to their production, the
rule which determines the respective quantities of goods which shall be
given in exchange for each other, we must not be supposed to deny the
accidental and temporary deviations of the actual or market price of
commodities from this, their primary and natural price.
In the ordinary course of events, there is no commodity which continues for
any length of time to be supplied precisely in that decree of abundance,
which the wants and wishes of mankind require, and therefore there is none
which is not subject to accidental and temporary variations of price.
It is only in consequence of such variations, that capital is apportioned
precisely, in the requisite abundance and no more, to the production of the
different commodities which happen to be in demand. With the rise or fall
of price, profits are elevated above, or depressed below their general level,
and capital is either encouraged to enter into, or is warned to depart from
the particular employment in which the variation has taken place.
Whilst every man is free to employ his capital where he pleases, he will
naturally seek for it that employment which is most advantageous; he will
naturally be dissatisfied with a profit of 10 per cent., if by removing his
capital he can obtain a profit of 15 per cent. This restless desire on the part
of all the employers of stock, to quit a less profitable for a more
advantageous business, has a strong tendency to equalize the rate of profits
of all, or to fix them in such proportions, as may in the estimation of the

parties, compensate for any advantage which one may have, or may appear
to have over the other. It is perhaps very difficult to trace the steps by which
this change is effected: it is probably effected, by a manufacturer not
absolutely changing his employment, but only lessening the quantity of
capital he has in that employment. In all rich countries, there is a number of
men forming what is called the monied class; these men are engaged in no
trade, but live on the interest of their money, which is employed in
discounting bills, or in loans to the more industrious part of the community.
The bankers too employ a large capital on the same objects. The capital so
employed forms a circulating capital of a large amount, and is employed, in
larger or smaller proportions, by all the different trades of a country. There
is perhaps no manufacturer, however rich, who limits his business to the
extent that his own funds alone will allow: he has always some portion of
this floating capital, increasing or diminishing according to the activity of
the demand for his commodities. When the demand for silks increases, and
that for cloth diminishes, the clothier does not remove with his capital to the
silk trade, but he dismisses some of his workmen, he discontinues his
demand for the loan from bankers and monied men; while the case of the
silk manufacturer is the reverse: he wishes to employ more workmen, and
thus his motive for borrowing is increased: he borrows more, and thus
capital is transferred from one employment to another, without the necessity
of a manufacturer discontinuing his usual occupation. When we look to the
markets of a large town, and observe how regularly they are supplied both
with home and foreign commodities, in the quantity in which they are
required, under all the circumstances of varying demand, arising from the
caprice of taste, or a change in the amount of population, without often
producing either the effects of a glut from a too abundant supply, or an
enormously high price from the supply being unequal to the demand, we
must confess that the principle which apportions capital to each trade in the
precise amount that it is required, is more active than is generally supposed.
A capitalist, in seeking profitable employment for his funds, will naturally
take into consideration all the advantages which one occupation possesses
over another. He may therefore be willing to forego a part of his money
profit, in consideration of the security, cleanliness, ease, or any other real or
fancied advantage which one employment may possess over another.

If from a consideration of these circumstances, the profits of stock should
be so adjusted that in one trade they were 20, in another 25, and in another
30 per cent., they would probably continue permanently with that relative
difference, and with that difference only; for if any cause should elevate the
profits of one of these trades 10 per cent. either these profits would be
temporary, and would soon again fall back to their usual station, or the
profits of the others would be elevated in the same proportion.
Let us suppose that all commodities are at their natural price, and
consequently that the profits of capital in all employments are exactly at the
same rate, or differ only so much as, in the estimation of the parties, is
equivalent to any real or fancied advantage which they possess or forego.
Suppose now, that a change of fashion should increase the demand for silks,
and lessen that for woollens; their natural price, the quantity of labour
necessary to their production, would continue unaltered, but the market
price of silks would rise, and that of woollens would fall; and consequently
the profits of the silk manufacturer would be above, whilst those of the
woollen manufacturer would be below, the general and adjusted rate of
profits. Not only the profits, but the wages of the workmen would be
affected in these employments. This increased demand for silks would
however soon be supplied, by the transference of capital and labour from
the woollen to the silk manufacture; when the market prices of silks and
woollens would again approach their natural prices, and then the usual
profits would be obtained by the respective manufacturers of those
commodities.
It is then the desire, which every capitalist has, of diverting his funds from a
less to a more profitable employment, that prevents the market price of
commodities from continuing for any length of time either much above, or
much below their natural price. It is this competition which so adjusts the
exchangeable value of commodities, that after paying the wages for the
labour necessary to their production, and all other expenses required to put
the capital employed in its original state of efficiency, the remaining value
or overplus will in each trade be in proportion to the value of the capital
employed.
In the 7th chap. of the Wealth of Nations, all that concerns this question is
most ably treated. Having fully acknowledged the temporary effects which,

in particular employments of capital, may be produced on the prices of
commodities, as well as on the wages of labour, and the profits of stock, by
accidental causes, without influencing the general price of commodities,
wages, or profits, since these effects are equally operative in all stages of
society, we may be permitted to leave them entirely out of our
consideration, whilst we are treating of the laws which regulate natural
prices, natural wages, and natural profits, effects totally independent of
these accidental causes. In speaking then of the exchangeable value of
commodities, or the power of purchasing possessed by any one commodity,
I mean always that power which it would possess, if not disturbed by any
temporary or accidental cause, and which is its natural price.

CHAPTER V.

ON WAGES

Labour, like all other things which are purchased and sold, and which may
be increased or diminished in quantity, has its natural and its market price.
The natural price of labour is that price which is necessary to enable the
labourers, one with another, to subsist and to perpetuate their race, without
either increase or diminution.
The power of the labourer to support himself, and the family which may be
necessary to keep up the number of labourers, does not depend on the
quantity of money, which he may receive for wages; but on the quantity of
food, necessaries, and conveniences become essential to him from habit,
which that money will purchase. The natural price of labour, therefore,
depends on the price of the food, necessaries, and conveniences required for
the support of the labourer and his family. With a rise in the price of food
and necessaries, the natural price of labour will rise; with the fall in their
price, the natural price of labour will fall.
With the progress of society, the natural price of labour has always a
tendency to rise, because one of the principal commodities by which its
natural price is regulated, has a tendency to become dearer, from the greater
difficulty of producing it. As, however, the improvements in agriculture, the

discovery of new markets, whence provisions may be imported, may for a
time counteract the tendency to a rise in the price of necessaries, and may
even occasion their natural price to fall, so will the same causes produce the
correspondent effects on the natural price of labour.
The natural price of all commodities excepting raw produce and labour has
a tendency to fall, in the progress of wealth and population; for though, on
one hand, they are enhanced in real value, from the rise in the natural price
of the raw material of which they are made, this is more than
counterbalanced by the improvements in machinery, by the better division
and distribution of labour, and by the increasing skill, both in science and
art, of the producers.
The market price of labour is the price which is really paid for it, from the
natural operation of the proportion of the supply to the demand; labour is
dear when it is scarce, and cheap when it is plentiful. However much the
market price of labour may deviate from its natural price, it has, like
commodities, a tendency to conform to it.
It is when the market price of labour exceeds its natural price, that the
condition of the labourer is flourishing and happy, that he has it in his
power to command a greater proportion of the necessaries and enjoyments
of life, and therefore to rear a healthy and numerous family. When however,
by the encouragement which high wages give to the increase of population,
the number of labourers is increased, wages again fall to their natural price,
and indeed from a re-action sometimes fall below it.
When the market price of labour is below its natural price, the condition of
the labourers is most wretched: then poverty deprives them of those
comforts which custom renders absolute necessaries. It is only after their
privations have reduced their number, or the demand for labour has
increased, that the market price of labour will rise to its natural price, and
that the labourer will have the moderate comforts, which the natural price of
wages will afford.
Notwithstanding the tendency of wages to conform to their natural rate,
their market rate may, in an improving society, for an indefinite period, be
constantly above it; for no sooner may the impulse, which an increased
capital gives to a new demand for labour be obeyed, than another increase

of capital may produce the same effect; and thus if the increase of capital be
gradual and constant, the demand for labour may give a continued stimulus
to an increase of people.
Capital is that part of the wealth of a country, which is employed in
production, and consists of food, clothing, tools, raw material, machinery,
&c. necessary to give effect to labour.
Capital may increase in quantity at the same time that its value rises. An
addition may be made to the food and clothing of a country, at the same
time that more labour may be required to produce the additional quantity
than before; in that case not only the quantity, but the value of capital will
rise.
Or capital may increase without its value increasing, and even while its
value is actually diminishing; not only may an addition be made to the food
and clothing of a country, but the addition may be made by the aid of
machinery, without any increase, and even with an absolute diminution in
the proportional quantity of labour required to produce them. The quantity
of capital may increase, while neither the whole together, nor any part of it
singly, will have a greater value than before.
In the first case, the natural price of wages, which always depends on the
price of food, clothing, and other necessaries, will rise; in the second, it will
remain stationary, or fall; but in both cases the market rate of wages will
rise, for in proportion to the increase of capital will be the increase in the
demand for labour; in proportion to the work to be done will be the demand
for those who are to do it.
In both cases too the market price of labour will rise above its natural price;
and in both cases it will have a tendency to conform to its natural price, but
in the first case this agreement will be most speedily effected. The situation
of the labourer will be improved, but not much improved; for the increased
price of food and necessaries will absorb a large portion of his increased
wages; consequently a small supply of labour, or a trifling increase in the
population, will soon reduce the market price to the then increased natural
price of labour.

In the second case, the condition of the labourer will be very greatly
improved; he will receive increased money wages, without having to pay
any increased price, and perhaps, even a diminished price for the
commodities which he and his family consume; and it will not be till after a
great addition has been made to the population, that the market price of
wages will again sink to their then low and reduced natural price.
Thus, then, with every improvement of society, with every increase in its
capital, the market wages of labour will rise; but the permanence of their
rise will depend on the question, whether the natural price of wages has also
risen; and this again will depend on the rise in the natural price of those
necessaries, on which the wages of labour are expended.
It is not to be understood that the natural price of wages, estimated even in
food and necessaries, is absolutely fixed and constant. It varies at different
times in the same country, and very materially differs in different countries.
It essentially depends on the habits and customs of the people. An English
labourer would consider his wages under their natural rate, and too scanty
to support a family, if they enabled him to purchase no other food than
potatoes, and to live in no better habitation than a mud cabin; yet these
moderate demands of nature are often deemed sufficient in countries where
"man's life is cheap," and his wants easily satisfied. Many of the
conveniences now enjoyed in an English cottage, would have been thought
luxuries at an early period of our history.
From manufactured commodities always falling, and raw produce always
rising, with the progress of society, such a disproportion in their relative
value is at length created, that in rich countries a labourer, by the sacrifice
of a very small quantity only of his food, is able to provide liberally for all
his other wants.
Independently of the variations in the value of money, which necessarily
affect wages, but which we have here supposed to have no operation, as we
have considered money to be uniformly of the same value, wages are
subject to a rise or fall from two causes:
1st. The supply and demand of labourers.

2dly. The price of the commodities on which the wages of labour are
expended.
In different stages of society, the accumulation of capital, or of the means of
employing labour, is more or less rapid, and must in all cases depend on the
productive powers of labour. The productive powers of labour are generally
greatest when there is an abundance of fertile land: at such periods
accumulation is often so rapid, that labourers cannot be supplied with the
same rapidity as capital.
It has been calculated, that under favourable circumstances population may
be doubled in twenty-five years; but under the same favourable
circumstances, the whole capital of a country might possibly be doubled in
a shorter period. In that case, wages during the whole period would have a
tendency to rise, because the demand for labour would increase still faster
than the supply.
In new settlements, where the arts and knowledge of countries far advanced
in refinement are introduced, it is probable that capital has a tendency to
increase faster than mankind: and if the deficiency of labourers were not
supplied by more populous countries, this tendency would very much raise
the price of labour. In proportion as these countries become populous, and
land of a worse quality is taken into cultivation, the tendency to an increase
of capital diminishes; for the surplus produce remaining, after satisfying the
wants of the existing population, must necessarily be in proportion to the
facility of production, viz. to the smaller number of persons employed in
production. Although, then, it is probable, that under the most favourable
circumstances, the power of production is still greater than that of
population, it will not long continue so; for the land being limited in
quantity, and differing in quality; with every increased portion of capital
employed on it, there will be a decreased rate of production, whilst the
power of population continues always the same.
In those countries where there is abundance of fertile land, but where, from
the ignorance, indolence, and barbarism of the inhabitants, they are exposed
to all the evils of want and famine, and where it has been said that
population presses against the means of subsistence, a very different
remedy should be applied from that which is necessary in long settled

countries, where, from the diminishing rate of the supply of raw produce,
all the evils of a crowded population are experienced. In the one case, the
misery proceeds from the inactivity of the people. To be made happier, they
need only to be stimulated to exertion; with such exertion, no increase in
the population can be too great, as the powers of production are still greater.
In the other case, the population increases faster than the funds required for
its support. Every exertion of industry, unless accompanied by a diminished
rate of increase in the population, will add to the evil, for production cannot
keep pace with it.
In some countries of Europe, and many of Asia, as well as in the islands in
the South Seas, the people are miserable, either from a vicious government
or from habits of indolence, which make them prefer present ease and
inactivity, though without security against want, to a moderate degree of
exertion, with plenty of food and necessaries. By diminishing their
population, no relief would be afforded, for productions would diminish in
as great, or even in a greater, proportion. The remedy for the evils under
which Poland and Ireland suffer, which are similar to those experienced in
the South Seas, is to stimulate exertion, to create new wants, and to implant
new tastes; for those countries must accumulate a much larger amount of
capital, before the diminished rate of production will render the progress of
capital necessarily less rapid than the progress of population. The facility
with which the wants of the Irish are supplied, permits that people to pass a
great part of their time in idleness: if the population were diminished, this
evil would increase, because wages would rise, and therefore the labourer
would be enabled, in exchange for a still less portion of his labour, to obtain
all that his moderate wants require.
Give to the Irish labourer a taste for the comforts and enjoyments which
habit has made essential to the English labourer, and he would be then
content to devote a further portion of his time to industry, that he might be
enabled to obtain them. Not only would all the food now produced be
obtained, but a vast additional value in those other commodities, to the
production of which the now unemployed labour of the country might be
directed. In those countries, where the labouring classes have the fewest
wants, and are contented with the cheapest food, the people are exposed to
the greatest vicissitudes and miseries. They have no place of refuge from
calamity; they cannot seek safety in a lower station; they are already so low,

that they can fall no lower. On any deficiency of the chief article of their
subsistence, there are few substitutes of which they can avail themselves,
and dearth to them is attended with almost all the evils of famine.
In the natural advance of society, the wages of labour will have a tendency
to fall, as far as they are regulated by supply and demand; for the supply of
labourers will continue to increase at the same rate, whilst the demand for
them will increase at a slower rate. If, for instance, wages were regulated by
a yearly increase of capital, at the rate of 2 per cent., they would fall when it
accumulated only at the rate of 1½ per cent. They would fall still lower
when it increased only at the rate of 1, or ½ per cent., and would continue to
do so until the capital became stationary, when wages also would become
stationary, and be only sufficient to keep up the numbers of the actual
population. I say that, under these circumstances, wages would fall, if they
were regulated only by the supply and demand of labourers; but we must
not forget, that wages are also regulated by the prices of the commodities on
which they are expended.
As population increases, these necessaries will be constantly rising in price,
because more labour will be necessary to produce them. If, then, the money
wages of labour should fall, whilst every commodity on which the wages of
labour were expended rose, the labourer would be doubly affected, and
would be soon totally deprived of subsistence. Instead, therefore, of the
money wages of labour falling, they would rise; but they would not rise
sufficiently to enable the labourer to purchase as many comforts and
necessaries as he did before the rise in the price of those commodities. If his
annual wages were before 24l., or six quarters of corn when the price was
4l. per quarter, he would probably receive only the value of five quarters
when corn rose to 5l. per quarter. But five quarters would cost 25l.; he
would therefore receive an addition in his money wages, though with that
addition he would be unable to furnish himself with the same quantity of
corn and other commodities, which he had before consumed in his family.
Notwithstanding, then, that the labourer would be really worse paid, yet this
increase in his wages would necessarily diminish the profits of the
manufacturer; for his goods would sell at no higher price, and yet the
expense of producing them would be increased. This, however, will be
considered in our examination into the principles which regulate profits.

It appears, then, that the same cause which raises rent, namely, the
increasing difficulty of providing an additional quantity of food with the
same proportional quantity of labour, will also raise wages; and therefore if
money be of an unvarying value, both rent and wages will have a tendency
to rise with the progress of wealth and population.
But there is this essential difference between the rise of rent and the rise of
wages. The rise in the money value of rent is accompanied by an increased
share of the produce; not only is the landlord's money rent greater, but his
corn rent also; he will have more corn, and each defined measure of that
corn will exchange for a greater quantity of all other goods which have not
been raised in value. The fate of the labourer will be less happy: he will
receive more money wages, it is true, but his corn wages will be reduced;
and not only his command of corn, but his general condition will be
deteriorated, by his finding it more difficult to maintain the market rate of
wages above their natural rate. While the price of corn rises 10 per cent.,
wages will always rise less than 10 per cent., but rent will always rise more;
the condition of the labourer will generally decline, and that of the landlord
will always be improved.
When wheat was at 4l. per quarter, suppose the labourer's wages to be 24l.
per annum, or the value of six quarters of wheat, and suppose half his
wages to be expended on wheat, and the other half, or 12l., on other things.
He would receive
£24.14. £4.4.8. 5.83 qrs.
25.10. 4.10. 5.66 qrs.
when wheat was at or the value of
26.8. 4.16. 5.50 qrs.
27.8.6 5.2.10 5.33 qrs.

He would receive these wages to enable him to live just as well, and no
better, than before; for when corn was at 4l. per quarter, he would expend
for three quarters of corn,

at 4l. per qr. £12
and on other things 12
——
24

When wheat was 4l. 4s. 8d., three quarters, which he and
his family consumed, would cost him £12.14
other things not altered in price 12
——
24.14

When at 4l. 10s., three quarters of wheat would cost £13.10
and other things 12
——
25.10

When at 4l. 16s., three qrs. of wheat £14.8
Other things 12
——
26.8

When at 5.2.10l. three quarters of wheat would cost £15.8.6.
Other things 12
——
27.8.6

In proportion as corn became dear, he would receive less corn wages, but
his money wages would always increase, whilst his enjoyments on the
above supposition, would be precisely the same. But as other commodities
would be raised in price in proportion as raw produce entered into their
composition, he would have more to pay for some of them. Although his
tea, sugar, soap, candles, and house rent, would probably be no dearer, he

would pay more for his bacon, cheese, butter, linen, shoes, and cloth; and
therefore, even with the above increase of wages, his situation would be
comparatively worse. But it may be said that I have been considering the
effect of wages on price, on the supposition that gold, or the metal from
which money is made, is the produce of the country in which wages varied;
and that the consequences which I have deduced agree little with the actual
state of things, because gold is a metal of foreign production. The
circumstance however, of gold being a foreign production, will not
invalidate the truth of the argument, because it may be shewn, that whether
it were found at home, or were imported from abroad, the effects ultimately
and indeed immediately would be the same.
When wages rise, it is generally because the increase of wealth and capital
have occasioned a new demand for labour, which will infallibly be attended
with an increased production of commodities. To circulate these additional
commodities, even at the same prices as before, more money is required,
more of this foreign commodity from which money is made, and which can
only be obtained by importation. Whenever a commodity is required in
greater abundance than before, its relative value rises comparatively with
those commodities with which its purchase is made. If more hats were
wanted, their price would rise, and more gold would be given for them. If
more gold were required, gold would rise, and hats would fall in price, as a
greater quantity of hats and of all other things would then be necessary to
purchase the same quantity of gold. But in the case supposed, to say that
commodities will rise, because wages rise, is to affirm a positive
contradiction; for we first say that gold will rise in relative value in
consequence of demand, and secondly, that it will fall in relative value
because prices will rise, two effects which are totally incompatible with
each other. To say that commodities are raised in price, is the same thing as
to say that money is lowered in relative value; for it is by commodities that
the relative value of gold is estimated. If then all commodities rose in price,
gold could not come from abroad to purchase those dear commodities, but it
would go from home to be employed with advantage in purchasing the
comparatively cheaper foreign commodities. It appears then, that the rise of
wages will not raise the prices of commodities, whether the metal from
which money is made be produced at home or in a foreign country. All
commodities cannot rise at the same time without an addition to the

quantity of money. This addition could not be obtained at home, as we have
already shewn; nor could it be imported from abroad. To purchase any
additional quantity of gold from abroad, commodities at home must be
cheap, not dear. The importation of gold, and a rise in the price of all home-
made commodities with which gold is purchased or paid for, are effects
absolutely incompatible. The extensive use of paper money does not alter
this question, for paper money conforms, or ought to conform to the value
of gold, and therefore its value is influenced by such causes only as
influence the value of that metal.
These then are the laws by which wages are regulated, and by which the
happiness of far the greatest part of every community is governed. Like all
other contracts, wages should be left to the fair and free competition of the
market, and should never be controlled by the interference of the
legislature.
The clear and direct tendency of the poor laws, is in direct opposition to
these obvious principles: it is not, as the legislature benevolently intended,
to amend the condition of the poor, but to deteriorate the condition of both
poor and rich; instead of making the poor rich, they are calculated to make
the rich poor; and whilst the present laws are in force, it is quite in the
natural order of things that the fund for the maintenance of the poor should
progressively increase, till it has absorbed all the neat revenue of the
country, or at least so much of it as the state shall leave to us, after
satisfying its own never failing demands for the public expenditure.9
This pernicious tendency of these laws is no longer a mystery, since it has
been fully developed by the able hand of Mr. Malthus; and every friend to
the poor must ardently wish for their abolition. Unfortunately however they
have been so long established, and the habits of the poor have been so
formed upon their operation, that to eradicate them with safety from our
political system requires the most cautious and skilful management. It is
agreed by all who are most friendly to a repeal of these laws, that if it be
desirable to prevent the most overwhelming distress to those for whose
benefit they were erroneously enacted, their abolition should be effected by
the most gradual steps.

It is a truth which admits not a doubt, that the comforts and well being of
the poor cannot be permanently secured without some regard on their part,
or some effort on the part of the legislature, to regulate the increase of their
numbers, and to render less frequent among them early and improvident
marriages. The operation of the system of poor laws has been directly
contrary to this. They have rendered restraint superfluous, and have invited
imprudence by offering it a portion of the wages of prudence and industry.
The nature of the evil points out the remedy. By gradually contracting the
sphere of the poor laws; by impressing on the poor the value of
independence, by teaching them that they must look not to systematic or
casual charity, but to their own exertions for support, that prudence and
forethought are neither unnecessary nor unprofitable virtues, we shall by
degrees approach a sounder and more healthful state.
No scheme for the amendment of the poor laws merits the least attention,
which has not their abolition for its ultimate object; and he is the best friend
to the poor, and to the cause of humanity, who can point out how this end
can be attained with the most security, and at the same time with the least
violence. It is not by raising in any manner different from the present, the
fund from which the poor are supported, that the evil can be mitigated. It
would not only be no improvement, but it would be an aggravation of the
distress which we wish to see removed, if the fund were increased in
amount, or were levied according to some late proposals, as a general fund
from the country at large. The present mode of its collection and application
has served to mitigate its pernicious effects. Each parish raises a separate
fund for the support of its own poor. Hence it becomes an object of more
interest and more practicability to keep the rates low, than if one general
fund were raised for the relief of the poor of the whole kingdom. A parish is
much more interested in an economical collection of the rate, and a sparing
distribution of relief, when the whole saving will be for its own benefit,
than if hundreds of other parishes were to partake of it.
It is to this cause, that we must ascribe the fact of the poor laws not having
yet absorbed all the net revenue of the country; it is to the rigour with which
they are applied, that we are indebted for their not having become
overwhelmingly oppressive. If by law every human being wanting support
could be sure to obtain it, and obtain it in such a degree as to make life

tolerably comfortable, theory would lead us to expect that all other taxes
together would be light compared with the single one of poor rates. The
principle of gravitation is not more certain than the tendency of such laws to
change wealth and power into misery and weakness; to call away the
exertions of labour from every object, except that of providing mere
subsistence; to confound all intellectual distinction; to busy the mind
continually in supplying the body's wants; until at last all classes should be
infected with the plague of universal poverty. Happily these laws have been
in operation during a period of progressive prosperity, when the funds for
the maintenance of labour have regularly increased, and when an increase
of population would be naturally called for. But if our progress should
become more slow; if we should attain the stationary state, from which I
trust we are yet far distant, then will the pernicious nature of these laws
become more manifest and alarming; and then too will their removal be
obstructed by many additional difficulties.

CHAPTER V*.

ON PROFITS.

The profits of stock in different employments, having been shewn to bear a
proportion to each other, and to have a tendency to vary all in the same
degree and in the same direction, it remains for us to consider what is the
cause of the permanent variations in the rate of profit, and the consequent
permanent alterations in the rate of interest.

We have seen that the price10 of corn is regulated by the quantity of labour
necessary to produce it, with that portion of capital which pays no rent. We
have seen too that all manufactured commodities rise and fall in price, in
proportion as more or less labour becomes necessary to their production.
Neither the farmer who cultivates that quality of land, which regulates
price, nor the manufacturer, who manufactures goods, sacrifice any portion
of the produce for rent. The whole value of their commodities is divided
into two portions only: one constitutes the profits of stock, the other the
wages of labour.

Supposing corn and manufactured goods always to sell at the same price,
profits would be high or low in proportion as wages were low or high. But
suppose corn to rise in price because more labour is necessary to produce it;
that cause will not raise the price of manufactured goods in the production
of which no additional quantity of labour is required. If then wages
continued the same, profits would remain the same; but if, as is absolutely
certain, wages should rise with the rise of corn, then profits would
necessarily fall.
If a manufacturer always sold his goods for the same money, for 1000l. for
example, his profits would depend on the price of the labour necessary to
manufacture those goods. His profits would be less when wages amounted
to 800l. than when he paid only 600l. In proportion then as wages rose,
would profits fall. But if the price of raw produce would increase, it may be
asked, whether the farmer at least would not have the same rate of profits,
although he should pay an additional price for wages? Certainly not: for he
will not only have to pay, in common with the manufacturer, an increase of
wages to each labourer he employs, but he will be obliged either to pay
rent, or to employ an additional number of labourers to obtain the same
produce; and the rise in the price of raw produce will be proportioned only
to that rent, or that additional number, and will not compensate him for the
rise of wages.
If both the manufacturer and farmer employed ten men, on wages rising
from 24l. to 25l. per annum. per man, the whole sum paid by each would be
250l. instead of 240l. This is, however, the whole addition that would be
paid by the manufacturer to obtain the same quantity of commodities; but
the farmer on new land would probably be obliged to employ an additional
man, and therefore to pay an additional sum of 25l. for wages; and the
farmer on the old land would be obliged to pay precisely the same
additional sum of 25l. for rent; without which additional labour, corn would
not have risen. One will therefore have to pay 275l. for wages alone, the
other, for wages and rent together; each 25l. more than the manufacturer:
for this latter 25l. they are compensated by the addition to the price of raw
produce, and therefore their profits still conform to the profits of the
manufacturer. As this proposition is important, I will endeavour still further
to elucidate it.

We have shewn that in early stages of society, both the landlord's and the
labourer's share of the value of the produce of the earth, would be but small;
and that it would increase in proportion to the progress of wealth, and the
difficulty of procuring food. We have shewn too, that although the value of
the labourer's portion will be increased by the high value of food, his real
share will be diminished; whilst that of the landlord will not only be raised
in value, but will also be increased in quantity.
The remaining quantity of the produce of the land, after the landlord and
labourer are paid, necessarily belongs to the farmer, and constitutes the
profits of his stock. But it may be alleged, that though as society advances,
his proportion of the whole produce will be diminished, yet as it will rise in
value, he, as well as the landlord and labourer, may, notwithstanding,
receive a greater value.
It may be said for example, that when corn rose from 4l. to 10l., the 180
quarters obtained from the best land would sell for 1800l. instead of 720l.;
and therefore, though the landlord and labourer be proved to have a greater
value for rent and wages, still the value of the farmer's profit might also be
augmented. This however is impossible, as I shall now endeavour to shew.
In the first place, the price of corn would rise only in proportion to the
increased difficulty of growing it on land of a worse quality.
It has been already remarked, that if the labour of ten men will, on land of a
certain quality, obtain 180 quarters of wheat, and its value be 4l. per quarter,
or 720l.; and if the labour of ten additional men, will on the same or any
other land, produce only 170 quarters in addition, wheat would rise from 4l.
to 4l. 4s. 8d.; for 170: 180:: 4l.: 4l. 4s. 8d. In other words, as for the
production of 170 quarters, the labour of ten men is necessary, in the one
case, and only that of 9.44 in the other, the rise would be as 9.44 to 10, or as
4l. to 4l. 4s. 8d. In the same manner it might be shewn, that if the labour of
ten additional men would only produce 160 quarters, the price would
further rise to 4l. 10s.; if 150, to 4l. 16s., &c. &c.

But when 180 quarters were produced on the land paying
no rent, and its price was 4l. per quarter, it sold for £720

And when 170 quarters were produced on the land paying
no rent, and the price rose to 4l. 4s. 8d. it still sold for 720
So, 160 quarters at 4l. 10s. produce 720
And 150 quarters at 4l. 16s. produce the same sum of 720

Now it is evident, that if out of these equal values, the farmer is at one time
obliged to pay wages regulated by the price of wheat at 4l., and at other
times at higher prices, the rate of his profits will diminish in proportion to
the rise in the price of corn.
In this case, therefore, I think it is clearly demonstrated that a rise in the
price of corn, which increases the money wages of the labourer, diminishes
the money value of the farmer's profits.
But the case of the farmer of the old and better land will be in no way
different; he also will have increased wages to pay, and will never retain
more of the value of the produce, however high may be its price, than 720l.
to be divided between himself and his always equal number of labourers; in
proportion therefore as they get more, he must retain less.
When the price of corn was at 4l., the whole 180 quarters belonged to the
cultivator, and he sold it for 720l. When corn rose to 4l. 4s. 8d. he was
obliged to pay the value of ten quarters out of his 180 for rent, consequently
the remaining 170 yielded him no more than 720l.: when it rose further to
4l. 10s. he paid twenty quarters, or their value, for rent, and consequently
only retained 160 quarters, which yielded the same sum of 720l.
It will be seen then, that whatever rise may take place in the price of corn,
in consequence of the necessity of employing more labour and capital to
obtain a given additional quantity of produce, such rise will always be
equalled in value by the additional rent, or additional labour employed; so
that whether corn sells for 4l., 4l. 10s., or 5l. 2s. 10d., the farmer will obtain
for that which remains to him, after paying rent, the same real value. Thus
we see, that whether the produce belonging to the farmer be 180, 170, 160,
or 150 quarters, he always obtains the same sum of 720l. for it; the price
increasing in an inverse proportion to the quantity.
Rent then, it appears, always falls on the consumer, and never on the
farmer; for if the produce of his farm should uniformly be 180 quarters,

with the rise of price, he would retain the value of a less quantity for
himself, and give the value of a larger quantity to his landlord; but the
deduction would be such as to leave him always the same sum of 720l.
It will be seen too that, in all cases, the same sum of 720l. must be divided
between wages and profits. If the value of the raw produce from the land
exceed this value, it belongs to rent, whatever may be its amount. If there be
no excess, there will be no rent. Whether wages or profits rise or fall, it is
this sum of 720l. from which they must both be provided. On the one hand,
profits can never rise so high as to absorb so much of this 720l., that enough
will not be left to furnish the labourers with absolute necessaries; on the
other hand, wages can never rise so high as to leave no portion of this sum
for profits.
Thus in every case, agricultural, as well as manufacturing profits are
lowered by a rise in the price of raw produce, if it be accompanied by a rise
of wages.11 If the farmer gets no additional value for the corn which
remains to him after paying rent, if the manufacturer gets no additional
value for the goods which he manufactures, and if both are obliged to pay a
greater value in wages, can any point be more clearly established than that
profits must fall, with a rise of wages?
The farmer then, although he pays no part of his landlord's rent, that being
always regulated by the price of produce, and invariably falling on the
consumers, has however a very decided interest in keeping rent low, or
rather in keeping the natural price of produce low. As a consumer of raw
produce, and of those things into which raw produce enters as a component
part, he will in common with all other consumers, be interested in keeping
the price low. But he is most materially concerned with the high price of
corn as it affects wages. With every rise in the price of corn, he will have to
pay out of an equal and unvarying sum of 720l., an additional sum for
wages to the ten men whom he is supposed constantly to employ. We have
seen in treating on wages, that they invariably rise with the rise in the price
of raw produce. On a basis assumed for the purpose of calculation, page
106, it will be seen that if when wheat is at 4l. per quarter, wages should be
24l. per annum.

£ s. d. £ s. d.

4 4 8 24 14 0
4 10 0 25 10 0
When Wheat is at wages would be
4 16 0 26 8 0
5 2 10 27 8 6

Now, of the unvarying fund of 720l. to be distributed between labourers and
farmers,

£ s. d. £ s. £ s. d.
4 0 0 240 0 480 0 0
4 4 8 247 0 473 0 0
When the price of the labourer will the former will
Wheat at
4 10 8 receive
255 0 receive
465 0 0
4 16 8 264 0 456 0 0
5 2 8 274 5 445 15 12

And supposing that the original capital of the farmer was 3000l., the profits
of his stock being in the first instance 480l., would be at the rate of 16 per
cent. When his profits fell to 473l., they would be at the rate of 15.7 per
cent.
465 15.5
456 15.2
445 14.8

But the rate of profits will fall still more, because the capital of the farmer,
it must be recollected, consists in a great measure of raw produce, such as
his corn and hay-ricks, his unthreshed wheat and barley, his horses and
cows, which would all rise in price in consequence of the rise of produce.
His absolute profits would fall from 480l. to 445l. 15s.; but if from the
cause which I have just stated, his capital should rise from 3000l. to 3200l.
the rate of his profits would, when corn was at 5l. 2s. 10d., be under 14 per
cent.
If a manufacturer had also employed 3000l. in his business, he would be
obliged in consequence of the rise of wages, to increase his capital, in order
to be enabled to carry on the same business. If his commodities sold before
for 720l., they would continue to sell at the same price; but the wages of

labour, which were before 240l., would rise when corn was at 5l. 2s. 10d. to
274l. 5s. In the first case he would have a balance of 480l. as profit on
3000l., in the second he would have a profit only of 445l. 15s., on an
increased capital, and therefore his profits would conform to the altered rate
of those of the farmer.
There are few commodities which are not more or less affected in their
price by the rise of raw produce, because some raw material from the land
enters into the composition of most commodities. Cotton goods, linen, and
cloth, will all rise in price with the rise of wheat; but they rise on account of
the greater quantity of labour expended on the raw material from which
they are made, and not because more was paid by the manufacturer to the
labourers whom he employed on those commodities.
In all cases, commodities rise because more labour is expended on them,
and not because the labour which is expended on them is at a higher value.
Articles of jewellery, of iron, of plate, and of copper, would not rise,
because none of the raw produce from the surface of the earth enters into
their composition.
It may be said that I have taken it for granted, that money wages would rise
with a rise in the price of raw produce, but that this is by no means a
necessary consequence, as the labourer may be contented with fewer
enjoyments. It is true that the wages of labour may previously have been at
a high level, and that they may bear some reduction. If so, the fall of profits
will be checked; but it is impossible to conceive that the money price of
wages should fall, or remain stationary with a gradually increasing price of
necessaries; and therefore it may be taken for granted that, under ordinary
circumstances, no permanent rise takes place in the price of necessaries,
without occasioning, or having been preceded by a rise in wages.
The effects produced on profits, would have been the same, or nearly the
same, if there had been any rise in the price of those other necessaries,
besides food, on which the wages of labour are expended. The necessity
which the labourer would be under of paying an increased price for such
necessaries, would oblige him to demand more wages; and whatever
increases wages, necessarily reduces profits. But suppose the price of silks,
velvets, furniture, and any other commodities, not required by the labourer,

to rise in consequence of more labour being expended on them, would not
that affect profits? certainly not: for nothing can affect profits but a rise in
wages; silks and velvets are not consumed by the labourer, and therefore
cannot raise wages.
It is to be understood that I am speaking of profits generally. I have already
remarked that the market price of a commodity may exceed its natural or
necessary price, as it may be produced in less abundance than the new
demand for it requires. This however is but a temporary effect. The high
profits on capital employed in producing that commodity will naturally
attract capital to that trade; and as soon as the requisite funds are supplied,
and the quantity of the commodity is duly increased, its price will fall, and
the profits of the trade will conform to the general level. A fall in the
general rate of profits is by no means incompatible with a partial rise of
profits in particular employments. It is through the inequality of profits, that
capital is moved from one employment to another. Whilst then general
profits are falling, and gradually settling at a lower level in consequence of
the rise of wages, and the increasing difficulty of supplying the increasing
population with necessaries, the profits of the farmer, may, for an interval of
some little duration, be above the former level. An extraordinary stimulus
may be also given for a certain time, to a particular branch of foreign and
colonial trade; but the admission of this fact by no means invalidates the
theory, that profits depend on high or low wages, wages on the price of
necessaries, and the price of necessaries chiefly on the price of food,
because all other requisites may be increased almost without limit.
It should be recollected that prices always vary in the market, and in the
first instance, through the comparative state of demand and supply.
Although cloth could be furnished at 40s. per yard, and give the usual
profits of stock, it may rise to 60 or 80s. from a general change of fashion,
or from any other cause which should suddenly and unexpectedly increase
the demand, or diminish the supply of it. The makers of cloth will for a time
have unusual profits, but capital will naturally flow to that manufacture, till
the supply and demand are again at their fair level, when the price of cloth
will again sink to 40s., its natural or necessary price. In the same manner,
with every increased demand for corn, it may rise so high as to afford more
than the general profits to the farmer. If there be plenty of fertile land, the
price of corn will again fall to its former standard, after the requisite

quantity of capital has been employed in producing it, and profits will be as
before; but if there be not plenty of fertile land, if, to produce this additional
quantity, more than the usual quantity of capital and labour be required,
corn will not fall to its former level. Its natural price will be raised, and the
farmer, instead of obtaining permanently larger profits, will find himself
obliged to be satisfied with the diminished rate which is the inevitable
consequence of the rise of wages, produced by the rise of necessaries.
The natural tendency of profits then is to fall; for, in the progress of society
and wealth, the additional quantity of food required is obtained by the
sacrifice of more and more labour. This tendency, this gravitation as it were
of profits, is happily checked at repeated intervals by the improvements in
machinery, connected with the production of necessaries, as well as by
discoveries in the science of agriculture which enable us to relinquish a
portion of labour before required, and therefore to lower the price of the
prime necessary of the labourer. The rise in the price of necessaries and in
the wages of labour is however limited; for as soon as wages should be
equal (as in the case formerly stated) to 720l., the whole receipts of the
farmer, there must be an end of accumulation; for no capital can then yield
any profit whatever, and no additional labour can be demanded, and
consequently population will have reached its highest point. Long indeed
before this period, the very low rate of profits will have arrested all
accumulation, and almost the whole produce of the country, after paying the
labourers, will be the property of the owners of land and the receivers of
tithes and taxes.
Thus, taking the former very imperfect basis as the grounds of my
calculation, it would appear that when corn was at 20l. per quarter, the
whole net income of the country would belong to the landlords, for then the
same quantity of labour that was originally necessary to produce 180
quarters, would be necessary to produce 36; since 20l. : 4l. :: 180 : 36. The
farmer then, who originally produced 180 quarters, (if any such there were,
for the old and new capital employed on the land would be so blended, that
it could in no way be distinguished,) would sell the
180 qrs. at 20l. per qr. or £3600
to landlord for rent, being the difference
The value of 144grs. 2880 ——
between 36 and 180 qrs.
36 grs. 720

the value of 50 grs. to labourers ten in number 720

leaving nothing whatever for profit.
At this price of 20l. the labourers would continue to consume
three quarters each per annum or £60
And on other commodities they would expend 12
——
72 for each labourer
——
And therefore ten labourers would cost 720l. per annum.

In all these calculations I have been desirous only to elucidate the principle,
and it is scarcely necessary to observe, that my whole basis is assumed at
random, and merely for the purpose of exemplification. The results though
different in degree, would have been the same in principle, however
accurately I might have set out in stating the difference in the number of
labourers necessary to obtain the successive quantities of corn required by
an increasing population, the quantity consumed by the labourer's family,
&c. &c. My object has been to simplify the subject, and I have therefore
made no allowance for the increasing price of the other necessaries, besides
food, of the labourer; an increase which would be the consequence of the
increased value of the raw material from which they are made, and which
would of course further increase wages, and lower profits.
I have already said, that long before this state of prices was become
permanent, there would be no motive for accumulation; for no one
accumulates but with a view to make his accumulation productive, and it is
only when so employed that it operates on profits. Without a motive there
could be no accumulation, and consequently such a state of prices never
could take place. The farmer and manufacturer can no more live without
profit, than the labourer without wages. Their motive for accumulation will
diminish with every diminution of profit, and will cease altogether when
their profits are so low as not to afford them an adequate compensation for
their trouble, and the risk which they must necessarily encounter in
employing their capital productively.
I must again observe, that the rate of profits would fall much more rapidly
than I have estimated in my calculation: for the value of the produce being
what I have stated it under the circumstances supposed, the value of the

farmer's stock would be greatly increased from its necessarily consisting of
many of the commodities which had risen in value. Before corn could rise
from 4l. to 12l. his capital would probably be doubled in exchangeable
value, and be worth 6000l. instead of 3000l. If then his profit were 180l., or
6 per cent. on his original capital, profits would not at that time be really at
a higher rate than 3 per cent.; for 6000l. at 3 per cent. gives 180l.; and on
those terms only could a new farmer with 6000l. money in his pocket enter
into the farming business.
Many trades would derive some advantage, more or less, from the same
source. The brewer, the distiller, the clothier, the linen manufacturer, would
be partly compensated for the diminution of their profits, by the rise in the
value of their stock of raw and finished materials; but a manufacturer of
hardware, of jewellery, and of many other commodities, as well as those
whose capitals uniformly consisted of money, would be subject to the
whole fall in the rate of profits, without any compensation whatever.
We should also expect that, however the rate of the profits of stock might
diminish in consequence of the accumulation of capital on the land, and the
rise of wages, yet the aggregate amount of profits would increase. Thus
supposing that, with repeated accumulations of 100,000l., the rate of profit
should fall from 20 to 19, to 18, to 17 per cent., a constantly diminishing
rate, we should expect that the whole amount of profits received by those
successive owners of capital would be always progressive; that it would be
greater when the capital was 200,000l., than when 100,000l.; still greater
when 300,000l.; and so on, increasing, though at a diminishing rate, with
every increase of capital. This progression however is only true for a certain
time: thus 19 per cent. on 200,000l. is more than 20 on 100,000l.; again 18
per cent. on 300,000l. is more than 19 per cent. on 200,000l.; but after
capital has accumulated to a large amount, and profits have fallen, the
further accumulation diminishes the aggregate of profits. Thus suppose the
accumulation should be 1,000,000l., and the profits 7 per cent. the whole
amount of profits will be 70,000l.; now if an addition of 100,000l. capital be
made to the million, and profits should fall to 6 per cent., 66,000l. or a
diminution of 4000l. will be received by the owners of stock, although the
whole amount of stock will be increased from 1,000,000l. to 1,100,000l.

There can, however, be no accumulation of capital, so long as stock yields
any profit at all, without its yielding not only an increase of produce, but an
increase of value. By employing 100,000l. additional capital, no part of the
former capital will be rendered less productive. The produce of the land and
labour of the country must increase, and its value will be raised, not only by
the value of the addition which is made to the former quantity of
productions, but by the new value which is given to the whole produce of
the land, by the increased difficulty of producing the last portion of it,
which new value always goes to rent. When the accumulation of capital,
however, becomes very great, notwithstanding this increased value, it will
be so distributed that a less value than before will be appropriated to profits,
while that which is devoted to rent and wages will be increased. Thus with
successive additions of 100,000l. to capital, with a fall in the rate of profits,
from 20 to 19, to 18, to 17 per cent. &c. the productions annually obtained
will increase in quantity, and be of more than the whole additional value,
which the additional capital is calculated to produce. From 20,000l. it will
rise to more than 39,000l. and then to more than 57,000l., and when the
capital employed is a million, as we before supposed, if 100,000l. more be
added to it, and the aggregate of profits is actually lower than before, more
than 6000l. will nevertheless be added to the revenue of the country, but it
will be to the revenue of the landlords; they will obtain more than the
additional produce, and will from their situation be enabled to encroach
even on the former gains of the capitalist. Thus, suppose the price of corn to
be 4l. per quarter, and that therefore, as we before calculated, of every 720l.
remaining to the farmer after payment of his rent, 480l. were retained by
him, and 240l. were paid to his labourers; when the price rose to 6l. per
quarter, he would be obliged to pay his labourers 300l. and retain only 420l.
for profits. Now if the capital employed were so large as to yield a hundred
thousand times 720l. or 72,000,000l. the aggregate of profits would be
48,000,000l. when wheat was at 4l. per quarter; and if by employing a
larger capital, 105,000 times 720l. were obtained when wheat was at 6l., or
75,600,000l., profits would actually fall from 48,000,000l. to 44,100,000l.
or 105,000 times 420l., and wages would rise from 24,000,000l. to
31,500,000l. Wages would rise because more labourers would be employed,
in proportion to capital; and each labourer would receive more money
wages; but the condition of the labourer, as we have already shewn, would
be worse, inasmuch as he would be able to command a less quantity of the

produce of the country. The only real gainers would be the landlords; they
would receive higher rents, first, because produce would be of a higher
value, and secondly, because they would have a greatly increased
proportion.
Although a greater value is produced, a greater proportion of what remains
of that value, after paying rent, is consumed by the producers, and it is this,
and this alone, which regulates profits. Whilst the land yields abundantly,
wages may temporarily rise, and the producers may consume more than
their accustomed proportion; but the stimulus which will thus be given to
population, will speedily reduce the labourers to their usual consumption.
But when poor lands are taken into cultivation, or when more capital and
labour are expended on the old land, with a less return of produce, the effect
must be permanent. A greater proportion of that part of the produce which
remains to be divided, after paying rent, between the owners of stock and
the labourers, will be apportioned to the latter. Each man may, and probably
will, have a less absolute quantity; but as more labourers are employed in
proportion to the whole produce retained by the farmer, the value of a
greater proportion of the whole produce will be absorbed by wages, and
consequently the value of a smaller proportion will be devoted to profits.
This will necessarily be rendered permanent by the laws of nature, which
have limited the productive powers of the land.
Thus we again arrive at the same conclusion which we have before
attempted to establish:—that in all countries, and at all times, profits depend
on the quantity of labour requisite to provide necessaries for the labourers,
on that land or with that capital which yields no rent. The effects then of
accumulation will be different in different countries, and will depend
chiefly on the fertility of the land. However extensive a country may be
where the land is of a poor quality, and where the importation of food is
prohibited, the most moderate accumulations of capital will be attended
with great reductions in the rate of profit, and a rapid rise in rent; and on the
contrary a small but fertile country, particularly if it freely permits the
importation of food, may accumulate a large stock of capital without any
great diminution in the rate of profits, or any great increase in the rent of
land. In the Chapter on Wages, we have endeavoured to shew that the
money price of commodities would not be raised by a rise of wages, either
on the supposition that gold, the standard of money, was the produce of this

country, or that it was imported from abroad. But if it were otherwise, if the
prices of commodities were permanently raised by high wages, the
proposition would not be less true, which asserts that high wages invariably
affect the employers of labour, by depriving them of a portion of their real
profits. Supposing the hatter, the hosier, and the shoemaker, each paid 10l.
more wages in the manufacture of a particular quantity of their
commodities, and that the price of hats, stockings, and shoes, rose by a sum
sufficient to repay the manufacturer the 10l.; their situation would be no
better than if no such rise took place. If the hosier sold his stockings for
110l. instead of 100l., his profits would be precisely the same money
amount as before; but as he would obtain in exchange for this equal sum,
one tenth less of hats, shoes, and every other commodity, and as he could
with his former amount of savings employ fewer labourers at the increased
wages, and purchase fewer raw materials at the increased prices, he would
be in no better situation than if his money profits had been really
diminished in amount, and every thing had remained at its former price.
Thus then I have endeavoured to shew, first, that a rise of wages would not
raise the price of commodities, but would invariably lower profits; and
secondly, that if the prices of commodities could be raised, still the effect on
profits would be the same; and that in fact the value of the medium only in
which prices and profits are estimated would be lowered.

CHAPTER VI.

ON FOREIGN TRADE.

No extension of foreign trade will immediately increase the amount of
value in a country, although it will very powerfully contribute to increase
the mass of commodities, and therefore the sum of enjoyments. As the
value of all foreign goods is measured by the quantity of the produce of our
land and labour, which is given in exchange for them, we should have no
greater value, if by the discovery of new markets, we obtained double the
quantity of foreign goods in exchange for a given quantity of ours. If by the
purchase of English goods to the amount of 1000l. a merchant can obtain a
quantity of foreign goods, which he can sell in the English market for

1,200l., he will obtain 20 per cent. profit by such an employment of his
capital; but neither his gains, nor the value of the commodities imported,
will be increased or diminished by the greater or smaller quantity of foreign
goods obtained. Whether, for example, he imports twenty-five or fifty pipes
of wine, his interest can be no way affected, if at one time the twenty-five
pipes, and at another the fifty pipes, equally sell for 1,200l. In either case
his profit will be limited to 200l., or 20 per cent. on his capital; and in either
case the same value will be imported into England. If the fifty pipes sold for
more than 1,200l., the profits of this individual merchant would exceed the
general rate of profits, and capital would naturally flow into this
advantageous trade, till the fall of the price of wine had brought every thing
to the former level.
It has indeed been contended, that the great profits which are sometimes
made by particular merchants in foreign trade, will elevate the general rate
of profits in the country, and that the abstraction of capital from other
employments, to partake of the new and beneficial foreign commerce, will
raise prices generally, and thereby increase profits. It has been said, by high
authority, that less capital being necessarily devoted to the growth of corn,
to the manufacture of cloth, hats, shoes, &c. while the demand continues
the same, the price of these commodities will be so increased, that the
farmer, hatter, clothier, and shoemaker, will have an increase of profits, as
well as the foreign merchant.13
They who hold this argument agree with me, that the profits of different
employments have a tendency to conform to one another; to advance and
recede together. Our variance consists in this: They contend, that the
equality of profits will be brought about by the general rise of profits; and I
am of opinion, that the profits of the favoured trade will speedily subside to
the general level.
For, first, I deny that less capital will necessarily be devoted to the growth
of corn, to the manufacture of cloth, hats, shoes, &c., unless the demand for
these commodities be diminished; and if so, their price will not rise. In the
purchase of foreign commodities, either the same, a larger, or a less portion
of the produce of the land and labour of England will be employed. If the
same portion be so employed, then will the same demand exist for cloth,
shoes, corn, and hats, as before, and the same portion of capital will be

devoted to their production. If, in consequence of the price of foreign
commodities being cheaper, a less portion of the annual produce of the land
and labour of England is employed in the purchase of foreign commodities,
more will remain for the purchase of other things. If there be a greater
demand for hats, shoes, corn, &c. than before, which there may be, the
consumers of foreign commodities having an additional portion of their
revenue disposable, the capital is also disposable with which the greater
value of foreign commodities was before purchased; so that with the
increased demand for corn, shoes, &c. there exists also the means of
procuring an increased supply, and therefore neither prices nor profits can
permanently rise. If more of the produce of the land and labour of England
be employed in the purchase of foreign commodities, less can be employed
in the purchase of other things, and therefore fewer hats, shoes, &c. will be
required. At the same time that capital is liberated from the production of
shoes, hats, &c. more must be employed in manufacturing those
commodities with which foreign commodities are purchased; and
consequently in all cases the demand for foreign and home commodities
together, as far as regards value, is limited by the revenue and capital of the
country. If one increases, the other must diminish. If the importation of
wine, given in exchange for the same quantity of English commodities be
doubled, the people of England can either consume double the quantity of
wine that they did before, or the same quantity of wine and a greater
quantity of English commodities. If my revenue had been 1000l., with
which I purchased annually one pipe of wine for 100l. and a certain
quantity of English commodities for 900l.; when wine fell to 50l. per pipe, I
might lay out the 50l. saved, either in the purchase of an additional pipe of
wine, or in the purchase of more English commodities. If I bought more
wine, and every wine-drinker did the same, the foreign trade would not be
in the least disturbed; the same quantity of English commodities would be
exported in exchange for wine, and we should receive double the quantity,
though not double the value of wine. But if I, and others contented
ourselves with the same quantity of wine as before, fewer English
commodities would be exported, and the wine-drinkers might either
consume the commodities which were before exported, or any others for
which they had an inclination. The capital required for their production
would be supplied by the capital liberated from the foreign trade.

There are two ways in which capital may be accumulated: it may be saved
either in consequence of increased revenue, or of diminished consumption.
If my profits are raised from 1000l. to 1200l. while my expenditure
continues the same, I accumulate annually 200l. more than I did before. If I
save 200l. out of my expenditure while my profits continue the same, the
same effect will be produced; 200l. per annum will be added to my capital.
The merchant who imported wine after profits had been raised from 20 per
cent. to 40 per cent., instead of purchasing his English goods for 1000l.,
must purchase them for 857l. 2s. 10d., still selling the wine which he
imports in return for those goods for 1200l.; or, if he continued to purchase
his English goods for 1000l., must raise the price of his wine to 1400l.; he
would thus obtain 40 instead of 20 per cent. profit on his capital; but if, in
consequence of the cheapness of all the commodities on which his revenue
was expended, he and all other consumers could save the value of 200l. out
of every 1000l. they before expended, they would more effectually add to
the real wealth of the country; in one case, the savings would be made in
consequence of an increase of revenue, in the other in consequence of
diminished expenditure.
If, by the introduction of machinery, the generality of the commodities on
which revenue was expended fell 20 per cent. in value, I should be enabled
to save as effectually as if my revenue had been raised 20 per cent.; but in
one case the rate of profits is stationary, in the other it is raised 20 per cent.
—If, by the introduction of cheap foreign goods, I can save 20 per cent.
from my expenditure, the effect will be precisely the same as if machinery
had lowered the expense of their production, but profits would not be
raised.
It is not, therefore, in consequence of the extension of the market that the
rate of profits is raised, although such extension may be equally efficacious
in increasing the mass of commodities, and may thereby enable us to
augment the funds destined for the maintenance of labour, and the materials
on which labour may be employed. It is quite as important to the happiness
of mankind, that our enjoyments should be increased by the better
distribution of labour, by each country producing those commodities for
which by its situation, its climate, and its other natural or artificial
advantages it is adapted, and by their exchanging them for the commodities

of other countries, as that they should be augmented by a rise in the rate of
profits.
It has been my endeavour to shew throughout this work, that the rate of
profits can never be increased but by a fall in wages, and that there can be
no permanent fall of wages but in consequence of a fall of the necessaries
on which wages are expended. If, therefore, by the extension of foreign
trade, or by improvements in machinery, the food and necessaries of the
labourer can be brought to market at a reduced price, profits will rise. If,
instead of growing our own corn, or manufacturing the clothing and other
necessaries of the labourer, we discover a new market from which we can
supply ourselves with these commodities at a cheaper price, wages will fall
and profits rise; but if the commodities obtained at a cheaper rate, by the
extension of foreign commerce, or by the improvement of machinery, be
exclusively the commodities consumed by the rich, no alteration will take
place in the rate of profits. The rate of wages would not be affected,
although wine, velvets, silks, and other expensive commodities, should fall
50 per cent., and consequently profits would continue unaltered.
Foreign trade, then, though highly beneficial to a country, as it increases the
amount and variety of the objects on which revenue may be expended, and
affords, by the abundance and cheapness of commodities, incentives to
saving, and to the accumulation of capital, has no tendency to raise the
profits of stock, unless the commodities imported be of that description on
which the wages of labour are expended.
The remarks which have been made respecting foreign trade, apply equally
to home trade. The rate of profits is never increased by a better distribution
of labour, by the invention of machinery, by the establishment of roads and
canals, or by any means of abridging labour either in the manufacture or in
the conveyance of goods. These are causes which operate on price, and
never fail to be highly beneficial to consumers; since they enable them with
the same labour, or with the value of the produce of the same labour, to
obtain in exchange a greater quantity of the commodity to which the
improvement is applied; but they have no effect whatever on profit. On the
other hand, every diminution in the wages of labour raises profits, but
produces no effect on the price of commodities. One is advantageous to all
classes, for all classes are consumers; the other is beneficial only to

producers; they gain more, but every thing remains at its former price. In
the first case, they get the same as before; but every thing on which their
gains are expended, is diminished in exchangeable value.
The same rule which regulates the relative value of commodities in one
country, does not regulate the relative value of the commodities exchanged
between two or more countries.
Under a system of perfectly free commerce, each country naturally devotes
its capital and labour to such employments as are most beneficial to each.
This pursuit of individual advantage is admirably connected with the
universal good of the whole. By stimulating industry, by rewarding
ingenuity, and by using most efficaciously the peculiar powers bestowed by
nature, it distributes labour most effectively and most economically: while,
by increasing the general mass of productions, it diffuses general benefit,
and binds together by one common tie of interest and intercourse, the
universal society of nations throughout the civilized world. It is this
principle which determines that wine shall be made in France and Portugal,
that corn shall be grown in America and Poland, and that hardware and
other goods shall be manufactured in England.
In one and the same country, profits are, generally speaking, always on the
same level; or differ only as the employment of capital may be more or less
secure and agreeable. It is not so between different countries. If the profits
of capital employed in Yorkshire, should exceed those of capital employed
in London, capital would speedily move from London to Yorkshire, and an
equality of profits would be effected; but if in consequence of the
diminished rate of production in the lands of England, from the increase of
capital and population, wages should rise, and profits fall, it would not
follow that capital and population would necessarily move from England to
Holland, or Spain, or Russia, where profits might be higher.
If Portugal had no commercial connexion with other countries, instead of
employing a great part of her capital and industry in the production of
wines, with which she purchases for her own use the cloth and hardware of
other countries, she would be obliged to devote a part of that capital to the
manufacture of those commodities, which she would thus obtain probably
inferior in quality as well as quantity.

The quantity of wine which she shall give in exchange for the cloth of
England, is not determined by the respective quantities of labour devoted to
the production of each, as it would be, if both commodities were
manufactured in England, or both in Portugal.
England may be so circumstanced, that to produce the cloth may require the
labour of 100 men for one year; and if she attempted to make the wine, it
might require the labour of 120 men for the same time. England would
therefore find it her interest to import wine, and to purchase it by the
exportation of cloth.
To produce the wine in Portugal, might require only the labour of eighty
men for one year, and to produce the cloth in the same country, might
require the labour of ninety men for the same time. It would therefore be
advantageous for her to export wine in exchange for cloth. This exchange
might even take place, notwithstanding that the commodity imported by
Portugal could be produced there with less labour than in England. Though
she could make the cloth with the labour of ninety men, she would import it
from a country where it required the labour of 100 men to produce it,
because it would be advantageous to her rather to employ her capital in the
production of wine, for which she would obtain more cloth from England,
than she could produce by diverting a portion of her capital from the
cultivation of vines to the manufacture of cloth.
Thus, England would give the produce of the labour of 100 men for the
produce of the labour of 80. Such an exchange could not take place between
the individuals of the same country. The labour of 100 Englishmen cannot
be given for that of 80 Englishmen, but the produce of the labour of 100
Englishmen may be given for the produce of the labour of 80 Portuguese,
60 Russians, or 120 East Indians. The difference in this respect, between a
single country and many, is easily accounted for, by considering the
difficulty with which capital moves from one country to another, to seek a
more profitable employment, and the activity with which it invariably
passes from one province to another in the same country.14
It would undoubtedly be advantageous to the capitalists of England, and to
the consumers in both countries, that under such circumstances, the wine
and the cloth should both be made in Portugal, and therefore that the capital

and labour of England employed in making cloth, should be removed to
Portugal for that purpose. In that case, the relative value of these
commodities would be regulated by the same principle, as if one were the
produce of Yorkshire, and the other of London; and in every other case, if
capital freely flowed towards those countries where it could be most
profitably employed, there could be no difference in the rate of profit, and
no other difference in the real or labour price of commodities, than the
additional quantity of labour required to convey them to the various markets
where they were to be sold.
Experience however shews, that the fancied or real insecurity of capital,
when not under the immediate control of its owner, together with the natural
disinclination which every man has to quit the country of his birth and
connexions, and intrust himself with all his habits fixed, to a strange
government and new laws, check the emigration of capital. These feelings,
which I should be sorry to see weakened, induce most men of property to be
satisfied with a low rate of profits in their own country, rather than seek a
more advantageous employment for their wealth in foreign nations.
Gold and silver having been chosen for the general medium of circulation,
they are, by the competition of commerce, distributed in such proportions
amongst the different countries of the world, as to accommodate themselves
to the natural traffic which would take place if no such metals existed, and
the trade between countries were purely a trade of barter.
Thus, cloth cannot be imported into Portugal, unless it sell there for more
gold than it cost in the country from which it was imported; and wine
cannot be imported into England, unless it will sell for more there than it
cost in Portugal. If the trade were purely a trade of barter, it could only
continue whilst England could make cloth so cheap as to obtain a greater
quantity of wine with a given quantity of labour, by manufacturing cloth
than by growing vines; and also whilst the industry of Portugal were
attended by the reverse effects. Now suppose England to discover a process
for making wine, so that it should become her interest rather to grow it than
import it: she would naturally divert a portion of her capital from the
foreign trade to the home trade; she would cease to manufacture cloth for
exportation, and would grow wine for herself. The money price of these
commodities would be regulated accordingly; wine would fall here while

cloth continued at its former price, and in Portugal no alteration would take
place in the price of either commodity. Cloth would continue for some time
to be exported from this country, because its price would continue to be
higher in Portugal than here; but money instead of wine would be given in
exchange for it, till the accumulation of money here, and its diminution
abroad, should so operate on the relative value of cloth in the two countries,
that it would cease to be profitable to export it. If the improvement in
making wine were of a very important description, it might become
profitable for the two countries to exchange employments; for England to
make all the wine, and Portugal all the cloth, consumed by them: but this
could be effected only by a new distribution of the precious metals, which
should raise the price of cloth in England, and lower it in Portugal. The
relative price of wine would fall in England in consequence of the real
advantage from the improvement of its manufacture; that is to say, its
natural price would fall: the relative price of cloth would rise there from the
accumulation of money.
Thus, suppose before the improvement in making wine in England, the
price of wine here were 50l. per pipe, and the price of a certain quantity of
cloth were 45l., whilst in Portugal the price of the same quantity of wine
was 45l., and that of the same quantity of cloth 50l.; wine would be
exported from Portugal with a profit of 5l., and cloth from England with a
profit of the same amount.
Suppose that, after the improvement, wine falls to 45l. in England, the cloth
continuing at the same price. Every transaction in commerce is an
independent transaction. Whilst a merchant can buy cloth in England for
45l., and sell it with the usual profit in Portugal, he will continue to export it
from England. His business is simply to purchase English cloth, and to pay
for it by a bill of exchange, which he purchases with Portuguese money. It
is to him of no importance what becomes of this money; he has discharged
his debt by the remittance of the bill. His transaction is undoubtedly
regulated by the terms on which he can obtain this bill, but they are known
to him at the time; and the causes which may influence the market price of
bills, or the rate of exchange, is no consideration of his.
If the markets be favourable for the exportation of wine from Portugal to
England, the exporter of the wine will be a seller of a bill, which will be

purchased either by the importer of the cloth, or by the person who sold him
his bill; and thus without the necessity of money passing from either
country, the exporters in each country will be paid for their goods. Without
having any direct transaction with each other, the money paid in Portugal by
the importer of cloth will be paid to the Portuguese exporter of wine; and in
England by the negociation of the same bill, the exporter of the cloth will be
authorized to receive its value from the importer of wine.
But if the prices of wine were such that no wine could be exported to
England, the importer of cloth would equally purchase a bill; but the price
of that bill would be higher, from the knowledge which the seller of it
would possess, that there was no counter bill in the market by which he
could ultimately settle the transactions between the two countries: he might
know that the gold or silver money which he received in exchange for his
bill, must be actually exported to his correspondent in England, to enable
him to pay the demand which he had authorized to be made upon him, and
he might therefore charge in the price of his bill all the expenses to be
incurred, together with his fair and usual profit.
If then this premium for a bill on England should be equal to the profit on
importing cloth, the importation would of course cease; but if the premium
on the bill were only 2 per cent., if to be enabled to pay a debt in England of
100l., 102l. should be paid in Portugal, whilst cloth which cost 45l. would
sell for 50l., cloth would be imported, bills would be bought, and money
would be exported, till the diminution of money in Portugal, and its
accumulation in England, had produced such a state of prices, as would
make it no longer profitable to continue these transactions.
But the diminution of money in one country, and its increase in another, do
not operate on the price of one commodity only, but on the prices of all, and
therefore the price of wine and cloth will be both raised in England, and
both lowered in Portugal. The price of cloth from being 45l. in one country,
and 50l. in the other, would probably fall to 49l. or 48l. in Portugal, and rise
to 46l. or 47l. in England, and not afford a sufficient profit after paying a
premium for a bill, to induce any merchant to import that commodity.
It is thus that the money of each country is apportioned to it in such
quantities only as may be necessary to regulate a profitable trade of barter.

England exported cloth in exchange for wine, because by so doing, her
industry was rendered more productive to her; she had more cloth and wine
than if she had manufactured both for herself; and Portugal imported cloth,
and exported wine, because the industry of Portugal could be more
beneficially employed for both countries in producing wine. Let there be
more difficulty in England in producing cloth, or in Portugal in producing
wine, or let there be more facility in England in producing wine, or in
Portugal in producing cloth, and the trade must immediately cease.
No change whatever takes place in the circumstances of Portugal; but
England finds that she can employ her labour more productively in the
manufacture of wine, and instantly the trade of barter between the two
countries changes. Not only is the exportation of wine from Portugal
stopped, but a new distribution of the precious metals takes place, and her
importation of cloth is also prevented.
Both countries would probably find it their interest to make their own wine
and their own cloth; but this singular result would take place: in England,
though wine would be cheaper, cloth would be elevated in price, more
would be paid for it by the consumer; while in Portugal the consumers, both
of cloth and of wine, would be able to purchase those commodities cheaper.
In the country where the improvement was made, prices would be
enhanced; in that where no change had taken place, but where they had
been deprived of a profitable branch of foreign trade, prices would fall.
This, however, is only a seeming advantage to Portugal, for the quantity of
cloth and wine together produced in that country would be diminished,
while the quantity produced in England would be increased. Money would
in some degree have changed its value in the two countries—it would be
lowered in England, and raised in Portugal. Estimated in money, the whole
revenue of Portugal would be diminished; estimated in the same medium,
the whole revenue of England would be increased.
Thus then it appears, that the improvement of a manufacture in any country
tends to alter the distribution of the precious metals amongst the nations of
the world: it tends to increase the quantity of commodities, at the same time
that it raises general prices in the country where the improvement takes
place.

To simplify the question, I have been supposing the trade between two
countries to be confined to two commodities, to wine and cloth, but it is
well known that many and various articles enter into the list of exports and
imports. By the abstraction of money from one country, and the
accumulation of it in another, all commodities are affected in price, and
consequently encouragement is given to the exportation of many more
commodities besides money, which will therefore prevent so great an effect
from taking place on the value of money in the two countries, as might
otherwise be expected.
Beside the improvements in arts and machinery, there are various other
causes which are constantly operating on the natural course of trade, and
which interfere with the equilibrium, and the relative value of money.
Bounties on exportation or importation, new taxes on commodities,
sometimes by their direct, and at other times by their indirect operation,
disturb the natural trade of barter, and produce a consequent necessity of
importing or exporting money, in order that prices may be accommodated
to the natural course of commerce; and this effect is produced not only in
the country where the disturbing cause takes place, but, in a greater or less
degree, in every country of the commercial world.
This will in some measure account for the different value of money in
different countries; it will explain to us why the prices of home
commodities, and those of great bulk, are, independently of other causes,
higher in those countries where manufactures flourish. Of two countries
having precisely the same population, and the same quantity of land of
equal fertility in cultivation, with the same knowledge too of agriculture,
the prices of raw produce will be highest in that where the greater skill, and
the better machinery is used in the manufacture of exportable commodities.
The rate of profits will probably differ but little; for wages, or the real
reward of the labourer, may be the same in both; but those wages, as well as
raw produce, will be rated higher in money in that country, into which, from
the advantages attending their skill and machinery, an abundance of money
is imported in exchange for their goods.
Of these two countries, if one had the advantage in the manufacture of
goods of one quality, and the other in the manufacture of goods of another
quality, there would be no decided influx of the precious metals into either;

but if the advantage very heavily preponderated in favour of either, that
effect would be inevitable.
In the former part of this work, we have assumed for the purpose of
argument, that money always continued of the same value; we are now
endeavouring to shew that besides the ordinary variations in the value of
money, and those which are common to the whole commercial world, there
are also partial variations to which money is subject in particular countries;
and in fact, that the value of money is never the same in any two countries,
depending as it does on relative taxation, on manufacturing skill, on the
advantages of climate, natural productions, and many other causes.
Although, however, money is subject to such perpetual variations, and
consequently the prices of the commodities which are common to most
countries, are also subject to considerable difference, yet no effect will be
produced on the rate of profits, either from the influx or efflux of money.
Capital will not be increased, because the circulating medium is augmented.
If the rent paid by the farmer to his landlord, and the wages to his labourers,
be 20 per cent. higher in one country than another, and if at the same time
the nominal value of the farmer's capital be 20 per cent. more, he will
receive precisely the same rate of profits, although he should sell his raw
produce 20 per cent. higher.
Profits, it cannot be too often repeated, depend on wages; not on nominal,
but real wages; not on the number of pounds that may be annually paid to
the labourer, but on the number of days' work necessary to obtain those
pounds. Wages may therefore be precisely the same in two countries: they
may bear too the same proportion to rent, and to the whole produce
obtained from the land, although in one of those countries the labourer
should receive ten shillings per week, and in the other twelve.
In the early states of society, when manufactures have made little progress,
and the produce of all countries is nearly similar, consisting of the bulky
and most useful commodities, the value of money in different countries will
be chiefly regulated by their distance from the mines which supply the
precious metals; but as the arts and improvements of society advance, and
different nations excel in particular manufactures, although distance will

still enter into the calculation, the value of the precious metals will be
chiefly regulated by the superiority of those manufactures.
Suppose all nations to produce corn, cattle, and coarse clothing only, and
that it was by the exportation of such commodities that gold could be
obtained from the countries which produced them, or from those who held
them in subjection; gold would naturally be of greater exchangeable value
in Poland than in England, on account of the greater expense of sending
such a bulky commodity as corn the more distant voyage, and also the
greater expense attending the conveying of gold to Poland.
This difference in the value of gold, or which is the same thing, this
difference in the price of corn in the two countries, would exist although the
facilities of producing corn in England should far exceed those of Poland,
from the greater fertility of the land, and the superiority in the skill and
implements of the labourer.
If however Poland should be the first to improve her manufactures, if she
should succeed in making a commodity which was generally desirable,
including great value in little bulk, or if she should be exclusively blessed
with some natural production, generally desirable, and not possessed by
other countries, she would obtain an additional quantity of gold in exchange
for this commodity, which would operate on the price of her corn, cattle,
and coarse clothing. The disadvantage of distance would probably be more
than compensated by the advantage of having an exportable commodity of
great value, and money would be permanently of lower value in Poland
than in England. If on the contrary, the advantage of skill and machinery
were possessed by England, another reason would be added to that which
before existed, why gold should be less valuable in England than in Poland,
and why corn, cattle, and clothing, should be at a higher price in the former
country.
These I believe to be the only two causes which regulate the comparative
value of money in the different countries of the world; for although taxation
occasions a disturbance of the equilibrium of money, it does so by depriving
the country in which it is imposed of some of the advantages attending skill,
industry, and climate.

It has been my endeavour carefully to distinguish between a low value of
money, and a high value of corn, or any other commodity with which
money may be compared. These have been generally considered as
meaning the same thing; but it is evident, that when corn rises from five to
ten shillings a bushel, it may be owing either to a fall in the value of money,
or to a rise in the value of corn. Thus we have seen, that from the necessity
of having recourse successively to land of a worse and worse quality, in
order to feed an increasing population, corn must rise in relative value to
other things. If therefore money continue permanently of the same value,
corn will exchange for more of such money, that is to say, it will rise in
price. The same rise in the price of corn will be produced by such
improvement of machinery in manufactures, as shall enable us to
manufacture commodities with peculiar advantages: for the influx of money
will be the consequence; it will fall in value, and therefore exchange for less
corn. But the effects resulting from a high price of corn when produced by
the rise in the value of corn, and when caused by a fall in the value of
money, are totally different. In both cases the money price of wages will
rise, but if it be in consequence of the fall in the value of money, not only
wages and corn, but all other commodities will rise. If the manufacturer has
more to pay for wages, he will receive more for his manufactured goods,
and the rate of profits will remain unaffected. But when the rise in the price
of corn is the effect of the difficulty of production, profits will fall; for the
manufacturer will be obliged to pay more wages, and will not be enabled to
remunerate himself by raising the price of his manufactured commodity.
Any improvement in the facility of working the mines, by which the
precious metals may be produced with a less quantity of labour, will sink
the value of money generally. It will then exchange for fewer commodities
in all countries; but when any particular country excels in manufactures, so
as to occasion an influx of money towards it, the value of money will be
lower, and the prices of corn and labour will be relatively higher in that
country, than in any other.
This higher value of money will not be indicated by the exchange; bills may
continue to be negotiated at par, although the prices of corn and labour
should be 10, 20, or 30 per cent. higher in one country than another. Under
the circumstances supposed, such a difference of prices is the natural order
of things, and the exchange can only be at par when a sufficient quantity of

money is introduced into the country excelling in manufactures, so as to
raise the price of its corn and labour. If foreign countries should prohibit the
exportation of money, and could successfully enforce obedience to such a
law, they might indeed prevent the rise in the prices of the corn and labour
of the manufacturing country; for such rise can only take place after the
influx of the precious metals, supposing paper money not to be used; but
they could not prevent the exchange from being very unfavourable to them.
If England were the manufacturing country, and it were possible to prevent
the importation of money, the exchange with France, Holland, and Spain,
might be 5, 10, or 20 per cent. against those countries.
Whenever the current of money is forcibly stopped, and when money is
prevented from settling at its just level, there are no limits to the possible
variations of the exchange. The effects are similar to those which follow,
when a paper money, not exchangeable for specie at the will of the holder,
is forced into circulation. Such a currency is necessarily confined to the
country where it is issued: it cannot, when too abundant, diffuse itself
generally amongst other countries. The level of circulation is destroyed, and
the exchange will inevitably be unfavourable to the country where it is
excessive in quantity: just so would be the effects of a metallic circulation,
if by forcible means, by laws which could not be evaded, money should be
detained in a country, when the stream of trade gave it an impetus towards
other countries.
When each country has precisely the quantity of money which it ought to
have, money will not indeed be of the same value in each, for with respect
to many commodities it may differ 5, 10, or even 20 per cent., but the
exchange will be at par. One hundred pounds in England, or the silver
which is in 100l., will purchase a bill of 100l., or an equal quantity of silver
in France, Spain, or Holland.
In speaking of the exchange and the comparative value of money in
different countries, we must not in the least refer to the value of money
estimated in commodities, in either country. The exchange is never
ascertained by estimating the comparative value of money in corn, cloth, or
any commodity whatever, but by estimating the value of the currency of one
country, in the currency of another.

It may also be ascertained by comparing it with some standard common to
both countries. If a bill on England for 100l. will purchase the same
quantity of goods in France or Spain, that a bill on Hamburgh for the same
sum will do, the exchange between Hamburgh and England is at par; but if
a bill on England for 130l., will purchase no more than a bill on Hamburgh
for 100l., the exchange is 30 per cent. against England.
In England 100l. may purchase a bill, or the right of receiving 101l. in
Holland, 102l. in France, and 105l. in Spain. The exchange with England is,
in that case, said to be 1 per cent. against Holland, 2 per cent. against
France, and 5 per cent. against Spain. It indicates that the level of currency
is higher than it should be in those countries, and the comparative value of
their currencies, and that of England, would be immediately restored to par,
by abstracting from theirs, or by adding to that of England.
Those who maintained that our currency was depreciated during the last ten
years, when the exchange varied from 20 to 30 per cent. against this
country, have never contended, as they have been accused of doing, that
money could not be more valuable in one country than another, as
compared with various commodities; but they did contend, that 130l. could
not be detained in England, when it was of no more value, estimated in the
money of Hamburgh, or of Holland, than 100l.
By sending 130l. good English pounds sterling to Hamburgh, even at an
expense of 5l., I should be possessed there of 125l.; what then could make
me consent to give 130l. for a bill which would give me 100l. in Hamburgh,
but that my pounds were not good pounds sterling?—they were
deteriorated, were degraded in intrinsic value below the pounds sterling of
Hamburgh, and if actually sent there, at an expense of 5l., would sell only
for 100l. With metallic pounds sterling, it is not denied that my 130l. would
procure me 125l. in Hamburgh, but with paper pounds sterling I can only
obtain 100l.; and yet it is maintained that 130l. in paper, is of equal value
with 130l. in silver or gold.
Some indeed more reasonably maintained, that 130l. in paper was not of
equal value with 130l. in metallic money; but they said that it was the
metallic money which had changed its value, and not the paper money.
They wished to confine the meaning of the word depreciation to an actual

fall of value, and not to a comparative difference between the value of
money, and the standard by which by law it is regulated. One hundred
pounds of English money was formerly of equal value with, and could
purchase 100l. of Hamburgh money: in any other country a bill of 100l. on
England, or on Hamburgh, could purchase precisely the same quantity of
commodities. To obtain the same things, I was lately obliged to give 130l.
English money, when Hamburgh could obtain them for 100l. Hamburgh
money. If English money was of the same value then as before, Hamburgh
money must have risen in value. But where is the proof of this? How is it to
be ascertained whether English money has fallen, or Hamburgh money has
risen? there is no standard by which this can be determined. It is a plea
which admits of no proof, and can neither be positively affirmed, nor
positively contradicted. The nations of the world must have been early
convinced, that there was no standard of value in nature, to which we might
unerringly refer, and therefore chose a medium, which, on the whole
appeared to them less variable than any other commodity.
To this standard we must conform till the law is changed, and till some
other commodity is discovered, by the use of which we shall obtain a more
perfect standard, than that which we have established. While gold is
exclusively the standard in this country, money will be depreciated, when a
pound sterling is not of equal value with 5 dwts. and 3 grs. of standard gold,
and that, whether gold rises or falls in general value.

CHAPTER VII.

ON TAXES.

Taxes are a portion of the produce of the land and labour of a country,
placed at the disposal of the government; and are always ultimately paid,
either from the capital, or from the revenue of the country.
We have already shewn how the capital of a country is either fixed or
circulating, according as it is of a more or of a less durable nature. It is
difficult to define strictly, where the distinction between circulating and
fixed capital begins; for there are almost infinite degrees in the durability of

capital. The food of a country is consumed and reproduced, at least once in
every year; the clothing of the labourer is probably not consumed and
reproduced in less than two years; whilst his house and furniture are
calculated to endure for a period of ten or twenty years.
When the annual productions of a country exceed its annual consumption, it
is said to increase its capital; when its annual consumption at least is not
replaced by its annual production, it is said to diminish its capital. Capital
may therefore be increased by an increased production, or by a diminished
consumption.
If the consumption of the government, when increased by the levy of
additional taxes, be met either by an increased production, or by a
diminished consumption on the part of the people, the taxes will fall upon
revenue, and the national capital will remain unimpaired; but if there be no
increased production or diminished consumption on the part of the people,
the taxes will necessarily fall on capital.
In proportion as the capital of a country is diminished, its productions will
be necessarily diminished; and therefore, if the same expenditure on the
part of the people and of the government continue, with a constantly
diminishing annual reproduction, the resources of the people and the state
will fall away with increasing rapidity, and distress and ruin will follow.
Notwithstanding the immense expenditure of the English government
during the last twenty years, there can be little doubt but that the increased
production on the part of the people has more than compensated for it. The
national capital has not merely been unimpaired, it has been greatly
increased, and the annual revenue of the people, even after the payment of
their taxes, is probably greater at the present time than at any former period
of our history.
For the proof of this we might refer to the increase of population—to the
extension of agriculture—to the increase of shipping and manufactures—to
the building of docks—to the opening of numerous canals, as well as to
many other expensive undertakings; all denoting an increase both of capital
and of annual production.

There are no taxes which have not a tendency to impede accumulation,
because there are none which may not be considered as checking
production, and as causing the same effects as a bad soil or climate, a
diminution of skill or industry, a worse distribution of labour, or the loss of
some useful machinery; and although some taxes will produce these effects
in a much greater degree than others, it must be confessed that the great evil
of taxation is to be found, not so much in any selection of its objects, as in
the general amount of its effects taken collectively.
Taxes are not necessarily taxes on capital, because they are laid on capital;
nor on income, because they are laid on income. If from my income of
1000l. per annum, I am required to pay 100l., it will really be a tax on my
income, should I be content with the expenditure of the remaining 900l.; but
it will be a tax on capital, if I continue to spend 1000l.
The capital from which my income of 1000l. is derived may be of the value
of 10,000l.; a tax of one per cent. on such capital would be 100l.; but my
capital would be unaffected, if after paying this tax, I in like manner
contented myself with the expenditure of 900l.
The desire which every man has to keep his station in life, and to maintain
his wealth at the height which it has once attained, occasions most taxes,
whether laid on capital or on income, to be paid from income; and therefore
as taxation proceeds, or as government increases its expenditure, the annual
expenditure of the people must be diminished, unless they are enabled
proportionally to increase their capitals and income. It should be the policy
of governments to encourage a disposition to do this in the people, and
never to lay such taxes as will inevitably fall on capital; since by so doing,
they impair the funds for the maintenance of labour, and thereby diminish
the future production of the country.
In England this policy has been neglected, in taxing the probates of wills, in
the legacy duty, and in all taxes affecting the transference of property from
the dead to the living. If a legacy of 1000l. be subject to a tax of 100l., the
legatee considers his legacy as only 900l., and feels no particular motive to
save the 100l. duty from his expenditure, and thus the capital of the country
is diminished; but if he had really received 1000l. and had been required to
pay 100l. as a tax on income, on wine, on horses, or on servants, he would

probably have diminished, or rather not increased his expenditure by that
sum, and the capital of the country would have been unimpaired.
"Taxes upon the transference of property from the dead to the living," says
Adam Smith, "fall finally, as well as immediately, upon the persons to
whom the property is transferred. Taxes on the sale of land fall altogether
upon the seller. The seller is almost always under the necessity of selling,
and must therefore take such a price as he can get. The buyer is scarce ever
under the necessity of buying, and will therefore only give such a price as
he likes. He considers what the land will cost him in tax and price together.
The more he is obliged to pay in the way of tax, the less he will be disposed
to give in the way of price. Such taxes, therefore, fall almost always upon a
necessitous person, and must therefore be very cruel and oppressive."
"Stamp duties, and duties upon the registration of bonds and contracts for
borrowed money, fall altogether upon the borrower, and in fact are always
paid by him. Duties of the same kind upon law proceedings fall upon the
suitors. They reduce to both the capital value of the subject in dispute. The
more it costs to acquire any property, the less must be the neat value of it
when acquired. All taxes upon the transference of property of every kind, so
far as they diminish the capital value of that property, tend to diminish the
funds destined for the maintenance of labour. They are all more or less
unthrifty taxes, that increase the revenue of the sovereign, which seldom
maintains any but unproductive labourers, at the expense of the capital of
the people, which maintains none but productive."
But this is not the only objection to taxes on the transference of property;
they prevent the national capital from being distributed in the way most
beneficial to the community. For the general prosperity, there cannot be too
much facility given to the conveyance and exchange of all kinds of
property, as it is by such means that capital of every species is likely to find
its way into the hands of those who will best employ it in increasing the
productions of the country. "Why," asks M. Say, "does an individual wish to
sell his land? it is because he has another employment in view in which his
funds will be more productive. Why does another wish to purchase this
same land? it is to employ a capital which brings him in too little, which
was unemployed, or the use of which he thinks susceptible of improvement.
This exchange will increase the general income, since it increases the
income of these parties. But if the charges are so exorbitant as to prevent

the exchange, they are an obstacle to this increase of the general income."
Those taxes however are easily collected; and this by many may be thought
to afford some compensation for their injurious effects.

CHAPTER VIII.

TAXES ON RAW PRODUCE.

Having in a former part of this work established, I hope satisfactorily, the
principle, that the price of corn is regulated by the cost of its production on
that land exclusively, or rather with that capital exclusively, which pays no
rent, it will follow that whatever may increase the cost of production will
increase the price; whatever may reduce it, will lower the price. The
necessity of cultivating poorer land, or of obtaining a less return with a
given additional capital on land already in cultivation, will inevitably raise
the exchangeable value of raw produce. The discovery of machinery, which
will enable the cultivator to obtain his corn at a less cost of production, will
necessarily lower its exchangeable value. Any tax which may be imposed
on the cultivator, whether in the shape of land-tax, tithes, or a tax on the
produce when obtained, will increase the cost of production, and will
therefore raise the price of raw produce.
If the price of raw produce did not rise so as to compensate the cultivator
for the tax, he would naturally quit a trade where his profits were reduced
below the general level of profits: this would occasion a diminution of
supply, until the unabated demand should have produced such a rise in the
price of raw produce, as to make the cultivation of it equally profitable with
the investment of capital in any other trade.
A rise of price is the only means by which he could pay the tax, and
continue to derive the usual and general profits from this employment of his
capital. He could not deduct the tax from his rent, and oblige his landlord to
pay it, for he pays no rent. He would not deduct it from his profits, for there
is no reason why he should continue in an employment which yields small
profits, when all other employments are yielding greater. There can then be

no question, but that he will have the power of raising the price of raw
produce by a sum equal to the tax.
A tax on raw produce would not be paid by the landlord; it would not be
paid by the farmer; but it would be paid, in an increased price, by the
consumer.
Rent, it should be remembered, is the difference between the produce
obtained by equal portions of labour and capital employed on land of the
same or different qualities. It should be remembered too, that the money
rent of land, and the corn rent of land, do not vary in the same proportion.
In the case of a tax on raw produce, of a land tax, or tithes, the corn rent of
land will vary, while the money rent will remain as before.
If, as we have before supposed, the land in cultivation were of three
qualities, and that with an equal amount of capital,
180 qrs. of corn were obtained from land No. 1.
170 from 2.
160 from 3.

the rent of No. 1 would be 20 quarters, the difference between that of No. 3
and No. 1; and of No. 2, 10 quarters, the difference between that of No. 3
and No. 2; while No. 3 would pay no rent whatever.
Now if the price of corn were 4l. per quarter, the money rent of No. 1 would
be 80l., and that of No. 2, 40l.
Suppose a tax of 8s. per quarter to be imposed on corn; then the price would
rise to 4l. 8s.; and if the landlords obtained the same corn rent as before, the
rent of No. 1 would be 88l., and that of No. 2, 44l. But they would not
obtain the same corn rent; the tax would fall heavier on No. 1 than on No. 2,
and on No. 2 than on No. 3, because it would be levied on a greater quantity
of corn. It is the difficulty of production on No. 3 which regulates price; and
corn rises to 4l. 8s., that the profits of the capital employed on No. 3 may be
on a level with the general profits of stock.
The produce and tax on the three qualities of land will be as follows:
No. 1, yielding 180 qrs. at 4l. 8s. per qr. £792

Deduct the value of 16.3 or 8s. per qr. on 180 qrs. 72
—— ——
Net corn produce 163.7 Net money produce £720
—— ——

No. 2, yielding 170 qrs. at 4l. 8s. per qr. £748
Deduct the value of 15.4 qrs. at 4l. 8s. or 8s. per qr. on 170 qrs. 68
—— ——
Net corn produce 154.6 Net money produce £680
—— ——

No. 3, 160 qrs. at 4l. 8s. £704
Deduct the value of 14.5 qrs. at 4l. 8s. or 8s. per qr. on 160 64
—— ——
Net corn produce 145.5 Net money produce £640
—— ——

The money rent of No. 1 would continue to be 80l., or the difference
between 640 and 720l.; and that of No. 2, 40l., or the difference between
640l. and 680l., precisely the same as before; but the corn rent will be
reduced from 20 quarters on No. 1 to 18.2 quarters, and that on No. 2 from
10 to 9.1 quarters.
A tax on corn, then, would fall on the consumers of corn, and would raise
its value as compared with all other commodities, in a degree proportioned
to the tax. In proportion as raw produce entered into the composition of
other commodities, would their value also be raised, unless the tax were
countervailed by other causes. They would in fact be indirectly taxed, and
their value would rise in proportion to the tax.
A tax, however, on raw produce, and on the necessaries of the labourer,
would have another effect—it would raise wages. From the effect of the
principle of population on the increase of mankind, wages of the lowest
kind never continue much above that rate which nature and habit demand
for the support of the labourers. This class is never able to bear any
considerable portion of taxation; and, consequently, if they had to pay 8s.
per quarter in addition for wheat, and in some smaller proportion for other
necessaries, they would not be able to subsist on the same wages as before,
and to keep up the race of labourers. Wages would inevitably and
necessarily rise; and in proportion as they rose, profits would fall.

Government would receive a tax of 8s. per quarter on all the corn consumed
in the country, a part of which would be paid directly by the consumers of
corn; the other part would be paid indirectly by those who employed labour,
and would affect profits in the same manner as if wages had been raised
from the increased demand for labour compared with the supply, or from an
increasing difficulty of obtaining the food and necessaries required by the
labourer.
In as far as the tax might affect consumers, it would be an equal tax, but in
as far as it would affect profits, it would be a partial tax; for it would neither
operate on the landlord nor on the stockholder, since they would continue to
receive, the one the same money rent, the other the same money dividends
as before. A tax on the produce of the land then would operate as follows:
1st. It would raise the price of raw produce by a sum equal to the tax, and
would therefore fall on each consumer in proportion to his
consumption.
2dly. It would raise the wages of labour, and lower profits.
It may then be objected against such a tax,
1st. That by raising the wages of labour, and lowering profits, it is an
unequal tax, as it affects the income of the farmer, trader, and
manufacturer, and leaves untaxed the income of the landlord,
stockholder, and others enjoying fixed incomes.
2dly. That there would be a considerable interval between the rise in the
price of corn and the rise of wages, during which much distress would
be experienced by the labourer.
3rdly. That raising wages and lowering profits is a discouragement to
accumulation, and acts in the same way as a natural poverty of soil.
4thly. That by raising the price of raw produce, the prices of all
commodities into which raw produce enters, would be raised, and that
therefore we should not meet the foreign manufacture on equal terms
in the general market.
With respect to the first objection, that by raising the wages of labour and
lowering profits it acts unequally, as it affects the income of the farmer,

trader, and manufacturer, and leaves untaxed the income of the landlord,
stockholder, and others enjoying fixed incomes,—it may be answered, that
if the operation of the tax be unequal, it is for the legislature to make it
equal, by taxing directly the rent of land, and the dividends from stock. By
so doing, all the objects of an income tax would be obtained, without the
inconvenience of having recourse to the obnoxious measure of prying into
every man's concerns, and arming commissioners with powers repugnant to
the habits and feelings of a free country.
With respect to the second objection, that there would be a considerable
interval between the rise of the price of corn and the rise of wages, during
which much distress would be experienced by the lower classes,—I answer,
that under different circumstances, wages follow the price of raw produce
with very different degrees of celerity; that in some cases no effect
whatever is produced on wages by a rise of corn; in others, the rise of
wages precedes the rise in the price of corn; again, in some the effect is
slow, and in others the interval must be very short.
Those who maintain that it is the price of necessaries which regulates the
price of labour, always allowing for the particular state of progression in
which the society, may be seem to have conceded too readily, that a rise or
fall in the price of necessaries will be very slowly succeeded by a rise or fall
of wages. A high price of provisions may arise from very different causes,
and may accordingly produce very different effects. It may arise from
1st. A deficient supply.
2nd. From a gradually increasing demand, which may be ultimately
attended with an increased cost of production.
3dly. From a fall in the value of money.
4thly. From taxes on necessaries.
These four causes have not been sufficiently distinguished and separated by
those who have inquired into the influence of a high price of necessaries on
wages. We will examine them severally.
A bad harvest will produce a high price of provisions, and the high price is
the only means by which the consumption is compelled to conform to the
state of the supply. If all the purchasers of corn were rich, the price might

rise to any degree, but the result would remain unaltered; the price would at
last be so high, that the least rich would be obliged to forego the use of a
part of the quantity which they usually consumed, as by diminished
consumption alone, the demand could be brought down to the limits of the
supply. Under such circumstances no policy can be more absurd, than that
of forcibly regulating money wages by the price of food, as is frequently
done, by misapplication of the poor laws. Such a measure affords no real
relief to the labourer, because its effect is to raise still higher the price of
corn, and at last he must be obliged to limit his consumption in proportion
to the limited supply. In the natural course of affairs a deficient supply from
bad seasons, without any pernicious and unwise interference, would not be
followed by a rise of wages. The raising of wages is merely nominal to
those who receive them; it increases the competition in the corn market, and
its ultimate effect is to raise the profits of the growers and dealers in corn.
The wages of labour are really regulated by the proportion between the
supply and demand of necessaries, and the supply and demand of labour;
and money is merely the medium, or measure, in which wages are
expressed. In this case then the distress of the labourer is unavoidable, and
no legislation can afford a remedy, except by the importation of additional
food.
When a high price of corn is the effect of an increasing demand, it is always
preceded by an increase of wages, for demand cannot increase, without an
increase of means in the people to pay for that which they desire. An
accumulation of capital naturally produces an increased competition among
the employers of labour, and a consequent rise in its price. The increased
wages are not immediately expended on food, but are first made to
contribute to the other enjoyments of the labourer. His improved condition
however induces, and enables him to marry, and then the demand for food
for the support of his family naturally supersedes that of those other
enjoyments on which his wages were temporarily expended. Corn rises then
because the demand for it increases, because there are those in the society
who have improved means of paying for it; and the profits of the farmer
will be raised above the general level of profits, till the requisite quantity of
capital has been employed on its production. Whether, after this has taken
place, corn shall again fall to its former price, or shall continue permanently
higher, will depend on the quality of the land from which the increased

quantity of corn has been supplied. If it be obtained from land of the same
fertility, as that which was last in cultivation, and with no greater cost of
labour, the price will fall to its former state; if from poorer land, it will
continue permanently higher. The high wages in the first instance proceeded
from an increase in the demand for labour: inasmuch as it encouraged
marriage, and supported children, it produced the effect of increasing the
supply of labour. But when the supply is obtained, wages will again fall to
their former price, if corn has fallen to its former price: to a higher than the
former price, if the increased supply of corn has been produced from land
of an inferior quality. A high price is by no means incompatible with an
abundant supply: the price is permanently high, not because the quantity is
deficient, but because there has been an increased cost in producing it. It
generally happens indeed, that when a stimulus has been given to
population, an effect is produced beyond what the case requires; the
population may be, and generally is so much increased as, notwithstanding
the increased demand for labour, to bear a greater proportion to the funds
for maintaining labourers than before the increase of capital. In this case a
re-action will take place, wages will be below their natural level, and will
continue so, till the usual proportion between the supply and demand has
been restored. In this case then, the rise in the price of corn is preceded by a
rise of wages, and therefore entails no distress on the labourer.
A fall in the value of money, in consequence of an influx of the precious
metals from the mines, or from the abuse of the privileges of banking, is
another cause for the rise of the price of food; but it will make no alteration
in the quantity produced. It leaves undisturbed too the number of labourers,
as well as the demand for them; for there will be neither an increase nor a
diminution of capital. The quantity of necessaries to be allotted to the
labourer, depends on the comparative demand and supply of necessaries,
with the comparative demand and supply of labour; money being only the
medium in which the quantity is expressed; and as neither of these is
altered, the real reward of the labourer will not alter. Money wages will rise,
but they will only enable him to furnish himself with the same quantity of
necessaries as before. Those who dispute this principle, are bound to shew
why an increase of money should not have the same effect in raising the
price of labour, the quantity of which has not been increased, as they
acknowledge it would have on the price of shoes, of hats, and of corn, if the

quantity of those commodities were not increased. The relative market
value of hats and shoes is regulated by the demand and supply of hats,
compared with the demand and supply of shoes, and money is but the
medium in which their value is expressed. If shoes be doubled in price, hats
will also be doubled in price, and they will retain the same comparative
value. So if corn and all the necessaries of the labourer be doubled in price,
labour will be doubled in price also, and while there is no interruption to the
usual demand and supply of necessaries and of labour, there can be no
reason why they should not preserve their relative value.
Neither a fall in the value of money, nor a tax on raw produce, though each
will raise the price, will necessarily interfere with the quantity of raw
produce; or with the number of people, who are both able to purchase, and
willing to consume it. It is very easy to perceive why, when the capital of a
country increases irregularly, wages should rise, whilst the price of corn
remains stationary, or rises in a less proportion; and why, when the capital
of a country diminishes, wages should fall whilst corn remains stationary, or
falls in a much less proportion, and this too for a considerable time; the
reason is, because labour is a commodity which cannot be increased and
diminished at pleasure. If there are too few hats in the market for the
demand, the price will rise, but only for a short time; for in the course of
one year, by employing more capital in that trade, any reasonable addition
may be made to the quantity of hats, and therefore their market price cannot
long very much exceed their natural price; but it is not so with men; you
cannot increase their number in one or two years when there is an increase
of capital, nor can you rapidly diminish their number when capital is in a
retrograde state; and therefore, the number of hands increasing or
diminishing slowly, whilst the funds for the maintenance of labour increase
or diminish rapidly, there must be a considerable interval before the price of
labour is exactly regulated by the price of corn and necessaries; but in the
case of a fall in the value of money, or of a tax on corn, there is not
necessarily any excess in the supply of labour, nor any abatement of
demand, and therefore there can be no reason why the labourer should
sustain a real diminution of wages.
A tax on corn does not necessarily diminish the quantity of corn, it only
raises its money price; it does not necessarily diminish the demand
compared with the supply of labour; why then should it diminish the

portion paid to the labourer? Suppose it true that it did diminish the quantity
given to the labourer, in other words, that it did not raise his money wages
in the same proportion as the tax raised the price of the corn which he
consumed; would not the supply of corn exceed the demand?—would it not
fall in price? and would not the labourer thus obtain his usual portion? In
such case indeed capital would be withdrawn from agriculture; for if the
price were not increased by the whole amount of the tax, agricultural profits
would be lower than the general level of profits, and capital would seek
more advantageous employment. In regard then to a tax on raw produce,
which is the point under discussion, it appears to me that no interval which
could bear oppressively on the labourer, would elapse between the rise in
the price of raw produce, and the rise in the wages of the labourer; and that
therefore no other inconvenience would be suffered by this class, than that
which they would suffer from any other mode of taxation, namely, the risk
that the tax might infringe on the funds destined for the maintenance of
labour, and might therefore check or abate the demand for it.
With respect to the third objection against taxes on raw produce, namely,
that the raising wages, and lowering profits, is a discouragement to
accumulation, and acts in the same way as a natural poverty of soil; I have
endeavoured to shew in another part of this work that savings may be as
effectually made from expenditure as from production; from a reduction in
the value of commodities, as from a rise in the rate of profits. By increasing
my profits from 1000l. to 1200l., whilst prices continue the same, my power
of increasing my capital by savings is increased but it is not increased so
much as it would be if my profits continued as before, whilst commodities
were so lowered in price, that 800l. would procure me as much as 1000l.
purchased before.
Taxation under every form presents but a choice of evils; if it does not act
on profit, it must act on expenditure; and provided the burden be equally
borne, and do not repress reproduction, it is indifferent on which it is laid.
Taxes on production, or on the profits of stock, whether applied
immediately to profits, or indirectly, by taxing the land or its produce, have
this advantage over other taxes; no class of the community can escape them,
and each contributes according to his means.

From taxes on expenditure a miser may escape; he may have an income of
10,000 per annum, and expend only 300l.; but from taxes on profits,
whether direct or indirect, he cannot escape; he will contribute to them
either by giving up a part or the value of a part of his produce; or by the
advanced prices of the necessaries essential to production, he will be unable
to continue to accumulate at the same rate. He may indeed have an income
of the same value, but he will not have the same command of labour, nor of
an equal quantity of materials on which such labour can be exercised.
If a country is insulated from all others, having no commerce with any of its
neighbours, it can in no way shift any portion of its taxes from itself. A
portion of the produce of its land and labour will be devoted to the service
of the state; and I cannot but think that, unless it presses unequally on that
class which accumulates and saves, it will be of little importance whether
the taxes be levied on profits, on agricultural, or on manufactured
commodities. If my revenue be 1000l. per annum, and I must pay taxes to
the amount of 100l., it is of little importance whether I pay it from my
revenue, leaving myself only 900l., or pay 100l. in addition for my
agricultural commodities, or for my manufactured goods. If 100l. is my fair
proportion of the expenses of the country, the virtue of taxation consists in
making sure that I shall pay that 100l., neither more nor less; and that
cannot be effected in any manner so securely as by taxes on wages, profits,
or raw produce.
The fourth and last objection which remains to be noticed is: That by
raising the price of raw produce, the prices of all commodities into which
raw produce enters, will be raised, and that therefore we shall not meet the
foreign manufacturer on equal terms in the general market.
In the first place, corn and all home commodities could not be materially
raised in price without an influx of the precious metals; for the same
quantity of money could not circulate the same quantity of commodities, at
high as at low prices, and the precious metals never could be purchased
with dear commodities. When more gold is required, it must be obtained by
giving more, and not fewer commodities in exchange for it. Neither could
the want of money be supplied by paper, for it is not paper that regulates the
value of gold as a commodity, but gold that regulates the value of paper.
Unless then the value of gold could be lowered, no paper could be added to

the circulation without being depreciated. And that the value of gold could
not be lowered appears clear, when we consider that the value of gold as a
commodity must be regulated by the quantity of goods which must be given
to foreigners in exchange for it. When gold is cheap, commodities are dear;
and when gold is dear, commodities are cheap, and fall in price. Now as no
cause is shewn why foreigners should sell their gold cheaper than usual, it
does not appear probable that there would be any influx of gold. Without
such an influx there can be no increase of quantity, no fall in its value, no
rise in the general price of goods.
The probable effect of a tax on raw produce would be to raise the price of
all commodities in which raw produce entered, but not in any degree
proportioned to the tax; while other commodities in which no raw produce
entered, such as articles made of the metals and the earths, would fall in
price: so that the same quantity of money as before would be adequate to
the whole circulation.
A tax which should have the effect of raising the price of all home
productions, would not discourage exportation, except during a very limited
time. If they were raised in price at home, they could not indeed
immediately be profitably exported, because they would be subject to a
burthen here from which abroad they were free. The tax would produce the
same effect as an alteration in the value of money, which was not general
and common to all countries, but confined to a single one. If England were
that country, she might not be able to sell, but she would be able to buy,
because importable commodities would not be raised in price. Under these
circumstances nothing but money could be exported in return for foreign
commodities, but this is a trade which could not long continue; a nation
cannot be exhausted of its money, for after a certain quantity has left it, the
value of the remainder will rise, and such a price of commodities will be the
consequence, that they will again be capable of being profitably exported.
When money had risen, therefore, we should no longer export it in return
for goods imported, but we should export those manufactures which had
first been raised in price, by the rise in the price of the raw produce from
which they were made, and then again lowered by the exportation of
money.

But it may be objected, that when money so rose in value, it would rise with
respect to foreign as well as home commodities, and therefore that all
encouragement to import foreign goods would cease. Thus, suppose we
imported goods which cost 100l. abroad, and which sold for 120l. here, we
should cease to import them, when the value of money had so risen in
England, that they would only sell for 100l. here: this however could never
happen. The motive which determines us to import a commodity, is the
discovery of its relative cheapness abroad: it is the comparison of its natural
price abroad, with its natural price at home. If a country exports hats, and
imports cloth, it does so because it can obtain more cloth by making hats,
and exchanging them for cloth, than if it made the cloth itself. If the rise of
raw produce occasions any increased cost of production in making hats, it
would occasion also an increased cost in making cloth. If therefore both
commodities were made at home, they would both rise. One, however,
being a commodity which we import, would not rise, neither would it fall,
when the value of money rose; for by not falling, it would regain its natural
relation to the exported commodity. The rise of raw produce makes a hat
rise from 30 to 33 shillings, or 10 per cent.: the same cause if we
manufactured cloth, would make it rise from 20s. to 22s. per yard. This rise
does not destroy the relation between cloth and hats; a hat was, and
continues to be, worth one yard and a half of cloth. But if we import cloth,
its price will continue uniformly at 20s. per yard, unaffected first by the fall,
and then by the rise in the value of money; whilst hats, which had risen
from 30s. to 33s., will again fall from 33s. to 30s., at which point the
relation between cloth and hats will be restored.
To simplify the consideration of this subject, I have been supposing that a
rise in the value of raw materials would affect, in an equal proportion, all
home commodities; that if the effect on one were to raise it 10 per cent., it
would raise all 10 per cent.; but as the value of commodities is very
differently made up of raw material and labour; as some commodities, for
instance all those made from the metals, would be unaffected by the rise of
raw produce from the surface of the earth, it is evident that there would be
the greatest variety in the effects produced on the value of commodities, by
a tax on raw produce. As far as this effect was produced, it would stimulate
or retard the exportation of particular commodities, and would undoubtedly
be attended with the same inconvenience that attends the taxing of

commodities; it would destroy the natural relation between the value of
each. Thus, the natural price of a hat, instead of being the same as a yard
and a half of cloth, might only be of the value of a yard and a quarter, or it
might be of the value of a yard and three quarters, and therefore rather a
different direction might be given to foreign trade. All these inconveniences
would not interfere with the value of the exports and imports; they would
only prevent the very best distribution of the capital of the whole world,
which is never so well regulated, as when every commodity is freely
allowed to settle at its natural price.
Although then the rise in the price of most of our own commodities, would
for a time check exportation generally, and might permanently prevent the
exportation of a few commodities, it could not materially interfere with
foreign trade, and would not place us under any comparative disadvantage
as far as regarded competition in foreign markets.

CHAPTER VIII.*

TAXES ON RENT.

A tax on rent would affect rent only; it would fall wholly on landlords, and
could not be shifted to any class of consumers. The landlord could not raise
his rent, because he would leave unaltered the difference between the
produce obtained from the least productive land in cultivation, and that
obtained from land of every other quality. Three sorts of land, No. 1, 2, and
3, are in cultivation, and yield respectively with the same labour 180, 170,
and 160 quarters of wheat; but No. 3 pays no rent, and is therefore untaxed:
the rent then of No. 2 cannot be made to exceed the value of ten, nor No. 1,
of twenty quarters. Such a tax could not raise the price of raw produce,
because as the cultivator of No. 3 pays neither rent nor tax, he would in no
way be enabled to raise the price of the commodity produced. A tax on rent
would not discourage the cultivation of fresh land, for such land pays no
rent, and would be untaxed. If No. 4 were taken into cultivation, and
yielded 150 quarters, no tax would be paid for such land; but it would create
a rent of ten quarters on No. 3, which would then commence paying the tax.

A tax on rent, as rent is constituted, would discourage cultivation, because it
would be a tax on the profits of the landlord. The term rent of land, as I
have elsewhere observed, is applied to the whole amount of the value paid
by the farmer to his landlord, a part only of which is strictly rent. The
buildings and fixtures, and other expenses paid for by the landlord, form
strictly a part of the stock of the farm, and must have been furnished by the
tenant, if not provided by the landlord. Rent is the sum paid to the landlord
for the use of the land, and for the use of the land only. The further sum that
is paid to him under the name of rent, is for the use of the buildings, &c.,
and is really the profits of the landlord's stock. In taxing rent, as no
distinction would be made between that part paid for the use of the land,
and that paid for the use of the landlord's stock, a portion of the tax would
fall on the landlord's profits, and would therefore discourage cultivation,
unless the price of raw produce rose. On that land, for the use of which no
rent was paid, a compensation under that name might be given to the
landlord for the use of his buildings. These buildings would not be erected,
nor would raw produce be grown on such land, till the price at which it sold
would not only pay for all the usual outgoings, but also for this additional
one of the tax. This part of the tax does not fall on the landlord, nor on the
farmer, but on the consumer of raw produce.
There can be little doubt, but that if a tax were laid on rent, landlords would
soon find a way to discriminate between that which was paid to them for
the use of the land, and that which was paid for the use of the buildings, and
the improvements which were made by the landlord's stock. The latter
would either be called the rent of house and buildings, or in all new land
taken into cultivation such buildings and improvements would be made by
the tenant, and not by the landlord. The landlord's capital might indeed be
really employed for that purpose; it might be nominally expended by the
tenant, the landlord furnishing him with the means, either in the shape of a
loan, or in the purchase of an annuity for the duration of the lease. Whether
distinguished or not, there is a real difference between the nature of the
compensations which the landlord receives for these different objects; and it
is quite certain, that a tax on the real rent of land falls wholly on the
landlord, but that a tax on that remuneration which the landlord receives for
the use of his stock expended on the farm, falls on the consumer of raw
produce. If a tax were laid on rent, and no means of separating the

remuneration now paid by the tenant to the landlord under the name of rent
were adopted, the tax, as far as it regarded the rent on the buildings and
other fixtures, would never fall for any length of time on the landlord, but
on the consumer. The capital expended on these buildings, &c., must afford
the usual profits of stock; but it would cease to afford this profit on the land
last cultivated, if the expenses of those buildings, &c. did not fall on the
tenant; and if they did, the tenant would then cease to make his usual profits
of stock, unless he could charge them on the consumer.

CHAPTER IX.

TITHES.

Tithes are a tax on the gross produce of the land, and, like taxes on raw
produce, fall wholly on the consumer. They differ from a tax on rent,
inasmuch as they affect land which such a tax would not reach; and raise
the price of raw produce, which that tax e of raw produce, which that tax
would not alter. Lands of the worst quality, as well as of the best, pay tithes,
and exactly in proportion to the quantity of produce obtained from them;
tithes are therefore an equal tax.
If land of the last quality, or that which pays no rent, and which regulates
the price of corn, yield a sufficient quantity to give the farmer the usual
profits of stock, when the price of wheat is 4l. per quarter, the price must
rise to 4l. 8s. before the same profits can be obtained after the tithes are
imposed, because for every quarter of wheat the cultivator must pay eight
shillings to the church.
The only difference between tithes and taxes on raw produce, is, that one is
a variable money tax, the other a fixed money tax. In a stationary state of
society, where there is neither increased nor diminished facility of
producing corn, they will be precisely the same in their effects; for in such a
state corn will be at an invariable price, and the tax will therefore be also
invariable. In either a retrograde state, or in a state in which great
improvements are made in agriculture, and where consequently raw
produce will fall in value comparatively with other things, tithes will be a

lighter tax than a permanent money tax; for if the price of corn should fall
from 4l. to 3l., the tax would fall from eight to six shillings. In a progressive
state of society, yet without any marked improvements in agriculture, the
price of corn would rise, and tithes would be a heavier tax than a permanent
money tax. If corn rose from 4l. to 5l., the tithes on the same land would
advance from eight to ten shillings.
Neither tithes nor a money tax will affect the money rent of landlords, but
both will materially affect corn rents. We have already observed how a
money tax operates on corn rents, and it is equally evident that a similar
effect would be produced by tithes. If the lands, No. 1, 2, 3, respectively
produced 180, 170, and 160 quarters, the rents might be on No. 1, twenty
quarters, and on No. 2, ten quarters; but they would no longer preserve that
proportion after the payment of tithes: for if a tenth be taken from each, the
remaining produce will be 162, 153, 144, and consequently the corn rent of
No. 1 will be reduced to eighteen, and that of No. 2 to nine quarters. But the
price of corn would rise from 4l. to 4l. 8s. 10⅔d.; for nine quarters are to 4l.
as ten quarters to 4l. 8s. 10⅔d., and consequently the money rent would
continue unaltered; for on No. 1 it would be 80l., and on No. 2, 40l.
The chief objection against tithes is, that they are not a permanent and fixed
tax, but increase in value, in proportion as the difficulty of producing corn
increases. If those difficulties should make the price of corn 4l. the tax is
8s., if they should increase it to 5l., the tax is 10s., and at 6l., it is 12s. They
not only rise in value, but they increase in amount: thus, when No. 1 was
cultivated, the tax was only levied on 180 quarters; when No. 2 was
cultivated, it was levied on 180 + 170, or 350 quarters; and when No. 3 was
cultivated, on 180 + 170 + 160 = 510 quarters. Not only is the amount of
the tax increased from 100,000 quarters, to 200,000 quarters, when the
produce is increased from one to two millions of quarters; but, owing to the
increased labour necessary to produce the second million, the relative value
of raw produce is so advanced, that the 200,000 quarters may be, though
only twice in quantity, yet in value three times that of the 100,000 quarters
which were paid before.
If an equal value were raised for the church by any other means, increasing
in the same manner as tithes increase, proportionably with the difficulty of
cultivation, the effect would be the same. The church would be constantly

obtaining an increased portion of the net produce of the land and labour of
the country. In an improving state of society, the net produce of land is
always diminishing in proportion to its gross produce; but it is from the net
income of a country that all taxes are ultimately paid, either in a progressive
or in a stationary country. A tax increasing with the gross income, and
falling on the net income, must necessarily be a very burdensome, and a
very intolerable tax. Tithes are a tenth of the gross, and not of the net
produce of the land, and therefore as society improves in wealth, they must,
though the same proportion of the gross produce, become a larger and
larger portion of the net produce.
Tithes however may be considered as injurious to landlords, inasmuch as
they act as a bounty on importation, by taxing the growth of home corn,
while the importation of foreign corn remains unfettered. And if in order to
relieve the landlords from the effects of the diminished demand for land,
which such a bounty must encourage, imported corn were also taxed one
tenth, and the produce paid to the state, no measure could be more fair and
equitable; since whatever were paid to the state by this tax, would go to
diminish the other taxes which the expenses of government make
necessary: but if such a tax were devoted only to increase the fund paid to
the church, it might indeed on the whole increase the general mass of
production, but it would diminish the portion of that mass allotted to the
productive classes.
If the trade of cloth were left perfectly free, our manufacturers might be
able to sell cloth cheaper than we could import it. If a tax were laid on the
home manufacturer, and not on the importer of cloth, capital might be
injuriously driven from the manufacture of cloth to the manufacture of
some other commodity, as it might then be imported cheaper than it could
be made at home. If imported cloth should also be taxed, cloth would again
be manufactured at home. The consumer first bought cloth at home,
because it was cheaper than foreign cloth; he then bought foreign cloth,
because it was cheaper untaxed than home cloth taxed: he lastly bought it
again at home, because it was cheaper when both home and foreign cloth
were taxed. It is in the last case that he pays the greatest price for his cloth,
but all his additional payment is gained by the state. In the second case, he
pays more than in the first, but all he pays in addition is not received by the
state, it is an increased price caused by difficulty of production, which is

incurred, because the easiest means of production are taken away from us,
by being fettered with a tax.

CHAPTER X.

LAND-TAX.

A land-tax, levied in proportion to the rent of land, and varying with every
variation of rent, is in effect a tax on rent; and as such a tax will not apply to
that land which yields no rent, nor to the produce of that capital which is
employed on the land with a view to profit merely, and which never pays
rent, it will not in any way affect the price of raw produce, but will fall
wholly on the landlords. In no respect would such a tax differ from a tax on
rent. But if a land-tax be imposed on all cultivated land, however moderate
that tax may be, it will be a tax on produce, and will therefore raise the
price of produce. If No. 3 be the land last cultivated, although it should pay
no rent, it cannot, after the tax, be cultivated, and afford the general rate of
profit, unless the price of produce rise to meet the tax. Either capital will be
withheld from that employment until the price of corn shall have risen, in
consequence of demand, sufficiently to afford the usual profit; or if already
employed on such land, it will quit it, to seek a more advantageous
employment. The tax cannot be removed to the landlord, for by the
supposition he receives no rent. Such a tax may be proportioned to the
quality of the land and the abundance of its produce, and then it differs in
no respect from tithes; or it may be a fixed tax per acre on all land
cultivated, whatever its quality may be.
A land-tax of this latter description would be a very unequal tax, and would
be contrary to one of the four maxims with regard to taxes in general, to
which, according to Adam Smith, all taxes should conform. The four
maxims are as follow:

1. "The subjects of every state ought to contribute towards the support of
the Government, as nearly as possible in proportion to their respective
abilities.
2. "The tax which each individual is bound to pay ought to be certain and
not arbitrary.
3. "Every tax ought to be levied at the time, or in the manner in which it
is most likely to be convenient for the contributor to pay it.
4. "Every tax ought to be so contrived as both to take out and to keep out
of the pockets of the people as little as possible, over and above what it
brings into the public treasury of the state."
An equal land-tax, imposed indiscriminately and without any regard to the
distinction of its quality, on all land cultivated, will raise the price of corn in
proportion to the tax paid by the cultivator of the land of the worst quality.
Lands of different quality, with the employment of the same capital, will
yield very different quantities of raw produce. If on the land which yields a
thousand quarters of corn with a given capital, a tax of 100l. be laid, corn
will rise 2s. per quarter to compensate the farmer for the tax. But with the
same capital on land of a better quality, 2,000 quarters may be produced,
which at 2s. a quarter advance, would give 200l.; the tax, however, bearing
equally on both lands will be 100l. on the better as well as on the inferior,
and consequently the consumer of corn will be taxed, not only to pay the
exigencies of the state, but also to give to the cultivator of the better land,
100l. per annum. during the period of his lease, and afterwards to raise the
rent of the landlord to that amount. A tax of this description then would be
contrary to the fourth maxim of Adam Smith, it would take out and keep out
of the pockets of the people, more than what it brought into the treasury of
the state. The taille in France before the Revolution, was a tax of this
description; those lands only were taxed, which were held by an ignoble
tenure, the price of raw produce rose in proportion to the tax, and therefore
they whose lands were not taxed, were benefited by the increase of their
rent. Taxes on raw produce as well as tithes are free from this objection:
they raise the price of raw produce, but they take from each quality of land
a contribution in proportion to its actual produce, and not in proportion to
the produce of that which is the least productive.

From the peculiar view which Adam Smith took of rent, from his not
having observed that much capital is expended in every country, on the land
for which no rent is paid, he concluded that all taxes on the land, whether
they were laid on the land itself in the form of land-tax or tithes, or on the
produce of the land, or were taken from the profits of the farmer, were all
invariably paid by the landlord, and that he was in all cases the real
contributor, although the tax was in general, nominally advanced by the
tenant. "Taxes upon the produce of the land," he says, "are in reality taxes
upon the rent; and though they may be originally advanced by the farmer,
are finally paid by the landlord. When a certain portion of the produce is to
be paid away for a tax, the farmer computes as well as he can, what the
value of this portion is, one year with another, likely to amount to, and he
makes a proportionable abatement in the rent which he agrees to pay to the
landlord. There is no farmer who does not compute before hand what the
church tithe, which is a land-tax of this kind, is, one year with another,
likely to amount to." It is undoubtedly true, that the farmer does calculate
his probable outgoings of all descriptions, when agreeing with his landlord
concerning the rent of his farm; and if for the tithe paid to the church, or for
the tax on the produce of the land, he were not compensated by a rise in the
relative value of the produce of his farm, he would naturally deduct them
from his rent. But this is precisely the question in dispute: whether he will
eventually deduct them from his rent, or be compensated by a higher price
of produce. For the reasons which have been already given, I cannot have
the least doubt but that they would raise the price of produce, and
consequently that Adam Smith has taken an incorrect view of this important
question.
Dr. Smith's view of this subject is probably the reason why he has described
"the tithe, and every other land-tax of this kind, under the appearance of
perfect equality, as very unequal taxes; a certain portion of the produce
being in different situations, equivalent to a very different portion of the
rent." I have endeavoured to shew that such taxes do not fall with unequal
weight on the different classes of farmers or landlords, as they are both
compensated by the rise of raw produce, and only contribute to the tax in
proportion as they are consumers of raw produce. Inasmuch indeed as
wages, and through wages, the rate of profits are affected, landlords, instead
of contributing their full share to such a tax, are the class peculiarly

exempted. It is the profits of stock, from which that portion of the tax is
derived which falls on those labourers, who from the insufficiency of their
funds, are incapable of paying taxes; this portion is exclusively borne by all
those whose income is derived from the employment of stock, and therefore
it in no degree affects landlords.
It is not to be inferred from this view of tithes, and taxes on the land and its
produce, that they do not discourage cultivation. Every thing which raises
the exchangeable value of commodities of any kind, which are in very
general demand, tends to discourage both cultivation and production; but
this is an evil inseparable from all taxation, and is not confined to the
particular taxes of which we are now speaking.
This may be considered indeed as the unavoidable disadvantage attending
all taxes received and expended by the state. Every new tax becomes a new
charge on production, and raises natural price. A portion of the labour of the
country which was before at the disposal of the contributor to the tax, is
placed at the disposal of the state. This portion may become so large, that
sufficient surplus produce may not be left to stimulate the exertions of those
who usually augment by their savings the capital of the state. Taxation has
happily never yet in any free country been carried so far as constantly from
year to year to diminish its capital. Such a state of taxation could not be
long endured; or if endured, it would be constantly absorbing so much of
the annual produce of the country as to occasion the most extensive scene
of misery, famine, and depopulation.
"A land-tax," says Adam Smith, "which like that of Great Britain, is
assessed upon each district according to a certain invariable canon, though
it should be equal at the time of its first establishment, necessarily becomes
unequal in process of time, according to the unequal degrees of
improvement or neglect in the cultivation of the different parts of the
country. In England the valuation according to which the different counties
and parishes were assessed to the land-tax by the 4th. William and Mary,
was very unequal, even at its first establishment. This tax, therefore, so far
offends against the first of the four maxims above mentioned. It is perfectly
agreeable to the other three. It is perfectly certain. The time of payment for
the tax being the same as that for the rent, is as convenient as it can be to
the contributor. Though the landlord is in all cases the real contributor, the

tax is commonly advanced by the tenant, to whom the landlord is obliged to
allow it in the payment of the rent."
If the tax be shifted by the tenant not on the landlord but on the consumer,
then if it be not unequal at first, it can never become so; for the price of
produce has been at once raised in proportion to the tax, and will afterwards
vary no more on that account. It may offend if unequal, as I have attempted
to shew that it will, against the fourth maxim above mentioned, but it will
not offend against the first. It may take more out of the pockets of the
people than it brings into the public treasury of the state, but it will not fall
unequally on any particular class of contributors. M. Say appears to me to
have mistaken the nature and effects of the English land-tax, when he says,
"Many persons attribute to this fixed valuation, the great prosperity of
English agriculture. That it has very much contributed to it there can be no
doubt. But what should we say to a Government, which, addressing itself to
a small trader, should hold this language: 'With a small capital you are
carrying on a limited trade, and your direct contribution is in consequence
very small. Borrow, and accumulate capital; extend your trade, so that it
may procure you immense profits; yet you shall never pay a greater
contribution. Moreover, when your successors shall inherit your profits, and
shall have further increased them, they shall not be valued higher to them
than they are to you; and your successors shall not bear a greater portion of
the public burdens.'
"Without doubt this would be a great encouragement given to manufactures
and trade; but would it be just? Could not their advancement be obtained at
any other price? In England itself, has not manufacturing and commercial
industry made even greater progress, since the same period, without being
distinguished with so much partiality? A landlord by his assiduity, economy,
and skill, increases his annual revenue by 5000 francs. If the state claim of
him the fifth part of his augmented income, will there not remain 4000
francs of increase to stimulate his further exertions?"
If Mr. Say's suggestion were followed, and the state were to claim the fifth
part of the augmented income of the farmer, it would be a partial tax, acting
on the farmer's profits, and not affecting the profits of other employments.
The tax would be paid by all lands, by those which yielded scantily as well
as by those which yielded abundantly; and on some lands there could be no

compensation for it by deduction from rent, for no rent is paid. A partial tax
on profits never falls on the trade on which it is laid, for the trader will
either quit his employment, or remunerate himself for the tax. Now those
who pay no rent could be recompensed only by a rise in the price of
produce, and thus would M. Say's proposed tax fall on the consumer, and
not either on the landlord or farmer.
If the proposed tax were increased in proportion to the increased quantity,
or value, of the gross produce obtained from the land, it would differ in
nothing from tithes, and would equally be transferred to the consumer.
Whether then it fell on the gross or on the net produce of land, it would be
equally a tax on consumption, and would only affect the landlord and
farmer in the same way as other taxes on raw produce.
If no tax whatever had been laid on the land, and the same sum had been
raised by any other means, agriculture would have flourished at least as
well as it has done; for it is impossible that any tax on land can be an
encouragement to agriculture; a moderate tax may not, and probably does
not, greatly prevent, but it cannot encourage production. The English
Government has held no such language as M. Say has supposed. It did not
promise to exempt the agricultural class and their successors from all future
taxation, and to raise the further supplies which the state might require,
from the other classes of society; it said only, "in this mode we will no
further burthen the land; but we retain to ourselves the most perfect liberty
of making you pay, under some other form, your full quota to the future
exigencies of the state."
Speaking of taxes in kind, or a tax of a certain proportion of the produce,
which is precisely the same as tithes, M. Say says, "This mode of taxation
appears to be the most equitable; there is however none which is less so: it
totally leaves out of consideration the advances made by the producer; it is
proportioned to the gross, and not to the net revenue. Two agriculturists
cultivate different kinds of raw produce: one cultivates corn on middling
land, his expenses amounting annually on an average to 8000 francs; the
raw produce from his lands sells for 12,000 francs; he has then a net
revenue of 4000 francs.

"His neighbour has pasture or wood land, which brings in every year a like
sum of 12,000 francs, but his expenses amount only to 2000 francs. He has
therefore on an average a net revenue of 10,000 francs.
"A law ordains that a twelfth of the produce of all the fruits of the earth be
levied in kind, whatever they may be. From the first is taken in consequence
of this law, corn of the value of 1000 francs; and from the second, hay,
cattle, or wood, of the same value of 1000 francs. What has happened?
From the one, a quarter of his net income, 4000 francs, has been taken;
from the other, whose income was 10,000 francs, a tenth only has been
taken. Income is the net profit which remains after replacing the capital
exactly in its former state. Has a merchant an income equal to all the sales
which he makes in the course of a year? certainly not; his income only
amounts to the excess of his sales above his advances, and it is on this
excess only that taxes on income should fall."
M. Say's error in the above passage lies in supposing that because the value
of the produce of one of these two farms, after re-instating the capital, is
greater than the value of the produce of the other, on that account the net
income of the cultivators will differ by the same amount. M. Say has wholly
omitted the consideration of the different amount of rent, which these
cultivators would have to pay. There cannot be two rates of profit in the
same employment, and therefore when produce is in different proportions to
capital, it is the rent which will differ, and not the profit. Upon what
pretence would one man with a capital of 2000 francs, be allowed to obtain
a net profit of 10,000 francs from its employment, whilst another with a
capital of 8000 francs would only obtain 4000 francs? Let M. Say make a
due allowance for rent; let him further allow for the effect which such a tax
would have on the prices of these different kinds of raw produce, and he
will then perceive that it is not an unequal tax, and further that the
producers themselves will not otherwise contribute to it, than any other
class of consumers.

CHAPTER XI.

TAXES ON GOLD.

The rise in the price of commodities, in consequence of taxation or of
difficulty of production, will in all cases ultimately ensue; but the duration
of the interval, before the market price of commodities conforms to their
natural price, must depend on the nature of the commodity, and on the
facility with which it can be reduced in quantity. If the quantity of the
commodity taxed could not be diminished, if the capital of the farmer or of
the hatter for instance, could not be withdrawn to other employments, it
would be of no consequence that their profits were reduced below the
general level by means of a tax; unless the demand for their commodities
should increase, they would never be able to elevate the market price of
corn and hats up to the increased natural price. Their threats to leave their
employments, and remove their capitals to more favoured trades, would be
treated as an idle menace which could not be carried into effect; and
consequently the price would not be raised by diminished production.
Commodities however of all descriptions can be reduced in quantity, and
capital can be removed from trades which are less profitable to those which
are more so, but with different degrees of rapidity. In proportion as the
supply of a particular commodity can be more easily reduced, the price of it
will more quickly rise after the difficulty of its production has been
increased by taxation, or by any other means. Corn being a commodity
indispensably necessary to every one, little effect will be produced on the
demand for it in consequence of a tax, and therefore the supply could not be
long excessive, even if the producers had great difficulty in removing their
capitals from the land; the price of corn therefore, will speedily be raised by
taxation, and the farmer will be enabled to transfer the tax from himself to
the consumer.
If the mines which supply us with gold were in this country, and if gold
were taxed, it could not rise in relative value to other things till its quantity
were reduced. This would be more particularly the case, if gold were
exclusively used for money. It is true that the least productive mines, those
which paid no rent, could no longer be worked, as they could not afford the
general rate of profits till the relative value of gold rose, by a sum equal to
the tax. The quantity of gold, and therefore the quantity of money would be
slowly reduced; it would be a little diminished in one year, a little more in
another, and finally its value would be raised in proportion to the tax; but in
the interval, the proprietors or holders, as they would pay the tax, would be

the sufferers, and not those who used money. If out of every 1000 quarters
of wheat in the country, and every 1000 produced in future, government
should exact 100 quarters as a tax, the remaining 900 quarters would
exchange for the same quantity of other commodities that 1000 did before;
but if the same thing took place with respect to gold, if of every 1000l.
money now in the country, or in future to be brought into it, government
could exact 100l. as a tax, the remaining 900l. would purchase very little
more than 900l. purchased before. The tax would fall upon him, whose
property consisted of money, and would continue to do so till its quantity
were reduced in proportion to the increased cost of its production caused by
the tax.
This perhaps would be more particularly the case with respect to a metal
used for money, than any other commodity, because the demand for money
is not for a definite quantity, as is the demand for clothes, or for food. The
demand for money is regulated entirely by its value, and its value by its
quantity. If gold were of double the value, half the quantity would perform
the same functions in circulation, and if it were of half the value, double the
quantity would be required. If the market value of corn be increased one
tenth by taxation, or by difficulty of production, it is doubtful, whether any
effect whatever would be produced on the quantity consumed, because
every man's want is for a definite quantity, and, therefore, if he has the
means of purchasing, he will continue to consume as before; but for money,
the demand is exactly proportioned to its value. No man could consume
twice the quantity of corn, which is usually necessary for his support, but
every man purchasing and selling only the same quantity of goods, may be
obliged to employ twice, thrice, or any number of times the same quantity
of money.
The argument which I have just been using, applies only to those states of
society in which the precious metals are used for money, and where paper
credit is not established. The metal gold like all other commodities has its
value in the market ultimately regulated by the comparative facility or
difficulty of producing it; and although from its durable nature, and from
the difficulty of reducing its quantity, it does not readily bend to variations
in its market value, yet that difficulty is much increased from the
circumstance of its being used as money. If the quantity of gold in the
market for the purpose of commerce only, were 10,000 ounces, and the

consumption in our manufactures were 2000 ounces annually, it might be
raised one fourth, or 25 per cent. in its value, in one year, by withholding
the annual supply; but if in consequence of its being used as money, the
quantity employed were 100,000 ounces, it would not be raised one fourth
in value in less than ten years. As money made of paper may be readily
reduced in quantity, its value, though its standard were gold, would be
increased as rapidly as that of the metal itself would be increased if it had
no connexion whatever with money.
If gold were the produce of one country only, and it were used universally
for money, a very considerable tax might be imposed on it, which would not
fall on any country, except in proportion as they used it in manufactures,
and for utensils; upon that portion which was used for money, though a
large tax might be received, nobody would pay it. This is a quality peculiar
to money. All other commodities of which there exists a limited quantity,
and which cannot be increased by competition, are dependant for their
value, on the tastes, the caprice, and the power of purchasers; but money is
a commodity which no country has any wish or necessity to increase: no
more advantage results from using twenty millions, than from using ten
millions of currency. A country might have a monopoly of silk, or of wine,
and yet the prices of silks and wine might fall, because from caprice or
fashion, or taste, cloth and brandy might be preferred, and substituted; the
same effect might in a degree take place with gold, as far as its use is
confined to manufactures: but while money is the general medium of
exchange, the demand for it is never a matter of choice, but always of
necessity; you must take it in exchange for your goods, and therefore there
are no limits to the quantity which may be forced on you by foreign trade, if
it fall in value; and no reduction to which you must not submit, if it rise.
You may indeed substitute paper money, but by this you do not, and cannot
lessen the quantity of money; it is only by the rise of the price of
commodities, that you can prevent them from being exported from a
country where they are purchased with little money, to a country where they
can be sold for more, and this rise can only be effected by an importation of
metallic money from abroad, or by the creation or addition of paper money
at home. If then the King of Spain, supposing him to be in exclusive
possession of the mines, and gold alone to be used for money, were to lay a
considerable tax on gold, he would very much raise its natural value; and as

its market value in Europe is ultimately regulated by its natural value in
Spanish America, more commodities would be given by Europe for a given
quantity of gold. But the same quantity of gold would not be produced in
America, as its value would only be increased in proportion to the
diminution of quantity consequent on its increased cost of production. No
more goods then would be obtained in America, in exchange for all their
gold exported, than before; and it may be asked, where then would be the
benefit to Spain and her colonies? The benefit would be this, that if less
gold were produced, less capital would be employed in producing it; the
same value of goods from Europe would be imported by the employment of
the smaller capital, that was before obtained by the employment of the
larger; and therefore all the productions obtained by the employment of the
capital withdrawn from the mines, would be a benefit which Spain would
derive from the imposition of the tax, and which she could not obtain in
such abundance, or with such certainty, by possessing the monopoly of any
other commodity whatever. From such a tax, as far as money was
concerned, the nations of Europe would suffer no injury whatever; they
would have the same quantity of goods, and consequently the same means
of enjoyment as before, but these goods would be circulated with a less
quantity of money.
If in consequence of the tax, only one tenth of the present quantity of gold
were obtained from the mines, that tenth would be of equal value with the
ten tenths now produced. But the King of Spain is not exclusively in
possession of the mines of the precious metals; and if he were, his
advantage from their possession, and the power of taxation, would be very
much reduced by the limitation of demand and consumption in Europe, in
consequence of the universal substitution, in a greater or less degree, of
paper money. The agreement of the market and natural prices of all
commodities, depends at all times on the facility with which the supply can
be increased or diminished. In the case of gold, houses, and labour, as well
as many other things, this effect cannot, under some circumstances, be
speedily produced. But it is different with those commodities which are
consumed and reproduced from year to year, such as hats, shoes, corn, and
cloth; they may be reduced if necessary, and the interval cannot be long
before the supply is contracted in proportion to the increased charge of
producing them.

A tax on raw produce from the surface of the earth, will, as we have seen,
fall on the consumer, and will in no way affect rent; unless, by diminishing
the funds for the maintenance of labour, it lowers wages, reduces the
population, and diminishes the demand for corn. But a tax on the produce of
gold mines must, by enhancing the value of that metal, necessarily reduce
the demand for it, and must therefore necessarily displace capital from the
employment to which it was applied. Notwithstanding then, that Spain
would derive all the benefits which I have stated from a tax on gold, the
proprietors of mines from which capital was withdrawn would lose all their
rent. This would be a loss to individuals, but not a national loss; rent being
not a creation, but merely a transfer of wealth: the King of Spain, and the
proprietors of the mines which continued to be worked, would together
receive not only all that the liberated capital produced, but all that the other
proprietors lost.
Suppose the mines of the 1st, 2nd, and 3rd quality to be worked, and to
produce respectively 100, 80, and 70 pounds weight of gold, and therefore
the rent of No. 1 to be thirty pounds, and that of No. 2 ten pounds. Suppose
now the tax to be seventy pounds of gold per annum on each mine worked;
and consequently that No. 1 alone could be profitably worked; it is evident
that all rent would immediately disappear. Before the imposition of the tax,
out of the 100 pounds produced on No. 1, a rent was paid of thirty pounds,
and the worker of the mine retained seventy, a sum equal to the produce of
the least productive mine. The value then of what remains to the capitalist
of the mine No. 1 must be the same as before, or he would not obtain the
common profits of stock; and consequently, after paying seventy out of his
100 pounds for tax, the value of the remaining thirty must be as great as
seventy were before, and therefore the value of the whole hundred as great
as 233 pounds before. Its value might be higher, but it could not be lower,
or even this mine would cease to be worked. Being a monopolised
commodity, it could exceed its natural value, and then it would pay a rent
equal to that excess; but no funds would be employed in the mine, if it were
below this value. In return for one third of the labour and capital employed
in the mines, Spain would obtain as much gold as would exchange for the
same, or very nearly the same, quantity of commodities as before. She
would be richer by the produce of the two thirds liberated from the mines. If
the value of the 100 pounds of gold should be equal to that of the 250

pounds extracted before; the king of Spain's portion, his seventy pounds,
would be equal to 175 at the former value: a small part of the king's tax
only would fall on his own subjects, the greater part being obtained by the
better distribution of capital.
The account of Spain would stand thus:

Formerly produced:
yards of
Gold 250 pounds, of the value of (suppose). 10,000
cloth.

Now produced:
By the two capitalists who quitted the mines, the value of 140 pounds of gold, yards of
5,000
or cloth.

By the capitalist who works the mine, No. 1, thirty pounds of gold increased yards of
3,000
in value, as 1 to 2½, and therefore now of the value of cloth.

yards of
Tax to the king seventy pounds, now of the value of 7,000
cloth.
——
15,600
——

Of the 7000 received by the king, the people of Spain would contribute only
1400, and 5600 would be pure gain, effected by the liberated capital.
If the tax, instead of being a fixed sum per mine worked, were a certain
portion of its produce, the quantity would not be reduced in consequence. If
a half, a fourth, or a third of each mine were taken for the tax, it would
nevertheless be the interest of the proprietors to make their mines yield as
abundantly as before; but if the quantity were not reduced, but only a part of
it transferred from the proprietor to the king, its value would not rise; the
tax would fall on the people of the colonies, and no advantage would be
gained. A tax of this kind would have the effect that Adam Smith supposes
taxes on raw produce would have on the rent of land—it would fall entirely
on the rent of the mine. If pushed a little further, the tax would not only

absorb the whole rent, but would deprive the worker of the mine of the
common profits of stock, and he would consequently withdraw his capital
from the production of gold. If still further extended, the rent of still better
mines would be absorbed, and capital would be further withdrawn; and thus
the quantity would be continually reduced, and its value raised, and the
same effects would take place as we have already pointed out; a part of the
tax would be paid by the people of the Spanish colonies, and the other part
would be a new creation of produce, by increasing the power of the
instrument used as a medium of exchange. Taxes on gold are of two kinds,
one on the actual quantity of gold in circulation, the other on the quantity
that is annually produced from the mines. Both have a tendency to reduce
the quantity, and to raise the value of gold; but by neither will its value be
raised till the quantity is reduced, and therefore such taxes will fall for a
time, until the supply is diminished, on the proprietors of money, but
ultimately they will be paid by the owner of the mine in the reduction of
rent, and by the purchasers of that portion of gold, which is used as a
commodity contributing to the enjoyments of mankind, and not set apart
exclusively for a circulating medium.

CHAPTER XII.

TAXES ON HOUSES.

There are also other commodities besides gold which cannot be speedily
reduced in quantity; any tax on which will therefore fall on the proprietor, if
the increase of price should lessen the demand.
Taxes on houses are of this description; though laid on the occupier, they
will frequently fall by a diminution of rent on the landlord. The produce of
the land is consumed and reproduced from year to year, and so are many
other commodities; as they may therefore be speedily brought to a level
with the demand, they cannot long exceed their natural price. But as a tax
on houses may be considered in the light of an additional rent paid by the
tenant, its tendency will be to diminish the demand for houses of the same

annual rent, without diminishing their supply. Rent will therefore fall, and a
part of the tax will be paid indirectly by the landlord.
"The rent of a house," says Adam Smith, "may be distinguished into two
parts, of which the one may very properly be called the building rent, the
other is commonly called the ground rent. The building rent is the interest
or profit of the capital expended in building the house. In order to put the
trade of a builder upon a level with other trades, it is necessary that this rent
should be sufficient first to pay the same interest which he would have got
for his capital, if he had lent it upon good security; and secondly, to keep
the house in constant repair, or what comes to the same thing, to replace
within a certain term of years the capital which had been employed in
building it." "If in proportion to the interest of money, the trade of the
builder affords at any time a much greater profit than this, it will soon draw
so much capital from other trades, as will reduce the profit to its proper
level. If it affords at any time much less than this, other trades will soon
draw so much capital from it as will again raise that profit. Whatever part of
the whole rent of a house is over and above what is sufficient for affording
this reasonable profit, naturally goes to the ground rent; and where the
owner of the ground, and the owner of the building are two different
persons, it is in most cases completely paid to the former. In country
houses, at a distance from any great town, where there is a plentiful choice
of ground, the ground rent is scarcely any thing, or no more than what the
space upon which the house stands, would pay if employed in agriculture.
In country villas, in the neighbourhood of some great town, it is sometimes
a good deal higher, and the peculiar conveniency, or beauty of situation, is
there frequently very highly paid for. Ground rents are generally highest in
the capital, and in those particular parts of it, where there happens to be the
greatest demand for houses, whatever be the reason for that demand,
whether for trade and business, for pleasure and society, or for mere vanity
and fashion." A tax on the rent of houses may either fall on the occupier, on
the ground landlord, or on the building landlord. In ordinary cases it may be
presumed, that the whole tax would be paid both immediately and finally by
the occupier.
If the tax be moderate, and the circumstances of the country such, that it is
either stationary or advancing, there would be little motive for the occupier
of a house to content himself with one of a worse description. But if the tax

be high, or any other circumstances should diminish the demand for houses,
the landlord's income would fall, for the occupier would be partly
compensated for the tax by a diminution of rent. It is, however, difficult to
say, in what proportions that part of the tax, which was saved by the
occupier by a fall of rent, would fall on the building rent and the ground
rent. It is probable, that in the first instance, both would be affected; but as
houses are, though slowly, yet certainly perishable, and as no more would
be built, till the profits of the builder were restored to the general level,
building rent, would, after an interval, be restored to its natural price. As the
builder receives rent only whilst the building endures, he could pay no part
of the tax, under the most disastrous circumstances, for any longer period.
The payment of this tax, then, would ultimately fall on the occupier and
ground landlord, but "in what proportion, this final payment would be
divided between them," says Adam Smith, "it is not perhaps very easy to
ascertain. The division would probably be very different in different
circumstances, and a tax of this kind might, according to those different
circumstances, affect very unequally both the inhabitant of the house, and
the owner of the ground."15
Adam Smith considers ground rents as peculiarly fit subjects for taxation.
"Both ground rents, and the ordinary rent of land," he says, "are a species of
revenue, which the owner in many cases enjoys, without any care or
attention of his own. Though a part of this revenue should be taken from
him, in order to defray the expenses of the state, no discouragement will
thereby be given to any sort of industry. The annual produce of the land and
labour of the society, the real wealth and revenue of the great body of the
people, might be the same after such a tax as before. Ground rents, and the
ordinary rent of land, are, therefore, perhaps the species of revenue, which
can best bear to have a peculiar tax imposed upon them." It must be
admitted that the effects of these taxes would be such as Adam Smith has
described; but it would surely be very unjust, to tax exclusively the revenue
of any particular class of a community. The burdens of the state should be
borne by all in proportion to their means: this is one of the four maxims
mentioned by Adam Smith, which should govern all taxation. Rent often
belongs to those who after many years of toil, have realised their gains, and
expended their fortunes in the purchase of land; and it certainly would be an
infringement of that principle which should ever be held sacred, the security

of property, to subject it to unequal taxation. It is to be lamented, that the
duty by stamps, with which the transfer of landed property is loaded,
materially impedes the conveyance of it into those hands, where it would
probably be made most productive. And if it be considered, that land,
regarded as a fit subject for exclusive taxation, would not only be reduced
in price, to compensate for the risk of that taxation, but in proportion to the
indefinite nature and uncertain value of the risk, would become a fit subject
for speculations, partaking more of the nature of gambling, than of sober
trade, it will appear probable, that the hands into which land would in that
case be most apt to fall, would be the hands of those, who possess more of
the qualities of the gambler, than of the qualities of the sober-minded
proprietor, who is likely to employ his land to the greatest advantage.

CHAPTER XIII.

TAXES ON PROFITS.

Taxes on those commodities, which are generally denominated luxuries,
fall on those only who make use of them. A tax on wine is paid by the
consumer of wine. A tax on pleasure horses, or on coaches, is paid by those
who provide for themselves such enjoyments, and in exact proportion as
they provide them. But taxes on necessaries do not affect the consumers of
necessaries, in proportion to the quantity that may be consumed by them,
but often in a much higher proportion. A tax on corn, we have observed, not
only affects a manufacturer in the proportion that he and his family may
consume corn, but it alters the rate of profits of stock, and therefore also
affects his income. Whatever raises the wages of labour, lowers the profits
of stock; therefore every tax on any commodity consumed by the labourer,
has a tendency to lower the rate of profits.
A tax on hats will raise the price of hats; a tax on shoes, the price of shoes;
if this were not the case, the tax would be finally paid by the manufacturer;
his profits would be reduced below the general level, and he would quit his
trade. A partial tax on profits will raise the price of the commodity on which
it falls: a tax, for example, on the profits of the hatter, would raise the price

of hats; for if his profits were taxed, and not those of any other trade, his
profits, unless he raised the price of his hats, would be below the general
rate of profits, and he would quit his employment for another.
In the same manner a tax on the profits of the farmer would raise the price
of corn; a tax on the profits of the clothier, the price of cloth; and if a tax in
proportion to profits were laid on all trades, every commodity would be
raised in price. But if the mine, which supplied us with the standard of our
money, were in this country, and the profits of the miner were also taxed,
the price of no commodity would rise, each man would give an equal
proportion of his income, and every thing would be as before.
If money be not taxed, and therefore be permitted to preserve its value,
whilst every thing else is taxed, and is raised in value, the hatter, the farmer,
and clothier, each employing the same capitals, and obtaining the same
profits, will pay the same amount of tax. If the tax be 100l., the hats, the
cloth, and the corn, will each be increased in value 100l. If the hatter gain
by his hats 1100l., instead of 1000l., he will pay 100l. to Government for
the tax; and therefore will still have 1000l. to lay out on goods for his own
consumption. But as the cloth, corn, and all other commodities, will be
raised in price from the same cause, he will not obtain more for his 1000l.
than he before obtained for 910l., and thus will he contribute by his
diminished expenditure to the exigencies of the state; he will, by the
payment of the tax, have placed a portion of the produce of the land and
labour of the country at the disposal of Government, instead of using that
portion himself. If instead of expending his 1000l., he adds it to his capital,
he will find in the rise of wages, and in the increased cost of the raw
material and machinery, that his saving of 1000l. does not amount to more
than a saving of 910l. amounted to before.
If money be taxed, or if by any other cause its value be altered, and all
commodities remain precisely at the same price as before, the profits of the
manufacturer and farmer will also be the same as before, they will continue
to be 1000l.; and as they will each have to pay 100l. to Government, they
will retain only 900l., which will give them a less command over the
produce of the land and labour of the country, whether they expend it in
productive or unproductive labour. Precisely what they lose, Government
will gain. In the first case the contributor to the tax would, for 1000l., have

as great a quantity of goods as he before had for 910l.; in the second, he
would have only as much as he before had for 900l. This proceeds from the
difference in the amount of the tax; in the first case it is only an eleventh of
his income, in the second it is a tenth; money in the two cases being of a
different value.
But although, if money be not taxed, and do not alter in value, all
commodities will rise in price, they will not rise in the same proportion;
they will not after the tax bear the same relative value to each other which
they did before the tax. In a former part of this work, we discussed the
effects of the division of capital into fixed and circulating, or rather into
durable and perishable capital, on the prices of commodities. We shewed
that two manufacturers might employ precisely the same amount of capital,
and might derive from it precisely the same amount of profits, but that they
would sell their commodities for very different sums of money, according
as the capitals they employed were rapidly, or slowly, consumed and
reproduced. The one might sell his goods for 4000l., the other for 10,000l.,
and they might both employ 10,000l. of capital, and obtain 20 per cent.
profit, or 2000l. The capital of one might consist for example of 2000l.
circulating capital, to be reproduced, and 8000l. fixed, in buildings and
machinery; the capital of the other on the contrary might consist of 8000l.
of circulating, and of only 2000l. fixed capital in machinery and buildings.
Now if each of these persons were to be taxed 10 per cent. on his income,
or 200l., the one, to make his business yield him the general rate of profit,
must raise his goods from 10,000l. to 10,200l.; the other would also be
obliged to raise the price of his goods from 4000l. to 4200l. Before the tax,
the goods sold by one of these manufacturers were 2½ times more valuable
than the goods of the other; after the tax they will be 2.42 times more
valuable: the one kind will have risen 2 per cent.; the other 5 per cent.:
consequently a tax upon income, whilst money continued unaltered in
value, would alter the relative prices and value of commodities. This is true,
if the tax instead of being laid on the profits were laid on the commodities
themselves: provided they were taxed in proportion to the value of the
capital employed on their production, they would rise equally, whatever
might be their value, and therefore they would not preserve the same
proportion as before. A commodity, which rose from ten to eleven thousand
pounds, would not bear the same relation as before, to another which rose

from 2 to 3000l. If under these circumstances money rose in value, from
whatever cause it might proceed, it would not affect the prices of
commodities in the same proportion. The same cause which would lower
the price of one from 10,200l. to 10,000l. or less than 2 per cent., would
lower the price of the other from 4200l. to 4000l. or 4-3/4 per cent. If they
fell in any different proportion, profits would not be equal; for to make
them equal, when the price of the first commodity was 10,000l., the price of
the second should be 4000l.; and when the price of the first was 10,200l.,
the price of the other should be 4200l.
The consideration of this fact will lead to the understanding of a very
important principle, which I believe has never been adverted to. It is this;
that in a country where no taxation subsists, the alteration in the value of
money arising from scarcity or abundance will operate in an equal
proportion on the prices of all commodities; that if a commodity of 1000l.
value rise to 1200l., or fall to 800l., a commodity of 10,000l. value will rise
to 12,000l. or fall to 8000l.; but in a country where prices are artificially
raised by taxation, the abundance of money from an influx, or the
exportation and consequent scarcity of it from foreign demand, will not
operate in the same proportion on the prices of all commodities; some it
will raise or lower 5, 6, or 12 per cent., others 3, 4, or 7 per cent. If a
country were not taxed, and money should fall in value, its abundance in
every market would produce similar effects in each. If meat rose 20 per
cent., bread, beer, shoes, labour, and every commodity, would also rise 20
per cent.; it is necessary they should do so, to secure to each trade the same
rate of profits. But this is no longer true when any of these commodities is
taxed; if in that case they should all rise in proportion to the fall in the value
of money, profits would be rendered unequal; in the case of the
commodities taxed profits would be raised above the general level, and
capital would be removed from one employment to another, till an
equilibrium of profits was restored, which could only be, after the relative
prices were altered.
Will not this principle account for the different effects, which it was
remarked were produced on the prices of commodities, from the altered
value of money during the Bank-restriction? It was objected to those who
contended that the currency was at that period depreciated, from the too
great abundance of the paper circulation, that, if that were the fact, all

commodities ought to have risen in the same proportion; but it was found
that many had varied considerably more than others, and thence it was
inferred that the rise of prices was owing to something affecting the value
of commodities, and not to any alteration in the value of the currency. It
appears however, as we have just seen, that in a country where commodities
are taxed, they will not all vary in price in the same proportion, either in
consequence of a rise or of a fall in the value of currency.
If the profits of all trades were taxed, excepting the profits of the farmer, all
goods would rise in money value, excepting raw produce. The farmer
would have the same corn income as before, and would sell his corn also
for the same money price; but as he would be obliged to pay an additional
price for all the commodities, except corn, which he consumed, it would be
to him a tax on expenditure. Nor would he be relieved from this tax by an
alteration in the value of money, for an alteration in the value of money
might sink all the taxed commodities to their former price, but the untaxed
one would sink below its former level; and therefore, though the farmer
would purchase his commodities at the same price as before, he would have
less money with which to purchase them.
The landlord too would be precisely in the same situation, he would have
the same corn, and the same money rent as before, if all commodities rose
in price, and money remained at the same value; and he would have the
same corn, but a less money rent, if all commodities remained at the same
price: so that in either case, though his income were not directly taxed, he
would indirectly contribute towards the money raised.
But suppose the profits of the farmer to be also taxed, he then would be in
the same situation as other traders; his raw produce would rise, so that he
would have the same money revenue, after paying the tax, but he would pay
an additional price for all the commodities he consumed, raw produce
included.
His landlord however would be differently situated, he would be benefited
by the tax on his tenant's profits, as he would be compensated for the
additional price at which he would purchase his manufactured commodities,
if they rose in price; and he would have the same money revenue, if in
consequence of a rise in the value of money, commodities sold at their

former price. A tax on the profits of the farmer, is not a tax proportioned to
the gross produce of the land, but to its net produce, after the payment of
rent, wages, and all other charges. As the cultivators of the different kinds
of land, No. 1, 2, and 3, employ precisely the same capitals, they will get
precisely the same profits, whatever may be the quantity of gross produce,
which one may obtain more than the other; and consequently they will be
all taxed alike. Suppose the gross produce of the land of the quality No. 1,
to be 180 qrs., that of No. 2, 170 qrs., and of No 3, 160, and each to be
taxed 10 quarters, the difference between the produce of No. 1, No. 2, and
No. 3, after paying the tax, will be the same as before; for if No. 1 be
reduced to 170, No. 2 to 160, and No. 3 to 150 qrs.; the difference between
3 and 1 will be as before, 20 qrs.; and of No. 3 and No. 2, 10 qrs. If after the
tax the prices of corn and of every other commodity should remain the same
as before, money rent as well as corn rent, would continue unaltered; but if
the price of corn, and every other commodity should rise in consequence of
the tax, money rent will also rise in the same proportion. If the price of corn
were 4l. per quarter, the rent of No. 1 would have been 80l., and that of No.
2, 40l.; but if corn rose ten per cent., or to 4l. 8s., rent would also rise ten
per cent., for twenty quarters of corn would then be worth 88l., and ten
quarters 44l.; so that in every case the landlord will be unaffected by such a
tax. A tax on the profits of stock always leaves corn rent unaltered, and
therefore money rent varies with the price of corn; but a tax on raw
produce, or tithes, never leaves corn rent unaltered, but generally leaves
money rent the same as before. In another part of this work I have observed,
that if a land-tax of the same money amount, were laid on every kind of
land in cultivation, without any allowance for difference of fertility, it
would be very unequal in its operation, as it would be a profit to the
landlord of the more fertile lands. It would raise the price of corn in
proportion to the burden borne by the farmer of the worst land; but this
additional price being obtained for the greater quantity of produce yielded
by the better land, farmers of such land would be benefited during their
leases, and afterwards, the advantage would go to the landlord in the form
of an increase of rent. The effect of an equal tax on the profits of the farmer
is precisely the same; it raises the money rent of the landlords, if money
retains the same value; but as the profits of all other trades are taxed, as
well as those of the farmer, and consequently the prices of all goods, as well
as corn, are raised, the landlord loses as much by the increased money price

of the goods and corn on which his rent is expended, as he gains by the rise
of his rent. If money should rise in value, and all things should, after a tax
on the profits of stock, fall to their former prices, rent also would be the
same as before. The landlord would receive the same money rent, and
would obtain all the commodities on which it was expended at their former
price; so that under all circumstances he would continue untaxed.
A tax on the profits of stock would also affect the stockholder, if all
commodities were to rise in proportion to the tax; but if from the alteration
in the value of money, all commodities were to sink to their former price,
the stockholder would pay nothing towards the tax; he would purchase all
his commodities at the same price, but would still receive the same money
dividend.
If it be agreed, that by taxing the profits of one manufacturer only, the price
of his goods would rise, to put him on an equality with all other
manufacturers; and that by taxing the profits of two manufacturers, the
prices of two descriptions of goods must rise, I do not see how it can be
disputed, that by taxing the profits of all manufacturers, the prices of all
goods would rise, provided the mine which supplied us with money, were in
the country taxed. But as money, or the standard of money, is a commodity
imported from abroad, the prices of all goods could not rise; for such an
effect could not take place without an additional quantity of money, which
could not be obtained in exchange for dear goods, as was shewn in page
108. If however, such a rise could take place, it could not be permanent, for
it would have a powerful influence on foreign trade. In return for
commodities imported, those dear goods could not be exported, and
therefore we should for a time continue to buy, although we ceased to sell;
and should export money, or bullion, till the relative prices of commodities
were nearly the same as before. It appears to me absolutely certain, that a
well regulated tax on profits, would ultimately restore commodities both of
home and foreign manufacture, to the same money price which they bore
before the tax was imposed.
As taxes on raw produce, tithes, taxes on wages, and on the necessaries of
the labourer, will, by raising wages, lower profits, they will all, though not
in an equal degree, be attended with the same effects.

The discovery of machinery, which materially improves home
manufactures, always tends to raise the relative value of money, and
therefore to encourage its importation. All taxation, all increased
impediments, either to the manufacturer, or the grower of commodities,
tend on the contrary to lower the relative value of money, and therefore to
encourage its exportation.

CHAPTER XIV.

TAXES ON WAGES.

Taxes on wages will raise wages, and therefore will diminish the rate of the
profits of stock. We have already seen that a tax on necessaries will raise
their prices, and will be followed by a rise of wages. The only difference
between a tax on necessaries, and a tax on wages is, that the former will
necessarily be accompanied by a rise in the price of necessaries, but the
latter will not; towards a tax on wages, consequently, neither the
stockholder, the landlord, nor any other class but the employers of labour
will contribute. A tax on wages is wholly a tax on profits, a tax on
necessaries is partly a tax on profits, and partly a tax on rich consumers.
The ultimate effects which will result from such taxes then are precisely the
same as those which result from a direct tax on profits.
"The wages of the inferior classes of workmen," says Adam Smith, "I have
endeavoured to shew in the first book, are every where necessarily
regulated by two different circumstances; the demand for labour, and the
ordinary or average price of provisions. The demand for labour, according
as it happens to be either increasing, stationary, or declining, or to require
an increasing, stationary, or declining population, regulates the subsistence
of the labourer, and determines in what degree it shall be either liberal,
moderate, or scanty. The ordinary or average price of provisions
determines the quantity of money which must be paid to the workman, in
order to enable him one year with another to purchase this liberal,
moderate, or scanty subsistence. While the demand for labour, and the price
of provisions, therefore remain the same, a direct tax upon the wages of

labour can have no other effect than to raise them somewhat higher than the
tax."
To the proposition, as it is here advanced by Dr. Smith, Mr. Buchanan offers
two objections. First, he denies that the money wages of labour are
regulated by the price of provisions; and secondly, he denies that a tax on
the wages of labour would raise the price of labour. On the first point, Mr.
Buchanan's argument is as follows, page 59: "The wages of labour, it has
already been remarked, consist not in money, but in what money purchases,
namely, provisions and other necessaries; and the allowance of the labourer
out of the common stock, will always be in proportion to the supply. Where
provisions are cheap and abundant, his share will be the larger; and where
they are scarce and dear, it will be the less. His wages will always give him
his just share, and they cannot give him more. It is an opinion indeed,
adopted by Dr. Smith and most other writers, that the money price of labour
is regulated by the money price of provisions, and that when provisions rise
in price, wages rise in proportion. But it is clear that the price of labour has
no necessary connexion with the price of food, since it depends entirely on
the supply of labourers compared with the demand. Besides, it is to be
observed, that the high price of provisions is a certain indication of a
deficient supply, and arises in the natural course of things, for the purpose
of retarding the consumption. A smaller supply of food, shared among the
same number of consumers, will evidently leave a smaller portion to each,
and the labourer must bear his share of the common want. To distribute this
burden equally, and to prevent the labourer from consuming subsistence so
freely as before, the price rises. But wages it seems must rise along with it,
that he may still use the same quantity of a scarcer commodity; and thus
nature is represented as counteracting her own purposes: first, raising the
price of food, to diminish the consumption, and afterwards, raising wages to
give the labourer the same supply as before."
In this argument of Mr. Buchanan, there appears to me, to be a great
mixture of truth and error. Because a high price of provisions is sometimes
occasioned by a deficient supply, Mr. Buchanan assumes it as a certain
indication of a deficient supply. He attributes to one cause exclusively, that
which may arise from many. It is undoubtedly true, that in the case of a
deficient supply, a smaller quantity will be shared among the same number
of consumers, and a smaller portion will fall to each. To distribute this

privation equally, and to prevent the labourer from consuming subsistence
so freely as before, the price rises. It must therefore be conceded to Mr.
Buchanan, that any rise in the price of provisions, occasioned by a deficient
supply, will not necessarily raise the money wages of labour; as the
consumption must be retarded; which can only be effected by diminishing
the power of the consumers to purchase. But, because the price of
provisions is raised by a deficient supply, we are by no means warranted in
concluding, as Mr. Buchanan appears to do, that there may not be an
abundant supply, with a high price; not a high price with regard to money
only, but with regard to all other things.
The natural price of commodities, which always ultimately governs their
market price, depends on the facility of production; but the quantity
produced is not in proportion to that facility. Although the lands, which are
now taken into cultivation, are much inferior to the lands in cultivation
three centuries ago, and therefore the difficulty of production is increased,
who can entertain any doubt, but that the quantity produced now, very far
exceeds the quantity then produced? Not only is a high price compatible
with an increased supply, but it rarely fails to accompany it. If, then, in
consequence of taxation, or of difficulty of production, the price of
provisions be raised, and the quantity be not diminished, the money wages
of labour will rise; for as Mr. Buchanan has justly observed, "The wages of
labour consist not in money, but in what money purchases, namely,
provisions and other necessaries; and the allowance of the labourer out of
the common stock, will always be in proportion to the supply."
With respect to the second point, whether a tax on the wages of labour
would raise the price of labour, Mr. Buchanan says, "After the labourer has
received the fair recompense of his labour, how can he have recourse on his
employer, for what he is afterwards compelled to pay away in taxes? There
is no law or principle in human affairs to warrant such a conclusion. After
the labourer has received his wages, they are in his own keeping, and he
must, as far as he is able, bear the burthen of whatever exactions he may
ever afterwards be exposed to: for he has clearly no way of compelling
those to reimburse him, who have already paid him the fair price of his
work." Mr. Buchanan has quoted with great approbation, the following able
passage from Mr. Malthus's work on population, which appears to me
completely to answer his objection. "The price of labour, when left to find

its natural level, is a most important political barometer, expressing the
relation between the supply of provisions, and the demand for them,
between the quantity to be consumed, and the number of consumers; and,
taken on the average, independently of accidental circumstances, it further
expresses, clearly, the wants of the society respecting population, that is,
whatever may be the number of children to a marriage necessary to
maintain exactly the present population, the price of labour will be just
sufficient to support this number, or be above it, or below it, according to
the state of the real funds, for the maintenance of labour, whether stationary,
progressive, or retrograde. Instead, however, of considering it in this light,
we consider it as something which we may raise or depress at pleasure,
something which depends principally on his majesty's justices of the peace.
When an advance in the price of provisions already expresses that the
demand is too great for the supply, in order to put the labourer in the same
condition as before, we raise the price of labour, that is, we increase the
demand, and are then much surprised, that the price of provisions continues
rising. In this, we act much in the same manner, as if, when the quicksilver
in the common weather glass, stood at stormy, we were to raise it by some
forcible pressure to settled fair, and then be greatly astonished that it
continued raining."
"The price of labour will express, clearly, the wants of the society
respecting population;" it will be just sufficient to support the population,
which at that time the state of the funds for the maintenance of labourers,
requires. If the labourer's wages were before only adequate to supply the
requisite population, they will, after the tax, be inadequate to that supply,
for he will not have the same funds to expend on his family. Labour will
therefore rise, because the demand continues, and it is only by raising the
price, that the supply is not checked.
Nothing is more common, than to see hats or malt rise when taxed; they rise
because the requisite supply would not be afforded if they did not rise: so
with labour, when wages are taxed, its price rises, because, if it did not, the
requisite population would not be kept up. Does not Mr. Buchanan allow all
that is contended for, when he says, that "were he (the labourer) indeed
reduced to a bare allowance of necessaries, he would then suffer no further
abatement of his wages, as he could not on such conditions continue his
race?" Suppose the circumstances of the country to be such, that the lowest

labourers are not only called upon to continue their race, but to increase it;
their wages would have been regulated accordingly. Can they multiply, if a
tax takes from them a part of their wages, and reduces them to bare
necessaries?
It is undoubtedly true, that a taxed commodity will not rise in proportion to
the tax, if the demand for it will diminish, and if the quantity cannot be
reduced. If metallic money were in general use, its value would not for a
considerable time be increased by a tax, in proportion to the amount of the
tax, because at a higher price, the demand would be diminished, and the
quantity would not be diminished; and unquestionably the same cause
frequently influences the wages of labour, the number of labourers cannot
be rapidly increased or diminished in proportion to the increase or
diminution of the fund, which is to employ them; but in the case supposed,
there is no necessary diminution of demand for labour, and if diminished,
the demand does not abate in proportion to the tax. Mr. Buchanan forgets
that the fund raised by the tax is employed by Government in maintaining
labourers, unproductive indeed, but still labourers. If labour were not to rise
when wages are taxed, there would be a great increase in the competition
for labour, because the owners of capital, who would have nothing to pay
towards such a tax, would have the same funds for imploying labour; whilst
the Government who received the tax would have an additional fund for the
same purpose. Government and the people thus become competitors, and
the consequence of their competition is a rise in the price of labour. The
same number of men only will be employed, but they will be employed at
additional wages.
If the tax had been laid at once on the people, their fund for the
maintenance of labour would have been diminished in the very same degree
that the fund of Government for that purpose had been increased; and
therefore there would have been no rise in wages; for though there would be
the same demand, there would not be the same competition. If when the tax
were levied, Government at once exported the produce of it as a subsidy to
a foreign state, and if therefore these funds were devoted to the maintenance
of foreign, and not of English labourers, such as soldiers, sailors, &c. &c.;
then, indeed, there would be a diminished demand for labour, and wages
might not increase although they were taxed; but the same thing would
happen if the tax had been laid on consumable commodities, on the profits

of stock, or if in any other manner the same sum had been raised to supply
this subsidy: less labour could be employed at home. In one case wages are
prevented from rising, in the other they must absolutely fall. But suppose
the amount of a tax on wages were, after being raised on the labourers, paid
gratuitously to their employers, it would increase their money fund for the
maintenance of labour, but it would not increase either commodities or
labour. It would consequently increase the competition amongst the
employers of labour, and the tax would be ultimately attended with no loss
either to master or labourer. The master would pay an increased price for
labour; the addition which the labourer received would be paid as a tax to
Government, and would be again returned to the masters. It must however
not be forgotten that the produce of taxes is often wastefully expended, and
that by diminishing capital they tend to diminish the real fund destined for
the maintenance of labour; and therefore to diminish the real demand for it.
Taxes then, generally, as far as they impair the real capital of the country,
diminish the demand for labour, and therefore it is a probable, but not a
necessary, nor a peculiar consequence of a tax on wages, that though wages
would rise, they would not rise by a sum precisely equal to the tax.
Adam Smith, as we have seen, has fully allowed that the effect of a tax on
wages would be to raise wages by a sum at least equal to the tax, and would
be finally, if not immediately, paid by the employer of labour. Thus far we
fully agree; but we essentially differ in our views of the subsequent
operation of such a tax.
"A direct tax upon the wages of labour, therefore," says Adam Smith,
"though the labourer might perhaps pay it out of his hand, could not
properly be said to be even advanced by him; at least if the demand for
labour and the average price of provisions remained the same after the tax
as before it. In all such cases, not only the tax, but something more than the
tax, would in reality be advanced by the person who immediately employed
him. The final payment would in different cases fall upon different persons.
The rise which such a tax might occasion in the wages of manufacturing
labour, would be advanced by the master manufacturer, who would be
entitled and obliged to charge it with a profit, upon the price of his goods.
The rise which such a tax might occasion in country labour would be
advanced by the farmer, who, in order to maintain the same number of
labourers as before, would be obliged to employ a greater capital. In order

to get back this greater capital, together with the ordinary profits of stock, it
would be necessary that he should retain a larger portion, or what comes to
the same thing, the price of a larger portion of the produce of the land, and
consequently that he should pay less rent to the landlord. The final payment
of this rise of wages, therefore, would in this case fall upon the landlord,
together with the additional profits of the farmer who had advanced it. In
all cases a direct tax upon the wages of labour must, in the long run,
occasion both a greater reduction in the rent of land, and a greater rise in the
price of manufactured goods, than would have followed, from the proper
assessment of a sum equal to the produce of the tax, partly upon the rent of
land, and partly upon consumable commodities." Vol. iii. p. 337. In this
passage it is asserted that the additional wages paid by farmers will
ultimately fall on the landlords, who will receive a diminished rent; but that
the additional wages paid by manufacturers will occasion a rise in the price
of manufactured goods, and will therefore fall on the consumers of those
commodities.
Now suppose a society to consist of landlords, manufacturers, farmers, and
labourers. The labourers, it is agreed, would be recompensed for the tax;—
but by whom?—who would pay that portion which did not fall on the
landlords?—the manufacturers could pay no part of it; for if the price of
their commodities should rise in proportion to the additional wages they
paid, they would be in a better situation after than before the tax. If the
clothier, the hatter, the shoemaker, &c., should be each able to raise the
price of their goods 10 per cent.,—supposing 10 per cent. to recompense
them completely for the additional wages they paid,—if, as Adam Smith
says, "they would be entitled and obliged to charge the additional wages
with a profit upon the price of their goods," they could each consume as
much as before of each other's goods, and therefore they would pay nothing
towards the tax. If the clothier paid more for his hats and shoes, he would
receive more for his cloth, and if the hatter paid more for his cloth and
shoes, he would receive more for his hats. All manufactured commodities
then would be bought by them with as much advantage as before, and
inasmuch as corn would not be raised in price whilst they had an additional
sum to lay out upon its purchase, they would be benefited, and not injured
by such a tax.

If then neither the labourers nor the manufacturers would contribute
towards such a tax; if the farmers would be also recompensed by a fall of
rent, landlords alone must not only bear its whole weight, but they must
also contribute to the increased gains of the manufacturers. To do this,
however, they should consume all the manufactured commodities in the
country, for the additional price charged on the whole mass is little more
than the tax originally imposed on the labourers in manufactures.
Now it will not be disputed that the clothier, the hatter, and all other
manufacturers, are consumers of each other's goods; it will not be disputed
that labourers of all descriptions consume soap, cloth, shoes, candles, and
various other commodities: it is therefore impossible that the whole weight
of these taxes should fall on landlords only.
But if the labourers pay no part of the tax, and yet manufactured
commodities rise in price, wages must rise, not only to compensate them for
the tax, but for the increased price of manufactured necessaries, which, as
far as it affects agricultural labour, will be a new cause for the fall of rent;
and, as far as it affects manufacturing labour, for a further rise in the price
of goods. This rise in the price of goods will again operate on wages, and
the action and re-action, first of wages on goods, and then of goods on
wages, will be extended without any assignable limits. The arguments by
which this theory is supported, lead to such absurd conclusions that it may
at once be seen that the principle is wholly indefensible.
All the effects which are produced on the profits of stock and the wages of
labour, by a rise of rent and a rise of necessaries, in the natural progress of
society, and increasing difficulty of production, will be produced by a rise
of wages in consequence of taxation; and therefore the enjoyments of the
labourer, as well as those of his employers, will be curtailed by the tax; and
not by this tax particularly, but by any other which should raise an equal
amount.
The error of Adam Smith proceeds in the first place from supposing, that all
taxes paid by the farmer must necessarily fall on the landlord, in the shape
of a deduction from rent. On this subject I have explained myself most
fully, and I trust that it has been shewn, to the satisfaction of the reader, that
since much capital is employed on the land which pays no rent, and since it

is the result obtained by this capital which regulates the price of raw
produce, no deduction can be made from rent; and consequently either no
remuneration will be made to the farmer for a tax on wages, or if made, it
must be made by an addition to the price of raw produce.
If taxes press unequally on the farmer, he will be enabled to raise the price
of raw produce, to place himself on a level with those who carry on other
trades; but a tax on wages, which would not affect him more than it would
affect any other trade, could not be removed or compensated by a high price
of raw produce; for, the same reason which should induce him to raise the
price of corn, namely, to remunerate himself for the tax, would induce the
clothier to raise the price of cloth, the shoemaker, hatter, and upholsterer, to
raise the price of shoes, hats, and furniture.
If they could all raise the price of their goods, so as to remunerate
themselves, with a profit, for the tax; as they are all consumers of each
other's commodities, it is obvious that the tax could never be paid; for who
would be the contributors if all were compensated?
I hope then that I have succeeded in shewing, that any tax which shall have
the effect of raising wages, will be paid by a diminution of profits, and
therefore that a tax on wages is in fact a tax on profits.
This principle of the division of the produce of labour and capital between
wages and profits, which I have attempted to establish, appears to me so
certain, that excepting in the immediate effects, I should think it of little
importance whether the profits of stock, or the wages of labour, were taxed.
By taxing the profits of stock, you would probably alter the rate at which
the funds for the maintenance of labour increase, and wages would be
disproportioned to the state of that fund, by being too high. By taxing
wages, the reward paid to the labourer would also be disproportioned to the
state of that fund, by being too low. In the one case by a fall, and in the
other by a rise in money wages, the natural equilibrium between profits and
wages would be restored. A tax on wages then does not fall on the landlord,
but it falls on the profits of stock: it does not "entitle and oblige the master
manufacturer to charge it with a profit on the prices of his goods," for he
will be unable to increase their price, and therefore he must himself wholly
and without compensation pay such a tax.16

If the effect of taxes on wages be such as I have described, they do not
merit the censure cast upon them by Dr. Smith. He observes of such taxes,
"These, and some other taxes of the same kind, by raising the price of
labour, are said to have ruined the greater part of the manufactures of
Holland. Similar taxes, though not quite so heavy, take place in the
Milanese, in the states of Genoa, in the duchy of Modena, in the duchies of
Parma, Placentia, and Guastalla, and in the ecclesiastical states. A French
author of some note, has proposed to reform the finances of his country, by
substituting in the room of other taxes, this most ruinous of all taxes. 'There
is nothing so absurd,' says Cicero, 'which has not sometimes been asserted
by some philosophers.'" And in another place he says: "taxes upon
necessaries, by raising the wages of labour, necessarily tend to raise the
price of all manufactures, and consequently to diminish the extent of their
sale and consumption." They would not merit this censure; even if Dr.
Smith's principle were correct that such taxes would enhance the prices of
manufactured commodities; for such an effect could be only temporary, and
would subject us to no disadvantage in our foreign trade. If any cause
should raise the price of a few manufactured commodities, it would prevent
or check their exportation; but if the same cause operated generally on all,
the effect would be merely nominal, and would neither interfere with their
relative value, nor in any degree diminish the stimulus to a trade of barter;
which all commerce, both foreign and domestic, really is.
I have already attempted to shew, that when any cause raises the prices of
all commodities in general, the effects are nearly similar to a fall in the
value of money. If money falls in value, all commodities rise in price; and if
the effect is confined to one country, it will affect its foreign commerce in
the same way as a high price of commodities caused by general taxation;
and therefore in examining the effects of a low value of money confined to
one country, we are also examining the effects of a high price of
commodities confined to one country. Indeed Adam Smith was fully aware
of the resemblance between these two cases, and consistently maintained
that the low value of money, or, as he calls it, of silver in Spain, in
consequence of the prohibition against its exportation, was very highly
prejudicial to the manufactures and foreign commerce of Spain. "But that
degradation in the value of silver, which being the effect either of the
peculiar situation, or of the political institutions of a particular country,

takes place only in that country, is a matter of very great consequence,
which, far from tending to make any body really richer, tends to make every
body really poorer. The rise in the money price of all commodities, which is
in this case peculiar to that county, tends to discourage more or less every
sort of industry which is carried on within it, and to enable foreign nations,
by furnishing almost all sorts of goods for a smaller quantity of silver than
its own workmen can afford to do, to undersell them not only in the foreign,
but even in the home market." Vol. ii. page 278.
One, and I think the only one of the disadvantages of a low value of silver
in a country, proceeding from a forced abundance, has been ably explained
by Dr. Smith. If the trade in gold and silver were free, "the gold and silver
which would go abroad, would not go abroad for nothing, but would bring
back an equal value of goods of some kind or another. Those goods too
would not be all matters of mere luxury and expense, to be consumed by
idle people, who produce nothing in return for their consumption. As the
real wealth and revenue of idle people would not be augmented by this
extraordinary exportation of gold and silver, so would neither their
consumption be augmented by it. Those goods would, probably the greater
part of them, and certainly some part of them, consist in materials, tools,
and provisions, for the employment and maintenance of industrious people,
who would reproduce with a profit, the full value of their consumption. A
part of the dead stock of the society would thus be turned into active stock,
and would put into motion a greater quantity of industry than had been
employed before."
By not allowing a free trade in the precious metals when the prices of
commodities are raised, either by taxation, or by the influx of the precious
metals, you prevent a part of the dead stock of the society from being turned
into active stock—you prevent a greater quantity of industry from being
employed. But this is the whole amount of the evil; an evil never felt by
those countries where the exportation of silver is either allowed or connived
at.
The exchanges between countries are at par only, whilst they have precisely
that quantity of currency which in the actual situation of things they should
have to carry on the circulation of their commodities. If the trade in the
precious metals were perfectly free, and money could be exported without

any expense whatever, the exchanges could be no otherwise in every
country than at par. If the trade in the precious metals were perfectly free, if
they were generally used in circulation, even with the expenses of
transporting them, the exchange could never in any of them deviate more
from par, than by these expenses. These principles I believe are now no
where disputed. If a country used paper money not exchangeable for specie,
and therefore not regulated by any fixed standard, the exchanges in that
country might deviate as much from par, as its money might be multiplied
beyond that quantity which would have been allotted to it by general
commerce, if the trade in money had been free, and the precious metals had
been used, either for money, or for the standard of money.
If by the general operations of commerce, 10 millions of pounds sterling, of
a known weight and fineness of bullion, should be the portion of England,
and 10 millions of paper pounds were substituted, no effect would be
produced on the exchange; but if by the abuse of the power of issuing paper
money, 11 millions of pounds should be employed in the circulation, the
exchange would be 9 per cent. against England; if 12 millions were
employed, the exchange would be 16 per cent.; and if 20 millions, the
exchange would be 50 per cent. against England. To produce this effect it is
not however necessary that paper money should be employed: any cause
which retains in circulation a greater quantity of pounds than would have
circulated, if commerce had been free, and the precious metals of a known
weight and fineness had been used, either for money, or for the standard of
money, would exactly produce the same effects. Suppose that by clipping
the money, each pound did not contain the quantity of gold or silver which
by law it should contain, a greater number of such pounds might be
employed in the circulation, than if they were not clipped. If from each
pound one tenth were taken away, 11 millions of such pounds might be used
instead of 10; if two tenths were taken away, 12 millions might be
employed; and if one half were taken away, 20 millions might not be found
superfluous. If the latter sum were used instead of 10 millions, every
commodity in England would be raised to double its former price, and the
exchange would be 50 per cent. against England, but this would occasion
no disturbance in foreign commerce, nor discourage the manufacture of any
one commodity. If for example, cloth rose in England from 20l. to 40l. per
piece, we should just as freely export it after as before the rise, for a

compensation of 50 per cent. would be made to the foreign purchaser in the
exchange; so that with 20l. of his money, he could purchase a bill which
would enable him to pay a debt of 40l. in England. In the same manner if he
exported a commodity which cost 20l. at home, and which sold in England
for 40l. he would only receive 20l., for 40l. in England would only purchase
a bill for 20l. on a foreign country. The same effects would follow from
whatever cause 20 millions could be forced to perform the business of
circulation in England, if 10 millions only were necessary. If so absurd a
law, as the prohibition of the exportation of the precious metals, could be
enforced, and the consequence of such prohibition were to force 11 millions
instead of 10 into circulation, the exchange would be 9 per cent. against
England; if 12 millions, 16 per cent.; and if 20 millions, 50 per cent. against
England. But no discouragement would be given to the manufactures of
England; if home commodities sold at a high price in England, so would
foreign commodities; and whether they were high or low would be of little
importance to the foreign exporter and importer, whilst he would, on the
one hand, be obliged to allow a compensation in the exchange when his
commodities sold at a dear rate, and would receive the same compensation,
when he was obliged to purchase English commodities at a high price. The
sole disadvantage then which could happen to a country from retaining by
prohibitory laws a greater quantity of gold and silver in circulation than
would otherwise remain there, would be the loss which it would sustain
from employing a portion of its capital unproductively, instead of
employing it productively. In the form of money this capital is productive of
no profit; in the form of materials, machinery, and food, for which it might
be exchanged, it would be productive of revenue, and would add to the
wealth and the resources of the state. Thus then I hope I have satisfactorily
proved, that a comparatively low price of the precious metals, in
consequence of taxation, or in other words, a generally high price of
commodities, would be of no disadvantage to a state, as a part of the metals
would be exported, which, by raising their value, would again lower the
prices of commodities. And further, that if they were not exported, if by
prohibitory laws they could be retained in a country, the effect on the
exchange would counterbalance the effect of high prices. If then taxes on
necessaries and on wages would not raise the prices of all commodities on
which labour was expended, they cannot be condemned on such grounds;

and moreover, even if the opinion that they would have such an effect were
well founded, they would be in no degree injurious on that account.
It is undoubtedly true, that "taxes upon luxuries have no tendency to raise
the price of any other commodities, except that of the commodities taxed;"
but it is not true, that taxes upon necessaries, by raising the wages of labour,
necessarily tend to raise the price of all manufactures." It is true, that "taxes
upon luxuries are finally paid by the consumers of the commodities taxed,
without any retribution. They fall indifferently upon every species of
revenue, the wages of labour, the profits of stock, and the rent of land;" but
it is not true, "that taxes upon necessaries so far as they affect the labouring
poor, are finally paid partly by landlords in the diminished rent of their
lands, and partly by rich consumers, whether landlords or others, in the
advanced price of manufactured goods;" for so far as these taxes affect the
labouring poor, they will be almost wholly paid by the diminished profits
of stock, a small part only being paid by the labourers themselves in the
diminished demand for labour, which taxation of every kind has a tendency
to produce.
It is from Dr. Smith's erroneous view of the effect of those taxes, that he has
been led to the conclusion, that "the middling and superior ranks of people,
if they understood their own interest, ought always to oppose all taxes upon
the necessaries of life, as well as all direct taxes upon the wages of labour."
This conclusion follows from his reasoning, "that the final payment of both
one and the other falls altogether upon themselves, and always with a
considerable overcharge. They fall heaviest upon the landlords, who always
pay in a double capacity; in that of landlords, by the reduction of their rent,
and in that of rich consumers, by the increase of their expense. The
observation of Sir Matthew Decker, that certain taxes are in the price of
certain goods, sometimes repeated and accumulated four or five times, is
perfectly just with regard to taxes upon the necessaries of life. In the price
of leather, for example, you must pay, not only for the tax upon the leather
of your own shoes, but for a part of that upon those of the shoemaker and
the tanner. You must pay too for the tax upon the salt, upon the soap, and
upon the candles, which those workmen consume while employed in your
service, and for the tax upon the leather, which the salt-maker, the soap-
maker, and the candle-maker consume, while employed in their service."

Now as Dr. Smith does not contend that the tanner, the salt-maker, the soap-
maker, and the candle-maker, will either of them be benefited by the tax on
leather, salt, soap, and candles; and as it is certain, that government will
receive no more than the tax imposed, it is impossible to conceive, that
more can be paid by the public upon whomsoever the tax may fall. The rich
consumers may, and indeed will, pay for the poor consumer, but they will
pay no more than the whole amount of the tax; and it is not in the nature of
things, that "the tax should be repeated and accumulated four or five times."
A system of taxation may be defective; more may be raised from the
people, than what finds its way into the coffers of the state, as a part, in
consequence of its effect on prices, may possibly be received by those, who
are benefited by the peculiar mode in which taxes are laid. Such taxes are
pernicious, and should not be encouraged; for it may be laid down as a
principle, that when taxes operate justly, they conform to the first of Dr.
Smith's maxims, and raise from the people as little as possible beyond what
enters into the public treasury of the state. M. Say says, "others offer plans
of finance, and propose means for filling the coffers of the sovereign,
without any charge to his subjects. But unless a plan of finance is of the
nature of a commercial undertaking, it cannot give government more than it
takes away, either from individuals, or from government itself, under some
other form. Something cannot be made out of nothing, by the stroke of a
wand. In whatever way an operation may be disguised, whatever forms we
may constrain a value to take, whatever metamorphosis we may make it
undergo, we can only have a value by creating it, or by taking it from
others. The very best of all plans of finance is to spend little, and the best of
all taxes is, that which is the least in amount."
Dr. Smith uniformly, and I think justly, contends, that the labouring classes
cannot materially contribute to the burdens of the state. A tax on
necessaries, or on wages, will therefore be shifted from the poor to the rich:
if then, the meaning of Dr. Smith is, "that certain taxes are in the price of
certain goods sometimes repeated, and accumulated four or five times," for
the purpose only of accomplishing this end, namely, the transference of the
tax from the poor to the rich, they cannot be liable to censure on that
account.

Suppose the just share of the taxes of a rich consumer to be 100l., and that
he would pay it directly, if the tax were laid on income, on wine, or on any
other luxury, he would suffer no injury if by the taxation of necessaries, he
should be only called upon for the payment of 25l., as far as his own
consumption of necessaries, and that of his family was concerned, but
should be required to repeat this tax three times, by paying an additional
price for other commodities to remunerate the labourers, or their employers,
for the tax which they have been called upon to advance. Even in that case
the reasoning is inconclusive: for if there be no more paid than what is
required by Government; of what importance can it be to the rich consumer,
whether he pay the tax directly, by paying an increased price for an object
of luxury, or indirectly, by paying an increased price for the necessaries and
other commodities he consumes? If more be not paid by the people, than
what is received by Government, the rich consumer will only pay his
equitable share; if more is paid, Adam Smith should have stated by whom it
is received.
M. Say does not appear to me to have consistently adhered to the obvious
principle, which I have quoted from his able work; for in the next page,
speaking of taxation, he says, "When it is pushed too far, it produces this
lamentable effect, it deprives the contributor of a portion of his riches,
without enriching the state. This is what we may comprehend, if we
consider that every man's power of consuming, whether productively or not,
is limited by his income. He cannot then be deprived of a part of his
income, without being obliged proportionally to reduce his consumption.
Hence arises a diminution of demand for those goods, which he no longer
consumes, and particularly for those on which the tax is imposed. From this
diminution of demand, there results a diminution of production, and
consequently of taxable commodities. The contributor then will lose a
portion of his enjoyments; the producer, a portion of his profits; and the
treasury, a portion of its receipts."
M. Say instances the tax on salt in France, previous to the revolution;
which, he says, diminished the production of salt by one half. If, however,
less salt was consumed, less capital was employed in producing it; and
therefore, though the producer would obtain less profits on the production
of salt, he would obtain more on the production of other things. If a tax,
however burdensome it may be, falls on revenue, and not on capital, it does

not diminish demand, it only alters the nature of it. It enables Government
to consume as much of the produce of the land and labour of the country, as
was before consumed by the individuals who contribute to the tax. If my
income is 1000l. per annum, and I am called upon for 100l. per annum for a
tax, I shall only be able to demand nine tenths of the quantity of goods,
which I before consumed, but I enable Government to demand the other
tenth. If the commodity taxed be corn, it is not necessary that my demand
for corn should diminish, as I may prefer to pay 100l. per annum more for
my corn, and to the same amount abate in my demand for wine, furniture,
or any other luxury.17 Less capital will consequently be employed in the
wine or upholstery trade, but more will be employed in manufacturing those
commodities, on which the taxes levied by Government will be expended.
M. Say says that M. Turgot, by reducing the market dues on fish (les droits
d'entrée et de halle sur la marée) in Paris one half, did not diminish the
amount of their produce, and that consequently, the consumption of fish
must have doubled. He infers from this, that the profits of the fisherman and
those engaged in the trade, must also have doubled, and that the income of
the country must have increased, by the whole amount of these increased
profits; and by giving a stimulus to accumulation, must have increased the
resources of the state.18
Without calling in question the policy, which dictated this alteration of the
tax, I may be permitted to doubt whether it gave any great stimulus to
accumulation. If the profits of the fisherman and others engaged in the
trade, were doubled in consequence of more fish being consumed, capital
and labour must have been withdrawn from other occupations to engage
them in this particular trade. But in those occupations capital and labour
were productive of profits, which must have been given up when they were
withdrawn. The ability of the country to accumulate was only increased by
the difference between the profits obtained in the business in which the
capital was newly engaged, and those obtained in that from which it was
withdrawn.
Whether taxes be taken from revenue or capital, they diminish the taxable
commodities of the state. If I cease to expend 100l. on wine, because by
paying a tax of that amount I have enabled Government to expend 100l.
instead of expending it myself, one hundred pounds worth of goods are

necessarily withdrawn from the list of taxable commodities. If the revenue
of the individuals of a country be 10 millions, they will have at least 10
millions worth of taxable commodities. If by taxing some, one million be
transferred to the disposal of Government, their revenue will still be
nominally 10 millions, but they will remain with only nine millions worth
of taxable commodities. There are no circumstances under which taxation
does not abridge the enjoyments of those on whom the taxes ultimately fall,
and no means by which those enjoyments can again be extended, but the
accumulation of new revenue.
Taxation can never be so equally applied, as to operate in the same
proportion on the value of all commodities, and still to preserve them at the
same relative value. It frequently operates very differently from the
intention of the legislature, by its indirect effects. We have already seen,
that the effect of a direct tax on corn and raw produce, is, if money be also
produced in the country, to raise the price of all commodities, in proportion
as raw produce enters into their composition, and thereby to destroy the
natural relation which previously existed between them. Another indirect
effect is, that it raises wages, and lowers the rate of profits; and we have
also seen, in another part of this work, that the effect of a rise of wages, and
a fall of profits, is to lower the money prices of those commodities which
are produced in a greater degree by the employment of fixed capital.
That a commodity when taxed can no longer be so profitably exported, is so
well understood, that a drawback is frequently allowed on its exportation,
and a duty laid on its importation. If these drawbacks and duties be
accurately laid, not only on the commodities themselves, but on all which
they may indirectly affect, then indeed there will be no disturbance in the
value of the precious metals. Since we could as readily export a commodity
after being taxed as before, and since no peculiar facility would be given to
importation, the precious metals would not, more than before, enter into the
list of exportable commodities.
Of all commodities, none are perhaps so proper for taxation, as those which
either by the aid of nature or art, are produced with peculiar facility. With
respect to foreign countries, such commodities may be classed under the
head of those which are not regulated in their price by the quantity of labour
bestowed, but rather by the caprice, the tastes, and the power of the

purchasers. If England had more productive tin mines than other countries,
or if from superior machinery or fuel she had peculiar facilities in
manufacturing cotton goods, the prices of tin, and of cotton goods would
still in England be regulated by the comparative quantity of labour and
capital required to produce them, and the competition of our merchants
would make them very little dearer to the foreign consumer. Our advantage
in the production of these commodities might be so decided, that probably
they could bear a very great additional price in the foreign market, without
very materially diminishing their consumption. This price they never could
attain, whilst competition was free at home, by any other means but by a tax
on their exportation. This tax would fall wholly on foreign consumers, and
part of the expenses of the Government of England would be defrayed, by a
tax on the land and labour of other countries. The tax on tea, which at
present is paid by the people of England, and goes to aid the expenses of the
Government of England, might, if laid in China, on the exportation of the
tea, be diverted to the payment of the expenses of the Government of China.
Taxes on luxuries have some advantage over taxes on necessaries. They are
generally paid from income, and therefore do not diminish the productive
capital of the country. If wine were much raised in price in consequence of
taxation, it is probable that a man would rather forego the enjoyments of
wine, than make any important encroachments on his capital, to be enabled
to purchase it. They are so identified with price, that the contributor is
hardly aware that he is paying a tax. But they have also their disadvantages.
First, they never reach capital, and on some extraordinary occasions it may
be expedient that even capital should contribute towards the public
exigencies; and secondly, there is no certainty as to the amount of the tax,
for it may not reach even income. A man intent on saving will exempt
himself from a tax on wine, by giving up the use of it. The income of the
country may be undiminished, and yet the state may be unable to raise a
shilling by the tax.
Whatever habit has rendered delightful, will be relinquished with
reluctance, and will continue to be consumed notwithstanding a very heavy
tax; but this reluctance has its limits, and experience every day
demonstrates that an increase in the nominal amount of taxation, often
diminishes the produce. One man will continue to drink the same quantity
of wine, though the price of every bottle should be raised three shillings,

who would yet relinquish the use of wine rather than pay four. Another will
be content to pay four, yet refuse to pay five shillings. The same may be
said of other taxes on luxuries: many would pay a tax of 5l. for the
enjoyment which a horse affords, who would not pay 10l. or 20l. It is not
because they cannot pay more, that they give up the use of wine and of
horses, but because they will not pay more. Every man has some standard in
his own mind by which he estimates the value of his enjoyments, but that
standard is as various as the human character. A country whose financial
situation has become extremely artificial, by the mischievous policy of
accumulating a large national debt, and a consequently enormous taxation,
is particularly exposed to the inconvenience attendant on this mode of
raising taxes. After visiting with a tax the whole round of luxuries; after
laying horses, carriages, wine, servants, and all the other enjoyments of the
rich, under contribution; a minister is disposed to conclude that the country
is arrived at the maximum of taxation, because by increasing the rate, he
cannot increase the amount of any one of these taxes. But in this conclusion
he will not be always correct, for it is very possible that such a country
could bear a very great addition to its burdens without infringing on the
integrity of its capital.

CHAPTER XV.

TAXES ON OTHER COMMODITIES THAN RAW PRODUCE.

On the same principle that a tax on corn would raise the price of corn, a tax
on any other commodity would raise the price of that commodity. If the
commodity did not rise by a sum equal to the tax, it would not give the
same profit to the producer which he had before, and he would remove his
capital to some other employment.
The taxing of all commodities, whether they be necessaries or luxuries,
will, while money remains at an unaltered value, raise their prices by a sum
at least equal to the tax.19 A tax on the manufactured necessaries of the
labourer would have the same effect on wages as a tax on corn, which
differs from other necessaries only by being the first and most important on

the list; and it would produce precisely the same effects on the profits of
stock and foreign trade. But a tax on luxuries would have no other effect
than to raise their price. It would fall wholly on the consumer, and could
neither increase wages, nor lower profits.
Taxes which are levied on a country for the purpose of supporting war, or
for the ordinary expenses of the state, and which are chiefly devoted to the
support of unproductive labourers, are taken from the productive industry of
the country; and every saving which can be made from such expenses will
be generally added to the income, if not to the capital of the contributors.
When for the expenses of a year's war, twenty millions are raised by means
of a loan, it is the twenty millions which are withdrawn from the productive
capital of the nation. The million per annum which is raised by taxes to pay
the interest of this loan, is merely transferred from those who pay it to those
who receive it, from the contributor to the tax to the national creditor. The
real expense is the twenty millions, and not the interest which must be paid
for it.20 Whether the interest be or be not paid, the country will neither be
richer nor poorer. Government might at once have required the twenty
millions in the shape of taxes; in which case it would not have been
necessary to raise annual taxes to the amount of a million. This however
would not have changed the nature of the transaction. An individual instead
of being called upon to pay 100l. per annum, might have been obliged to
pay 2000l. once for all. It might also have suited his convenience rather to
borrow this 2000l., and to pay 100l. per annum for interest to the lender,
than to spare the larger sum from his own funds. In one case it is a private
transaction between A and B, in the other Government guarantees to B the
payment of the interest to be equally paid by A. If the transaction had been
of a private nature, no public record would be kept of it, and it would be a
matter of comparative indifference to the country whether A faithfully
performed his contract to B, or unjustly retained, the 100l. per annum in his
own possession. The country would have a general interest in the faithful
performance of a contract, but with respect to the national wealth, it would
have no other interest than whether A or B would make this 100l. most
productive, but on this question it would neither have the right nor the
ability to decide. It might be possible, that if A retained it for his own use,
he might squander it unprofitably, and if it were paid to B, he might add it
to his capital, and employ it productively. And the converse would also be

possible, B might squander it, and A might employ it productively. With a
view to wealth only, it might be equally or more desirable that A should or
should not pay it; but the claims of justice and good faith, a greater utility,
are not to be compelled to yield to those of a less; and accordingly, if the
state were called upon to interfere, the courts of justice would oblige A to
perform his contract. A debt guaranteed by the nation, differs in no respect
from the above transaction. Justice and good faith demand that the interest
of the national debt should continue to be paid, and that those who have
advanced their capitals for the general benefit, should not be required to
forego their equitable claims, on the plea of expediency.
But independently of this consideration, it is by no means certain, that
political utility would gain any thing by the sacrifice of political integrity; it
does by no means follow, that the party exonerated from the payment of the
interest of the national debt would employ it more productively than those
to whom indisputably it is due. By cancelling the national debt, one man's
income might be raised from 1000l. to 1500l., but another man's would be
lowered from 1500l. to 1000l. These two men's income now amount to
2500l., they would amount to no more then. If it be the object of
Government to raise taxes, there would be precisely the same taxable
capital and income in one case, as in the other. It is not then by the payment
of the interest on the national debt that a country is distressed, nor is it by
the exoneration from payment that it can be relieved. It is only by saving
from income, and retrenching in expenditure, that the national capital can
be increased; and neither the income would be increased, nor the
expenditure diminished by the annihilation of the national debt. It is by the
profuse expenditure of Government, and of individuals, and by loans, that a
country is impoverished; every measure therefore which is calculated to
promote public and private œconomy will relieve the public distress; but it
is error and delusion, to suppose that a real national difficulty can be
removed, by shifting it from the shoulders of one class of the community,
who justly ought to bear it, to the shoulders of another class, who upon
every principle of equity ought to bear no more than their share. From what
I have said, it must not be inferred that I consider the system of borrowing
as the best calculated to defray the extraordinary expenses of the state. It is
a system which tends to make us less thrifty—to blind us to our real
situation. If the expenses of a war be 40 millions per annum, and the share

which a man would have to contribute towards that annual expense were
100l., he would endeavour, on being at once called upon for his portion, to
save speedily the 100l. from his income. By the system of loans he is called
upon to pay only the interest of this 100l., or 5l. per annum, and considers
that he does enough by saving this 5l. from his expenditure, and then
deludes himself with the belief that he is as rich as before. The whole
nation, by reasoning and acting in this manner, save only the interest of 40
millions, or two millions; and thus, not only lose all the interest or profit
which 40 millions of capital, employed productively, would afford, but also
38 millions, the difference between their savings and expenditure. If, as I
before observed, each man had to make his own loan, and contribute his full
proportion to the exigencies of the state, as soon as the war ceased, taxation
would cease, and we should immediately fall into a natural state of prices.
Out of his private funds, A might have to pay to B interest for the money he
borrowed of him during the war, to enable him to pay his quota of the
expense; but with this the nation would have no concern. A country which
has accumulated a large debt is placed in a most artificial situation; and
although the amount of taxes, and the increased price of labour, may not,
and I believe does not, place it under any other disadvantage with respect to
foreign countries, except the unavoidable one of paying those taxes, yet it
becomes the interest of every contributor to withdraw his shoulder from the
burthen, and to shift this payment from himself to another; and the
temptation to remove himself and his capital to another country, where he
will be exempted from such burthens, becomes at last irresistible, and
overcomes the natural reluctance which every man feels to quit the place of
his birth, and the scene of his early associations. A country which has
involved itself in the difficulties attending this artificial system, would act
wisely by ransoming itself from them, at the sacrifice of any portion of its
property which might be necessary to redeem its debt. That which is wise in
an individual, is wise also in a nation. A man who has 10,000l., paying him
an income of 500l., out of which he has to pay 100l. per annum towards the
interest of the debt, is really worth only 8000l., and would be equally rich,
whether he continued to pay 100l. per annum, or at once, and for only once,
sacrificed 2000l. But where, it is asked, would be the purchaser of the
property which he must sell to obtain this 2000l.? The answer is plain: the
national creditor, who is to receive this 2000l., will want an investment for
his money, and will be disposed either to lend it to the landholder, or

manufacturer, or to purchase from them a part of the property of which they
have to dispose. To such an effect the stockholders themselves would
largely contribute. Such a scheme has been often recommended, but we
have, I fear, neither wisdom enough, nor virtue enough, to adopt it. It must
however be admitted, that during peace, our unceasing efforts should be
directed towards paying off that part of the debt which has been contracted
during war; and that no temptation of relief, no desire of escape from
present, and I hope temporary distresses, should induce us to relax in our
attention to that great object. No sinking fund can be efficient for the
purpose of diminishing the debt, if it be not derived from the excess of the
public revenue over the public expenditure. It is to be regretted, that the
sinking fund in this country is only such in name; for there is no excess of
revenue above expenditure. It ought by economy, to be made what it is
professed to be, a really efficient fund for the payment of the debt. If on the
breaking out of any future war, we shall not have very considerably reduced
our debt, one of two things must happen, either the whole expenses of that
war must be defrayed by taxes raised from year to year, or we must, at the
end of that war, if not before, submit to a national bankruptcy; not that we
shall be unable to bear any large additions to the debt; it would be difficult
to set limits to the powers of a great nation; but assuredly there are limits to
the price, which in the form of perpetual taxation, individuals will submit to
pay for the privilege merely of living in their native country.
When a commodity is at a monopoly price, it is at the very highest price at
which the consumers are willing to purchase it. Commodities are only at a
monopoly price, when by no possible device their quantity can be
augmented; and when therefore, the competition is wholly on one side—
amongst the buyers. The monopoly price of one period may be much lower
or higher than the monopoly price of another, because the competition
amongst the purchasers must depend on their wealth, and their tastes and
caprices. Those peculiar wines, which are produced in very limited quantity,
and those works of art, which from their excellence or rarity, have acquired
a fanciful value, will be exchanged for a very different quantity of the
produce of ordinary labour, according as the society is rich or poor, as it
possesses an abundance or scarcity of such produce, or as it may be in a
rude or polished state. The exchangeable value therefore of a commodity

which is at a monopoly price, is no where regulated by the cost of
production.
Raw produce is not at a monopoly price, because the market price of barley
and wheat is as much regulated by their cost of production, as the market
price of cloth and linen. The only difference is this, that one portion of the
capital employed in agriculture regulates the price of corn, namely, that
portion which pays no rent; whereas, in the production of manufactured
commodities, every portion of capital is employed with the same results;
and as no portion pays rent, every portion is equally a regulator of price:
corn, and other raw produce, can be augmented too in quantity, by the
employment of more capital on the land, and therefore they are not at a
monopoly price. There is competition among the sellers, as well as amongst
the buyers. This is not the case in the production of those rare wines, and
those valuable specimens of art, of which we have been speaking; their
quantity cannot be increased, and their price is limited only by the extent of
the power and will of the purchasers. The rent of these vineyards may be
raised beyond any moderately assignable limits, because no other land
being able to produce such wines, none can be brought into competition
with them.
The corn and raw produce of a country, may indeed for a time sell at a
monopoly price; but they can do so permanently only when no more capital
can be profitably employed on the lands, and when, therefore, their produce
cannot be increased. At such time, every portion of land in cultivation, and
every portion of capital employed on the land will yield a rent, differing
indeed in proportion to the difference in the return. At such a time too, any
tax which may be imposed on the farmer, will fall on rent, and not on the
consumer. He cannot raise the price of his corn, because, by the
supposition, it is already at the highest price at which the purchasers will or
can buy it. He will not be satisfied with a lower rate of profits, than that
obtained by other capitalists, and, therefore, his only alternative will be to
obtain a reduction of rent, or to quit his employment.
Mr. Buchanan considers corn and raw produce as at a monopoly price,
because they yield a rent: all commodities which yield a rent, he supposes
must be at a monopoly price; and thence he infers, that all taxes on raw
produce would fall on the landlord, and not on the consumer. "The price of

corn," he says, "which always affords a rent, being in no respect influenced
by the expenses of its production, those expenses must be paid out of the
rent; and when they rise or fall, therefore, the consequence is not a higher or
a lower price, but a higher or a lower rent. In this view, all taxes on farm
servants, horses, or the implements of agriculture, are in reality land-taxes;
the burden falling on the farmer during the currency of his lease, and on the
landlord, when the lease comes to be renewed. In like manner all those
improved implements of husbandry which save expense to the farmer, such
as machines for threshing and reaping, whatever gives him easier access to
the market, such as good roads, canals, and bridges, though they lessen the
original cost of corn, do not lessen its market price. Whatever is saved by
those improvements, therefore, belongs to the landlord as part of his rent."
It is evident that if we yield to Mr. Buchanan the basis on which his
argument is built, namely, that the price of corn always yields a rent, all the
consequences which he contends for would follow of course. Taxes on the
farmer would then fall not on the consumer but on rent; and all
improvements in husbandry would increase rent: but I hope I have made it
sufficiently clear, that until a country is cultivated in every part, and up to
the highest degree, there is always a portion of capital employed on the land
which yields no rent, and that it is this portion of capital, the result of
which, as in manufactures, is divided between profits and wages, that
regulates the price of corn. The price of corn then, which does not afford a
rent, being influenced by the expenses of its production, those expenses
cannot be paid out of rent. The consequence therefore of those expenses
increasing, is a higher price, and not a lower rent.21
It is remarkable that both Adam Smith and Mr. Buchanan, who entirely
agree that taxes on raw produce, a land-tax, and tithes, all fall on the rent of
land, and not on the consumers of raw produce, should nevertheless admit
that taxes on malt would fall on the consumer of beer, and not on the rent of
the landlord. Adam Smith's argument is so able a statement of the view
which I take of the subject of the tax on malt, and every other tax on raw
produce, that I cannot refrain from offering it to the attention of the reader.
"The rent and profits of barley land must always be nearly equal to those of
other equally fertile, and equally well cultivated land. If they were less,
some part of the barley land would soon be turned to some other purpose;

and if they were greater, more land would soon be turned to the raising of
barley. When the ordinary price of any particular produce of land is at what
may be called a monopoly price, a tax upon it necessarily reduces the rent
and profit22 of the land which grows it. A tax upon the produce of those
precious vineyards, of which the wine falls so much short of the effectual
demand, that its price is always above the natural proportion to that of other
equally fertile, and equally well cultivated land, would necessarily reduce
the rent and profit22 of those vineyards. The price of the wines being
already the highest that could be got for the quantity commonly sent to
market, it could not be raised higher without diminishing that quantity; and
the quantity could not be diminished without still greater loss, because the
lands could not be turned to any other equally valuable produce. The whole
weight of the tax, therefore, would fall upon the rent and profit;23 properly
upon the rent of the vineyard." "But the ordinary price of barley has never
been a monopoly price; and the rent and profit of barley land have never
been above their natural proportion to those of other equally fertile and
equally well cultivated land. The different taxes which have been imposed
upon malt, beer, and ale, have never lowered the price of barley; have never
reduced the rent and profit24 of barley land. The price of malt to the brewer
has constantly risen in proportion to the taxes imposed upon it; and those
taxes, together with the different duties upon beer and ale, have constantly
either raised the price, or, what comes to the same thing, reduced the quality
of those commodities to the consumer. The final payment of those taxes has
fallen constantly upon the consumer, and not upon the producer." On this
passage Mr. Buchanan remarks, "A duty on malt never could reduce the
price of barley, because, unless as much could be made of barley by malting
it as by selling it unmalted, the quantity required would not be brought to
market. It is clear, therefore, that the price of malt must rise in proportion to
the tax imposed on it, as the demand could not otherwise be supplied. The
price of barley, however, is just as much a monopoly price as that of sugar;
they both yield a rent, and the market price of both has equally lost all
connexion with the original cost."
It appears then to be the opinion of Mr. Buchanan, that a tax on malt would
raise the price of malt, but that a tax on the barley from which malt is made,
would not raise the price of barley; and therefore, if malt is taxed, the tax
will be paid by the consumer; if barley is taxed, it will be paid by the

landlord, as he will receive a diminished rent. According to Mr. Buchanan
then, barley is at a monopoly price, at the highest price which the
purchasers are willing to give for it; but malt made of barley is not at a
monopoly price, and consequently it can be raised in proportion to the taxes
that may be imposed upon it. This opinion of Mr. Buchanan of the effects of
a tax on malt appears to me to be in direct contradiction to the opinion he
has given of a similar tax, a tax on bread. "A tax on bread will be ultimately
paid, not by a rise of price, but by a reduction of rent."24 If a tax on malt
would raise the price of beer, a tax on bread must raise the price of bread.
The following argument of M. Say is founded on the same views as Mr.
Buchanan's: "The quantity of wine or corn which a piece of land will
produce, will remain nearly the same, whatever may be the tax with which
it is charged. The tax may take away a half, or even three-fourths of its net
produce, or of its rent if you please, yet the land would nevertheless be
cultivated for the half or the quarter not absorbed by the tax. The rent, that
is to say the landlord's share, would merely be somewhat lower. The reason
of this will be perceived, if we consider, that in the case supposed, the
quantity of produce obtained from the land, and sent to market, will remain
nevertheless the same. On the other hand the motives on which the demand
for the produce is founded continue also the same.
"Now, if the quantity of produce supplied, and the quantity demanded,
necessarily continue the same, notwithstanding the establishment or the
increase of the tax, the price of that produce will not vary; and if the price
do not vary, the consumer will not pay the smallest portion of this tax.
"Will it be said that the farmer, he who furnishes labour and capital, will,
jointly with the landlord, bear the burden of this tax? certainly not; because
the circumstance or the tax has not diminished the number of farms to be
let, nor increased the number of farmers. Since in this instance also the
supply and demand remain the same, the rent of farms must also remain the
same. The example of the manufacturer of salt, who can only make the
consumers pay a portion of the tax, and that of the landlord who cannot
reimburse himself in the smallest degree, prove the error of those who
maintain, in opposition to the economists, that all taxes fall ultimately on
the consumer."—Vol. ii. p. 338.

If the tax "took away half, or even three-fourths of the net produce of the
land," and the price of produce did not rise, how could those farmers obtain
the usual profits of stock who paid very moderate rents, having that quality
of land which required a much larger proportion of labour to obtain a given
result, than land of a more fertile quality? If the whole rent were remitted,
they would still obtain lower profits than those in other trades, and would
therefore not continue to cultivate their land, unless they could raise the
price of its produce. If the tax fell on the farmers, there would be fewer
farmers disposed to hire farms; if it fell on the landlord, many farms would
not be let at all, for they would afford no rent. But from what fund would
those pay the tax who produce corn without paying any rent? It is quite
clear that the tax must fall on the consumer. How would such land, as M.
Say describes in the following passage, pay a tax of one-half or three-
fourths of its produce?
"We see in Scotland poor lands thus cultivated by the proprietor, and which
could be cultivated by no other person. Thus too we see in the interior
provinces of the United States vast and fertile lands, the revenue of which
alone would not be sufficient for the maintenance of the proprietor. These
lands are cultivated nevertheless, but it must be by the proprietor himself,
or, in other words, he must add to the rent, which is little or nothing, the
profits of his capital and industry, to enable him to live in competence. It is
well known that land, though cultivated, yields no revenue to the landlord
when no farmer will be willing to pay a rent for it: which is a proof that
such land will give only the profits of the capital and of the industry
necessary for its cultivation."—Say, Vol. ii. p. 127.

CHAPTER XVI.

POOR RATES.

We have seen that taxes on raw produce, and on the profits of the farmer,
will fall on the consumer of raw produce; since unless he had the power of
remunerating himself by an increase of price, the tax would reduce his
profits below the general level of profits, and would urge him to remove his

capital to some other trade. We have seen too that he could not, by
deducting it from his rent, transfer the tax to his landlord; because that
farmer who paid no rent, would, equally with the cultivator of better land,
be subject to the tax, whether it were laid on raw produce, or on the profits
of the farmer. I have also attempted to shew, that if a tax were general, and
affected equally all profits, whether manufacturing or agricultural, it would
not operate either on the price of goods or raw produce, but would be
immediately, as well as ultimately, paid by the producers. A tax on rent, it
has been observed, would fall on the landlord only, and could not by any
means be made to devolve on the tenant.
The poor rate is a tax which partakes of the nature of all these taxes, and
under different circumstances falls on the consumer of raw produce and
goods, on the profits of stock, and on the rent of land. It is a tax which falls
with peculiar weight on the profits of the farmer, and therefore may be
considered as affecting the price of raw produce. According to the degree in
which it bears on manufacturing and agricultural profits equally, it will be a
general tax on the profits of stock, and will occasion no alteration in the
price of raw produce and manufactures. In proportion to the farmer's
inability to remunerate himself, by raising the price of raw produce, for that
portion of the tax which peculiarly affects him, it will be a tax on rent, and
will be paid by the landlord. To know then the operation of the poor rate at
any particular time, we must ascertain whether at that time it affects in an
equal or unequal degree the profits of the farmer and manufacturer; and also
whether the circumstances be such as to afford to the farmer the power of
raising the price of raw produce.
The poor rates are professed to be levied on the farmer in proportion to his
rent; and accordingly, the farmer who paid a very small rent, or no rent at
all, should pay little or no tax. If this were true, poor rates, as far as they are
paid by the agricultural class, would entirely fall on the landlord, and could
not be shifted to the consumer of raw produce. But I believe that is not true;
the poor rate is not levied according to the rent which a farmer actually pays
to his landlord; it is proportioned to the annual value of his land, whether
that annual value be given to it by the capital of the landlord or of the
tenant.

If two farmers rented land of two different qualities in the same parish, the
one paying a rent of 100l. per annum for 50 acres of the most fertile land,
and the other the same sum of 100l. for 1000 acres of the least fertile land,
they would pay the same amount of poor rates, if neither of them attempted
to improve the land; but if the farmer of the poor land, presuming on a very
long lease, should be induced at a great expense to improve the productive
powers of his land, by manuring, draining, fencing, &c., he would
contribute to the poor rates, not in proportion to the actual rent paid to the
landlord, but to the actual annual value of the land. The rate might equal or
exceed the rent; but whether it did or not, no part of this rate would be paid
by the landlord. It would have been previously calculated upon by the
tenant; and if the price of produce were not sufficient to compensate him for
all his expenses, together with this additional charge for poor rates, his
improvements would not have been undertaken. It is evident then that the
tax in this case is paid by the consumer; for if there had been no rate, the
same improvements would have been undertaken, and the usual and general
rate of profits would have been obtained on the stock employed, with a
lower price of corn.
Nor would it make the slightest difference in this question, if the landlord
had made these improvements himself, and had in consequence raised his
rent from 100l. to 500l.; the rate would be equally charged to the consumer;
for whether he should expend a large sum of money on his land, would
depend on the rent, or what is called rent, which he would receive as a
remuneration for it; and this again would depend on the price of corn, or
other raw produce, being sufficiently high not only to cover this additional
rent, but also the rate to which the land would be subject. But if at the same
time all manufacturing capital contributed to the poor rates, in the same
proportion as the capital expended by the farmer or landlord in improving
the land, then it would no longer be a partial tax on the profits of the
farmer's or landlord's capital, but a tax on the capital of all producers; and
therefore it could no longer be shifted either on the consumer of raw
produce or on the landlord. The farmer's profits would feel the effect of the
rate no more than those of the manufacturer; and the former could not, any
more than the latter, plead it as a reason for an advance in the price of his
commodity. It is not the absolute, but the relative fall of profits, which

prevents capital from being employed in any particular trade: it is the
difference of profit which sends capital from one employment to another.
It must be acknowledged however, that in the actual state of the poor rates,
a much larger amount falls on the farmer than on the manufacturer, in
proportion to their respective profits; the farmer being rated according to
the actual productions which he obtains, the manufacturer only according to
the value of the buildings in which he works, without any regard to the
value of the machinery, labour, or stock, which he may employ. From this
circumstance it follows, that the farmer will be enabled to raise the price of
his produce by this whole difference. For since the tax falls unequally, and
peculiarly on his profits, he would have less motive to devote his capital to
the land, than to employ it in some other trade, unless the price of raw
produce were raised. If on the contrary, the rate had fallen with greater
weight on the manufacturer than on the farmer, he would have been enabled
to raise the price of his goods by the amount of the difference, for the same
reason that the farmer, under similar circumstances, could raise the price of
raw produce. In a society therefore, which is extending its agriculture, when
poor rates fall with peculiar weight on the land, they will be paid partly by
the employers of capital in a diminution of the profits of stock, and partly
by the consumer of raw produce in its increased price. In such a state of
things, the tax may, under some circumstances, be even advantageous rather
than injurious to landlords; for if the tax paid by the cultivator of the worst
land, be higher in proportion to the quantity of produce obtained, than that
paid by the farmers of the more fertile lands, the rise in the price of corn,
which will extend to all corn, will more than compensate the latter for the
tax. This advantage will remain with them during the continuance of their
leases, but it will afterwards be transferred to their landlords. This then
would be the effect of poor rates in an advancing society; but in a
stationary, or in a retrograde country, so far as capital could not be
withdrawn from the land, if a further rate were levied for the support of the
poor, that part of it which fell on agriculture would be paid, during the
current leases, by the farmers, but at the expiration of those leases it would
almost wholly fall on the landlords. The farmer, who during his former
lease, had expended his capital in improving his land, if it were still in his
own hands, would be rated for this new tax according to the new value
which the land had acquired by its improvement, and this amount he would

be obliged to pay during his lease, although his profits might thereby be
reduced below the general rate of profits; for the capital which he has
expended may be so incorporated with the land, that it cannot be removed
from it. If indeed he, or his landlord, (should it have been expended by him)
were able to remove this capital, and thereby reduce the annual value of the
land, the rate would proportionably fall, and as the produce would at the
same time be diminished, its price would rise; he would be compensated for
the tax, by charging it to the consumer, and no part would fall on rent; but
this is impossible, at least with respect to some proportion of the capital,
and consequently in that proportion the tax will be paid by the farmers
during their leases, and by landlords at their expiration. This additional tax,
as far as it fell unequally on manufacturers, would under such
circumstances be added to the price of their goods; for there can be no
reason why their profits should be reduced below the general rate of profits,
when their capitals might be easily removed to agriculture.25

CHAPTER XVII.

ON SUDDEN CHANGES IN THE CHANNELS OF TRADE.

A great manufacturing country is peculiarly exposed to temporary reverses
and contingencies, produced by the removal of capital from one
employment to another. The demands for the produce of agriculture are
uniform, they are not under the influence of fashion, prejudice, or caprice.
To sustain life, food is necessary, and the demand for food must continue in
all ages, and in all countries. It is different with manufactures; the demand
for any particular manufactured commodity, is subject not only to the
wants, but to the tastes and caprice of the purchasers. A new tax too may
destroy the comparative advantage which a country before possessed in the
manufacture of a particular commodity; or the effects of war may so raise
the freight and insurance on its conveyance, that it can no longer enter into
competition with the home manufacture of the country to which it was
before exported. In all such cases, considerable distress, and no doubt some
loss, will be experienced by those who are engaged in the manufacture of
such commodities; and it will be felt not only at the time of the change, but

through the whole interval during which they are removing their capitals,
and the labour which they can command, from one employment to another.
Nor will distress be experienced in that country alone where such
difficulties originate, but in the countries to which its commodities were
before exported. No country can long import unless it also exports, or can
long export unless it also imports. If then any circumstance should occur,
which should permanently prevent a country from importing the usual
amount of foreign commodities, it will necessarily diminish the
manufacture of some of those commodities which were usually exported;
and although the total value of the productions of the country will probably
be but little altered, since the same capital will be employed, yet they will
not be equally abundant and cheap; and considerable distress will be
experienced through the change of employments. If by the employment of
10,000l. in the manufacture of cotton goods for exportation, we imported
annually 3000 pair of silk stockings of the value of 2000l., and by the
interruption of foreign trade we should be obliged to withdraw this capital
from the manufacture of cotton, and employ it ourselves in the manufacture
of stockings, we should still obtain stockings of the value of 2000l.
provided no part of the capital were destroyed; but instead of having 3000
pair, we might only have 2,500. In the removal of the capital from the
cotton to the stocking trade, much distress might be experienced, but it
would not considerably impair the value of the national property, although
it might lessen the quantity of our annual productions.
The commencement of war after a long peace, or of peace after a long war,
generally produces considerable distress in trade. It changes in a great
degree the nature of the employments to which the respective capitals of
countries were before devoted; and during the interval while they are
settling in the situations which new circumstances have made the most
beneficial, much fixed capital is unemployed, perhaps wholly lost, and
labourers are without full employment. The duration of this distress will be
longer or shorter according to the strength of that disinclination, which most
men feel to abandon that employment of their capital to which they have
long been accustomed. It is often protracted too by the restrictions and
prohibitions, to which the absurd jealousies which prevail between the
different states of the commercial commonwealth give rise.

The distress which proceeds from a revulsion of trade, is often mistaken for
that which accompanies a diminution of the national capital, and a
retrograde state of society; and it would perhaps be difficult to point out any
marks by which they may be accurately distinguished.
When, however, such distress immediately accompanies a change from war
to peace, our knowledge of the existence of such a cause will make it
reasonable to believe, that the funds for the maintenance of labour have
rather been diverted from their usual channel than materially impaired, and
that after temporary suffering, the nation will again advance in prosperity. It
must be remembered too that the retrograde condition is always an
unnatural state of society. Man from youth grows to manhood, then decays,
and dies; but this is not the progress of nations. When arrived to a state of
the greatest vigour, their further advance may indeed be arrested, but their
natural tendency is to continue for ages, to sustain undiminished their
wealth, and their population.
In rich and powerful countries where large capitals are invested in
machinery, more distress will be experienced from a revulsion in trade, than
in poorer countries where there is proportionally a much smaller amount of
fixed, and a much larger amount of circulating capital, and where
consequently more work is done by the labour of men. It is not so difficult
to withdraw a circulating as a fixed capital, from any employment in which
it may be engaged. It is often impossible to divert the machinery which may
have been erected for one manufacture, to the purposes of another; but the
clothing, the food, and the lodging of the labourer in one employment may
be devoted to the support of the labourer in another, or the same labourer
may receive the same food, clothing, and lodging, whilst his employment is
changed. This, however, is an evil to which a rich nation must submit; and it
would not be more reasonable to complain of it, than it would be in a rich
merchant to lament that his ship was exposed to the dangers of the sea,
whilst his poor neighbour's cottage was safe from all such hazard.
From contingencies of this kind, though in an inferior degree, even
agriculture is not exempted. War, which in a commercial country, interrupts
the commerce of states, frequently prevents the exportation of corn from
countries where it can be produced with little cost, to others not so
favourably situated. Under such circumstances an unusual quantity of

capital is drawn to agriculture, and the country which before imported
becomes independent of foreign aid. At the termination of the war, the
obstacles to importation are removed, and a competition destructive to the
home-grower commences, from which he is unable to withdraw, without
the sacrifice of a great part of his capital. The best policy of the state would
be, to lay a tax, decreasing in amount from time to time, on the importation
of foreign corn, for a limited number of years, in order to afford to the
home-grower an opportunity to withdraw his capital gradually from the
land. In so doing the country might not be making the most advantageous
distribution of its capital, but the temporary tax to which it was subjected,
would be for the advantage of a particular class, the distribution of whose
capital was highly useful in procuring a supply of food when importation
was stopped. If such exertions in a period of emergency were followed by
risk of ruin on the termination of the difficulty, capital would shun such an
employment. Besides the usual profits of stock, farmers would expect to be
compensated for the risk which they incurred of a sudden influx of corn,
and therefore the price to the consumer, at the seasons when he most
required a supply, would be enhanced, not only by the superior cost of
growing corn at home, but also by the insurance which he would have to
pay, in the price, for the peculiar risk to which this employment of capital
was exposed. Notwithstanding then, that it would be more productive of
wealth to the country, at whatever sacrifice of capital it might be done, to
allow the importation of cheap corn, it would perhaps be advisable to
charge it with a duty for a few years.
In examining the question of rent, we found, that with every increase in the
supply of corn, and with the consequent fall of its price, capital would be
withdrawn from the poorer land; and land of a better description, which
would then pay no rent, would become the standard by which the natural
price of corn would be regulated. At 4l. per quarter, land of an inferior
quality, which may be designated by No. 6, might be cultivated; at 3l. 10s.
No. 5; at 3l. No. 4, and so on. If corn, in consequence of permanent
abundance, fell to 3l. 10s. the capital employed on No. 6 would cease to be
employed; for it was only when corn was at 4l. that it could obtain the
general profits, even without paying rent: it would therefore be withdrawn
to manufacture those commodities with which all the corn grown on No. 6
would be purchased and imported. In this employment it would necessarily

be more productive to its owner, or it would not be withdrawn from the
other; for if he could obtain more corn by growing it on land for which he
paid no rent, than by manufacturing a commodity with which he purchased
it, its price could not be under 4l.
It has, however, been said that capital cannot be withdrawn from the land;
that it takes the form of expenses, which cannot be recovered, such as
manuring, fencing, draining, &c., which are necessarily inseparable from
the land. This is in some degree true; but that capital which consists of
cattle, sheep, hay and corn ricks, carts, &c. may be withdrawn; and it
always becomes a matter of calculation whether these shall continue to be
employed on the land, notwithstanding the low price of corn, or whether
they shall be sold, and their value transferred to another employment.
Suppose, however, the fact to be as stated, and that no part of the capital
could be withdrawn; the farmer would continue to raise corn, and precisely
the same quantity too, at whatever price it might sell; for it could not be his
interest to produce less, and if he did not so employ his capital, he would
obtain from it no return whatever. Corn could not be imported, because he
would sell it lower than 3l. 10s. rather than not sell it at all, and by the
supposition the importer could not sell it under that price. Although then the
farmers, who cultivated land of this quality, would undoubtedly be injured
by the fall in the exchangeable value of the commodity which they
produced,—how would the country be affected? We should have precisely
the same quantity of every commodity produced, but raw produce and corn
would sell at a much cheaper price. The capital of a country consists of its
commodities, and as these would be the same as before, reproduction would
go on at the same rate. This low price of corn would however only afford
the usual profits of stock to the land, No. 5, which would then pay no rent,
and the rent of all better land would fall: wages would also fall, and profits
would rise.
However low the price of corn might fall; if capital could not be removed
from the land, and the demand did not increase, no importation would take
place; for the same quantity as before would be produced at home.
Although there would be a different division of the produce, and some
classes would be benefited, and others injured, the aggregate of production

would be precisely the same, and the nation collectively would neither be
richer nor poorer.
But there is this advantage always resulting from a relatively low price of
corn,—that the division of the actual production is more likely to increase
the fund for the maintenance of labour, inasmuch as more will be allotted,
under the name of profit, to the productive class, a less, under the name of
rent, to the unproductive class.
This is true, even if the capital cannot be withdrawn from the land, and
must be employed there, or not be employed at all: but if great part of the
capital could be withdrawn, as it evidently could, it will be only withdrawn,
when it will yield more to the owner by being withdrawn than by being
suffered to remain where it was; it will only be withdrawn then, when it can
elsewhere be employed more productively both for the owner and the
public. He consents to sink that part of his capital which cannot be
separated from the land, because with that part which he can take away, he
can obtain a greater value, and a greater quantity of raw produce, than by
not sinking this part of the capital. His case is precisely similar to that of a
man who has erected machinery in his manufactory at a great expense,
machinery which is afterwards so much improved upon by more modern
inventions, that the commodities manufactured by him very much sink in
value. It would be entirely a matter of calculation with him whether he
should abandon the old machinery, and erect the more perfect, losing all the
value of the old, or continue to avail himself of its comparatively feeble
powers. Who, under such circumstances, would exhort him to forego the
use of the better machinery, because it would deteriorate or annihilate the
value of the old? Yet this is the argument of those who would wish us to
prohibit the importation of corn, because it will deteriorate or annihilate that
part of the capital of the farmer which is for ever sunk in land. They do not
see that the end of all commerce is to increase production, and that by
increasing production, though you may occasion partial loss, you increase
the general happiness. To be consistent, they should endeavour to arrest all
improvements in agriculture and manufactures, and all inventions of
machinery; for though these contribute to general abundance, and therefore
to the general happiness, they never fail, at the moment of their
introduction, to deteriorate or annihilate a part of the existing capital of
farmers and manufacturers.

Agriculture like all other trades, and particularly in a commercial country, is
subject to a re-action, which, in an opposite direction, succeeds the action of
a strong stimulus. Thus, when war interrupts the importation of corn, its
consequent high price attracts capital to the land, from the large profits
which such an employment of it affords; this will probably cause more
capital to be employed, and more raw produce to be brought to market than
the demands of the country require. In such case, the price of corn will fall
from the effects of a glut, and much agricultural distress will be produced,
till the average supply is brought to a level with the average demand.

CHAPTER XVIII.

VALUE AND RICHES, THEIR DISTINCTIVE PROPERTIES.

"A man is rich or poor," says Adam Smith, "according to the degree in
which he can afford to enjoy the necessaries, conveniences, and
amusements of human life."
Value then essentially differs from riches, for value depends not on
abundance, but on the difficulty or facility of production. The labour of a
million of men in manufactures, will always produce the same value, but
will not always produce the same riches. By the invention of machinery, by
improvements in skill, by a better division of labour, or by the discovery of
new markets, where more advantageous exchanges may be made, a million
of men may produce double, or treble the amount of riches, of "necessaries,
conveniences, and amusements," in one state of society, that they could
produce in another, but they will not on that account add any thing to value;
for every thing rises or falls in value, in proportion to the facility or
difficulty of producing it, or in other words, in proportion to the quantity of
labour employed on its production. Suppose with a given capital, the labour
of a certain number of men produced 1000 pair of stockings, and that by
inventions in machinery, the same number of men can produce 2000 pair, or
that they can continue to produce 1000 pair, and can produce besides 500
hats; then the value of the 2000 pair of stockings; or of the 1000 pair of
stockings, and 500 hats, will be neither more nor less than that of the 1000

pair of stockings before the introduction of machinery; for they will be the
produce of the same quantity of labour. But the value of the general mass of
commodities will nevertheless be diminished; for although the value of the
increased quantity produced in consequence of the improvement will be the
same exactly as the value would have been of the less quantity that would
have been produced, had no improvement taken place, an effect is also
produced on the portion of goods still unconsumed, which were
manufactured previously to the improvement; the value of those goods will
be reduced, inasmuch as they must fall to the level, quantity for quantity, of
the goods produced under all the advantages of the improvement: and the
society will, notwithstanding the increased quantity of its commodities,
notwithstanding its augmented riches, and its augmented means of
enjoyment, have a less amount of value. By constantly increasing the
facility of production, we constantly diminish the value of some of the
commodities before produced, though by the same means we not only add
to the national riches, but also to the power of future production. Many of
the errors in political economy have arisen from errors on this subject, from
considering an increase of riches, and an increase of value, as meaning the
same thing, and from unfounded notions as to what constituted a standard
measure of value. One man considers money as a standard of value, and a
nation grows richer or poorer, according to him, in proportion as its
commodities of all kinds can exchange for more or less money. Others
represent money as a very convenient medium for the purpose of barter, but
not as a proper measure by which to estimate the value of other things: the
real measure of value according to them is corn,26 and a country is rich or
poor, according as its commodities will exchange for more or less corn.
There are others again, who consider a country rich or poor, according to
the quantity of labour that it can purchase.27 But why should gold, or corn,
or labour, be the standard measure of value, more than coals or iron?—more
than cloth, soap, candles, and the other necessaries of the labourer?—why,
in short, should any commodity, or all commodities together, be the
standard, when such a standard is itself subject to fluctuations in value?
Corn, as well as gold, may from difficulty or facility of production, vary 10,
20, or 30 per cent., relatively to other things; why should we always say,
that it is those other things which have varied, and not the corn? That
commodity is alone invariable, which at all times requires the same
sacrifice of toil and labour to produce it. Of such a commodity we have no

knowledge, but we may hypothetically argue and speak about it, as if we
had; and may improve our knowledge of the science, by shewing distinctly
the absolute inapplicability of all the standards which have been hitherto
adopted. But supposing either of these to be a correct standard of value, still
it would not be a standard of riches, for riches do not depend on value. A
man is rich or poor, according to the abundance of necessaries and luxuries,
which he can command; and whether the exchangeable value of these for
money, for corn, or for labour, be high or low, they will equally contribute
to the enjoyment of their possessor. It is through confounding the ideas of
value and wealth, or riches, that it has been asserted, that by diminishing the
quantity of commodities, that is to say, of the necessaries, conveniences,
and enjoyments of human life, riches may be increased. If value were the
measure of riches this could not be denied, because by scarcity the value of
commodities is raised; but if Adam Smith be correct, if riches consist in
necessaries and enjoyments, then they cannot be increased by a diminution
of quantity.
It is true, that the man in possession of a scarce commodity is richer, if by
means of it he can command more of the necessaries and enjoyments of
human life; but as the general stock out of which each man's riches are
drawn, is diminished in quantity, by all that any individual takes from it,
other men's shares must necessarily be reduced in proportion as this
favoured individual is able to appropriate a greater quantity to himself.
Let water become scarce, says Lord Lauderdale, and be exclusively
possessed by an individual, and you will increase his riches, because water
will then have value; and if wealth be the aggregate of individual riches,
you will by the same means also increase wealth. You undoubtedly will
increase the riches of this individual, but inasmuch as the farmer must sell a
part of his corn, the shoemaker a part of his shoes, and all men give up a
portion of their possessions for the sole purpose of supplying themselves
with water, which they before had for nothing, they are poorer by the whole
quantity of commodities which they are obliged to devote to this purpose,
and the proprietor of water is benefited precisely by the amount of their
loss. The same quantity of water, and the same quantity of commodities, are
enjoyed by the whole society, but they are differently distributed. This is
however supposing rather a monopoly of water than a scarcity of it. If it
should be scarce, then the riches of the country and of individuals would be

actually diminished, inasmuch as it would be deprived of a portion of one
of its enjoyments. The farmer would not only have less corn to exchange for
the other commodities which might be necessary or desirable to him, but he
and every other individual would be abridged in the enjoyment of one of the
most essential of their comforts. Not only would there be a different
distribution of riches, but an actual loss of wealth.
It may be said then of two countries possessing precisely the same quantity
of all the necessaries and comforts of life, that they are equally rich, but the
value of their respective riches would depend on the comparative facility or
difficulty with which they were produced. For if an improved piece of
machinery should enable us to make two pair of stockings, instead of one,
without additional labour, double the quantity would be given in exchange
for a yard of cloth. If a similar improvement be made in the manufacture of
cloth, stockings and cloth will exchange in the same proportions as before,
but they will both have fallen in value; for in exchanging them for hats, for
gold, or other commodities in general, twice the former quantity must be
given. Extend the improvement to the production of gold, and every other
commodity; and they will all regain their former proportions. There will be
double the quantity of commodities annually produced in the country, and
therefore the wealth of the country will be doubled, but this wealth will not
have increased in value.
Although Adam Smith has given the correct description of riches, which I
have more than once noticed, he afterwards explains them differently, and
says, "that a man must be rich or poor according to the quantity of labour
which he can afford to purchase." Now this description differs essentially
from the other, and is certainly incorrect; for suppose the mines were to
become more productive, so that gold and silver fell in value, from the
greater facility of their production; or that velvets were to be manufactured
with so much less labour than before, that they fell to half their former
value; the riches of all those who purchased those commodities would be
increased: one man might increase the quantity of his plate, another might
buy double the quantity of velvet; but with the possession of this additional
plate, and velvet, they could employ no more labour than before; because as
the exchangeable value of velvet and of plate would be lowered, they must
part with proportionally more of these species of riches to purchase a day's

labour. Riches then cannot be estimated by the quantity of labour which
they can purchase.
From what has been said, it will be seen that the wealth of a country may be
increased in two ways: it may be increased by employing a greater portion
of revenue in the maintenance of productive labour,—which will not only
add to the quantity, but to the value of the mass of commodities; or it may
be increased, without employing any additional quantity of labour, by
making the same quantity more productive,—which will add to the
abundance, but not to the value of commodities.
In the first case, a country would not only become rich, but the value of its
riches would increase. It would become rich by parsimony; by diminishing
its expenditure on objects of luxury and enjoyment; and employing those
savings in reproduction.
In the second case, there will not necessarily be either any diminished
expenditure on luxuries and enjoyments, or any increased quantity of
productive labour employed, but with the same labour more would be
produced; wealth would increase, but not value. Of these two modes of
increasing wealth, the last must be preferred, since it produces the same
effect without the privation and diminution of enjoyments, which can never
fail to accompany the first mode. Capital is that part of the wealth of a
country which is employed with a view to future production, and may be
increased in the same manner as wealth. An additional capital will be
equally efficacious in the production of future wealth, whether it be
obtained from improvements in skill and machinery, or from using more
revenue reproductively; for wealth always depends on the quantity of
commodities produced, without any regard to the facility with which the
instruments employed in production may have been procured. A certain
quantity of clothes and provisions will maintain and employ the same
number of men, and will therefore procure the same quantity of work to be
done, whether they be produced by the labour of 100 or of 200 men; but
they will be of twice the value if 200 have been employed on their
production.
M. Say appears to me to have been singularly unfortunate in his definition
of riches and value in the first chapter of his excellent work: the following

is the substance of his reasoning: riches, he observes, consist only of things
which have a value in themselves: riches are great, when the sum of the
values of which they are composed is great. They are small when the sum
of their values is small. Two things having an equal value, are riches of
equal amount. They are of equal value, when by general consent they are
freely exchanged for each other. Now, if mankind attach value to a thing, it
is on account of the uses to which it is applicable. This faculty, which
certain things have, of satisfying the various wants of mankind, I call utility.
To create objects that have a value of any kind is to create riches, since the
utility of things is the first foundation of their value, and it is the value of
things which constitutes riches. But we do not create objects: all we can do
is to reproduce matter under another form—we can give it utility.
Production then is a creation, not of matter but of utility, and it is measured
by the value arising from the utility of the object produced. The utility of
any object, according to general estimation, is pointed out by the quantity of
other commodities for which it will exchange. This valuation, arising from
the general estimate formed by society, constitutes what Adam Smith calls
value in exchange; what Turgot calls appreciable value; and what we may
more briefly designate by the term value.
Thus far M. Say, but in his account of value and riches he has confounded
two things which ought always to be kept separate, and which are called by
Adam Smith, value in use and value in exchange. If by an improved
machine I can, with the same quantity of labour, make two pair of stockings
instead of one, I in no way impair the utility of one pair of stockings, though
I diminish their value. If then I had precisely the same quantity of coats,
shoes, stockings, and all other things, as before, I should have precisely the
same quantity of useful objects, and should therefore be equally rich, if
utility were the measure of riches; but I should have a less amount of value,
for my stockings would be of only half their former value. Utility then is
not the measure of exchangeable value.
If we ask M. Say in what riches consist, he tells us in the possession of
objects having value. If we then ask him what he means by value, he tells us
that things are valuable in proportion as they possess utility. If again we ask
him to explain to us by what means we are to judge of the utility of objects,
he answers, by their value. Thus then the measure of value is utility, and the
measure of utility is value.

M. Say, in speaking of the excellences and imperfections of the great work
of Adam Smith, imputes to him, as an error, that "he attributes to the labour
of man alone the power of producing value. A more correct analysis shews
us that value is owing to the action of labour, or rather the industry of man,
combined with the action of those agents which nature supplies, and with
that of capital. His ignorance of this principle prevented him from
establishing the true theory of the influence of machinery in the production
of riches."
In contradiction to the opinion of Adam Smith, M. Say, in the fourth
chapter, speaks of the value which is given to commodities by natural
agents, such as the sun, the air, the pressure of the atmosphere &c., which
are sometimes substituted for the labour of man, and sometimes concur
with him in producing.28
But these natural agents, though they add greatly to value in use, never add
exchangeable value, of which M. Say is speaking, to a commodity: as soon
as by the aid of machinery, or by the knowledge of natural philosophy, you
oblige natural agents to do the work which was before done by man, the
exchangeable value of such work falls accordingly. If ten men turned a corn
mill, and it be discovered that by the assistance of wind, or of water, the
labour of these ten men may be spared, the flour, which is the produce of
the work performed by the mill, would immediately fall in value, in
proportion to the quantity of labour saved; and the society would be richer
by the commodities which the labour of the ten men could produce, the
funds destined for their maintenance being in no degree impaired.
M. Say accuses Dr. Smith of having overlooked the value which is given to
commodities by natural agents, and by machinery, because he considered
that the value of all things was derived from the labour of man; but it does
not appear to me, that this charge is made out; for Adam Smith no where
undervalues the services which these natural agents and machinery perform
for us, but he very justly distinguishes the nature of the value which they
add to commodities—they are serviceable to us, by increasing the
abundance of productions, by making men richer, by adding to value in use;
but as they perform their work gratuitously, as nothing is paid for the use of
air, of heat, and of water, the assistance which they afford us, adds nothing
to value in exchange. In the first chapter of the second book, M. Say

himself gives a similar statement of value, for he says that "utility is the
foundation of value, that commodities are only desirable, because they are
in some way useful, but that their value depends not on their utility, not on
the degree in which they are desired, but on the quantity of labour necessary
to procure them." "The utility of a commodity thus understood, makes it an
object of man's desire, makes him wish for it, and establishes a demand for
it. When to obtain a thing, it is sufficient to desire it, it may be considered
as an article of natural wealth, given to man in an unlimited quantity, and
which he enjoys, without purchasing it by any sacrifice; such are the air,
water, the light of the sun. If he obtained in this manner all the objects of his
wants and desires, he would be infinitely rich: he would be in want of
nothing. But unfortunately this is not the case; the greater part of the things
which are convenient and agreeable to him, as well as those which are
indispensably necessary in the social state, for which man seems to be
specifically formed, are not given to him gratuitously; they could only exist
by the exertion of certain labour, the employment of a certain capital, and,
in many cases, by the use of land. These are obstacles in the way of
gratuitous enjoyment; obstacles from which result a real expense of
production; because we are obliged to pay for the assistance of these agents
of production." "It is only when this utility has thus been communicated to a
thing (viz. by industry, capital, and land,) that it is a production, and that it
has a value. It is its utility which is the foundation of the demand for it, but
the sacrifices, and the charges necessary to obtain it, or in other words, its
price, limits the extent of this demand."
The confusion which arises from confounding the terms "value" and
"riches" will best be seen in the following passages.30 His pupil observes:
"You have said, besides, that the riches of a society were composed of the
sum total of the values which it possessed; it appears to me to follow, that
the fall of one production, of stockings for example, by diminishing the sum
total of the value belonging to the society, diminishes the mass of its
riches;" to which the following answer is given: "the sum of the society's
riches will not fall on that account. Two pair of stockings are produced
instead of one; and two pair at three francs, are equally valuable with one
pair at six francs. The income of the society remains the same, because the
manufacturer has gained as much on two pair at three francs, as he gained
on one pair at six francs." Thus far M. Say, though incorrect, is at least

consistent. If value be the measure of riches, the society is equally rich,
because the value of all its commodities is the same as before. But now for
his inference. "But when the income remains the same, and productions fall
in price, the society is really enriched. If the same fall took place in all
commodities at the same time, which is not absolutely impossible, the
society by procuring at half their former price, all the objects of its
consumption, without having lost any portion of its income, would really be
twice as rich as before, and could purchase twice the quantity of goods."
In the first passage we are told, that if every thing fell to half its value, from
abundance, the society would be equally rich, because there would be
double the quantity of commodities at half their former value, or in other
words, there would be the same value. But in the last passage we are
informed, that by doubling the quantity of commodities, although the value
of each commodity should be diminished one half, and therefore the value
of all the commodities together be precisely the same as before, yet the
society would be twice as rich as before. In the first case riches are
estimated by the amount of value: in the second, they are estimated by the
abundance of commodities contributing to human enjoyments. M. Say
further says, "that a man is infinitely rich without valuables, if he can for
nothing obtain all the objects he desires; yet in another place we are told,
"that riches consist, not in the product itself, for it is not riches if it have not
value, but in its value." Vol. ii. p. 2.

CHAPTER XIX.

EFFECTS OF ACCUMULATION ON PROFITS AND INTEREST.

From the account which has been given of the profits of stock, it will
appear, that no accumulation of capital will permanently lower profits,
unless there be some permanent cause for the rise of wages. If the funds for
the maintenance of labour were doubled, trebled, or quadrupled, there
would not long be any difficulty in procuring the requisite number of hands,
to be employed by those funds; but owing to the increasing difficulty of
making constant additions to the food of the country, funds of the same

value would probably not maintain the same quantity of labour. If the
necessaries of the workman could be constantly increased with the same
facility, there could be no permanent alteration in the rate of profits or
wages, to whatever amount capital might be accumulated. Adam Smith,
however, uniformly ascribes the fall of profits to accumulation of capital,
and to the competition which will result from it, without ever adverting to
the increasing difficulty of providing food for the additional number of
labourers which the additional capital will employ. "The increase of stock
he says, which raises wages, tends to lower profit. When the stocks of many
rich merchants are turned into the same trade, their mutual competition
naturally tends to lower its profit; and when there is a like increase of stock
in all the different trades carried on in the same society, the same
competition must produce the same effect in all." Adam Smith speaks here
of a rise of wages, but it is of a temporary rise, proceeding from increased
funds before the population is increased; and he does not appear to see, that
at the same time that capital is increased, the work to be effected by capital,
is increased in the same proportion. M. Say has however most satisfactorily
shewn, that there is no amount of capital which may not be employed in a
country, because demand is only limited by production. No man produces,
but with a view to consume or sell, and he never sells, but with an intention
to purchase some other commodity, which may be immediately useful to
him, or which may contribute to future production. By producing, then, he
necessarily becomes either the consumer of his own goods, or the purchaser
and consumer of the goods of some other person. It is not to be supposed
that he should, for any length of time, be ill-informed of the commodities
which he can most advantageously produce, to attain the object which he
has in view, namely, the possession of other goods; and therefore it is not
probable that he will continually produce a commodity for which there is no
demand.31
There cannot then be accumulated in a country any amount of capital which
cannot be employed productively, until wages rise so high in consequence
of the rise of necessaries, and so little consequently remains for the profits
of stock, that the motive for accumulation ceases.32 While the profits of
stock are high, men will have a motive to accumulate. Whilst a man has any
wished-for gratification unsupplied he will have a demand for more
commodities; and it will be an effectual demand while he has any new

value to offer in exchange for them. If ten thousand pounds were given to a
man having 100,000l. per annum, he would not lock it up in a chest, but
would either increase his expenses by 10,000l.; employ it himself
productively, or lend it to some other person for that purpose; in either case,
demand would be increased, although it would be for different objects. If he
increased his expenses, his effectual demand might probably be for
buildings, furniture, or some such enjoyment. If he employed his 10,000l.
productively, his effectual demand would be for food, clothing, and raw
material, which might set new labourers to work; but still it would be
demand.33
Productions are always bought by productions, money is only the medium
by which the exchange is effected. Too much of a particular commodity
may be produced, of which there may be such a glut in the market, as not to
repay the capital expended on it; but this cannot be the case with respect to
all commodities; the demand for corn is limited by the mouths which are to
eat it, for shoes and coats by the persons who are to wear them; but though
a community, or a part of a community, may have as much corn, and as
many hats and shoes, as it is able or may wish to consume, the same cannot
be said of every commodity produced by nature or by art. Some would
consume more wine, if they had the ability to procure it. Others having
enough of wine, would wish to increase the quantity or improve the quality
of their furniture. Others might wish to ornament their grounds, or to
enlarge their houses. The wish to do all or some of these is implanted in
every man's breast; nothing is required but the means, and nothing can
afford the means, but an increase of production. If I had food and
necessaries at my disposal, I should not be long in want of workmen who
would put me in possession of some of the objects most useful or most
desirable to me.
Whether these increased productions, and the consequent demand which
they occasion, shall or shall not lower profits, depends solely on the rise of
wages; and the rise of wages, excepting for a limited period, on the facility
of producing the food and necessaries of the labourer. I say excepting for a
limited period, because no point is better established, than that the supply of
labourers will always ultimately be in proportion to the means of supporting
them.

There is only one case, and that will be temporary, in which the
accumulation of capital with a low price of food may be attended with a fall
of profits; and that is, when the funds for the maintenance of labour
increase much more rapidly than population;—wages will then be high, and
profits low. If every man were to forego the use of luxuries, and be intent
only on accumulation, a quantity of necessaries might be produced, for
which there could not be any immediate consumption. Of commodities so
limited in number, there might undoubtedly be an universal glut, and
consequently there might neither be demand for an additional quantity of
such commodities, nor profits on the employment of more capital. If men
ceased to consume, they would cease to produce. This admission, does not
impugn the general principle. In such a country as England, for example, it
is difficult to suppose that there can be any disposition to devote the whole
capital and labour of the country to the production of necessaries only.
When merchants engage their capitals in foreign trade, or in the carrying
trade, it is always from choice, and never from necessity: it is because in
that trade their profits will be somewhat greater than in the home trade.
Adam Smith has justly observed "that the desire of food is limited in every
man by the narrow capacity of the human stomach, but the desire of the
conveniences and ornaments of building, dress, equipage, and household
furniture, seems to have no limit or certain boundary." Nature then has
necessarily limited the amount of capital which can at any one time be
profitably engaged in agriculture, but she has placed no limits to the amount
of capital that may be employed in procuring "the conveniences and
ornaments" of life. To procure these gratifications in the greatest abundance
is the object in view, and it is only because foreign trade, or the carrying
trade, will accomplish it better, that men engage in them, in preference to
manufacturing the commodities required, or a substitute for them, at home.
If, however, from peculiar circumstances, we were precluded from
engaging capital in foreign trade, or in the carrying trade, we should, though
with less advantage, employ it at home; and while there is no limit to the
desire of "conveniences, ornaments of building, dress, equipage, and
household furniture," there can be no limit to the capital that may be
employed in procuring them, except that which bounds our power to
maintain the workmen who are to produce them.

Adam Smith however, speaks of the carrying trade as one not of choice, but
of necessity; as if the capital engaged in it would be inert if not so
employed, as if the capital in the home trade could overflow, if not confined
to a limited amount. He says, "when the capital stock of any country is
increased to such a degree, that it cannot be all employed in supplying the
consumption, and supporting the productive labour of that particular
country, the surplus part of it naturally disgorges itself into the carrying
trade, and is employed in performing the same offices to other countries."
"About ninety-six thousand hogsheads of tobacco are annually purchased
with a part of the surplus produce of British industry. But the demand of
Great Britain does not require, perhaps, more than fourteen thousand. If the
remaining eighty-two thousand, therefore, could not be sent abroad and
exchanged for something more in demand at home, the importation of them
would cease immediately, and with it the productive labour of all the
inhabitants of Great Britain, who are at present employed in preparing the
goods with which these eighty-two thousand hogsheads are annually
purchased." But could not this portion of the productive labour of Great
Britain be employed in preparing some other sort of goods, with which
something more in demand at home might be purchased? And if it could
not, might we not employ this productive labour, though with less
advantage, in making those goods in demand at home, or at least some
substitute for them? If we wanted velvets, might we not attempt to make
velvets; and if we could not succeed, might we not make more cloth, or
some other object desirable to us?
We manufacture commodities, and with them buy goods abroad, because
we can obtain a greater quantity than we could make at home. Deprive us of
this trade, and we immediately manufacture again for ourselves. But this
opinion of Adam Smith is at variance with all his general doctrines on this
subject. "If a foreign country can supply us with a commodity cheaper than
we ourselves can make it, better buy it of them with some part of the
produce of our own industry, employed in a way in which we have some
advantage. The general industry of the country being always in proportion
to the capital which employs it, will not thereby be diminished, but only left
to find out the way in which it can be employed with the greatest
advantage."

Again. "Those, therefore, who have the command of more food than they
themselves can consume, are always willing to exchange the surplus, or,
what is the same thing, the price of it, for gratifications of another kind.
What is over and above satisfying the limited desire, is given for the
amusement of those desires which cannot be satisfied, but seem to be
altogether endless. The poor, in order to obtain food, exert themselves to
gratify those fancies of the rich; and to obtain it more certainly, they vie
with one another in the cheapness and perfection of their work. The number
of workmen increases with the increasing quantity of food, or with the
growing improvement and cultivation of the lands; and as the nature of their
business admits of the utmost subdivisions of labours, the quantity of
materials which they can work up increases in a much greater proportion
than their numbers. Hence arises a demand for every sort of material which
human invention can employ, either usefully or ornamentally, in building,
dress, equipage, or household furniture; for the fossils and minerals
contained in the bowels of the earth, the precious metals, and the precious
stones."
Adam Smith has justly observed, that it is extremely difficult to determine
the rate of the profits of stock. "Profit is so fluctuating, that even in a
particular trade, and much more in trades in general, it would be difficult to
state the average rate of it. To judge of what it may have been formerly, or
in remote periods of time, with any degree of precision, must be altogether
impossible." Yet since it is evident that much will be given for the use of
money, when much can be made by it, he suggests, that "the market rate of
interest will lead us to form some notion of the rate of profits, and the
history of the progress of interest afford us that of the progress of profits."
Undoubtedly if the market rate of interest could be accurately known for
any considerable period, we should have a tolerably correct criterion, by
which to estimate the progress of profits.
But in all countries, from mistaken notions of policy, the state has interfered
to prevent a fair and free market rate of interest, by imposing heavy and
ruinous penalties on all those who shall take more than the rate fixed by
law. In all countries probably these laws are evaded, but records give us
little information on this head, and point out rather the legal and fixed rate,
than the market rate of interest. During the present war, exchequer and navy
bills have frequently been at so high a discount, as to afford the purchasers

of them 7, 8 per cent., or a greater rate of interest for their money. Loans
have been raised by Government at an interest exceeding 6 per cent., and
individuals have been frequently obliged, by indirect means, to pay more
than 10 per cent., for the interest of money; yet during this same period the
legal rate of interest has been uniformly at 5 per cent. Little dependance for
information then can be placed on that which is the fixed and legal rate of
interest, when we find it may differ so considerably from the market rate.
Adam Smith informs us, that from the 37th of Henry VIII., to 21st of James
I., 10 per cent. continued to be the legal rate of interest. Soon after the
restoration, it was reduced to 6 per cent., and by the 12th of Anne, to 5 per
cent. He thinks the legal rate followed, and did not precede the market rate
of interest. Before the American War, Government borrowed at 3 per cent.,
and the people of credit in the capital, and in many other parts of the
kingdom at 3½, 4, and 4½ per cent.
The rate of interest, though ultimately and permanently governed by the
rate of profit, is however subject to temporary variations from other causes.
With every fluctuation in the quantity and value of money, the prices of
commodities naturally vary. They vary also, as we have already shewn,
from the alteration in the proportion of supply to demand, although there
should not be either greater facility or difficulty of production. When the
market prices of goods fall from an abundant supply, from a diminished
demand, or from a rise in the value of money, a manufacturer naturally
accumulates an unusual quantity of finished goods, being unwilling to sell
them at very depressed prices. To meet his ordinary payments, for which he
used to depend on the sale of his goods, he now endeavours to borrow on
credit, and is often obliged to give an increased rate of interest. This
however is but of temporary duration; for either the manufacturer's
expectations were well grounded, and the market price of his commodities
rises, or he discovers that there is a permanently diminished demand, and he
no longer resists the course of affairs: prices fall, and money and interest
regain their real value. If by the discovery of a new mine, by the abuses of
banking, or by any other cause, the quantity of money be greatly increased,
its ultimate effect is to raise the prices of commodities in proportion to the
increased quantity of money; but there is probably always an interval,
during which some effect is produced on the rate of interest.

The price of funded property is not a steady criterion by which to judge of
the rate of interest. In time of war, the stock market is so loaded by the
continual loans of Government, that the price of stock has not time to settle
at its fair level before a new operation of funding takes place, or it is
affected by anticipation of political events. In time of peace, on the
contrary, the operations of the sinking fund, the unwillingness, which a
particular class of persons feel to divert their funds to any other
employment than that to which they have been accustomed, which they
think secure, and in which their dividends are paid with the utmost
regularity, elevates the price of stock, and consequently depresses the rate
of interest on these securities below the general market rate. It is observable
too, that for different securities, Government pays very different rates of
interest. Whilst 100l. capital in 5 per cent. stock is selling for 95l., an
exchequer bill of 100l., will be sometimes selling for 100l. 5s., for which
exchequer bill, no more interest will be annually paid than 4l. 11s. 3d.: one
of these securities pays to a purchaser at the above prices, an interest of
more than 5¼ per cent., the other but little more than 4¼; a certain quantity
of these exchequer bills is required as a safe and marketable investment for
bankers; if they were increased much beyond this demand, they would
probably be as much depreciated as the 5 per cent. stock. A stock paying 3
per cent. per annum will always sell at a proportionally greater price than
stock paying 5 per cent., for the capital debt of neither can be discharged
but at par, or 100l. money for 100l. stock. The market rate of interest may
fall to 4 per cent., and Government would then pay the holder of 5 per cent.
stock at par, unless he consented to take 4 per cent., or some diminished rate
of interest under 5 per cent.: they would have no advantage from so paying
the holder of 3 per cent. stock, till the market rate of interest had fallen
below 3 per cent. per annum. To pay the interest on the national debt, large
sums of money are withdrawn from circulation four times in the year for a
few days. These demands for money being only temporary, seldom affect
prices; they are generally surmounted by the payment of a large rate of
interest.35

CHAPTER XX.

BOUNTIES ON EXPORTATION, AND PROHIBITIONS OF IMPORTATION.

A bounty on the exportation of corn tends to lower its price to the foreign
consumer, but it has no permanent effect on its price in the home market.
Suppose that to afford the usual and general profits of stock, the price of
corn should in England be 4l. per quarter; it could not then be exported to
foreign countries where it sold for 3l. 15s. per quarter. But if a bounty of
10s. per quarter were given on exportation, it could be sold in the foreign
market at 3l. 10s., and consequently the same profit would be afforded to
the corn grower, whether he sold it at 3l. 10s. in the foreign, or at 4l. in the
home market.
A bounty then, which should lower the price of British corn in the foreign
country, below the cost of producing corn in that country, would naturally
extend the demand for British, and diminish the demand for their own corn.
This extension of demand for British corn could not fail to raise its price for
a time in the home market, and during that time to prevent also its falling so
low in the foreign market as the bounty has a tendency to effect. But the
causes which would thus operate on the market price of corn in England
would produce no effect whatever on its natural price, on its real cost of
production. To grow corn would neither require more labour nor more
capital, and, consequently, if the profits of the farmer's stock were before
only equal to the profits of the stock of other traders, they will, after the rise
of price, be considerably above them. By raising the profits of the farmer's
stock, the bounty will operate as an encouragement to agriculture, and
capital will be withdrawn from manufactures to be employed on the land,
till the enlarged demand for the foreign market has been supplied, when the
price of corn will again fall in the home market to its natural and necessary
price, and profits will be again at their ordinary and accustomed level. The
increased supply of grain operating on the foreign market, will also lower
its price in the country to which it is exported, and will thereby restrict the
profits of the exporter to the lowest rate at which he can afford to trade.
The ultimate effect then of a bounty on the exportation of corn, is not to
raise or to lower the price in the home market, but to lower the price of corn
to the foreign consumer—to the whole extent of the bounty, if the price of
corn had not before been lower in the foreign, than in the home market—

and in a less degree, if the price in the home had been above the price in the
foreign market.
A writer in the fifth vol. of the Edinburgh Review on the subject of a bounty
on the exportation of corn, has very clearly pointed out its effects on the
foreign and home demand. He has also justly remarked, that it would not
fail to give encouragement to agriculture in the exporting country; but he
appears to have imbibed the common error which has misled Dr. Smith, and
I believe most other writers on this subject. He supposes, because the price
of corn ultimately regulates wages, that therefore it will regulate the price of
all other commodities. He says that the bounty, "by raising the profits of
farming, will operate as an encouragement to husbandry; by raising the
price of corn to the consumers at home, it will diminish for the time their
power of purchasing this necessary of life, and thus abridge their real
wealth. It is evident, however, that this last effect must be temporary: the
wages of the labouring consumers had been adjusted before by competition,
and the same principle will adjust them again to the same rate, by raising
the money price of labour, and, through that, of other commodities, to the
money price of corn. The bounty upon exportation, therefore, will
ultimately raise the money price of corn in the home market; not directly,
however, but through the medium of an extended demand in the foreign
market, and a consequent enhancement of the real price at home: and this
rise of the money price, when it has once been communicated to other
commodities, will of course become fixed."
If, however, I have succeeded in shewing that it is not the rise in the money
wages of labour which raises the price of commodities, but that such rise
always affects profits, it will follow that the prices of commodities would
not rise in consequence of a bounty.
But a temporary rise in the price of corn, produced by an increased demand
from abroad, would have no effect on the money price of wages. The rise of
corn is occasioned by a competition for that supply which was before
exclusively appropriated to the home market. By raising profits, additional
capital is employed in agriculture, and the increased supply is obtained; but
till it be obtained, the high price is absolutely necessary to proportion the
consumption to the supply, which would be counteracted by a rise of wages.
The rise of corn is the consequence of its scarcity, and is the means by

which the demand of the home purchasers is diminished. If wages were
increased, the competition would increase, and a further rise of the price of
corn would become necessary. In this account of the effects of a bounty,
nothing has been supposed to occur to raise the natural price of corn, by
which its market price is ultimately governed; for it has not been supposed
that any additional labour would be required on the land to insure a given
production, and this alone can raise natural price. If the natural price of
cloth were 20s. per yard, a great increase in the foreign demand might raise
the price to 25s., or more, but the profits which would then be made by the
clothier would not fail to attract capital in that direction, and although the
demand should be doubled, trebled, or quadrupled, the supply would
ultimately be obtained, and cloth would fall to its natural price of 20s. So in
the supply of corn, although we should export 2, 3, or 800,000 quarters,
annually, it would ultimately be produced at its natural price, which never
varies unless a different quantity of labour becomes necessary to
production.
Perhaps in no part of Adam Smith's justly celebrated work are his
conclusions more liable to objection, than in the chapter on bounties. In the
first place, he speaks of corn as of a commodity of which the production
cannot be increased in consequence of a bounty on exportation; he supposes
invariably that it acts only on the quantity actually produced, and is no
stimulus to further production. "In years of plenty," he says, "by
occasioning an extraordinary exportation, it necessarily keeps up the price
of corn in the home market above what it would naturally fall to. In years of
scarcity, though the bounty is frequently suspended, yet the great
exportation which it occasions in years of plenty, must frequently hinder,
more or less, the plenty of one year from relieving the scarcity of another.
Both in the years of plenty and in years of scarcity, therefore, the bounty
necessarily tends to raise the money price of corn somewhat higher than it
otherwise would be in the home market."36
Adam Smith appears to have been fully aware, that the correctness of his
argument entirely depended on the fact, whether the increase "of the money
price of corn, by rendering that commodity more profitable to the farmer,
would not necessarily encourage its production."

"I answer," he says, "that this might be the case, if the effect of the bounty
was to raise the real price of corn, or to enable the farmer, with an equal
quantity of it, to maintain a greater number of labourers in the same manner,
whether liberal, moderate, or scanty, as other labourers are commonly
maintained in his neighbourhood."
If nothing were consumed by the labourer but corn, and if the portion which
he received, was the very lowest which his sustenance required, there might
be some ground for supposing that the quantity paid to the labourer could,
under no circumstances, be reduced,—but the money wages of labour
sometimes do not rise at all, and never rise in proportion to the rise in the
money price of corn, because corn, though an important part, is only a part
of the consumption of the labourer. If half his wages were expended on
corn, and the other half on soap, candles, fuel, tea, sugar, clothing, &c.,
commodities on which no rise is supposed to take place, it is evident that he
would be quite as well paid with a bushel and a half of wheat, when it was
16s. a bushel, as he was with two bushels, when the price was 8s. per
bushel; or with 24s. in money, as he was before with 16s. His wages would
rise only 50 per cent. though corn rose 100 per cent., and, consequently,
there would be sufficient motive to divert more capital to the land, if profits
on other trades continued the same as before. But such a rise of wages
would also induce manufacturers to withdraw their capitals from
manufactures, to employ them on the land; for whilst the farmer increased
the price of his commodity 100 per cent., and his wages only 50 per cent.,
the manufacturer would be obliged also to raise wages 50 per cent., whilst
he had no compensation whatever, in the rise of his manufactured
commodity, for this increased charge of production; capital would
consequently flow from manufactures to agriculture, till the supply would
again lower the price of corn to 8s. per bushel, and wages to 16s. per week;
when the manufacturer would obtain the same profits as the farmer, and the
tide of capital would cease to set in either direction. This is in fact the mode
in which the cultivation of corn is always extended, and the increased wants
of the market supplied. The funds for the maintenance of labour increase,
and wages are raised. The comfortable situation of the labourer induces him
to marry—population increases, and the demand for corn raises its price
relatively to other things,—more capital is profitably employed on
agriculture, and continues to flow towards it, till the supply is equal to the

demand, when the price again falls, and agricultural and manufacturing
profits are again brought to a level.
But whether wages were stationary after the rise in the price of corn, or
advanced moderately, or enormously, is of no importance to this question,
for wages are paid by the manufacturer as well as by the farmer, and,
therefore, in this respect they must be equally affected by a rise in the price
of corn. But they are unequally affected in their profits, inasmuch as the
farmer sells his commodity at an advanced price, while the manufacturer
sells his for the same price as before. It is however the inequality of profit,
which is always the inducement to remove capital from one employment to
another, and therefore more corn would be produced, and fewer
commodities manufactured. Manufactures would not rise, because fewer
were manufactured, for a supply of them would be obtained in exchange for
the exported corn.
A bounty, if it raises the price of corn, either raises it in comparison with the
price of other commodities, or it does not. If the affirmative be true, it is
impossible to deny the greater profits of the farmer, and the temptation to
the removal of capital, till its price is again lowered by an abundant supply.
If it does not raise it in comparison with other commodities, where is the
injury to the home consumer, beyond the inconvenience of paying the tax?
If the manufacturer pays a greater price for his corn, he is compensated by
the greater price at which he sells his commodity, with which his corn is
ultimately purchased.

The error of Adam Smith proceeds precisely from the same source as that of
the writer in the Edinburgh Review; for they both think "that the money
price of corn regulates that of all other home-made commodities."37 "It
regulates," says Adam Smith, "the money price of labour, which must
always be such as to enable the labourer to purchase a quantity of corn
sufficient to maintain him and his family, either in the liberal, moderate, or
scanty manner, in which the advancing, stationary, or declining
circumstances of the society oblige his employers to maintain him. By
regulating the money price of all the other parts of the rude produce of land,
it regulates that of the materials of almost all manufactures. By regulating
the money price of labour, it regulates that of manufacturing art, and
industry; and by regulating both, it regulates that of the complete
manufacture. The money price of labour, and of every thing that is the
produce either of land and labour, must necessarily rise or fall in
proportion to the money price of corn."
This opinion of Adam Smith, I have before attempted to refute. In
considering a rise in the price of commodities as a necessary consequence
of a rise in the price of corn, he reasons as though there were no other fund
from which the increased charge could be paid. He has wholly neglected the
consideration of profits, the diminution of which forms that fund, without
raising the price of commodities. If this opinion of Dr. Smith were well
founded, profits could never really fall, whatever accumulation of capital
there might be. If when wages rose, the farmer could raise the price of his
corn, and the clothier, the hatter, the shoemaker, and every other
manufacturer, could also raise the price of their goods in proportion to the
advance, although estimated in money, they might be all raised, they would
continue to bear the same value relatively to each other. Each of these
trades could command the same quantity as before of the goods of the
others, which, since it is goods, and not money, which constitute wealth, is
the only circumstance that could be of importance to them; and the whole
rise in the price of raw produce and of goods, would be injurious to no other
persons but to those whose property consisted of gold and silver, or whose
annual income was paid in a contributed quantity of those metals, whether
in the form of bullion or of money. Suppose the use of money to be wholly
laid aside, and all trade to be carried on by barter. Under such
circumstances, could corn rise in exchangeable value with other things? If it

could, then it is not true that the value of corn regulates the value of all
other commodities; for to do that, it should not vary in relative value to
them. If it could not, then it must be maintained, that whether corn be
obtained on rich, or on poor land, with much labour, or with little, with the
aid of machinery, or without, it would always exchange for an equal
quantity of all other commodities.
I cannot, however, but remark that, though Adam Smith's general doctrines
correspond with this which I have just quoted, yet in one part of his work he
appears to have given a correct account of the nature of value. "The
proportion between the value of gold and silver, and that of goods of any
other kind, depends in all cases," he says, "upon the proportion between the
quantity of labour which is necessary in order to bring a certain quantity of
gold and silver to market, and that which is necessary to bring thither a
certain quantity of any other sort of goods." Does he not here fully
acknowledge that if any increase takes place in the quantity of labour,
required to bring one sort of goods to market, whilst no such increase takes
place in bringing another sort thither, those goods will rise in relative value.
If no more labour be required to bring cloth and gold to market, they will
not vary in relative value, but if more labour be required to bring corn and
shoes to market, will not corn and shoes rise in value relatively to cloth, and
money made of gold?
Adam Smith again considers that the effect of the bounty is to cause a
partial degradation in the value of money. "That degradation," says he "in
the value of silver, which is the effect of the fertility of the mines, and
which operates equally, or very nearly equally, through the greater part of
the commercial world, is a matter of very little consequence to any
particular country. The consequent rise of all money prices, though it does
not make those who receive them really richer, does not make them really
poorer. A service of plate becomes really cheaper, and every thing else
remains precisely of the same real value as before." This observation is
most correct.
"But that degradation in the value of silver, which being the effect either of
the peculiar situation, or of the political institutions of a particular country,
takes place only in that country, is a matter of very great consequence,
which, far from tending to make any body really richer, tends to make every

body really poorer. The rise in the money price of all commodities, which is
in this case peculiar to that country, tends to discourage more or less every
sort of industry which is carried on within it, and to enable foreign nations,
by furnishing almost all sorts of goods for a smaller quantity of silver than
its own workmen can afford to do, to undersell them, not only in the
foreign, but even in the home market."
I have elsewhere attempted to shew that a partial degradation in the value of
money, which shall affect both agricultural produce, and manufactured
commodities, cannot possibly be permanent. To say that money is partially
degraded, in this sense, is to say that all commodities are at a high price; but
while gold and silver are at liberty to make purchases in the cheapest
market, they will be exported for the cheaper goods of other countries, and
the reduction of their quantity will increase their value at home;
commodities will regain their usual level, and those fitted for foreign
markets will be exported, as before.
A bounty therefore cannot, I think, be objected to on this ground.
If then, a bounty raises the price of corn in comparison with all other things,
the farmer will be benefited, and more land will be cultivated; but if the
bounty do not raise the value of corn relatively to other things, then no other
inconvenience will attend it, than that of paying the bounty; one which I
neither wish to conceal nor underrate.
Dr. Smith states, that "by establishing high duties on the importation, and
bounties on the exportation of corn, the country gentlemen seemed to have
imitated the conduct of the manufacturers." By the same means both had
endeavoured to raise the value of their commodities. "They did not perhaps
attend to the great and essential difference which nature has established
between corn, and almost every other sort of goods. When by either of the
above means, you enable our manufacturers to sell their goods for
somewhat a better price than they otherwise could get for them, you raise
not only the nominal, but the real price of those goods. You increase not
only the nominal, but the real profit, the real wealth and revenue of those
manufacturers—you really encourage those manufactures. But when, by the
like institutions, you raise the nominal or money price of corn, you do not
raise its real value, you do not increase the real wealth of our farmers or

country gentlemen, you do not encourage the growth of corn. The nature of
things has stamped upon corn a real value, which cannot be altered by
merely altering its money price. Through the world in general, that value is
equal to the quantity of labour which it can maintain."
I have already attempted to shew, that the market price of corn, would,
under an increased demand from the effects of a bounty, exceed its natural
price, till the requisite additional supply was obtained, and that then it
would again fall to its natural price. But the natural price of corn is not so
fixed as the natural price of commodities; because, with any great
additional demand for corn, land of a worse quality must be taken into
cultivation, on which more labour will be required to produce a given
quantity, and the natural price of corn would be raised. By a continued
bounty, therefore, on the exportation of corn, there would be created a
tendency to a permanent rise in the price of corn, and this, as I have shewn
elsewhere,38 never fails to raise rent. Country gentlemen then have not only
a temporary but a permanent interest in prohibitions of the importation of
corn, and in bounties on its exportation; but manufacturers have no
permanent interest in a bounty on the exportation of commodities, their
interest is wholly temporary.
A bounty on the exportation of manufactures will undoubtedly, as Dr. Smith
contends, raise the market price of manufactures, but it will not raise their
natural price. The labour of 200 men will produce double the quantity of
these goods that 100 could produce before; and consequently, when the
requisite quantity of capital was employed in supplying the requisite
quantity of manufactures, they would again fall to their natural price. It is
then only during the interval after the rise in the market price of
commodities, and before the additional supply is obtained, that the
manufacturers will enjoy high profits; for as soon as prices had subsided,
their profits would sink to the general level.
Instead of agreeing, therefore, with Adam Smith, that the country gentlemen
had not so great an interest in prohibiting the importation of corn, as the
manufacturer had in prohibiting the importation of manufactured goods, I
contend that they have a much superior interest; for their advantage is
permanent, while that of the manufacturer is only temporary. Dr. Smith
observes, that nature has established a great and essential difference

between corn and other goods, but the proper inference from that
circumstance is directly the reverse of that which he draws from it; for it is
on account of this difference that rent is created, and that country gentlemen
have an interest in the rise of the natural price of corn. Instead of comparing
the interest of the manufacturer with the interest of the country gentleman,
Dr. Smith should have compared it with the interest of the farmer, which is
very distinct from that of his landlord. Manufacturers have no interest in the
rise of the natural price of their commodities, nor have farmers any interest
in the rise of the natural price of corn, or other raw produce, though both
these classes are benefited while the market price of their productions
exceeds their natural price. On the contrary, landlords have a most decided
interest in the rise of the natural price of corn; for the rise of rent is the
inevitable consequence of the difficulty of producing raw produce, without
which its natural price could not rise. Now as bounties on exportation and
prohibitions of the importation of corn increase the demand, and drive us to
the cultivation of poorer lands, they necessarily occasion an increased
difficulty of production.
The sole effect of the bounty either on the exportation of manufactures, or
of corn, is to divert a portion of capital to an employment, which it would
not naturally seek. It causes a pernicious distribution of the general funds of
the society—it bribes a manufacturer to commence or continue in a
comparatively less profitable employment. It is the worst species of
taxation, for it does not give to the foreign country all that it takes away
from the home country, the balance of loss being made up by the less
advantageous distribution of the general capital. Thus, if the price of corn is
in England 4l., and in France 3l. 15s. a bounty of 10s. will ultimately reduce
it to 3l. 10s. in France, and maintain it at the same price of 4l. in England.
For every quarter exported, England pays a tax of 10s. For every quarter
imported into France, France gains only 5s., so that the value of 5s. per
quarter is absolutely lost to the world, by such a distribution of its funds as
to cause diminished production, probably not of corn, but of some other
object of necessity or enjoyment.
Mr. Buchanan appears to have seen the fallacy of Dr. Smith's arguments
respecting bounties, and on the last passage which I have quoted, very
judiciously remarks: "In asserting that nature has stamped a real value on
corn, which cannot be altered by merely altering its money price, Dr. Smith

confounds its value in use, with its value in exchange. A bushel of wheat
will not feed more people during scarcity than during plenty; but a bushel of
wheat will exchange for a greater quantity of luxuries and conveniences
when it is scarce, than when it is abundant; and the landed proprietors, who
have a surplus of food to dispose of, will therefore, in times of scarcity, be
richer men; they will exchange their surplus for a greater value of other
enjoyments, than when corn is in greater plenty. It is vain to argue,
therefore, that if the bounty occasions a forced exportation of corn, it will
not also occasion a real rise of price." The whole of Mr. Buchanan's
arguments on this part of the subject of bounties, appear to me to be
perfectly clear and satisfactory.
Mr. Buchanan however has not, I think, any more than Dr. Smith, or the
writer in the Edinburgh Review, correct opinions as to the influence of a
rise in the price of labour on manufactured commodities. From his peculiar
views, which I have elsewhere noticed, he thinks that the price of labour has
no connexion with the price of corn, and therefore that the real value of
corn might and would rise without affecting the price of labour; but if
labour were affected, he would maintain with Adam Smith and the writer in
the Edinburgh Review, that the price of manufactured commodities would
also rise; and then I do not see how he would distinguish such a rise of corn,
from a fall in the value of money, or how he could come to any other
conclusion than that of Dr. Smith. In a note to page 276, vol. i. of the
Wealth of Nations, Mr. Buchanan observes, "but the price of corn does not
regulate the money price of all the other parts of the rude produce of land. It
regulates the price neither of metals, nor of various other useful substances,
such as coals, wood, stones, &c.; and as it does not regulate the price of
labour, it does not regulate the price of manufactures; so that the bounty, in
so far as it raises the price of corn, is undoubtedly a real benefit to the
farmer. It is not on this ground, therefore, that its policy must be argued. Its
encouragement to agriculture, by raising the price of corn, must be
admitted; and the question then comes to be, whether agriculture ought to
be thus encouraged?"—It is then, according to Mr. Buchanan, a real benefit
to the farmer, because it does not raise the price of labour; but if it did, it
would raise the price of all things in proportion, and then it would afford no
particular encouragement to agriculture.

It must, however, be conceded, that the tendency of a bounty on the
exportation of any commodity is to lower in a small degree the value of
money. Whatever facilitates exportation, tends to accumulate money in a
country; and on the contrary, whatever impedes exportation, tends to
diminish it. The general effect of taxation, by raising the prices of the
commodities taxed, tends to diminish exportation, and therefore to check
the influx of money; and on the same principle, a bounty encourages the
influx of money. This is more fully explained in the general observations on
taxation.
The injurious effects of the mercantile system have been fully exposed by
Dr. Smith; the whole aim of that system was to raise the price of
commodities, in the home market, by prohibiting foreign competition; but
this system was no more injurious to the agricultural classes than to any
other part of the community. By forcing capital into channels where it
would not otherwise flow, it diminished the whole amount of commodities
produced. The price, though permanently higher, was not sustained by
scarcity, but by difficulty of production; and therefore, though the sellers of
such commodities sold them for a higher price, they did not sell them, after
the requisite quantity of capital was employed in producing them, at higher
profits.39
The manufacturers themselves, as consumers, had to pay an additional price
for such commodities, and therefore it cannot be correctly said, that "the
enhancement of price occasioned by both, (corporation laws and high duties
on the importation of foreign commodities,) is every where finally paid by
the landlords, farmers, and labourers of the country."
It is the more necessary, to make this remark, as in the present day the
authority of Adam Smith is quoted by country gentlemen for imposing
similar high duties on the importation of foreign corn. Because the cost of
production, and therefore the prices of various manufactured commodities,
are raised to the consumer by one error in legislation, the country has been
called upon, on the plea of justice, quietly to submit to fresh exactions.
Because we all pay an additional price for our linen, muslin, and cottons, it
is thought just that we should pay also an additional price for our corn.
Because, in the general distribution of the labour of the world, we have
prevented the greatest amount of productions from being obtained by that

labour in manufactured commodities; we should further punish ourselves by
diminishing the productive powers of the general labour in the supply of
raw produce. It would be much wiser to acknowledge the errors which a
mistaken policy has induced us to adopt, and immediately to commence a
gradual recurrence to the sound principles of an universally free trade.
"I have already had occasion to remark," observes M. Say, "in speaking of
what is improperly called the balance of trade, that if it suits a merchant
better to export the precious metals to a foreign country than any other
goods, it is also the interest of the state that he should export them, because
the state only gains or loses through the channel of its citizens; and in what
concerns foreign trade, that which best suits the individual, best suits also
the state; therefore, by opposing obstacles to the exportation which
individuals would be inclined to make of the precious metals, nothing more
is done, than to force them to substitute some other commodity less
profitable to themselves, and to the state. It must however be remarked, that
I say only in what concerns foreign trade; because the profits which
merchants make by their dealings with their countrymen, as well as those
which are made in the exclusive commerce with colonies, are not entirely
gains for the state. In the trade between individuals of the same country,
there is no other gain but the value of an utility produced; Que la valeur
d'une utilité produite."40 Vol. i. p. 401. I cannot see the distinction here
made between the profits of the home and foreign trade. The object of all
trade is to increase productions. If for the purchase of a pipe of wine, I had
it in my power to export bullion, which was bought with the value of the
produce of 100 days' labour, but Government, by prohibiting the
exportation of bullion, should oblige me to purchase my wine with a
commodity bought with the value of the produce of one hundred and five
days' labour, the produce of five days' labour is lost to me, and, through me,
to the state. But if these transactions took place between individuals, in
different provinces of the same country, the same advantage would accrue
both to the individual, and, through him, to the country, if he were
unfettered in his choice of the commodities, with which he made his
purchases; and the same disadvantage, if he were obliged by Government to
purchase with the least beneficial commodity. If a manufacturer could work
up with the same capital, more iron where coals are plentiful, than he could
where coals are scarce, the country would be benefited by the difference.

But if coals were no where plentiful, and he imported iron, and could get
this additional quantity, by the manufacture of a commodity, with the same
capital and labour, he would in like manner benefit his country by the
additional quantity of iron. In the 6th Chap. of this work, I have
endeavoured to shew that all trade, whether foreign or domestic, is
beneficial, by increasing the quantity, and not by increasing the value of
productions. We shall have no greater value, whether we carry on the most
beneficial home and foreign trade, or in consequence of being fettered by
prohibitory laws, we are obliged to content ourselves with the least
advantageous. The rate of profits, and the value produced, will be the same.
The advantage always resolves itself into that which M. Say appears to
confine to the home trade; in both cases there is no other gain but that of the
value of an utilité produite.

CHAPTER XXI.

ON BOUNTIES ON PRODUCTION.

It may not be uninstructive to consider the effects of a bounty on the
production of raw produce and other commodities, with a view to observe
the application of the principles which I have been endeavouring to
establish, with regard to the profits of stock, the annual produce of the land
and labour, and the relative prices of manufactures and raw produce. In the
first place, let us suppose that a tax was imposed on all commodities, for the
purpose of raising a fund to be employed by Government, in giving a
bounty on the production of corn. As no part of such a tax would be
expended by Government, and as all that was received from one class of the
people, would be returned to another, the nation collectively would neither
be richer nor poorer, from such a tax and bounty. It would be readily
allowed, that the tax on commodities by which the fund was created, would
raise the price of the commodities taxed; all the consumers of those
commodities therefore would contribute towards that fund; in other words,
their natural or necessary price being raised, so would too their market
price. But for the same reason that the natural price of those commodities
would be raised, the natural price of corn would be lowered; before the

bounty was paid on production, the farmers obtained as great a price for
their corn as was necessary to repay them their rent and their expenses, and
afford them the general rate of profits; after the bounty, they would receive
more than that rate, unless the price of corn fell by a sum at least equal to
the bounty. The effect then of the tax and bounty, would be to raise the price
of commodities in a degree equal to the tax levied on them, and to lower the
price of corn by a sum equal to the bounty paid. It will be observed too, that
no permanent alteration could be made in the distribution of capital between
agriculture and manufactures, because as there would be no alteration,
either in the amount of capital or population, there would be precisely the
same demand for bread and manufactures. The profits of the farmer would
be no higher than the general level, after the fall in the price of corn; nor
would the profits of the manufacturer be lower after the rise of
manufactured goods; the bounty then would not occasion any more capital
to be employed on the land in the production of corn, nor any less in the
manufacture of goods. But how would the interest of the landlord be
affected? On the same principles that a tax on raw produce would lower the
corn rent of land, leaving the money rent unaltered, a bounty on production,
which is directly the contrary of a tax, would raise corn rent, leaving the
money rent unaltered.41 With the same money rent the landlord would have
a greater price to pay for his manufactured goods, and a less price for his
corn; he would probably therefore be neither richer nor poorer.
Now whether such a measure would have any operation on the wages of
labour, would depend on the question, whether the labourer, in purchasing
commodities, would pay as much towards the tax, as he would receive from
the bounty, in the low price of his food. If these two quantities were equal,
wages would continue unaltered; but if the commodities taxed were not
those consumed by the labourer, his wages would fall, and his employer
would be benefited by the difference. But this is no real advantage to his
employer; it would indeed operate to increase the rate of his profits, as
every fall of wages must do; but in proportion as the labourer contributed
less to the fund from which the bounty was paid, and which, let it be
remembered, must be raised, his employer must contribute more; in other
words, he would contribute as much to the tax by his expenditure, as he
would receive in the effects of the bounty and the higher rate of profits
together. He obtains a higher rate of profits to requite him for his payment,

not only of his own quota of the tax, but of his labourer's also; the
remuneration which he receives for his labourer's quota appears in
diminished wages, or, which is the same thing, in increased profits; the
remuneration for his own appears in the diminution in the price of the corn
which he consumes, arising from the bounty.
Here it will be proper to remark the different effects produced on profits
from an alteration in the real labour value of corn, and an alteration in the
relative value of corn, from taxation and from bounties. If corn is lowered
in price by an alteration in its labour price, not only will the rate of the
profits of stock be altered, but the absolute profits also; which does not
happen, as we have just seen, when the fall is occasioned artificially by a
bounty. In the real fall in the value of corn, arising from less labour being
required to produce one of the most important objects of man's
consumption, labour is rendered more productive. With the same capital the
same labour is employed, and an increase of productions is the result; not
only then will the rate of profits, but the absolute profits of stock be
increased; not only will each capitalist have a greater money revenue, if he
employs the same money capital, but also when that money is expended, it
will procure him a greater sum of commodities; his enjoyments will be
augmented. In the case of the bounty, to balance the advantage which he
derives from the fall of one commodity, he has the disadvantage of paying a
price more than proportionally high for another; he receives an increased
rate of profits in order to enable him to pay this higher price; so that his real
situation is in no way improved: though he gets a higher rate of profits, he
has no greater command of the produce of the land and labour of the
country. When the fall in the value of corn is brought about by natural
causes, it is not counteracted by the rise of other commodities; on the
contrary, they fall from the raw material falling from which they are made:
but when the fall in corn is occasioned by artificial means, it is always
counteracted by a real rise in the value of some other commodity, so that if
corn be bought cheaper, other commodities are bought dearer.
This then is a further proof, that no particular disadvantage arises from
taxes on necessaries, on account of their raising wages and lowering the rate
of profits. Profits are indeed lowered, but only to the amount of the
labourer's portion of the tax, which must at all events, be paid either by his
employer, or by the consumer of the produce of the labourer's work.

Whether you deduct 50l. per annum from the employer's revenue, or add
50l. to the prices of the commodities which he consumes, can be of no other
consequence to him or to the community, than as it may equally affect all
other classes. If it be added to the prices of the commodity, a miser may
avoid the tax by not consuming; if it be indirectly deducted from every
man's revenue, he cannot avoid paying his fair proportion of the public
burthens.
A bounty on the production of corn then, would produce no real effect on
the annual produce of the land and labour of the country, although it would
make corn relatively cheap, and manufactures relatively dear. But suppose
now that a contrary measure should be adopted, that a tax should be raised
on corn for the purpose of affording a fund for a bounty on the production
of commodities.
In such case, it is evident that corn would be dear, and commodities cheap;
labour would continue at the same price, if the labourer were as much
benefited by the cheapness of commodities as he was injured by the
dearness of corn; but if he were not, wages would rise, and profits would
fall, while money rent would continue the same as before; profits would
fall, because, as we have just explained, that would be the mode in which
the labourer's share of the tax would be paid by the employers of labour. By
the increase of wages the labourer would be compensated for the tax which
he would pay in the increased price of corn; by not expending any part of
his wages on the manufactured commodities, he would receive no part of
the bounty; the bounty would be all received by the employers, and the tax
would be partly paid by the employed; a remuneration would be made to
the labourers, in the shape of wages, for this increased burden laid upon
them, and thus the rate of profits would be reduced. In this case too there
would be a complicated measure producing no national result whatever.
In considering this question, we have purposely left out of our consideration
the effect of such a measure on foreign trade; we have rather been
supposing the case of an insulated country, having no commercial
connexion with other countries. We have seen that as the demand of the
country for corn and commodities would be the same, whatever direction
the bounty might take, there would be no temptation to remove capital from
one employment to another: but this would no longer be the case if there

were foreign commerce, and that commerce were free. By altering the
relative value of commodities and corn, by producing so powerful an effect
on their natural prices, we should be applying a strong stimulus to the
exportation of those commodities whose natural prices were lowered, and
an equal stimulus to the importation of those commodities whose natural
prices were raised, and thus such a financial measure might entirely alter
the natural distribution of employments; to the advantage indeed of the
foreign countries, but ruinously to that in which so absurd a policy was
adopted.

CHAPTER XXII.

DOCTRINE OF ADAM SMITH CONCERNING THE RENT OF LAND.

"Such parts only of the produce of land," says Adam Smith, "can
commonly be brought to market, of which the ordinary price is sufficient to
replace the stock which must be employed in bringing them thither, together
with its ordinary profits. If the ordinary price is more than this, the surplus
part of it will naturally go to the rent of land. If it is not more, though the
commodity can be brought to market, it can afford no rent to the landlord.
Whether the price is, or is not more, depends upon the demand."
This passage would naturally lead the reader to conclude that its author
could not have mistaken the nature of rent, and that he must have seen that
the quality of land which the exigencies of society might require to be taken
into cultivation would depend on "the ordinary price of its produce,"
whether it were "sufficient to replace the stock, which must be employed in
cultivating it, together with its ordinary profits."
But he had adopted the notion that "there were some parts of the produce of
land for which the demand must always be such as to afford a greater price
than what is sufficient to bring them to market;" and he considered food as
one of those parts.
He says, that "land, in almost any situation, produces a greater quantity of
food than what is sufficient to maintain all the labour necessary for bringing

it to market, in the most liberal way in which that labour is ever maintained.
The surplus too is always more than sufficient to replace the stock which
employed that labour, together with its profits. Something, therefore,
always remains for a rent to the landlord."
But what proof does he give of this?—no other than the assertion that "the
most desert moors in Norway and Scotland produce some sort of pasture for
cattle, of which the milk and the increase are always more than sufficient,
not only to maintain all the labour necessary for tending them, and to pay
the ordinary profit to the farmer, or owner of the herd or flock, but to afford
some small rent to the landlord." Now of this I may be permitted to
entertain a doubt. I believe that as yet in every country, from the rudest to
the most refined, there is land of such a quality that it cannot yield a
produce more than sufficiently valuable to replace the stock employed upon
it, together with the profits ordinary and usual in that country. In America
we all know that this is the case, and yet no one maintains that the
principles which regulate rent are different in that country and in Europe.
But if it were true that England had so far advanced in cultivation, that at
this time there were no lands remaining which did not afford a rent, it
would be equally true that there formerly must have been such lands; and
that whether there be or not is of no importance to this question, for it is the
same thing if there be any capital employed in Great Britain on land which
yields only the return of stock with its ordinary profits, whether it be
employed on old or on new land. If a farmer agrees for land on a lease of
seven or fourteen years, he may propose to employ on it a capital of
10,000l., knowing that at the existing price of grain and raw produce, he can
replace that part of his stock which he is obliged to expend, pay his rent,
and obtain the general rate of profit. He will not employ 11,000l., unless the
last 1,000l. can be employed so productively as to afford him the usual
profits of stock. In his calculation, whether he shall employ it or not, he
considers only whether the price of raw produce is sufficient to replace his
expenses and profits, for he knows that he shall have no additional rent to
pay. Even at the expiration of his lease his rent will not be raised; for if his
landlord should require rent, because this additional 1000l. was employed,
he would withdraw it; since by employing it he gets, by the supposition,
only the ordinary and usual profits which he may obtain by any other
employment of stock; and therefore he cannot afford to pay rent for it,

unless the price of raw produce should further rise, or, which is the same
thing, unless the usual and general rate of profits should fall.
If the comprehensive mind of Adam Smith had been directed to this fact, he
would not have maintained that rent forms one of the component parts of
the price of raw produce; for price is everywhere regulated by the return
obtained by this last portion of capital, for which no rent whatever is paid.
If he had adverted to this principle, he would have made no distinction
between the law which regulates the rent of mines and the rent of land.
"Whether a coal mine, for example," he says, "can afford any rent, depends
partly upon its fertility, and partly upon its situation. A mine of any kind
may be said to be either fertile or barren, according as the quantity of
mineral which can brought from it by a certain quantity of labour, is greater
or less than what can be brought by an equal quantity from the greater part
of other mines of the same kind. Some coal mines, advantageously situated,
cannot be wrought on account of their barrenness. The produce does not
pay the expense. They can afford neither profit nor rent. There are some, of
which the produce is barely sufficient to pay the labour, and replace,
together with its ordinary profits, the stock employed in working them.
They afford some profit to the undertaker of the work, but no rent to the
landlord. They can be wrought advantageously by nobody but the landlord,
who being himself the undertaker of the work, gets the ordinary profit of
the capital which he employs in it. Many coal mines in Scotland are
wrought in this manner, and can be wrought in no other. The landlord will
allow no body else to work them without paying some rent, and nobody can
afford to pay any.
"Other coal mines in the same country, sufficiently fertile, cannot be
wrought on account of their situation. A quantity of mineral sufficient to
defray the expense of working, could be brought from the mine by the
ordinary, or even less than the ordinary quantity of labour; but in an inland
country, thinly inhabited, and without either good roads or water-carriage,
this quantity could not be sold." The whole principle of rent is here
admirably and perspicuously explained, but every word is as applicable to
land as it is to mines; yet he affirms that "it is otherwise in estates above
ground. The proportion, both of their produce and of their rent, is in
proportion to their absolute, and not to their relative fertility." But suppose

that there were no land which did not afford a rent; then, the amount of rent
on the worst land would be in proportion to the excess of the value of the
produce above the expenditure of capital and the ordinary profits of stock:
the same principle would govern the rent of land of a somewhat better
quality, or more favourably situated, and therefore the rent of this land
would exceed the rent of that inferior to it, by the superior advantages
which it possessed; the same might be said of that of the third quality, and
so on to the very best. Is it not then as certain that it is the relative fertility
of the land which determines the portion of the produce which shall be paid
for the rent of land, as it is that the relative fertility of mines determines the
portion of their produce, which shall be paid for the rent of mines?
After Adam Smith has declared that there are some mines which can only
be worked by the owners, as they will afford only sufficient to defray the
expense of working, together with the ordinary profits of the capital
employed, we should expect that he would admit that it was these particular
mines which regulated the price of the produce. If the old mines are
insufficient to supply the quantity of coal required, the price of coal will
rise, and will continue rising till the owner of a new and inferior mine finds
that he can obtain the usual profits of stock by working his mine. If his
mine be tolerably fertile, the rise will not be great before it becomes his
interest so to employ his capital; but if it be less productive, it is evident
that the price must continue to rise till it will afford him the means of
paying his expenses, and obtaining the ordinary profits of stock. It appears,
then, that it is always the least fertile mine which regulates the price of coal.
Adam Smith, however, is of a different opinion: he observes, that "the most
fertile coal mine too regulates the price of coals at all the other mines in its
neighbourhood. Both the proprietor and the undertaker of the work find, the
one that he can get a greater rent, the other, that he can get a greater profit,
by somewhat underselling all their neighbours. Their neighbours are soon
obliged to sell at the same price, though they cannot so well afford it, and
though it always diminishes, and sometimes takes away altogether, both
their rent and their profit. Some works are abandoned altogether; others can
afford no rent, and can be wrought only by the proprietor." If the demand
for coal should be diminished, or if by new processes the quantity should be
increased, the price would fall, and some mines would be abandoned; but in
every case, the price must be sufficient to pay the expenses and profit of

that mine which is worked without being charged with rent. It is therefore
the least fertile mine which regulates price. Indeed it is so stated in another
place by Adam Smith himself, for he says, "The lowest price at which coals
can be sold for any considerable time, is like that of all other commodities,
the price which is barely sufficient to replace, together with its ordinary
profits, the stock which must be employed in bringing them to market. At a
coal mine for which the landlord can get no rent, but which he must either
work himself, or let it alone all together, the price of coals must generally
be nearly about this price."
But the same circumstance, namely, the abundance and consequent
cheapness of coals, from whatever cause it may arise, which would make it
necessary to abandon those mines on which there was no rent, or a very
moderate one, would, if there were the same abundance, and consequent
cheapness of raw produce, render it necessary to abandon the cultivation of
those lands for which either no rent was paid, or a very moderate one. If, for
example, potatoes should become the general and common food of the
people, as rice is in some countries, one fourth, or one half of the land now
in cultivation, would probably be immediately abandoned; for if, as Adam
Smith says, "an acre of potatoes will produce six thousand weight of solid
nourishment, three times the quantity produced by the acre of wheat," there
could not be for a considerable time such a multiplication of people, as to
consume the quantity that might be raised on the land before employed for
the cultivation of wheat; much land would consequently be abandoned, and
rent would fall; and it would not be till the population had been doubled or
trebled, that the same quantity of land could be in cultivation, and the rent
paid for it as high as before.
Neither would any greater proportion of the gross produce be paid to the
landlord, whether it consisted of potatoes, which would feed three hundred
people, or of wheat, which would feed only one hundred; because, though
the expenses of production would be very much diminished if the labourer's
wages were chiefly regulated by the price of potatoes and not by the price
of wheat, and though therefore the proportion of the whole gross produce,
after paying the labourers, would be greatly increased, yet no part of that
additional proportion would go to rent, but the whole invariably to profits,
—profits being at all times raised as wages fall, and lowered as wages rise.
Whether wheat or potatoes were cultivated, rent would be governed by the

same principle—it would be always equal to the difference between the
quantities of produce obtained with equal capitals, either on the same land
or on land of different qualities; and therefore, while lands of the same
quality were cultivated, and there was no alteration in their relative fertility
or advantages, rent would always bear the same proportion to the gross
produce.
Adam Smith, however, maintains that the proportion which falls to the
landlord would be increased by a diminished cost of production, and
therefore, that he would receive a larger share as well as a larger quantity,
from an abundant than from a scanty produce. "A rice field," he says,
"produces a much greater quantity of food than the most fertile corn field.
Two crops in the year, from thirty to sixty bushels each, are said to be the
ordinary produce of an acre. Though its cultivation therefore requires more
labour, a much greater surplus remains after maintaining all that labour. In
those rice countries therefore, where rice is the common and favourite
vegetable food of the people, and where the cultivators are chiefly
maintained with it, a greater share of this greater surplus should belong to
the landlord than in corn countries."
Mr. Buchanan also remarks, that "it is quite clear, that if any other produce
which the land yielded more abundantly than corn, were to become the
common food of the people, the rent of the landlord would be improved in
proportion to its greater abundance."
If potatoes were to become the common food of the people, there would be
a long interval during which the landlords would suffer an enormous
deduction of rent. They would not probably receive nearly so much of the
sustenance of man as they now receive, while that sustenance would fall to
a third of its present value. But all manufactured commodities, on which a
part of the landlord's rent is expended, would suffer no other fall than that
which proceeded from the fall in the raw material of which they were made,
and which would arise only from the greater fertility of the land, which
might then be devoted to its production.
When from the progress of population, land of the same quality as before
should be taken into cultivation, to produce the food required, and the same
number of men should be employed in producing it, the landlord would

have not only the same proportion of the produce as before, but that
proportion would also be of the same value as before. Rent then would be
the same as before; profits, however, would be much higher, because the
price of food, and consequently of wages, would be much lower. High
profits are favourable to the accumulation of capital. The demand for labour
would further increase, and landlords would be permanently benefited by
the increased demand for land.
The interest of the landlord is always opposed to that of the consumer and
manufacturer. Corn can be permanently at an advanced price, only because
additional labour is necessary to produce it; because its cost of production is
increased. The same cause invariably raises rent, it is therefore for the
interest of the landlord that the cost attending the production of corn should
be increased. This, however, is not the interest of the consumer; to him it is
desirable that corn should be low relatively to money and commodities, for
it is always with commodities or money that corn is purchased. Neither is it
the interest of the manufacturer that corn should be at a high price, for the
high price of corn will occasion high wages, but will not raise the price of
his commodity. Not only then must more of his commodity, or, which
comes to the same thing, the value of more of his commodity, be given in
exchange for the corn which he himself consumes, but more must be given,
or the value of more, for wages to his workmen, for which he will receive
no remuneration. All classes therefore, except the landlords, will be injured
by the increase in the price of corn. The dealings between the landlord and
the public are not like dealings in trade, whereby both the seller and buyer
may equally be said to gain, but the loss is wholly on one side, and the gain
wholly on the other; and if corn could by importation be procured cheaper,
the loss in consequence of not importing is far greater on one side, than the
gain is on the other.
Adam Smith never makes any distinction between a low value of money,
and a high value of corn, and therefore infers, that the interest of the
landlord is not opposed to that of the rest of the community. In the first
case, money is low relatively to all commodities; in the other, corn is high
relatively to all. In the first, corn and commodities continue at the same
relative values, in the second, corn is higher relatively to commodities as
well as money.

The following observation of Adam Smith is applicable to a low value of
money, but it is totally inapplicable to a high value of corn. "If importation
(of corn) was at all times free, our farmers and country gentlemen would
probably one year with another, get less money for their corn than they do
at present, when importation is at most times in effect prohibited; but the
money which they got would be of more value, would buy more goods of
all other kinds, and would employ more labour. Their real wealth, their real
revenue, therefore, would be the same as at present, though it might be
expressed by a smaller quantity of silver; and they would neither be
disabled nor discouraged from cultivating corn as much as they do at
present. On the contrary, as the rise in the real value of silver, in
consequence of lowering the money price of corn, lowers somewhat the
money price of all other commodities, it gives the industry of the country
where it takes place, some advantage in all foreign markets, and thereby
tends to encourage and increase that industry. But the extent of the home
market for corn, must be in proportion to the general industry of the country
where it grows, or to the number of those who produce something else, to
give in exchange for corn. But in every country the home market, as it is the
nearest and most convenient, so is it likewise the greatest and most
important market for corn. That rise in the real value of silver, therefore,
which is the effect of lowering the average money price of corn, tends to
enlarge the greatest and most important market for corn, and thereby to
encourage, instead of discouraging its growth."
A high or low money price of corn, arising from the abundance and
cheapness of gold and silver, is of no importance to the landlord, as every
sort of produce would be equally affected, just as Adam Smith describes;
but a relatively high price of corn is at all times greatly beneficial to the
landlord, as with the same quantity of corn it not only gives him a command
over a greater quantity of money, but over a greater quantity of every
commodity which money can purchase.

CHAPTER XXIII.

ON COLONIAL TRADE.

Adam Smith, in his observations on colonial trade, has shewn, most
satisfactorily, the advantages of a free trade, and the injustice suffered by
colonies, in being prevented by their mother countries, from selling their
produce at the dearest market, and buying their manufactures and stores at
the cheapest. He has shewn, that by permitting every country freely to
exchange the produce of its industry when and where it pleases, the best
distribution of the labour of the world will be effected, and the greatest
abundance of the necessaries and enjoyments of human life will be secured.
He has attempted also to shew, that this freedom of commerce, which
undoubtedly promotes the interest of the whole, promotes also that of each
particular country; and that the narrow policy adopted in the countries of
Europe respecting their colonies, is not less injurious to the mother
countries themselves, than to the colonies whose interests are sacrificed.
"The monopoly of the colony trade," he says, "like all the other mean and
malignant expedients of the mercantile system, depresses the industry of all
other countries, but chiefly that of the colonies, without, in the least,
increasing, but on the contrary diminishing, that of the country in whose
favour it is established."
This part of his subject, however, is not treated in so clear and convincing a
manner as that in which he shews the injustice of this system towards the
colony.
Without affirming or denying, that the actual practice of Europe with regard
to their colonies is injurious to the mother countries, I may be permitted to
doubt whether a mother country may not sometimes be benefited by the
restraints to which she subjects her colonial possessions. Who can doubt,
for example, that if England were the colony of France, the latter country
would be benefited by a heavy bounty paid by England on the exportation
of corn, cloth, or any other commodities? In examining the question of
bounties, on the supposition of corn being at 4l. per quarter in this country,
we saw, that with a bounty of 10s. per quarter, on exportation in England,
corn would have been reduced to 3l. 10s. in France. Now, if corn had
previously been at 3l. 15s. per quarter in France, the French consumers
would have been benefited by 5s. per quarter on all imported corn; if the
natural price of corn in France were before 4l., they would have gained the

whole bounty of 10s. per quarter. France would thus be benefited by the
loss sustained by England: she would not gain a part only of what England
lost, but in some cases the whole.
It may however be said, that a bounty on exportation is a measure of
internal policy, and could not easily be imposed by the mother country.
If it would suit the interests of Jamaica and Holland to make an exchange of
the commodities which they respectively produce, without the intervention
of England, it is quite certain, that by their being prevented from so doing,
the interests of Holland and Jamaica would suffer; but if Jamaica is obliged
to send her goods to England, and there exchange them for Dutch goods, an
English capital, or English agency, will be employed in a trade in which it
would not otherwise be engaged. It is allured thither by a bounty, not paid
by England, but by Holland and Jamaica.
That the loss sustained, through a disadvantageous distribution of labour in
two countries, may be beneficial to one of them, while the other is made to
suffer more than the loss actually belonging to such a distribution, has been
stated by Adam Smith himself; which, if true, will at once prove that a
measure, which may be greatly hurtful to a colony, may be partially
beneficial to the mother country.
Speaking of treaties of commerce, he says, "When a nation binds itself by
treaty, either to permit the entry of certain goods from one foreign country
which it prohibits from all others, or to exempt the goods of one country
from duties to which it subjects those of all others, the country, or at least
the merchants and manufacturers of the country, whose commerce is so
favoured, must necessarily derive great advantage from the treaty. Those
merchants and manufacturers enjoy a sort of monopoly in the country,
which is so indulgent to them. That country becomes a market both more
extensive and more advantageous for their goods; more extensive, because
the goods of other nations, being either excluded or subjected to heavier
duties, it takes off a greater quantity of them; more advantageous, because
the merchants of the favoured country enjoying a sort of monopoly there,
will often sell their goods for a better price than if exposed to the free
competition of all other nations."

Let the two nations, between which the commercial treaty is made, be the
mother country and her colony, and Adam Smith, it is evident, admits, that a
mother country may be benefited by oppressing her colony. It may,
however, be again remarked, that unless the monopoly of the foreign market
be in the hands of an exclusive company, no more will be paid for
commodities by foreign purchasers than by home purchasers; the price
which they will both pay will not differ greatly from their natural price in
the country where they are produced. England, for example, will, under
ordinary circumstances, always be able to buy French goods, at the natural
price of those goods in France, and France would have an equal privilege of
buying English goods at their natural price in England. But at these prices,
goods would be bought without a treaty. Of what advantage or disadvantage
then is the treaty to either party?
The disadvantage of the treaty to the importing country would be this: it
would bind her to purchase a commodity, from England for example, at the
natural price of that commodity in England, when she might perhaps have
bought it at the much lower natural price of some other country. It
occasions then a disadvantageous distribution of the general capital, which
falls chiefly on the country bound by its treaty to buy in the least productive
market; but it gives no advantage to the seller on account of any supposed
monopoly, for he is prevented by the competition of his own countrymen
from selling his goods above their natural price; at which he would sell
them, whether he exported them to France, Spain, or the West Indies, or
sold them for home consumption.
In what then does the advantage of the stipulation in the treaty consist? It
consists in this: these particular goods could not have been made in England
for exportation, but for the privilege which she alone had of serving this
particular market; for the competition of that country, where the natural
price was lower, would have deprived her of all chance of selling those
commodities. This, however, would have been of little importance, if
England were quite secure that she could sell to the same amount any other
goods which she might fabricate, either in the French market, or with equal
advantage in any other. The object which England has in view, is, for
example, to buy a quantity of French wines of the value of 5000l.—she
desires then to sell goods somewhere by which she may get 5000l. for this
purpose. If France gives her a monopoly of the cloth market, she will

readily export cloth for this purpose; but if the trade is free, the competition
of other countries may prevent the natural price of cloth in England from
being sufficiently low to enable her to get 5000l. by the sale of cloth, and to
obtain the usual profits by such an employment of her stock. The industry
of England must be employed then on some other commodity; but there
may be none of her productions which, at the existing value of money, she
can afford to sell at the natural price of other countries. What is the
consequence? The wine drinkers of England are still willing to give 5000l.
for their wine, and consequently 5000l. in money is exported to France for
that purpose. By this exportation of money its value is raised in England,
and lowered in other countries; and with it the natural price of all
commodities produced by British industry is also lowered. The advance in
the price of money is the same thing as the decline in the price of
commodities. To obtain 5000l., British commodities may now be exported;
for at their reduced natural price they may now enter into competition with
the goods of other countries. More goods are sold, however, at the low
prices to obtain the 5000l. required, which, when obtained, will not procure
the same quantity of wine; because, whilst the diminution of money in
England has lowered the natural price of goods there, the increase of money
in France has raised the natural price of goods and wine in France. Less
wine then will be imported into England, in exchange for its commodities,
when the trade is perfectly free, than when she is peculiarly favoured by
commercial treaties. The rate of profits however will not have varied;
money will have altered in relative value in the two countries, and the
advantage gained by France will be the obtaining a greater quantity of
English, in exchange for a given quantity of French goods, while the loss
sustained by England will consist in obtaining a smaller quantity of French
goods in exchange for a given quantity of those of England.
Foreign trade then, whether fettered, encouraged, or free, will always
continue, whatever may be the comparative difficulty of production in
different countries; but it can only be regulated by altering the natural price,
not the natural value at which commodities can be produced in those
countries, and that is effected by altering the distribution of the precious
metals. This explanation confirms the opinion which I have elsewhere
given, that there is not a tax, a bounty, or a prohibition on the importation or
exportation commodities which does not occasion a different distribution of

the precious metals, and which does not therefore every where alter both the
natural and the market price of commodities.
It is evident then, that the trade with a colony may be so regulated, that it
shall at the same time be less beneficial to the colony, and more beneficial
to the mother country, than a perfectly free trade. As it is disadvantageous to
a single consumer to be restricted in his dealings to one particular shop, so
is it disadvantageous for a nation of consumers to be obliged to purchase of
one particular country. If the shop or the country afforded the goods
required the cheapest, they would be secure of selling them without any
such exclusive privilege; and if they did not sell cheaper, the general
interest would require that they should not be encouraged to continue a
trade which they could not carry on at an equal advantage with others. The
shop, or the selling country, might lose by the change of employments, but
the general benefit is never so fully secured, as by the most productive
distribution of the general capital; that is to say, by an universally free trade.
An increase in the cost of production of a commodity, if it be an article of
the first necessity, will not necessarily diminish its consumption; for
although the general power of the purchasers to consume, is diminished by
the rise of any one commodity, yet they may relinquish the consumption of
some other commodity whose cost of production has not risen. In that case,
the quantity supplied will be in the same proportion to the demand as
before; the cost of production only will have increased, and yet the price
will rise, and must rise, to place the profits of the producer of the enhanced
commodity on a level with the profits derived from other trades.
M. Say acknowledges that the cost of production is the foundation of price,
and yet in various parts of his book he maintains that price is regulated by
the proportion which demand bears to supply. The real and ultimate
regulator of the relative value of any two commodities, is the cost of their
production, and neither the respective quantities which may be produced,
nor the competition amongst the purchasers.
According to Adam Smith the colony trade, by being one in which British
capital only can be employed, has raised the rate of profits of all other
trades; and as in his opinion high profits, as well as high wages, raise the
prices of commodities, the monopoly of the colony trade has been,

according to him, injurious to the mother country; as it has diminished her
power of selling manufactured commodities as cheap as other countries. He
says, that "in consequence of the monopoly, the increase of the colony trade
has not so much occasioned an addition to the trade which Great Britain had
before, as a total change in its direction. Secondly, this monopoly has
necessarily contributed to keep up the rate of profit in all the different
branches of British trade, higher than it naturally would have been, had all
nations been allowed a free trade to the British colonies." "But whatever
raises in any country the ordinary rate of profit higher than it otherwise
would be, necessarily subjects that country both to an absolute, and to a
relative disadvantage in every branch of trade of which she has not the
monopoly. It subjects her to an absolute disadvantage, because in such
branches of trade, her merchants cannot get this greater profit without
selling dearer than they otherwise would do, both the goods of foreign
countries which they import into their own, and the goods of their own
country which they export to foreign countries. Their own country must
both buy dearer and sell dearer; must both buy less and sell less; must both
enjoy less and produce less than she otherwise would do."
"Our merchants frequently complain of the high wages of British labour as
the cause of their manufactures being undersold in foreign markets; but they
are silent about the high profits of stock. They complain of the extravagant
gain of other people, but they say nothing of their own. The high profits of
British stock, however, may contribute towards raising the price of British
manufacture in many cases as much, and in some perhaps more, than the
high wages of British labour."
I allow that the monopoly of the colony trade will change, and often
prejudicially, the direction of capital; but from what I have already said on
the subject of profits, it will be seen that any change from one foreign trade
to another, or from home to foreign trade, cannot, in my opinion, affect the
rate of profits. The injury suffered will be what I have just described; there
will be a worse distribution of the general capital and industry, and
therefore less will be produced. The natural price of commodities will be
raised, and therefore, though the consumer will be able to purchase to the
same money value, he will obtain a less quantity of commodities. It will be
seen too, that if it even had the effect of raising profits, it would not

occasion the least alteration in prices; prices being regulated neither by
wages nor profits.
And does not Adam Smith agree in this opinion, when he says, that "the
prices of commodities, or the value of gold and silver, as compared with
commodities, depends upon the proportion between the quantity of labour
which is necessary, in order to bring a certain quantity of gold and silver to
market, and that which is necessary to bring thither a certain quantity of any
other sort of goods?" That quantity will not be affected, whether profits be
high or low, or wages low or high. How then can prices be raised by high
profits?

CHAPTER XXIV.

ON GROSS AND NET REVENUE.

Adam Smith constantly magnifies the advantages which a country derives
from a large gross, rather than a large net income. "In proportion as a
greater share of the capital of a country is employed in agriculture," he says,
"the greater will be the quantity of productive labour which it puts into
motion within the country; as will likewise be the value which its
employment adds to the annual produce of the land and labour of the
society. After agriculture, the capital employed in manufactures puts into
motion the greatest quantity of productive labour, and adds the greatest
value to the annual produce. That which is employed in the trade of
exportation has the least effect of any of the three."42
Granting for a moment that this were true; what would be the advantage
resulting to a country from the employment of a great quantity of
productive labour, if, whether it employed that quantity or a smaller, its net
rent and profits together would be the same. The whole produce of the land
and labour of every country is divided into three portions; of these, one
portion is devoted to wages, another to profits, and the other to rent. It is
from the two last portions only, that any deductions can be made for taxes,
or for savings; the former, if moderate, constituting always the necessary
expenses of production. To an individual, with a capital of 20,000l., whose

profits were 2000l. per annum, it would be a matter quite indifferent,
whether his capital would employ a hundred, or a thousand men, whether
the commodity produced sold for 10,000l., or for 20,000l., provided, in all
cases, his profits were not diminished below 2000l. Is not the real interest of
the nation similar? Provided its net real income, its rent and profits be the
same, it is of no importance whether the nation consists of ten or of twelve
millions of inhabitants. Its power of supporting fleets and armies, and all
species of unproductive labour, must be in proportion to its net, and not in
proportion to its gross income. If five millions of men could produce as
much food and clothing as was necessary for ten millions, food and clothing
for five millions would be the net revenue. Would it be of any advantage to
the country, that to produce this same net revenue, seven millions of men
should be required, that is to say, that seven millions should be employed to
produce food and clothing sufficient for twelve millions? The food and
clothing of five millions would be still the net revenue. The employing a
greater number of men would enable us neither to add a man to our army
and navy, nor to contribute one guinea more in taxes.
It is not on the grounds of any supposed advantage accruing from a large
population, or of the happiness that may be enjoyed by a greater number of
human beings, that Adam Smith supports the preference of that employment
of capital, which gives motion to the greatest quantity of industry, but
expressly on the ground of its increasing the power of the country; for he
says, that "the riches, and, so far as power depends upon riches, the power
of every country must always be in proportion to the value of its annual
produce, the fund from which all taxes must ultimately be paid." It must
however be obvious, that the power of paying taxes, is in proportion to the
net, and not in proportion to the gross revenue.
In the distribution of employments amongst all countries, the capital of
poorer nations will be naturally employed in those pursuits, wherein a great
quantity of labour is supported at home, because in such countries the food
and necessaries for an increasing population can be most easily procured. In
rich countries, on the contrary, where food is dear, capital will naturally
flow, when trade is free, into those occupations, wherein the least quantity
of labour is required to be maintained at home: such as the carrying trade,
the distant foreign trade, where profits are in proportion to the capital, and
not in proportion to the quantity of labour employed.43

Although I admit, that from the nature of rent, a given capital employed in
agriculture, on any but the land last cultivated, puts in motion a greater
quantity of labour than an equal capital employed in manufactures and
trade, yet I cannot admit that there is any difference in the quantity of
labour employed by a capital engaged in the home trade, and an equal
capital engaged in the foreign trade.
"The capital which sends Scots manufactures to London, and brings back
English corn and manufactures to Edinburgh," says Adam Smith,
"necessarily replaces, by every such operation, two British capitals which
had both been employed in the agriculture or manufactures of Great Britain.
"The capital employed in purchasing foreign goods for home consumption,
when this purchase is made with the produce of domestic industry, replaces
too, by every such operation, two distinct capitals; but one of them only is
employed in supporting domestic industry. The capital which sends British
goods to Portugal, and brings back Portuguese goods to Great Britain,
replaces, by every such operation, only one British capital, the other is a
Portuguese one. Though the returns, therefore, of the foreign trade of
consumption should be as quick as the home trade, the capital employed in
it will give but one half the encouragement to the industry or productive
labour of the country."
This argument appears to me to be fallacious; for though two capitals, one
Portuguese and one English, be employed, as Dr. Smith supposes, still a
capital will be employed in the foreign trade, double of what would be
employed in the home trade. Suppose that Scotland employs a capital of a
thousand pounds in making linen, which she exchanges for the produce of a
similar capital employed in making silks in England. Two thousand pounds,
and a proportional quantity of labour will be employed by the two
countries. Suppose now, that England discovers, that she can import more
linen from Germany, for the silks which she before exported to Scotland,
and that Scotland discovers that she can obtain more silks from France in
return for her linen, than she before obtained from England,—will not
England and Scotland immediately cease trading with each other, and will
not the home trade of consumption be changed for a foreign trade of
consumption? But although two additional capitals will enter into this trade,
the capital of Germany and that of France, will not the same amount of

Scotch and of English capital continue to be employed, and will it not give
motion to the same quantity of industry as when it was engaged in the home
trade?

CHAPTER XXV.

ON CURRENCY AND BANKS.

It is not my intention to detain the reader by any long dissertation on the
subject of money. So much has already been written on currency, that of
those who give their attention to such subjects, none but the prejudiced are
ignorant of its true principles. I shall therefore take only a brief survey of
some of the general laws which regulate its quantity and value.
Gold and silver, like all other commodities, are valuable only in proportion
to the quantity of labour necessary to produce them, and bring them to
market. Gold is about fifteen times dearer than silver, not because there is a
greater demand for it, nor because the supply of silver is fifteen times
greater than that of gold, but solely because fifteen times the quantity of
labour is necessary to procure a given quantity of it.
The quantity of money that can be employed in a country must depend on
its value: if gold alone were employed for the circulation of commodities, a
quantity would be required, one fifteenth only of what would be necessary,
if silver were made use of for the same purpose.
A circulation can never be so abundant as to overflow; for by diminishing
its value, in the same proportion you will increase its quantity, and by
increasing its value, diminish its quantity.44
While the state coins money, and charges no seignorage, money will be of
the same value as any other piece of the same metal of equal weight and
fineness; but if the state charges a seignorage for coinage, the coined piece
of money will generally exceed the value of the uncoined piece of metal by
the whole seignorage charged, because it will require a greater quantity of